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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------------
For the fiscal year ended December 31, 1999
MERRILL LYNCH PREFERRED CAPITAL TRUST III
(Exact name of Registrant as specified in its certificate of trust)
COMMISSION FILE NO.: 1-7182-06
Delaware 13-7139561
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center
North Tower
New York, New York 10281
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
7% Trust Originated Preferred New York Stock Exchange
Securities ("TOPrS")
(and the related guarantee)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
MERRILL LYNCH PREFERRED FUNDING III, L.P.
(Exact name of Registrant as specified in its certificate of
limited partnership)
COMMISSION FILE NO.: 1-7182-05
Delaware 13-3982448
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center
North Tower
New York, New York 10281
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
7% Partnership Preferred Securities New York Stock Exchange
(and the related guarantee)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
As of March 28, 2000, no voting stock was held by non-affiliates of the
Registrants.
DOCUMENTS INCORPORATED BY REFERENCE:
PROSPECTUS, DATED JANUARY 12, 1998, FILED PURSUANT TO RULE 424(b) IN CONNECTION
WITH REGISTRATION STATEMENT ON FORM S-3 (No. 333-42859) FILED BY THE REGISTRANTS
AND MERRILL LYNCH & CO., INC.- INCORPORATED BY REFERENCE IN PART I
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PART I
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ITEM 1. BUSINESS
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MERRILL LYNCH PREFERRED CAPITAL TRUST III
Merrill Lynch Preferred Capital Trust III (the "Trust") is a statutory business
trust formed under the Delaware Business Trust Act, as amended, pursuant to a
declaration of trust and the filing of a certificate of trust with the Secretary
of State on December 19, 1997, which was subsequently amended by an amended and
restated declaration of trust dated as of January 12, 1998. The Trust exists for
the exclusive purposes of (i) issuing trust securities, consisting of 7% Trust
Originated Preferred Securities (the "TOPrS") and trust common securities (the
"Trust Common Securities"), representing undivided beneficial ownership
interests in the assets of the Trust, (ii) investing the gross proceeds of the
trust securities in 7% Partnership Preferred Securities (the "Partnership
Preferred Securities") issued by Merrill Lynch Preferred Funding III, L.P. (the
"Partnership"), and (iii) engaging in only those other activities necessary or
incidental thereto.
MERRILL LYNCH PREFERRED FUNDING III, L.P.
The Partnership is a limited partnership formed under the Delaware Revised
Uniform Limited Partnership Act, as amended, pursuant to an agreement of limited
partnership and the filing of a certificate of limited partnership with the
Secretary of State on December 19, 1997, which was subsequently amended by an
amended and restated agreement of limited partnership dated January 16, 1998.
Merrill Lynch & Co., Inc. (the "Company") is the sole general partner of the
Partnership. The Partnership is managed by the general partner and exists for
the exclusive purposes of (i) issuing its partnership interests, consisting of
the Company's general partner interest and the Partnership Preferred Securities,
(ii) investing the proceeds thereof in certain eligible securities of the
Company and wholly owned subsidiaries of the Company (the "Affiliate Investment
Instruments") and certain eligible debt securities, and (iii) engaging in only
those other activities necessary or incidental thereto.
The information set forth under the headings "Merrill Lynch Preferred Capital
Trust III", "Merrill Lynch Preferred Funding III, L.P.", "Description of the
Trust Preferred Securities", "Description of the Trust Guarantee", "Description
of the Partnership Preferred Securities", "Description of the Partnership
Guarantee", and "Use of Proceeds" in the Prospectus dated January 12, 1998 of
the Trust and the Partnership is incorporated by reference herein.
ITEM 2. PROPERTIES
----------
Not Applicable.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Registrants know of no material legal proceedings involving the Trust, the
Partnership or the assets of either of them.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matter was submitted to a vote of holders of any securities of the Trust or
the Partnership during the fiscal year covered by this report.
PART II
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ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(a) There is no established public market for the Trust Common Securities or the
general partnership interest in the Partnership.
(b) All of the Trust Common Securities and the entire general partnership
interest in the Partnership are owned of record and beneficially by the Company.
(c) The Company, as holder of the Trust Common Securities, is entitled to
receive cumulative cash distributions accumulating from January 16, 1998 and
payable quarterly in arrears on each March 30, June 30, September 30 and
December 30, commencing March 30, 1998, at an annual rate of 7% of the
liquidation amount per annum. Distributions not paid on the scheduled payment
date will accumulate and compound quarterly at a rate per annum equal to 7%. The
certificate of limited partnership of the Partnership does not require any
regular periodic distributions to be made to the general partner; however, to
the extent that aggregate payments to the Partnership on the Affiliate
Investment Instruments and on certain eligible debt securities exceed
distributions accumulated or payable with respect to the Partnership Preferred
Securities, the Partnership may at times have excess funds which shall be
allocated to and may, in the general partner's sole discretion, be distributed
to the general partner.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Registrants' activities are limited to issuing securities and investing the
proceeds as described in ITEM 1. - Business, above. Accordingly, the financial
statements included herein in response to ITEM 8. - Financial Statements and
Supplementary Data are incorporated by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The Registrants' activities are limited to issuing securities and investing the
proceeds as described in ITEM 1.- Business above. Since the Trust was organized
on December 19, 1997, its activities, as specified in its declaration of trust,
have been limited to the issuance of the TOPrS and the Trust Common Securities,
the investing of the proceeds in the Partnership Preferred Securities, and the
payment of distributions on the TOPrS and the Trust Common Securities in
accordance with their terms. Since the Partnership was organized on December 19,
1997, its activities, as specified in its agreement of limited partnership, have
been limited to the issuance of the Partnership Preferred Securities, the
receipt of a capital contribution from the Company, as general partner, the
investment of the proceeds in Affiliate Investment Instruments and certain
eligible debt securities, and the payment of distributions on the Partnership
Preferred Securities.
In 1999 Merrill Lynch completed its efforts to address the Year 2000 issue (the
"Y2K issue"). The Y2K issue was the result of a widespread programming technique
that caused computer systems to identify a date based on the last two numbers of
a year, with the assumption that the first two numbers of the year are "19." As
a result, the year 2000 would be stored a "00," causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K issue may have caused
serious failures in information technology systems and other systems. The Trust
and the Partnership have no independent operations and are dependent upon
Merrill Lynch. Merrill Lynch's efforts to address the Y2K issue are more fully
discussed in the Merrill Lynch & Co., Inc. Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed with the Securities and Exchange
Commission.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
On January 16, 1998, the Trust invested the gross proceeds from the sale of the
Trust Common Securities and the TOPrS in the Partnership Preferred Securities
(the "Trust Assets"). The Partnership, in turn, invested the proceeds from the
sale of the Partnership Preferred Securities and a capital contribution from ML
& Co. in certain Affiliate Investment Instruments and eligible securities (the
"Partnership Assets"). To the extent the Partnership has funds available from
the Partnership Assets, the general partner of the Partnership may declare
distributions to the Trust, as holder of the Partnership Preferred Securities.
The Trust's ability to pay distributions to the holders of the TOPrS is
dependent on its receipt of distributions on the Trust Assets from the
Partnership. Therefore, upon the receipt by the Partnership of payments from the
Partnership Assets and the distribution thereof to the Trust, the Trust will
pass through such payments to the holders of the TOPrS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
In response to this ITEM 8, the financial statements and notes thereto and the
independent auditors' reports set forth on pages F-1 through F-15 are
incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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The Trustees of the Trust are as follows:
Regular Trustees: John C. Stomber
Stanley Schaefer
Property Trustee: The Chase Manhattan Bank
Delaware Trustee: Chase Manhattan Bank Delaware
Stanley Schaefer is Senior Director of Corporate Tax for the Company and has
served in that capacity or another capacity with the Company for the last five
years. John C. Stomber is Senior Vice President and Treasurer of the Company.
Mr. Stomber joined the Company in March 1999. Mr. Stomber was an employee of
Deutsche Bank from 1991 to March 1999, serving as Deutsche Bank's Treasurer for
the Americas Region starting in 1996.
With the exception of Mr. Stomber, each Trustee has served since the Trust was
organized on December 19, 1997. Mr. Stomber has served since September 30, 1999.
The Trustees serve at the pleasure of the Company, as the holder of the Trust
Common Securities.
The Partnership has no directors or executive officers.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Neither the Trust nor the Partnership has any executive officers. No employee of
the Company receives any compensation for serving as a Regular Trustee or acting
in any capacity for the Trust or the Partnership separate from his or her
compensation as an employee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information in ITEM 1. - Business and ITEM 5.- Market for Registrants"
Common Equity and Related Stockholder Matters with respect to ownership of the
Trust Common Securities is incorporated by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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(a) Documents filed as part of this Report:
1. Financial Statements
The contents of the financial statements are listed on
page F-1 hereof, and the financial statements and
accompanying independent auditor' reports appear on pages
F-2 through F-15.
2. Financial Statement Schedules
None.
3. Exhibits
Certain of the following exhibits were previously filed
as exhibits to other reports or registration statements
filed by the Registrants and are incorporated herein by
reference to such reports or registration statements as
indicated parenthetically below by the appropriate report
reference date or registration statement number.
4.1 Certificate of Trust dated December 19, 1997, of the Trust
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form S-3 (No. 333-42859)(the "Registration
Statement"))
4.2 Form of Amended and Restated Declaration of Trust of the
Trust (incorporated by reference to Exhibit 4.2 to the
Registration Statement)
4.3 Certificate of Limited Partnership, dated as of December
19, 1997, of the Partnership(incorporated by reference to
Exhibit 4.3 to the Registration Statement)
4.4 Form of Amended and Restated Agreement of Limited Partnership
of the Partnership (incorporated by reference to Exhibit 4.4
to the Registration Statement)
4.5 Form of Trust Preferred Securities Guarantee Agreement
between the Company and The Chase Manhattan Bank, as
guarantee trustee (incorporated by reference to Exhibit
4.5 to the Registration Statement)
4.6 Form of Partnership Preferred Securities Guarantee Agreement
between the Company and The Chase Manhattan Bank, as
guarantee trustee (incorporated by reference to
Exhibit 4.6 to the Registration Statement)
4.7 Form of Subordinated Debenture Indenture between the
Company and The Chase Manhattan Bank, as trustee (incorporated
by reference to Exhibit 4.7 to the Registration Statement)
4.8 Form of Affiliate Debenture Guarantee Agreement between
the Company and The Chase Manhattan Bank, as guarantee
trustee (incorporated by reference to Exhibit 4.8 to the
Registration Statement)
4.9 Form of Trust Preferred Security (included in Exhibit 4.2
above)
4.10 Form of Partnership Preferred Security (included in Exhibit
4.4 above)
4.11 Form of Subordinated Debenture (incorporated by reference
to Exhibit 4.11 to the Registration Statement)
12* Computation of Ratios of Earnings to Combined Fixed
Charges and Preferred Securities Distributions
23* Consent of Deloitte & Touche LLP
24* Powers of Attorney
27* Financial Data Schedules. The Financial Data Schedules
to be contained in Exhibit 27 are required to be submitted
only in the Registrants' electronic filing of this Form
10-K by means of the EDGAR system.
(b) Reports on Form 8-K
None.
____________
* Filed herewith
INDEX TO FINANCIAL STATEMENTS
-----------------------------
ITEM 14(a)(1)
FINANCIAL STATEMENTS PAGE
- -------------------- ----
MERRILL LYNCH PREFERRED CAPITAL TRUST III
Balance Sheets, December 31, 1999 and December 25, 1998 F-2
Statements of Earnings, Year Ended December 31, 1999
and Period January 16, 1998 to December 26, 1998 F-3
Statements of Changes in Stockholders' Equity, Year Ended
December 31,1999 and Period January 16, 1998 to
December 26, 1998 F-4
Statements of Cash Flows, Year Ended December 31, 1999
and Period January 16, 1998 to December 26, 1998 F-5
Notes to Financial Statements F-6
Independent Auditors' Report F-8
MERRILL LYNCH PREFERRED FUNDING III, L.P.
Balance Sheets, December 31, 1999 and December 25, 1998 F-9
Statements of Earnings, Year Ended December 31, 1999
and Period January 16, 1998 to December 26, 1998 F-10
Statements of Changes in Partners' Capital, Year Ended
December 31, 1999 and Period January 16, 1998 to
December 26, 1998 F-11
Statements of Cash Flows, Year Ended December 31, 1999
and Period January 16, 1998 to December 26, 1998 F-12
Notes to Financial Statements F-13
Independent Auditors' Report F-15
F-1
MERRILL LYNCH PREFERRED CAPITAL TRUST III
BALANCE SHEETS
(dollars in thousands, except per security amounts)
- -------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -----------------
ASSETS
Investment in partnership preferred securities $ 773,196 $ 773,196
Income receivable - 13,531
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Total Assets $ 773,196 $ 786,727
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LIABILITY AND STOCKHOLDERS' EQUITY
Distributions payable $ - $ 13,531
---------- ----------
Stockholders' equity:
Preferred securities (7% Trust
Originated Preferred Securities;
30,000,000 authorized, issued, and
outstanding; $25 liquidation
amount per security) 750,000 750,000
Common securities (7% Trust Common
Securities; 927,840 authorized,
issued, and outstanding;
$25 liquidation amount per security) 23,196 23,196
---------- ----------
Total stockholders' equity 773,196 773,196
---------- ----------
Total Liability and Stockholders' Equity $ 773,196 $ 786,727
========== ==========
See Notes to Financial Statements
F-2
MERRILL LYNCH PREFERRED CAPITAL TRUST III
STATEMENTS OF EARNINGS
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -------------------
EARNINGS
Income on partnership preferred securities $ 54,124 $ 51,727
========= =========
See Notes to Financial Statements
F-3
MERRILL LYNCH PREFERRED CAPITAL TRUST III
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
- -------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -------------------
PREFERRED SECURITIES
Balance, beginning of period $ 750,000 $ -
Issuance of preferred securities - 750,000
--------- ---------
Balance, end of period 750,000 750,000
--------- ---------
COMMON SECURITIES
Balance, beginning of period 23,196 -
Issuance of common securities - 23,196
--------- -------
Balance, end of period 23,196 23,196
--------- -------
UNDISTRIBUTED EARNINGS
Balance, beginning of period - -
Earnings 54,124 51,727
Distributions (54,124) (38,196)
Distributions payable - (13,531)
--------- ---------
Balance, end of period - -
--------- ---------
Total Stockholders' Equity $ 773,196 $ 773,196
========= =========
See Notes to Financial Statements
F-4
MERRILL LYNCH PREFERRED CAPITAL TRUST III
STATEMENTS OF CASH FLOWS
(dollars in thousands)
- -----------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings $ 54,124 $ 51,727
Decrease (increase) in income receivable 13,531 (13,531)
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Cash provided by operating activities 67,655 38,196
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of partnership preferred securities - (773,196)
-------- --------
Cash used for investing activities - (773,196)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions (67,655) (38,196)
Proceeds from issuance of preferred securites - 750,000
Proceeds from issuance of common securities - 23,196
-------- --------
Cash (used for) provided by financing activities (67,655) 735,000
-------- --------
NET CHANGE IN CASH - -
CASH, BEGINNING OF PERIOD - -
-------- --------
CASH, END OF PERIOD $ - $ -
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Preferred and common distributions of $13,125 and $406, respectively, were
accrued at December 25, 1998 and distributed in the following fiscal year.
See Notes to Financial Statements
F-5
MERRILL LYNCH PREFERRED CAPITAL TRUST III
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PURPOSE
Merrill Lynch Preferred Capital Trust III (the "Trust") is a statutory business
trust formed under the laws of the State of Delaware on December 19, 1997 for
the exclusive purposes of (i) issuing its preferred and common securities (the
"Trust Preferred Securities" and the "Trust Common Securities", respectively),
(ii) purchasing partnership preferred securities (the "Partnership Preferred
Securities"), representing the limited partnership interest of Merrill Lynch
Preferred Funding III, L.P. (the "Partnership"), with the proceeds from the sale
of Trust Preferred and Common Securities, and (iii) engaging in only those other
activities necessary or incidental thereto. The Trust has a perpetual existence,
subject to certain termination events as provided in the Declaration of Trust
under which it was formed.
Merrill Lynch & Co., Inc. (the "Company") has paid compensation to the
underwriters of the offering of the Trust Preferred Securities. The Company also
has agreed to (i) pay all fees and expenses related to the organization and
operations of the Trust (including taxes, duties, assessments, or government
charges of whatever nature (other than withholding taxes) imposed by the United
States or any other domestic taxing authority upon the Trust) and the offering
of the Trust Preferred Securities and (ii) be responsible for all debts and
other obligations of the Trust (other than with respect to the Trust Preferred
and Common Securities). The Company has agreed to indemnify the trustees and
certain other persons.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented in accordance with U.S. generally
accepted accounting principles, which require management to make estimates that
affect reported amounts and disclosure of contingencies in the financial
statements. As such, actual results could differ from those estimates.
INVESTMENT
The investment in Partnership Preferred Securities represents a limited
partnership interest in the Partnership and is recorded at cost. As of year end,
the fair value of the investment approximates its carrying value. Income on the
Partnership Preferred Securities is accrued when earned.
INCOME TAXES
The Trust does not incur any income tax liabilities. Such liabilities are
incurred directly by the security holders.
F-6
MERRILL LYNCH PREFERRED CAPITAL TRUST III
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
3. INVESTMENT IN PARTNERSHIP PREFERRED SECURITIES
The Trust holds 30,927,840 7% Partnership Preferred Securities, $25
liquidation preference per security. The interest payment dates and redemption
provisions of the Partnership Preferred Securities, which are redeemable after
March 30, 2008 at the option of the Partnership, correspond to the
distribution payment dates and redemption provisions of the Trust Preferred
Securities. Upon any redemption of the Partnership Preferred Securities, the
Trust Preferred Securities will be redeemed. The Company has guaranteed, on a
subordinated basis, the payment of distributions by the Partnership on the
Partnership Preferred Securities if, as, and when declared out of funds legally
available and payments upon liquidation of the Partnership or the redemption of
the Partnership Preferred Securities to the extent of funds legally available.
4. STOCKHOLDERS' EQUITY
TRUST PREFERRED SECURITIES
The Trust issued 30,000,000 7% Trust Preferred Securities, $25 liquidation
amount per security in a public offering on January 16, 1998. The Trust
Preferred Securities are redeemable on or after March 30, 2008 at the option
of the Trust, in whole or in part, at a redemption price equal to $25 per
security. Distributions on the Trust Preferred Securities are cumulative from
the date of original issue and are payable quarterly if, as, and when the Trust
has funds available for payment. Holders of the Trust Preferred Securities have
limited voting rights and are not entitled to vote to appoint, remove, or
replace, or to increase or decrease the number of, trustees, which voting rights
are vested exclusively in the holder of the Trust Common Securities. Under
certain circumstances, the Trust Preferred Securities have preferential rights
to payment relative to the Trust Common Securities.
The Company has guaranteed, on a subordinated basis, the payment in full of all
distributions and other payments on the Trust Preferred Securities to the extent
that the Trust has funds legally available. This guarantee and the partnership
distribution guarantee are subordinated to all other liabilities of the Company
and rank equally with the most senior preferred stock of the Company.
TRUST COMMON SECURITIES
The Trust issued 927,840 8% Trust Common Securities, $25 liquidation amount
per security, to the Company on January 16, 1998. The Trust Common Securities
are redeemable on or after March 30, 2008 at the option of the Trust, in
whole or in part, at a redemption price equal to $25 per security.
F-7
INDEPENDENT AUDITORS' REPORT
To the Trustees of
Merrill Lynch Preferred Capital Trust III
We have audited the accompanying balance sheets of Merrill Lynch Preferred
Capital Trust III (the "Trust") as of December 31, 1999 and December 25, 1998,
and the related statements of earnings, changes in stockholders' equity and cash
flows for the period ended December 31, 1999 and for the period January 16, 1998
to December 25, 1998. These financial statements are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at December 31, 1999 and December
25, 1998, and the results of its operations and its cash flows for the period
ended December 31, 1999 and for the period January 16, 1998 to December 25, 1998
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 28, 2000
F-8
MERRILL LYNCH PREFERRED FUNDING III, L.P.
BALANCE SHEETS
(dollars in thousands)
- --------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 25, 1998
----------------- -----------------
ASSETS
Cash $ - $ 421
Investments:
Affiliate debentures 900,547 900,547
U.S. Treasury bills 9,181 9,110
---------- ----------
Total investments 909,728 909,657
Interest receivable - 15,760
---------- ----------
Total Assets $ 909,728 $ 925,838
========== ==========
LIABILITY AND PARTNERS' CAPITAL
Distributions payable $ - $ 15,760
---------- ----------
Partners' capital:
Limited partnership interest 773,196 773,196
General partnership interest 136,532 136,882
---------- ----------
Total partners' capital 909,728 910,078
---------- ----------
Total Liability and Partners' Capital $ 909,728 $ 925,838
========== ==========
See Notes to Financial Statements
F-9
MERRILL LYNCH PREFERRED FUNDING III, L.P.
STATEMENTS OF EARNINGS
(dollars in thousands)
- -----------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
------------------ -------------------
EARNINGS
Interest income:
Affiliate debentures $ 63,038 $ 60,247
U.S. Treasury bills 433 438
--------- ---------
Earnings $ 63,471 $ 60,685
========= =========
See Notes to Financial Statements
F-10
MERRILL LYNCH PREFERRED FUNDING III, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
(dollars in thousands)
- -----------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
------------------ -------------------
LIMITED PARTNER'S CAPITAL
Balance, beginning of period $ 773,196 $ -
Issuance of preferred securities - 773,196
Net income allocated to limited partner 54,124 51,727
Distributions (54,124) (38,196)
Distributions payable - (13,531)
--------- ---------
Balance, end of period 773,196 773,196
--------- ---------
GENERAL PARTNER'S CAPITAL
Balance, beginning of period 136,882 -
Capital contribution - 136,447
Net income allocated to general partner 9,347 8,958
Distributions (9,697) (6,294)
Distributions payable - (2,229)
--------- ---------
Balance, end of period 136,532 136,882
--------- ---------
TOTAL PARTNERS' CAPITAL $ 909,728 $ 910,078
========= =========
See Notes to Financial Statements
F-11
MERRILL LYNCH PREFERRED FUNDING III, L.P.
STATEMENTS OF CASH FLOWS
(dollars in thousands)
- --------------------------------------------------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED JANUARY 16, 1998 TO
DECEMBER 31, 1999 DECEMBER 25, 1998
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings $ 63,471 $ 60,685
Accretion of U.S. Treasury bills (433) (438)
Decrease (increase) in interest receivable 15,760 (15,760)
-------- --------
Cash provided by operating activities 78,798 44,487
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of affiliate debentures - (900,547)
Purchases of investment securities (18,192) (27,507)
Maturities of investment securities 18,554 18,835
-------- --------
Cash provided by (used for) investing activities 362 (909,219)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partner (67,655) (38,196)
Distributions to general partner (11,926) (6,294)
Proceeds from issuance of preferred securities - 773,196
Capital contribution - general partner - 136,447
-------- --------
Cash (used for) provided by financing activities (79,581) 865,153
-------- --------
NET CHANGE IN CASH (421) 421
CASH, BEGINNING OF PERIOD 421 -
-------- --------
CASH, END OF PERIOD $ - $ 421
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Distributions of $15,760 were accrued at December 25, 1998 and
distributed in the following fiscal year.
See Notes to Financial Statements
F-12
MERRILL LYNCH PREFERRED FUNDING III, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PURPOSE
Merrill Lynch Preferred Funding III, L.P. (the "Partnership") is a limited
partnership that was formed under the Delaware Revised Uniform Limited
Partnership Act on December 19, 1997 for the exclusive purpose of purchasing
certain eligible debt instruments of Merrill Lynch & Co., Inc. (the "Company")
and wholly owned subsidiaries of the Company with (i) the proceeds from the sale
of its preferred securities (the "Partnership Preferred Securities"),
representing a limited partner interest, to Merrill Lynch Preferred Capital
Trust III (the "Trust") and (ii) a capital contribution from the Company in
exchange for the general partnership interest in the Partnership.
The Company, in its capacity as sole general partner of the Partnership, has
agreed to (i) pay all fees and expenses related to the organization and
operations of the Partnership (including taxes, duties, assessments, or
government charges (other than withholding taxes) imposed by the United States
or any other domestic taxing authority upon the Partnership) and (ii) be
responsible for all debts and other obligations of the Partnership (other than
with respect to the Partnership Preferred Securities). The Company has also
agreed to indemnify certain officers and agents of the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented in accordance with U.S. generally
accepted accounting principles, which require management to make estimates that
affect reported amounts and disclosure of contingencies in the financial
statements. As such, actual results could differ from those estimates.
INVESTMENTS
The Partnership's investment in affiliate debentures is recorded at cost, and
its investment in U.S. Treasury bills is classified as available-for-sale and
recorded at accreted cost, which approximates fair value.
INCOME TAXES
The Partnership does not incur any income tax liabilities. Such liabilities are
incurred directly by the partners.
F-13
MERRILL LYNCH PREFERRED FUNDING III, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
3. INVESTMENT IN AFFILIATE DEBENTURES
The Partnership holds debentures of the Company and a wholly owned subsidiary of
the Company. The debentures have a term of approximately 20 years and bear
interest at 7% per annum. The interest payment dates and redemption
provisions of the debentures, which are redeemable at the option of the Company
and its subsidiary on or after March 30, 2008, correspond to the distribution
payment dates and redemption provisions of the Partnership Preferred Securities.
Interest and redemption payments on the subsidiary debenture are guaranteed by
the Company on a subordinated basis.
4. PARTNERS' CAPITAL
The Partnership issued 30,927,840 7% Partnership Preferred Securities, $25
liquidation preference per security, to the Trust on January 16, 1998.
Distributions on the Partnership Preferred Securities are cumulative from the
date of original issue and are payable quarterly if, as, and when declared by
the general partner. The Partnership Preferred Securities are redeemable on or
after March 30, 2008 at the option of the Partnership, at a redemption price
equal to $25 per security. Except as provided in the Limited Partnership
Agreement and Partnership Preferred Securities Guarantee Agreement, and as
otherwise provided by law, the holders of the Partnership Preferred Securities
have no voting rights.
The Company has guaranteed the payment of distributions by the Partnership on
the Partnership Preferred Securities if, as, and when declared out of funds
legally available and payments upon liquidation of the Partnership or the
redemption of the Partnership Preferred Securities to the extent of funds
legally available. This guarantee is subordinated to all other liabilities of
the Company and ranks equally with the most senior preferred stock of the
Company.
F-14
INDEPENDENT AUDITORS' REPORT
To the General Partner and Limited Partner of
Merrill Lynch Preferred Funding III, L.P.
We have audited the accompanying balance sheets of Merrill Lynch Preferred
Funding III, L.P. (the "Partnership") as of December 31, 1999 and December 25,
1998, and the related statement of earnings, changes in partners' capital, and
cash flows for the period ended December 31, 1999 and for the period January 16,
1998 to December 25, 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 31, 1999 and
December 25, 1998, and the results of its operations and its cash flows for the
period ended December 31, 1999 and for the period January 16, 1998 to December
25, 1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 28, 2000
F-15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized on the 29th day of March,
2000.
MERRILL LYNCH PREFERRED CAPITAL TRUST III*
By: /s/ John C. Stomber
--------------------------------------------------
Name: John C. Stomber
Title: Regular Trustee
By: /s/ Stanley Schaefer
--------------------------------------------------
Name: Stanley Schaefer
Title: Regular Trustee
MERRILL LYNCH PREFERRED FUNDING III, L.P.*
By: MERRILL LYNCH & CO., INC., as General Partner
By: /s/ John C. Stomber
--------------------------------------------------
Name: John C. Stomber
Title: Senior Vice President and Treasurer, and as
Attorney-in-Fact for a majority of the Board of
Directors**
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* There is no principal executive officer(s), principal financial officer,
controller, principal accounting officer or board of directors of the
Registrants. The Trustees of the Trust (which include the Regular
Trustees, the Property Trustee and the Delaware Trustee) together exercise
all powers and perform all functions with respect to the Trust.
** Pursuant to Powers of Attorney filed as Exhibit 24 hereto.
EXHIBIT INDEX
4.1 Certificate of Trust dated December 19, 1997, of the Trust
(incorporated by reference to Exhibit 4.1 to Registration Statement on
Form S-3 (No. 333-42859) (the "Registration Statement"))
4.2 Form of Amended and Restated Declaration of Trust of the Trust
(incorporated by reference to Exhibit 4.2 to the Registration
Statement)
4.3 Certificate of Limited Partnership, dated as of December 19,
1997, of the Partnership (incorporated by reference to Exhibit 4.3
to Registration Statement)
4.4 Form of Amended and Restated Agreement of Limited Partnership
of the Partnership (incorporated by reference to Exhibit 4.4 to
the Registration Statement)
4.5 Form of Trust Preferred Securities Guarantee Agreement between the
Company and The Chase Manhattan Bank, as guarantee trustee
(incorporated by reference to Exhibit 4.5 to the Registration
Statement)
4.6 Form of Partnership Preferred Securities Guarantee Agreement between
the Company and The Chase Manhattan Bank, as guarantee trustee
(incorporated by reference to Exhibit 4.6 to the Registration
Statement)
4.7 Form of Subordinated Debenture Indenture between the Company and The
Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit
4.7 to the Registration Statement)
4.8 Form of Affiliate Debenture Guarantee Agreement between the Company and
The Chase Manhattan Bank, as guarantee trustee (incorporated by
reference to Exhibit 4.8 to the Registration Statement)
4.9 Form of Trust Preferred Security (included in Exhibit 4.2 above)
4.10 Form of Partnership Preferred Security (included in Exhibit 4.4 above)
4.11 Form of Subordinated Debenture (incorporated by reference to
Exhibit 4.11 to the Registration Statement)
12* Computation of Ratios of Earnings to Combined Fixed Charges
and Preferred Securities Distributions
23* Consent of Deloitte & Touche LLP
24* Powers of Attorney
27* Financial Data Schedules. The Financial Data Schedules to be
contained in Exhibit 27 are required to be submitted only in the
Registrants' electronic filing of this Form 10-K by means of the
EDGAR system.
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* Filed herewith