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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
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For the fiscal year ended December 29, 1995 Commission file number 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2740599
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
World Financial Center
North Tower
250 Vesey Street
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:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $1.33 1/3 New York Stock Exchange;
Chicago Stock Exchange; The
Pacific Stock Exchange; The
Paris Stock Exchange; London
Stock Exchange; and The Tokyo
Stock Exchange
Depositary Shares representing 1/400th share New York Stock Exchange
of 9% Cumulative Preferred Stock, Series A
Rights to Purchase Series A Junior Preferred New York Stock Exchange; Chicago
Stock Stock Exchange; The Pacific
Stock Exchange; The Paris Stock
Exchange; London Stock Exchange;
and The Tokyo Stock Exchange
S&P 500 Market Index Target-Term Securities New York Stock Exchange
("MITTS") due August 29, 1997; S&P 500 MITTS
due July 31, 1998; European Portfolio MITTS
due June 30, 1999; Global Telecommunications
Portfolio MITTS due October 15, 1998; Stock
Market Annual Reset Term Notes ("SMART Notes")
due December 31, 1997; SMART Notes due
December 31, 1999 (Series A); Global Bond
Linked Securities ("GloBLS") due December 31,
1998; Equity Participation Securities with
Minimum Return Protection due June 30, 1999;
Currency Protected Notes ("CPNs") due
December 31, 1998; 6 1/2% Structured Yield
Product Exchangeable for Stock ("STRYPES") due
August 15, 1998
Japan Index Equity Participation Securities American Stock Exchange
with Minimum Return Protection due January 31,
2000; AMEX Oil Index SMART Notes due
December 29, 2000; Nikkei Stock Index 300
Call Warrants, expiring February 3, 1997;
Greater of U.S. Dollar/Japanese Yen Put
Currency Warrants, expiring May 15, 1997;
Russell 2000 Index Call Warrants expiring
November 17, 1998; AMEX Hong Kong 30 Index
Equity Participation Notes due February 16,
1999
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1996, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $9.95 billion.
As of March 15, 1996, there were 177,013,550 shares of Common Stock
outstanding (this amount includes 4,012,519 shares held by Merrill Lynch & Co.,
Inc. Employee Stock Ownership Plan that are not considered outstanding for
accounting purposes). All amounts of shares of Common Stock presented herein
reflect the two-for-one Common Stock split, effected in the form of a 100% stock
dividend, paid on November 24, 1993.
Documents Incorporated By Reference:
1. Merrill Lynch & Co., Inc. 1995 Annual Report to Stockholders --
Incorporated by reference in part in Form 10-K, Parts I, II and IV.
2. Merrill Lynch & Co., Inc. Proxy Statement for its 1996 Annual Meeting of
Stockholders dated March 11, 1996 -- Incorporated by reference in part in
this Form 10-K in Parts III and IV.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Merrill Lynch & Co., Inc.,* a Delaware corporation, is a holding company formed
in 1973 that, through its subsidiaries and affiliates, provides investment,
financing, insurance, and related services on a global basis. Such services
include securities brokering, trading, and underwriting; investment banking and
other corporate finance advisory activities, including loan syndication; asset
management and other investment advisory services; trading of foreign exchange
instruments, futures, commodities, and derivatives; securities clearance
services; banking, trust, and lending services; and insurance sales and
underwriting services. These services are provided to a large group of clients
and customers, including individual investors, corporations, governments and
governmental agencies, and financial institutions.
In the third quarter of 1995, ML & Co., through a wholly-owned subsidiary,
acquired Smith New Court PLC, a global securities firm based in the United
Kingdom ("Smith New Court"). This acquisition has made ML & Co. the largest
equities organization in the world in terms of research, trading and sales
capabilities and has strengthened its presence in nearly every major global
financial market. Additional information respecting the Smith New Court
acquisition is set forth in the Corporation's 1995 Annual Report to Stockholders
under the caption "Management's Discussion and Analysis -- Results of
Operations" and is incorporated herein by reference.
The Corporation conducts its business from its World Headquarters facility in
New York City, New York, additional principal locations in New Jersey, London,
Tokyo, Hong Kong, various regional facilities located in the United States and
in other countries, and numerous retail sales and other offices throughout the
world.
At December 29, 1995, ML & Co. employed approximately 46,000 people,
approximately 1,200 of which joined ML & Co. as a result of the Smith New
Court acquisition.
The financial services industry in which ML & Co. is a leading participant is
highly competitive and highly regulated. It is directly affected by general
economic conditions, trends in business and finance, government regulation, and
investor sentiment, as well as by interest rate changes, currency volatility,
and fluctuations in equity and commodity prices, both in the U.S. and throughout
the world. The Corporation's revenues are particularly sensitive to industry and
general economic conditions, the volume of securities transactions, and
securities price levels. In addition, its business is subject to foreign
exchange rate fluctuations, regulation by non-U.S. governments, and other
factors inherent in international operations. Furthermore, its business
activities are subject to varying degrees of risk and profitability depending
upon the nature of the activity and the extent to which it has placed its
capital at risk in the conduct of a variety of transactions, including dealer
transactions, investment banking, derivative transactions, syndicated and bridge
loan financing, and other related transactions.
The Corporation conducts its worldwide business through a number of highly
integrated subsidiaries and affiliates which frequently participate in the
facilitation and consummation of a single transaction. Financial information
concerning the Corporation for each of the three
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* Unless the context otherwise requires, Merrill Lynch & Co., Inc. and its
consolidated subsidiaries are referred to herein as "ML & Co." or the
"Corporation."
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fiscal years ended on the last Friday in December of 1995, 1994 and 1993,
including the amount of total revenue contributed by classes of similar products
or services that accounted for 10% or more of its consolidated revenues in any
one of these fiscal periods and information with respect to the Corporation's
operations by geographic area, is set forth in the Corporation's Consolidated
Financial Statements and the Notes thereto in the 1995 Annual Report to
Stockholders, which is incorporated herein by reference.
The business activities of certain significant domestic and international ML &
Co. subsidiaries are described below.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), which traces its
origin to a brokerage business founded in 1820, is one of the largest securities
firms in the world. It is a leading broker in securities, options contracts, and
commodity and financial futures contracts; a leading dealer in options and in
corporate and municipal securities; a leading investment banking firm that
provides advice to, and raises capital for, corporations and other institutional
clients, sovereigns, and municipalities; and an underwriter of selected
insurance products. Merrill Lynch Canada Inc. ("Merrill Lynch Canada"), a
subsidiary of MLPF&S, provides certain of these financial services in Canada.
BROKERAGE TRANSACTIONS. A significant portion of MLPF&S's revenues are generated
by the commissions that it earns as a broker (i.e., agent) for investors in the
purchase and sale of corporate securities, primarily common and preferred stocks
and bonds traded on securities exchanges or in the over-the-counter markets.
MLPF&S also acts as a broker for investors in the purchase and sale of mutual
funds, money market instruments, government securities, corporate and high-yield
bonds, municipal securities, futures, and options, including option contracts
for the purchase and sale of various types of securities. MLPF&S provides such
services to individual and institutional investors.
MLPF&S has established commission rates for all brokerage services that it
performs. For accounts that are actively traded, however, MLPF&S's policy is to
negotiate commissions based on economies of size and the complexity of the
particular trading transaction and, additionally, for its institutional
customers, based on the competitive environment and trading opportunities.
MLPF&S customers participating in the Blueprint (service mark) program can
purchase certain equity securities, mutual funds, and precious metals at a
lower cost due to order processing efficiencies.
At December 29, 1995, there were approximately 7.6 million retail and
institutional customer accounts worldwide at MLPF&S, compared to 7.1 million
accounts at year-end 1994. In the United States and Canada, these accounts were
served by approximately 12,600 retail financial consultants and institutional
account executives, including trainees (as compared with approximately 12,300 at
year-end 1994), in approximately 500 branch offices and 130 special market
offices ("SMOs"). In the rest of the world, these accounts were served through
Merrill Lynch International Incorporated and its subsidiaries and affiliates by
approximately 1,150 retail financial consultants and institutional account
executives at various international locations which are linked with the
communications and trading network of MLPF&S.
MLPF&S, as a futures commission merchant, introduces customers to its affiliate
Merrill Lynch Futures Inc. ("MLF") for the purchase and sale of futures
contracts and options on such futures contracts in substantially all
exchange-traded commodity and financial futures products. MLPF&S and certain of
its affiliates may also take proprietary market positions in futures and
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futures options in certain instances. MLF holds memberships on all major
commodity and financial futures exchanges and clearing associations in the
United States and it also carries positions reflecting trades executed on
exchanges outside of the United States.
All futures and futures options transactions are cleared through and carried by
MLF and other ML & Co. subsidiaries engaged in futures clearing activities. As a
result of their membership in the clearing associations of various futures
exchanges, these ML & Co. entities have potentially significant financial
exposure in the event that other members of futures clearing houses default
materially in their obligations to such clearing houses. In addition, as with
any margin transaction, the risk of loss to MLF and its customers from the
trading of futures contracts is greater than the risk in cash securities
transactions, primarily as a result of the low initial margin requirements (good
faith deposits) relative to the value of the actual futures contracts. MLF may
have financial exposure if a customer fails to meet a margin call. Net worth
requirements, financial reviews, margin procedures, and other credit standards
established for MLF customer futures accounts are intended to limit any exposure
to MLF resulting from its trading in futures accounts. For information
respecting ML & Co.'s credit management policies, see the information set forth
in "Management's Discussion and Analysis -- Risk Management -- Credit Risk" in
the 1995 Annual Report to Stockholders, which discussion is incorporated herein
by reference.
DEALER TRANSACTIONS. MLPF&S regularly makes a market in the equity securities of
approximately 900 U.S. corporations. In addition, it engages in
market-making for approximately 2,000 non-U.S. securities traded in the
over-the-counter markets. Its market-making activities are conducted with
customers and other dealers. In addition, as a block positioner, MLPF&S
regularly acts as a market-maker in certain listed securities. MLPF&S is also a
dealer in municipal, mortgage-backed, asset-backed, and corporate fixed-income
securities. MLPF&S engages in certain commodity-related transactions, such as
purchase and repurchase transactions and precious metals consignments as a
principal.
As an adjunct to its trading activities, MLPF&S places its capital at risk by
engaging in block positioning to facilitate transactions in large blocks of
listed and over-the-counter securities and by engaging, from time to time, in
arbitrage transactions for its own account. In its block positioning activities,
MLPF&S purchases securities, or sells securities short for its own account,
without having full commitments for their resale or covering purchase, thereby
employing its capital to effect large transactions. Such positioning activities
are undertaken after analyzing a given security's marketability and any position
taken typically is liquidated as soon as practicable. In addition, MLPF&S
facilitates various trading strategies involving the purchase and sale of
financial futures contracts and options and, in connection with this activity,
it may establish positions for its own account and risk.
Other ML & Co. subsidiaries act as dealers in certain specified securities,
including governmental obligations, engage in interest rate and foreign currency
swaps and other derivative product transactions with third parties on a
principal or an intermediary basis, and act as foreign exchange dealers. For
further information on ML & Co.'s dealer activities, see below "Merrill Lynch
Government Securities Inc.", "Merrill Lynch Capital Services, Inc., Merrill
Lynch Derivative Products, Inc., and Merrill Lynch Capital Markets PLC", and
"Merrill Lynch's Banking, Trust, and Mortgage Lending Activities".
INVESTMENT BANKING. MLPF&S is a major investment banking firm that participates
in every aspect of investment banking for corporate, institutional and
governmental clients and acts in principal, agency, and advisory capacities. In
addition to underwriting the sale of securities to
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the public, it arranges for the private placement of securities with investors.
MLPF&S also provides a broad range of financial and corporate advisory services
for its clients on strategic matters, including mergers and acquisitions,
divestitures, restructurings, spin-offs, leveraged buyouts, defensive projects,
project financing, mortgage and lease financing, capital structure, and specific
financing opportunities.
MLPF&S, either directly or through affiliates, provides advice, valuation
services, and financing assistance and engages in the underwriting and private
placement of high-yield securities in connection with leveraged buyouts and
other acquisition-related transactions. MLPF&S and its affiliates have, from
time to time, taken principal positions in such transactions. It may extend
credit to clients in the form of senior and subordinated debt, as well as
bridge financing on a select and limited basis. In addition, it may syndicate
loans in connection with corporate transactions, including leveraged
transactions. Substantial funds may be provided to clients on a temporary basis
until permanent financing is obtained. Additionally, MLPF&S and its affiliates
occasionally retain equity interests in the subject companies in connection
with their non-investment grade underwriting and merchant banking activities.
Before MLPF&S and its affiliates engage in any of these financing activities,
an analysis is performed to ascertain the underlying creditworthiness of the
particular client and the liquidity of the market for securities that may be
issued in connection with any such financings and to determine the likelihood
of refinancing the transaction within a reasonable period.
The Corporation, through various subsidiaries and affiliates, including Merrill
Lynch Capital Partners, Inc. ("MLCP") and Merrill Lynch Capital Corporation ("ML
Capital Corp."), has made investments in equity and debt securities in
acquisition transactions, including leveraged buyouts, for which MLPF&S has
acted as financial advisor or underwriter. MLCP manages two leveraged buyout
funds, Merrill Lynch Capital Appreciation Fund I, L.P. and Merrill Lynch Capital
Appreciation Fund II, L.P. (the "Funds") which have been funded primarily by
private investors. ML & Co., through MLPF&S and its other subsidiaries, may
underwrite, trade, invest, and make markets in certain securities of issuers in
which the Funds have invested. In addition, it may provide financial advisory
services to these issuers. ML Capital Corp. has been a participant in
middle-market leveraged acquisitions. Utilizing ML & Co.'s capital, ML Capital
Corp., as principal, has provided senior and subordinated financing to, and
acquired equity interests in, certain companies.
For additional information respecting these investment banking activities, see
"Management's Discussion and Analysis -- Non-Investment Grade Holdings and
Highly Leveraged Transactions" and Note 5 to the Consolidated Financial
Statements in the 1995 Annual Report to Stockholders, which information is
incorporated herein by reference.
MARGIN LENDING. MLPF&S also provides financing to clients, including margin
lending and other extensions of credit. In a margin-based transaction, MLPF&S
extends credit for a portion of the market value of the securities in the
customer's account up to the limit imposed by internal MLPF&S policies and
applicable margin regulations. Since MLPF&S may have financial exposure if a
customer fails to meet a margin call, any margin loan made by MLPF&S is
collateralized by securities in the customer's margin account. Financial
reviews, margin procedures, and other credit standards have been implemented in
an effort to limit any exposures resulting from this margin lending activity.
Interest on margin loans is an important source of revenue for MLPF&S. To
finance margin loans, MLPF&S uses funds on which it pays interest (including
borrowings from ML & Co.), funds on which it does not pay interest, including
its own capital, funds derived from customers' free credit balances to the
extent permitted by regulations, and funds derived from securities loaned. For
additional information respecting ML & Co.'s risk management policies in this
area, see "Management's Discussion
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and Analysis -- Risk Management -- Credit Risk" in the 1995 Annual Report to
Stockholders, which information is incorporated herein by reference.
SECURITIES AND ECONOMIC RESEARCH. MLPF&S's Global Securities Research and
Economics Group provides the Corporation's institutional and retail sales forces
and customers with investment and related information on global securities
markets and economic conditions. MLPF&S provides fundamental equity, fixed-
income, technical market, and quantitative analyses; convertible securities
analyses; investment and fixed-income strategy; high-yield debt securities
research; credit research on municipal securities; and futures research
information. MLPF&S provides research on more than 3,000 companies located in
50 countries. By means of a computer-based retrieval system available in each
MLPF&S branch or affiliate office, current information and investment opinions
on the common equity securities of approximately 1,900 corporations worldwide
are readily available to all of the Corporation's retail and institutional
customers through their financial consultants and account executives.
SECURITIES CLEARING SERVICES. MLPF&S provides securities clearing services
through its subsidiaries Broadcort Capital Corp. ("BCC") and Wagner Stott
Clearing Corp. ("WSCC"). BCC provides these services to approximately 89
unaffiliated broker-dealers. Those utilizing BCC's clearing services may also
execute transactions through BCC's fixed-income desk and participate in
underwritings of Defined Asset FundsSM sponsored by MLPF&S. While the
broker-dealer firm retains all sales functions with their customers, BCC
services the customers' accounts and handles all settlement and credit aspects
of transactions. WSCC clears transactions for specialists and market-makers on
various national and regional stock exchanges; clears commodities futures
transactions for clients through a divisional clearing arrangement with MLF and
other futures commissions merchants; and clears transactions of arbitrageurs,
customers, and other professional trading entities.
SALES OF INVESTMENT ADVISORY PRODUCTS AND SERVICES AND OTHER ACTIVITIES. In
1995, MLPF&S sold more than $24.5 billion of mutual funds, including income,
balanced, and growth funds, of which approximately $13.4 billion represented
sales of mutual funds advised by its affiliate MLAM (as defined below).
MLPF&S also sponsors Defined Asset Funds (service mark), a series of funds that
are unit investment trusts registered under the Investment Company Act of 1940.
These funds have invested in municipal obligations, corporate fixed-income
securities, U.S. Government obligations, U.S. equity securities, and non-U.S.
equity and debt securities. At the end of 1995, approximately $13 billion of
client funds were invested in Defined Asset Funds.
In addition, MLPF&S offers the Merrill Lynch Consults (registered trademark)
service for an annual fee to individual and institutional clients with at
least $100,000 to invest. Through the Merrill Lynch Consults service, MLPF&S
assists these clients in identifying their investment objectives so that
appropriate third party investment managers can be selected based on those
stated objectives. In addition, periodic performance reports are provided on
the managed account. More than 25 of the investment managers participating in
the Merrill Lynch Consults service manage portfolios in seven risk categories
using varying proportions of equity and fixed-income instruments. At the end of
1995, approximately $17 billion was held in approximately 77,000 client accounts
subscribing to the Merrill Lynch Consults service.
MLPF&S also provides Cash Management Account (registered trademark) financial
services (the "CMA (registered trademark) account service") in all MLPF&S retail
offices. Participating customers may access their assets through VISA
(registered trademark) cards issued by Merrill Lynch National Financial and
Merrill Lynch Bank & Trust Co. and through checking services provided by Bank
One, Columbus, N.A. Customers may also obtain
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through a toll free information service and monthly account statements
information concerning the securities and balances in their CMA accounts and, if
a margin account, the loan value of margin securities in such account. The CMA
account service money market funds are managed by MLAM (as defined below). At
the end of 1995, MLPF&S had more than 1.4 million CMA accounts for its United
States customers, with aggregate assets of approximately $325 billion (as
compared with approximately $265 billion at year-end 1994). In addition, there
are approximately 40,500 CMA accounts held by the Corporation's clients outside
the United States with aggregate assets of more than $16 billion.
MLPF&S also offers the Capital Builder (service mark) Account service ("CBA
(registered trademark) account"), which was developed to meet the needs of the
new investor through all MLPF&S retail offices. At the end of 1995, MLPF&S
had more than 330,000 CBA accounts with assets of approximately $15 billion.
MLPF&S also provides a wide variety of retirement plan products, particularly
investment, employee education, and recordkeeping services to 401(k) and other
benefit plans. At December 29, 1995, it provided these services to approximately
7,000 plans, representing $35.5 billion in plan assets.
MERRILL LYNCH INTERNATIONAL INCORPORATED
Merrill Lynch International Incorporated ("MLI"), through its subsidiaries and
affiliates, provides comprehensive investment, financing, and related services
on a global basis outside the United States and Canada to sovereign governments,
corporations, and other institutional clients and individual investors. The
Corporation's acquisition of Smith New Court and its subsidiaries has
strengthened its presence in the global community.
MLI's worldwide trading operations, particularly in London and Tokyo, make it
one of the largest dealers and secondary market-makers in Eurobonds and other
internationally traded securities and futures and a significant participant in
the over-the-counter equity derivatives business. MLI, through its subsidiary
MLIB Limited (as defined below), also engages in foreign exchange transactions
(including options on non-U.S. currencies) as a dealer and consequently assumes
principal positions in numerous currencies and related options. MLI and its
subsidiaries and affiliated companies are members of various non-U.S. stock and
futures exchanges and engage in over-the-counter and exchange-listed trading of
commodities, including precious metals and base metals. The investment,
financing, and market-making operations of MLI and its affiliates are conducted
through a network of offices, including representative and liaison offices,
located in more than 40 countries outside the United States and Canada. This
office network services major "money center" institutions as well as thousands
of smaller regional institutions and individual investors.
Information on international banking and foreign exchange activities of MLI and
certain of its subsidiaries is set forth below under the caption "Merrill
Lynch's Banking, Trust, and Mortgage Lending Activities."
MERRILL LYNCH ASSET MANAGEMENT
The Corporation's asset management activities are conducted through, or managed
by, Merrill Lynch Asset Management, LP, Fund Asset Management, LP, and their
affiliates (together, "MLAM"). MLAM constitutes the investment management arm of
ML & Co., and is one of the largest mutual fund managers in the world. In 1995,
sales of equity and bond funds managed by MLAM approximated $13.4 billion.
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MLAM's other major business activity is separate account management. Assets
under management were $26.2 billion at the end of 1995 (which amount includes
approximately $3.9 billion of general account assets managed on behalf of
insurance companies that are affiliates of MLAM) as compared with approximately
$24.3 billion in 1994 (which amount includes approximately $4.4 billion of
general account assets managed on behalf of insurance companies that are
affiliates of MLAM).
By the end of 1995, total assets under management approximated $196 billion, as
compared with $164 billion at year-end 1994.
At the end of 1995, MLAM managed 217 portfolios representing a wide variety of
investment objectives ranging from money market funds to long-term taxable and
tax-exempt fixed income funds, along a broad spectrum of quality ratings and
maturities. In addition, MLAM offers a wide variety of equity funds which in the
aggregate invest in more than 48 markets globally. MLAM open-end funds, other
than money-market funds, are generally offered pursuant to the Merrill Lynch
Select Pricing (service mark) System which allows investors four purchase
alternatives.
MERRILL LYNCH GOVERNMENT SECURITIES INC.
Merrill Lynch Government Securities Inc. ("MLGSI") is a primary dealer in
obligations issued or guaranteed by the United States Government and by Federal
agencies or other government-sponsored entities, including Government National
Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA"),
and Federal Home Loan Mortgage Corporation ("FHLMC"). It is one of 37 primary
government securities dealers that daily report positions and activities to the
Federal Reserve Bank of New York. It is a dealer in GNMA, FNMA and FHLMC
mortgage-backed-pass-through certificates and deals in related futures, options,
and forward contracts for its own account, to hedge its own risk, and to
facilitate customers' transactions.
MLGSI's transactions in obligations of the United States Government, Federal
agencies and government-sponsored entities involve large dollar amounts and
small dealer spreads. As an integral part of its business, MLGSI enters into
repurchase agreements whereby it obtains funds by pledging its own securities as
collateral. The repurchase agreements provide financing for MLGSI's dealer
inventory and serve as short-term investments for MLGSI's customers. MLGSI also
enters into reverse repurchase agreements whereby it lends funds against the
pledge of collateral by customers. Such agreements provide MLGSI with needed
collateral and provide MLGSI's customers with temporary liquidity for their
investments in United States Government and agency securities.
MERRILL LYNCH CAPITAL SERVICES, INC., MERRILL LYNCH DERIVATIVE PRODUCTS,
INC., AND MERRILL LYNCH CAPITAL MARKETS PLC
Merrill Lynch Capital Services, Inc. ("MLCS") and Merrill Lynch Derivative
Products, Inc. ("MLDP") are ML & Co.'s primary derivative product dealers and
act as intermediaries and principals in a variety of interest-rate, currency,
and other over-the-counter derivative transactions. In addition, Merrill Lynch
Capital Markets PLC engages in the equity derivatives business in the
over-the-counter markets. In 1995, Merrill Lynch Capital Markets Bank Limited
was established in Dublin, Ireland to handle part of the Corporation's
non-dollar swap activities.
MLCS primarily acts as a counterparty for certain derivative financial products,
including interest rate, currency and commodity swaps, caps and floors, currency
options, and credit derivatives. MLCS maintains positions in interest-bearing
securities, financial futures, and
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forward contracts primarily to hedge assets and liabilities. In the normal
course of its business, MLCS enters into repurchase and resale agreements with
certain affiliated companies.
MLDP acts as an intermediary for certain derivative products, including interest
rate and currency swaps between MLCS and highly-rated counterparties. Its
activities address the continuing desire of swap customers to limit their
trading to dealers with the highest credit quality. MLDP has been assigned an
Aaa, AAA, and AAA counterparty rating by the rating agencies Moody's Investors
Service, Inc., Standard & Poor's Ratings Group, and Fitch Investors Service,
Inc., respectively. Customers meeting certain credit criteria enter into swaps
with MLDP and, in turn, MLDP enters into offsetting mirror swaps with MLCS.
However, MLCS is required to provide MLDP with collateral to meet certain
exposures MLDP may have to MLCS.
For additional information regarding the Corporation's derivatives business,
including its accounting, risk, and credit policies, see "Management's
Discussion and Analysis -- Derivative Financial Instruments" in the 1995 Annual
Report to Stockholders and Notes 4, 5, and 6 to the Consolidated Financial
Statements in the 1995 Annual Report to Stockholders, which information is
hereby incorporated herein by reference.
MERRILL LYNCH MONEY MARKETS INC.
ML & Co., through Merrill Lynch Money Markets Inc. ("MLMMI"), provides a full
range of origination, trading, and marketing services with respect to money
market instruments such as commercial paper, bankers' acceptances, and
institutional certificates of deposit. MLMMI also originates medium-term notes
issued by U.S. and non-U.S. corporations and short- and medium-term
notes issued by financial institutions, and through MLPF&S, it trades and
markets such notes. MLMMI is also a commercial paper dealer for U.S. and
non-U.S. corporations and financial institutions. MLMMI also acts as a dealer
for U.S. and non-U.S. financial institutions in the certificate of deposit and
bankers' acceptance markets and in connection with the purchase of certificates
of deposit from federally-insured depository institutions. Such instruments are
resold to certain institutional customers such as thrift institutions, banks,
insurance companies, pension plans, and state and local governments. MLMMI, in
cooperation with MLPF&S, originates the placement of certificates of deposit
issued by such depository institutions that are sold to a broad range of retail
customers of MLPF&S.
MERRILL LYNCH MORTGAGE CAPITAL INC.
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is a dealer in whole loan
mortgages and mortgage servicing. MLMCI, through its CMO Passport (service mark)
service, provides dealers and investors with general indicative information and
analytic capability with respect to collateralized mortgage obligations ("CMOs")
and asset-backed securities. As an integral part of its business, MLMCI enters
into repurchase agreements whereby it obtains funds by pledging its own whole
loans as collateral. The repurchase agreements provide financing for MLMCI's
inventory and serve as short-term investments for MLMCI's customers. MLMCI also
enters into reverse repurchase agreements through which it makes loans to
customers collateralized by loan mortgages providing customers with temporary
liquidity for their investments in secured whole loans. MLMCI also has a
mortgage conduit which purchases commercial and multi-family mortgage loans
from lenders and securitizes these loans for sale to investors.
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MERRILL LYNCH INVESTMENT PARTNERS INC.
Merrill Lynch Investment Partners Inc. ("MLIP"), serves principally as the
general partner and commodity pool operator of public and privately offered
commodity pools for which MLF acts as commodity broker and MLPF&S acts as
selling agent. MLIP also structures and sponsors managed futures investments to
meet a variety of client objectives. MLIP is one of the largest managed futures
sponsors in the world as measured by assets under its management and by its
financial resources. MLIP is an integrated business, whose capabilities include
research, trading, finance, systems, operations, sales, and marketing. MLIP's
responsibilities include selecting and monitoring trading advisors, as well as
allocating and reallocating capital among them. At December 29, 1995,
approximately $1.3 billion in equity was invested or was to be invested in 41
U.S. and non-U.S. commodity futures funds which MLIP has sponsored or been
selected to manage (as compared with approximately $1.2 billion in equity
invested or to be invested in 48 commodity futures funds worldwide at the end
of 1994).
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
Merrill Lynch Business Financial Services Inc. ("MLBFS") provides financing
services to small- and medium-sized businesses in conjunction with the Working
Capital Management (service mark) account ("WCMA (registered trademark)
Account"), which MLPF&S markets to business customers. The WCMA Account combines
business checking, borrowing, investment, and electronic funds transfer services
into one account for participating business customers. As of December 29, 1995,
there were more than 120,000 WCMA Accounts which, in the aggregate, had
investment assets of more than $50 billion. In addition to providing qualifying
customers with short-term working capital financing through the WCMA Commercial
Line of Credit, MLBFS offers assistance to business customers with their term
lending, equipment, and other asset-based financing needs. In 1995, MLBFS
originated more than $575 million in new commercial loans for business customers
and, at December 29, 1995, total outstanding loans were $760 million, of which
approximately 97% were secured by tangible assets pledged by customers.
MERRILL LYNCH'S INSURANCE ACTIVITIES
ML & Co.'s operations in insurance services consist of the underwriting of life
insurance and annuity products by Merrill Lynch Life Insurance Company ("MLLIC")
and ML Life Insurance Company of New York ("ML Life") and the sale of life
proprietary and non-proprietary insurance and annuity products through Merrill
Lynch Life Agency Inc. and other insurance agencies affiliated or associated
with MLPF&S.
MLLIC, an Arkansas stock life insurance company, is authorized to underwrite
insurance and annuities products in 49 states, the District of Columbia, Guam,
and the U.S. Virgin Islands which are then marketed to MLPF&S customers.
Although authorized to do so, it does not presently underwrite accident
and health insurance. At year-end 1995, MLLIC had approximately $11.2 billion
of life insurance in force as compared with $10.8 billion at year-end 1994. At
year-end 1995, MLLIC had annuity contracts in force of approximately $6.4
billion in value as compared with $6 billion at year-end 1994.
ML Life, a New York stock life insurance company, is authorized to underwrite
life insurance, annuities, and accident and health insurance in nine states;
however, it does not presently underwrite accident and health insurance. At
year-end 1995, ML Life had approximately $2.2 billion of life insurance in
force, as compared with $2.1 billion of life insurance in force at year-end
1994. Life insurance in force includes $1.3 billion reinsured from yearly
renewable term
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insurance of an unaffiliated insurer. At year-end 1995, ML Life had annuity
contracts in force of approximately $485 million in value, as compared with $457
million at year-end 1994.
Through agency agreements, licensed affiliate insurance agencies and other
insurance agencies associated with MLPF&S sell life and health insurance and
annuities products. A significant portion of these sales consists of products
underwritten by MLLIC and ML Life.
For additional information respecting the Corporation's insurance activities
through its subsidiaries, see the 1995 Annual Report to Stockholders at Note 1
to the Consolidated Financial Statements under the caption "Insurance".
MERRILL LYNCH'S BANKING, TRUST, AND MORTGAGE LENDING ACTIVITIES
Merrill Lynch Bank & Trust Co. and Merrill Lynch National Financial, both
Federal Deposit Insurance Corporation-insured institutions, issue certificates
of deposit and money market deposit accounts (including the Insured Savings
(service mark) Account for the CMA account service), make and purchase secured
loans, and issue VISA (registered trademark) cards.
Merrill Lynch International Bank Limited ("MLIB Limited"), a United Kingdom bank
with branch offices in Germany, Singapore, Bahrain, Luxembourg, and Italy
provides foreign exchange trading and collateralized lending services and
accepts deposits. Merrill Lynch International Bank, an Edge Act corporation
("MLIB"), provides foreign exchange trading services to corporations and
institutions. Merrill Lynch Bank (Suisse) S.A., a Swiss bank, provides loans,
deposits, portfolio management, and individual client services to international
private banking clients. Merrill Lynch Bank A.G., a German bank with a branch
office in Japan, engages in capital markets activities such as underwriting,
foreign exchange, and swap and other derivative transactions.
The Corporation provides personal trust, employee benefit trust, and custodial
services in certain states through six state-chartered trust institutions. Trust
services outside of the United States are provided by Merrill Lynch Bank and
Trust Company (Cayman) Limited.
Merrill Lynch Credit Corporation ("MLCC") provides real estate-based lending
products enabling clients to purchase and refinance their homes as well as to
manage their other personal credit needs. MLCC offers a variety of
adjustable-rate and fixed-rate first mortgage loans throughout the United
States, including the PrimeFirst (registered trademark) mortgage program.
In addition, MLCC originates and services home equity credit lines and other
mortgage loans as well as services mortgage loans for affiliated and
unaffiliated financial institutions. MLCC uses a variety of financing
techniques to fund its loan portfolio, including securitizing its mortgages
for sale into the secondary marketplace. MLCC also provides securities-based
lending through its Omega(service mark) account, a personal line of credit using
eligible securities as collateral that is accessible by VISA (registered
trademark) card and by check.
COMPETITION
All aspects of ML & Co.'s business are intensely competitive, particularly in
the current securities industry environment of global overcapacity in
underwriting, trading, and operations. Through its subsidiaries, it competes
directly on a worldwide basis with other U.S. and non-U.S. trading, investment
banking, and financial services firms, brokers and dealers in securities and
commodities, and with commercial banks, particularly in its derivative and
wholesale
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capital markets businesses. Many of the Corporation's international competitors
may have competitive advantages in their home markets. Through its subsidiaries,
the Corporation also competes indirectly for investment funds with mutual fund
management companies, insurance companies, finance and investment advisory
companies, and banks. Its competitive position depends to an extent on
prevailing worldwide economic conditions and U.S. and non-U.S. governmental
policies.
ML & Co. competes for customers on the basis of price, the range of products
that it offers, the quality of its services, its financial resources, and
product innovation. Financial services companies also compete to attract and
retain successful financial consultants and other revenue-producing personnel.
There is increased competition from sources other than those traditionally
engaged in the securities business, such as commercial banks and insurance
companies. Certain U.S. judicial and regulatory actions in recent years
concerning, among other things, the authority of bank affiliates to engage in
securities underwriting and brokerage activities have resulted in increased
competition in those aspects of the Corporation's business. In addition,
domestic legislative proposals are made from time to time which, if enacted,
would relieve certain restrictions on commercial banks and would result in
increased competition from commercial banks and their affiliates.
The Corporation's insurance businesses operate in highly competitive
environments. Many companies, both stock and mutual, are older and larger and
have more substantial financial resources and larger agency relationships than
do the Corporation's insurance subsidiaries.
REGULATION
Certain aspects of the Corporation's business, as that of its competitors and
with the securities, commodities, and financial services industry in general,
are subject to stringent regulation by U.S. federal and state regulatory
agencies and non-U.S. governmental agencies or regulatory bodies which have been
charged with the protection of the financial markets and the interests of those
participating in those markets. These regulatory agencies include, among others,
the Securities and Exchange Commission (the "SEC" or the "Commission"), the
Commodity Futures Trading Commission ("CFTC"), and the Federal Deposit Insurance
Corporation (the "FDIC").
MLPF&S and certain other subsidiaries of ML & Co. are registered as
broker-dealers with the SEC and as such are subject to regulation by the SEC and
by self-regulatory organizations, such as the National Association of Securities
Dealers, Inc. (the "NASD"). MLPF&S, those ML & Co. subsidiaries engaged in
securities clearing services, and Merrill Lynch Specialists Inc., a ML & Co.
subsidiary acting as a specialist on certain securities exchanges, are also
subject to regulation by the NASD and by the securities exchanges of which each
is a member. Certain ML & Co. subsidiaries, including MLPF&S, MLAM, and
MLIP, are registered as investment advisers with the SEC. MLPF&S and MLAM are
registered as investment advisers with certain states requiring such
registration.
Certain ML & Co. subsidiaries, including MLPF&S, are regulated as
broker-dealers under the laws of the jurisdictions in which they operate. Those
ML & Co. entities that are broker-dealers registered with the SEC and members of
the United States national securities exchanges are subject to Net Capital Rule
15c3-1 under the Securities Exchange Act of 1934 (the "Exchange Act") which is
designed to measure the general financial condition and liquidity of a
broker-dealer. Under this rule, they are required to maintain the minimum net
capital
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deemed necessary to meet broker-dealers' continuing commitments to customers and
others. Under certain circumstances, this rule limits the ability of ML & Co. to
make withdrawals of capital from such broker-dealers. Additional information
regarding net capital requirements, set forth in Note 14 to the Consolidated
Financial Statements under the caption "Regulatory Requirements and Dividend
Restrictions" in the 1995 Annual Report to Stockholders, is incorporated herein
by reference.
The Corporation is also subject to the temporary risk assessment rules adopted
by the SEC under the Market Reform Act of 1990, which require, among other
things, that certain broker-dealers maintain and preserve records and other
information, describe risk management policies and procedures, and report on the
financial condition of certain affiliates whose financial and securities
activities are reasonably likely to have a material impact on the financial and
operating condition of the broker-dealer.
Broker-dealers are also subject to other regulations covering the operations of
their business, including sales and trading practices, use of client funds and
securities, and conduct of directors, officers, and employees. Broker-dealers
are also subject to regulation by state securities administrators in those
states where they do business. Violations of the stringent regulations governing
the actions of a broker-dealer can result in the revocation of broker-dealer
licenses, the imposition of censures or fines, the issuance of cease and desist
orders, and the suspension or expulsion from the securities business of a firm,
its officers or employees. With the enactment of the Insider Trading and
Securities Fraud Enforcement Act of 1988, the SEC and the securities exchanges
have intensified their regulation of broker-dealers, emphasizing in particular
the need for supervision and control by broker-dealers of their employees.
Furthermore, the SEC, various banking regulators, the Financial Accounting
Standards Board and Congressional committees, among others, have launched a
number of initiatives which may have the effect of increasing regulation of, and
requiring greater disclosure on, derivatives positions and activities. In March
1995, a committee known as the Derivatives Policy Group (the "DPG"), consisting
of representatives of ML & Co. and five other major U.S. securities firms,
agreed to implement a voluntary oversight framework to address issues related to
capital, management controls, and counterparty relationships arising out of the
OTC derivatives activities of unregulated affiliates of SEC-registered
broker-dealers and CFTC-registered futures commission merchants. In connection
with this initiative, the Corporation formed the Risk Control Committee to
provide general oversight of risk management for all institutional trading
activities and to monitor compliance with the Corporation's commitment under the
DPG's Framework for Voluntary Oversight.
Additional legislation and regulations, changes in rules promulgated by the SEC
or other U.S. federal and state governmental regulatory authorities and
self-regulatory organizations, as well as non-U.S. governments and governmental
regulatory agencies, or changes in the interpretation or enforcement of laws and
rules, may directly affect the manner of operation and profitability of the
Corporation.
The Corporation's registered government securities dealer is also subject to
regulation by the NASD and the Chicago Board of Trade and is required to
maintain minimum net capital pursuant to rules of the U.S. Department of the
Treasury. The Corporation's futures commission merchants are regulated by the
CFTC, the National Futures Association ("NFA") and the commodity exchanges of
which each is a member. The CFTC and the NFA impose net capital requirements on
these companies. MLIP is registered with the CFTC as a
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commodity pool operator and commodity trading advisor and is a member of the NFA
in such capacities.
Merrill Lynch Canada is an investment dealer in Canada and is regulated under
the laws of the Canadian provinces by securities authorities and by the
Investment Dealers Association of Canada. It is also a member of all major
Canadian exchanges and is subject to their rules and regulations.
ML Life is subject to extensive regulation and supervision by the New York State
Insurance Department. MLLIC is subject to extensive regulation and supervision
by the Insurance Department of the State of Arkansas. Both MLLIC and ML Life are
subject to similar regulation in the other states in which they are licensed.
Merrill Lynch Bank & Trust Co. is regulated primarily by the State of New Jersey
and by the FDIC. Merrill Lynch Trust Company (New Jersey), MLBFS, and MLCC are
regulated by the New Jersey Department of Banking. MLCC is also licensed to
conduct its lending activities in over 35 other states and as such is subject
to regulation and examination by the appropriate authorities in these states.
Merrill Lynch National Financial is regulated primarily by the State of Utah
and by the FDIC. MLIB is regulated by the Federal Reserve Bank of New York.
MLIB Limited is regulated by the New York State Banking Department.
The Corporation's trust institutions are subject to regulation by the
governmental agencies in the states in which they are incorporated.
The Corporation's business is also subject to extensive regulation by various
non-U.S. governments, securities exchanges, central banks, and regulatory
bodies, particularly in those countries where it has established an office. The
Corporation's subsidiaries engaged in banking activities outside the United
States are regulated by various governmental entities in the particular
jurisdiction where they are chartered, incorporated and/or conduct their
business activities.
ITEM 2. PROPERTIES
The executive offices and a significant portion of ML & Co.'s business
activities are located in a building on 250 Vesey Street (the "North Tower") in
the World Financial Center ("WFC") in New York City. Additional offices,
operations, and functions are located at 225 Liberty Street (the "South Tower")
in the WFC. An ML & Co. affiliate is a partner in the partnership that holds the
ground lessee's interest (including the right to grant occupancy and possession
to tenants) in the North Tower. The North Tower and the South Tower are each
occupied under separate leases held by an ML & Co. affiliate. Both the North and
South Tower leases commenced in 1988. The information regarding lease
commitments of ML & Co. (including commitments for leases of premises) is set
forth in Note 17 to the Consolidated Financial Statements under the caption
"Leases" of the 1995 Annual Report to Stockholders and is hereby incorporated
by reference.
ML & Co. affiliates also occupy additional principal locations in New Jersey at
which certain of the Corporation's business activities are conducted. These
include owned facilities in Plainsboro on 240 acres and on 35 acres (which is
the replacement facility for leased locations in Somerset where two leases
expired in 1994 and one expired in 1995); a leased facility in Piscataway (lease
expiring in 2005); and a leased facility in Jersey City (lease expiring in 2007,
exclusive of renewals) in which an ML & Co. affiliate holds an interest in
partnerships that own the land and the building and in which another ML & Co.
affiliate holds the lease for office space housing support functions. Other
significant facilities are at three New York City locations held by
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MLPF&S under leases expiring in 2000, 2007, and 2024, exclusive of extensions.
Affiliates of ML & Co. also own significant facilities in Lakewood and
Englewood, Colorado and Jacksonville, Florida.
Insurance activities are conducted by insurance subsidiaries of ML & Co. at
locations in Plainsboro, New Jersey (fee-owned facility), Jacksonville, Florida
(fee-owned facility), New York City (lease expiring in 2000), Springfield,
Massachusetts (sublease expiring in 1997), and at additional locations at MLPF&S
branch offices throughout the United States which service MLPF&S branch offices.
An ML & Co. affiliate leases a building with approximately 250,000 square feet
at Ropemaker Place, London. The lease commenced in 1987 and continues for 25
years with a right to cancel in the year 2002. As a result of the Smith New
Court acquisition, another ML affiliate leases a building with approximately
170,000 square feet at Farringdon Road in London. This lease commenced in 1990
and continues for 25 years. Another ML & Co. affiliate leases 97,000 square feet
of office space in Tokyo. The lease, which expires in the year 2003, can be
canceled at any time on six-months notice.
Substantially all other offices, including approximately 500 branch offices and
more than 130 SMOs, of ML & Co.'s subsidiaries throughout the world, are located
in leased premises. Facilities owned or occupied by the Corporation are believed
to be adequate for the purposes for which they are currently used and are well
maintained.
ITEM 3. LEGAL PROCEEDINGS
ML & Co., certain of its subsidiaries, including MLPF&S, and other persons have
been named as parties in numerous civil actions and arbitration proceedings,
including the following. Each of the following actions is reported as of March
22, 1996.
Orange County Litigation. The following actions have been filed against or on
behalf of the Corporation in connection with the Corporation's business
activities with the Treasurer-Tax Collector of Orange County, California
("Orange County") or from the purchase of debt instruments issued by Orange
County that were underwritten by MLPF&S. On December 6, 1994, bankruptcy
petitions were filed on behalf of Orange County and the Orange County Investment
Pools (the "Pools") in the United States Bankruptcy Court for the Central
District of California (the "Bankruptcy Court"). The Pools' bankruptcy petition
subsequently was dismissed. The currently pending actions involving the
Corporation and Orange County include, in the order summarized below, an action
in the names of Orange County and the current Orange County Treasurer-Tax
Collector; actions by investors and participants in the Pools; actions by
investors in the Corporation or affiliated entities; and actions by holders of
bonds or other debt instruments issued by or on behalf of Orange County and
other public entities with funds controlled by the Orange County Treasurer-Tax
Collector.
On January 12, 1995, an action was commenced in the Bankruptcy Court by Orange
County and the Pools against the Corporation and certain of its subsidiaries
(the "Orange County Action"). Orange County filed a first amended complaint on
June 6, 1995, which was dismissed on October 17, 1995. Orange County filed a
second amended complaint on October 25, 1995 adding John M.W. Moorlach, the
current Orange County Treasurer-Tax Collector, as a plaintiff, and alleging,
among other things, that the Corporation's liquidation of certain securities
entitles the plaintiffs to relief under Sections 362, 502, 510, 549 and 922 of
the Bankruptcy Code, that various securities transactions between Orange County
and/or the Pools and the Corporation and its subsidiaries violated California
law and are null and void,
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that the Corporation and its subsidiaries violated Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder, Section 25401 of the California
Corporations Code (the "California Code"), Section 17200 of the California
Business and Professions Code, Sections 1709-10 of the California Civil Code,
breached fiduciary duties, aided and abetted breaches of fiduciary duty and
conspired to make unauthorized use of public funds. Damages in excess of $2
billion, injunctive and declaratory relief are sought.
On March 1, 1995, the parties entered into an agreement pursuant to which the
proceeds from the sale of securities purchased by the Corporation from Orange
County pursuant to certain master repurchase agreements are to be used to
purchase short-term United States Treasury Bills or United States Treasury Notes
that will be identifiable and held separate and subject to any rights that the
Corporation may have in the master repurchase agreements. This agreement may be
terminated by the Corporation upon 30 days' written notice.
On December 13, 1994, a purported class action was commenced in the Superior
Court of the State of California, Orange County, on behalf of individuals whose
funds were deposited with the Orange County Treasurer-Tax Collector pursuant to
proceedings in California Superior Court (the "DeLeon Action"). On December 27,
1994, plaintiffs filed a first amended class action complaint; on April 19,
1995, plaintiffs filed a second amended complaint which was dismissed on
November 13, 1995 and on December 18, 1995 plaintiffs filed a third amended
complaint. As amended, the DeLeon Action is brought on behalf of the same
individuals on whose behalf the action was originally brought and on behalf of
individuals who invested funds in the Pools representing deferred compensation
and/or retirement funds. The defendants include the Corporation, a subsidiary of
the Corporation, and an employee of the Corporation. Plaintiffs allege, among
other things, that the defendants breached fiduciary duties, aided and abetted
breaches of fiduciary duties, conspired to breach a fiduciary duty and committed
professional negligence in connection with the Corporation's business activities
with the Orange County Treasurer-Tax Collector. Damages in an unspecified amount
are sought. The parties have agreed to stay this action pending developments in
the Orange County Action described above.
On January 10, 1995, a purported class action was commenced in the Superior
Court of the State of California, Orange County, on behalf of persons whose
funds were deposited in the Pools pursuant to proceedings in California Superior
Court (the "Small Action"). The Corporation, a subsidiary of the Corporation, an
employee of the Corporation, and Robert L. Citron, formerly the Treasurer-Tax
Collector of Orange County, are named as defendants. Plaintiffs allege claims
for breach of fiduciary duty and fraud in connection with the Corporation's
business activities with the Orange County Treasurer-Tax Collector. Injunctive
relief and damages in an unspecified amount are sought. The complaint was never
served.
On September 15, 1995, an action was commenced in the Superior Court for the
State of California, San Francisco County, by twelve California public entities
(the "Atascadero State Court Action"). Named as defendants are the Corporation,
certain subsidiaries of the Corporation, and an employee of the Corporation. The
complaint alleges, among other things, that the defendants committed fraud and
deceit, negligence and negligent misrepresentation, breached fiduciary duties,
aided and abetted breaches of fiduciary duty, and violated California Penal Code
Section 496 and the California Unfair Business Practices Act, in connection with
the Corporation's business activities with the Orange County Treasurer-Tax
Collector. Injunctive relief, rescission, restitution, and damages in excess of
$50 million are sought. The case has been transferred to Contra Costa County,
California.
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On November 27, 1995, an action was commenced in the United States District
Court for the Central District of California by fourteen California public
entities (the "Atascadero Federal Court Action"). Named as defendants are the
Corporation, certain subsidiaries of the Corporation, and an employee of the
Corporation. John Moorlach is named as a nominal defendant. The complaint
alleges, among other things, that defendants violated Sections 10(b) and 20(a)
of the Exchange Act and Rule 10b-5 promulgated thereunder, Sections 25400,
25401, 25500 and 25501 of the California Code, Section 496 of the California
Penal Code, the California Unfair Business Practices Act, and the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), committed fraud and deceit,
negligence and negligent misrepresentation, breached fiduciary duties, and aided
and abetted breaches of fiduciary duty, in connection with the Corporation's
business activities with the Orange County Treasurer-Tax Collector. Rescission,
restitution, and damages in excess of $50 million are sought. The complaint in
this action has not been served.
Beginning on December 5, 1994, five derivative actions purportedly brought
on behalf of the Corporation were filed in the Supreme Court of the State of
New York, New York County (the "Wilson Actions"). On February 21, 1995, the
court consolidated the actions and an amended consolidated complaint was filed
on June 5, 1995 naming as defendants 22 present or past directors, officers or
employees of the Corporation and/or certain of its subsidiaries. The complaint
alleges, among other things, breach of fiduciary duty and oversight failures,
waste of corporate assets and claims for indemnification in connection with the
Corporation's business activities with the Orange County Treasurer-Tax
Collector. The Corporation is named as a nominal defendant in these actions.
Damages in an unspecified amount are sought on behalf of the Corporation against
the individuals named as defendants.
On December 16, 1994, a purported class action was commenced in the United
States District Court for the Southern District of New York (the "Balan
Action"). An amended complaint was filed on May 15, 1995. As amended, the Balan
Action is brought on behalf of purchasers of the Corporation's common stock
between March 31, 1994 and December 6, 1994, and names as defendants the
Corporation and two of its directors and officers. The plaintiff alleges, among
other things, violations of Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder in connection with the Corporation's
disclosure with respect to its business activities with the Orange County
Treasurer-Tax Collector. Damages in an unspecified amount are sought.
Beginning on December 8, 1994, ten purported class actions were commenced in the
United States District Court for the Central District of California on behalf of
individuals who purchased bonds or other debt instruments issued by or on behalf
of Orange County during various periods of time (the "Smith Federal Court
Action"). Plaintiffs filed an amended consolidated complaint on January 27,
1995, and a first amended consolidated complaint on February 27, 1995. As
amended, the Smith Federal Court Action purports to be brought on behalf of all
persons who purchased bonds or other debt instruments between July 1, 1992 and
December 6, 1994 that were issued by Orange County or other public entities with
funds controlled by the Orange County Treasurer-Tax Collector. The defendants in
the first amended consolidated complaint are the Corporation, an employee of the
Corporation, Paine Webber, Inc., CS First Boston Corp., Smith Barney, Inc.,
Lehman Brothers, Inc., Donaldson, Lufkin & Jenrette, Inc., Kidder Peabody & Co.,
Inc., Stone & Youngberg, Rauscher Pierce Refsnes, Inc., Leifer Capital, Inc.,
Fieldman Rolapp & Associates, Inc., CGMS, Inc., and O'Brien Partners, Inc.
Following a stipulation and order filed on July 17, 1995 dismissing certain
state law claims without prejudice, the plaintiffs allege, among other things,
that the defendants affiliated with the Corporation violated Section 10(b) of
the Exchange Act and Rule 10b-5 promulgated
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thereunder with respect to the sale of bonds and other debt instruments issued
by Orange County and other public entities. Damages in an unspecified amount are
sought.
On September 28, 1995, a purported class action was commenced in the Superior
Court for the State of California, Orange County, asserting the state law claims
previously dismissed in the Smith Federal Court Action (the "Smith State Court
Action"). The Smith State Court Action is brought on behalf of the same
purported class as the Smith Federal Court Action. Named as defendants are the
Corporation, an employee of the Corporation, and the same defendants not
affiliated with the Corporation as in the Smith Federal Court Action and, in
addition, KPMG Peat Marwick. Violations of Sections 25400, 25401, 25500, 25501
and 25504.1 of the California Code and fraud and deceit are alleged in
connection with disclosure made with respect to the sale of bonds and other debt
instruments issued by Orange County or other public entities with funds
controlled by the Orange County Treasurer-Tax Collector. Damages in an
unspecified amount are sought. Certain of the defendants in the Smith Federal
Court Action and the Smith State Court Action other than the Corporation and the
employee of the Corporation named as a defendant have entered into settlement
agreements with the plaintiffs in these cases.
On March 9, 1995, an action (the "Kemper Action") was commenced in the Circuit
Court of Cook County, Illinois, Chancery Division, by five money market mutual
funds managed by Kemper Financial Services, Inc. (namely, the Cash Account
Trust, Cash Equivalent Fund, Kemper Investors Fund, Kemper Money Market Fund,
and Kemper Portfolios). Named as defendants are a subsidiary of the Corporation
and an employee of the Corporation. The complaint alleges, among other things,
that the defendants violated Sections 12A, 12F, 12G and 12I of the Illinois
Securities Act and committed common law fraud with respect to disclosure made in
connection with the issuance and sale of 1994-95 Taxable Notes that were issued
by Orange County on July 8, 1994. Rescission and damages in an unspecified
amount are sought. This action has been stayed until June 30, 1996.
The Corporation has also received formal and informal inquiries from various
governmental entities and agencies examining the events underlying the above
described litigation and is cooperating with these inquiries.
Pittleman Action. On November 3, 1995, a purported derivative action on behalf
of the Corporation was filed in the Supreme Court of the State of New York, New
York County, naming 12 present or past directors of the Corporation as
defendants. Damages in an unspecified amount are sought on behalf of the
Corporation. The complaint alleges, among other things, claims for breach of
fiduciary duty, indemnification and corporate waste in connection with (i)
certain of the Corporation's municipal finance activities, including certain
contractual arrangements that led to a civil settlement of approximately $12
million with the United States Attorney for the District of Massachusetts, the
Massachusetts Attorney General and the SEC and to the issuance by the SEC of an
order censuring MLPF&S and an order directing MLPF&S to cease and desist from
committing or causing any violation or future violation of Rule G-17 of the
Municipal Securities Rulemaking Board (as to which MLPF&S consented without
admitting or denying any of the findings or allegations contained in the orders)
and (ii) certain basket trading activities in Japan that led to administrative
sanctions by Japanese securities regulators consisting of a 48-hour suspension
of arbitrage trading by the Corporation for its own account in Japan.
NASDAQ Antitrust Litigation. On December 16, 1994, a consolidated amended
complaint was filed in In Re NASDAQ Market-Makers Antitrust Litigation, MDL
No. 1023, in the United States District Court for the Southern District of
New York. As subsequently amended, the complaint alleges that 33 market-makers,
including MLPF&S, engaged in a conspiracy with respect to the "spread" between
bid and ask prices for certain securities traded on NASDAQ by refusing to
quote bid and ask prices in so-called "odd-eighths". The complaint purports to
be brought on behalf of all persons who purchased or sold these securities
between May 1, 1989 and May 27, 1994. The complaint alleges violations of
antitrust laws and seeks compensatory damages in an unspecified amount, treble
damages, declaratory and injunctive relief, and attorney's fees and costs.
Judgment against each of the defendants is sought on a joint and several basis.
MLPF&S has filed an answer denying the allegations in the complaint. Discovery
is proceeding.
In connection with their industry-wide investigations into the NASDAQ market,
the Corporation, along with other named defendants, has received inquiries from
the Antitrust Division of the Department of Justice and the SEC and is
cooperating with these inquiries.
GSLIC Litigation. In each of the legal proceedings described below except for
the stockholder derivative actions, the claims against the Merrill Lynch
defendants (as defined below) have
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<PAGE>
now either been dismissed pursuant to settlements or under the terms of a
settlement for which court approval is now being sought will be dismissed.
All the actions arise from certain securities trading transactions that occurred
at year-end 1984, 1985, 1986, and 1988 between MLPF&S and MLGSI and a Florida
insurance company, Guarantee Security Life Insurance Company ("GSLIC"), which
was taken into liquidation. A principal focus of the allegations in the
following civil proceedings is an assertion that GSLIC's purpose in engaging in
the year-end transactions was to distort its apparent financial condition. It is
claimed that GSLIC's former officers and employees improperly took assets from
the company and its investment portfolio declined substantially in value before
its true financial condition became known to insurance regulators, GSLIC's
policyholders, and the creditors of GSLIC and its parent company, Transmark USA,
Inc. ("Transmark").
On December 20, 1991, an action (the "Receiver Action") was commenced by the
Florida Department of Insurance as Receiver of GSLIC (the "Receiver") in the
Fourth Judicial Circuit Court in Duval County, Florida naming as defendants
former officers, directors, and shareholders of GSLIC and Transmark, GSLIC's
former outside attorneys and accountants, MLPF&S, MLGSI, and a former managing
director of MLPF&S (the Merrill Lynch parties in the Receiver Action being
referred to collectively as the "Merrill Lynch defendants"). The complaint
alleges state law claims against the above-mentioned Merrill Lynch defendants
for fraud, breach of fiduciary duty, conspiracy, and aiding and abetting a
breach of duty arising from their involvement in the year-end trades with GSLIC,
alleges that GSLIC was damaged in excess of $300 million, and seeks relief in an
unspecified amount from the Merrill Lynch defendants. On July 14, 1995, an
agreement was signed among the Receiver of GSLIC, the Merrill Lynch defendants,
along with certain other named defendants, to settle this action. The court has
entered an order severing for purposes of trial the claims against the settling
defendants and otherwise staying all further proceedings in respect of such
defendants. Pursuant to the terms of the final settlement agreement (executed on
October 19, 1995) and subject to the finality of the court's Order of Final
Approval of Settlement dated March 8, 1996, the Merrill Lynch defendants will
pay $45 million to the Receiver, and the Receiver's claims against them will be
dismissed in their entirety.
Substantially the same defendants are named in two consolidated lawsuits brought
in federal court in Jacksonville, Florida on October 15, 1991 and on February
28, 1992 on behalf of an uncertified alleged class of purchasers of GSLIC
insurance policies and annuities between 1984 and 1991 (the "Haag/Levine
Action"). The complaint alleges substantially the same claims as the Receiver
Action as well as RICO claims and Section 10(b) of the Exchange Act and seeks
unspecified money damages. The court has stayed the Haag/Levine Action pending
the resolution of the Receiver Action. A condition of the settlement in the
Receiver Action is dismissal of the claims in the Haag/Levine Action against the
Merrill Lynch defendants, at no further cost to the Merrill Lynch defendants.
The Resolution Trust Corporation ("RTC"), as receiver for four failed savings
institutions (CenTrust Association Savings Bank, Imperial Savings Association,
FarWest Savings and Loan Association, and Columbia Savings and Loan Association)
in January and April, 1993 filed civil actions in federal court in Jacksonville,
Florida against ML & Co., MLPF&S, MLGSI, a former MLPF&S managing director,
and former officers, directors, and employees of Transmark and GSLIC (the "RTC
Action"). The action seeks to recover damages as a result of purchases by the
four above-named institutions of securities issued by Transmark, GSLIC's
parent corporation. The claims alleged are substantially similar to those in
the Haag/Levine action mentioned above. In April, 1993, Trans-Resources Inc.,
a company that alleges it also purchased Transmark securities, filed a
complaint in the federal
18
<PAGE>
court in Jacksonville, Florida substantially following the allegations of the
RTC Action and names substantially the same defendants (the "Trans-Resources
Action"). The RTC Action and Trans-Resources Action each seek compensatory and
punitive damages in unspecified amounts, trebling of damages under the RICO
claim, rescissory relief, and reimbursement of costs of suit. On August 10,
1995, an agreement was signed among the RTC and these Merrill Lynch defendants
to settle the RTC Action, as well as all other pending litigation brought by the
RTC against the Corporation or its affiliates. Pursuant to the agreement, $4.5
million has been paid to the RTC in respect of the RTC Action, and the RTC's
claims against these Merrill Lynch defendants have been dismissed in their
entirety. On December 22, 1995, an agreement was signed among Trans-Resources
and these Merrill Lynch defendants to settle the Trans-Resources Action.
Pursuant to the Agreement, $150,000 has been paid to Trans-Resources, and claims
against the Merrill Lynch defendants in this action have been dismissed in
their entirety.
In October 1991, Messrs. Miller and Steiner commenced derivative actions, now
consolidated, purportedly brought on behalf of the Corporation in New York State
Supreme Court, New York County, naming as defendants directors of ML & Co. who
were directors at the time of the year-end securities transactions in question,
among others. The plaintiffs assert claims of breach of fiduciary duties in
connection with the year-end securities transactions with GSLIC and other claims
against Transmark and one of Transmark's principals. The damages sought in this
action are unspecified. The court has stayed the action for all purposes pending
a resolution of the above-mentioned related litigation in Florida.
* * * *
The Corporation believes it has strong defenses to, and will vigorously contest,
the actions described above. Although the ultimate outcome of the actions
described above and other civil actions, arbitration proceedings and claims
pending against the Corporation or its subsidiaries as of March 22, 1996 cannot
be ascertained at this time and the results of legal proceedings cannot be
predicted with certainty, it is the opinion of the management of the Corporation
that the resolution of these actions will not have a material adverse effect on
the financial condition or the results of operations of the Corporation as set
forth in the Consolidated Financial Statements contained in the 1995 Annual
Report to Stockholders.
ITEM 4. Submission Of Matters To A Vote Of Security Holders None.
19
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning executive officers
of ML & Co. as of March 22, 1996.
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE
MARCH 1991*
Herbert M. Allison, Jr., 52 Executive Vice President, Corporate and
Institutional Client Group since January 1995;
Executive Vice President, Investment Banking
Group from May 1993 to January 1995; Executive
Vice President, Finance and Administration from
October, 1990 to April 1993; Executive Vice
President, Administration from July 1989 to
October 1990.
Edward L. Goldberg, 55 Executive Vice President, Operations, Systems
and Telecommunications since April 1991 (and
responsible for Corporate Real Estate and
Purchasing since March, 1993); Director and
Executive Vice President of MLPF&S since May
1991; from January 1991 to April 1991,
performed senior management responsibilities
in the Operations, Systems and
Telecommunications Division; Senior Vice
President of Equity Markets, Professional
Securities Services Group of MLPF&S,
September, 1988 to December, 1990.
Stephen L. Hammerman, 57 Vice Chairman of the Board since April 1992;
Executive Vice President from June 1985 to
April 1992; General Counsel since October
1984; General Counsel of MLPF&S since March
1981.
Jerome P. Kenney, 54 Executive Vice President, Corporate Strategy and
Research since October 1990; also Executive Vice
President, Corporate Credit from May 1993 to May
1995; Executive Vice President and President of
the Capital Markets Sector from September 1984
to October 1990.
David H. Komansky, 56 President and Chief Operating Officer since
January 1995; President and Chief Executive
Officer of MLPF&S since February 1995; Executive
Vice President, Debt and Equity Markets Group
from May 1993 to January 1995; Executive Vice
President, Debt Markets Group from June 1992 to
April 1993; Executive Vice President, Equity
Markets Group from October 1990 to May 1992.
- ----------
* Unless otherwise indicated, the offices listed are of the parent company.
Under ML & Co.'s By-Laws, elected officers are elected annually to hold
office until their successors are elected and qualify. All Executive Officers
are elected by the Board of Directors.
20
<PAGE>
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE
MARCH 1991*
Winthrop H. Smith, Jr., 46 Executive Vice President, International since
June 1992; National Sales Director of Eastern
Division from November 1990 to May 1992; Regional
Director of Mid-Atlantic Region from July 1985 to
November 1990.
John L. Steffens, 54 Executive Vice President, Private Client Group
since October 1990; Executive Vice President and
President of the Consumer Markets Sector from
July 1985 to October 1990.
Daniel P. Tully, 64 Chairman of the Board since June, 1993; Chief
Executive Officer since May, 1992; President and
Chief Operating Officer from July, 1985 to
January, 1995; Chairman of the Board, President,
and Chief Executive Officer of MLPF&S from July,
1985 to February, 1995.
Joseph T. Willett, 44 Chief Financial Officer since April 1993;
Controller from April 1992 to September 1995;
Senior Vice President since February 1991;
Treasurer from February 1991 to April 1992; First
Vice President of MLPF&S from January 1988 to
February 1991.
Arthur Zeikel, 63 Executive Vice President, Asset Management
Group since October 1990; Director, Corporate
Strategy from July 1988 to October 1990;
President and Chief Investment Officer of Merrill
Lynch Asset Management since November 1976.
- ----------
* Unless otherwise indicated, the offices listed are of the parent company.
Under ML & Co.'s By-Laws, elected officers are elected annually to hold
office until their successors are elected and qualify. All Executive Officers
are elected by the Board of Directors.
21
<PAGE>
PART II
ITEM 5. Market For Registrant's Common Equity And Related Stockholder Matters
Information relating to the principal market in which the Registrant's Common
Stock is traded, the high low sales prices per share for each full quarterly
period within the two most recent fiscal years, the approximate number of
holders of record of Common Stock and the frequency and amount of any cash
dividends declared for the two most recent fiscal years is set forth under the
captions "Dividends Per Common Share" and "Stockholder Information" on page 68
of the 1995 Annual Report to Stockholders and such information is hereby
incorporated herein by reference.
The Common Stock of ML & Co. (trading symbol MER) is listed on the following
stock exchanges: New York Stock Exchange, Chicago Stock Exchange, The Pacific
Stock Exchange, The Paris Stock Exchange, London Stock Exchange, and The Tokyo
Stock Exchange.
ITEM 6. Selected Financial Data
Selected financial data for the Registrant and its subsidiaries for each of the
last five fiscal years is set forth in the financial table "Selected Financial
Data" on page 26 of the 1995 Annual Report to Stockholders (excluding for this
purpose the financial ratio, leverage, and employee information set forth under
the headings "Financial Ratios" and "Other Statistics") and in the information
set forth on page 66 of the 1995 Annual Report to Stockholders. Such information
is hereby incorporated herein by reference and should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto on pages 41 to
65 in the 1995 Annual Report to Stockholders.
ITEM 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth on pages 28 to 40 of the 1995 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis" and is
hereby incorporated herein by reference. In addition, in response to this Item
7, the financial information set forth in the financial table "Selected
Financial Data" under the caption "Financial Ratios-Average Leverage" on page 26
of the 1995 Annual Report to Stockholders and the information in Note 14 to the
Consolidated Financial Statements in the 1995 Annual Report to Stockholders is
hereby incorporated herein by reference. All of such information should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
on pages 41 to 65 in the 1995 Annual Report to Stockholders.
ITEM 8. Financial Statements And Supplementary Data
The consolidated financial statements of the Registrant and its subsidiaries,
together with the Notes thereto and the Report of Independent Auditors thereon,
are contained in the 1995 Annual Report to Stockholders on pages 41 to 65 and
such information is hereby incorporated herein by reference. In addition, the
information on page 68 of the 1995 Annual Report to Stockholders under the
caption "Quarterly Information" is hereby incorporated by reference herein.
22
<PAGE>
ITEM 9. Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
None.
PART III
ITEM 10. Directors And Executive Officers Of The Registrant
The information set forth under the caption "Election of Directors" on pages 5
to 8 of ML & Co.'s Proxy Statement dated March 11, 1996 for its 1996 Annual
Meeting of Stockholders (the "Proxy Statement") and the information set forth
in Part I hereof under the caption "Executive Officers of the Registrant" is
hereby incorporated herein by reference.
ITEM 11. Executive Compensation
Information relating to executive compensation is set forth under the caption
"Executive Compensation" on pages 14 to 27 of the Proxy Statement and is hereby
incorporated herein by reference.
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management
Information respecting security ownership of management and certain beneficial
owners is set forth on pages 1 and 2 of the Proxy Statement and under the
caption "Election of Directors" on pages 5 to 8 of the Proxy Statement. Such
information is hereby incorporated herein by reference.
ITEM 13. Certain Relationships And Related Transactions
Information regarding certain relationships and related transactions set forth
under the caption "Certain Transactions" on pages 25 and 26 of the Proxy
Statement is hereby incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The financial statements are listed on page F-1 hereof by reference to
the corresponding page number in the 1995 Annual Report to
Stockholders.
2. Financial Statement Schedules
The financial statement schedules required to be filed hereunder are
listed on page F-1 hereof and the schedules included herewith appear on
pages F-3 through F-7 hereof.
23
<PAGE>
3. Exhibits
Certain of the following exhibits were previously filed as exhibits to
other reports or registration statements filed by the Registrant and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate report
reference date or registration statement number. For convenience,
Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, Current
Reports on Form 8-K, and Registration Statements on Form S-3 are
designated herein as "10-Q", "10-K", "8-K", and "S-3", respectively.
(3) Articles of Incorporation and By-Laws.
(i)(a) Restated Certificate of Incorporation of ML & Co., as
amended April 24, 1987 (Exhibit 3(i) to 10-K for fiscal
year ended December 25, 1992 ("1992 10-K")).
(b) Certificate of Amendment dated April 29, 1993 of the
Certificate of Incorporation of ML & Co. (Exhibit 3(i) to
10-Q for the quarter ended March 26, 1993 ("1st Quarter 1993
10-Q")).
(c) Form of certificate representing the 9% Cumulative Preferred
Stock, Series A, par value $1.00 per share, of ML & Co. (the
"9% Preferred Stock") (Exhibit 4(i) to 10-Q for the quarter
ended September 30, 1994 ("3rd Quarter 1994 10-Q")).
(d) Form of Depositary Receipt evidencing the Depositary Shares
for the 9% Preferred Stock (Exhibit 4(ii) to 3rd Quarter 1994
10-Q).
(e) Certificate of Designation of ML & Co. establishing the
rights, preferences, privileges, qualifications,
restrictions, and limitations relating to the 9% Preferred
Stock (Exhibit 4(iii) to 3rd Quarter 1994 10-Q).
(f) Deposit Agreement dated as of November 3, 1994 among ML &
Co., Citibank, N.A. as Depositary, and the holders from time
to time of the Depositary Receipts (Exhibit 4(iv) to 3rd
Quarter 1994 10-Q).
(g) Certificate of Designation dated March 30, 1988 for
Remarketed Preferred Stock, Series C (Exhibit 3(ii) to 1st
Quarter 1993 10-Q).
(h) Certificate of Designation dated December 17, 1987 for
Series A Junior Preferred Stock (Exhibit 3(f) to S-3 (File
No. 33-19975)).
(i) Form of Rights Agreement dated as of December 16, 1987
between ML & Co. and Chemical Bank (successor by merger to
Manufacturers Hanover Trust Company) (Exhibit 3(iv) to 1992
10-K).
(ii) By-Laws of ML & Co., effective as of October 25, 1993
(Exhibit 3(i) to 10-Q for the quarter ended September 24,
1993 ("3rd Quarter 1993 10-Q")).
24
<PAGE>
(4) Instruments defining the rights of security holders,
including indentures.
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
hereby undertakes to furnish to the Commission, upon request, copies
of the instruments defining the rights of holders of long-term
debt securities of the Registrant, none of which instruments
authorize an amount of securities that exceed 10% of the total
assets of the Registrant and its subsidiaries on a consolidated
basis. For convenience purposes, the Registrant hereby lists as
Exhibits 4(iii) through 4(vi) each long-term security issued by
the Registrant since the filing of its latest registration statement
for debt securities and warrants.
(i) Senior Indenture dated as of April 1, 1983, as amended and
restated, between ML & Co. and Chemical Bank (successor by
merger to Manufacturers Hanover Trust Company) and the
Supplemental Indenture thereto dated as of March 15, 1990
(Exhibit 3 to ML & Co.'s Registration Statement on Form
8-A dated July 20, 1992).
(ii) Senior Indenture dated as of October 1, 1993 between ML & Co.
and The Chase Manhattan Bank, N.A. (Exhibit 4 to 8-K dated
October 7, 1993).
(iii) Form of ML & Co.'s 6% Notes due January 15, 2001 (Exhibit 4 to
8-K dated January 17, 1996).
(iv) Form of ML & Co.'s AMEX Hong Kong 30 Index Equity
Participation Notes due February 16, 1999 (Exhibit 4 to 8-K
dated February 7, 1996).
(v) Form of ML & Co.'s 6% Notes due March 1, 2001 (Exhibit 4 to
8-K dated February 29, 1996).
(vi) Form of ML & Co.'s 7% Notes due March 19, 2006 (Exhibit 4 to
8-K dated March 18, 1996).
(10) Material Contracts.
Management Contracts, Compensation Plans, and other Employee
Arrangements:
(i) ML & Co. 1978 Incentive Equity Purchase Plan, as amended
through January 16, 1995 (Exhibit 10(i) to 1994 10-K).
(ii) Form of ML & Co. Amended and Restated 1994 Deferred
Compensation Agreement for a Select Group of Eligible
Employees, as amended through November 10, 1994 (Exhibit
10(ii) to 1994 10-K).
25
<PAGE>
*(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended
through December 4, 1995.
(iv) ML & Co. Equity Capital Accumulation Plan, as amended through
December 5, 1994 (Exhibit 10(iv) to 1994 10-K).
(v) ML & Co. Executive Officer Compensation Plan (Exhibit 10(i) to
ML & Co.'s Proxy Statement for the 1994 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on
March 14, 1994 ("1994 Proxy Statement")).
(vi) Written description of Retirement Program for Non-Employee
Directors of ML & Co., as amended June 29, 1988 (Page 24 of ML
& Co.'s Proxy Statement for the 1996 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on
March 11, 1996 ("1996 Proxy Statement")).
(vii) ML & Co. Non-Employee Directors' Equity Plan (Exhibit 10(iv)
to 10-Q for the quarter ended September 25, 1992 (the "3rd
Quarter 1992 10-Q")).
(viii) Executive Annuity Agreement dated July 24, 1991 by and
between ML & Co. and Daniel P. Tully (Exhibit 10(iii) to
10-Q for the quarter ended June 28, 1991 (the "2nd Quarter
1991 10-Q")).
(ix) Amendment dated April 30, 1992 to Executive Annuity
Agreement dated July 24, 1991 by and between ML & Co. and
Daniel P. Tully (Exhibit 10(ii) to 10-Q for the quarter
ended June 26, 1992).
*(x) Form of Severance Agreement between ML & Co. and certain of
its directors and executive officers.
(xi) Form of Indemnification Agreement entered into with all
current directors of ML & Co. and to be entered into with all
future directors of ML & Co. (Exhibit 10(xi) to 1993 10-K).
(xii) Written description of ML & Co.'s incentive compensation
programs (Exhibit 10(xii) to 1993 10-K).
(xiii) Written description of ML & Co.'s compensation policy for
directors (Page 14 of ML & Co.'s 1996 Proxy Statement).
(xiv) Merrill Lynch KECALP Growth Investments Limited Partnership
1983 (Exhibit 1(b) to Registration Statement on Form N-2 (File
No. 2-81619)).
(xv) Merrill Lynch KECALP L.P. 1984 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-87962)).
(xvi) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
(xvii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
- ----------
* Filed herewith.
26
<PAGE>
(xviii) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
(xix) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
(xx) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 33-51825)).
(xxi) Form of ML & Co. 1994 Deferred Restricted Unit Agreement for
Executive Officers (Exhibit 10(i) to 10-Q for the quarter
ended April 1, 1994 (the "1st Quarter 1994 10-Q")).
(xxii) Form of ML & Co. 1995 Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(xxii) to 1994 10-K).
(xxiii) Form of ML & Co. Fee Deferral Plan for Non-Employee
Directors, as amended through February 24, 1995 (Exhibit
10(xxiii) to 1994 10-K).
(xxiv) Form of ML & Co. 1996 Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(i) to 10-Q for the
quarter ended September 29, 1995).
-- 10(xxv) intentionally omitted --
Agreements Relating To The World Financial Center:
(xxvi) The following documents relate to the Registrant's occupation
of office space in buildings at the World Financial Center,
New York, New York:
(a) Reimbursement Agreement between Olympia & York Tower D
Company and Merrill Lynch/WFC/L, Inc. ("WFC/L") dated as
of August 24, 1984 (Exhibit 10(i) to 8-K dated January 22,
1990).
(b) Reimbursement Agreement between Olympia & York Tower B
Company ("B Company") and WFC/L dated as of August 24,
1984 (Exhibit 10(ii) to 8-K dated January 22, 1990).
+(c) Agreement of Lease (with respect to Parcel D) dated as
of February 26, 1988 between WFC Tower D Company
(formerly known as Olympia & York Tower D Company) ("D
Company") and WFC/L (Exhibit 10(xxx)(c) to 1992 10-K).
+(d) Guaranty and Assumption Agreement dated as of February
26, 1988 between ML & Co. and D Company (Exhibit
19(xxx)(d) to 1992 10-K).
+(e) Agreement of Lease (with respect to Parcel B) dated as
of September 29, 1988 between B Company and WFC/L (Exhibit
10(i) to 1st Quarter 1993 10-Q).
- ----------
+ Confidential treatment has been obtained for portions of this exhibit.
27
<PAGE>
+(f) Guaranty and Assumption Agreement dated as of September
29, 1988 between ML & Co. and B Company (Exhibit 10(ii) to
1st Quarter 1993 10-Q).
+(g) Restated and Amended Partnership Agreement of D Company,
executed on December 24, 1986 (Exhibit 10(xxx)(g) to 1992
10-K).
+(h) Agreement of Sublease dated as of September 29, 1988
between WFC/L and Olympia & York Tower B Lease Company
(Exhibit 10(iii) to 1st Quarter 1993 10-Q).
+(i) Agreement of Sublease (with respect to a portion of
Parcel B) dated November 26, 1990 between WFC/L and
Nomura Holding America, Inc. (Exhibit 10(xxvi)(i) to 1993
10-K).
+(j) Agreement of Sublease (with respect to a portion of
Parcel B) dated December 17, 1993 between WFC/L and
Deloitte & Touche (Exhibit 10(xxvi)(j) to 1993 10-K).
(xxvii) The following are amendments to certain of the documents that
are related to Registrant's occupation of office space in
buildings at the World Financial Center, New York, New York:
(a) First Amendment to Building D Agreement to Lease,
Leasehold Improvements Agreement and Reimbursement
Agreement (with respect to Parcel D) dated as of July 12,
1985 between D Company and WFC/L (Exhibit 10(iii) to 8-K
dated January 22, 1990).
(b) First Amendment to Building B Agreement to Lease,
Reimbursement Agreement, Second Amendment to Leasehold
Improvements Agreement (with respect to Parcel B) dated
as of July 12, 1985 between B Company and WFC/L (Exhibit
10(iv) to 8-K dated January 22, 1990).
(c) Second Amendment to Reimbursement Agreement (with respect
to Parcel D) dated as of February 26, 1988 between D
Company and WFC/L (Exhibit 10(iv) to 1st Quarter 1993
10-Q).
+(d) Amended and Restated Second Amendment to Reimbursement
Agreement (with respect to Parcel B) dated as of
September 29, 1988 between B Company and WFC/L (Exhibit
10(v) to 1st Quarter 1993 10-Q).
(e) Amendment of Agreement of Lease (with respect to Parcel
D) dated as of September 29, 1988 between D Company and
WFC/L (Exhibit 10(vi) to 1st Quarter 1993 10-Q).
(f) First Amendment to Agreement of Sublease dated as of
September 29, 1988 between WFC/L and Olympia & York Tower
B Lease Company (Exhibit 10(v) to 10-Q for the quarter
ended March 24, 1989).
- ----------
+ Confidential treatment has been obtained for portions of this exhibit.
28
<PAGE>
(g) Letter Amendment to the Restated and Amended Partnership
Agreement of WFC Tower D Company dated as of February 26,
1988 between O&Y Tower D Holding Company I ("O&Y I")
(which has succeeded to the interest of O&Y U.S.
Development Corp.), O&Y Tower D Holding Company II ("O&Y
II") and HQ North Company, Inc. (formerly known as O&Y
Delta Corp.) ("HQ North") (Exhibit 10(vii) to 1st Quarter
1993 10-Q).
(h) Third Amendment to Restated and Amended Partnership
Agreement of WFC Tower D Company dated as of July 12,
1990 among O&Y I, O&Y II, and HQ North (Exhibit
10(xxix)(i) to 10-K for the fiscal year ended
December 28, 1990 ("1990 10-K")).
+(i) Second Amendment dated as of December 26, 1990 to
Agreement of Sublease dated as of September 29, 1988
between WFC/L and Olympia & York Tower B Lease Company
(Exhibit 10(xxix)(j) to 1990 10-K).
+(j) Second Amendment dated as of January 5, 1994 to
Agreement of Sublease (with respect to a portion of Parcel
B) dated November 26, 1990 between WFC/L and Nomura
Holding America, Inc. (Exhibit 10(xxvii)(j) to 1993 10-K).
Certain Olympia & York entities have filed for bankruptcy
protection. The ML & Co. affiliates party to certain of the
above agreements are pursuing their claims. In addition to the
foregoing agreements, various guarantees, security agreements,
and related documents were granted by or to Olympia & York
Developments Limited and by or to O & Y Equity Corp. to or by
ML & Co. in connection with the World Financial Center
transactions. Exhibits to the documents listed in items
(xxvi) and (xxvii) above have been omitted, except where such
exhibits are material to the transactions.
* (11) Statement re computation of per share earnings.
* (12) Statement re computation of ratios.
* (13) 1995 Annual Report to Stockholders.
* (21) Subsidiaries of the Registrant.
* (23) Consent of Independent Auditors.
* (27) Financial Data Schedule.
- ----------
+ Confidential treatment has been obtained for portions of this exhibit.
* Filed herewith.
29
<PAGE>
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the Registrant
during the fourth quarter of 1995 with the Commission under the caption
"Item 5. Other Events":
(i) Current Report on Form 8-K dated October 17, 1995 for the purpose of
filing Preliminary Unaudited Earnings Summaries for the three- and
nine-month periods ended September 29, 1995.
(ii) Current Report on Form 8-K dated November 2, 1995 for the purpose of
filing ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet as
of September 29, 1995 and statements regarding computation of
ratios.
(ii) Current Report on Form 8-K dated November 27, 1995 for the purpose of
filing the form of Registrant's Index Warrant Agreement, including
form of Global Warrant Certificate, relating to ML & Co.'s
Russell 2000 Index Call Warrants expiring November 17, 1998.
INDEMNIFICATION
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
Registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
30
<PAGE>
DESCRIPTION OF COMMON STOCK
The authorized capital stock of ML & Co. consists of 500,000,000 shares of
common stock, par value $1.33 1/3 per share ("Common Stock"), and 25,000,000
shares of preferred stock, par value $1.00 per share, issuable in series
("Preferred Stock"). As of March 15, 1996, 177,013,550 shares of Common Stock
were outstanding (including 4,012,519 shares held by Merrill Lynch & Co., Inc.
Employee Stock Ownership Plan that are not considered outstanding for accounting
purposes). The shares of Common Stock have no preemptive or conversion
rights, redemption provisions, or sinking fund provisions. The outstanding
shares of Common Stock are duly and validly issued, fully paid, and
nonassessable. Each share is eligible to participate under the Rights Agreement
referenced below, to the extent specified therein, to purchase certain
securities upon the occurrence of certain events specified in such Rights
Agreement.
The Board of Directors of ML & Co., without further action by stockholders, has
the authority to issue all of the 25,000,000 shares of Preferred Stock, which
are currently authorized, from time to time in one or more series and, with
respect to each such series, has authority to fix the powers (including voting
power), designations, preferences as to dividends and liquidation, and relative,
participating, optional, or other special rights and the qualifications,
limitations or restrictions thereof. As of March 15, 1996, there were 17,000,000
Depositary Shares issued, each representing a one-four hundredth interest in a
share of the 9% Preferred Stock. The 9% Preferred Stock is a single series
consisting of 42,500 shares with an aggregate liquidation preference of
$425,000,000. As of March 15, 1996, there were 42,500 shares of 9% Preferred
Stock outstanding. As of March 15, 1996, there were 3,000 shares of ML & Co.'s
Remarketed Preferred (service mark) Stock, Series C (the "RP (registered
trademark) Stock ") issued, of which 1,938 were outstanding. From time to
time, MLPF&S may occasionally acquire a temporary position in the Depositary
Shares and shares of RP Stock. At March 15, 1996, the Depositary Shares and
shares of RP Stock held by MLPF&S for the purpose of resale was not material.
The 9% Preferred Stock and RP Stock have dividend and liquidation preference
over the Common Stock and over the Series A Junior Preferred Stock issuable
pursuant to a Rights Agreement dated as of December 16, 1987 between ML & Co.
and Chemical Bank (successor by merger to Manufacturers Hanover Trust Company).
31
<PAGE>
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14 (A)(1) AND 14 (A)(2)
Page Reference
--------------
1995 Annual
Report to
Form 10-K Stockholders
--------- ------------
Financial Statements
- --------------------
Statements of Consolidated Earnings, Year Ended Last
Friday in December 1995, 1994, and 1993 41
Consolidated Balance Sheets, December 29, 1995 and
December 30, 1994 42-43
Statements of Changes in Consolidated Stockholders'
Equity, Year Ended Last Friday in December 1995,
1994, and 1993 44-45
Statements of Consolidated Cash Flows, Year Ended
Last Friday in December 1995, 1994, and 1993 46
Notes to Consolidated Financial Statements 47-65
Independent Auditors' Report 65
Financial Statement Schedules
- -----------------------------
Independent Auditors' Report F-2
Schedule I Condensed Financial Information of F-3 to F-7
Registrant
Specifically incorporated elsewhere herein by
reference are certain portions of the following
unaudited items:
(i) Selected Financial Data 26
(ii) Management's Discussion and Analysis 28-40
(iii) Five-Year Financial Summary 66
(iv) Quarterly Information 68
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the
Consolidated Financial Statements and Notes thereto which are incorporated
herein by reference to the Registrant's 1995 Annual Report to Stockholders.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries (the "Company") as of December 29, 1995 and December 30,
1994 and for each of the three years in the period ended December 29, 1995 and
have issued our report thereon dated February 26, 1996; such consolidated
financial statements and report are included in your 1995 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also
included Schedule I listed in the Index to Financial Statements and Financial
Statement Schedules. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 26, 1996
F-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994, AND DECEMBER 31, 1993
(Dollars in Millions)
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
(52 weeks) (52 weeks) (53 weeks)
REVENUES
Management service fees (from affiliates) ... $ 282 $ 268 $ 262
Interest (principally from affiliates) ...... 2,002 1,423 921
Other ....................................... 80 14 2
------- ------- -------
Total Revenues .............................. 2,364 1,705 1,185
Interest Expense ............................ 2,061 1,514 948
------- ------- -------
Net Revenues ................................ 303 191 237
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits ................... 198 186 206
Other ....................................... 206 232 355
------- ------- -------
Total Non-Interest Expenses ................. 404 418 561
------- ------- -------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT),
EQUITY IN EARNINGS OF AFFILIATES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ...... (101) (227) (324)
Income Tax Expense (Benefit) ................ 112 (21) (105)
------- ------- -------
LOSS BEFORE EQUITY IN EARNINGS OF AFFILIATES
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .......................... (213) (206) (219)
Equity in Earnings of Affiliates ............ 1,327 1,223 1,613
------- ------- -------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ....................... 1,114 1,017 1,394
Cumulative Effect of Change in
Accounting Principle (net of applicable
income taxes of $25) .......................... -- -- (35)
------- ------- -------
NET EARNINGS .................................. $ 1,114 $ 1,017 $ 1,359
======= ======= ========
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS ........................... $ 1,066 $ 1,004 $ 1,354
======= ======= ========
See Notes to Condensed Financial Statements
F-3
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
DECEMBER 29, 1995 AND DECEMBER 30 ,1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------
ASSETS
------
Cash and cash equivalents ............................ $ 37 $ 88
Loans to, receivables from and preference
securities of affiliates............................ 39,366 33,059
Investments in affiliates, at equity ................. 6,017 5,722
Property, leasehold improvements and equipment (net of
accumulated depreciation and amortization of $223 in
1995 and $266 in 1994).............................. 153 253
Other receivables and assets ......................... 1,113 1,023
-------- ---------
TOTAL ASSETS ......................................... $ 46,686 $ 40,145
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Commercial paper and other short-term borrowings ..... $ 17,338 $ 14,747
Loans from and payables to affiliates ................ 2,657 2,137
Other liabilities and accrued interest ............... 2,707 2,154
Long-term borrowings ................................. 17,843 15,289
-------- ---------
Total Liabilities .................................... 40,545 34,327
-------- ---------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity 619 619
-------- ---------
Common Stockholders' Equity:
Common stock, par value $1.33 1/3 per share;
authorized: 500,000,000 shares;
issued: 1995 and 1994 - 236,330,162 shares ....... 315 315
Paid-in capital ...................................... 1,237 1,196
Foreign currency translation adjustment .............. 11 4
Net unrealized gains (losses) on investment securities
available-for-sale (net of applicable income tax
expense (benefit) of $13 in 1995 and $(31) in 1994) 25 (57)
Retained earnings .................................... 6,492 5,606
-------- ---------
Subtotal ............................................ 8,080 7,064
Less: Treasury stock, at cost:
1995 - 60,929,278 shares
1994 - 48,423,944 shares ..................... 2,241 1,627
Unallocated ESOP reversion shares, at cost:
1995 - 4,012,519 shares
1994 - 6,427,091 shares ..................... 63 101
Employee stock transactions .................... 254 137
-------- ---------
Total Common Stockholders' Equity .................... 5,522 5,199
-------- ---------
Total Stockholders' Equity ........................... 6,141 5,818
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 46,686 $ 40,145
======== =========
See Notes to Condensed Financial Statements
F-4
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 29, 1995, DECEMBER 30, 1994, AND DECEMBER 31, 1993
(Dollars in Millions)
- ------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings ................................... $ 1,114 $ 1,017 $ 1,359
Noncash items included in earnings:
Cumulative effect of change in
accounting principle ....................... - - 35
Equity in earnings of affiliates ............. (1,327) (1,223) (1,613)
Depreciation and amortization ................ 31 38 40
Other ........................................ (35) 57 104
(Increase) decrease in:
Intercompany receivables, net of payables .... (5,608) (435) (9,064)
Investments in affiliates .................... (363) (90) (176)
Other operating assets, net of liabilities ... 649 (12) 453
Proceeds from dividends from affiliates ...... 1,455 947 914
------- ------- -------
Cash (used for) provided by operating
activities ................................. (4,084) 299 (7,948)
------- ------- -------
Cash flows from investing activities:
Proceeds from (payments for):
Investment securities ........................ - - 8
Property, leasehold improvements and
equipment .................................. (12) (33) (22)
------- ------- -------
Cash used for investing activities ........... (12) (33) (14)
------- ------- -------
Cash flows from financing activities:
Proceeds from (payments for):
Commercial paper and other short-term
borrowings ................................. 2,592 (978) 6,010
Issuance and resale of long-term borrowings .. 9,458 8,450 7,282
Settlement and repurchases of long-term
borrowings ................................. (6,883) (6,917) (4,590)
Issuance of 9% Cumulative Preferred Stock .... - 425 -
Common stock transactions .................... (894) (1,048) (511)
Dividends .................................... (228) (188) (153)
------- ------- -------
Cash provided by (used for) financing
activities ................................. 4,045 (256) 8,038
------- ------- -------
Increase (decrease) in cash and cash equivalents . (51) 10 76
Cash and cash equivalents, beginning of year ..... 88 78 2
------- ------- -------
Cash and cash equivalents, end of year ........... $ 37 $ 88 $ 78
======= ======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes totaled $487 in 1995, $1,057 in 1994, and $1,004 in 1993.
Interest totaled $2,086 in 1995, $1,490 in 1994, and $897 in 1993.
See Notes to Condensed Financial Statements
F-5
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
The condensed financial statements of Merrill Lynch & Co., Inc. (the
"Parent Company") should be read in conjunction with the consolidated
financial statements of Merrill Lynch & Co., Inc. and subsidiaries (the
"Corporation") and the notes thereto incorporated elsewhere herein by
reference. Where appropriate, prior years' financial statements have
been reclassified to conform to the 1995 presentation.
DIVIDENDS RECEIVED FROM AFFILIATES
Cash dividends totaling $1,455, $947, and $914 were received from
consolidated subsidiaries in 1995, 1994, and 1993, respectively.
LONG-TERM BORROWINGS AND GUARANTEES
Reference is made to page 58 of the Annual Report for additional
information on Parent Company long-term borrowings. At December 29,
1995, Parent Company borrowings totaling $619 were held for purposes of
resale by affiliates which also purchased $1,088 and resold $894 of
such borrowings during the year.
In certain instances, the Parent Company guarantees obligations of
subsidiaries that may include obligations associated with foreign
exchange forward contracts and swap transactions.
Substantially all of the Parent Company's fixed-rate long-term
borrowings are swapped into variable interest rates. These swaps,
generally made with an affiliated dealer in such instruments, are used
to hedge interest rate, foreign currency, and equity-linked exposures
associated with long-term borrowings. At December 29, 1995 and December
30, 1994, the notional amounts of these instruments were $20,416 and
$15,915, respectively.
F-6
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
ACCOUNTING CHANGES
In 1993, the Parent Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits"
and SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". SFAS No. 112 was effective as of the 1993 first
quarter. The cumulative effect of this change in accounting principle,
reported in the Condensed Statements of Earnings, resulted in a charge
of $35 (net of applicable income tax benefits), including $32 (net of
applicable income tax benefits) from equity in earnings of affiliates.
SFAS No. 115 was effective as of the last day of the 1993 fiscal year.
The effect of this change, reported in the Condensed Balance Sheet
under Stockholders' Equity, was an increase of $21 (net of applicable
income taxes), all from equity in affiliates.
Reference is made to page 49 of the Annual Report for additional
information on Accounting Changes.
NON-INTEREST EXPENSES - OTHER
The Parent Company recorded a non-recurring pretax charge totaling $103
($60 after income taxes) in 1993 related to the Corporation's decision
not to occupy certain office space at its World Financial Center
Headquarters facility and to sublease the unused space to third
parties.
STOCKHOLDERS' EQUITY
In 1994, the Corporation issued 17,000,000 Depositary Shares, each
representing a one-four-hundredth interest in a share of 9% Cumulative
Preferred Stock, Series A, $10,000 liquidation preference per share
("9% Preferred Stock"). The 9% Preferred Stock is a single series
consisting of 42,500 shares with an aggregate liquidation preference of
$425.
Reference is made to pages 56 and 57 of the Annual Report for
additional information on Stockholders' Equity.
COMMITMENTS AND CONTINGENCIES
Reference is made to pages 63 and 64 of the Annual Report for
information on litigation, leases, and other commitments and contingencies.
F-7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 22nd day of March,
1996.
MERRILL LYNCH & CO., INC.
By: /s/ Daniel P. Tully
------------------------------
Daniel P. Tully
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on the 22nd day of March, 1996.
Signature Title
/s/ Daniel P. Tully Chairman of the Board,
----------------------------- Chief Executive Officer
(Daniel P. Tully) and Director
/s/ David H. Komansky President,
----------------------------- Chief Operating Officer and
(David H. Komansky) Director
/s/ Joseph T. Willett Senior Vice President and
----------------------------- Chief Financial Officer
(Joseph T. Willett)
/s/ Michael J. Castellano Senior Vice President and
----------------------------- Controller
Michael J. Castellano
/s/ William O. Bourke Director
-----------------------------
(William O. Bourke)
/s/ W. H. Clark Director
-----------------------------
(W.H. Clark)
/s/ Jill K. Conway Director
-----------------------------
(Jill K. Conway)
/s/ Stephen L. Hammerman Director
-----------------------------
(Stephen L. Hammerman)
/s/ Earle H. Harbison, Jr. Director
-----------------------------
(Earle H. Harbison, Jr.)
<PAGE>
/s/ George B. Harvey Director
-----------------------------
(George B. Harvey)
/s/ William R. Hoover Director
-----------------------------
(William R. Hoover)
/s/ Robert P. Luciano Director
-----------------------------
(Robert P. Luciano)
/s/ Aulana L. Peters Director
-----------------------------
(Aulana L. Peters)
/s/ John J. Phelan, Jr. Director
-----------------------------
(John J. Phelan, Jr.)
/s/ William L. Weiss Director
-----------------------------
(William L. Weiss)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MERRILL LYNCH & CO., INC.
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 1-7182
December 29, 1995
<PAGE>
EXHIBITS TO FORM 10-K
INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
3(i)(a) Restated Certificate of Incorporation of ML & Co., as
amended April 24, 1987 (Exhibit 3(i) to 10-K for fiscal
year ended December 25, 1992 ("1992 10-K")).
3(i)(b) Certificate of Amendment, dated April 29, 1993, of the
Certificate of Incorporation of ML & Co. (Exhibit 3(i) to
10-Q for the quarter ended March 26, 1993 ("1st Quarter 1993
10-Q")).
3(i)(c) Form of certificate representing the 9% Cumulative Preferred
Stock, Series A, par value $1.00 per share, of ML & Co. (the
"9% Preferred Stock") (Exhibit 4(i) to 10-Q for the quarter
ended September 30, 1994 ("3rd Quarter 1994 10-Q")).
3(i)(d) Form of Depositary Receipt evidencing the Depositary Shares
for the 9% Preferred Stock (Exhibit 4(ii) to 3rd Quarter 1994
10-Q).
3(i)(e) Certificate of Designation of ML & Co. establishing the
rights, preferences, privileges, qualifications,
restrictions, and limitations relating to the 9% Preferred
Stock (Exhibit 4(iii) to 3rd Quarter 1994 10-Q).
3(i)(f) Deposit Agreement dated as of November 3, 1994 among ML &
Co., Citibank, N.A. as Depositary, and the holders from time
to time of the Depositary Receipts (Exhibit 4(iv) to 3rd
Quarter 1994 10-Q).
3(i)(g) Certificate of Designation dated March 30, 1988 for
Remarketed Preferred Stock, Series C (Exhibit 3(ii) to 1st
Quarter 1993 10-Q).
3(i)(h) Certificate of Designation dated December 17, 1987 for
Series A Junior Preferred Stock (Exhibit 3(f) to S-3 (File
No. 33-19975)).
3(i)(i) Form of Rights Agreement dated as of December 16, 1987
between ML & Co. and Chemical Bank (successor by merger to
Manufacturers Hanover Trust Company) (Exhibit 3(iv) to 1992
10-K).
3(ii) By-Laws of ML & Co., effective as of October 25, 1993
(Exhibit 3(i) to 10-Q for the quarter ended September 24,
1993 ("3rd Quarter 1993 10-Q")).
- ----------
Certain of the exhibits in this index were previously filed as exhibits to other
reports or registration statements filed by the Registrant and are incorporated
herein by reference to such reports or registration statements as indicated
parenthetically by the appropriate report reference date or registration
statement number. For convenience, Quarterly Reports on Form 10-Q, Annual
Reports on Form 10-K, Current Reports on Form 8-K, and Registration Statements
on Form S-3 are designated herein as "10-Q", "10-K", "8-K", and "S-3",
respectively.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
4(i) Senior Indenture dated as of April 1, 1983, as amended and
restated, between ML & Co. and Chemical Bank (successor by
merger to Manufacturers Hanover Trust Company) and the
Supplemental Indenture thereto dated as of March 15, 1990
(Exhibit 3 to ML & Co.'s Registration Statement on Form
8-A dated July 20, 1992).
4(ii) Senior Indenture dated as of October 1, 1993 between ML &
Co. and The Chase Manhattan Bank, N.A. (Exhibit 4 to 8-K dated
October 7, 1993).
4(iii) Form of ML & Co.'s 6% Notes due January 15, 2001 (Exhibit 4 to
8-K dated January 17, 1996).
4(iv) Form of ML & Co.'s AMEX Hong Kong 30 Index Equity
Participation Notes due February 16, 1999 (Exhibit 4 to 8-K
dated February 7, 1996).
4(v) Form of ML & Co.'s 6% Notes due March 1, 2001 (Exhibit 4 to
8-K dated February 29, 1996).
4(vi) Form of ML & Co.'s 7% Notes due March 19, 2006 (Exhibit 4 to
8-K dated March 18, 1996).
10(i) ML & Co. 1978 Incentive Equity Purchase Plan, as amended
through January 16, 1995 (Exhibit 10(i) to 1994 10-K).
10(ii) Form of ML & Co. Amended and Restated 1994 Deferred
Compensation Agreement for a Select Group of Eligible
Employees, as amended through November 10, 1994 (Exhibit
10(ii) to 1994 10-K).
*10(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended
through December 4, 1995.
10(iv) ML & Co. Equity Capital Accumulation Plan, as amended through
December 5, 1994 (Exhibit 10(iv) to 1994 10-K).
10(v) ML & Co. Executive Officer Compensation Plan (Exhibit 10(i) to
ML & Co.'s Proxy Statement for the 1994 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on
March 14, 1994 ("1994 Proxy Statement")).
10(vi) Written description of Retirement Program for Non-Employee
Directors of ML & Co., as amended June 29, 1988 (Page 24 of ML
& Co.'s Proxy Statement for the 1996 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on
March 11, 1996 ("1996 Proxy Statement")).
- ----------
* Filed herewith.
E-2
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10(vii) ML & Co. Non-Employee Directors' Equity Plan (Exhibit 10(iv)
to 3rd Quarter 1992 10-Q for the quarter ended September 25,
1992 (the "3rd Quarter 1992 10-Q")).
10(viii) Executive Annuity Agreement dated July 24, 1991 by and
between ML & Co. and Daniel P. Tully (Exhibit 10(iii) to
10-Q for the quarter ended June 28, 1991 (the "2nd Quarter
1991 10-Q")).
10(ix) Amendment dated April 30, 1992 to Executive Annuity
Agreement dated July 24, 1991, by and between ML & Co. and
Daniel P. Tully (Exhibit 10(ii) to 2nd Quarter 1992 10-Q for
the quarter ended June 26, 1992).
*10(x) Form of Severance Agreement between ML & Co. and certain of
its directors and executive officers.
10(xi) Form of Indemnification Agreement entered into with all
current directors of ML & Co. and to be entered into with all
future directors of ML & Co. (Exhibit 10(xi) to 1993 10-K).
10(xii) Written description of ML & Co.'s incentive compensation
programs (Exhibit 10(xii) to 1993 10-K).
10(xiii) Written description of ML & Co.'s compensation policy for
directors (Page 14 of ML & Co.'s 1996 Proxy Statement).
10(xiv) Merrill Lynch KECALP Growth Investments Limited Partnership
1983 (Exhibit 1(b) to Registration Statement on Form N-2 (File
No. 2-81619)).
10(xv) Merrill Lynch KECALP L.P. 1984 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-87962)).
- ----------
* Filed herewith.
E-3
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10(xvi) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
10(xvii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
10(xviii) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
10(xix) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
10(xx) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 33-51825)).
10(xxi) Form of ML & Co. 1994 Deferred Restricted Unit Agreement for
Executive Officers (Exhibit 10(i) to 10-Q for the quarter
ended April 1, 1994 (the "1st Quarter 1994 10-Q")).
10(xxii) Form of ML & Co. 1995 Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(xxii) to 1994 10-K).
10(xxiii) Form of ML & Co. Fee Deferral Plan for Non-Employee
Directors, as amended through February 24, 1995 (Exhibit
10(xxiii) to 1994 10-K).
10(xxiv) Form of ML & Co. 1996 Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(i) to 10-Q for the
quarter ended September 29, 1995).
10(xxv) Intentionally omitted.
E-4
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10(xxvi)(a) Reimbursement Agreement between Olympia & York Tower D
Company and Merrill Lynch/WFC/L, Inc. ("WFC/L") dated as
of August 24, 1984 (Exhibit 10(i) to 8-K dated January 22,
1990).
10(xxvi)(b) Reimbursement Agreement between Olympia & York Tower B
Company ("B Company") and WFC/L dated as of August 24,
1984 (Exhibit 10(ii) to 8-K dated January 22, 1990).
+10(xxvi)(c) Agreement of Lease (with respect to Parcel D) dated as
of February 26, 1988 between WFC Tower D Company
(formerly known as Olympia & York Tower D Company) ("D
Company") and WFC/L (Exhibit 10(xxx)(c) to 1992 10-K).
+10(xxvi)(d) Guaranty and Assumption Agreement dated as of February
26, 1988 between ML & Co. and D Company (Exhibit
19(xxx)(d) to 1992 10-K).
+10(xxvi)(e) Agreement of Lease (with respect to Parcel B) dated as
of September 29, 1988 between B Company and WFC/L (Exhibit
10(i) to 1st Quarter 1993 10-Q).
+10(xxvi)(f) Guaranty and Assumption Agreement dated as of September
29, 1988 between ML & Co. and B Company (Exhibit 10(ii) to
1st Quarter 1993 10-Q).
+10(xxvi)(g) Restated and Amended Partnership Agreement of D Company,
executed on December 24, 1986 (Exhibit 10(xxx)(g) to 1992
10-K).
+10(xxvi)(h) Agreement of Sublease dated as of September 29, 1988
between WFC/L and Olympia & York Tower B Lease Company
(Exhibit 10(iii) to 1st Quarter 1993 10-Q).
+10(xxvi)(i) Agreement of Sublease (with respect to a portion of
Parcel B) dated November 26, 1990 between WFC/L and
Nomura Holding America, Inc. (Exhibit 10(xxvi)(i) to 1993
10-K).
+10(xxvi)(j) Agreement of Sublease (with respect to a portion of
Parcel B), dated December 17, 1993 between WFC/L and
Deloitte & Touche (Exhibit 10(xxvi)(j) to 1993 10-K).
10(xxvii)(a) First Amendment to Building D Agreement to Lease,
Leasehold Improvements Agreement and Reimbursement
Agreement (with respect to Parcel D) dated as of July 12,
1985 between D Company and WFC/L (Exhibit 10(iii) to 8-K
dated January 22, 1990).
10(xxvii)(b) First Amendment to Building B Agreement to Lease,
Reimbursement Agreement, Second Amendment to Leasehold
Improvements Agreement (with respect to Parcel B) dated
as of July 12, 1985 between B Company and WFC/L (Exhibit
10(iv) to 8-K dated January 22, 1990).
10(xxvii)(c) Second Amendment to Reimbursement Agreement (with respect
to Parcel D), dated as of February 26, 1988 between D
Company and WFC/L (Exhibit 10(iv) to 1st Quarter 1993
10-Q).
+10(xxvii)(d) Amended and Restated Second Amendment to Reimbursement
Agreement (with respect to Parcel B) dated as of
September 29, 1988 between B Company and WFC/L (Exhibit
10(v) to 1st Quarter 1993 10-Q).
- ----------
+ Confidential treatment has been obtained for portions of this exhibit.
E-5
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
10(xxvii)(e) Amendment of Agreement of Lease (with respect to Parcel
D) dated as of September 29, 1988 between D Company and
WFC/L (Exhibit 10(vi) to 1st Quarter 1993 10-Q).
10(xxvii)(f) First Amendment to Agreement of Sublease dated as of
September 29, 1988 between WFC/L and Olympia & York Tower
B Lease Company (Exhibit 10(v) to 10-Q for the quarter ended
March 24, 1989).
10(xxvii)(g) Letter Amendment to the Restated and Amended Partnership
Agreement of WFC Tower D Company dated as of February 26,
1988 between O&Y Tower D Holding Company I ("O&Y I")
(which has succeeded to the interest of O&Y U.S.
Development Corp.), O&Y Tower D Holding Company II ("O&Y
II") and HQ North Company, Inc. (formerly known as O&Y
Delta Corp.) ("HQ North") (Exhibit 10(vii) to 1st Quarter
1993 10-Q).
10(xxvii)(h) Third Amendment to Restated and Amended Partnership
Agreement of WFC Tower D Company dated as of July 12,
1990 among O&Y I, O&Y II, and HQ North (Exhibit
10(xxix)(i) to 10-K, for the fiscal year ended
December 28, 1990 ("1990 10-K")).
+10(xxvii)(i) Second Amendment, dated as of December 26, 1990 to
Agreement of Sublease dated as of September 29, 1988
between WFC/L and Olympia & York Tower B Lease Company
(Exhibit 10(xxix)(j) to 1990 10-K).
+10(xxvii)(j) Second Amendment dated as of January 5, 1994 to
Agreement of Sublease (with respect to a portion of Parcel
B) dated November 26, 1990 between WFC/L and Nomura
Holding America, Inc. (Exhibit 10(xxvii)(j) to 1993 10-K).
* 11 Statement re computation of per share earnings.
* 12 Statement re computation of ratios.
* 13 1995 Annual Report to Stockholders.
* 21 Subsidiaries of the Registrant.
* 23 Consent of Independent Auditors.
* 27 Financial Data Schedule.
- ----------
+ Confidential treatment has been obtained for portions of this exhibit.
* Filed herewith.
E-6
Exhibit 10(iii)
As amended through December 4, 1995
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - GENERAL..................................................... 1
Section 1.1 Purpose............................................... 1
Section 1.2 Definitions........................................... 1
(a) "Board of Directors" or "Board"......................... 1
(b) "Code".................................................. 1
(c) "Company"............................................... 1
(d) "Committee"............................................. 1
(e) "Common Stock" ......................................... 2
(f) "Disability"............................................ 2
(g) "Fair Market Value" .................................... 2
(h) "Junior Preferred Stock"................................ 2
(i) "Other ML & Co. Security"............................... 2
(j) "Participant"........................................... 2
(k) "Performance Period" ................................... 2
(l) "Performance Share" .................................... 3
(m) "Performance Unit" ..................................... 3
(n) "Restricted Period"..................................... 3
(o) "Restricted Share"...................................... 3
(p) "Restricted Unit"....................................... 3
(q) "Retirement"............................................ 3
(r) "Rights"................................................ 3
(s) "Rights Agreement"...................................... 3
(t) "Stock Appreciation Right" ............................. 3
(u) "Stock Option".......................................... 3
(v) "Vesting Period"........................................ 4
Section 1.3 Administration........................................ 4
Section 1.4 Shares and Units Subject to the Plan.................. 4
Section 1.5 Eligibility and Participation......................... 5
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES AND
PERFORMANCE UNITS........................................... 5
Section 2.1 Performance Periods and Restricted Periods............ 5
(i)
<PAGE>
PAGE
Section 2.2 Performance Objectives................................ 6
Section 2.3 Grants of Performance Shares and Performance Units ... 6
Section 2.4 Rights and Benefits During Performance Period ........ 7
Section 2.5 Adjustment with respect to Performance
Shares and Performance Units ....................... 7
Section 2.6 Payment of Performance Shares and
Performance Units................................... 7
(a) Performance Shares ..................................... 7
(i) If a Restricted Period has been established ........ 7
(ii) If a Restricted Period has not been established..... 8
(b) Performance Units....................................... 8
Section 2.7 Termination of Employment ............................ 8
(a) Prior to the end of a Performance Period................ 8
(i) Death............................................... 8
(ii) Disability or Retirement............................ 9
(iii) Other Terminations.................................. 9
(b) After the end of a Performance Period but
prior to the end of a Restricted Period................. 9
(i) Death, Disability, or Retirement.................... 9
(ii) Other Terminations ................................. 9
Section 2.8 Deferral of Payment ..................................10
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES
AND RESTRICTED UNITS......................................10
Section 3.1 Vesting Periods and Restricted Periods................10
(ii)
<PAGE>
PAGE
Section 3.2 Grants of Restricted Shares and
Restricted Units...................................11
Section 3.3 Rights and Restrictions Governing
Restricted Shares..................................11
Section 3.4 Rights Governing Restricted Units.....................12
Section 3.5 Adjustment with respect to Restricted
Shares and Restricted Units.........................12
Section 3.6 Payment of Restricted Shares and
Restricted Units....................................12
(a) Restricted Shares.......................................12
(b) Restricted Units........................................12
Section 3.7 Termination of Employment.............................12
(a) Prior to the end of a Vesting Period ...................12
(i) Death...............................................12
(ii) Disability or Retirement............................13
(iii) Other Terminations..................................13
(b) After the end of a Vesting Period but
prior to the end of a Restricted Period................13
(i) Death, Disability, or Retirement....................13
(ii) Other Terminations..................................13
Section 3.8 Extension of Vesting; Deferral of Payment.............13
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS.....................14
Section 4.1 Grants of Stock Options...............................14
Section 4.2 Option Documentation..................................14
Section 4.3 Exercise Price........................................14
(iii)
<PAGE>
PAGE
Section 4.4 Exercise of Stock Options.............................15
(a) Exercisability..........................................15
(b) Option Period...........................................15
(c) Exercise in the Event of Termination
of Employment..........................................15
(i) Death...............................................15
(ii) Disability or Retirement............................15
(iii) Other Terminations..................................16
(d) Limitations on Transferability..........................16
Section 4.5 Payment of Purchase Price and Tax Liability Upon Exercise;
Delivery of Shares....................................16
(a) Payment of Purchase Price...............................16
(b) Payment of Taxes........................................17
(c) Delivery of Shares......................................17
Section 4.6 Limitation on Fair Market Value of Shares of
Common Stock Received upon Exercise of
Incentive Stock Options.............................17
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION
RIGHTS......................................................17
Section 5.1 Grants of Stock Appreciation Rights...................17
Section 5.2 Stock Appreciation Rights Granted in
Connection with Incentive Stock Options.............18
Section 5.3 Payment Upon Exercise of Stock Appreciation
Rights.............................................19
Section 5.4 Termination of Employment............................19
(a) Death...................................................19
(b) Disability..............................................19
(c) Retirement..............................................19
(d) Other Terminations......................................19
(iv)
<PAGE>
PAGE
ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO.
SECURITIES..................................................20
Section 6.1 Grants of Other ML & Co. Securities...................20
Section 6.2 Terms and Conditions of Conversion or
Exchange...........................................20
ARTICLE VII - CHANGES IN CAPITALIZATION.................................20
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT AFTER
A CHANGE IN CONTROL......................................21
Section 8.1 Value of Payments Upon Termination After a
Change in Control...............................21
(a) Performance Shares and Performance Units................22
(b) Restricted Shares and Restricted Units..................22
(c) Stock Options and Stock Appreciation Rights.............22
(d) Other ML & Co. Securities...............................23
Section 8.2 A Change in Control...................................24
Section 8.3 Effect of Agreement Resulting in Change
in Control.........................................24
Section 8.4 Termination for Cause.................................25
Section 8.5 Good Reason...........................................25
(a) Inconsistent Duties.....................................25
(b) Reduced Salary or Bonus Opportunity.....................25
(c) Relocation..............................................26
(d) Compensation Plans......................................26
(e) Benefits and Perquisites................................26
(f) No Assumption by Successor..............................27
Section 8.6 Effect on Plan Provisions.............................27
ARTICLE IX - MISCELLANEOUS..............................................27
Section 9.1 Designation of Beneficiary............................27
(v)
<PAGE>
PAGE
Section 9.2 Employment Rights.....................................28
Section 9.3 Nontransferability....................................28
Section 9.4 Withholding...........................................28
Section 9.5 Relationship to Other Benefits........................28
Section 9.6 No Trust or Fund Created..............................28
Section 9.7 Expenses..............................................29
Section 9.8 Indemnification.......................................29
Section 9.9 Tax Litigation........................................29
ARTICLE X - AMENDMENT AND TERMINATION...................................29
ARTICLE XI - INTERPRETATION.............................................29
Section 11.1 Governmental and Other Regulations...................29
Section 11.2 Governing Law........................................30
ARTICLE XII - EFFECTIVE DATE AND STOCKHOLDER APPROVAL...................30
(vi)
<PAGE>
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
ARTICLE I - GENERAL
Section 1.1 Purpose.
The purposes of the Long-Term Incentive Compensation Plan (the "Plan")
are: (a) to enhance the growth and profitability of Merrill Lynch & Co., Inc., a
Delaware corporation ("ML & Co."), and its subsidiaries by providing the
incentive of long-term rewards to key employees who are capable of having a
significant impact on the performance of ML & Co. and its subsidiaries; (b) to
attract and retain employees of outstanding competence and ability; (c) to
encourage long-term stock ownership by employees; and (d) to further the
identity of interests of such employees with those of stockholders of ML & Co.
Section 1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated:
(a) "Board of Directors" or "Board" shall mean the Board of Directors of
ML & Co.
(b) "Code" shall mean the Internal Revenue Code of l986, as amended,
including any successor law thereto.
(c) "Company" shall mean ML & Co. and any corporation, partnership, or
other organization of which ML & Co. owns or controls, directly or indirectly,
not less than 50% of the total combined voting power of all classes of stock or
other equity interests. For purposes of this Plan, the terms "ML & Co." and
"Company" shall include any successor thereto.
(d) "Committee" shall mean the Management Development and Compensation
Committee of the Board of Directors, or its functional successor, unless some
other Board committee has been designated by the Board of Directors to
administer the Plan. The Committee shall be constituted so that at all relevant
times it meets the then applicable requirements of Rule 16b-3 (or its successor)
promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE>
(e) "Common Stock" shall mean the Common Stock, par value $1.33 1/3 per
share, of ML & Co. and a "share of Common Stock" shall mean one share of Common
Stock together with, for so long as Rights are outstanding, one Right (whether
trading with the Common Stock or separately).
(f) "Disability," unless otherwise provided herein, shall mean any
physical or mental condition that, in the opinion of the Director of Human
Resources of Merrill Lynch & Co., Inc. (or his functional successor), renders an
employee incapable of engaging in any employment or occupation for which he is
suited by reason of education or training, provided that, in the case of any
officer of ML & Co., as defined in Rule 16a-1 under the Securities Exchange Act
of 1934, such determination shall be made by the Committee following
recommendation by the Director of Human Resources.
(g) "Fair Market Value" of shares of Common Stock on any given date(s)
shall be: (a) the mean of the high and low sales prices on the New York Stock
Exchange--Composite Tape of such shares on the date(s) in question, or, if the
shares of Common Stock shall not have been traded on any such date(s), the mean
of the high and low sales prices on the New York Stock Exchange--Composite Tape
on the first day prior thereto on which the shares of Common Stock were so
traded; or (b) if the shares of Common Stock are not traded on the New York
Stock Exchange, such other amount as may be determined by the Committee by any
fair and reasonable means.
"Fair Market Value" of any Other ML & Co. Security on any given
date(s) shall be: (a) the mean of the high and low sales prices of such Other ML
& Co. Security on the principal securities exchange on which such Security is
traded on the date(s) in question or, if such Other ML & Co. Security shall not
have been traded on any such exchange on such date(s), the mean of the high and
low sales prices on such exchange on the first day prior thereto on which such
Other ML & Co. Security was so traded; or (b) if the Other ML & Co. Security is
not publicly traded on a securities exchange, such other amount as may be
determined by the Committee by any fair and reasonable means.
(h) "Junior Preferred Stock" shall mean ML & Co.'s Series A Junior
Preferred Stock, par value $1.00 per share.
(i) "Other ML & Co. Security" shall mean a financial instrument
issued pursuant to Article VI.
(j) "Participant" shall mean any employee who has met the eligibility
requirements set forth in Section 1.5 hereof and to whom a grant has been made
and is outstanding under the Plan.
(k) "Performance Period" shall mean, in relation to Performance Shares or
Performance Units, any period, for which performance objectives have been
established, of not less than one nor more than ten consecutive ML & Co. fiscal
2
<PAGE>
years, commencing with the first day of the fiscal year in which such
Performance Shares or Performance Units were granted.
(l) "Performance Share" shall mean a right, granted to a Participant
pursuant to Article II, that will be paid out as a share of Common Stock.
(m) "Performance Unit" shall mean a right, granted to a Participant
pursuant to Article II, to receive an amount equal to the Fair Market Value of
one share of Common Stock in cash.
(n) "Restricted Period" shall mean, (i) in relation to shares of Common
Stock receivable in payment for Performance Shares, the period beginning at the
end of the applicable Performance Period during which restrictions on the
transferability of such shares of Common Stock are in effect; and (ii) in
relation to Restricted Shares, the period, beginning with the first day of the
month in which Restricted Shares are granted, during which restrictions on the
transferability of such Restricted Shares are in effect and which shall not be
of shorter duration than the Vesting Period applicable to the same Restricted
Shares.
(o) "Restricted Share" shall mean a share of Common Stock, granted to a
Participant pursuant to Article III, subject to the restrictions set forth in
Section 3.3 hereof.
(p) "Restricted Unit" shall mean the right, granted to a Participant
pursuant to Article III, to receive an amount equal to the Fair Market Value of
one share of Common Stock in cash.
(q) "Retirement" shall mean the cessation of employment by the Company
after reaching age 55 and having completed at least 5 years of service,
including approved leaves of absence of one year or less.
(r) "Rights" means the Rights to Purchase Units of Junior Preferred Stock
issued pursuant to the Rights Agreement.
(s) "Rights Agreement" means the Rights Agreement dated as of
December 16, 1987 between ML & Co. and Manufacturers Hanover Trust Company,
Rights Agent, as amended from time to time.
(t) "Stock Appreciation Right" shall mean a right, granted to a
Participant pursuant to Article V, to receive, in cash or shares of Common
Stock, an amount equal to the increase in Fair Market Value, over a specified
period of time, of a specified number of shares of Common Stock.
(u) "Stock Option" shall mean a right, granted to a Participant pursuant
to Article IV, to purchase, before a specified date and at a specified price, a
specified number of shares of Common Stock. Stock Options may be "Incentive
3
<PAGE>
Stock Options," which meet the definition of such in Section 422A of the Code,
or "Nonqualified Stock Options," which do not meet such definition.
(v) "Vesting Period" shall mean, in relation to Restricted Shares or
Restricted Units, any period of not less than 12 months beginning with the first
day of the month in which the grant of the applicable Restricted Shares or
Restricted Units is effective, during which such Restricted Shares or Restricted
Units may be forfeited if the Participant terminates employment.
Section 1.3 Administration.
(a) The Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to:
(i) subject to Section 1.5 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the number of
Performance Shares, Performance Units, Restricted Shares, Restricted Units,
Stock Appreciation Rights, or Other ML & Co. Securities subject to each grant;
(iii) determine the number of shares of Common Stock subject to each Stock
Option grant; (iv) determine the time or times when grants are to be made or are
to be effective; (v) determine the terms and conditions subject to which grants
may be made; (vi) extend the term of any Stock Option; (vii) provide at the time
of grant that all or any portion of any Stock Option shall be canceled upon the
Participant's exercise of any Stock Appreciation Rights; (viii) prescribe the
form or forms of the instruments evidencing any grants made hereunder, provided
that such forms are consistent with the Plan; (ix) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (x) construe and interpret the Plan and all rules,
regulations, and instruments utilized thereunder; and (xi) make all
determinations deemed advisable or necessary for the administration of the Plan.
All determinations by the Committee shall be final and binding.
(b) The Committee shall act in accordance with the procedures established
for a Committee under ML & Co.'s Certificate of Incorporation and By-Laws or
under any resolution of the Board.
Section 1.4 Shares and Units Subject to the Plan.
The total number of shares of Common Stock that may be distributed under
the Plan shall be 80,000,000* (whether granted as Restricted Shares or reserved
for distribution upon grant of Performance Shares, Stock Options, Stock
Appreciation Rights (to the extent they may be paid out in Common Stock), or
Other ML & Co. Securities), subject to adjustment as provided in Article VII
hereof. Shares of Common Stock distributed under the Plan may be treasury shares
or authorized but unissued shares. The total number of units payable in cash
- ----------
*The net number of shares that remain available for distribution and reserved
for issuance under the Plan as of October 22, 1993 was 59,001,220, adjusted (as
of such date) for ML & Co.'s 2 for 1 stock split, effected in the form of a
stock dividend.
4
<PAGE>
under the Plan, including Performance Units, Restricted Units, and Stock
Appreciation Rights (to the extent they are paid out in cash) shall be
80,000,000.* To the extent that awards of Other ML & Co. Securities are
convertible into Common Stock or are otherwise equity securities (or convertible
into equity securities) of ML & Co., they shall be subject to the limitation
expressed above on the number of shares of Common Stock that can be awarded
under the Plan; otherwise, they shall be treated as if they were awards of units
payable in cash under the Plan and subject to the foregoing limitation thereon.
Any shares of Common Stock that have been granted as Restricted Shares or that
have been reserved for distribution in payment for Performance Shares but are
later forfeited or for any other reason are not payable under the Plan may again
be made the subject of grants under the Plan. If any Stock Option, Stock
Appreciation Right, or Other ML & Co. Security granted under the Plan expires or
terminates, or any Stock Appreciation Right is paid out in cash, the underlying
shares of Common Stock may again be made the subject of grants under the Plan.
Units payable in cash that are later forfeited or for any reason are not payable
under the Plan may again be the subject of grants under the Plan.
Section 1.5 Eligibility and Participation.
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried, key employees of the
Company.
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES AND
PERFORMANCE UNITS.
Section 2.1 Performance Periods and Restricted Periods.
The Committee shall establish Performance Periods applicable to
Performance Shares and Performance Units and may establish Restricted Periods
applicable to Performance Shares, at its discretion. Each such Performance
Period shall commence with the beginning of a fiscal year in which the
Performance Shares and Performance Units are granted and have a duration of not
less than one nor more than ten consecutive fiscal years. Each such Restricted
Period shall commence with the end of the Performance Period established for
such Performance Shares and shall end on such date as may be determined by the
Committee at the time of grant. There shall be no limitation on the number of
Performance Periods or Restricted Periods established by the Committee, and more
than one Performance Period may encompass the same fiscal year.
- ----------
*The net number of units that remain available for distribution under the Plan,
as of October 22, 1993, was 70,157,928, adjusted (as of such date) for ML&Co.'s
2 for 1 stock split, effected in form of a stock dividend.
5
<PAGE>
Section 2.2 Performance Objectives.
At any time before or during a Performance Period, the Committee shall
establish one or more performance objectives for such Performance Period,
provided that such performance objectives shall be established prior to the
grant of any Performance Shares or Performance Units with respect to such
Period. Performance objectives shall be based on one or more measures such as
return on stockholders' equity, earnings, or any other standard deemed relevant
by the Committee, measured internally or relative to other organizations and
before or after extraordinary items, as may be determined by the Committee;
provided, however, that any such measure shall include all accruals for grants
made under the Plan and for all other employee benefit plans of the Company. The
Committee may, in its discretion, establish performance objectives for the
Company as a whole or for only that part of the Company in which a given
Participant is involved, or a combination thereof. In establishing the
performance objective or objectives for a Performance Period, the Committee
shall determine both a minimum performance level, below which no Performance
Shares or Performance Units shall be payable, and a full performance level, at
or above which 100% of the Performance Shares or Performance Units shall be
payable. In addition, the Committee may, in its discretion, establish
intermediate levels at which given proportions of the Performance Shares or
Performance Units shall be payable. Such performance objectives shall not
thereafter be changed except as set forth in Sections 2.5 and 2.6 and Article
VII hereof.
Section 2.3 Grants of Performance Shares and Performance
Units.
The Committee may select employees to become Participants subject to the
provisions of Section 1.5 hereof and grant Performance Shares or Performance
Units to such Participants at any time prior to or during the first fiscal year
of a Performance Period. Grants shall be deemed to have been made as of the
beginning of the first fiscal year of the Performance Period. Before making
grants, the Committee must receive the recommendations of the management of the
Company, which will take into account such factors as level of responsibility,
current and past performance, and performance potential. Subject to the
provisions of Section 2.7 hereof, a grant of Performance Shares or Performance
Units shall be effective for the entire applicable Performance Period and may
not be revoked. Each grant to a Participant shall be evidenced by a written
instrument stating the number of Performance Shares or Performance Units
granted, the Performance Period, the performance objective or objectives, the
proportion of payments for performance between the minimum and full performance
levels, if any, the Restricted Periods and restrictions applicable to shares of
Common Stock receivable in payment for Performance Shares, and any other terms,
conditions, and rights with respect to such grant. At the time of any grant of
Performance Shares, there shall be reserved out of the number of shares of
6
<PAGE>
Common Stock authorized for distribution under the Plan a number of shares equal
to the number of Performance Shares so granted.
Section 2.4 Rights and Benefits During Performance Period.
The Committee may provide that, during a Performance Period, a Participant
shall be paid cash amounts, with respect to each Performance Share or
Performance Unit held by such Participant, in the same manner, at the same time,
and in the same amount paid, as a dividend on a share of Common Stock.
Section 2.5 Adjustment with respect to Performance Shares and
Performance Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time adjust performance objectives (up or down) and minimum
or full performance levels (and any intermediate levels and proportion of
payments related thereto), adjust the way performance objectives are measured,
or shorten any Performance Period or Restricted Period, if it determines that
conditions, including but not limited to, changes in the economy, changes in
competitive conditions, changes in laws or governmental regulations, changes in
generally accepted accounting principles, changes in the Company's accounting
policies, acquisitions or dispositions, or the occurrence of other unusual,
unforeseen, or extraordinary events, so warrant.
Section 2.6 Payment of Performance Shares and Performance
Units.
Within 90 days after the end of any Performance Period, the Company shall
determine the extent to which performance objectives established by the
Committee pursuant to Section 2.2 hereof for such Performance Period have been
met during such Performance Period and the resultant extent to which Performance
Shares or Performance Units granted for such Performance Period are payable.
Payment for Performance Shares and Performance Units shall be as follows:
(a) Performance Shares:
(i) If a Restricted Period has been established in relation to
the Performance Shares:
(A) At the end of the applicable Performance Period, one or more
certificates representing the number of shares of Common Stock equal to the
number of Performance Shares payable shall be registered in the name of the
Participant but shall be held by the Company for the account of the employee.
Such shares will be nonforfeitable but restricted as to transferability during
the applicable Restricted Period. During the Restricted Period, the Participant
shall have all rights of a holder as to such shares of Common Stock, including
7
<PAGE>
the right to receive dividends, to exercise Rights, and to vote such Common
Stock and any securities issued upon exercise of Rights, subject to the
following restrictions: (1) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; and (2) none of such
shares of Common Stock or Rights may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restricted Period. Any shares of
Common Stock or other securities or property received with respect to such
shares shall be subject to the same restrictions as such shares; provided,
however, that the Company shall not be required to register any fractional
shares of Common Stock payable to any Participant, but will pay the value of
such fractional shares, measured as set forth in Section 2.6(b) below, to the
Participant.
(B) At the end of the applicable Restricted Period, all
restrictions applicable to the shares of Common Stock, and other securities or
property received with respect to such shares, held by the Company for the
accounts of recipients of Performance Shares granted in relation to such
Restricted Period shall lapse, and one or more stock certificates for such
shares of Common Stock and securities, free of the restrictions, shall be
delivered to the Participant, or such shares and securities shall be credited to
a brokerage account if the Participant so directs.
(ii) If a Restricted Period has not been established in relation to
the Performance Shares, at the end of the applicable Performance Period, one or
more stock certificates representing the number of shares of Common Stock equal
to the number of Performance Shares payable, free of restrictions, shall be
registered in the name of the Participant and delivered to the Participant, or
such shares shall be credited to a brokerage account if the Participant so
directs.
(b) Performance Units: At the end of the applicable Performance Period, a
Participant shall be paid a cash amount equal to the number of Performance Units
payable, times the mean of the Fair Market Value of Common Stock during the
second calendar month following the end of the Performance Period, unless some
other date or period is established by the Committee at the time of grant.
Section 2.7 Termination of Employment.
(a) Prior to the end of a Performance Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Performance Period by reason of death, any outstanding
Performance Shares or Performance Units with respect to such Participant shall
become payable and be paid to such Participant's beneficiary or estate, as the
case may be, as soon as practicable in the manner set forth in Sections
2.6(a)(ii) and 2.6(b) hereof, respectively. In determining the extent to which
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performance objectives established for such Performance Period have been met and
the resultant extent to which Performance Shares or Performance Units are
payable, the Performance Period shall be deemed to end as of the end of the
fiscal year in which the Participant's death occurred.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article II, and such Participant shall not forfeit any Performance Shares
or Performance Units held by him, provided that following Disability or
Retirement such Participant does not engage in or assist any business that the
Committee, in its sole discretion, determines to be in competition with business
engaged in by the Company during the remainder of the applicable Performance
Period. A Participant who does engage in or assist any business that the
Committee, in its sole discretion, determines to be in competition with business
engaged in by the Company shall be deemed to have terminated employment.
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Performance Period for any reason other than death, the
Participant shall immediately forfeit all Performance Shares and Performance
Units previously granted under the Plan and all right to receive any payment for
such Performance Shares and Performance Units. The Committee may, however,
direct payment in accordance with the provisions of Section 2.6 hereof for a
number of Performance Shares or Performance Units, as it may determine, granted
under the Plan to a Participant whose employment has so terminated (but not
exceeding the number of Performance Shares or Performance Units that could have
been payable had the Participant remained an employee) if it finds that the
circumstances in the particular case so warrant. For purposes of the preceding
sentence, the Performance Period over which performance objectives shall be
measured shall be deemed to end as of the end of the fiscal year in which
termination occurred.
(b) After the end of a Performance Period but prior to the end of a
Restricted Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death or in the case of the Disability
or Retirement of a Participant, the Restricted Period shall be deemed to have
ended and shares held by the Company shall be paid as soon as practicable in the
manner set forth in Section 2.6(a)(i)(B).
(ii) Other Terminations: Terminations of employment for any reason
other than death after the end of a Performance Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless the
Committee, in its sole discretion, finds that the circumstances so warrant and
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determines that the Restricted Period shall end on an earlier date as determined
by the Committee and that shares held by the Company shall be paid as soon as
practicable following such earlier date in the manner set forth in Section
2.6(a)(i)(B).
(c) Except as otherwise provided in this Section 2.7, termination of
employment after the end of a Performance Period but before the payment of
Performance Shares or Performance Units relating to such Performance Period
shall not affect the amount, if any, to be paid pursuant to Section 2.6 hereof.
Approved leaves of absence of one year or less shall not be deemed to be
terminations of employment under this Section 2.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
2.7, unless the Committee determines otherwise.
Section 2.8 Deferral of Payment.
The Committee may, in its sole discretion, offer a Participant the right,
by execution of a written agreement, to defer the receipt of all or any portion
of the payment, if any, for Performance Shares or Performance Units. If such an
election to defer is made, the Common Stock receivable in payment for
Performance Shares shall be deferred as stock units equal in number to and
exchangeable, at the end of the deferral period, for the number of shares of
Common Stock that would have been paid to the Participant. Such stock units
shall represent only a contractual right and shall not give the Participant any
interest, right, or title to any Common Stock during the deferral period. The
cash receivable in payment for Performance Units or fractional shares receivable
for Performance Shares shall be deferred as cash units. Deferred stock units and
cash units may be credited annually with the appreciation factor contained in
the deferred compensation agreement, which may include dividend equivalents. All
other terms and conditions of deferred payments shall be as contained in the
written agreement.
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES AND
RESTRICTED UNITS.
Section 3.1 Vesting Periods and Restricted Periods.
The Committee shall establish one or more Vesting Periods applicable to
Restricted Shares and Restricted Units and one or more Restricted Periods
applicable to Restricted Shares, at its discretion. Each such Vesting Period
shall have a duration of not less than 12 months, measured from the first day of
the month in which the grant of the applicable Restricted Shares or Restricted
Units is effective. Each such Restricted Period shall have a duration of 12 or
more consecutive months, measured from the first day of the month in which the
grant of the applicable Restricted Shares is effective, but in no event shall
any Restricted Period applicable to a Restricted Share be of shorter duration
than the Vesting Period applicable to such Restricted Share.
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Section 3.2 Grants of Restricted Shares and Restricted Units.
The Committee may select employees to become Participants (subject to the
provisions of Section 1.5 hereof) and grant Restricted Shares or Restricted
Units to such Participants at any time. Before making grants, the Committee must
receive the recommendations of the management of the Company, which will take
into account such factors as level of responsibility, current and past
performance, and performance potential.
Subject to the provisions of Section 3.7 hereof, a grant of Restricted
Shares or Restricted Units shall be effective for the entire applicable Vesting
and Restricted Periods and may not be revoked. Each grant to a Participant shall
be evidenced by a written instrument stating the number of Restricted Shares
granted, the Vesting Period, the Restricted Period, the restrictions applicable
to such Restricted Shares, the nature and terms of payment of consideration, if
any, and the consequences of forfeiture that will apply to such Restricted
Shares, and any other terms, conditions, and rights with respect to such grant.
Each grant to a Participant of Restricted Units shall be evidenced by a written
instrument stating the number of Restricted Units granted, the Vesting Period,
and all other terms, conditions and rights with respect to such grant.
Section 3.3 Rights and Restrictions Governing Restricted
Shares.
At the time of grant of Restricted Shares, subject to the receipt by the
Company of any applicable consideration for such Restricted Shares, one or more
certificates representing the appropriate number of shares of Common Stock
granted to a Participant shall be registered either in his name or for his
benefit either individually or collectively with others, but shall be held by
the Company for the account of the Participant. The Participant shall have all
rights of a holder as to such shares of Common Stock, including the right to
receive dividends, to exercise Rights, and to vote such Common Stock and any
securities issued upon exercise of Rights, subject to the following
restrictions: (a) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; (b) none of the
Restricted Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted Period; and (c) all of the
Restricted Shares shall be forfeited and all rights of the Participant to such
Restricted Shares shall terminate without further obligation on the part of the
Company unless the Participant remains in the continuous employment of the
Company for the entire Vesting Period in relation to which such Restricted
Shares were granted, except as otherwise allowed by Section 3.7 hereof. Any
shares of Common Stock or other securities or property received with respect to
such shares shall be subject to the same restrictions as such Restricted Shares.
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Section 3.4 Rights Governing Restricted Units.
During the Vesting Period for Restricted Units, a Participant shall be
paid, with respect to each Restricted Unit to which such Vesting Period is
applicable, cash amounts in the same manner, at the same time, and in the same
amount paid, as a dividend on a share of Common Stock.
Section 3.5 Adjustment with respect to Restricted Shares and Restricted
Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time shorten any Vesting Period or Restricted Period, if it
determines that conditions, including but not limited to, changes in the
economy, changes in competitive conditions, changes in laws or governmental
regulations, changes in generally accepted accounting principles, changes in the
Company's accounting policies, acquisitions or dispositions, or the occurrence
of other unusual, unforeseen, or extraordinary events, so warrant.
Section 3.6 Payment of Restricted Shares and Restricted
Units.
(a) Restricted Shares: At the end of the Restricted Period, all
restrictions contained in the Restricted Share Agreement and in the Plan shall
lapse as to Restricted Shares granted in relation to such Restricted Period, and
one or more stock certificates for the appropriate number of shares of Common
Stock, free of restrictions, shall be delivered to the Participant or such
shares shall be credited to a brokerage account if the Participant so directs.
(b) Restricted Units: At the end of the Vesting Period applicable to
Restricted Units granted to a Participant, a cash amount equivalent in value to
the Fair Market Value of one share of Common Stock on the last day of the
Vesting Period, or during such period as is established by the Committee at the
time of grant, shall be paid, with respect to each such Restricted Unit, to the
Participant, or his beneficiary or estate, as the case may be.
Section 3.7 Termination of Employment.
(a) Prior to the end of a Vesting Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Vesting Period by reason of death, all Restricted Shares
and Restricted Units granted to such Participant are immediately payable as set
forth in Section 3.6.
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(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article III and such Participant shall not forfeit any Restricted Shares or
Restricted Units held by him, provided that, during the remainder of the
applicable Vesting Period, such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee, in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Vesting Period for any reason other than death, the
Participant shall immediately forfeit all Restricted Shares and Restricted Units
previously granted with respect to such Vesting Period in accordance with the
provisions of Section 3.2 hereof, unless the Committee, in its sole discretion,
finds that the circumstances in the particular case so warrant and allows a
Participant whose employment has so terminated to retain any or all of the
Restricted Shares or Restricted Units granted to such Participant.
(b) After the end of a Vesting Period but prior to the end of a
Restricted Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death, or in the case of the Disability
or Retirement of a Participant, prior to the end of a Restricted Period, all
Restricted Shares granted to such Participant are immediately payable in the
manner set forth in Section 3.6.
(ii) Other Terminations: Terminations of employment for any reason
other than death after the end of a Vesting Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless the
Committee, in its sole discretion, finds that the circumstances so warrant and
determines that the Restricted Period shall end on an earlier date as determined
by the Committee and that shares held by the Company shall be paid as soon as
practicable following such earlier date in the manner set forth in Section 3.6.
(c) Approved leaves of absence of one year or less shall not be deemed to
be terminations of employment under this Section 3.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
3.7, unless the Committee determines otherwise.
Section 3.8 Extension of Vesting; Deferral of Payment.
The Committee may, in its sole discretion, offer any Participant the
right, by execution of a written agreement with ML & Co. containing such terms
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and conditions as the Committee shall in its sole discretion provide for, to
extend the Vesting Period applicable to all or any portion of such Participant's
Restricted Shares or Restricted Units, to convert all or any portion of such
Participant's Restricted Shares into Restricted Units or to defer the receipt of
all or any portion of the payment, if any, for such Participant's Restricted
Units (including any Restricted Shares converted into Restricted Units). In the
event that any Vesting Period with respect to Restricted Shares is extended
pursuant to this Section 3.8, the Restricted Period with respect to such
Restricted Shares shall be extended to the same date. The provisions of any
written agreement with a Participant pursuant to this Section 3.8 may provide
for the payment or crediting of interest, an appreciation factor or index or
dividend equivalents, as appropriate.
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS.
Section 4.1 Grants of Stock Options.
The Committee may select employees to become Participants (subject to
Section 1.5 hereof) and grant Stock Options to such Participants at any time;
provided, however, that Incentive Stock Options shall be granted within 10 years
of the earlier of the date the Plan is adopted by the Board or approved by the
stockholders. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. Subject to the provisions of the Plan, the Committee
shall also determine the number of shares of Common Stock to be covered by each
Stock Option. The Committee shall have the authority, in its discretion, to
grant "Incentive Stock Options" or "Nonqualified Stock Options," or to grant
both types of Stock Options. Furthermore, the Committee may grant a Stock
Appreciation Right in connection with a Stock Option, as provided in Article V.
Section 4.2 Option Documentation.
Each Stock Option granted under the Plan shall be evidenced by written
documentation containing such terms and conditions as the Committee may deem
appropriate and are not inconsistent with the provisions of the Plan.
Section 4.3 Exercise Price.
The Committee shall establish the exercise price at the time any Stock
Option is granted at such amount as the Committee shall determine, except that
such exercise price shall not be less than 50% of the Fair Market Value of the
underlying shares of Common Stock on the day a Stock Option is granted and that,
with respect to an Incentive Stock Option, such exercise price shall not be less
than 100% of the Fair Market Value of the underlying shares of Common Stock on
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the day such Incentive Stock Option is granted. The exercise price will be
subject to adjustment in accordance with the provisions of Article VII of the
Plan.
Section 4.4 Exercise of Stock Options.
(a) Exercisability: Stock Options shall become exercisable at such times
and in such installments as the Committee may provide at the time of grant. The
Committee may, however, in its sole discretion accelerate the time at which a
Stock Option or installment may be exercised. A Stock Option may be exercised
at any time from the time first set by the Committee until the close of
business on the expiration date of the Stock Option. Notwithstanding the
foregoing, in no event may a Participant, or a Participant's transferee
pursuant to Section 4.4(d), exercise a Stock Option during the 12-month period
following a hardship withdrawal by the Participant of Elective 401(k) Deferrals
as defined under the Merrill Lynch & Co., Inc. 401(k) Savings & Investment
Plan.
(b) Option Period: For each Stock Option granted, the Committee shall
specify the period during which the Stock Option may be exercised, provided
that no Stock Option shall be exercisable after the expiration of 10 years from
the date of grant of such Stock Option.
(c) Exercise in the Event of Termination of Employment:
(i) Death: If a Participant ceases to be an employee of the Company
by reason of death prior to the exercise or expiration of Stock Options granted
to him and outstanding on the date of death, such Stock Options may be exercised
to the full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant or under the terms of Section 4.4(a)
hereof, by his estate or beneficiaries, as the case may be, if such Stock
Options are outstanding in his name, or by his transferee pursuant to Section
4.4(d) or such transferee's estate or beneficiaries, if such Stock Options are
outstanding in the name of such transferee, at any time and from time to time,
but in no event after the expiration date of such Stock Option.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article IV, provided that following Disability or Retirement such
Participant does not engage in or assist any business that the Committee, in its
sole discretion, determines to be in competition with business engaged in by the
Company. A Participant who does engage in or assist any business that the
Committee, in its sole discretion, determines to be competition with business
engaged in by the Company shall be deemed to have terminated employment. In the
case of Incentive Stock Options, Disability shall be as defined in Code Section
22(e)(3).
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(iii) Other Terminations: If a Participant ceases to be an employee
prior to the exercise or expiration of a Stock Option for any reason other than
death, all outstanding Stock Options granted to such Participant, whether
outstanding in his name or in the name of another person as a result of a
transfer in accordance with Section 4.4(d), shall expire on the date of such
termination of employment, unless the Committee, in its sole discretion, finds
that the circumstances in the particular case so warrant and determines that the
Participant, his transferee pursuant to Section 4.4(d) or such transferee's
estate or beneficiaries, may exercise any such outstanding Stock Option (to the
extent that any such outstanding Stock Option could have been exercised at the
date of such termination of employment) at any time and from time to time within
up to 5 years after such termination of employment but in no event after the
expiration date of such Stock Option (the "Extended Period"). If a Participant
dies during the Extended Period and prior to the exercise or expiration of a
Stock Option, his estate or beneficiaries, as the case may be, if such Stock
Option is outstanding in his name, or his transferee pursuant to Section 4.4(d)
or such transferee's estate or beneficiaries, if such Stock Option is
outstanding in the name of such transferee, may exercise such Stock Option (to
the extent such Stock Option could have been exercised at the date of
termination of employment) at any time and from time to time, but in no event
after the end of the Extended Period.
(d) Limitations on Transferability: Stock Options are not transferable by
a Participant except by will or the laws of descent and distribution and are
exercisable during his lifetime only by him; provided, however, that the
Committee shall have the authority, in its discretion, to grant (or to sanction
by way of amendment of an existing grant) Stock Options which may be
transferred by the Participant during his lifetime to any member of his
immediate family or to a trust established for the exclusive benefit of one or
more members of his immediate family, in which case the written documentation
containing the terms and conditions of such Stock Options shall so state. A
transfer of a Stock Option pursuant to this subparagraph may only be effected
by the Corporation at the written request of a Participant and shall become
effective only when recorded in the Corporation's record of outstanding Stock
Options. In the event a Stock Option is transferred as contemplated in this
subparagraph, such Stock Option may not be subsequently transferred by the
transferee except by will or the laws of descent and distribution. In the event
a Stock Option is transferred as contemplated in this subparagraph, such Stock
Option shall continue to be governed by and subject to the terms and
limitations of the Plan and the relevant grant, and the transferee shall be
entitled to the same rights as the Participant under Articles VII, VIII and X
hereof, as if no transfer had taken place. As used in this subparagraph,
"immediate family" shall mean, with respect to any person, any child, stepchild
or grandchild, and shall include relationships arising from legal adoption.
Section 4.5 Payment of Purchase Price and Tax Liability Upon
Exercise; Delivery of Shares.
(a) Payment of Purchase Price: The purchase price of the shares as to
which a Stock Option is exercised shall be paid to the Company at the time of
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exercise (i) in cash, (ii) by delivering freely transferable shares of Common
Stock already owned by the person exercising the Stock Option having a total
Fair Market Value on the day prior to the date of exercise equal to the
purchase price, (iii) a combination of cash and shares of Common Stock equal in
value to the exercise price, or (iv) by such other means as the Committee, in
its sole discretion, may determine.
(b) Payment of Taxes: Upon exercise, a Participant may elect to satisfy
any federal, state or local taxes required by law to be withheld that arise as
a result of the exercise of a Stock Option by directing the Company to withhold
from the shares of Common Stock otherwise deliverable upon the exercise of such
Stock Option, such number of shares as shall have a total Fair Market Value, on
the day prior to the date of exercise, at least equal to the amount of tax to
be withheld; provided that, with respect to any officer of ML & Co., as defined
in Rule 16a-1 under the Securities Exchange Act of 1934, the Committee shall
have the right to disapprove such election.
(c) Delivery of Shares: Upon receipt by the Company of the purchase price,
stock certificate(s) for the shares of Common Stock as to which a Stock Option
is exercised (net of any shares withheld pursuant to Section 4.5(b) above)
shall be delivered to the person in whose name the Stock Option is outstanding
or such person's estate or beneficiaries, as the case may be, or such shares
shall be credited to a brokerage account or otherwise delivered, in such manner
as such person or such person's estate or beneficiaries, as the case may be,
may direct.
Section 4.6 Limitation on Fair Market Value of Shares of Common Stock
Received upon Exercise of Incentive Stock Options.
The aggregate Fair Market Value (determined at the time an Incentive Stock
Option is granted) of the shares of Common Stock with respect to which an
Incentive Stock Option is exercisable for the first time by a Participant during
any calendar year (under all plans of the Company) shall not exceed $100,000 or
such other limit as may be established from time to time under the Code.
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION RIGHTS.
Section 5.1 Grants of Stock Appreciation Rights.
The Committee may select employees to become Participants (subject to the
provisions of Sections 1.5 hereof) and grant Stock Appreciation Rights to such
Participants at any time. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. The Committee shall have the authority to grant Stock
Appreciation Rights in connection with a Stock Option or independently. The
Committee may grant Stock Appreciation Rights in connection with a Stock Option,
either at the time of grant or by amendment, in which case each such right shall
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be subject to the same terms and conditions as the related Stock Option and
shall be exercisable only at such times and to such extent as the related Stock
Option is exercisable. A Stock Appreciation Right granted in connection with a
Stock Option shall entitle the holder to surrender to the Company the related
Stock Option unexercised, or any portion thereof, and receive from the Company
in exchange therefor an amount equal to the excess of the Fair Market Value of
one share of the Common Stock on the day preceding the surrender of such Stock
Option over the Stock Option exercise price times the number of shares
underlying the Stock Option, or portion thereof, that is surrendered. A Stock
Appreciation Right granted independently of a Stock Option shall entitle the
holder to receive upon exercise an amount equal to the excess of the Fair Market
Value of one share of Common Stock on the day preceding the exercise of the
Stock Appreciation Right over the Fair Market Value of one share of Common Stock
on the date such Stock Appreciation Right was granted, or such other price
determined by the Committee at the time of grant, which shall in no event be
less than 50% of the Fair Market Value of one share of Common Stock on the date
such Stock Appreciation Right was granted. Stock Appreciation Rights are not
transferable by a Participant except by will or the laws of descent and
distribution and are exercisable during his lifetime only by him.
Section 5.2 Stock Appreciation Rights Granted in Connection with
Incentive Stock Options.
(a) Stock Appreciation Rights granted in connection with Incentive Stock
Options must expire no later than the last date the underlying Incentive Stock
Option can be exercised.
(b) Such Stock Appreciation Rights may be granted for no more than 100% of
the difference between the exercise price of the underlying Incentive Stock
Option and the Fair Market Value of the Common Stock subject to the underlying
Incentive Stock Option at the time the Stock Appreciation Right is exercised.
(c) Such Stock Appreciation Rights are transferable only to the extent and
at the same time and under the same conditions as the underlying Incentive Stock
Options.
(d) Such Stock Appreciation Rights may be exercised only when the
underlying Incentive Stock Options may be exercised.
(e) Such Stock Appreciation Rights may be exercised only when the Fair
Market Value of the shares of Common Stock subject to the Incentive Stock
Options exceeds the exercise price of the Incentive Stock Options.
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Section 5.3 Payment Upon Exercise of Stock Appreciation Rights.
The Company's obligation to any Participant exercising a Stock
Appreciation Right may be paid in cash or shares of Common Stock, or partly in
cash and partly in shares, at the sole discretion of the Committee.
Section 5.4 Termination of Employment.
(a) Death: If a Participant ceases to be an employee of the Company prior
to the exercise or expiration of a Stock Appreciation Right outstanding in his
name on the date of death, such Stock Appreciation Right may be exercised to the
full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant, by his estate or beneficiaries, as the
case may be, at any time and from time to time within l2 months after the date
of death but in no event after the expiration date of such Stock Appreciation
Right.
(b) Disability: The Disability of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following the Disability such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee, in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
(c) Retirement: The Retirement of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following Retirement such Participant does not engage in or assist any business
that the Committee, in its sole discretion, determines to be in competition with
business engaged in by the Company, and such Participant may exercise any Stock
Appreciation Right outstanding in his name at any time and from time to time
within 5 years after the date his Retirement commenced but in no event after the
expiration date of such Stock Appreciation Right. A Participant who does engage
in or assist any business that the Committee, in its sole discretion, determines
to be in competition with business engaged in by the Company shall be deemed to
have terminated employment.
(d) Other Terminations: If a Participant ceases to be an employee prior to
the exercise or expiration of a Stock Appreciation Right for any reason other
than death, all outstanding Stock Appreciation Rights granted to such
Participant shall expire on the date of such termination of employment, unless
the Committee, in its sole discretion, determines that he may exercise any such
outstanding Stock Appreciation Right (to the extent that he was entitled to do
so at the date of such termination of such employment) at any time and from time
to time within up to 5 years after such termination of employment but in no
event after the expiration date of such Stock Appreciation Right.
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ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO. SECURITIES.
Section 6.1 Grants of Other ML & Co. Securities.
Subject to the provisions of the Plan and any necessary action by the
Board of Directors, the Committee may select employees to become Participants
(subject to the provisions of Section 1.5 hereof) and grant to Participants
Other ML & Co. Securities or the right or option to purchase Other ML & Co.
Securities on such terms and conditions as the Committee shall determine,
including, without limitation, the period such rights or options may be
exercised, the nature and terms of payment of consideration for such Other ML &
Co. Securities, whether such Other ML & Co. Securities shall be subject to any
or all of the provisions of Article III of the Plan applicable to Restricted
Shares and/or Restricted Units, the consequences of termination of employment,
and the terms and conditions, if any, upon which such Other ML & Co. Securities
may or must be repurchased by the Company. Before making grants, the Committee
must receive the recommendations of the management of the Company, which will
take into account such factors as level of responsibility, current and past
performance, and performance potential. Each such Other ML & Co. Security shall
be issued at a price that will not exceed the Fair Market Value thereof on the
date the corresponding right or option is granted. Other ML & Co. Securities may
bear interest or pay dividends from such date and at a rate or rates or pursuant
to a formula or formulas fixed by the Committee or any necessary action of the
Board. Any applicable conversion or exchange rate with respect to Other ML & Co.
Securities shall be fixed by, or pursuant to a formula determined by, the
Committee or any necessary action of the Board at each date of grant and may be
predicated upon the attainment of financial or other performance goals.
Section 6.2 Terms and Conditions of Conversion or Exchange.
Each Other ML & Co. Security may be convertible or exchangeable on such
date and within such period of time as the Committee, or the Board if necessary,
determines at the time of grant. Other ML & Co. Securities may be convertible
into or exchangeable for (i) shares of Preferred Stock of ML & Co. or (ii) other
securities of ML & Co. or any present or future subsidiary of ML & Co., whether
or not convertible into shares of Common Stock, as the Committee, or the Board
if necessary, determines at the time of grant (or at any time prior to the
conversion or exchange date).
ARTICLE VII - CHANGES IN CAPITALIZATION.
Any other provision of the Plan to the contrary notwithstanding, if any
change shall occur in or affect shares of Common Stock or Performance Units,
Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML & Co.
Securities on account of a merger, consolidation, reorganization, stock
dividend, stock split or combination, reclassification, recapitalization, or
distribution to holders of shares of Common Stock (other than cash dividends)
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including, without limitation, a merger or other reorganization event in which
the shares of Common Stock cease to exist, or, if in the opinion of the
Committee, after consultation with the Company's independent public accountants,
changes in the Company's accounting policies, acquisitions, divestitures,
distributions, or other unusual or extraordinary items have disproportionately
and materially affected the value of shares of Common Stock or Performance
Units, Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML &
Co. Securities, the Committee shall make such adjustments, if any, that it may
deem necessary or equitable in (a) the maximum number of shares of Common Stock
available for distribution under the Plan; (b) the number of shares subject to
or reserved for issuance under outstanding Performance Share, Restricted Share,
and Stock Option grants; (c) the performance objectives for the Performance
Periods not yet completed, including the minimum, intermediate, and full
performance levels and portion of payments related thereto; and (d) any other
terms or provisions of any outstanding grants of Performance Shares, Performance
Units, Restricted Shares, Restricted Units, Stock Options, Stock Appreciation
Rights, or Other ML & Co. Securities, in order to preserve the full benefits of
such grants for the Participants, taking into account inflation, interest rates,
and any other factors that the Committee, in its sole discretion, considers
relevant. In the event of a change in the presently authorized shares of Common
Stock that is limited to a change in the designation thereof or a change of
authorized shares with par value into the same number of shares with a different
par value or into the same number of shares without par value, the shares
resulting from any such change shall be deemed to be shares of Common Stock
within the meaning of the Plan. In the event of any other change affecting the
shares of Common Stock, Performance Units, Restricted Units, Stock Options,
Stock Appreciation Rights, or Other ML & Co. Securities, such adjustment shall
be made as may be deemed equitable by the Committee to give proper effect to
such event.
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT AFTER A
CHANGE IN CONTROL.
Section 8.1 Value of Payments Upon Termination After a Change
in Control.
Any other provision of the Plan to the contrary notwithstanding and
notwithstanding any election to the contrary previously made by the Participant,
in the event a Change in Control shall occur and thereafter the Company shall
terminate the Participant's employment without Cause or the Participant shall
terminate his employment with the Company for Good Reason, the Participant shall
be paid the value of his Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, and Other ML
& Co. Securities in a lump sum in cash, promptly after termination of his
employment but, without limiting the foregoing, in no event later than 30 days
thereafter. Payments shall be calculated as set forth below:
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(a) Performance Shares and Performance Units.
Any payment for Performance Shares and Performance Units pursuant to this
Section 8.1(a) shall be calculated by applying performance objectives for any
outstanding Performance Shares and Performance Units as if the applicable
Performance Period and any applicable Restricted Period had ended on the first
day of the month in which the Participant's employment is terminated. The amount
of any payment to a Participant pursuant to this Section 8.1(a) shall be reduced
by the amount of any payment previously made to the Participant with respect to
the Performance Shares and Performance Units, exclusive of ordinary dividend
payments, resulting by operation of law from the Change in Control, including,
without limitation, payments resulting from a merger pursuant to state law. The
value of the Performance Shares and Performance Units payable pursuant to this
Section 8.1(a) shall be the amount equal to the number of Performance Shares and
Performance Units payable in accordance with the preceding sentence multiplied
by the Fair Market Value of a share of Common Stock on the day the Participant's
employment is terminated or, if higher, the highest Fair Market Value of a share
of the Common Stock on any day during the 90-day period ending on the date of
the Change in Control (the "Pre-CIC Value").
(b) Restricted Shares and Restricted Units.
Any payment under this Section 8.1(b) shall be calculated as if all the
relevant Vesting and Restricted Periods had been fully completed immediately
prior to the date on which the Participant's employment is terminated. The
amount of any payment to a Participant pursuant to this Section 8.1(b) shall be
reduced by the amount of any payment previously made to the Participant with
respect to the Restricted Shares and Restricted Units, exclusive of ordinary
dividend payments, resulting by operation of law from the Change in Control,
including, without limitation, payments resulting from a merger pursuant to
state law. The value of the Participant's Restricted Shares and Restricted Units
payable pursuant to this Section 8.1(b) shall be the amount equal to the number
of the Restricted Shares and Restricted Units outstanding in a Participant's
name multiplied by the Fair Market Value of a share of Common Stock on the day
the Participant's employment is terminated or, if higher, the Pre-CIC Value.
(c) Stock Options and Stock Appreciation Rights.
Any payment for Stock Options and Stock Appreciation Rights pursuant to
this Section 8.1(c) shall be calculated as if all such Stock Options and Stock
Appreciation Rights, regardless of whether or not then fully exercisable under
the terms of the grant, became exercisable immediately prior to the date on
which the Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(c) shall be reduced by the amount of
any payment previously made to a Participant with respect to the Stock Options
and Stock Appreciation Rights, exclusive of any ordinary dividend payments,
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resulting by operation of law from the Change in Control, including, without
limitation, payments resulting from a merger pursuant to state law. The value of
the Participant's Stock Options and Stock Appreciation Rights payable pursuant
to this Section 8.1(c) shall be
(i) in the case of a Stock Option, for each underlying share of
Common Stock, the excess of the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the per share exercise price
for such Stock Option;
(ii) in the case of a Stock Appreciation Right granted in tandem
with a Stock Option, the Fair Market Value of a share of Common
Stock on the day the Participant's employment is terminated, or, if
higher, the Pre-CIC Value, over the Stock Option exercise price; and
(iii) in the case of a Stock Appreciation Right granted
independently of a Stock Option, the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the Fair Market Value of one
share of Common Stock on the date such Stock Appreciation Right was
granted, or such other price determined by the Committee at the time
of grant.
(d) Other ML & Co. Securities.
Any payment for Other ML & Co. Securities under this Section 8.1(d) shall
be calculated as if any relevant Vesting or Restricted Periods or other
applicable conditions dependent on the passage of time and relating to the
exercisability of any right or option to purchase Other ML & Co. Securities, or
relating to the full and unconditional ownership of such Other ML & Co.
Securities themselves, had been met on the first day of the month in which the
Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(d) shall be reduced by the amount of
any payment previously made to the Participant with respect to the Other ML &
Co. Securities, exclusive of ordinary dividend payments, resulting by operation
of law from the Change in Control, including, without limitation, payments
resulting from a merger pursuant to state law. The value of the Participant's
Other ML & Co. Securities payable pursuant to this Section 8.1(d) shall be
(i) in the case of an option or right to purchase such Other ML &
Co. Security, for each underlying Other ML & Co. Security, the
excess of the Fair Market Value of such Other ML & Co. Security on
the day the Participant's employment is terminated, or, if higher,
the Pre-CIC Value, over the exercise price of such option or right;
and
(ii) in the case of the Other ML & Co. Security itself (where there
is no outstanding option or right relating to such Other ML & Co.
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Security), the Fair Market Value of the Other ML & Co. Security on
the day the Participant's employment is terminated, or, if higher,
the Pre-CIC Value.
Section 8.2 A Change in Control.
A "Change in Control" shall mean a change in control of ML & Co. of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided, however, that, without
limitation, a Change in Control shall be deemed to have occurred if:
(a) any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity, or any syndicate or group deemed to
be a person under Section 14(d)(2) of the Exchange Act, other than the Company's
employee stock ownership plan, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 of the General Rules and Regulations under the Exchange Act),
directly or indirectly, of securities of ML & Co. representing 30% or more of
the combined voting power of ML & Co.'s then outstanding securities entitled to
vote in the election of directors of ML & Co.;
(b) during any period of two consecutive years (not including any period
prior to the Effective Date of this Plan) individuals who at the beginning of
such period constituted the Board of Directors and any new directors, whose
election by the Board of Directors or nomination for election by the
stockholders of ML & Co. was approved by a vote of at least three quarters of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(c) all or substantially all of the assets of ML & Co. are liquidated
or distributed.
Section 8.3 Effect of Agreement Resulting in Change in Control.
If ML & Co. executes an agreement, the consummation of which would result
in the occurrence of a Change in Control as described in Section 8.2, then, with
respect to a termination of employment without Cause or for Good Reason
occurring after the execution of such agreement (and, if such agreement expires
or is terminated prior to consummation, prior to such expiration or termination
of such agreement), a Change in Control shall be deemed to have occurred as of
the date of the execution of such agreement.
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Section 8.4 Termination for Cause.
Termination of the Participant's employment by the Company for "Cause"
shall mean termination upon:
(a) the willful and continued failure by the Participant substantially to
perform his duties with the Company (other than any such failure resulting from
the Participant's incapacity due to physical or mental illness or from the
Participant's Retirement or any such actual or anticipated failure resulting
from termination by the Participant for Good Reason) after a written demand for
substantial performance is delivered to him by the Board of Directors, which
demand specifically identifies the manner in which the Board of Directors
believes that he has not substantially performed his duties; or
(b) the willful engaging by the Participant in conduct that is
demonstrably and materially injurious to the Company, monetarily or otherwise.
No act or failure to act by the Participant shall be deemed "willful"
unless done, or omitted to be done, by the Participant not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Company.
Notwithstanding the foregoing, the Participant shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three quarters of the entire membership of the Board of Directors at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Participant and an opportunity for him, together with counsel, to be heard
before the Board of Directors), finding that, in the good faith opinion of the
Board of Directors, the Participant was guilty of conduct set forth above in
clause (a) or (b) of the first sentence of this Section 8.4 and specifying the
particulars thereof in detail.
Section 8.5 Good Reason.
"Good Reason" shall mean the Participant's termination of his employment
with the Company if, without the Participant's written consent, any of the
following circumstances shall occur:
(a) Inconsistent Duties. A meaningful and detrimental alteration in the
Participant's position or in the nature or status of his responsibilities
(including those as a director of ML & Co., if any) from those in effect
immediately prior to the Change in Control;
(b) Reduced Salary or Bonus Opportunity. A reduction by the Company in the
Participant's annual base salary as in effect immediately prior to the Change in
Control; a failure by the Company to increase the Participant's salary at a rate
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commensurate with that of other key executives of the Company; or a reduction in
the Participant's annual cash bonus below the greater of (i) the annual cash
bonus that he received, or to which he was entitled, immediately prior to the
Change in Control, or (ii) the average annual cash bonus paid to the Participant
by the Company for the three years preceding the year in which the Change in
Control occurs;
(c) Relocation. The relocation of the office of the Company where the
Participant is employed at the time of the Change in Control (the "CIC
Location") to a location that in his good faith assessment is an area not
generally considered conducive to maintaining the executive offices of a company
such as ML & Co. because of hazardous or undesirable conditions including
without limitation a high crime rate or inadequate facilities, or to a location
that is more than twenty-five (25) miles away from the CIC Location or the
Company's requiring the Participant to be based more than twenty-five (25) miles
away from the CIC Location (except for required travel on the Company's business
to an extent substantially consistent with his customary business travel
obligations in the ordinary course of business prior to the Change in Control);
(d) Compensation Plans. The failure by the Company to continue in effect
any compensation plan in which the Participant participates, including but not
limited to this Plan, the Company's retirement program, Employee Stock Purchase
Plan, 1978 Incentive Equity Purchase Plan, Equity Capital Accumulation Plan,
Canadian Capital Accumulation Plan, Management Capital Accumulation Plan,
limited partnership offerings, cash incentive compensation or any other plans
adopted prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan in connection with the Change in Control, or the failure by
the Company to continue the Participant's participation therein on at least as
favorable a basis, both in terms of the amount of benefits provided and the
level of his participation relative to other Participants, as existed
immediately prior to the Change in Control;
(e) Benefits and Perquisites. The failure of the Company to continue to
provide the Participant with benefits at least as favorable as those enjoyed by
the Participant under any of the Company's retirement, life insurance, medical,
health and accident, disability, deferred compensation or savings plans in which
the Participant was participating immediately prior to the Change in Control;
the taking of any action by the Company that would directly or indirectly
materially reduce any of such benefits or deprive the Participant of any
material fringe benefit enjoyed by him immediately prior to the Change in
Control, including, without limitation, the use of a car, secretary, office
space, telephones, expense reimbursement, and club dues; or the failure by the
Company to provide the Participant with the number of paid vacation days to
which the Participant is entitled on the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect
immediately prior to the Change in Control;
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(f) No Assumption by Successor. The failure of ML & Co. to obtain a
satisfactory agreement from any successor to assume and agree to perform a
Participant's employment agreement as contemplated thereunder or, if the
business of the Company for which his services are principally performed is sold
at any time after a Change in Control, the purchaser of such business shall fail
to agree to provide the Participant with the same or a comparable position,
duties, compensation, and benefits as provided to him by the Company immediately
prior to the Change in Control.
Section 8.6 Effect on Plan Provisions.
In the event of a Change in Control, no changes in the Plan, or in any
documents evidencing grants of Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML
& Co. Securities and no adjustments, determinations or other exercises of
discretion by the Committee or the Board of Directors, that were made subsequent
to the Change in Control and that would have the effect of diminishing a
Participant's rights or his payments under the Plan or this Article shall be
effective, including, but not limited to, any changes, determinations or other
exercises of discretion made to or pursuant to the Plan. Once a Participant has
received a payment pursuant to this Article VIII, shares of Common Stock that
were reserved for issuance in connection with any Performance Shares, Restricted
Shares, Stock Options, or Other ML & Co. Securities for which payment is made
shall no longer be reserved and shares of Common Stock that are Restricted
Shares or that are restricted and held by the Company pursuant to Section
2.6(a)(i), for which payment has been made, shall no longer be registered in the
name of the Participant and shall again be available for grants under the Plan.
If the Participant's employment is terminated without Cause or for Good Reason
after a Change in Control, any election to defer payment for Performance Shares
or Performance Units pursuant to Section 2.8 hereof or Restricted Shares or
Restricted Units pursuant to Section 3.8 hereof shall be null and void.
ARTICLE IX - MISCELLANEOUS.
Section 9.1 Designation of Beneficiary.
A Participant, or the transferee of a Stock Option pursuant to Section
4.4(d), may designate, in a writing delivered to ML & Co. before his death, a
person or persons to receive, in the event of his death, any rights to which he
would be entitled under the Plan. A Participant or Stock Option transferee, may
also designate an alternate beneficiary to receive payments if the primary
beneficiary does not survive the Participant or Stock Option transferee. A
Participant or Stock Option transferee may designate more than one person as his
beneficiary or alternate beneficiary, in which case such persons would receive
payments as joint tenants with a right of survivorship. A beneficiary
designation may be changed or revoked by a Participant or Stock Option
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transferee at any time by filing a written statement of such change or
revocation with the Company. If a Participant or Stock Option transferee fails
to designate a beneficiary, then his estate shall be deemed to be his
beneficiary.
Section 9.2 Employment Rights.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant, and a
grant under the Plan shall not be construed as giving any Participant any right
to be retained in the employ of the Company.
Section 9.3 Nontransferability.
Except as provided in Section 4.4(d), a Participant's rights under the
Plan, including the right to any amounts or shares payable, may not be
assigned, pledged, or otherwise transferred except, in the event of a
Participant's death, to his designated beneficiary or, in the absence of such a
designation, by will or the laws of descent and distribution.
Section 9.4 Withholding.
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to any
brokerage account, to deduct or withhold from any payment under the Plan any
Federal, state, local or other taxes, including transfer taxes, required by law
to be withheld or to require the Participant or his beneficiary or estate, as
the case may be, to pay any amount, or the balance of any amount, required to be
withheld.
Section 9.5 Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining any
benefits under any retirement, group insurance, or other employee benefit plan
of the Company. The Plan shall not preclude the stockholders of ML & Co., the
Board of Directors or any committee thereof, or the Company from authorizing or
approving other employee benefit plans or forms of incentive compensation, nor
shall it limit or prevent the continued operation of other incentive
compensation plans or other employee benefit plans of the Company or the
participation in any such plans by Participants in the Plan.
Section 9.6 No Trust or Fund Created.
Neither the Plan nor any grant made hereunder shall create or be construed
to create a trust or separate fund of any kind or a fiduciary relationship
between the Company and a Participant or any other person. To the extent that
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any person acquires a right to receive payments from the Company pursuant to a
grant under the Plan, such right shall be no greater than the right of any
unsecured general creditor of the Company.
Section 9.7 Expenses.
The expenses of administering the Plan shall be borne by the Company.
Section 9.8 Indemnification.
Service on the Committee shall constitute service as a member of the Board
of Directors so that members of the Committee shall be entitled to
indemnification and reimbursement as directors of ML & Co. pursuant to its
Certificate of Incorporation, By-Laws, or resolutions of its Board of Directors
or stockholders.
Section 9.9 Tax Litigation.
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is related to
the Plan and that the Company believes to be important to Participants in the
Plan and to conduct any such contest or any litigation arising therefrom to a
final decision.
ARTICLE X - AMENDMENT AND TERMINATION.
The Board of Directors or the Committee (but no other committee of the
Board of Directors) may modify, amend or terminate the Plan at any time, except
that, to the extent then required by applicable law, rule or regulation,
approval of the holders of a majority of shares of Common Stock represented in
person or by proxy at a meeting of the stockholders will be required to increase
the maximum number of shares of Common Stock available for distribution under
the Plan (other than increases due to an adjustment in accordance with the
Plan). No modification, amendment or termination of the Plan shall adversely
affect the rights of a Participant under a grant previously made to him without
the consent of such Participant.
ARTICLE XI - INTERPRETATION.
Section 11.1 Governmental and Other Regulations.
The Plan and any grant hereunder shall be subject to all applicable
Federal and state laws, rules, and regulations and to such approvals by any
regulatory or governmental agency that may, in the opinion of the counsel for
the Company, be required.
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Section 11.2 Governing Law.
The Plan shall be construed and its provisions enforced and administered
in accordance with the laws of the State of New York applicable to contracts
entered into and performed entirely in such State.
ARTICLE XII - EFFECTIVE DATE AND STOCKHOLDER APPROVAL.
The Plan shall not be effective unless or until approved by a majority of
the votes cast at a duly held stockholders' meeting at which a quorum
representing a majority of all outstanding voting stock is, either in person or
by proxy present and voting on the Plan.
30
Exhibit 10(x)
FORM OF SEVERANCE AGREEMENT BETWEEN MERRILL LYNCH & CO., INC.
AND CERTAIN OF ITS DIRECTORS AND EXECUTIVE OFFICERS
<PAGE>
Merrill Lynch & Co., Inc. ("ML & Co.") considers it essential to the
best interests of its stockholders to foster the continuous employment of key
management personnel. Further, the Board of Directors of ML & Co. (the "Board")
recognizes that the possibility of a change in control exists, and that such
possibility, and the uncertainty and questions that it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of ML & Co. and its stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
management of ML & Co. and its subsidiaries (the "Company"), including yourself,
to their assigned duties without distraction in the face of potentially
disturbing circumstances arising from any possible change in control of ML & Co.
In order to induce you to remain in the employ of the Company, ML &
Co. agrees that you shall receive the severance benefits set forth in this
letter agreement (this "Agreement") in the event your employment with the
Company is terminated subsequent to a Change in Control (as defined in Section 2
hereof) under the circumstances described below.
1. Term of Agreement. The term of this Agreement (the "Term") shall
commence on the date hereof and shall continue in effect through March 1, 1999;
provided, however, that commencing on January 1, 1997 and each January 1
hereafter, the original Term of this Agreement shall automatically be extended
for one additional year unless, not later than September 30 of the preceding
year, ML & Co. shall have given notice that it does not wish to extend the Term.
Notwithstanding any such notice by ML & Co. not to extend the Term, if a Change
in Control shall have occurred during the original or extended Term, the Term
shall continue in effect for a period of twenty-four (24) months beyond the Term
in effect immediately before such Change in Control.
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a Change in Control, as set forth below. For purposes of
this Agreement, a "Change in Control" shall mean a change in control of ML & Co.
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not ML & Co. is then subject
to such reporting requirement; provided that, without limitation, a Change in
Control shall be deemed to have occurred if:
(A) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity, or any syndicate or group
deemed to be a person under Section 14(d)(2) of the Exchange Act, is or becomes
the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), directly or indirectly, of securities of ML
& Co. representing 30% or more of the combined voting power of ML & Co.'s then
outstanding securities entitled to vote in the election of directors of ML &
Co.;
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(B) during any period of two (2) consecutive years (not including
any period prior to the execution of this Agreement), individuals who at the
beginning of such period constituted the Board and any new directors, whose
election by the Board or nomination for election by ML & Co.'s stockholders was
approved by a vote of at least three quarters (3/4) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof; or
(C) all or substantially all of the assets of ML & Co. are
liquidated or distributed.
If ML & Co. executes an agreement, the consummation of which would
result in the occurrence of a Change in Control as described above, then, with
respect to a termination of employment, unless such termination is because of
your death or Retirement, by the Company for Cause or Disability, or by you
other than for Good Reason, occurring after the execution of such agreement
(and, if such agreement expires or is terminated prior to consummation, prior to
such expiration or termination of such agreement), a Change in Control shall be
deemed to have occurred as of the date of the execution of such agreement.
3. Termination Following Change in Control. If any of the events
described in Section 2 hereof constituting a Change in Control shall have
occurred, you shall be entitled to the benefits provided in Subsection 4(D)
hereof upon the subsequent termination of your employment during the Term unless
such termination is due to your death, Disability, or Retirement, by the Company
for Cause, or by you other than for Good Reason.
(A) Disability. You shall be deemed to have incurred a "Disability"
upon a determination by the insurance carrier then responsible for long-term
disability payments that you are eligible for such payments (which determination
shall require that you have been absent from the full-time performance of your
duties with the Company for six (6) consecutive months). Any question as to the
existence of your Disability upon which you and the carrier cannot agree shall
be determined by a qualified independent physician selected by you (or, if you
are unable to make such selection, by any adult member of your immediate family)
and approved by the carrier. The determination of such physician made in writing
to the carrier and to you shall be final and conclusive for all purposes of this
Agreement.
(B) Retirement. Termination of your employment based on "Retirement"
shall mean your voluntary termination of employment on or after your fifty-fifth
(55th) birthday and your completion of ten (10) or more years of service.
(C) Cause. Termination by the Company of your employment for "Cause"
shall mean termination upon (i) the willful and continued failure by you
substantially to perform your duties with the Company (other than any such
failure resulting from your incapacity due to physical or mental illness or from
your Retirement or any such actual or anticipated failure resulting from
termination by you for Good Reason) after a written demand for substantial
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performance is delivered to you by the Board, which demand specifically
identifies the manner in which the Board believes that you have not
substantially performed your duties, or (ii) the willful engaging by you in
conduct that is demonstrably and materially injurious to the Company, monetarily
or otherwise. For purposes of this Subsection, no act or failure to act on your
part shall be deemed "willful" unless done, or omitted to be done, by you not in
good faith and without reasonable belief that your action or omission was in the
best interest of the Company. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
not less than three quarters (3/4) of the entire membership of the Board at a
meeting of the Board called and held for such purpose (after reasonable notice
to you and an opportunity for you, together with your counsel, to be heard
before the Board), finding that in the good faith opinion of the Board you were
guilty of conduct set forth above in clause (i) or (ii) of the first sentence of
this subsection and specifying the particulars thereof in detail.
(D) Good Reason. You shall be entitled to terminate your employment
for Good Reason. For purposes of this Agreement, "Good Reason" shall mean,
without your express written consent, any of the following:
(i) Inconsistent Duties. A meaningful and detrimental
alteration in your position or in the nature or status of your
responsibilities (including those as a director of ML & Co., if
any) from those in effect immediately prior to the Change in
Control;
(ii) Reduced Salary or Bonus Opportunity. A reduction by the
Company in your annual base salary as in effect on the date hereof
or as the same may be increased from time to time; a failure by the
Company to increase your salary at a rate commensurate with that of
other key executives of the Company; or a reduction in your annual
bonus below the greater of (a) the annual bonus which you received,
or to which you were entitled, immediately prior to the Change in
Control, or (b) the average annual bonus paid to you by the Company
for the three years preceding the year in which the Change in
Control occurs.
(iii) Relocation. The relocation of the office of the Company
where you are employed at the time of the Change in Control (the
"CIC Location") to a location which in your good faith assessment is
an area not generally considered conducive to maintaining the
executive offices of a company such as ML & Co. because of hazardous
or undesirable conditions including without limitation a high crime
rate or inadequate facilities, or to a location which is more that
fifty (50) miles away from the CIC Location or the Company's
requiring you to be based more than fifty (50) miles away from the
CIC Location (except for required travel on the Company's business
to an extent substantially consistent with your customary business
travel obligations in the ordinary course of business prior to the
Change in Control);
3
<PAGE>
(iv) Compensation Plans. The failure by the Company to
continue in effect any compensation plan in which you participate,
including but not limited to the Company's retirement program,
Employee Stock Purchase Plan, 1978 Incentive Equity Purchase Plan,
Equity Capital Accumulation Plan, Canadian Capital Accumulation
Plan, Management Capital Accumulation Plan, Long-Term Incentive
Compensation Plan, limited partnership offerings, cash incentive
compensation or any other plans adopted and in effect prior to the
Change in Control, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect
to such plan in connection with the Change in Control, or the
failure by the Company to continue your participation therein on at
least as favorable a basis, both in terms of the amount of benefits
provided and the level of your participation relative to other
participants, as existed at the time of the Change in Control;
(v) Benefits and Perquisites. The failure by the Company to
continue to provide you with benefits at least as favorable as those
enjoyed by you under any of the Company's retirement, life
insurance, medical, health and accident, disability or savings plans
in which you were participating at the time of the Change in
Control; the taking of any action by the Company that would directly
or indirectly materially reduce any of such benefits or deprive you
of any material perquisite enjoyed by you at the time of the Change
in Control including without limitation, the use of a car,
secretary, office space, telephones, expense reimbursement and club
dues; or the failure by the Company to provide you with the number
of paid vacation days to which you are entitled on the basis of
years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the Change in
Control;
(vi) No Assumption by Successor. The failure of ML & Co. to
obtain a satisfactory agreement from any successor to assume and
agree to perform this Agreement, as contemplated in Section 5 hereof
or, if the business of the Company for which your services are
principally performed is sold at any time after a Change in Control,
the purchaser of such business shall fail to agree to provide you
with the same or a comparable position, duties, compensation and
benefits (as described in subsections (iv) and (v) above) as
provided to you by the Company immediately prior to the Change in
Control; or
(vii) No Notice. Any purported termination of your employment
which is not effected pursuant to a Notice of Termination satisfying
the requirements of Subsection (E) below (and, if applicable, the
requirements of Subsection (C) above); for purposes of this
Agreement, no such purported termination shall be effective.
4
<PAGE>
(E) Notice of Termination. Any purported termination of your
employment by the Company or by you (other than for reasons of death,
Disability, or Retirement) shall be communicated by written Notice of
Termination to the other party hereto in accordance with Section 6 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
(F) Date of Termination, Etc. "Date of Termination" shall mean (i)
if your employment is terminated for Disability, thirty (30) days after a Notice
of Termination is given (provided that you shall not have returned to the
full-time performance of your duties during such thirty (30) day period), and
(ii) if your employment is terminated pursuant to Subsection (C) or (D) above or
for any other reason (other than Disability), the date specified in the Notice
of Termination (which, in the case of a termination pursuant to Subsection (C)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (D) above shall not be less than thirty (30) nor more
than sixty (60) days from the date such Notice of Termination is given);
provided that if within thirty (30) days after any Notice of Termination is
given the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (which is not
appealable or the time for appeal therefrom having expired and no appeal having
been perfected); provided further that the Date of Termination shall be extended
by a notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay you your full compensation in effect when the notice giving rise
to the dispute was given and continue you as a participant in all compensation,
benefit, and insurance plans and perquisites in which you were participating
when the notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with this Subsection. Amounts paid under this
Subsection are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
4. Compensation Upon Termination or During Disability. Following a
Change in Control upon termination of your employment or during Disability
during the Term, ML & Co. shall cause there to be provided to you the following
benefits:
(A) Disability. Upon your Disability, your benefits shall be
determined in accordance with the Company's standard benefit and retirement
programs and compensation plans then in effect including those listed in
Subsection 3(D)(iv) hereof.
(B) Termination for Other than Good Reason or for Cause. If your
employment shall be terminated by the Company for Cause or by you other than for
Good Reason, death or Retirement, ML & Co. shall pay you your full base salary
5
<PAGE>
through the Date of Termination at the rate in effect at the time Notice of
Termination is given and any amounts to be paid to you pursuant to the Company's
standard benefit and retirement programs and compensation plans then in effect,
including those listed in Subsection 3(D)(iv), and ML & Co. shall have no
further obligations to you under this Agreement.
(C) Retirement; Death. If your employment shall be terminated for
Retirement, or by reason of your death, your benefits shall be determined in
accordance with the Company's standard benefit and retirement programs and
compensation plans then in effect including those listed in Subsection 3(D)(iv).
(D) Termination for Other Reasons. If your employment by the Company
shall be terminated, unless such termination is because of your death,
Disability, or Retirement, by the Company for Cause, or by you other than for
Good Reason, then you shall be entitled to the benefits provided below:
(i) Base Salary. ML & Co. shall pay you your full base salary
through the Date of Termination at the rate in effect at the time
the Notice of Termination is given;
(ii) Severance Payment. In lieu of any further salary payments
to you for periods subsequent to the Date of Termination, ML & Co.
shall pay as severance to you, not later than the fifth (5th) day
following the Date of Termination, a lump sum severance payment (the
"Severance Payment") equal to the lesser of (I) 2.99 times the
average of the annual compensation ("Average Annual Compensation")
which was payable to you by the Company (or any corporation
("Affiliate") affiliated with the Company within the meaning of
section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), determined without regard to section 1504(b) of the Code)
and includible in your gross income for Federal income tax purposes
for the five (5) taxable years (the "Base Period") preceding your
taxable year in which a Change in Control of ML & Co. occurred or
(II) 2.99 times the average of the annual salary which was payable
to you by the Company (or an Affiliate) during the Base Period and
the annual bonus (the "Bonus") which was payable to you by the
Company (or an Affiliate) with respect to performance during the
Base Period. For purposes of clause (I) of the first sentence of
this Section 4(D)(ii), the amount of your Average Annual
Compensation shall be determined in accordance with temporary or
final regulations promulgated under section 280G(d) of the Code.
Unless a different method of calculating your Average Annual
Compensation is prescribed by such regulations, if you were not
employed by the Company (or an Affiliate) during the entire Base
Period, your Average Annual Compensation shall be the lesser of (a)
the average of your annual compensation for the complete taxable
years during the Base Period during which you were employed by the
Company or (b) the average of your annual compensation for both
complete and partial taxable years during the Base Period during
which you were so employed, determined by annualizing any
compensation (other than nonrecurring items) includible in your
6
<PAGE>
gross income for any partial taxable year or (c) the annual average
of your total compensation for the Base Period during which you were
so employed, determined by dividing such total compensation by the
number of whole and fractional taxable years included in the Base
Period. In computing your Average Annual Compensation, compensation
payable to you by the Company (or an Affiliate) shall include every
type and form of compensation includible in your gross income in
respect of your employment by the Company (or an Affiliate),
including compensation income recognized as a result of your
exercise of stock options or sale of the stock so acquired, except
to the extent otherwise provided in temporary or final regulations
promulgated under section 280G(d) of the Code. For purposes of
clause (II) of the first sentence of this Section 4(D)(ii), Bonus
shall include (a) any annual cash bonus awarded under the Company's
Variable Incentive Compensation Program or any similar or successor
program thereto (including any amounts of cash bonus awarded with
respect to performance during the Base Period but deferred for
payment in subsequent years) and (b) the grant value (calculated for
a particular grant as specified in the record of such grant filed
with the minutes of the meetings of the Management Development and
Compensation Committee, or any successor committee thereto, of the
Merrill Lynch & Co., Inc. Board of Directors) of any annual award of
restricted stock, restricted units, stock options or any other
non-cash bonus compensation awarded with respect to performance
during the Base Period under the Equity Capital Appreciation Plan,
the Long-Term Incentive Compensation Plan or any similar or
successor plans thereto.
(iii) Legal Fees and Expenses. ML & Co. shall also pay to you
all legal fees and expenses incurred by you as a result of such
termination (including all such fees and expenses, if any, incurred
in contesting or disputing any such termination or in seeking to
obtain or enforce any right or benefit provided by this Agreement).
(iv) Supplemental Retirement Benefits. In addition to the
benefits to which you are entitled under any pension plan or any
annuity payable pursuant to the termination of any pension plan or
any payment due under any 401(k) savings, pension or retirement
program, ML & Co. shall pay you, not later than the fifth (5th) day
following the Date of Termination, a cash amount equal to the
retirement contribution that you would have been eligible to receive
from the Company under the terms of the ML & Co. retirement program,
consisting of the Retirement Accumulation Plan, the Employee Stock
Ownership Plan and any applicable company contributions to the
401(k) Savings & Investment Plan (without regard to any amendment to
such retirement program made subsequent to the Change in Control and
on or prior to the Date of Termination, which amendment adversely
affects in any manner the computation of retirement benefits
thereunder), or any successor program or plan that may be in effect
at the time of the Change in Control, determined as if you were
7
<PAGE>
fully vested thereunder and has continued (after the Date of
Termination) to be employed for an additional twenty-four (24)
months at your highest annual rate of compensation during the twelve
(12) months immediately preceding the Date of Termination for
purposes of determining your basic contributions and any applicable
supplemental contributions. In addition to the payment made by ML &
Co. pursuant to the foregoing sentence, ML & Co. shall pay you an
amount sufficient to cover the income taxes, if any, that accrue
solely by virtue of your receipt of such payment.
(v) Other Benefits. ML & Co. will pay you, not later
than the fifth (5th) day following the Date of Termination, a
lump sum in lieu of continued benefits, as follows:
Medical
24 times the monthly cost to you of coverage for medical
insurance pursuant to the provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"). You may elect COBRA coverage, if then
available, for a period of 18 months following the Date
of Termination and, if then available, elect to convert
to an individual policy, if these elections are made
within the appropriate time frames.
Life Insurance
Two times the annual cost to convert your basic
non-contributory Merrill Lynch Group Insurance to a one
year term policy. No payment shall be made to replace
supplemental contributory coverage.
Disability Insurance
Six times the dollar amount accrued annually by ML & Co.
for your basic long-term disability insurance plus four
times your current annual premium for coverage under ML
& Co.'s supplemental long-term disability program.
Business Travel Accident, and Accidental Death and Dismemberment
Two times your current annual premium for coverage under
ML & Co.'s Business Travel Accident and Accidental Death
and Dismemberment insurance.
Any calculations required to be made under this Section 4(D)(v)
shall be made by the Company in a fair and equitable manner that the
Company, in its sole discretion, may select. In addition to the
payments made by ML & Co. pursuant to this Section 4(D)(v), ML & Co.
shall pay you an amount sufficient to cover the income taxes, if
any, that accrue solely by virtue of your receipt of such payments
(except for any payment with respect to life insurance benefits that
8
<PAGE>
would have been taxable under Section 79 of the Internal Revenue
Code of 1986, as amended, if you had remained an employee of ML &
Co.).
(vi) Employee Benefit Plans. You shall be entitled to receive
all benefits payable to you under the Company's standard benefit and
retirement programs and compensation plans not otherwise
specifically provided for in Subsection 4(D), including those listed
in Subsection 3(D)(iv).
(E) No Mitigation. You shall not be required to mitigate the amount
of any payment provided for in this Section 4 by seeking other employment or
otherwise, nor shall the amount of any payment of benefit provided for in this
Section 4 be reduced by any compensation earned by you as the result of
employment by another employer or by any retirement benefits received after the
Date of Termination.
(F) Reduction of Payments In Certain Cases. Notwithstanding anything
herein to the contrary, if any amounts due to you under this Agreement and any
other plan or program of ML & Co. constitute a "parachute payment" (as defined
in Section 280G(b)(2) of the Code), and the amount of the parachute payment,
reduced by all federal, state and local taxes applicable thereto, including the
excise tax imposed pursuant to Section 4999 of the Code, is less than the amount
you would receive if you were paid three times your "base amount" (as defined in
Section 280G(b)(3) of the Code), less $1.00, reduced by all federal, state and
local taxes applicable thereto, then the aggregate of the amounts constituting
the parachute payment shall be reduced to an amount that will equal three times
your base amount less $1.00. The determinations to be made with respect to this
subsection 4(F) shall be made by an accounting firm (the "Auditor") jointly
selected by ML & Co. and you and paid by ML & Co. The Auditor shall be a
nationally recognized United States public accounting firm that has not during
the two years preceding the date of its selection acted, in any way, on behalf
of ML & Co. or any of its subsidiaries. If you and ML & Co. cannot agree on the
firm to serve as the Auditor, then you and ML & Co. shall each select one
accounting firm and these two firms shall jointly select the accounting firm to
serve as the Auditor. If a determination is made by the Auditor that a reduction
in the aggregate of all payments due to you upon a Change in Control is required
by this subsection 4(F), you shall have the right to specify the portion of such
reduction, if any, that will be made under this Agreement and each plan or
program of ML & Co. If you do not so specify within sixty (60) days following
the date of a determination by the Auditor pursuant to the preceding sentence,
ML & Co. shall determine, in its sole discretion, the portion of such reduction,
if any, to be made under this Agreement and each plan or program of ML & Co.
5. Successors; Binding Agreement. (A) Assumption By Successor. ML &
Co. will require any successor (whether direct or indirect, by purchaser,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of ML & Co. to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that ML & Co. would be
required to perform it if no such succession had taken place. Failure of ML &
Co. to obtain such assumption and agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle you to
9
<PAGE>
compensation from ML & Co. in the same amount and on the same terms as you would
be entitled hereunder if you had terminated your employment for Good Reason
following a Change in Control, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination. As used in this Agreement, "ML & Co." shall mean
ML & Co. as hereinbefore defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
(B) Enforceability By Beneficiaries. This Agreement shall inure to
the benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable to you
hereunder if you had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
your devisee, legatee or other designee or, if there is no such designee, to
your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
Director of Human Resources, Merrill Lynch & Co., Inc., World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281, with a copy to the
Assistant General Counsel - Corporate Law of ML & Co., or to you at the address
set forth on the first page of this Agreement or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party that are not expressly set forth in this Agreement and this Agreement
shall supersede all prior agreements, negotiations, correspondence, undertakings
and communications of the parties, oral or written, with respect to the subject
matter hereof. The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the State of New York applicable
to contracts entered into and performed in such State.
8. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10
<PAGE>
9. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
New York in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that you shall be entitled to seek
specific performance of your right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
11. No Contract of Employment. Nothing in this Agreement shall be
construed as giving you any right to be retained in the employ of the Company.
12. Headings. The headings contained in this Agreement are intended
solely for convenience and shall not affect the rights of the parties to this
Agreement.
If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to ML & Co. the enclosed copy of this letter
which will then constitute our agreement on this subject.
Sincerely,
MERRILL LYNCH & CO., INC.
By___________________________________
Senior Vice President
Agreed to this____ day of _________, 1996
_________________________________________
11
<TABLE>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Amounts)
<CAPTION>
Year Ended Last Friday in December
-------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- ------- -------
(52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
Earnings
Earnings before cumulative effect of
changes in accounting principles ................ $ 1,114 $ 1,017 $ 1,394 $ 952 $ 696
Cumulative effect of changes in
accounting principles ........................... -- -- (35) (58) --
--------- --------- --------- ------- -------
Net earnings ...................................... 1,114 1,017 1,359 894 696
Preferred stock dividends ......................... (48) (13) (5) (7) (18)
--------- --------- --------- ------- -------
Net earnings applicable to
common stockholders ............................. $ 1,066 $ 1,004 $ 1,354 $ 887 $ 678
========= ========= ========= ======= =======
Primary Weighted Average Shares
Common stock ...................................... 176.6 195.7 209.3 207.7 204.8
Assuming issuance of shares relating
to employee incentive plans ..................... 19.4 15.5 17.0 18.7 20.6
--------- --------- --------- ------- -------
Total shares ...................................... 196.0 211.2 226.3 226.4 225.4
========= ========= ========= ======= =======
Primary Earnings Per Share
Earnings before cumulative effect of
changes in accounting principles ................ $ 5.44 $ 4.75 $ 6.14 $ 4.18 $ 3.01
Cumulative effect of changes in
accounting principles ........................... -- -- (.16) (.26) --
--------- --------- --------- ------- -------
Net earnings ...................................... $ 5.44 $ 4.75 $ 5.98 $ 3.92 $ 3.01
========= ========= ========= ======= =======
Fully Diluted Weighted Average Shares
Common stock ...................................... 176.6 195.7 209.3 207.7 204.8
Assuming issuance of shares relating
to employee incentive plans ..................... 20.1 16.0 18.2 19.2 25.1
--------- --------- --------- ------- -------
Total shares ...................................... 196.7 211.7 227.5 226.9 229.9
========= ========= ========= ======= =======
Fully Diluted Earnings Per Share
Earnings before cumulative effect of
changes in accounting principles ................ $ 5.42 $ 4.74 $ 6.11 $ 4.17 $ 2.95
Cumulative effect of changes in
accounting principles ........................... -- -- (.16) (.26) --
--------- --------- --------- ------- -------
Net earnings ...................................... $ 5.42 $ 4.74 $ 5.95 $ 3.91 $ 2.95
========= ========= ========= ======= =======
<FN>
Notes:
All share and per share amounts have been restated for the two-for-one common stock split, effected in the form of a 100%
stock dividend, declared by the Board of Directors on October 11, 1993 and paid on November 24, 1993.
In accordance with Accounting Principles Board Opinion No. 15, the modified treasury stock method was used to calculate
Per Common Share Earnings in 1995, 1994, 1993, and 1992.
</TABLE>
<TABLE><CAPTION>
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
Year Ended Last Friday in December
----------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(52 Weeks) (52 Weeks) (53 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Pretax earnings from
continuing operations $ 1,811 $ 1,730 $2,425 $1,621 $1,017
Deduct equity in undistributed
net earnings of unconsolidated
subsidiaries - (19) (13) (13) (10)
------- ------- ------ ------ ------
Total pretax earnings from
continuing operations 1,811 1,711 2,412 1,608 1,007
------- ------- ------ ------ ------
Add:
Fixed charges
Interest 11,238 8,586 6,009 4,823 5,074
Other(A) 144 138 152 152 146
------- ------- ------ ------ ------
Total fixed charges 11,382 8,724 6,161 4,975 5,220
Preferred stock dividend
requirements 77 22 9 11 26
------- ------- ------ ------ ------
Total combined fixed charges and
preferred stock dividends 11,459 8,746 6,170 4,986 5,246
------- ------- ------ ------ ------
Pretax earnings before fixed charges $13,193 $10,435 $8,573 $6,583 $6,227
======= ======= ====== ====== ======
Pretax earnings before combined
fixed charges and preferred
stock dividends $13,270 $10,457 $8,582 $6,594 $6,253
======= ======= ====== ====== ======
Ratio of earnings to fixed charges 1.16 1.20 1.39 1.32 1.19
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.16 1.20 1.39 1.32 1.19
</TABLE>
(A) Other fixed charges consist of the interest factor in rentals,
amortization of debt expense, and preferred stock dividend requirements
of majority-owned subsidiaries.
Exhibit 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Graph titled "NET EARNINGS"
Presented is a bar graph (in millions) showing Merrill Lynch & Co., Inc.'s net
earnings for the past five years of $696, $894, $1,359, $1,017, and $1,114 for
the years ended 1991, 1992, 1993, 1994 and 1995, respectively.
- --------------------------------------------------------------------------------
Graph titled "STOCKHOLDERS' EQUITY"
Presented is a bar graph (in millions) showing Merrill Lynch & Co., Inc.'s
stockholders' equity for the past five years of $3,818, $4,569, $5,486, $5,818
and $6,141 at year-end 1991, 1992, 1993, 1994 and 1995, respectively.
- --------------------------------------------------------------------------------
Graph titled "RETURN ON AVERAGE COMMON STOCKHOLDERS' EQUITY"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s return on average
common stockholders' equity for the past five years of 20.8%, 22.0%, 27.3%,
18.6% and 20.1% for the years ended 1991, 1992, 1993, 1994 and 1995,
respectively.
- --------------------------------------------------------------------------------
Graph titled "PRIMARY EARNINGS PER SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s primary earnings
per share for the past five years of $3.01, $3.92, $5.98, $4.75 and $5.44 for
the years ended 1991, 1992, 1993, 1994 and 1995, respectively.
- --------------------------------------------------------------------------------
Graph titled "DIVIDENDS PAID PER COMMON SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s dividends paid per
common share for the past five years of $.50, $.575, $.70, $.89 and $1.01 for
the years ended 1991, 1992, 1993, 1994 and 1995, respectively.
- --------------------------------------------------------------------------------
Graph titled "BOOK VALUE PER COMMON SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s book value per
common share for the past five years of $17.88, $21.37, $26.17, $28.87 and
$32.41 for the years ended 1991, 1992, 1993, 1994 and 1995, respectively.
<PAGE>
<TABLE><CAPTION>
Year Ended Last Friday in December
------------------------------------------------------
(Dollars in Millions, Except Per Share Amounts) 1991 1992 1993 1994 1995
- ---------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
Operating Results
Total Revenues $12,353 $ 13,413 $ 16,588 $ 18,234 $ 21,513
Net Revenues $ 7,246 $ 8,577 $ 10,558 $ 9,625 $ 10,265
Net Earnings $ 696 $ 894 $ 1,359 $ 1,017 $ 1,114
Pretax Margin (a) 14.0% 18.9% 23.0% 18.0% 17.6%
Profit Margin (b) 9.6% 11.1% 13.2% 10.6% 10.8%
Return on Average Common
Stockholders' Equity 20.8% 22.0% 27.3% 18.6% 20.1%
- ---------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $86,259 $107,024 $152,910 $163,749 $176,857
Total Stockholders' Equity $ 3,818 $ 4,569 $ 5,486 $ 5,818 $ 6,141
- ---------------------------------------------------------------------------------------------------------
Per Common Share
Primary Earnings $ 3.01 $ 3.92 $ 5.98 $ 4.75 $ 5.44
Fully Diluted Earnings $ 2.95 $ 3.91 $ 5.95 $ 4.74 $ 5.42
Dividends Paid $ .50 $ .575 $ .70 $ .89 $ 1.01
Book Value $ 17.88 $ 21.37 $ 26.17 $ 28.87 $ 32.41
- ---------------------------------------------------------------------------------------------------------
Private Client Assets (in Billions)
Assets in Worldwide Private
Client Accounts $ 440 $ 487 $ 557 $ 568 $ 703
Assets Under Management $ 124 $ 139 $ 161 $ 164 $ 196
- ---------------------------------------------------------------------------------------------------------
Global Debt and Equity
Underwriting (c)
Volume (in Billions) $ 109.9 $ 149.9 $ 191.9 $ 137.2 $ 147.7
Market Share 12.7% 13.0% 12.8% 12.6% 13.8%
- ---------------------------------------------------------------------------------------------------------
Full-Time Employees 38,300 40,100 41,900 43,800 46,000
- ---------------------------------------------------------------------------------------------------------
Common Shares
Outstanding (d) (in Millions) 205.4 207.2 204.0 181.5 171.4
</TABLE>
(a) Earnings Before Income Taxes and Cumulative Effect of Changes in Accounting
Principles to Net Revenues.
(b) Earnings Before Cumulative Effect of Changes in Accounting Principles to Net
Revenues.
(c) Full credit to book manager. All market share data are derived from
Securities Data Co.
(d) Does not include unallocated reversion shares held in the Employee Stock
Ownership Plan, which are not considered outstanding for accounting
purposes.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE><CAPTION>
Year Ended Last Friday in December
----------------------------------------------------------
(Dollars in Millions, Except Per Share Amounts) 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
Operating Results
Revenues $ 21,513 $ 18,234 $ 16,588 $ 13,413 $ 12,353
Interest Expense 11,248 8,609 6,030 4,836 5,107
-------- -------- -------- -------- --------
Net Revenues 10,265 9,625 10,558 8,577 7,246
-------- -------- -------- -------- --------
Non-Interest Expenses 8,454 7,895 8,133 6,956 6,229
-------- -------- -------- -------- --------
Earnings Before Income Taxes and Cumulative Effect
of Changes in Accounting Principles 1,811 1,730 2,425 1,621 1,017
Income Tax Expense 697 713 1,031 669 321
-------- -------- -------- -------- --------
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 1,114 $ 1,017 $ 1,394 $ 952 $ 696
======== ======== ======== ======== ========
Net Earnings $ 1,114 $ 1,017 $ 1,359 $ 894 $ 696
======== ======== ======== ======== ========
Net Earnings Applicable to Common Stockholders $ 1,066 $ 1,004 $ 1,354 $ 887 $ 678
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $176,857 $163,749 $152,910 $107,024 $ 86,259
Short-Term Borrowings (a) $ 86,363 $ 78,304 $ 79,632 $ 51,180 $ 38,698
Long-Term Borrowings $ 17,340 $ 14,863 $ 13,469 $ 10,871 $ 7,964
Total Stockholders' Equity $ 6,141 $ 5,818 $ 5,486 $ 4,569 $ 3,818
- ----------------------------------------------------------------------------------------------------------------------
Tax Information
Other Taxes, Principally Payroll and Property $ 291 $ 255 $ 223 $ 222 $ 191
Total Taxes (b) $ 988 $ 968 $ 1,254 $ 891 $ 513
- ----------------------------------------------------------------------------------------------------------------------
Common Share Data
(In Thousands, Except Per Share Amounts)
Primary:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 5.44 $ 4.75 $ 6.14 $ 4.18 $ 3.01
Net Earnings $ 5.44 $ 4.75 $ 5.98 $ 3.92 $ 3.01
Fully Diluted:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 5.42 $ 4.74 $ 6.11 $ 4.17 $ 2.95
Net Earnings $ 5.42 $ 4.74 $ 5.95 $ 3.91 $ 2.95
Weighted-Average Shares Outstanding:
Primary 195,997 211,241 226,331 226,402 225,350
Fully Diluted 196,660 211,695 227,480 226,854 229,916
Shares Outstanding at Year-End (c) 171,388 181,479 203,990 207,203 205,444
Shares Repurchased 20,012 29,989 16,346 10,654 5,920
Average Share Repurchase Price $ 46.95 $ 37.96 $ 42.55 $ 24.36 $ 19.70
Book Value $ 32.41 $ 28.87 $ 26.17 $ 21.37 $ 17.88
Total Taxes (b) $ 5.04 $ 4.58 $ 5.54 $ 3.94 $ 2.27
Dividends Paid $ 1.01 $ .89 $ .70 $ .575 $ .50
- ----------------------------------------------------------------------------------------------------------------------
Financial Ratios
Pretax Margin (d) 17.6% 18.0% 23.0% 18.9% 14.0%
Profit Margin (e) 10.8% 10.6% 13.2% 11.1% 9.6%
Common Dividend Payout 16.9% 17.5% 10.9% 13.5% 15.2%
Return on Average Assets 0.6% 0.6% 1.0% 0.8% 0.8%
Return on Average Common Stockholders' Equity 20.1% 18.6% 27.3% 22.0% 20.8%
Average Leverage 32.7x 32.0x 27.4x 25.1x 24.1x
Average Adjusted Leverage (f) 19.5x 18.9x 16.6x 15.9x 16.3x
- ----------------------------------------------------------------------------------------------------------------------
Other Statistics
Number of Full-Time Employees 46,000 43,800 41,900 40,100 38,300
Number of Financial Consultants and Account
Executives 13,800 13,400 13,100 12,700 12,100
</TABLE>
(a) Short-Term Borrowings include repurchase agreements, and commercial paper
and other short-term borrowings.
(b) Excludes $25 and $73 of income taxes in 1993 and 1992, respectively,
related to the cumulative effect of changes in accounting principles.
(c) Does not include 4,013, 6,427, 8,932, 11,202, and 13,637 unallocated
reversion shares held in the Employee Stock Ownership Plan at year-end
1995, 1994, 1993, 1992, and 1991, respectively, which are not considered
outstanding for accounting purposes.
(d) Earnings Before Income Taxes and Cumulative Effect of Changes in Accounting
Principles to Net Revenues.
(e) Earnings Before Cumulative Effect of Changes in Accounting Principles to
Net Revenues.
(f) Average total assets less average resale agreements and securities
borrowed to average total stockholders' equity.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
Merrill Lynch & Co., Inc. and its subsidiaries (collectively referred to as the
"Corporation") conduct their businesses in global financial markets that are
influenced by a number of factors, including economic and market conditions,
political events, and investor sentiment. The reaction of issuers and investors
to a particular condition or event is unpredictable and can increase volatility
in the marketplace. While higher volatility increases risk, it may also increase
order flow, which drives many of the Corporation's businesses. Other global
market and economic conditions, including the liquidity of secondary markets,
the level and volatility of interest rates, currency exchange rates, and
security valuations, competitive conditions, and the size, number, and timing of
transactions may also affect earnings. As a result, revenues and net earnings
can vary significantly from year to year, and from quarter to quarter.
Global financial markets, which steadily weakened during most of 1994,
generally improved during 1995, led by a more stable U.S. economy, declining
interest rates, and heightened investor activity. Inflationary fears eased
throughout 1995 as key U.S. economic statistics indicated slow to moderate
growth. The Federal Reserve decreased short-term interest rates in July and
December 1995 following seven rate increases between February 1994 and February
1995. Investors reacted favorably to these events and were more active in stock
and bond markets during 1995, contributing to higher earnings for most U.S.
securities firms.
U.S. equity markets posted significant gains in 1995, reflecting increases
in most industry sectors. The Dow Jones Industrial Average ("DJIA") daily
closing index reached a record high close of 5,216 during the 1995 fourth
quarter. The Nasdaq Composite Index also showed significant gains, particularly
in the technology sector, advancing 35% from year-end 1994, to close at 1,052.
In addition, the New York Stock Exchange ("NYSE") and Nasdaq average daily
trading volumes reached record levels in 1995.
The U.S. Treasury yield curve, the relationship between interest rates and
maturities, flattened during 1995 as long-term interest rates declined more than
short-term rates. The decline in long-term interest rates contributed to a rally
in the U.S. bond market and the third best year for fixed-income investors as
30-year U.S. Treasury bonds returned 34%, including reinvested interest.
Nevertheless, certain short duration fixed-income products were negatively
impacted throughout most of the year due to the flattening yield curve.
In many European countries, interest rates declined while stocks rose an
average of 12% in 1995, as measured by the Financial Times-Stock Exchange
Eurotrack 100 Index. In Asia, market performance was mixed. Hong Kong's Hang
Seng Index rose 23% during 1995, as short-term interest rates declined.
Conversely, Japan's Nikkei 225 Index was virtually unchanged for the year,
although the Japanese market rebounded in the second half of 1995 after hitting
a low for the year in July. Financial markets in the Americas (excluding the
U.S.) also experienced varied results. Toronto's Stock Exchange Index rose 12%,
as positive effects of declining interest rates were somewhat offset by
political uncertainty due to the independence referendum in Canada's Quebec
province. In Mexico, the Bolsa Index rose 17% in 1995. Nevertheless, economic
reforms, recession, and an exodus by foreign investors led to a substantial
devaluation of the peso in 1995, causing the Bolsa to drop 23% in U.S. dollar
terms.
The stronger U.S. and international financial markets in 1995 led to
increased retail investor activity, higher fee-based revenues, and improved
trading profits industrywide.
U.S. underwriting volume, which weakened industrywide throughout the last
three quarters of 1994 and the first quarter of 1995, improved steadily
throughout the remainder of 1995, leading to a slight increase over 1994. Issuer
activity increased, primarily in the last three quarters of 1995, due to rising
stock prices, lower interest rates, and heightened investor demand.
Strategic services revenues improved in 1995 due to record merger and
acquisition volume. Companies seeking strategic alliances were helped by a
stronger economy, higher cash flows related to improved operating results and
balance sheet restructurings, and continued globalization trends.
Fiscal 1995 was characterized by strong financial markets and improved
economic conditions. Nevertheless, the financial services industry is cyclical.
As a result, the Corporation's businesses are evaluated across market cycles for
profitability and alignment with long-term strategic objectives. The Corporation
seeks to mitigate the effect of market downturns by expanding its global
presence, monitoring costs and risks, and continuing to diversify revenue
sources.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net earnings for 1995 were $1.1 billion or $5.44 per common share primary
($5.42 fully diluted), up 10% from 1994 earnings of $1.0 billion or $4.75 per
common share primary ($4.74 fully diluted). In 1993, net earnings reached a
record $1.4 billion or $5.98 per common share primary ($5.95 fully diluted). The
Corporation's return on average common stockholders' equity was 20.1% in 1995,
compared with 18.6% in 1994 and 27.3% in 1993.
Results for 1993 included a non-recurring pretax lease charge totaling $103
million ($60 million after income taxes), related to the Corporation's decision
to vacate certain space at the World Financial Center Headquarters facility. The
1993 results also included an after-tax charge of $35 million ($.16 per common
share primary and fully diluted) for the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits".
In 1995, the Corporation acquired Smith New Court PLC ("Smith New Court"),
a U.K.-based global securities firm, for approximately $800 million. The
Corporation recorded approximately $530 million of goodwill related to the
acquisition. The Corporation's 1995 results included Smith New Court operations
since mid-August 1995 and related goodwill amortization.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
Total revenues for 1995 were a record $21.5 billion, up 18% from 1994 and
up 30% from 1993. In 1995, net revenues (revenues after interest expense)
totaled $10.3 billion, up 7% from $9.6 billion in 1994 and down 3% from $10.6
billion in 1993. Non-interest expenses were $8.5 billion in 1995, up 7% from
1994 and up 4% from 1993.
The following discussion provides details of major categories of revenues
and expenses and other pertinent information regarding the Corporation's
business activities, financial condition, liquidity, and risks. Certain limited
reclassification and format changes have been made to prior years' amounts to
conform to the current year presentation.
- --------------------------------------------------------------------------------
COMMISSIONS
Commission revenues advanced 9% in 1995 to a record $3.1 billion due
primarily to higher levels of listed and over-the-counter securities
transactions and mutual fund commissions, partially offset by lower revenues
from commodities.
Commissions from listed and over-the-counter securities advanced 17% from
1994 to $1.7 billion, due primarily to higher trading volumes on most major U.S.
and international exchanges and the Corporation's expanded global market
presence.
Mutual fund commissions increased 3% in 1995 to $906 million due primarily
to higher distribution and redemption fees. Distribution fees from
deferred-charge funds increased due to strong fund sales in prior periods and
higher asset levels. Redemption fees increased as clients repositioned invested
assets. Revenues from front-end mutual fund sales were virtually unchanged.
Increased sales of domestic stock and bond funds were substantially offset by
decreased sales of offshore funds as investors shifted assets to the strong U.S.
financial markets.
Other commission revenues decreased 2% to $542 million in 1995 due to
declines in commodity and money market instrument commission revenues, partially
offset by improved sales of over-the-counter options and third party annuity
contracts.
Commission revenues of $2.9 billion in 1994 remained virtually unchanged
from 1993. Higher revenues from mutual fund and commodity transactions were
offset by lower revenues from money market instruments and listed securities
transactions.
- -------------------------------------------------------------------------------
INTEREST AND DIVIDENDS
Significant components of interest and dividend revenues and interest expense
for 1995, 1994, and 1993 follow:
(in millions) 1995 1994 1993
- -------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Trading assets $ 3,832 $3,431 $2,493
Securities borrowed 2,940 2,285 1,521
Resale agreements 2,810 1,807 1,161
Margin lending 1,394 1,018 779
Other 1,245 1,037 1,145
- -------------------------------------------------------------------------------
Subtotal 12,221 9,578 7,099
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Borrowings 4,330 3,381 2,515
Repurchase agreements 3,680 2,414 1,383
Trading liabilities 2,205 1,997 1,252
Other 1,033 817 880
- -------------------------------------------------------------------------------
Subtotal 11,248 8,609 6,030
- -------------------------------------------------------------------------------
Net interest and dividend profit $ 973 $ 969 $1,069
====== ====== ======
- -------------------------------------------------------------------------------
The Corporation hedges its long-term payment obligations with interest rate
and currency swaps. The effect of these hedges, which is included in the
"Borrowings" caption above, reduced interest expense for 1995, 1994, and 1993 by
$45 million, $153 million, and $326 million, respectively. See "Financing and
Other Non-Trading Derivatives" in Note 4 to the Consolidated Financial
Statements for further information.
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 $973 million, virtually unchanged from $969 million in
1994, with increases in net interest-earning assets offset by declining interest
spreads due to the flattening of the U.S. Treasury yield curve.
In 1994, net interest and dividend profit declined 9% from 1993 to $969
million. A significant increase in short-term relative to long-term interest
rates, year over year, led to a substantial flattening of the yield curve,
causing interest spreads to decline, and financing and hedging costs to increase
in 1994.
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL TRANSACTIONS
Principal transactions revenues rose 8% from 1994 to $2.5 billion in 1995.
Increases in equities and equity derivatives and taxable fixed-income trading
revenues were partially offset by decreases in trading revenues from municipal
securities, foreign exchange and commodities, and interest rate and currency
swaps.
Trading, hedging, and financing activities affect the recognition of both
principal transactions revenues and net interest and dividend profit. In
assessing the profitability of its trading activities, the Corporation views net
interest and principal transactions revenues in the aggregate. For financial
reporting purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions
revenues.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
The net interest carry (i.e., the spread representing interest earned
versus financing costs) for trading positions, including hedges, is recorded
either as principal transactions revenues or net interest profit, 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.
The following table provides information on aggregate trading profits,
including related net interest. Interest revenue and expense components are
based on financial reporting categories and management's assessment of the cost
to finance trading positions, after consideration of the underlying liquidity of
these positions.
NET
PRINCIPAL INTEREST NET
TRANSACTIONS REVENUE TRADING
(in millions) REVENUE (EXPENSE) REVENUE
- --------------------------------------------------------------------
1995
Equities and equity derivatives $ 912 $ (89) $ 823
Taxable fixed-income 516 255 771
Interest rate and currency swaps 732 (63) 669
Municipals 273 - 273
Foreign exchange and
commodities 86 (6) 80
------ ----- ------
Total $2,519 $ 97 $2,616
====== ===== ======
1994
Equities and equity derivatives $ 625 $(106) $ 519
Taxable fixed-income 471 352 823
Interest rate and currency swaps 750 (8) 742
Municipals 380 7 387
Foreign exchange and
commodities 109 (8) 101
------ ----- ------
Total $2,335 $ 237 $2,572
====== ===== ======
1993
Equities and equity derivatives $ 872 $ (44) $ 828
Taxable fixed-income 972 411 1,383
Interest rate and currency swaps 604 30 634
Municipals 315 1 316
Foreign exchange and
commodities 158 (9) 149
------ ----- ------
Total $2,921 $ 389 $3,310
====== ===== ======
Equities and equity derivatives trading revenues, in the aggregate, were
$912 million, up 46% from 1994, as trading revenues from most equity products
increased. Convertible and over-the-counter securities trading revenues advanced
significantly as a result of higher stock prices, lower interest rates, and
increased demand. International equities trading revenues benefited from
improved United Kingdom market conditions and the contribution of Smith New
Court in the latter part of 1995. Equity derivatives declined in 1995 due to
reduced demand for structured derivative transactions.
Taxable fixed-income trading revenues increased 10% in 1995 to $516 million
as lower interest rates and tighter credit spreads led to increased demand and
higher inventory values. Corporate bond and preferred stock trading revenues
benefited from lower interest rates and higher trading volume in U.S. and
international markets, as well as increased investor demand for fixed-rate
preferred stock issuances. Trading revenues from high-yield bonds increased as a
result of declining interest rates and improved credit ratings of certain
issuers. Non-U.S. governments and agencies trading revenues also advanced from
1994 levels due to increased trading activity in European, Australian, and
certain South American emerging market government instruments. These increases
were partially offset by lower revenues from Canadian government instruments,
which were affected by ongoing political uncertainty. Taxable fixed-income
trading revenues were negatively affected by a loss in mortgage-backed
securities due to reduced market liquidity for non-generic products.
Nevertheless, trading results from mortgage-backed products, which include net
interest revenues, were positive. U.S. Government and agencies securities
trading revenues were down, due to tighter spreads between U.S. Treasury
securities and related futures hedges, as well as reduced retail investor demand
attributable to lower interest rates.
Municipal securities revenues decreased 28% to $273 million. This decrease
resulted from reduced demand as investors remained wary of continuing
discussions on possible U.S. tax law revisions that would eliminate tax
advantages of municipal securities, and sought higher returns from equity and
taxable fixed-income securities.
Foreign exchange and commodities revenues, in the aggregate, declined 22%
to $86 million. Commodities trading revenues decreased due to lower volumes.
Increases in foreign exchange trading revenues resulted from higher customer
volume caused by the strengthening of the U.S. dollar versus other major
currencies during 1995.
Trading revenues from interest rate and currency swaps were down 2% to $732
million. A decrease in revenues from U.S. dollar-denominated transactions,
resulting from lower margins and reduced volume in structured products, was
substantially offset by an increase in revenues from non-U.S. dollar-denominated
transactions, particularly in Japanese and European markets.
In 1994, principal transactions revenues were down 20% from 1993 record
levels to $2.3 billion. Rising interest rates, a declining U.S. dollar, and
volatile world financial markets led to lower trading revenues in many products,
including taxable fixed-income securities (down 52%), equities and equity
derivatives (down 28%), and foreign exchange and commodities (down 31%).
Offsetting these declines were increases in trading revenues from interest rate
and currency swaps (up 24%) and municipal securities (up 21%) due to increased
demand.
- ------------------------------------------------------
INVESTMENT BANKING
- ------------------------------------------------------
(in millions) 1995 1994 1993
---- ---- ----
Underwriting revenues $ 964 $ 989 $1,647
Strategic services revenues 344 251 184
------ ------ ------
Total $1,308 $1,240 $1,831
====== ====== ======
Overall, investment banking revenues increased 5% from 1994. Underwriting
revenues declined 3%, due to lower revenues from equities, private placements,
high-yield debt,
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
and mortgage-backed securities underwriting, partially offset by increased
revenues from corporate bonds and preferred stock and defined asset funds.
Rising interest rates and falling share prices in an uncertain economic
environment caused a steady decline in industrywide underwriting activity after
the first six weeks of 1994 that continued through the first quarter of 1995.
Thereafter, declining interest rates and rising equity values increased issuer
and investor demand, leading to an increase in underwriting revenues each
quarter, both sequentially and year over year, during the last three quarters of
1995.
The Corporation retained its position as top underwriter of total debt and
equity issuances for the eighth consecutive year in the U.S., and for the
seventh consecutive year globally. The Corporation's domestic and global market
shares of debt and equity underwriting volume increased in 1995 to 17.9% and
13.8%, respectively, versus 16.5% and 12.6% in 1994 according to Securities Data
Co.
Strategic services revenues, which include fees for merger and acquisition
activity, debt restructuring, and other advisory services, increased 37% to a
record $344 million in 1995 as companies worldwide sought strategic partners to
promote growth while cutting costs and increasing efficiencies.
Investment banking revenues decreased 32% in 1994 as market conditions
deteriorated from more favorable 1993 conditions. Higher interest rates and
lower share prices in 1994 led to a decline industrywide in underwriting of
domestic debt and equity securities to its lowest level since 1991.
- --------------------------------------------------------------------------------
ASSET MANAGEMENT AND PORTFOLIO
SERVICE FEES
- --------------------------------------------------------------------------------
(in millions) 1995 1994 1993
------ ------ ------
Asset management fees $ 856 $ 794 $ 706
Portfolio service fees 477 437 369
Other fees 557 508 483
------ ------ ------
Total $1,890 $1,739 $1,558
====== ====== ======
Revenues from asset management and portfolio service fees rose 9% in 1995 to a
record $1.9 billion.
Asset management fees, which include fees earned on mutual funds sponsored
by the Corporation and third parties, increased 8% from 1994 due primarily to
growth in client assets. Total client assets in worldwide private client
accounts were $703 billion at year-end 1995, compared with $568 billion at
year-end 1994. New money investments accounted for approximately 40% of the
increase. Assets under management by Merrill Lynch Asset Management increased
$32 billion to a record $196 billion in 1995, with growth in money market,
equity, and bond funds. New money investments accounted for approximately 75% of
the increase. In 1995, approximately 91% of asset management fees were
attributable to Merrill Lynch-sponsored funds, as compared with 90% in 1994.
Portfolio service fees increased 9% in 1995. Fee revenues from Asset
Power(Registered Trademark), an asset-based fee product, and Mutual Fund
Advisor(Service Mark), a personalized portfolio management service, advanced
due to increases in the number of accounts and asset values. Fees from Merrill
Lynch Consults(Registered Trademark) ("ML Consults"), a portfolio management
service, decreased in 1995 due to lower average asset levels during the year
as well as a reduction in the number of accounts. Other portfolio service fees,
principally insurance and trust fees, increased from 1994.
Other fee-based revenues were up 10%, due primarily to increased revenues
from mutual fund transfer agency, custody, and mortgage servicing activities.
In 1994, asset management and portfolio service fees increased 12% from
1993 due principally to growth in money market and stock funds, higher
revenues from ML Consults, and increased revenues from mutual fund transfer
agency, CMA(Registered Trademark), IRA, and Keogh fees.
- --------------------------------------------------------------------------------
OTHER REVENUES
Other revenues decreased 5% in 1995 to $449 million. Other revenues include
investment gains and losses, partnership distributions, transaction processing
fees, and proxy activities.
In 1995, net investment gains related to merchant banking activities were
$23 million, compared with $81 million a year ago. Merchant banking positions
are carried at the lower of cost or estimated net realizable value. Loss
provisions related to these investments are established, as appropriate, to
reduce the carrying value to estimated net realizable value. In certain
instances, sales of merchant banking positions are subject to restrictions,
limiting the Corporation's ability to dispose of these instruments until
required holding periods expire (see "Non-Investment Grade Holdings and
Highly Leveraged Transactions"). Distributions from partnerships held as
investments increased 45% to $64 million in 1995. Revenues generated
from transaction processing and other activities increased 5% to $362 million.
In 1994, other revenues were up 65% to $471 million. Net investment gains
related to merchant banking activities were $81 million, compared with losses of
$133 million in 1993, as restrictions on certain investments lapsed and market
conditions changed, enabling the Corporation to dispose of certain merchant
banking investments.
<PAGE>
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Non-interest expenses totaled $8.5 billion in 1995, up 7% over the prior
year. The largest expense category, compensation and benefits, increased 6% from
1994 to $5.3 billion due to increased production-related compensation, a rise in
incentive compensation, and a 5% increase in the number of full-time employees.
Production-related compensation was up due to heightened business activity
and strong volumes in many businesses, while incentive compensation increased
due to the Corporation's improved profitability and return on average common
stockholders' equity.
Overall, full-time personnel totaled 46,000, compared with 43,800 at
year-end 1994, mainly due to the addition of employees through business
acquisitions, including Smith New Court. Selective hiring in 1995 consisted
primarily of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
revenue producers and sales assistants in private client and international
business areas. Compensation and benefits as a percentage of net revenues was
51.3% in 1995, slightly lower than 51.5% in 1994. The Corporation's ratio of
support employees and sales assistants to producers decreased to 1.43 to 1 in
1995, from 1.46 to 1 in 1994.
- --------------------------------------------------------------------------------
Graph titled "NET REVENUE CATEGORIES AND COMPENSATION AND BENEFITS"
Presented are side by side bar graphs comparing Merrill Lynch & Co., Inc.'s
net revenue categories with compensation and benefits expense levels for the
past five years. Graph is presented in billions, with net revenues comprised
of commissions, principal transactions, investment banking, asset management
and portfolio services fees, net interest and other. The graph shows total net
revenues of $7.2, $8.6, $10.6, $9.6, and $10.3 and compensation and benefits of
$3.9, $4.4, $5.3, $5.0, and $5.3 for the years ended 1991, 1992, 1993, 1994,
and 1995, respectively.
- --------------------------------------------------------------------------------
Communications and equipment rental expense was up 13% due to increased
levels of business activity and expanded use of market data services. Occupancy
costs rose 3% in 1995 due to international growth and the addition of Smith New
Court facilities. Depreciation and amortization expense increased 13% due
primarily to purchases of technology-related assets during the past year.
Professional fees advanced 16% from a year ago, due primarily to higher
legal fees and to increased systems development costs related to upgrading
technology and processing capabilities in customer, trading, and transaction
processing systems.
Advertising and market development expenses rose 6% as a result of
increased advertising, international travel, and sales promotion, primarily
related to international growth and the integration of Smith New Court.
Brokerage, clearing, and exchange fees increased 7% as a result of higher
securities volume, particularly in international markets. Other expenses were up
4%, due primarily to a $26 million first quarter charge for the write-off of
assets related to a technology contract and $14 million of goodwill amortization
related to Smith New Court.
In 1994, non-interest expenses declined 3% to $7.9 billion. Excluding the
1993 first quarter non-recurring lease charge of $103 million, non-interest
expenses declined 2%. Lower incentive and production-related compensation,
partially offset by increases in base wages, severance, and Financial Consultant
up-front hiring bonuses, led to a 6% decline in compensation and benefits
expense. Communications and equipment rental expense increased 12% due to
expanded use of market data, news, and statistical services. Occupancy costs
declined 7% (excluding the 1993 non-recurring lease charge) as a result of
continued relocation of support staff to lower-cost facilities. Depreciation and
amortization expense rose 5% due primarily to the acquisition of
technology-related equipment. Professional fees increased 26% due to the use of
systems and management consultants, as well as higher legal fees. Brokerage,
clearing, and exchange fees were up 20% as a result of increased international
equity volume and expanded risk management activities related to volatile global
market conditions.
- --------------------------------------------------------------------------------
INCOME TAXES
The Corporation's 1995 income tax provision of $697 million represented a
38.5% effective tax rate. In 1994 and 1993, income tax provisions were $713
million and $1.0 billion, respectively, representing effective tax rates of
41.2% in 1994 and 42.5% in 1993. The effective tax rate in 1995 decreased
primarily as a result of lower state income taxes, expanded international
business activities in jurisdictions with lower tax rates, and increases in
deductions for dividends received.
The Corporation records deferred tax assets for the effects of temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. The Corporation assessed its ability to
realize deferred tax assets based primarily on a strong earnings history and the
absence of negative evidence as discussed in SFAS No. 109, "Accounting for
Income Taxes". During the last 10 years, average pretax earnings were $1.0
billion per year. Accordingly, the Corporation believes it is more likely than
not that its deferred tax assets will be realized.
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Stockholders' equity at December 29, 1995 increased 6% to $6.1 billion from $5.8
billion reported at year-end 1994. The increase in 1995 resulted from net
earnings and a fair value adjustment related to SFAS No. 115, "Accounting for
Investments in Certain Debt and Equity Securities", offset by common share
repurchases and common and preferred dividends declared by the Corporation.
In 1995, the Corporation repurchased approximately 20 million common shares
at an average price of $46.95 per share for employee benefit plans and general
corporate purposes.
At December 29, 1995, total common shares outstanding, excluding the
unallocated Employee Stock Ownership Plan ("ESOP") reversion shares, amounted to
171.4 million, 6% lower than the 181.5 million shares outstanding at December
30, 1994. The decrease was principally attributable to common stock repurchases,
partially offset by employee stock grants and option exercises.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND LIABILITY MANAGEMENT
The primary objective of the Corporation's funding policies is to assure
liquidity at all times. There are three key elements to the Corporation's
liquidity strategy. The first element is to maintain alternative funding sources
such that all debt obligations maturing within one year, including commercial
paper, uncommitted bank loans, and the current portion of long-term debt, can be
funded when due without issuing new unsecured debt or liquidating any business
assets. The most significant alternative funding sources are the proceeds from
executing repurchase agreements and obtaining secured bank loans, both
principally employing unencumbered investment grade marketable securities. Other
alternative funding sources include liquidating cash equivalents; securitizing
additional home equity and other mortgage loan assets; and drawing on committed,
unsecured, revolving credit facilities ("Credit Facilities"), which at December
29, 1995 totaled $5.6 billion and have not been drawn upon.
As an additional measure, the Corporation regularly reviews the level and
mix of its assets and liabilities to ascertain its ability to conduct core
businesses beyond one year without reliance on issuing new unsecured debt or
drawing upon Credit Facilities. The composition of the Corporation's asset mix
provides a great degree of flexibility in managing liquidity. The Corporation's
liquidity position is enhanced since a significant portion of the Corporation's
assets turn over frequently and are typically match-funded with liabilities
whose cash flow characteristics closely match those of the assets. At December
29, 1995, approximately 97% of the Corporation's assets were considered readily
marketable by management.
As part of the Corporation's overall liquidity program, its insurance
subsidiaries regularly review the funding requirements of their contractual
obligations for in-force, fixed-rate life insurance and annuity contracts and
expected future acquisition and maintenance expenses for all contracts. The
Corporation's insurance subsidiaries primarily market variable life insurance
and variable annuity products. These products are not subject to the interest
rate, asset/liability matching, and credit risks attributable to fixed-rate
products, thereby reducing the risk profile and liquidity demands on the
insurance subsidiaries. At December 29, 1995, approximately 84% of invested
assets of insurance subsidiaries were considered liquid by management.
The second element of the Corporation's liquidity strategy is to
concentrate general purpose borrowings at the Merrill Lynch & Co., Inc. level,
except where tax regulations, time zone differences, or other business
considerations make this impractical. The benefits of this strategy are lower
financing costs; simplicity, control, and wider name recognition by creditors;
and flexibility to meet varying funding requirements within subsidiaries.
The third element is to expand and diversify the Corporation's funding
instruments and its investor and creditor base. The Corporation's funding
programs benefit from the ability to market its debt instruments through its own
sales force to a large, diversified customer base. The Corporation maintains
strict concentration standards for short-term lenders, which include limits for
any single investor. Commercial paper remains the Corporation's major source of
short-term general purpose funding. Commercial paper outstanding totaled $17.0
billion at December 29, 1995 and $14.8 billion at December 30, 1994, which
represented 10% and 9% of total assets at year-end 1995 and 1994, respectively.
Total term debt issuance in 1995 exceeded 1994 levels as the Corporation
continued to be active in both domestic and Euro debt markets, primarily through
public issues. Outstanding term debt at December 29, 1995 grew to $17.3 billion
from $14.9 billion at December 30, 1994.
At December 29, 1995, the Corporation's senior long-term debt was rated by
seven recognized credit rating agencies, as follows:
RATING AGENCY RATING
- ---------------------------------------
Duff & Phelps Credit Rating Co. AA-
Fitch Investors Service, Inc. AA
IBCA Ltd. AA-
The Japan Bond Research Institute AA
Moody's Investors Service, Inc. A1
Standard & Poor's Ratings Group A+
Thomson BankWatch, Inc. AA
- ---------------------------------------
The Corporation issued $9.6 billion of long-term debt during 1995. During
the same period, maturities and repurchases were $6.9 billion. In addition,
approximately $894 million of the Corporation's securities held by subsidiaries
were sold and $1.1 billion were purchased. At December 29, 1995, $11.7 billion
of term debt had maturity dates beyond one year. The average maturity on all
outstanding term debt was 3.5 years at both year-end 1995 and 1994 when measured
to maturity, and 3.1 and 3.0 years at year-end 1995 and 1994, respectively, when
measured to the earlier of call or put date.
Approximately $35.9 billion of the Corporation's indebtedness at December
29, 1995 is considered senior indebtedness as defined under various indentures.
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND CAPITAL ADEQUACY
The Corporation remains one of the most highly capitalized institutions whose
business is primarily in the U.S. securities industry. The Corporation has an
equity base of $6.1 billion at December 29, 1995, including $5.5 billion in
common equity, supplemented by $619 million in preferred stock. Average leverage
ratios, computed as the ratio of average month-end assets to average month-end
stockholders' equity, were 32.7x and 32.0x for 1995 and 1994, respectively.
Leverage ratios at the end of 1995 and 1994 were 28.8x and 28.1x, respectively.
To compute the Corporation's adjusted leverage ratios, resale agreements and
securities borrowed balances are subtracted from total assets. The average
adjusted leverage ratios were 19.5x and 18.9x for 1995 and 1994, respectively.
The Corporation's adjusted leverage ratios at the end of 1995 and 1994 were
18.2x and 16.9x, respectively.
The Corporation operates in many regulated businesses that require various
minimum levels of capital to conduct
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
business (see Note 14 to the Consolidated Financial Statements). The
Corporation's broker-dealer, banking, insurance, and Futures Commission Merchant
activities are subject to regulatory requirements that may restrict the free
flow of funds to affiliates. Regulatory approval is required for payment of
dividends in excess of certain established levels, making affiliated
investments, and entering into management and service agreements with affiliated
companies.
The Corporation's overall capital needs are continually reviewed to ensure
that its capital base can support the estimated risks of its businesses as well
as the regulatory and legal capital requirements of subsidiaries. Based upon
these analyses, management believes that the Corporation's equity base is
adequate.
- --------------------------------------------------------------------------------
ASSETS AND LIABILITIES
The Corporation manages its balance sheet and risk limits according to market
conditions and business needs, subject to profitability and control of risk.
Asset and liability levels are primarily determined by order flow and fluctuate
daily, sometimes significantly, depending upon volume and demand. The liquidity
and maturity characteristics of assets and liabilities are monitored
continually. The Corporation monitors and manages the change of its balance
sheet using point-in-time average daily balances. Average daily balances are
derived from the Corporation's management information system, which summarizes
balances on a settlement date basis. Financial statement balances, as required
under generally accepted accounting principles, are recorded on a trade date
basis. The discussion that follows compares the changes in settlement date
average daily balances, not year-end financial statement balances.
In 1995, average daily assets were $191 billion, up 5% from $182 billion in
1994. Average daily liabilities in 1995 rose 5% to $186 billion from $177
billion in 1994.
The major components in the growth of average daily assets and liabilities
are summarized as follows:
- ---------------------------------------------
INCREASE
IN AVERAGE PERCENT
(in millions) ASSETS INCREASE
----------- --------
Resale agreements $3,438 8%
Securities borrowed 2,364 7
Customer receivables 2,177 12
Trading assets 1,515 2
- ---------------------------------------------
INCREASE
IN AVERAGE PERCENT
LIABILITIES INCREASE
----------- --------
Repurchase agreements $4,303 6%
Trading liabilities 3,339 10
Customer payables 1,716 36
- ---------------------------------------------
In managing its balance sheet, the Corporation strives to match-fund its
interest-earning assets with interest-bearing liabilities having similar
maturities and cash flow characteristics, such as repurchase and resale
agreements. Repurchase and resale agreements rose during 1995 as a result of
an increase in match-funded transactions involving U.S. Government and
agencies securities.
In 1995, trading assets and liabilities were up due to increases in trading
activity. On-balance-sheet hedges, included in trading liabilities, which are
used to reduce trading risks, also advanced due to increased market activity
during 1995. Securities borrowed increased primarily to facilitate security
deliveries to customers. Customer receivables and payables also advanced as
trading volume, on average, was higher.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
AND HIGHLY LEVERAGED TRANSACTIONS
In the normal course of business, the Corporation underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market making, and derivative structuring activities. During the past three
years, the Corporation has increased its non-investment grade trading
inventories to satisfy client demand for higher-yielding investments, including
emerging market and other international securities.
Non-investment grade securities have been defined as debt and preferred
equity securities rated as BB+ or lower, or equivalent ratings by recognized
credit rating agencies, certain sovereign debt in emerging markets, amounts due
under various derivative contracts from non-investment grade counterparties, and
other instruments that, in the opinion of management, are non-investment grade.
At December 29, 1995, long and short non-investment grade inventories accounted
for 6.3% of aggregate consolidated trading inventories, compared with 4.3% at
year-end 1994. Non-investment grade trading inventories are carried at fair
value.
The Corporation provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. The Corporation
provides extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select and limited basis. In
addition, the Corporation syndicates loans for non-investment grade
counterparties or in connection with highly leveraged transactions. In
connection with these syndications, the Corporation may retain a residual
portion of these loans. At year-end 1995 and 1994, no bridge loans were
outstanding.
The Corporation holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. The Corporation
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 determined on a select
and limited basis.
Investment in non-investment grade securities and involvement in highly
leveraged transactions subject the Corporation to additional risks related to
the creditworthiness of the issuers and the liquidity of the market for such
securities. The Corporation recognizes such risks and, whenever possible,
employs strategies to mitigate exposures.
The specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment. The Corporation
continually monitors credit risk by individual issuer and industry
concentration.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
In certain instances, the Corporation engages in hedging strategies to reduce
its exposure associated with owning a non-investment grade position by selling
short the related equity security or by entering into an offsetting derivative
contract. The Corporation also uses certain non-investment grade trading
inventories, principally non-U.S. governments and agencies securities, to hedge
the exposure arising from structured derivative transactions. Collateral,
consisting principally of U.S. Government securities, may be obtained to reduce
credit risk related to these transactions.
The Corporation's insurance subsidiaries hold non-investment grade
securities. As a percentage of total insurance investments, non-investment grade
securities were 4.2%, compared with 5.5% at year-end 1994. Non-investment grade
securities of insurance subsidiaries are classified as available-for-sale and
are carried at fair value.
A summary of the Corporation's highly leveraged transactions and
non-investment grade holdings follows:
- -------------------------------------------------------------
(in millions) 1995 1994
- -------------------------------------------------------------
Trading assets $5,489 $3,309
Trading liabilities 353 456
Insurance subsidiaries' investments 234 314
Loans (net of allowance for loan losses)(1) 489 257
Equity investments(2) 211 289
Partnership interests 91 93
- -------------------------------------------------------------
Additional commitments to invest in
partnerships $ 79 $ 80
Unutilized revolving lines of credit and other
lending commitments 127 62
- -------------------------------------------------------------
(1) Represented outstanding loans to 30 and 35 medium-sized companies
at year-end 1995 and 1994, respectively.
(2) Invested in 62 and 80 enterprises at year-end 1995 and 1994, respectively.
At December 29, 1995, the largest non-investment grade concentration
consisted of various issues of a South American sovereign totaling $674 million,
which primarily represented on-balance-sheet hedges for off-balance-sheet
instruments. No one industry sector accounted for more than 35% of total
non-investment grade positions. Included in the preceding table are debt and
equity securities of issuers in various stages of bankruptcy proceedings or in
default. At December 29, 1995, the carrying value of these securities totaled
$164 million, of which 75% resulted from the Corporation's market making
activities in such securities.
- --------------------------------------------------------------------------------
LITIGATION
Certain actions have been filed against the Corporation by Orange County,
California and others in connection with the Corporation's business activities
with the Orange County Treasurer-Tax Collector or from the purchase of debt
instruments issued by Orange County that were underwritten by the Corporation's
subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated. The information
set forth under the caption "Litigation" in Note 17 to the Consolidated
Financial Statements is incorporated by reference herein. Although the ultimate
outcome of these actions cannot be ascertained at this time and the results of
legal proceedings cannot be predicted with certainty, it is the opinion of
management that the resolution of these actions will not have a material adverse
effect on the financial condition or the results of operations of the
Corporation as set forth in the Consolidated Financial Statements contained
herein.
- --------------------------------------------------------------------------------
CASH FLOWS
The Corporation's net cash flows are principally associated with operating and
financing activities, which support the Corporation's trading, customer, and
investment banking activities.
The Corporation's cash and cash equivalents totaled $3.1 billion at December
29, 1995, an increase of $779 million and $1.3 billion, respectively, from the
end of 1994 and 1993.
Cash flows of $7.9 billion in 1995 were used for operating activities,
primarily to fund increases in net trading assets consistent with an increase in
the level of business activity. The Corporation's investing activities used cash
of $873 million in 1995, primarily for the purchase of Smith New Court.
Financing activities provided the Corporation with $9.5 billion of cash in
1995, reflecting proceeds from net increases in repurchase/resale agreements and
net issuances of commercial paper and long-term borrowings, partially offset by
repurchases of common stock.
In 1994, cash and cash equivalents increased $529 million to $2.3 billion.
Cash provided by operating and investing activities totaled $7.4 billion and
$322 million, respectively, while cash used for financing activities totaled
$7.2 billion.
Cash and cash equivalents increased $531 million to $1.8 billion in 1993.
Cash used for operating activities totaled $17.1 billion, while investing and
financing activities provided cash of $386 million and $17.3 billion,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which is effective for fiscal years
beginning after December 15, 1995. The Corporation did not adopt SFAS No. 123 in
1995, and has not decided whether to adopt the cost recognition provisions of
SFAS No. 123 for 1996. The effect of adopting the cost recognition provisions
has not been computed.
- --------------------------------------------------------------------------------
GLOBAL OPERATIONS
The Corporation's international activities outside the U.S. are organized into
the following geographic regions: Europe, Africa, and the Middle East; Asia,
which includes Japan and Australia; and the Americas, excluding the U.S. In
1995, the Corporation continued to strategically expand its international
activities to further benefit from the ongo-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
ing globalization of financial markets, the increase in cross-border
transactions, and the demand for global investments.
In 1995, the Corporation's international businesses were influenced by many
of the same market conditions that positively affected U.S. operating results,
including declining interest rates, improved stock and bond markets, and
increased investor demand. These improved market conditions, combined with the
Corporation's expanded global presence, led to increases in both total and net
revenues in each geographic region from 1994 levels (see Note 18 to the
Consolidated Financial Statements).
- --------------------------------------------------------------------------------
EUROPE, AFRICA, AND THE MIDDLE EAST
The Corporation operates in Europe, Africa, and the Middle East as a dealer
in most products. The Corporation also provides investment banking, private
banking, and research services.
The Corporation continued its commitment to expand its businesses in Europe,
Africa, and the Middle East through the acquisition of Smith New Court, its
investment in Smith Borkum Hare in South Africa, and the establishment of a new
international banking operation in Dublin, Ireland. The acquisition of Smith New
Court, a major equity market maker and agency trader in the European market, has
enabled the Corporation to significantly expand its global equity trading and
research capabilities. The successful integration of Smith New Court has
enhanced the Corporation's ability to develop and capitalize on future business
opportunities within the region and beyond.
In 1995, total revenues for Europe, Africa, and the Middle East were $4.0
billion, up 15% from 1994. Net revenues totaled $1.3 billion, up 16% from 1994.
The region's earnings before income taxes decreased 12% to $155 million.
Trading results for the region improved from 1994. Higher trading revenues in
equities resulted from both the strong performance of European equity markets in
1995, and the added capacity achieved through the acquisition of Smith New
Court. Money market trading revenues and investment banking revenues also
increased from 1994. These improvements were offset by reductions in
equity-linked warrants and fixed-income trading revenues resulting from reduced
market volatility.
The decrease in earnings before income taxes is attributable to increased
trading-related costs, compensation and benefits expenses, start-up costs
resulting from ongoing expansion, and the amortization of goodwill. The number
of full-time employees in the region increased from 2,857 at year-end 1994 to
3,953 at the end of 1995, due primarily to personnel added through business
acquisitions.
In 1994, total revenues for Europe, Africa, and the Middle East were $3.5
billion, up 11% from 1993. Net revenues totaled $1.1 billion, down 16% from
1993. The region's earnings before income taxes were down 63% to $176 million.
Trading results for the region declined from 1993 due to decreases in
fixed-income securities trading revenues, as a result of rising interest rates
in 1994, and losses in structured money market products and equity-linked
warrants. Earnings before income taxes decreased due to higher financing and
other trading-related costs and an increase in compensation and benefits
expense.
- --------------------------------------------------------------------------------
ASIA
In Asia, the Corporation has a variety of operating centers serving a broad
retail and institutional client base. In Japan and China, the focus is
principally on institutional business opportunities, while in other locations,
such as Australia, Hong Kong, Korea, Singapore, and Taiwan, both retail and
institutional businesses are conducted. The Corporation has securities and
futures exchange memberships in the major financial centers and has increased
its trading and product capacity in Australia, Hong Kong, Japan, and Singapore.
In 1995, the Corporation also entered into strategic investments and joint
ventures in India, Indonesia, Malaysia, and Thailand.
Total revenues for Asia in 1995 were $1.2 billion, up 28% from 1994. Net
revenues and earnings before income taxes were $701 million and $81 million, up
27% and 8%, respectively.
Results in Asia benefited from an improved bond market, which led to
increased trading revenues for Japanese Government Bonds ("JGB") and other
fixed-income securities. After a slow start in 1995, equity trading increased
significantly with improved earnings and more favorable market conditions. The
acquisition of Smith New Court added significantly to the Corporation's equity
trading capabilities in the region.
In 1995, the number of full-time employees increased 22% to 1,805, almost
entirely due to the addition of personnel from the Smith New Court operations in
Hong Kong, Japan, and Singapore.
Total revenues in Asia in 1994 were $963 million, up 10% from 1993. Net
revenues and earnings before income taxes were $554 million and $75 million,
down 19% and 61% from 1993, respectively. Higher trading revenues from
non-dollar swaps, equity derivatives, and Australian debt were offset by reduced
JGB trading revenues and lower net interest profits.
<PAGE>
- --------------------------------------------------------------------------------
AMERICAS
In Latin America, the Corporation provides varied brokerage and investment
services. Included in the Latin American region are certain offices located in
the U.S. which primarily service Latin American clients. In 1995, the
Corporation expanded its equity trading operations in Brazil and, in the fourth
quarter, became the first U.S.-based firm to engage in broker-dealer activities
on the Mexican Bolsa. In Canada, the Corporation provides investment banking and
fixed-income sales and trading services.
Total revenues for the Americas increased to $704 million in 1995, up 14%
from 1994, and net revenues increased 4% to $347 million in 1995. Earnings
before income taxes were $127 million, down 7% from 1994.
The region benefited from increased high-yield financing and advisory
activity, mergers and acquisitions, global bond issuance, and growth of
cross-border activity, particularly in Canada. Latin American results also
benefited from equity and fixed-income sales to private banking
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
clients. Investment banking activities in the Americas were down from 1994
levels due to market and political uncertainties. The devaluation of the Mexican
peso, which began in the fourth quarter of 1994 and continued into 1995, also
negatively affected securities valuations and investor demand.
The reduction in earnings before taxes resulted from increased compensation
and benefits expenses and initial start-up costs, both associated with the
growth in this region. Staffing increased from 914 at year-end 1994 to 978 at
December 29, 1995, primarily to meet the needs of the expanded equity trading
operations in Brazil and Mexico.
Total revenues in the Americas increased to $617 million in 1994, up 17% from
1993, while net revenues decreased 12% to $333 million in 1994. Earnings before
income taxes were $137 million, down 2% from 1993. Investment banking activities
in Latin America were lower than in 1993, while the region benefited from the
continued growth of matched-book activity and fixed-income trading in Canada,
and equity sales to private banking clients in Latin America.
- -------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation, as a dealer, trades derivative financial instruments and
provides clients with customized derivative products. These transactions allow
clients to manage their exposure to interest rate, currency, security and
commodity price, and credit risks. The Corporation also uses derivative
financial instruments to manage and hedge its own risks related to its
proprietary trading strategies, client transactions, and non-trading activities.
Accounting standards define a derivative financial instrument as a future,
forward, swap, or option contract, or other financial instrument with similar
characteristics. Derivatives can be traded on an exchange or negotiated directly
between buyers and sellers in the over-the-counter markets. Derivative financial
instruments, unlike non-derivative (or cash) financial instruments, have both
on-and off- balance-sheet implications, depending upon the nature of the
contract. Forward contracts, for example, are treated as off-balance-sheet in
terms of notional amounts, with only unrealized gains and losses included in
trading assets or liabilities.
The Corporation conducts derivative activities through a number of wholly-
owned subsidiaries as part of its client-driven and proprietary business
transactions. Merrill Lynch Capital Services, Inc. ("MLCS") is the Corporation's
principal swaps dealer. Merrill Lynch Capital Markets PLC ("MLCM") is the
primary equity derivatives dealer of the Corporation. Merrill Lynch Derivatives
Products, Inc., a "AAA" rated entity, is the Corporation's swap subsidiary that
provides credit intermediation for interest rate and currency swaps, options,
and similar transactions between highly rated counterparties and MLCS. In
connection with these derivative activities, certain of these subsidiaries
purchase and sell cash instruments (debt and equity securities) for hedging
purposes.
The Corporation, directly or through its subsidiaries, enters into
derivative transactions to hedge certain proprietary positions, including other
derivatives. As an end-user, the Corporation also hedges its fixed-rate and
foreign currency-denominated debt issuances by entering into variable interest
rate swaps and foreign currency agreements with MLCS. MLCS then enters into
offsetting contracts with third parties as part of the Corporation's trading and
risk management strategies. The Corporation also hedges equity-related exposures
embedded in certain of its debt issuances with equity derivatives transacted
primarily through MLCM.
Derivatives facilitate risk transfer and enhance liquidity in the
marketplace. For issuers, derivatives may provide cost-effective funding
alternatives, while for investors, derivatives may provide alternative
investment options and the ability to hedge risk. Market participants include
dealers, such as banks and other financial institutions, and end-users such as
corporations, governments, pension funds, mutual funds, and other institutions.
Increased market participation and competition have helped increase liquidity
in conventional derivatives, such as interest rate swaps. Widespread acceptance
has also contributed to the development of more complex products structured for
specific clients. Rapid growth, complexity, and highly publicized losses,
particularly in 1994, have contributed to a perception that these products
possess additional risk to users and to financial markets. Although different in
form, both derivative and non-derivative financial instruments are subject to
market, credit, operational, and other similar risks. Credit considerations, for
example, exist for a corporate bond and an interest rate swap. In addition, both
of these instruments are sensitive to market risk due to movements in interest
rates that affect their respective pricing. The risks inherent in both types of
instruments need to be managed in a manner consistent with a company's overall
risk management policies (see "Risk Management").
- --------------------------------------------------------------------------------
ACCOUNTING AND VALUATION
Notional amounts of derivative instruments provide a common basis for compiling
and reporting outstanding transactions. Notional amounts do not represent a
measure of the Corporation's risk and are not recorded on the balance sheet.
Derivatives used in a dealer capacity and to hedge other trading positions are
marked-to-market. The unrealized gain or loss is recorded in trading assets or
liabilities on the Consolidated Balance Sheets with the related income or loss
reported in principal transactions revenues. Derivatives used to hedge the
Corporation's borrowings are generally recorded on an accrual basis. Interest is
accrued into income or expense over the life of the contract, which generally
matches the maturity of the related debt issue. Unrealized gains and losses on
derivatives used to hedge currency risk on borrowings are recognized currently.
The fair value of a derivative contract represents the amount the Corporation
would have to pay a third party to assume its obligations under the contract or
the amount a third party would pay to receive the Corporation's benefits under
the contract. The Corporation's derivative transactions are generally
marked-to-market by pricing models
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
based on the present value of future cash flows using mid-market valuations with
adjustments, as required, for credit, liquidity, and ongoing costs. These
adjustments are integral components of the mark-to-market process.
Certain products may require additional market valuation adjustments. New,
complex products, where no established two-way market exists, may create a need
for liquidity adjustments. Modeling a complex product involves multiple
variables and assumptions, the precision of which will evolve over time. The
Corporation does not recognize the market value of these contracts determined
solely by the pricing model during the early stages of a product's life. Due to
limited markets for certain new, complex products, the pricing model may not
have the precision associated with a model for an existing product. As these
products develop, pricing models will be refined and hedging strategies
modified, based on experience, to more closely correlate the market movement of
these instruments.
Further valuation adjustments are recorded for significant derivative product
positions. These adjustments acknowledge the difficulty in disposing of any
large trading position in a short time period.
Most of the Corporation's derivative products are relatively short-term in
nature. At year-end 1995, the weighted-average maturity of the Corporation's
derivative contracts was 2.24 years, compared with 2.29 years at year-end 1994.
Administrative costs are incurred to service periodic cash streams and maintain
hedges over the life of the contract. A portion of income related to longer-term
contracts is recognized as the costs related to these contracts are incurred.
Sources of derivative revenues and their related components are regularly
reviewed by product, with profitability measured net of related hedging
activities.
- --------------------------------------------------------------------------------
CREDIT
The notional or contractual values of derivative transactions do not directly
represent credit risk exposure. Credit risk represents the amount of accounting
loss that the Corporation would incur if a counterparty failed to perform its
obligations under contractual terms and the collateral held, if any, were
deemed worthless. The Corporation, however, requires collateral from its
counterparties to mitigate credit risk, when appropriate. From an economic
standpoint, credit risk is evaluated net of related collateral. Credit
exposures are analyzed to assess current and potential credit risk. Current
credit exposure represents the replacement cost of those contracts in a gain
position, while potential credit exposures are based on estimates of future
replacement costs over the remaining life of the contract. Credit exposure
considerations are embedded in the mark-to-market process.
The Corporation attempts to enter into International Swaps and Derivatives
Association, Inc. master agreements or their equivalent ("master netting
agreements") with each of its counterparties; however, in some cases the
Corporation encounters practical difficulties in obtaining executed agreements.
Master netting agreements provide protection in bankruptcy in certain
circumstances and in some cases enable receivables and payables with the same
counterparty to be presented net on the Consolidated Balance Sheets,
providing for a more meaningful balance sheet presentation of credit exposure.
Derivative credit exposures are aggregated with credit exposures related to
non-derivative transactions to assess the total exposure to each counterparty
and compliance with country, industry, and product limits. Specific reserves may
be required for exposures to less creditworthy counterparties, as appropriate,
and are reviewed as part of the Corporation's Reserve Committee process (see
"Risk Management").
- --------------------------------------------------------------------------------
RISK MANAGEMENT
The Corporation operates in dynamic businesses that are subject to many risks
that are continually monitored and evaluated. The Corporation's management has
developed corporate governance policies and procedures which require specific
areas and units to assist in the identification, assessment, and control of
these risks. The Corporation's Global Risk Management Group ("Risk Management")
is primarily responsible for monitoring market exposure, trading limits, and
concentration levels (see "Market Risk"). Risk Management is headed by a Senior
Vice President who is a member of the Executive Management Committee and reports
directly to the President and Chief Operating Officer. Credit risk is monitored
primarily by the Credit Division ("Corporate Credit") in conjunction with
business unit personnel (see "Credit Risk"). Other units, including Finance,
Corporate Audit, Operations, and Law and Compliance ("Units"), perform oversight
reviews or other functions critical to managing risk.
In addition to independent risk management responsibilities, senior
management from these Units take an active role in the oversight of the risk
management process through the Risk Control Committee and the Reserve Committee.
The Risk Control Committee, which was established in 1995 to provide general
oversight of risk management for all institutional trading activities, is
chaired by the head of Risk Management and includes senior representatives from
each of the other Units. The Risk Control Committee is chartered by and reports
periodically to the Audit and Finance Committee of the Board of Directors, and
is independent of the Corporation's business units. Its activities are designed
to ensure compliance with the Corporation's commitment under the Derivatives
Policy Group's Framework for Voluntary Oversight.
The Reserve Committee monitors valuation and certain other risks associated
with assets and liabilities. The Corporation establishes reserves in the
Consolidated Balance Sheets for existing conditions, events, or circumstances
that may reduce the carrying value of an asset or incur a liability. The Reserve
Committee, chaired by the Chief Financial Officer, reviews and approves firmwide
reserve levels, as well as changes in reserve methodologies. The Reserve
Committee meets monthly to review current market conditions and act on specific
issues brought to its attention by Finance, Corporate Credit, Risk Management,
and business unit personnel.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
The Corporation's reserves take into account management's judgment and are
generally recorded based on (i) identification of risks and exposures, (ii)
formulas, (iii) aging, concentration, and liquidity analyses, or (iv)
combinations of these three methods.
- --------------------------------------------------------------------------------
MARKET RISK
The Corporation incurs market risk primarily in connection with its trading
activities. Disclosure of methods for assessing and managing risk provides
useful information on market risk exposures. Disclosure of derivatives alone,
however, does not provide users of financial statements with a complete analysis
of market risk. Derivative and cash financial instruments are subject to similar
market and credit risks and are used together as part of trading and risk
management strategies.
Market risk affects trading inventory values through changes in interest
rates, credit spreads, prices, currency exchange rates, liquidity, and market
volatility. The Corporation's trading activities are primarily client order
flow-driven rather than proprietary, with hedging transactions executed when
appropriate. This strategy helps reduce market risk and volatility in principal
transactions revenues.
Risk Management monitors the Corporation's exposure to potential losses in
the value of its trading inventories due to adverse market movements. Risk
Management sets and monitors all trading limits, actively monitors trading and
inventory exposures, approves new products in conjunction with the Corporation's
new product review process, and has the authority to require reductions in
specific trading desk exposures or to veto proposed transactions.
Risk Management is organized along product lines with independent
professionals responsible for maintaining daily contact with specific trading
areas. Trading systems and complementary risk monitoring systems allow these
professionals to track established limit levels and exposures. Certain classes
of transactions, including new financial products, certain proposed equity,
emerging market, and high-yield underwritings, and bridge loans are subject to
prior approval from Risk Management.
Trading systems are designed to assist traders in mitigating market and other
risks prevalent in trading. Risk Management also has access to trading systems
to allow for monitoring of positions and for performing computerized analytics
on various market situations and conditions.
Risk Management uses an analytical technique known as stress simulations to
measure and monitor exposure to market risk across all trading areas. Stress
simulations estimate gains or losses that each trading area could experience
under both moderate and severe market movements.
Each simulation considers a specific change in interest rates, credit
spreads, equity prices, currency exchange rates, commodity prices, or
volatilities, holding all other variables constant. Each trading area provides
Risk Management with daily information on the expected gain or loss from
different stress scenarios. Based on these simulations, market risks can be
monitored firmwide and portfolios rebalanced, as necessary.
Stress simulations provide hypothetical results under different market
scenarios. The Corporation, however, views actual results as the best indicator
of risk management performance. Analyzing actual net revenues over time best
illustrates the Corporation's tolerance for risk and the effectiveness of its
risk management strategies. The nature of the Corporation's trading-related
activities, which are principally client order flow-driven, combined with its
risk management strategies, help reduce volatility in net revenues. A
distribution of weekly net revenues (which includes principal transactions
revenues, net interest, and selling concessions) by product for the last three
years is presented in the graph below:
- --------------------------------------------------------------------------------
Graph titled "DISTRIBUTION OF WEEKLY NET REVENUES BY PRODUCT"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s distribution of
weekly net revenues by product for the past three years. The graph illustrated
the percentage of weeks that net revenues fell within the specified dollar
ranges for each product presented below.
<TABLE><CAPTION>
$(10) - 0 $0 - 20 $20 - 40 $40 - 60 over $60
<S> <C> <C> <C> <C> <C>
Taxable Fixed-Income .64% 15.92% 56.05% 21.02% 6.37%
Municipals 1.91% 98.09% - - -
Interest Rate & Currency Swaps 1.91% 87.26% 10.83% - -
Foreign Exchange & Commodities 14.01% 85.99% - - -
Equities & Equity Derivatives - 4.46% 50.96% 37.58% 7.01%
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CREDIT RISK
Credit risk is monitored primarily by Corporate Credit in conjunction with
business unit personnel. Corporate Credit is headed by a Senior Vice President
who reports directly to the Chief Financial Officer.
Corporate Credit is organized geographically and along industry lines.
Credit officers perform credit analysis, set credit limits by country and by
counterparty, approve specific transactions, recommend credit reserves, manage
credit exposures, and participate in the new product review process. Credit
analysis, in many cases, is enhanced by due diligence meetings with
counterparties. Many types of transactions, including most derivatives, are
reviewed and are subject to prior approval from Corporate Credit. Corporate
Credit also works with the business units to develop and refine credit risk
measurement models and to analyze potential credit exposures for complex
derivative transactions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
Within Corporate Credit, prescribed levels of authority have been established
for approval of standard transactions. Required authority levels are governed by
the counterparty's credit quality, as well as the maturity and potential risk of
the transaction. Transactions that exceed prescribed levels must be approved by
the Credit Committee, which is composed of several Directors of Credit and the
Chief Credit Officer.
The credit system tracks information from automated and manual sources. This
system aggregates credit exposure with each counterparty for various legal
entities, maintains overall counterparty and specific product limits, and
identifies limit review dates by counterparty. Detailed information on firmwide
inventory positions and executed transactions, including current and potential
credit exposure, is updated frequently and compared with limits. Collateral,
which reduces the Corporation's credit exposure, is obtained as needed and
tracked on the credit system. The system enables Corporate Credit, in
conjunction with the business units, to monitor counterparty, product, industry,
country, and credit quality concentrations.
Corporate Credit also monitors credit exposures related to the Corporation's
loan products, including mortgages and home equity lines of credit, customer
margin accounts, extensions of credit to high-net-worth individuals, and working
capital facilities to small businesses, as well as merchant banking-related
activities. Reserves are estimated based on specific identification of
exposures, formulas, and aging analyses.
- --------------------------------------------------------------------------------
CONCENTRATION RISK
Concentration risk, the risk that the Corporation's businesses will be dependent
upon a single source of revenue, product, or market, is periodically reviewed as
part of the Corporation's ongoing strategic and business planning process. In
recent years, the Corporation has diversified its global revenue sources to
ensure that it is less dependent on any single financial product, customer base,
or market to generate revenues.
- --------------------------------------------------------------------------------
OPERATIONAL RISK
Operational risk focuses on the Corporation's ability to accumulate, process,
and communicate information necessary to conduct business in a global market
environment. These risks are monitored on both a local and centralized basis.
Central to managing its operational risk, the Corporation maintains backup
facilities worldwide. Information systems provide operational risk assessments
on transactions in major markets. This technology allows the Corporation to
promptly respond to changing market conditions worldwide. As necessary, systems
and equipment are updated for changes in technology. This enables the
Corporation to compete effectively in the dynamic financial services industry.
Exception reports are also used to manage operational risk, highlight
reconciliation issues, and enable the Corporation to identify instances where
additional collateral is required. These reports also help identify potential
business risk exposures and promote compliance with both internal management
policies and regulatory requirements. Operations personnel provide support and
control for trading, clearance, and settlement activities, and perform custodial
functions for customer and proprietary assets. Operations personnel who are
responsible for entering trades report to operations or business managers, not
to traders.
<PAGE>
STATEMENTS OF CONSOLIDATED EARNINGS
<TABLE><CAPTION>
Year Ended Last Friday in December
(Dollars in Millions, Except Per Share Amounts) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks)
Revenues
<S> <C> <C> <C>
Commissions $ 3,126 $ 2,871 $ 2,894
Interest and dividends 12,221 9,578 7,099
Principal transactions 2,519 2,335 2,921
Investment banking 1,308 1,240 1,831
Asset management and portfolio service fees 1,890 1,739 1,558
Other 449 471 285
------- ------- -------
Total Revenues 21,513 18,234 16,588
Interest Expense 11,248 8,609 6,030
------- ------- -------
Net Revenues 10,265 9,625 10,558
------- ------- -------
Non-Interest Expenses
Compensation and benefits 5,270 4,952 5,255
Communications and equipment rental 487 432 386
Occupancy 449 436 573
Depreciation and amortization 367 325 308
Professional fees 425 367 290
Advertising and market development 398 375 377
Brokerage, clearing, and exchange fees 361 338 281
Other 697 670 663
------- ------- -------
Total Non-Interest Expenses 8,454 7,895 8,133
------- ------- -------
Earnings Before Income Taxes and Cumulative Effect of Change
in Accounting Principle 1,811 1,730 2,425
Income Tax Expense 697 713 1,031
------- ------- -------
Earnings Before Cumulative Effect of Change in Accounting Principle 1,114 1,017 1,394
Cumulative Effect of Change in Accounting Principle
(net of applicable income taxes of $25) - - (35)
------- ------- -------
Net Earnings $ 1,114 $ 1,017 $ 1,359
======= ======= ========
Net Earnings Applicable to Common Stockholders $ 1,066 $ 1,004 $ 1,354
======= ======= ========
- ------------------------------------------------------------------------------------------------------------
Primary Earnings Per Common Share
Earnings Before Cumulative Effect of Change in Accounting Principle $ 5.44 $ 4.75 $ 6.14
Cumulative Effect of Change in Accounting Principle - - (.16)
------- ------- -------
Net Earnings $ 5.44 $ 4.75 $ 5.98
======= ======= ========
Fully Diluted Earnings Per Common Share
Earnings Before Cumulative Effect of Change in Accounting Principle $ 5.42 $ 4.74 $ 6.11
Cumulative Effect of Change in Accounting Principle - - (.16)
------- ------- -------
Net Earnings $ 5.42 $ 4.74 $ 5.95
======= ======= ========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
December 29, December 30,
-------------------------
(Dollars in Millions, Except Per Share Amounts) 1995 1994
- -------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 3,091 $ 2,312
------- -------
Cash and securities segregated for regulatory purposes or deposited
with clearing organizations 5,412 4,953
------- -------
Marketable investment securities 2,365 2,325
------- -------
Trading assets, at fair value
Corporate debt and preferred stock 17,581 14,818
Contractual agreements 11,833 9,519
Equities and convertible debentures 10,843 6,263
Non-U.S. governments and agencies 6,744 6,468
U.S. Government and agencies 6,672 8,197
Mortgages, mortgage-backed, and asset-backed 3,749 5,224
Money markets 1,680 958
Municipals 1,001 1,292
------- -------
Total 60,103 52,739
------- -------
Resale agreements 44,257 44,459
------- -------
Securities borrowed 20,645 20,993
------- -------
Receivables
Customers (net of allowance for doubtful accounts of $37 in 1995 and $42 in 1994) 14,783 14,030
Brokers and dealers 9,267 6,487
Interest and other 4,741 4,361
------- -------
Total 28,791 24,878
------- -------
Investments of insurance subsidiaries 5,619 5,719
Loans, notes, and mortgages (net of allowance for loan losses of $131 in 1995
and $181 in 1994) 2,172 1,587
Other investments 961 888
Property, leasehold improvements, and equipment (net of accumulated depreciation
and amortization of $2,239 in 1995 and $1,867 in 1994) 1,605 1,588
Other assets 1,836 1,308
-------- --------
Total Assets $176,857 $163,749
======== ========
</TABLE>
<PAGE>
<TABLE><CAPTION>
December 29, December 30,
1995 1994
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
<S> <C> <C>
Repurchase agreements $56,817 $ 51,864
------- --------
Commercial paper and other short-term borrowings 29,546 26,440
------- --------
Trading liabilities, at fair value
Contractual agreements 10,907 8,382
U.S. Government and agencies 9,089 15,990
Equities and convertible debentures 6,642 3,990
Non-U.S. governments and agencies 4,418 4,010
Corporate debt and preferred stock 2,199 2,564
Municipals 95 166
------- -------
Total 33,350 35,102
------- -------
Customers 11,391 11,609
Insurance 5,391 5,689
Brokers and dealers 6,366 4,638
Other liabilities and accrued interest 10,515 7,726
Long-term borrowings 17,340 14,863
------- -------
Total Liabilities 170,716 157,931
------- -------
Stockholders' Equity
Preferred Stockholders' Equity 619 619
------- -------
Common Stockholders' Equity
Common stock, par value $1.33 1/3 per share; authorized: 500,000,000 shares;
issued: 1995 and 1994 - 236,330,162 shares 315 315
Paid-in capital 1,237 1,196
Foreign currency translation adjustment 11 4
Net unrealized gains (losses) on investment securities available-for-sale (net of
applicable income tax expense (benefit) of $13 in 1995 and $(31) in 1994) 25 (57)
Retained earnings 6,492 5,606
------- -------
Subtotal 8,080 7,064
Less:
Treasury stock, at cost:
1995 - 60,929,278 shares
1994 - 48,423,944 shares 2,241 1,627
Unallocated ESOP reversion shares, at cost:
1995 - 4,012,519 shares
1994 - 6,427,091 shares 63 101
Employee stock transactions 254 137
------- -------
Total Common Stockholders' Equity 5,522 5,199
------- -------
Total Stockholders' Equity 6,141 5,818
------- -------
Total Liabilities and Stockholders' Equity $176,857 $163,749
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended Last Friday in December
----------------------------------
(Dollars in Millions, Except Per Share Amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred Stockholders' Equity
9% Cumulative Preferred Stock, Series A
$10,000 liquidation preference per share
Balance, beginning of year $ 425 $ - $ -
Issued (42,500 shares in 1994) - 425 -
------- ------- -------
Balance, end of year (42,500 shares in 1995 and 1994) 425 425 -
------- ------- -------
Remarketed Preferred Stock, Series C
$100,000 liquidation preference per share
Balance, beginning and end of year (3,000 shares in 1995,
1994, and 1993) 300 300 300
Remarketed Preferred Treasury Stock, at cost
Balance, beginning and end of year (1,062 shares in 1995,
1994, and 1993) (106) (106) (106)
------- ------- -------
Balance, end of year 194 194 194
------- ------- -------
Total Preferred Stockholders' Equity $ 619 $ 619 $ 194
======= ======= =======
Common Stockholders' Equity
Common Stock, par value $1.33 1/3
Balance, beginning of year (236,330,162 shares in 1995
and 1994; 234,692,848 shares in 1993) $ 315 $ 315 $ 313
Issued for employee benefit plans (1,637,314 shares in 1993) - - 2
------- ------- -------
Balance, end of year (236,330,162 shares in 1995,
1994, and 1993) $ 315 $ 315 $ 315
======= ======= =======
Paid-In Capital
Balance, beginning of year $ 1,196 $ 1,156 $ 1,081
Issuance of stock:
To employees (2) (9) (3)
For other activity, including employee stock grants (13) 13 14
To ESOP, including share allocations 56 36 64
------- ------- -------
Balance, end of year $ 1,237 $ 1,196 $ 1,156
======= ======= =======
Foreign Currency Translation Adjustment
Balance, beginning of year $ 4 $ (18) $ (6)
Translation adjustment (a) 7 22 (12)
------- ------- -------
Balance, end of year $ 11 $ 4 $ (18)
======= ======= =======
</TABLE>
<PAGE>
<TABLE><CAPTION>
Year Ended Last Friday in December
----------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Unrealized Gains (Losses) on Investment Securities
Available-for-Sale (net of applicable income taxes)
Balance, beginning of year $ (57) $ 21 $ --
Net unrealized gains (losses) on investment securities
available-for-sale 335 (410) 254
Other adjustments (b) (253) 332 (233)
------- ------- ------
Balance, end of year $ 25 $ (57) $ 21
======= ======= ======
Retained Earnings
Balance, beginning of year $ 5,606 $4,777 $3,571
Net earnings 1,114 1,017 1,359
Cash dividends declared:
9% Cumulative Preferred stock (38) (6) --
Remarketed Preferred stock (10) (7) (5)
Common stock ($1.01 per share in 1995; $.89 in 1994;
$.70 in 1993) (180) (175) (148)
------- ------- ------
Balance, end of year $ 6,492 $5,606 $4,777
======= ======= ======
Common Treasury Stock, at cost
Balance, beginning of year (48,423,944 shares in 1995;
23,408,139 in 1994; 16,288,488 in 1993) $(1,627) $ (696) $ (287)
Treasury stock purchased (20,011,821 shares in 1995;
29,988,523 in 1994; 16,345,568 in 1993) (939) (1,138) (695)
Issued out of treasury (net of reacquisitions):
Employees (822,818 shares in 1995; 1,026,321 in 1994;
955,391 in 1993) 37 42 33
Employee stock grants (6,683,669 shares in 1995;
3,946,397 in 1994; 8,270,526 in 1993) 288 165 253
------- ------- ------
Balance, end of year (60,929,278 shares in 1995;
48,423,944 in 1994; 23,408,139 in 1993) $(2,241) $(1,627) $ (696)
======= ======= ======
Unallocated ESOP Reversion Shares, at cost
Balance, beginning of year (6,427,091 shares in 1995;
8,932,332 in 1994; 11,201,672 in 1993) $ (101) $ (140) $ (176)
Allocation of shares to participants (2,414,572 shares in 1995;
2,505,241 in 1994; 2,269,340 in 1993) 38 39 36
------- ------- ------
Balance, end of year (4,012,519 shares in 1995;
6,427,091 in 1994; 8,932,332 in 1993) $ (63) $ (101) $ (140)
======= ======= ======
Employee Stock Transactions
Balance, beginning of year $ (137) $ (123) $ (121)
Net issuance of employee stock grants (192) (121) (115)
Amortization of employee stock grants 68 100 107
Repayment of employee loans 7 7 6
------- ------- ------
Balance, end of year $ (254) $ (137) $ (123)
======= ======= ======
Total Common Stockholders' Equity $ 5,522 $ 5,199 $5,292
======= ======= ======
Total Stockholders' Equity $ 6,141 $ 5,818 $5,486
======= ======= ======
</TABLE>
(a) Net of income tax benefit (expense) of $19 in 1995, $(8) in 1994, and $(2)
in 1993.
(b) Other adjustments consist of policyholder liabilities, deferred policy
acquisition costs, and deferred income taxes.
See Notes to Consolidated Financial Statements
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE><CAPTION>
Year Ended Last Friday in December
----------------------------------
(Dollars in Millions) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Earnings $ 1,114 $ 1,017 $ 1,359
Noncash items included in earnings:
Cumulative effect of change in accounting principle - - 35
Depreciation and amortization 367 325 308
Policyholder reserves 297 354 517
Other 672 658 683
(Increase) decrease in operating assets:
Trading assets (6,375) 6,610 (19,830)
Cash and securities segregated for regulatory purposes or deposited with
clearing organizations (459) (884) (645)
Securities borrowed 348 (1,992) (5,435)
Customers (771) (826) (3,481)
Maturities and sales of trading investment securities - 197 -
Purchases of trading investment securities - (213) -
Other 250 (273) (3,708)
Increase (decrease) in operating liabilities:
Trading liabilities (2,608) 5,642 7,088
Customers (1,377) (1,962) 3,674
Insurance (732) (1,855) (2,028)
Other 1,405 607 4,355
------ ------ ------
Cash (Used for) Provided by Operating Activities (7,869) 7,405 (17,108)
------ ------ ------
Cash Flows from Investing Activities:
Proceeds from (payments for):
Maturities of available-for-sale securities 1,453 2,610 -
Sales of available-for-sale securities 1,029 1,377 -
Purchases of available-for-sale securities (2,387) (2,296) -
Maturities of held-to-maturity securities 1,217 1,965 -
Purchases of held-to-maturity securities (1,094) (2,537) -
Maturities and sales of investments by insurance subsidiaries - - 3,983
Purchases of investments by insurance subsidiaries - - (2,439)
Marketable investment securities - - (575)
Purchase of Smith New Court, net of cash acquired (601) - -
Other investments and other assets (138) (391) (176)
Property, leasehold improvements, and equipment (352) (406) (407)
------ ------ ------
Cash (Used for) Provided by Investing Activities (873) 322 386
------ ------ ------
Cash Flows from Financing Activities:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements 5,155 (10,875) 10,873
Commercial paper and other short-term borrowings 3,106 3,225 4,445
Issuance and resale of long-term borrowings 10,353 10,353 7,862
Settlement and repurchases of long-term borrowings (7,971) (9,090) (5,263)
Issuance of 9% Cumulative Preferred Stock - 425 -
Common stock transactions (894) (1,048) (511)
Dividends (228) (188) (153)
------ ------- ------
Cash Provided by (Used for) Financing Activities 9,521 (7,198) 17,253
------ ------- ------
Increase in Cash and Cash Equivalents 779 529 531
Cash and Cash Equivalents, beginning of year 2,312 1,783 1,252
------ ------- ------
Cash and Cash Equivalents, end of year $ 3,091 $ 2,312 $ 1,783
====== ======= =======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Income taxes totaled $557 in 1995, $1,190 in 1994, and $1,032 in 1993.
Interest totaled $11,229 in 1995, $8,452 in 1994, and $5,788 in 1993.
Supplemental Disclosure of Noncash Investing and Financing Activity
As part of the consideration for Smith New Court, the Corporation issued
approximately $115 of unsecured floating-rate notes due December 31, 2000 (the
"Notes"). The Notes are redeemable at the option of the holders on any quarterly
interest payment date on or after December 31, 1996.
See Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, Except Per Share Amounts)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Merrill Lynch &
Co., Inc. and subsidiaries (collectively, the "Corporation"). All material
intercompany balances have been eliminated. Certain limited reclassification and
format changes have been made to prior years' amounts to conform to the current
year presentation.
The Corporation provides investment, financing, insurance, and related
services to individuals and institutions on a global basis through its principal
broker-dealer subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), and its broker, dealer, insurance, banking, and other financial
services subsidiaries. Such services include securities brokerage, trading,
underwriting, and clearance; investment banking and other corporate finance
advisory activities; investment advisory and other asset management services;
trading of foreign exchange instruments, futures, commodities, and other
derivatives; banking, trust, and lending services; and insurance sales and
underwriting services.
The consolidated financial statements are presented in accordance with
generally accepted accounting principles and prevailing industry practices,
both of which require management to make estimates regarding certain trading
inventory valuations, the outcome of litigation, goodwill, deferred tax asset
realization, insurance deferred acquisition costs, and other matters that
affect the reported amounts and disclosure of contingencies in the financial
statements. Estimates, by their nature, are based on judgment and available
information. As such, actual results could differ materially from those
estimates.
- -------------------------------------------------------------------------------
TRADING INSTRUMENTS
Trading assets and trading liabilities, which include securities sold but not
yet purchased and derivative instruments held for trading or to hedge trading
inventory positions, are recorded on a trade date basis at fair value. Fair
value is based on quoted market prices, pricing models (utilizing indicators of
general market conditions or other economic measurements), or management's
estimates of amounts to be realized on settlement, assuming current market
conditions and an orderly disposition over a reasonable period of time.
Derivative instruments include futures, forwards, options, and swaps
including swap options, caps, collars, and floors. Fair values for certain
exchange-traded derivatives, principally futures and certain options, are based
on quoted market prices. Fair values for over-the-counter ("OTC") derivative
financial instruments, principally forwards, options, and swaps, are based on
mid-market valuations adjusted, as required, to reflect amounts which would be
received from or paid to a third party in settlement of the instruments.
These adjustments are integral components of the mark-to-market process and
relate to credit spreads, market liquidity, concentrations,
close-out costs associated with unmatched positions, and funding and
administrative costs incurred over the life of the instrument.
Unrealized gains and losses from derivatives are reported separately as
assets and liabilities unless a legal right of setoff exists under a master
netting agreement enforceable at law. Balances related to swap and forward
transactions and foreign currency options are included in "Contractual
agreements" on the Consolidated Balance Sheets. All other derivative instrument
balances are recorded with the related trading asset or liability. The fair
value of equity security options purchased, for example, is recorded in the
"Equities and convertible debentures" trading asset caption.
The Corporation enters into when-issued and delayed delivery transactions.
Unrealized gains and losses from these transactions are recorded in the related
trading asset or liability account, respectively.
Principal transactions revenues are recognized on a trade date basis and
include net unrealized gains or losses from marking-to-market all trading
instruments. Realized gains and losses on trading instruments and any related
interest amounts are included in principal transactions revenues and interest
revenues and expenses, respectively.
- ------------------------------------------------------------------------------
FINANCING AND RELATED ACTIVITIES
The Corporation's objective is to match-fund the interest sensitivity of
its assets and liabilities. Funding is principally obtained from commercial
paper, repurchase agreements, and long-term borrowings. The Corporation utilizes
derivatives to reduce risk by managing interest rate, foreign currency, and
other exposures. Derivatives which modify the interest rate characteristics of
specified assets and liabilities are accounted for on an accrual basis, with
amounts to be paid or received recognized as adjustments to the specified assets
and liabilities and the related interest income or expense. Unrealized gains and
losses on all other financing derivatives are recognized currently. Realized
gains and losses on early terminations of interest rate contracts are deferred
over the remaining lives of the hedged assets or liabilities. At December 29,
1995, there were no deferred amounts related to terminated contracts.
Repurchase and resale agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts, plus
accrued interest. The Corporation's policy is to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
resale agreements. Collateral is valued daily, and the Corporation may require
counterparties to deposit additional collateral or return collateral pledged,
when appropriate, to ensure that the market value of the underlying collateral
remains sufficient. Substantially all repurchase and resale agreement activities
are transacted under master netting agreements that give the Corporation the
right, in the event of default, to liquidate collateral held and to set off
receivables and payables with the same counterparty. The Corporation offsets
certain repurchase and resale agreement balances with the same counterparty on
the Consolidated Balance Sheets.
Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions require
the Corporation to provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. The Corporation receives collateral in
the form of cash or other securities for
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
securities loaned transactions. For these transactions, the fee received or
paid by the Corporation is recorded as interest revenue or expense. The
Corporation monitors the market value of securities borrowed or loaned against
the collateral value daily. Although substantially all securities borrowing and
lending activities are transacted under master netting agreements, the
Corporation does not offset the related receivables and payables with the
same counterparty on the Consolidated Balance Sheets.
- -------------------------------------------------------------------------------
INVESTMENT SECURITIES
The Corporation holds debt and equity investments principally in non-broker-
dealer subsidiaries. These investments are classified as held-to-maturity,
trading, or available-for-sale.
Held-to-maturity investments are debt securities that the Corporation has
the positive intent and ability to hold to maturity. These investments are
recorded at amortized cost unless a decline in value is deemed
other-than-temporary, in which case the carrying value is adjusted. The
amortization of premium or accretion of discount and any unrealized loss deemed
other-than-temporary are included in current period earnings.
Debt and equity securities purchased principally for the purpose of resale
in the near term are recorded as trading investments and are reported at fair
value. Unrealized gains or losses on these investments are included in current
period earnings.
Other debt and equity securities that are not categorized as
held-to-maturity or trading are classified as available-for-sale and reported at
fair value. Unrealized gains or losses on these securities are reported as a
separate component of stockholders' equity, net of applicable income taxes and
other related items.
Restricted equity investment securities or equity investment securities
without available market quotations are reported at the lower of cost or
estimated net realizable value. Adjustments in carrying values are included in
current period earnings.
Realized gains and losses on investments are included in current period
earnings. The cost basis of each investment sold is specifically identified for
purposes of computing realized gains and losses.
- -------------------------------------------------------------------------------
COMMISSIONS AND RELATED EXPENSES
Commissions charged for executing customer transactions are accrued on a
trade date basis and included in current period earnings. Production-related
compensation and benefits expense is accrued to match revenue recognition.
- -------------------------------------------------------------------------------
INVESTMENT BANKING
Underwriting revenues and fees for mergers and acquisitions and advisory
assignments are recorded when services for the transaction are substantially
completed. Deal-related expenses are deferred and later expensed to match
revenue recognition.
- -------------------------------------------------------------------------------
INCOME TAXES
Merrill Lynch & Co., Inc. and certain of its wholly-owned subsidiaries file
a consolidated Federal income tax return. The Corporation uses the asset and
liability method in providing income taxes on all transactions that have been
recognized in the consolidated financial statements. The asset and liability
method requires that deferred taxes be adjusted to reflect the tax rates at
which future taxable amounts will be settled or realized. The effects of tax
rate changes on future deferred tax liabilities and deferred tax assets, as
well as other changes in income tax laws, are recognized in net earnings in
the period such changes are enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The Corporation does not provide for deferred income taxes on the undistributed
earnings of foreign subsidiaries, which are considered to be permanently
reinvested.
- -------------------------------------------------------------------------------
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
Property (excluding land), leasehold improvements, and equipment are reported
at historical cost, net of accumulated depreciation and amortization.
Land is reported at historical cost.
Depreciation and amortization are computed using the straight-line method.
Property and equipment are depreciated over the estimated useful lives of the
assets, while leasehold improvements are amortized over the lesser of the
estimated economic useful life of the asset or the term of the lease. Most of
the Corporation's fixed assets are technology-based and have shorter lives,
generally three to five years. Maintenance and repair costs are expensed as
incurred.
Facilities-related depreciation and amortization expense was $142, $135,
and $140 in 1995, 1994, and 1993, respectively. Non-facilities-related
depreciation and amortization expense for 1995, 1994, and 1993 was $225, $190,
and $168, respectively.
- -------------------------------------------------------------------------------
GOODWILL
Goodwill, which represents the cost of acquired businesses in excess of
fair value of the related net assets at acquisition, is amortized on a
straight-line basis over periods not exceeding fifteen years and is evaluated
periodically for impairment.
- -------------------------------------------------------------------------------
INSURANCE
Insurance liabilities are future benefits payable under annuity and
interest-sensitive life contracts and include deposits received plus interest
credited during the contract accumulation period, the present value of future
payments for contracts which have annuitized, and a mortality provision for
certain products. Certain policyholder liabilities are also adjusted for those
investments classified as available-for-sale (discussion follows).
Interest-crediting rates range from 3.1% to 10.0%. Liabilities for unpaid claims
consist of the mortality benefit for reported claims and an estimate of
unreported claims based on prior experience. Policy deposits are recorded as
insurance liabilities when received. Policy withdrawal, maintenance, and other
fees are recognized as revenue when earned.
Substantially all investments of insurance subsidiaries, principally debt
securities, are classified as available-for-sale and recorded at fair value.
These investments support the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
Corporation's in-force, universal life-type contracts. The Corporation records
adjustments to deferred acquisition costs and policyholder account balances
which, when combined, are equal to the adjustments that would have been
recorded if those available-for-sale investments had been sold at their
estimated fair values and the proceeds reinvested at current yields. The
corresponding credits or charges for these adjustments are recorded
as unrealized gains or losses in stockholders' equity, net of applicable income
taxes.
Certain variable costs related to the sale or acquisition of new and
renewal insurance contracts have been deferred to the extent such costs are
deemed recoverable from future income. Deferred costs are amortized over the
lives of the contracts in proportion to the estimated gross profit expected to
be realized for each group of contracts, utilizing an interest methodology.
The Corporation maintains separate accounts representing segregated funds
held for purposes of funding variable life and annuity contracts. Subsidiaries
of the Corporation receive various administrative and advisory fees for managing
such funds. Separate account assets are accounted for as customer assets since
the contract holders bear the risk of ownership, consistent with the
Corporation's other investment products. Accordingly, separate account assets
and the related liabilities are not consolidated with the assets and liabilities
of the Corporation.
- -------------------------------------------------------------------------------
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at year-end
currency exchange rates, while revenues and expenses are translated at average
currency exchange rates during the year. Adjustments that result from
translating foreign currency financial statements, net of hedging gains or
losses and related tax effects, are reported as a separate component of
stockholders' equity. Gains or losses resulting from the effect of exchange rate
changes on foreign currency transactions are included in earnings of the current
period.
- -------------------------------------------------------------------------------
CASH FLOWS
For purposes of the Statements of Consolidated Cash Flows, the Corporation
defines cash equivalents as short-term, highly liquid securities and
interest-earning deposits with original maturities of 90 days or less, other
than those held for trading purposes.
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense includes payments in lieu of dividends of $10, $23, and
$21 in 1995, 1994, and 1993, respectively.
- -------------------------------------------------------------------------------
NOTE 2. OTHER SIGNIFICANT EVENTS
ACCOUNTING CHANGES
In 1995, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan",
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures", and SFAS No. 122", "Accounting for Mortgage
Servicing Rights". The impact of adopting these pronouncements on 1995 results
of operations was not material.
In 1993, the Corporation adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits". The cumulative effect of this change in accounting
principle reported in the 1993 Statement of Consolidated Earnings resulted in a
charge of $35 (net of applicable income taxes of $25).
At December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The increase to
stockholders' equity at that date totaled $21 (net of $12 in applicable income
taxes). The impact of the year-end adoption of SFAS No. 115 on the 1993 results
of operations was not material.
- -------------------------------------------------------------------------------
ACQUISITION
In 1995, the Corporation acquired Smith New Court PLC ("Smith New Court"),
a U.K.-based global securities firm, for approximately $800, and recorded
approximately $530 of goodwill related to the acquisition. The Corporation's
results of operations include those of Smith New Court since mid-August 1995.
- -------------------------------------------------------------------------------
OCCUPANCY CHARGE
The Corporation recorded a non-recurring pretax charge totaling $103 ($60
after income taxes) in 1993 related to the Corporation's decision not to occupy
certain office space at its World Financial Center Headquarters ("WFC") facility
and to sublease the unused space to third parties.
- -------------------------------------------------------------------------------
NOTE 3. TRADING ACTIVITIES
The Corporation trades both derivative and cash financial instruments. While
trading activities are primarily generated by client order flow, the Corporation
also takes proprietary positions in interest rate, foreign exchange, debt,
equity, and commodity instruments based on expectations of future market
movements and conditions. The Corporation's trading strategies rely on the joint
management of its client-driven and proprietary transactions, along with the
hedging and financing of these positions.
Detailed information on principal transactions revenues by product category
follows(1):
- -------------------------------------------------------------------------------
1995 1994 1993
------ ------ ------
Equities and equity derivatives $ 912 $ 625 $ 872
Interest rate and currency swaps 732 750 604
Taxable fixed-income 516 471 972
Municipals 273 380 315
Foreign exchange and commodities 86 109 158
------ ------ ------
Total $2,519 $2,335 $2,921
====== ====== ======
- ------------------------------------------------------------------------------
(1) The revenue amounts presented include gains and losses from cash instruments
and related derivatives including swaps, forwards, futures, and options as
applicable.
Interest revenue and expense from derivative and cash financial instruments
are integral components of trading activities. In assessing the profitability of
trading activities, the Corporation views net interest and principal
transactions revenues in the aggregate. See "Principal Transactions" in
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
Management's Discussion and Analysis (unaudited) for further
information on the Corporation's net trading results.
- -------------------------------------------------------------------------------
NOTE 4. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Certain of the Corporation's financial instruments have off-balance-sheet
risk of accounting loss, which may consist of market and/or credit risk, in
excess of amounts recorded on the Consolidated Balance Sheets. Financial
instruments with off-balance-sheet market risk include derivatives, securities
sold but not yet purchased, and certain commitments and guarantees. These
instruments may also have off-balance-sheet credit risk. The credit risk of
off-balance-sheet instruments is discussed in Note 5, except to the extent that
the following off-balance-sheet market risk discussion includes the credit risk
of a derivative's underlying instrument.
- -------------------------------------------------------------------------------
DERIVATIVES
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments", defines a derivative as a future, forward,
swap, or option contract, or other financial instrument with similar
characteristics. The SFAS No. 119 definition excludes all on-balance-sheet
receivables and payables, including those that "derive" their values or
contractually required cash flows from the price of some other security or
index, such as mortgage-backed securities, interest-only and principal-only
obligations, and indexed debt instruments. It also excludes option features
embedded in on-balance-sheet receivables or payables. Conversion features and
call provisions embedded in convertible bonds, for example, do not qualify as
derivatives under the SFAS No. 119 definition.
Derivative contracts often involve future commitments to exchange interest
payment streams or currencies (such as in interest rate and currency swaps or
foreign exchange forwards) or to purchase or sell other financial instruments at
specified terms on a specified date. For instance, options can be purchased or
written on a wide range of financial instruments such as securities, currencies,
futures, and market indices. Options can require the writer to purchase or sell
a specified financial instrument or commodity, or to make a cash payment based
on changes in a reference index or interest rate. Different forward commitment
and option terms can also be combined to meet specialized needs. Interest rate
caps and floors provide the purchaser with protection against rising and falling
interest rates, respectively. Interest rate collars combine a cap and a floor,
providing the purchaser with a predetermined interest rate range. Swap options
provide the purchaser with an option to extend or cancel an existing swap
contract or enter into a new swap contract in the future.
The Corporation enters into various derivative financial instruments to
meet clients' needs and to manage its own market risks. See "Derivative
Financial Instruments" in Management's Discussion and Analysis (unaudited) for
further information.
- -------------------------------------------------------------------------------
MARKET RISK
Market risk is the potential change in value caused by fluctuations in
interest rates, foreign exchange rates, or market prices of an underlying
financial instrument or index. The level of market risk is influenced by the
volatility and the liquidity in the markets in which financial instruments are
traded.
The Corporation seeks to control market risk by developing and refining
hedging strategies that correlate price and currency movements of trading
inventories, non-trading assets and liabilities, and related hedges. In many
cases, derivative financial instruments are used to hedge other on- and
off-balance-sheet transactions.
The following discussion describes the types of market risk faced by the
Corporation and the relationship of derivatives, particularly those used for
trading purposes, to such risks.
- -------------------------------------------------------------------------------
INTEREST RATE RISK
Interest rate risk arises from the possibility that changes in interest
rates will affect the value of financial instruments. Interest rate swap
agreements are a common interest rate risk management tool. Eurodollar and U.S.
Treasury securities futures are also typically effective for managing interest
rate risk. The decision to manage interest rate risk using futures or swap
contracts, as opposed to buying or selling short U.S. Treasury securities,
depends on current market conditions and funding considerations.
Interest rate swap agreements used by the Corporation include caps,
collars, floors, swap options, basis swaps, and leveraged swaps. Basis
swaps are a type of interest rate swap agreement where rates received and paid
are variable based on different index rates. Leveraged swaps are another type of
interest rate swap where changes in the variable rate are multiplied by a
contractual leverage factor, such as four times three-month LIBOR (London
Interbank Offered Rate). The Corporation's exposure to interest rate risk
resulting from these leverage factors is hedged with other financial
instruments.
In addition to the credit risk of the counterparty, some swap agreements
and other derivatives subject to interest rate risk also expose the holder to
the credit risk of the underlying financial instrument. Total return swaps, for
instance, are typically designed to transfer all the risks and rewards of
ownership of an underlying debt instrument, including the risk of default, from
one party in the swap agreement to the other party, in exchange for a specified
interest rate.
- -------------------------------------------------------------------------------
CURRENCY RISK
Currency risk arises from the possibility that fluctuations in foreign
exchange rates will impact the value of financial instruments. Foreign exchange
forwards and options are commonly used to manage currency risk. Currency swaps
are also used primarily in situations where a long-dated forward market is not
available or where the end-user needs a customized instrument to hedge a foreign
currency cash flow stream. Parties to a currency swap initially exchange
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
principal amounts in two currencies, agreeing to exchange interest payments and
to re-exchange the currencies at a future date and agreed-upon rate. The
Corporation's foreign exchange contracts relate primarily to major currencies
such as the Japanese yen, German mark, and British pound.
- -------------------------------------------------------------------------------
EQUITY PRICE RISK
Equity price risk arises from the possibility that equity security prices will
fluctuate, affecting the value of contracts that derive their value from a stock
index, a particular stock, or a defined basket of stocks.
- -------------------------------------------------------------------------------
COMMODITY PRICE RISK
The Corporation views its commodity contracts as financial instruments since
they are generally settled in cash and not by delivery of the underlying
commodity. Market risk results from the possibility that the price of the
underlying commodity may rise or fall. Cash flows from commodity swaps are based
on the difference between an agreed-upon fixed price and a price that varies
with changes in a specified commodity index. Commodity contracts held by the
Corporation principally relate to natural resources and base metals.
- -------------------------------------------------------------------------------
TRADING DERIVATIVES
Many of the derivatives entered into by the Corporation are held for
trading purposes, which includes hedging other trading positions.
The contractual or notional 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 contractual or notional amounts of derivatives used
for trading purposes by type of risk follow:
- -------------------------------------------------------------------------------
Interest Equity Commodity
Rate Currency Price Price
(in billions) Risk(1)(2) Risk(3) Risk Risk
- -------------------------------------------------------------------------------
December 29, 1995
- -----------------
Swap agreements $851 $106 $ 7 $ 3
Futures contracts 215 1 2 2
Options purchased 45 24 38 5
Options written 64 24 41 6
Forward contracts 33 118 - 25
- -------------------------------------------------------------------------------
December 30, 1994
- -----------------
Swap agreements $653 $ 73 $ 2 $ 2
Futures contracts 172 - 2 2
Options purchased 75 22 22 12
Options written 74 22 21 7
Forward contracts 29 103 - 7
- -------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to credit
risk of the underlying financial instrument, such as total return swaps and
similar instruments.
(2) Forward contracts subject to interest rate risk principally represent "To
Be Announced" mortgage pools which bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts which are also
subject to interest rate risk.
Most of the Corporation's off-balance-sheet trading derivative transactions
are short-term in duration with a weighted-average maturity of approximately
2.24 years as of December 29, 1995 and 2.29 years as of December 30, 1994. The
remaining maturities for notional or contractual amounts outstanding at December
29, 1995 for trading derivatives follow:
- -------------------------------------------------------------------------------
Graph titled "REMAINING MATURITIES OF TRADING DERIVATIVES"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s remaining
maturities for notional or contractual amounts outstanding at December 29, 1995
of trading derivatives. The graph is presented in billions with trading
derivatives comprised of swap agreements, futures contracts, forward
contracts, options written, and options purchased. Remaining maturities for
these products in the aggregate total $1,610, $893, $632, $457, $342, $239, $197
and $152 at year-ends December 1995 through December 2001 and after 2001,
respectively.
- -------------------------------------------------------------------------------
FINANCING AND OTHER NON-TRADING DERIVATIVES
The Corporation's financing activities may create exposure to market risk, most
notably interest rate and currency risk. The Corporation issues dollar- and
foreign currency-denominated debt with both variable- and fixed-rate interest
payment terms. The Corporation generally enters into swap agreements to convert
fixed-rate interest payments on its debt obligations into variable-rate
payments. Interest obligations on variable-rate long-term debt and commercial
paper may also be modified through basis swaps, which change the underlying
interest rate basis or reset frequency.
The Corporation also issues debt that is linked to the performance of an
equity or other index (e.g., S&P 500) or an industry basket of stocks. These
debt features are often referred to as embedded options. The contingent
components of these indexed debt issuances and the related hedges are recorded
at amounts which approximate fair value.
For other non-trading activities, the Corporation uses interest rate swaps
to modify the interest rate characteristics of specified repurchase, resale, and
certain customer transactions. The Corporation also uses currency swaps to hedge
investments in and loans to foreign subsidiaries.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
The contractual or notional amounts of these instruments used for financing
and other non-trading purposes follow:
- -------------------------------------------------------------------------------
December 29, December 30,
(in billions) 1995 1994
------------ ------------
Interest rate swap contracts(1) $31 $22
Foreign exchange contracts(1) 3 3
Equity options purchased 1 1
- -------------------------------------------------------------------------------
(1) Includes options embedded in swap contracts which hedge callable debt
totaling $1 billion notional.
Most of the above transactions are entered into with the Corporation's
swap and foreign exchange dealer subsidiaries, which intermediate the interest
rate and currency risk with third parties in the normal course of their trading
activities.
- -------------------------------------------------------------------------------
OTHER FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET MARKET RISK
In addition to derivatives, the Corporation has sold securities that it
does not currently own and will therefore be obligated to purchase such
securities at a future date. These transactions are recorded as trading
liabilities on the Consolidated Balance Sheets. The Corporation will incur a
loss if the market values of these securities subsequently increase.
- -------------------------------------------------------------------------------
NOTE 5. FINANCIAL INSTRUMENTS WITH CREDIT RISK
Credit risk is quantified by the amount of accounting loss that the Corporation
would incur if a counterparty failed to perform its obligations under
contractual terms and the collateral held, if any, were deemed worthless. Both
on- and off-balance-sheet instruments may expose the Corporation to credit risk.
The Corporation attempts to control credit risk by monitoring credit exposures,
obtaining collateral, limiting transactions with specific counterparties, and
continually assessing the creditworthiness of counterparties.
- -------------------------------------------------------------------------------
CREDIT RISK OF OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
For derivative contracts, credit risk is limited to the current cost of
replacing those contracts in a gain position (i.e., the accounting loss). The
notional or contractual values of futures, forward, and swap contracts do not
represent exposure to credit risk. For futures contracts, the Corporation
usually does not intend to take or make physical delivery of the underlying
security, asset, or index. Since futures contracts are exchange-traded and
require daily cash settlement, the related risk of accounting loss is generally
limited to a one-day net positive change in market value. Option contracts can
be exchange-traded or OTC contracts. Purchased options have credit risk to the
extent of their replacement cost. Written options represent a potential
obligation of the Corporation and, accordingly, do not subject the Corporation
to credit risk.
To reduce credit risk, the Corporation requires collateral, principally
U.S. Government and agencies securities, on certain derivative transactions.
Presented below is a summary of counterparty credit ratings for the
replacement cost (net of $2,186 collateral) of trading derivatives in a gain
position by maturity at December 29, 1995.
- -------------------------------------------------------------------------------
Years to Maturity Cross-
maturity
0-3 3-5 5-7 Over 7 netting(1) Total
---------------------------------------------------------------
Credit
Rating(2)
AAA $ 446 $ 130 $ 137 $ 461 $ (95) $ 1 079
AA+/AA 1,250 158 102 302 (316) 1,496
AA- 1,434 590 373 604 (550) 2,451
A+/A 1,807 759 316 260 (481) 2,661
A- 1,254 546 265 132 (332) 1,865
BBB 700 194 85 70 (125) 924
BB+ 360 247 64 25 (58) 638
Other 416 63 21 21 (23) 498
------ ------ ------ ------ ------- -------
Total $7,667 $2,687 $1,363 $1,875 $(1,980) $11,612
------ ------ ------ ------ ------- -------
- -------------------------------------------------------------------------------
(1) Represents netting of payable balances with receivable balances for the same
counterparty across maturity categories. Receivable and payable balances
with the same counterparty in the same maturity category, however, are net
within the maturity category.
(2) Represents rating agency equivalent.
The Corporation is also exposed to off-balance-sheet credit and market risk
from various commitments and guarantees. In the normal course of business, the
Corporation enters into commitments to extend credit, predominantly at variable
interest rates, in connection with certain merchant banking and loan syndication
transactions. Customers may also be extended lines of credit collateralized by
first and second mortgages on real estate, certain liquid assets of small
businesses, or securities. The Corporation also issues various guarantees to
counterparties in connection with certain leasing, agency securities lending,
securitization, and other transactions. These commitments and guarantees usually
have a fixed expiration date and are contingent on certain contractual
conditions that may require payment of a fee by the counterparty. Once
commitments are drawn upon or guarantees are issued, the Corporation may require
the counterparty to post collateral depending upon credit-worthiness and market
conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements as guarantees and commitments may expire without being drawn
upon.
At December 29, 1995 and December 30, 1994, the Corporation had the
following commitments and guarantees:
- -------------------------------------------------------------------------------
1995 1994
------ ------
Commitments to extend credit $3,555 $2,072
Third party guarantees 887 520
- -------------------------------------------------------------------------------
The fair value of the outstanding guarantees was $31 and $22 at
December 29, 1995 and December 30, 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- -------------------------------------------------------------------------------
CREDIT RISK FROM CUSTOMER AND OTHER ACTIVITIES
In the normal course of business, the Corporation incurs credit risk when
executing, settling, and financing various customer securities and commodity
transactions. Execution of these transactions includes the purchase and sale
(including "short sales") of securities. These activities may expose the
Corporation to credit risk arising from the potential that customers or
counterparties may fail to satisfy their obligations. In these situations, the
Corporation may be required to purchase or sell financial instruments at
unfavorable market prices to satisfy obligations to its customers or
counterparties. The Corporation seeks to control the risks associated with its
customer activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines.
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, the
Corporation may purchase the underlying security in the market and seek
reimbursement for losses from the counterparty.
The Corporation borrows and lends securities to finance securities
transactions and to facilitate the settlement process, utilizing both securities
owned by the Corporation and securities owned by customers collateralizing
margin debt. In addition, securities transactions are financed through resale
and repurchase agreements, generally collateralized by U.S. Government and
agencies securities, medium-term notes, asset-backed securities, or certain
non-U.S. governments and agencies securities.
The market value of securities owned by the Corporation that have been
loaned or were collateralizing either repurchase agreements or obligations
associated with various settlement processes at December 29, 1995 and
December 30, 1994, were $37,074 and $34,921, respectively.
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK
The Corporation's exposure to credit risk associated with its trading and other
activities is measured on an individual counterparty basis, as well as by groups
of counterparties that share similar attributes. Concentrations of credit risk
can be affected by changes in geographic, industry, or economic factors. To
alleviate the potential for risk concentration, credit limits are established
and monitored in light of changing counterparty and market conditions.
At December 29, 1995, the Corporation's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration,
which arises from taking trading asset and investment security positions and
holding collateral on resale agreements, totaled $35,769 at December 29, 1995
and $40,018 at December 30, 1994.
At December 29, 1995, the Corporation had concentrations of credit risk
with other counterparties, including an Asian and a European sovereign rated
AA+ or above by a recognized credit rating agency. The total exposure to these
counterparties, excluding collateral held, was $3,642 or 2.1% of total assets.
At December 30, 1994, the Corporation had concentrations of credit risk with an
Asian and two European sovereigns totaling $2,615 or 1.6% of total assets,
excluding collateral held.
The Corporation's most significant industry credit concentration is
with domestic and foreign financial institutions. Financial institutions include
other brokers and dealers, commercial banks, automobile financing companies,
insurance companies, and mutual funds. This concentration arises in the normal
course of the Corporation's brokerage, trading, financing, and underwriting
activities. The Corporation also monitors credit exposures worldwide by region.
Within these regions, sovereign governments represent the most significant
concentration, followed by financial institutions and non-financial
institutions.
In connection with its mortgage trading activities, the Corporation held
whole loans with market values of $2,127 and $2,111 at December 29, 1995 and
December 30, 1994, respectively, as collateral for resale agreements with
financial institutions totaling $1,840 and $1,888, respectively.
In conjunction with its investment and merchant banking activities, the
Corporation provides extensions of credit and makes equity investments to
facilitate leveraged transactions. In the normal course of business, the
Corporation also purchases, sells, and makes markets in non-investment grade
securities. These activities expose the Corporation to a higher degree of credit
risk than is associated with investing, extending credit, underwriting, and
trading in investment grade instruments. At December 29, 1995, the Corporation's
aggregate exposure to credit risk (both on- and off-balance-sheet) associated
with non-investment grade securities and highly leveraged transactions amounted
to $7,073. See "Non-Investment Grade Holdings and Highly Leveraged Transactions"
in Management's Discussion and Analysis (unaudited) for further information.
- -------------------------------------------------------------------------------
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 29, 1995 and December 30, 1994, respectively, approximately 98%
and 99% of financial instrument assets are carried at fair value or amounts
which approximate fair value.
<PAGE>
- --------------------------------------------------------------------------------
TRADING FINANCIAL INSTRUMENTS
Trading assets and liabilities, including derivative financial instruments used
for trading purposes, are carried at fair value as described in Note 1.
The table below presents the average fair values of the Corporation's
trading derivatives for 1995 and 1994, calculated on a monthly basis:
- -------------------------------------------------------------------------------
Average Fair Value
----------------------------------------------------
1995 1994
----------------------- -----------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Swap agreements $10,264 $9,072 $8,349 $7,023
Forward contracts 1,543 1,915 1,358 1,365
Options 2,957 1,939 1,714 1,643
- -------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- -------------------------------------------------------------------------------
FINANCING AND OTHER NON-TRADING FINANCIAL INSTRUMENTS
Derivatives used to hedge borrowings and other non-trading activities are
generally recorded on an accrual basis. The fair value of these instruments and
related hedges is estimated using current market prices and pricing models. The
carrying and fair values of these instruments are summarized as follows:
- --------------------------------------------------------------------------------
December 29, 1995 December 30, 1994
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
Long-term
borrowings $ 17,340 $ 17,901 $ 14,863 $ 14,368
Related derivative:
Assets (260) (781) (133) (168)
Liabilities 176 154 66 547
------- -------- -------- --------
Total $17,256 $ 17,274 $ 14,796 $ 14,747
======= ======== ======== ========
Commercial
paper $16,969 $ 16,972 $ 14,759 $ 14,755
Related derivative:
Assets (16) (17) - -
Liabilities - 1 - 6
------- -------- -------- --------
Total $16,953 $ 16,956 $ 14,759 $ 14,761
======= ======== ======== ========
Other non-trading
liabilities $ 1,554 $ 1,572 $ 1,635 $ 1,606
Related derivative:
Assets (3) (4) - (4)
Liabilities - 2 (3) 23
------- -------- -------- --------
Total $ 1,551 $ 1,570 $ 1,632 $ 1,625
======= ======== ======== ========
- -------------------------------------------------------------------------------
Short-term financial instruments are carried at amounts which approximate
fair value. Such instruments include cash and cash equivalents, cash and
securities segregated for regulatory purposes or deposited with clearing
organizations, repurchase and resale agreements, securities borrowed,
receivables, commercial paper and other short-term borrowings, payables to
customers and brokers and dealers, and insurance and other liabilities.
Marketable investment securities and certain investments of insurance
subsidiaries and other investments are carried as held-to-maturity, trading, or
available-for-sale securities as described in Note 1. These securities are
predominantly carried at fair value or amounts that approximate fair value as
disclosed in Note 7.
Other financial instruments with carrying values different than fair values
are presented below:
- -------------------------------------------------------------------------------
December 29, 1995 December 30, 1994
------------------ -------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- ----- -------- -----
Merchant banking
equity and debt
portfolio $ 394 $ 595 $ 556 $ 764
Loans, notes, and
mortgages(1) 2,082 2,149 1,417 1,428
Capitalized mortgage
servicing rights 136 184 107 154
- --------------------------------------------------------------------------------
(1) Excludes loans related to merchant banking.
In connection with its merchant banking activities, the Corporation holds
certain equity instruments, including partnership interests (both included in
Other Investments in the Consolidated Balance Sheets), and loans consisting
primarily of senior and subordinated debt. Fair value for equity instruments is
estimated using a number of methods, including earnings multiples, cash flow
analyses, and review of underlying financial conditions and other market
factors. These instruments may be subject to restrictions (e.g., minority
ownership, consent of other investors) that may limit the Corporation's ability
to realize currently the estimated fair value. Accordingly, the Corporation's
current estimate of fair value and its ultimate realization on these instruments
may differ. Loans made in connection with merchant banking activities are
carried at unpaid principal balances less a reserve for estimated losses. Fair
value is estimated using discounted cash flows.
The Corporation's estimate of fair value for its loans, notes, and
mortgages (excluding loans made in connection with merchant banking activities)
is determined based on loan characteristics. For certain homogeneous categories
of loans, including residential mortgages and home equity loans, fair value is
estimated using market price quotations or previously executed transactions for
securities backed by similar loans, adjusted for credit risk and other
individual loan characteristics. For the Corporation's variable-rate loan
receivables, carrying value approximates fair value.
Capitalized mortgage servicing rights, which represent the present value of
estimated future net servicing revenues for mortgages securitized by the
Corporation, are included in Other Assets on the Consolidated Balance Sheets.
Fair value is computed based on the present value of estimated future servicing
revenues (net of servicing expenses), using current market assumptions for
discount rates, prepayment speeds, default estimates, and interest rates.
The Corporation holds a passive minority interest in a privately held
limited partnership that provides information services. Due to the lack of a
ready market for this investment and contractual restrictions on the disposition
of the Corporation's interest, the fair value of this investment is not readily
determinable as of December 29, 1995. It is the opinion of management, however,
that the fair value of this investment significantly exceeds the carrying value
of $39.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
NOTE 7. INVESTMENTS
The Corporation has several broad categories of investments on its
Consolidated Balance Sheets, including investments of insurance subsidiaries,
marketable investment securities, and other investments.
Investments of insurance subsidiaries, primarily debt securities, are used
to fund policyholder liabilities. Marketable investment securities consist of
equity and debt securities held for rating agency purposes or to manage cash
flows related to certain liabilities of the Corporation's banking subsidiaries.
Other investments consist principally of equity and debt securities which were
acquired primarily in connection with merchant banking activities. Certain
merchant banking investments are subject to restrictions which may limit the
Corporation's ability to realize its investment until such restrictions expire.
A reconciliation of the Corporation's investment securities to those
reported in the Consolidated Balance Sheets is presented below:
- -------------------------------------------------------------------------------
December 29, December 30,
1995 1994
------------ ------------
Investments of insurance
subsidiaries
Available-for-sale $4,145 $4,189
Non-qualifying 1,474 1,530
------ ------
Total $5,619 $5,719
====== ======
Marketable investment
securities
Available-for-sale $1,064 $ 486
Held-to-maturity 1,268 1,807
Trading 33 32
------ ------
Total $2,365 $2,325
====== ======
Other investments
Available-for-sale $ 165 $ 106
Held-to-maturity 43 27
Non-qualifying 753 755
------ ------
Total $ 961 $ 888
====== ======
- -------------------------------------------------------------------------------
Information regarding investment securities subject to SFAS No. 115 follows:
<TABLE><CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 29, 1995 December 30, 1994
--------------------------------------------------- ---------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Available-for-Sale(1) Cost Gains Losses Value Cost Gains Losses Value
--------------------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate debt $2,999 $145 $ (7) $3,137 $3,009 $21 $(143) $2,887
U.S. Government and
agencies 631 8 - 639 365 1 (6) 360
Municipals 168 1 - 169 225 8 (11) 222
Mortgage-backed securities 1,290 35 (2) 1,323 1,240 12 (41) 1,211
Other debt securities 57 1 - 58 53 1 - 54
------ ---- ---- ------ ------ --- ----- ------
Total debt securities 5,145 190 (9) 5,326 4,892 43 (201) 4,734
Equity securities 50 5 (7) 48 45 6 (4) 47
------ ---- ---- ------ ------ --- ------ ------
Total $5,195 $195 $(16) $5,374 $4,937 $49 $(205) $4,781
====== ==== ==== ====== ====== === ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
December 29, 1995 December 30, 1994
--------------------------------------------------- ---------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Held-to-Maturity(1) Cost Gains Losses Value Cost Gains Losses Value
--------------------------------------------------- ---------------------------------------------------
Corporate debt $1,051 $13 - $1,064 $1,188 - $(17) $1,171
U.S. Government and agencies 23 - - 23 104 - (1) 103
Municipals 1 - - 1 1 - - 1
Mortgage-backed securities 169 - - 169 497 - (16) 481
Other debt securities 67 1 - 68 44 - - 44
------ --- ---- ------ ------ ----- ---- ------
Total $1,311 $14 - $1,325 $1,834 - $(34) $1,800
====== === ==== ====== ====== ===== ==== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)In accordance with Financial Accounting Standards Board implementation
guidance on SFAS No. 115, the Corporation reassessed the classification
of all such securities and transferred held-to-maturity securities with
an amortized cost of $385 to the available-for-sale category on December
29, 1995. Net unrealized gains for these securities on the date of transfer
were $4.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
The carrying value and estimated fair value of debt securities at December
29, 1995, by contractual maturity, for available-for-sale and held-to-maturity
investments follow:
- --------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- ---------
Due in one year
or less $ 926 $ 929 $ 613 $ 614
Due after one year
through five years 1,799 1,866 500 513
Due after five years
through ten years 972 1,037 2 2
Due after ten years 158 171 27 27
----- ----- ----- -----
Subtotal 3,855 4,003 1,142 1,156
Mortgage-backed
securities 1,290 1,323 169 169
----- ----- ----- -----
Total(1) $5,145 $5,326 $1,311 $1,325
====== ====== ====== ======
- --------------------------------------------------------------------------------
(1) Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
The Corporation's insurance subsidiaries are required to adjust deferred
acquisition costs and certain policyholder liabilities associated with
investments classified as available-for-sale. These adjustments are recorded in
stockholders' equity and assume that the unrealized gain or loss on
available-for-sale securities was realized. The table below provides the
activity for the net unrealized gains (losses) recorded in stockholders' equity
for available-for-sale investments.
- --------------------------------------------------------------------------------
Dec. 29, Dec. 30, Dec. 31,
1995 1994 1993
------- ------ -------
Net unrealized gains (losses)
on investment securities
available-for-sale $ 335 $(410) $ 254
Adjustments for policyholder
liabilities (137) 215 (206)
Adjustments for deferred
policy acquisition costs (72) 74 (15)
Deferred income taxes (44) 43 (12)
------ ------ ------
Net activity 82 (78) 21
Net unrealized (losses) gains
on investment securities
classified as available-for-sale,
beginning of year (57) 21 -
------ ------ ------
Net unrealized gains (losses)
on investment securities
classified as available-for-sale,
end of year $ 25 $ (57) $ 21
====== ====== ======
- -------------------------------------------------------------------------------
The proceeds and gross realized gains (losses) from the sale of
available-for-sale investments are as follows:
- -------------------------------------------------------------------------------
1995 1994 1993
------ ------ ------
Proceeds $1,029 $1,377 $3,828
Gross realized gains 26 31 76
Gross realized losses (28) (34) (5)
- -------------------------------------------------------------------------------
Net unrealized gains (losses) from trading investment securities included
in the 1995 and 1994 Consolidated Statements of Earnings were $1 and $(7),
respectively.
- -------------------------------------------------------------------------------
NOTE 8. STOCKHOLDERS' EQUITY
PREFERRED EQUITY
The Corporation is authorized to issue 25,000,000 shares of undesignated
preferred stock, $1.00 par value per share. In 1994, the Corporation's Board of
Directors (the "Board") delegated to the Executive Committee of the Board the
authority to authorize the issuance, from time to time, of up to 100,000 shares
of previously undesignated preferred stock having an aggregate liquidation
preference not to exceed $600. All shares of currently outstanding preferred
stock constitute one and the same class and have equal rank and priority over
common stockholders as to dividends and in the event of liquidation.
<PAGE>
- -------------------------------------------------------------------------------
9% CUMULATIVE PREFERRED STOCK, SERIES A
In 1994, the Corporation issued 17,000,000 Depositary Shares, each
representing a one-four-hundredth interest in a share of 9% Cumulative Preferred
Stock, Series A, $10,000 liquidation preference per share ("9% Preferred
Stock"). The 9% Preferred Stock is a single series consisting of 42,500 shares
with an aggregate liquidation preference of $425.
Dividends on the 9% Preferred Stock are cumulative from the date of
original issue and are payable quarterly when declared by the authority of the
Board. The 9% Preferred Stock is redeemable on or after December 30, 2004 at
the option of the Corporation, in whole or in part, at a redemption price equal
to $10,000 per share, plus accrued and unpaid dividends (whether or not
declared) to the date fixed for redemption.
- -------------------------------------------------------------------------------
REMARKETED PREFERRED(Service Mark) STOCK, SERIES C
The Corporation has issued 3,000 shares of Remarketed Preferred Stock,
Series C ("RP(Registered Trademark) Stock") of which 1,938 shares were
outstanding as of December 29, 1995. The Corporation may redeem the RP Stock,
in whole or in part, on any dividend payment date at a redemption price of
$100,000 per share, plus accumulated dividends.
Dividends on the RP Stock are cumulative and payable when declared by the
authority of the Board. At the end of each dividend period, the RP Stock is
subject to a remarketing process, during which both the dividend period and the
dividend rate may be adjusted for periods of generally seven or 49 days with a
maximum dividend rate payable dependent on the credit rating assigned to the RP
Stock. Dividend rates in effect during 1995 on the RP Stock ranged from 4.15% to
5.20% per annum.
MLPF&S acts as one of the remarketing agents for the RP Stock. As a market
maker, MLPF&S may occasionally acquire a temporary position in the RP Stock. At
December 29, 1995, the RP Stock held by MLPF&S for the purpose of resale was not
material.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
STOCKHOLDER RIGHTS PLAN
The Corporation's Stockholder Rights Plan provides for the distribution of
preferred purchase rights ("Rights") to common stockholders which separate from
the common stock ten days following: (a) an announcement of an acquisition by a
person or group ("acquiring party") of 20% or more of the outstanding common
shares of the Corporation; or (b) the commencement of a tender or exchange offer
for 30% or more of the common shares outstanding. One-half of a Right is
attached to each outstanding share of common stock and will attach to all
subsequently issued shares. The Rights entitle the holder to purchase fractions
of a share ("Units") of Series A Junior Preferred Stock, par value $1.00 per
share, at an exercise price of $100 per Unit. The Units are nonredeemable and
have voting privileges and certain preferential dividend rights. The exercise
price and the number of Units issuable are subject to adjustment to prevent
dilution.
If, after the Rights have been distributed, either the acquiring party
holds 25% or more of the Corporation's outstanding shares or the Corporation is
a party to a business combination or other specifically defined transaction,
each Right (other than those held by the acquiring party) will entitle the
holder to receive, upon exercise, Units of preferred stock or shares of common
stock of the surviving company with a value equal to two times the exercise
price of the Right. The Rights expire December 16, 1997 and are redeemable at
the option of a majority of the independent directors of the Corporation at $.01
per Right at any time until the tenth day following an announcement of the
acquisition of 20% or more of the Corporation's common stock.
- --------------------------------------------------------------------------------
COMMON EQUITY
In 1993, the Board declared a two-for-one common stock split, effected in
the form of a 100% stock dividend. All share and per share data presented in
this Annual Report to Stockholders reflect the effect of the split. In addition,
the Corporation issued 1,637,314 shares of common stock in connection with
certain employee benefit plans in 1993.
- --------------------------------------------------------------------------------
NOTE 9. PER COMMON SHARE COMPUTATION
The Corporation computed earnings per common share using the modified
treasury stock method ("modified method") in accordance with Accounting
Principles Board Opinion No. 15. The modified method is used when the number of
shares obtainable upon exercise of outstanding options, warrants, and their
equivalents exceeds 20% of the Corporation's outstanding common stock.
Under this method, all options, warrants, and their equivalents are assumed
exercised (whether dilutive or antidilutive), with the aggregate proceeds used
to repurchase up to 20% of the Corporation's outstanding common stock, subject
to certain limitations. If the combined effect of the assumed exercise is
dilutive, all options, warrants, and their equivalents are included in the
computation.
Primary earnings per common share is computed by dividing net earnings,
after deducting preferred stock dividend requirements of $48, $13, and $5 for
1995, 1994, and 1993, respectively, by the weighted-average number of common
shares and common stock equivalents outstanding during each year. Shares of
common stock issuable under various employee stock plans are considered common
stock equivalents ("incremental shares").
The weighted-average common and incremental shares included in the primary
and fully diluted per common share computations follow:
- -------------------------------------------------------------------------------
(in thousands) 1995 1994 1993
---- ---- ----
Primary
Weighted-average
common shares 176,563 195,661 209,276
Incremental shares 19,434 15,580 17,055
------- ------- -------
Total 195,997 211,241 226,331
======= ======= =======
Fully Diluted
Weighted-average
common shares 176,563 195,661 209,276
Incremental shares 20,097 16,034 18,204
------- ------- -------
Total 196,660 211,695 227,480
======= ======= =======
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 10. COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings at December 29, 1995 and
December 30, 1994 are presented below:
- -------------------------------------------------------------------------------
1995 1994
------- -------
Commercial paper $16,969 $14,759
Demand and time deposits 8,182 7,578
Securities loaned 2,857 2,180
Bank loans and other 1,538 1,923
------ -------
Total $29,546 $26,440
======= =======
- -------------------------------------------------------------------------------
The Corporation's weighted-average interest rates on its short-term
financing instruments, which include repurchase agreements, commercial paper,
and other short-term borrowings, were 6.20% in 1995 and 4.74% in 1994.
The weighted-average interest rates on these instruments modified through
swap agreements were 6.18% and 4.76% in 1995 and 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
NOTE 11. LONG-TERM BORROWINGS
Long-term borrowings at December 29, 1995 and December 30, 1994 consisted of the
following (rates and maturities presented are as of December 29, 1995):
- --------------------------------------------------------------------------------
1995 1994
------- -------
U.S. dollar-denominated fixed-rate
obligations due 1996 to 2019 at
interest rates ranging from 4.75%
to 10.375% $ 4,670 $ 4,983
Foreign currency-denominated
fixed-rate obligations due 1996 to
2002 at interest rates ranging from
2.55% to 15.0% 1,157 725
U.S. dollar-denominated
variable-rate obligations(1)(2) 630 890
Foreign currency-denominated
variable-rate obligations(2) 222 110
U.S. dollar-denominated
medium-term notes(3) 7,650 6,934
Foreign currency-denominated
medium-term notes(3) 3,011 1,221
------- -------
Total $17,340 $14,863
======= =======
- -------------------------------------------------------------------------------
(1) Included in U.S. dollar-denominated variable-rate obligations are
various equity-linked indexed instruments issued by the
Corporation. Payments on these instruments may be linked to a
specific index (e.g., S&P 500) or industry basket of stocks.
(2) Variable interest rates are generally based on rates such as
LIBOR, the U.S. Treasury Bill Rate, or the Federal Funds Rate.
(3) Maturities of medium-term notes may range from nine months to 30
years from the date of issue.
Maturities of long-term borrowings at December 29, 1995 consisted of the
following:
- -------------------------------------------------------------------------------
Maturities
1996 $ 5,617
1997 1,896
1998 1,856
1999 2,320
2000 2,228
2001 and thereafter 3,423
-----
Total $17,340
=======
- --------------------------------------------------------------------------------
Substantially all of the Corporation's fixed-rate obligations are swapped
into variable interest rates. In addition, the Corporation enters into swaps or
other derivatives to modify or hedge its exposures on variable-rate and
equity-linked obligations. See "Financing and Other Non-Trading Derivatives" in
Note 4 for further detail.
Effective weighted-average interest rates for long-term borrowings, which
include the impact of hedges, at December 29, 1995 and December 30, 1994 were:
- -------------------------------------------------------------------------------
1995 1994
----- -----
Fixed-rate obligations 6.47% 4.54%
Variable-rate obligations 6.38 4.54
Medium-term notes 5.87 4.40
- --------------------------------------------------------------------------------
Certain long-term borrowing agreements contain provisions whereby the
borrowings are redeemable at the option of the holder at specified dates prior
to maturity. Management believes, however, that a significant portion of such
borrowings may remain outstanding beyond their earliest redemption date.
Subsequent to year-end 1995 and through February 20, 1996, long-term
borrowings, net of repayments and repurchases, increased approximately $1,684.
- --------------------------------------------------------------------------------
NOTE 12. INCOME TAXES
Income tax provisions (benefits) on earnings before
cumulative effect of a change in accounting principle consisted of:
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Federal
Current $ 788 $ 680 $ 878
Deferred (164) (150) (275)
State and Local
Current 81 158 376
Deferred (30) 2 (58)
Foreign
Current (39) 5 165
Deferred 61 18 (55)
----- ----- -------
Total $ 697 $ 713 $1,031
===== ===== =======
- -------------------------------------------------------------------------------
The corporate statutory tax rate was 35.0% for the three years presented. A
reconciliation of the statutory Federal income tax to the Corporation's income
tax provisions for earnings before cumulative effect of an accounting change
follows:
- -------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Federal income tax
at statutory rate $634 $605 $ 848
State and local income
taxes, net 33 104 207
Pension plan transaction 13 14 14
Foreign operations (4) 23 2
Tax-exempt interest (14) (18) (16)
Dividends received deduction (19) (17) (8)
Other, net 54 2 (16)
------ ------ ------
Total $697 $713 $1,031
====== ====== ======
- -------------------------------------------------------------------------------
For financial reporting purposes, the Corporation had no unrecognized net
operating loss or alternative minimum tax benefit carryforwards at December 29,
1995.
Deferred income taxes are provided for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
consolidated financial statements. These temporary differences result in taxable
or deductible amounts in future years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
Details of the Corporation's deferred tax assets and liabilities follow:
- -------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Deferred tax assets
Valuation of inventory,
investments, and receivables $ 700 $ 638 $ 659
Total deferred compensation 228 192 91
Other 364 338 247
----- ----- -----
Subtotal 1,292 1,168 997
Valuation allowance - - (3)
----- ----- -----
Total deferred tax assets net of
valuation allowance 1,292 1,168 994
----- ----- -----
Deferred tax liabilities
Lease transactions 100 113 74
Accelerated tax depreciation 70 92 114
Unrealized gains on trading
inventory 18 29 36
Other 88 73 87
------ ------ ------
Total deferred tax liabilities 276 307 311
------ ------ ------
Net deferred tax asset $1,016 $ 861 $683
====== ====== ======
- -------------------------------------------------------------------------------
Income tax benefits of $34, $5, and $75 were allocated to stockholders'
equity related to employee compensation transactions for 1995, 1994, and 1993,
respectively.
Earnings before income taxes included approximately $128, $48, and $395 of
earnings attributable to foreign entities for 1995, 1994, and 1993,
respectively. Cumulative undistributed earnings of foreign subsidiaries were
approximately $848 at December 29, 1995. No deferred Federal income taxes have
been provided for the undistributed earnings, as these earnings have been and
will continue to be reinvested in the Corporation's foreign operations. Assuming
utilization of foreign tax credits, the Corporation estimates that approximately
$133 of Federal income taxes and $37 of foreign withholding taxes would be
incurred on the repatriation of the foreign subsidiaries' earnings.
- --------------------------------------------------------------------------------
NOTE 13. REVOLVING CREDIT AGREEMENTS
The Corporation has obtained committed, unsecured revolving credit facilities
aggregating $5,565 under agreements with 76 banks. The agreements contain
covenants that require, among other things, that the Corporation maintain
specified levels of net worth, as defined in the agreements, on the date of an
advance. To date, there have never been any borrowings under current or prior
revolving credit facilities.
The credit quality, amounts, and terms of the credit facilities are
continually monitored and modified as warranted by business conditions. Under
the existing agreements, the credit facilities mature as follows: $980 in March
1996; $1,565 in May 1996; $1,260 in June 1996; and $1,760 in October 1996. At
maturity, the Corporation may convert amounts then borrowed, if any, into term
loans that would mature in two years.
- --------------------------------------------------------------------------------
NOTE 14. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
MLPF&S, a registered broker-dealer, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 ("SEA").
Under the alternative method permitted by this rule, the minimum required net
capital, as defined, shall not be less than 2% of aggregate debit items arising
from customer transactions. At December 29, 1995, MLPF&S's regulatory net
capital of $1,248 was 9% of aggregate debit items, and its regulatory net
capital in excess of the minimum required was $975.
In addition to amounts presented in the Consolidated Balance Sheets as cash
and securities segregated for regulatory purposes or deposited with clearing
organizations, securities with a market value of $100, primarily collateralizing
resale agreements, have been segregated in a special reserve bank account for
the exclusive benefit of customers pursuant to the reserve formula requirements
of SEA Rule 15c3-3.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in
U.S. Government securities and a subsidiary of the Corporation, is subject to
the capital adequacy requirements of the Government Securities Act of 1986. This
rule requires dealers to maintain liquid capital in excess of market and credit
risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 29,
1995, MLGSI's liquid capital of $658 was 209% of its total market and credit
risk, and liquid capital in excess of the minimum required was $280.
Merrill Lynch International Limited ("MLIL"), a United Kingdom registered
broker-dealer and a subsidiary of the Corporation, is subject to the capital
requirements of the Securities and Futures Authority ("SFA") of the United
Kingdom. Financial resources, as defined, must exceed the total financial
resources requirement of the SFA. At December 29, 1995, MLIL's financial
resources were $1,655, and exceeded the minimum requirement by $386.
The Corporation's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. As
of December 29, 1995, $537, representing 84% of the insurance subsidiaries' net
assets, was unavailable for distribution to the Corporation.
In addition, over 55 other subsidiaries are subject to regulatory
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These regulatory restrictions may limit the
amounts that these subsidiaries can pay in dividends or advance to the
Corporation. At December 29, 1995, restricted net assets of all subsidiaries
were $5,183. In addition, to satisfy rating agency standards, a credit
intermediary subsidiary of the Corporation must also meet certain minimum
capital requirements. At December 29, 1995, this minimum capital requirement was
$350.
There are no restrictions on the Corporation's present ability to pay
dividends on common stock, other than (a) the Corporation's obligation first to
make dividend payments on its preferred stock; and (b) the governing provisions
of the Delaware General Corporation Law.
- --------------------------------------------------------------------------------
NOTE 15. EMPLOYEE BENEFIT PLANS
The Corporation provides retirement and other postemployment benefits to its
employees worldwide through defined contribution and defined benefit pension
plans and other postretirement and postemployment benefit plans. The
Corporation reserves the right to amend or terminate these plans at any time.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
DEFINED CONTRIBUTION PENSION PLANS
The domestic defined contribution plans consist of the Retirement Accumulation
Plan ("RAP"), the Employee Stock Ownership Plan ("ESOP"), and the 401(k) Savings
& Investment Plan ("SIP"). The RAP, ESOP, and SIP cover substantially all U.S.
employees who have met age and service requirements.
The Corporation established the RAP and the ESOP (collectively, the
"Retirement Program") for the benefit of employees over the age of 21 with one
year of service. A separate retirement account is maintained for each
participant.
In 1989, the ESOP trust purchased 24,341,470 of common shares from the
Corporation with residual funds from a terminated defined benefit pension plan
("Reversion Shares") and loan proceeds from a subsidiary of the Corporation
("Leveraged Shares").
The Corporation credits a participant's account and records pension expense
under the Retirement Program based on years of service, age, and eligible
compensation. This expense is funded by quarterly allocations of Leveraged and
Reversion Shares and, if necessary, cash, to participants' accounts based on a
specified formula. Leveraged and Reversion Shares are released in accordance
with the terms of the ESOP. If the fair market value of the shares released does
not fund the formula allocation to the participants' accounts, cash
contributions are made to the RAP. Reversion Shares are allocated to
participants' accounts over a period of not more than eight years, ending in
1997. Leveraged Shares are allocated to participants' accounts, as principal on
the loan to the ESOP is repaid. Principal and interest on the loan are payable
quarterly upon receipt of dividends on certain shares of common stock or other
cash contributions.
ESOP shares are considered allocated (specifically assigned to
participants' accounts), committed (scheduled for release at a specified future
date but not yet legally released), or unallocated (not released, committed, or
allocated). Share information at December 29, 1995 follows:
- -------------------------------------------------------------------------------
Reversion Leveraged
Shares Shares
---------- ---------
Allocated 15,498,825 2,296,150
Committed 385,682 95,350
Unallocated 4,012,519 2,052,944
Cost of unallocated shares(1) $63 $33(2)
- -------------------------------------------------------------------------------
(1) The cost of the unallocated Reversion and Leveraged Shares are recorded as
reductions of Stockholders' Equity.
(2) Represents the ESOP loan balance.
Additional information on ESOP activity follows:
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Dividends used for debt service(1) $ 9 $ 11 $ 10
Compensation costs funded
with ESOP shares 143 109 110
- --------------------------------------------------------------------------------
(1) Dividends on all Leveraged and unallocated and committed Reversion Shares
are used for debt service. Dividends on allocated Reversion Shares are
credited to participants' accounts.
Employees can participate in the SIP by contributing, on a tax-deferred
basis, up to 15% of their eligible compensation but not more than the maximum
annual amount allowed by law. The Corporation's contributions are equal to
one-half of the first 4% of each participant's eligible compensation contributed
to the SIP, up to a maximum of fifteen hundred dollars annually. No corporate
contributions are made for participants who are also Employee Stock Purchase
Plan participants.
Internationally, the Corporation sponsors various defined contribution
plans. The costs of benefits under the RAP, SIP, and international plans are
expensed during the related service period.
- --------------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS
The Corporation has purchased a group annuity contract which guarantees the
payment of benefits vested under a U.S. defined benefit plan that was terminated
in accordance with the applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). At December 29, 1995 and December 30, 1994, a
substantial portion of the assets supporting the annuity contract were invested
in U.S. Government and agencies securities. The Corporation, under a
supplemental agreement, may be responsible for, or benefit from, actuarial
experience and investment performance of these annuity assets. The Corporation
also maintains supplemental defined benefit plans for certain U.S. employees.
Employees of certain non-U.S. subsidiaries participate in various local
plans. These pension plans provide benefits that are generally based on years
of credited service and a percentage of the employee's eligible compensation
during the final years of employment. The Corporation's funding policy has been
to contribute annually the amount necessary to satisfy local funding standards.
<PAGE>
Net periodic pension cost includes the following components:
- --------------------------------------------------------------------------------
1995 1994 1993
----- ----- -----
Defined contribution plan cost $ 169 $ 165 $ 146
----- ----- -----
Defined benefit plans(1):
Service cost for benefits
earned during the year 19 16 12
Interest cost on
projected benefit
obligation 105 92 89
Actual return on plan assets (480) 146 (281)
Deferral and amortization
of unrecognized items 373 (243) 189
----- ----- -----
Total defined benefit plan cost 17 11 9
----- ----- -----
Total pension cost $ 186 $ 176 $ 155
===== ===== =====
- --------------------------------------------------------------------------------
(1) The following actuarial assumptions were used in calculating the defined
benefit cost and benefit obligations. Weighted-average rates as of
the beginning of the year are:
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Weighted-average discount rate 6.5% 8.1% 6.7%
Rate of compensation increase
(not applicable to terminated plan) 5.5 6.0 5.9
Expected long-term rate of return
on plan assets 6.7 8.2 6.7
- -------------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
The funded status of the defined benefit plans (including the terminated plan)
follows:
<TABLE><CAPTION>
- ----------------------------------------------------------------------------------------------------------
1995 1994
---------------------------- ----------------------------
Pension plans in which: Pension plans in which:
---------------------------- ----------------------------
Assets Accumulated Asset Accumulated
Exceeded Benefits Exceeded Benefits
Accumulated Exceeded Accumulated Exceeded
Benefits Assets(1) Benefits Assets(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested $(1,429) $(110) $(1,189) $(41)
Non-vested (3) (7) (2) (4)
------- ----- ------- -----
Total (1,432) (117) (1,191) (45)
Effect of assumed increase in compensation
levels (23) (29) (13) (18)
------- ----- ------- -----
Projected benefit obligation (1,455) (146) (1,204) (63)
Plan assets at fair value 1,735 72 1,284 15
------- ----- ------- -----
Plan assets in excess of (less than)
projected benefit obligation 280 (74) 80 (48)
Unrecognized net liability at transition 3 2 4 3
Unrecognized net (gain) loss (106) 27 74 8
Unrecognized prior service (benefit) cost (7) (1) 4 (2)
------- ----- ------- -----
Prepaid (accrued) benefit cost $ 170 $ (46) $ 162 $(39)
======= ===== ======= =====
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Consists primarily of domestic supplemental plans not subject to ERISA and
non-U.S. plans where funding strategies vary due to legal requirements and
local practice.
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation provides health and life insurance benefits to retired employees
under a plan that covers substantially all U.S. employees who have met age and
service requirements. The health care component is contributory, with retiree
contributions adjusted periodically. The life insurance component of the plan is
noncontributory. The accounting for costs of health care benefits anticipates
future changes in cost-sharing provisions. The Corporation pays claims as
incurred. Full-time employees of the Corporation become eligible for these
benefits upon attainment of age 55 and completion of ten years of service. The
Corporation also sponsors similar plans that provide health care benefits to
eligible employees of certain international subsidiaries. As of December 29,
1995, these plans had not been funded.
Net periodic postretirement benefit expense included the following
components:
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Service cost $ 4 $ 4 $ 5
Interest cost on accumulated
postretirement benefit obligation 10 9 11
Amortization of unrecognized gain (1) - -
--- --- ---
Total $13 $13 $16
=== === ===
- --------------------------------------------------------------------------------
The amounts recognized for the Corporation's postretirement benefit plans
follow:
- -------------------------------------------------------------------------------
1995 1994
---- ----
Accumulated postretirement benefit obligation
Retirees $ (80) $ (52)
Fully eligible active plan participants (34) (35)
Other active plan participants (57) (41)
----- -----
Total (171) (128)
Unrecognized net loss (gain) 3 (32)
----- -----
Postretirement benefits accrued liability $(168) $(160)
===== =====
- --------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the postretirement
benefit cost and obligations. Weighted-average rates as of the beginning of the
year are:
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Weighted-average discount rate 6.5% 8.2% 6.8%
Health care cost trend rates(1)
Initial 9.0 11.0 12.0
2011 and thereafter 5.5 6.0 4.5
- --------------------------------------------------------------------------------
(1) Assumed to decrease gradually until 2011 and remain constant thereafter.
The assumed health care cost trend rate has a significant effect on the
amounts reported above. Increasing the assumed trend rate by one percentage
point per year would increase the accumulated postretirement benefit obligation
as of December 29, 1995 and December 30, 1994 by $29 and $17, respectively, and
increase the aggregate of service and interest costs for 1995 and 1994 by $3 and
$2, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
- --------------------------------------------------------------------------------
POSTEMPLOYMENT BENEFITS
The Corporation provides certain postemployment benefits for employees on
extended leave due to injury or illness and for terminated employees.
Employees that are disabled due to non-work-related illness or injury are
entitled to salary continuation, medical coverage, and life insurance. The
Corporation also provides severance benefits to terminated employees. In
addition, the Corporation is mandated by state and Federal regulations to
provide certain other postemployment benefits. The Corporation funds these
benefits through a combination of self-insured and insured plans.
The Corporation recognized $76, $76, and $79 in 1995, 1994, and 1993,
respectively (excluding the 1993 cumulative effect adjustment), of
postemployment benefits expense, which included severance costs for terminated
employees of $54, $66, and $60 in 1995, 1994, and 1993, respectively. Although
all full-time employees are eligible for severance benefits, no additional
amounts were accrued as of December 29, 1995 since future severance costs are
not estimable.
- --------------------------------------------------------------------------------
NOTE 16. EMPLOYEE INCENTIVE PLANS
The Corporation sponsors several employee compensation plans that provide
eligible employees with stock or deferred cash compensation or with options to
purchase shares.
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVE COMPENSATION PLAN ("LTICP")
AND EQUITY CAPITAL ACCUMULATION PLAN ("ECAP")
LTICP and ECAP provide for grants of equity and equity-related instruments to
certain key employees. LTICP provides for the issuance of Restricted Shares,
Restricted Units, and Nonqualified Stock Options (discussions follow), as well
as Incentive Stock Options, Performance Shares, Performance Units, Stock
Appreciation Rights, and other securities of the Corporation. ECAP provides
for the issuance of Restricted Shares and Nonqualified Stock Options
(discussions follow), as well as Performance Shares. As of December 29, 1995,
no instruments other than Restricted Shares, Restricted Units, and Nonqualified
Stock Options had been granted.
- -------------------------------------------------------------------------------
RESTRICTED SHARES AND UNITS
Restricted Shares are shares of the Corporation's common stock which carry
voting and dividend rights. A Restricted Unit is deemed equivalent in fair
market value to one share of the Corporation's common stock, is payable in cash,
and receives cash payments equivalent to dividends thereon. Under both plans,
such shares and units are restricted from sale, transfer, or assignment until
the end of the restricted period and are subject to forfeiture during the
vesting period for LTICP grants or the restricted period for ECAP grants.
The activity with respect to Restricted Shares and Units under these plans
for the years ended December 29, 1995 and December 30, 1994 follows:
- -------------------------------------------------------------------------------
LTICP ECAP
------------------------ ----------
Restricted Restricted Restricted
Shares Units Shares
---------- ---------- ----------
Authorized for issuance 80,000,000 80,000,000 26,200,000
========== ========== ==========
Available for issuance
at December 29, 1995(1) 18,266,797 67,179,006 2,821,181
========== ========== =========
Outstanding,
beginning of 1994 1,732,154 1,898,268 2,091,790
Granted - 1994 1,355,638 1,495,948 6,360
Paid, forfeited, or released
from contingencies (136,991) (180,822) (157,654)
--------- --------- ---------
Outstanding, end of 1994 2,950,801 3,213,394 1,940,496
Granted - 1995 2,158,209 2,084,721 541,960
Paid, forfeited, or released
from contingencies (1,837,250) (1,974,341) (1,876,465)
---------- ---------- ----------
Outstanding, end of 1995(2) 3,271,760 3,323,774 605,991
========== ========== =========
- --------------------------------------------------------------------------------
(1) Net of shares reserved for issuance upon the exercise of stock options.
(2) Subsequent to year-end through February 1, 1996, 1,332,563 and
1,398,852 LTICP Restricted Shares and Units, respectively, and
1,438,859 ECAP Restricted Shares were granted to eligible employees.
- --------------------------------------------------------------------------------
NONQUALIFIED STOCK OPTIONS
Nonqualified Stock Options granted under LTICP in 1989 through 1995
generally become exercisable over four years in equal installments commencing
one year after the date of grant. Options granted in 1996 and thereafter
(including those related to 1995 performance) generally will become exercisable
over five years. The exercise price of these options is equal to 100% of the
Fair Market Value (as defined in LTICP) of a share of common stock on the date
of grant. Nonqualified Stock Options expire ten years after their grant date.
At December 29, 1995, approximately 17,059,375 options were exercisable at
prices ranging from $10.6875 to $62.0625. During 1995, the fair market value of
shares acquired by the exercise of Nonqualified Stock Options ranged from
$35.125 to $64.00.
The activity for Nonqualified Stock Options under LTICP for 1995 and 1994
follows:
- -------------------------------------------------------------------------------
Shares Subject to Option
------------------------
1995 1994
---------- ----------
Balance, beginning of year 28,407,933 27,004,771
Granted 6,456,462 4,527,100
Exercised (3,959,949) (2,649,411)
Forfeited or surrendered (831,129) (474,527)
---------- ----------
Balance, end of year(1) 30,073,317 28,407,933
========== ==========
- --------------------------------------------------------------------------------
(1) In January 1996, eligible participants were granted Nonqualified Stock
Options for 6,816,190 shares.
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT CAPITAL ACCUMULATION AWARD PLAN ("FCCAAP")
Under FCCAAP, eligible employees in the Corporation's private client group are
granted awards generally based upon their prior year's performance. Payment
for an award
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
is contingent upon continued employment for a period of time and is subject to
forfeiture during that period. The award is payable ten years from the date of
grant in a fixed number of shares of the Corporation's common stock unless the
fair market value of such shares is less than a specified minimum value plus
interest, in which case the minimum value is paid in cash.
A total of 20,222,830 shares of the Corporation's common stock are
authorized for issuance under FCCAAP. Only shares of common stock held as
treasury stock may be issued under FCCAAP. At December 29, 1995, shares subject
to awards made to eligible employees totaled 16,175,603 with 3,388,298 shares
available for issuance.
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
ESPP allows eligible employees to invest from 1% to 10% of their eligible
compensation to purchase the Corporation's common stock at a price equal to
85% of its fair market value. These purchases are made on four quarterly
investment dates through payroll deductions. Up to 25,000,000 shares of the
Corporation's common stock have been authorized for issuance under ESPP. The
activity in ESPP for the two most recent fiscal years follows:
- -------------------------------------------------------------------------------
ESPP Shares
-----------------------
1995 1994
--------- ---------
Available, beginning of year 5,857,449 6,930,356
Purchased through plan (861,186) (1,072,907)
--------- ---------
Available, end of year 4,996,263 5,857,449
========= =========
- -------------------------------------------------------------------------------
INCENTIVE EQUITY PURCHASE PLAN ("IEPP")
IEPP allowed selected employees to purchase shares of the Corporation's common
stock ("Book Value Shares") at a price equal to book value per share as of a
valuation date preceding the purchase date. Once held for six months, Book Value
Shares, which otherwise may not be resold, may be sold back to the Corporation
at book value (adjusted for certain non-recurring events) as of a valuation date
preceding the sale, or exchanged at any time for a specified number of freely
transferable common shares. Book Value Shares outstanding under IEPP were
1,221,500 at December 29, 1995 and 1,372,700 at December 30, 1994. In 1995, IEPP
was amended to reduce the authorized shares to zero and prohibit the reuse of
any surrendered shares. No further offerings will be made under this plan.
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANTS INVESTMENT CERTIFICATE PROGRAM ("FCICP")
Under FCICP, eligible employees in the Corporation's private client group are
issued investment certificates based on their performance. The certificates
mature ten years from the date issued and are payable in cash if certain
performance criteria are achieved and the employee is continuously employed
for the ten-year period, with certain exceptions. The certificates bear
interest commencing with the date the performance requirements are achieved.
As of December 29, 1995 and December 30, 1994, the Corporation had $188 and
$147 accrued under this plan, respectively.
- --------------------------------------------------------------------------------
OTHER DEFERRED COMPENSATION PLANS
The Corporation sponsors other deferred compensation plans in which eligible
employees may participate. Generally, contributions to the plans are made on a
tax-deferred basis to participants. Participants may contribute portions of
certain variable compensation, or the Corporation may contribute cash awards.
Contributions are generally invested at the direction of the participant, often
from a selection of mutual funds sponsored by the Corporation. The plans'
investments and the amounts accrued by the Corporation under the plans are
included in Other Investments and Other Liabilities, respectively, and totaled
$135 and $147, respectively, at December 29, 1995.
- --------------------------------------------------------------------------------
NOTE 17. COMMITMENTS AND CONTINGENCIES
LITIGATION
There are numerous civil actions, arbitration proceedings, and claims
pending against the Corporation as of December 29, 1995, some of which involve
claims for substantial amounts.
In addition, on January 12, 1995, an action was commenced in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court") by Orange County, California (the "County") and the Orange County
Investment Pools (the "Pools"), both of which filed bankruptcy petitions in the
Bankruptcy Court on December 6, 1994 against the Corporation and certain of its
subsidiaries in connection with the corporation's business activities with the
Orange County Treasurer-Tax Collector. The Pools' bankruptcy petition
subsequently was dismissed.
The County and its current Treasurer-Tax Collector seek relief totaling in
excess of $2 billion in connection with various securities transactions between
the Orange County Treasurer-Tax Collector and the Corporation and its
subsidiaries. The complaint alleges, among other things, that these transactions
violated California law and should be adjudged null and void; that the
Corporation and its subsidiaries violated various provisions of the Bankruptcy
Code and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder; and that the Corporation and its subsidiaries breached a
fiduciary duty owed to the County and conspired to make unauthorized use of
public funds.
In addition, other actions have been brought against the Corporation and/or
certain of its officers, directors, and employees and certain of its
subsidiaries in the United States District Court for the Central District of
California, the United States District Court for the Southern District of New
York, and in the state courts in California, Illinois, and New York. These
include class actions and stockholder derivative actions brought by persons
alleging harm to themselves or to the Corporation arising out of the
Corporation's dealings with the Orange County Treasurer-Tax Collector, or from
the purchase of debt instruments issued by the County that were underwritten by
the Corporation's subsidiary, MLPF&S.
Although the ultimate outcome of these actions cannot be ascertained at
this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
management that the resolution of these matters will not have a
material adverse effect on the consolidated financial statements of the
Corporation contained herein.
- --------------------------------------------------------------------------------
LEASES
The Corporation has entered into various noncancelable long-term lease
agreements for premises and equipment that expire through 2024, including the
WFC. The Corporation has also entered into various noncancelable short-term
lease agreements which are primarily monthly commitments of less than one year
under equipment leases.
Future minimum rental commitments under noncancelable leases with initial
or remaining terms exceeding one year are presented below:
- --------------------------------------------------------------------------------
WFC Other Total
------ ------- ------
Minimum Rental Commitments
1996 $ 125 $ 194 $ 319
1997 126 186 312
1998 130 168 298
1999 142 152 294
2000 146 139 285
Thereafter 2,157 728 2,885
------ ------ ------
Total $2,826 $1,567 $4,393
====== ====== ======
- -------------------------------------------------------------------------------
Total minimum rental commitments have not been reduced by $1,246 of minimum
sublease rentals to be received in the future under noncancelable subleases.
Certain leases contain renewal or purchase options, or escalation clauses
providing for increased rental payments based upon maintenance, utility, and tax
increases.
Rent expense, net of sublease revenue, for each of the last three years is
presented below:
- --------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Rent expense $399 $395 $412
Sublease revenue (87) (79) (60)
---- ---- -----
Net rent expense $312 $316 $352
==== ==== =====
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER COMMITMENTS
In the normal course of business, the Corporation enters into when-issued
transactions and underwriting commitments. Settlement of these transactions as
of December 29, 1995, would not have a material effect on the consolidated
financial condition of the Corporation.
The Corporation obtains letters of credit from issuing banks to satisfy
various counterparty collateral requirements in lieu of the Corporation
depositing collateral of securities or cash. Letters of credit aggregated $2,352
and $1,161 at December 29, 1995 and December 30, 1994, respectively.
The Corporation has service agreements with providers of communications and
data processing services. Under the terms of these agreements, the Corporation
receives various communications and market data services. As of December 29,
1995 and December 30, 1994, minimum fee commitments under these contracts
aggregated $30 and $55, respectively.
- --------------------------------------------------------------------------------
NOTE 18. INDUSTRY AND GLOBAL OPERATIONS
The Corporation operates principally in the financial services industry and
services individual and institutional clients. These services, due to certain
legal requirements, are conducted through various subsidiaries including those
operating as brokers and dealers, insurance companies, and banks.
The Corporation operates in both international and domestic markets. The
Corporation's international business activities are conducted through offices in
three regions: Europe, Africa, and the Middle East; Asia, including Japan and
Australia; and the Americas, excluding the U.S.
European, African, and Middle Eastern operations offer international
investment and private banking services, research, and dealer services in equity
and fixed-income securities, swaps, futures, commodity contracts, and options.
The Corporation's Asian operations conduct business throughout various countries
including Australia, China, Hong Kong, Japan, and Singapore. The Corporation has
exchange memberships in the region's major financial centers. Traditional retail
and institutional services are provided in virtually all locations. In Canada,
the Corporation is a broker for securities and commodities and a market maker
for bonds and money market instruments. The Corporation also provides investment
banking and research for Canadian customers. In Latin America, the Corporation
provides international banking, brokerage, and trust services and has been
instrumental in the privatization of many Latin American companies.
The principal methodology used in preparing the international data that
follows includes: (i) commission revenues are recorded based on the location of
the sales force; (ii) trading revenues are principally recorded based on the
location of the trader; (iii) investment banking revenues are recorded based on
the location of the client; and (iv) asset management and portfolio service fees
are recorded based on the location of the fund manager. Earnings before income
taxes include the allocation of certain shared expenses among regions. In
addition, intercompany transfers are based primarily on service agreements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Millions, Except Per Share Amounts)
The information presented below, in management's judgment, provides a
reasonable representation of each region's contribution to the consolidated
amounts.
<TABLE><CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
--------------------------------------- ----------------------------------------
Total Revenues Net Revenues
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Europe, Africa, and Middle East $ 3,981 $ 3,464 $ 3,111 $ 1,319 $ 1,134 $ 1,358
Asia 1,232 963 879 701 554 683
Americas 704 617 526 347 333 377
--------- --------- -------- --------- --------- ---------
Subtotal 5,917 5,044 4,516 2,367 2,021 2,418
United States 16,107 13,754 13,475 8,092 7,703 9,309
Eliminations (511) (564) (1,403) (194) (99) (1,169)
--------- --------- --------- --------- --------- ---------
Total $ 21,513 $ 18,234 $ 16,588 $ 10,265 $ 9,625 $ 10,558
========= ========= ========= ========= ========= =========
<CAPTION>
Earnings Before Income Taxes Total Assets
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Europe, Africa, and Middle East $ 155 $ 176 $ 481 $ 56,948 $ 44,297 $ 37,107
Asia 81 75 191 16,914 11,389 8,546
Americas 127 137 139 4,997 4,216 5,658
--------- --------- --------- --------- --------- ---------
Subtotal 363 388 811 78,859 59,902 51,311
United States 1,448 1,342 1,614 105,702 108,147 106,132
Eliminations - - - (7,704) (4,300) (4,533)
--------- --------- --------- --------- --------- ---------
Total $ 1,811 $ 1,730 $ 2,425 $ 176,857 $ 163,749 $ 152,910
========= ========= ========= ========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.:
We have audited the accompanying consolidated balance sheets of Merrill Lynch &
Co., Inc. and subsidiaries as of December 29, 1995 and December 30, 1994 and the
related statements of consolidated earnings, changes in consolidated
stockholders' equity and consolidated cash flows for each of the three years in
the period ended December 29, 1995. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation and its
subsidiaries at December 29, 1995 and December 30, 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended December 29, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1993
the Corporation and its subsidiaries changed their method of accounting for
postemployment benefits and their method of accounting for certain investments
in debt and equity securities to conform with Statements of Financial Accounting
Standards No. 112 and No. 115, respectively.
/s/ Deloitte & Touche LLP
New York, New York
February 26, 1996
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
<TABLE><CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended Last Friday in December
--------------------------------------------------------------------------------------------
(Dollars in Millions) 1991 1992 1993 1994 1995
- -------------------------------------------------------------------------------------------------------------------------
Revenues (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commissions
Listed securities $ 1,065 8.6% $ 1,147 8.6% $ 1,404 8.5% $ 1,361 7.5% $ 1,558 7.2%
Mutual funds 519 4.2 668 5.0 846 5.1 879 4.8 906 4.2
Commodities 147 1.2 142 1.1 179 1.1 217 1.2 172 0.8
Money market instruments 176 1.4 191 1.4 165 1.0 109 0.6 92 0.4
Other 259 2.1 274 2.0 300 1.8 305 1.7 398 1.9
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total 2,166 17.5 2,422 18.1 2,894 17.5 2,871 15.8 3,126 14.5
Interest and Dividends 5,761 46.7 5,807 43.3 7,099 42.8 9,578 52.5 12,221 56.8
Principal Transactions
Equities and equity
derivatives 534 4.3 614 4.6 872 5.2 625 3.4 912 4.2
Interest rate and currency
swaps 240 2.0 390 2.9 604 3.6 750 4.1 732 3.4
Taxable fixed-income 825 6.6 742 5.5 972 5.9 471 2.6 516 2.4
Municipals 240 2.0 262 1.9 315 1.9 380 2.1 273 1.3
Foreign exchange and
commodities 67 0.5 158 1.2 158 1.0 109 0.6 86 0.4
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total 1,906 15.4 2,166 16.1 2,921 17.6 2,335 12.8 2,519 11.7
Investment Banking
Underwriting 1,020 8.2 1,309 9.8 1,647 9.9 989 5.4 964 4.5
Strategic services 156 1.3 175 1.3 184 1.1 251 1.4 344 1.6
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total 1,176 9.5 1,484 11.1 1,831 11.0 1,240 6.8 1,308 6.1
Asset Management and
Portfolio Service Fees 1,004 8.1 1,253 9.3 1,558 9.4 1,739 9.5 1,890 8.8
Other 340 2.8 281 2.1 285 1.7 471 2.6 449 2.1
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total Revenues 12,353 100.0 13,413 100.0 16,588 100.0 18,234 100.0 21,513 100.0
Interest Expense 5,107 41.3 4,836 36.0 6,030 36.4 8,609 47.2 11,248 52.3
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Net Revenues 7,246 58.7 8,577 64.0 10,558 63.6 9,625 52.8 10,265 47.7
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Non-Interest
Expenses
Compensation and benefits 3,868 53.4 4,365 50.9 5,255 49.8 4,952 51.5 5,270 51.3
Communications and
equipment rental 357 4.9 366 4.3 386 3.6 432 4.5 487 4.8
Occupancy 473 6.5 478 5.6 573 5.4 436 4.5 449 4.4
Depreciation and
amortization 276 3.8 281 3.3 308 2.9 325 3.4 367 3.6
Professional fees 235 3.3 257 3.0 290 2.7 367 3.8 425 4.1
Advertising and market
development 250 3.5 301 3.5 377 3.6 375 3.9 398 3.9
Brokerage, clearing, and
exchange fees 240 3.3 277 3.2 281 2.7 338 3.5 361 3.5
Other 530 7.3 631 7.3 663 6.3 670 6.9 697 6.8
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Total Non-Interest Expenses 6,229 86.0 6,956 81.1 8,133 77.0 7,895 82.0 8,454 82.4
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Earnings Before Income
Taxes and Cumulative
Effect of Changes in
Accounting Principles 1,017 14.0 1,621 18.9 2,425 23.0 1,730 18.0 1,811 17.6
Income Tax Expense 321 4.4 669 7.8 1,031 9.8 713 7.4 697 6.8
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Earnings Before Cumulative
Effect of Changes in
Accounting Principles 696 9.6 952 11.1 1,394 13.2 1,017 10.6 1,114 10.8
Cumulative Effect of
Changes in Accounting
Principles, Net of
Income Taxes - - (58) (.7) (35) (.3) - - - -
------- ---- ------- ---- ------- ---- ------ ---- ------- ----
Net Earnings $ 696 9.6% $ 894 10.4% $ 1,359 12.9% $ 1,017 10.6% $ 1,114 10.8%
======= ==== ======= ==== ======= ==== ====== ==== ======= ====
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Revenues and Interest Expense are presented as a percentage of Total Revenues.
Non-Interest Expenses, Cumulative Effect of Changes in Accounting Principles,
and Earnings are presented as a percentage of Net Revenues.
<PAGE>
STATISTICAL DATA
<TABLE><CAPTION>
Selected statistical data for the last five fiscal years are presented for
informational purposes below.
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended Last Friday in December
-----------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
Private Client Assets (in billions):
Assets in Worldwide Private Client
Accounts $440 $487 $557 $568 $703
Assets in U.S. Private Client
Accounts $422 $463 $527 $537 $665
Assets under Professional Management:
Money Markets $ 67 $ 67 $ 66 $ 67 $ 82
Equities 12 16 30 37 47
Fixed Income 27 35 42 36 41
Private Portfolio 11 13 17 20 22
Insurance 7 8 6 4 4
---- ---- ---- ---- ----
Subtotal 124 139 161 164 196
ML Consults 5 12 17 14 17
Mutual Fund Advisor and Asset Power - - 1 3 6
---- ---- ---- ---- ----
Total $129 $151 $179 $181 $219
==== ==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriting (dollars in billions) (a):
Global Debt and Equity:
Volume $109.9 $149.9 $191.9 $137.2 $147.7
Market Share 12.7% 13.0% 12.8% 12.6% 13.8%
U.S. Debt and Equity:
Volume $ 99.6 $139.6 $172.5 $116.1 $127.3
Market Share 17.0% 16.4% 16.4% 16.5% 17.9%
- -----------------------------------------------------------------------------------------------------------------------------------
Full-Time Employees:
U.S. 34,700 36,100 37,500 38,750 39,250
International 3,600 4,000 4,400 5,050 6,750
------ ------ ------ ------ ------
Total 38,300 40,100 41,900 43,800 46,000
====== ====== ====== ====== ======
Financial Consultants and Account
Executives Worldwide 12,100 12,700 13,100 13,400 13,800
Productivity Measures (dollars in
thousands):
Support Personnel to Producer
Ratio (b) 1.47 1.44 1.43 1.46 1.43
Net Revenues per Employee $189 $214 $252 $220 $223
Pretax Earnings per Employee $ 27 $ 40 $ 58 $ 39 $ 39
Compensation and Benefits Expense to
Net Revenues 53.4% 50.9% 49.8% 51.5% 51.3%
Compensation and Benefits Expense to
Total Non-Interest Expenses 62.1% 62.7% 64.6% 62.7% 62.3%
- -----------------------------------------------------------------------------------------------------------------------------------
Expense Coverage (in millions):
Fee-based Revenues (c) $1,697 $2,024 $2,429 $2,869 $3,101
Fixed and Semi-fixed Expenses $3,338 $3,656 $4,103 $4,306 $4,707
Fee-based Revenues to
Fixed and Semi-fixed Expenses 50.8% 55.4% 59.2% 66.6% 65.9%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Full credit to book manager. All market share data are derived from
Securities Data Co.
(b) Support personnel includes sales assistants.
(c) Fee-based revenues include principally asset management and portfolio
service fees and net margin interest.
<PAGE>
QUARTERLY INFORMATION
Presented below are the unaudited quarterly results of operations of the
Corporation by quarter for 1995 and 1994. The quarterly information is prepared
in conformity with generally accepted accounting principles and reflects all
adjustments, consisting only of normal recurring accruals, that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the periods presented. The nature of the Corporation's business
is such that the results of any interim period are not necessarily indicative of
results for a full year.
<TABLE><CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
------------------------------------------------------------------------------------------------------
(Dollars in Millions, Dec. 29, Sept. 29, June 30, Mar. 31, Dec. 30, Sept. 30, July 1, April 1,
Except Per Share Amounts) 1995 1995 1995 1995 1994 1994 1994 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $5,293 $5,431 $5,585 $5,204 $4,484 $4,530 $4,481 $4,739
Interest Expense 2,680 2,749 3,036 2,783 2,391 2,228 2,083 1,907
------ ------ ------ ------ ------ ------ ------ ------
Net Revenues 2,613 2,682 2,549 2,421 2,093 2,302 2,398 2,832
Non-Interest Expenses 2,131 2,197 2,085 2,041 1,838 1,912 1,965 2,180
------ ------ ------ ------ ------ ------ ------ ------
Earnings Before Income Taxes 482 485 464 380 255 390 433 652
Income Tax Expense 179 185 181 152 93 159 181 280
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings $ 303 $ 300 $ 283 $ 228 $ 162 $ 231 $ 252 $ 372
====== ====== ====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share:
Primary $ 1.49 $ 1.47 $ 1.40 $ 1.08 $ .76 $1.10 $ 1.18 $ 1.68
====== ====== ====== ====== ====== ====== ====== ======
Fully Diluted $ 1.49 $ 1.46 $ 1.39 $ 1.08 $ .75 $1.10 $ 1.18 $ 1.68
====== ====== ====== ====== ====== ====== ====== ======
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DIVIDENDS PER COMMON SHARE
(Declared and paid)
- ------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------------------------------------------------------
1995 $.23 $.26 $.26 $.26
- ------------------------------------------------------------------------
1994 $.20 $.23 $.23 $.23
- ------------------------------------------------------------------------
There are no restrictions on the Corporation's present ability to pay dividends
on common stock, other than (a) the Corporation's obligation first to make
dividend payments on its preferred stock and (b) the governing provisions of the
Delaware General Corporation Law. Certain subsidiaries' ability to declare
dividends may also be limited (see Note 14 to the Consolidated Financial
Statements).
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified calendar
quarters are noted below.
<TABLE><CAPTION>
- ------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
High Low High Low High Low High Low
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $45 $34 5/8 $53 1/4 $42 5/8 $63 3/4 $51 7/8 $64 3/4 $50 1/8
- ------------------------------------------------------------------------------------------------
1994 $45 5/8 $36 1/2 $40 1/2 $34 1/4 $40 7/8 $34 1/4 $41 1/8 $32 1/4
- ------------------------------------------------------------------------------------------------
</TABLE>
The approximate number of record holders of common stock as of February 2, 1996
was 12,800.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following are subsidiaries of ML & Co. as of March 22, 1996 and the states
or jurisdictions in which they are organized. Indentation indicates the
principal parent of each subsidiary. Except as otherwise specified, in each case
ML & Co. owns, directly or indirectly, at least 99% of the voting securities of
each subsidiary. The names of particular subsidiaries have been omitted because,
considered in the aggregate as a single subsidiary, they would not constitute,
as of the end of the year covered by this report, a "significant subsidiary" as
that term is defined in Rule 1.02(v) of Regulation S-X, under the Securities
Exchange Act of 1934.
State or Juris-
Name diction of Entity
- ---- -----------------
Merrill Lynch & Co., Inc. .................................. Delaware
Merrill Lynch, Pierce, Fenner & Smith Incorporated1 ..... Delaware
Broadcort Capital Corp. .............................. Delaware
Merrill Lynch & Co., Canada Ltd. ..................... Ontario
Merrill Lynch Canada Incorporated/Incorporee ....... Nova Scotia
Merrill Lynch Life Agency Inc.2 ...................... Washington
Wagner Stott Clearing Corp.3 ......................... Delaware
Merrill Lynch Bank & Trust Co. .......................... New Jersey
Merrill Lynch Capital Services, Inc. .................... Delaware
Merrill Lynch Government Securities Inc. ................ Delaware
Merrill Lynch Money Markets Inc. ..................... Delaware
Merrill Lynch Group, Inc. ............................... Delaware
Merrill Lynch Capital Partners, Inc................... Delaware
Merrill Lynch Derivative Products, Inc.4 ............. Delaware
Merrill Lynch Futures Inc. ........................... Delaware
Merrill Lynch Group Holdings Limited ................. Ireland
Merrill Lynch Capital Markets Bank Limited ........ Ireland
- ----------
1 MLPF&S also conducts business as "Merrill Lynch & Co."
2 Similarly named affiliates and subsidiaries that engage in the sale of life
insurance and annuity products are incorporated in various other
jurisdictions.
3 The preferred stock of the corporation is owned by an unaffiliated group of
investors.
4 ML & Co. owns 100% of this corporation's outstanding common voting stock.
100% of the outstanding preferred voting stock is held by outside parties.
The board of directors consist of 11 members, 9 of which are ML & Co.
employees and 2 of which represents outside parties.
<PAGE>
State or Juris-
Name diction of Entity
- ---- -----------------
Merrill Lynch & Co., Inc.
Merrill Lynch Group, Inc. (cont'd)
Merrill Lynch Insurance Group, Inc. .................. Delaware
Merrill Lynch Life Insurance Company ............... Arkansas
ML Life Insurance Company of New York .............. New York
Merrill Lynch International Finance Corporation ...... New York
Merrill Lynch International Bank Limited ........... England
Merrill Lynch Bank (Suisse) S.A. ................. Switzerland
Merrill Lynch Mortgage Capital Inc. .................. Delaware
Merrill Lynch National Financial ..................... Utah
Merrill Lynch Trust Bank of Michigan.................. Michigan
Merrill Lynch Trust Company........................... New Jersey
Merrill Lynch Business Financial Services Inc. ..... Delaware
Merrill Lynch Credit Corporation.................... Delaware
Merrill Lynch Home Equity Acceptance, Inc. ....... Delaware
Merrill Lynch Trust Company........................... Florida
Merrill Lynch Financial Data Services, Inc. ........ Florida
Merrill Lynch Trust Company of America................ Illinois
Merrill Lynch Trust Company of California ............ California
Merrill Lynch Trust Company of Texas ................. Texas
Merrill Lynch Investment Partners Inc. ............... Delaware
ML IBK Positions Inc. ................................ Delaware
Merrill Lynch Capital Corporation5 ................. Delaware
ML Leasing Equipment Corp.6 .......................... Delaware
Princeton Services, Inc.7............................. Delaware
Merrill Lynch International Incorporated................. Delaware
- ----------
5 This company has 7 subsidiaries holding or having a direct or indirect
interest in specific investments on its behalf.
6 This corporation has more than 45 direct or indirect subsidiaries operating
in the United States and serving as either general partners or associate
general partners of limited partnerships.
7 This corporation is the general partner of Merrill Lynch Asset Management, LP
and Fund Asset Management, LP (whose limited partner in both cases is ML &
Co.).
2
<PAGE>
State or Juris-
Name diction of Entity
- ---- -----------------
Merrill Lynch & Co., Inc.
Merrill Lynch International Incorporated (cont'd)
Merrill Lynch International (Australia) Limited....... New South Wales
Merrill Lynch International Bank...................... United States
Merrill Lynch International Holdings Inc. ............ Delaware
Merrill Lynch Bank (Austria) Aktiengesellschaft
A.G. ........................................ Austria
Merrill Lynch Bank and Trust Company (Cayman)
Limited .......................................... Cayman Islands,
British West Indies
Merrill Lynch International & Co.8 ............... Netherlands Antilles
Merrill Lynch Capital Markets A.G. ................. Switzerland
Merrill Lynch Europe PLC ........................... England
Merrill Lynch International Limited............... England
Merrill Lynch Capital Markets PLC................. England
Merrill Lynch, Pierce, Fenner & Smith (Brokers &
Dealers) Limited ............................... England
Merrill Trust Company (Jersey) Limited ........... Jersey,
Channel Islands
Merrill Lynch Europe Ltd. .......................... Cayman Islands,
British West Indies
Merrill Lynch Holding GmbH9 ........................ Germany
Merrill Lynch Bank A.G. .......................... Germany
Merrill Lynch GmbH................................ Germany
Merrill Lynch Holding S.A.F. ....................... France
Merrill Lynch Capital Markets (France) S.A. ...... France
Merrill Lynch Far East Limited ..................... Hong Kong
Merrill Lynch Japan Incorporated ..................... Delaware
- ----------
8 A partnership among subsidiaries of ML & Co.
9 ML & Co. holds a 50% interest in this corporation, with the remaining 50%
interest held by an outside party.
3
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the following Registration
Statements of Merrill Lynch & Co., Inc. of our reports dated February 26,
1996 included in and incorporated by reference in this Annual Report on
Form 10-K of Merrill Lynch & Co., Inc. for the year ended December 29, 1995.
Filed on Form S-8:
Registration Statement No. 33-41942 (1986 Employee Stock Purchase Plan)
Registration Statement No. 33-17908 (Incentive Equity Purchase Plan)
Registration Statement No. 33-33336 (Long Term Incentive Compensation
Plan)
Registration Statement No. 33-51831 (Long Term Incentive Compensation
Plan)
Registration Statement No. 33-51829 (401(k) Savings and Investment Plan)
Registration Statement No. 33-54154 (Non-Employee Directors' Equity Plan)
Registration Statement No. 33-54572 (401(k) Savings and Investment Plan
(Puerto Rico))
Registration Statement No. 33-56427 (1994 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-60989 (1995 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-00863 (401(k) Savings & Incentive Plan)
<PAGE>
Filed on Form S-3:
Debt Securities
Registration Statement No. 33-54218
Registration Statement No. 2-78338
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
Registration Statement No. 33-17965
Registration Statement No. 33-27512
Registration Statement No. 33-35456
Registration Statement No. 33-42041
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
Medium Term Notes
Registration Statement No. 2-96315
Registration Statement No. 33-03079
Registration Statement No. 33-05125
Registration Statement No. 33-09910
Registration Statement No. 33-16165
Registration Statement No. 33-19820
Registration Statement No. 33-23605
Registration Statement No. 33-27549
Registration Statement No. 33-38879
Other Securities
Registration Statement No. 33-19975 (Remarketed Preferred Stock, Series C)
Registration Statement No. 33-33335 (Common Stock)
Registration Statement No. 33-45777 (Common Stock)
Registration Statement No. 33-55363 (Preferred Stock)
/s/ Deloitte & Touche LLP
New York, New York
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> DEC-29-1995
<CASH> 3,091
<RECEIVABLES> 28,791
<SECURITIES-RESALE> 44,257
<SECURITIES-BORROWED> 20,645
<INSTRUMENTS-OWNED> 71,080<F1>
<PP&E> 1,605
<TOTAL-ASSETS> 176,857
<SHORT-TERM> 26,689
<PAYABLES> 17,757
<REPOS-SOLD> 56,817
<SECURITIES-LOANED> 2,857
<INSTRUMENTS-SOLD> 33,350
<LONG-TERM> 17,340
0
619
<COMMON> 315
<OTHER-SE> 5,207
<TOTAL-LIABILITY-AND-EQUITY> 176,857
<TRADING-REVENUE> 2,519
<INTEREST-DIVIDENDS> 12,221
<COMMISSIONS> 3,126
<INVESTMENT-BANKING-REVENUES> 1,308
<FEE-REVENUE> 1,890
<INTEREST-EXPENSE> 11,248
<COMPENSATION> 5,270
<INCOME-PRETAX> 1,811
<INCOME-PRE-EXTRAORDINARY> 1,114
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,114
<EPS-PRIMARY> 5.44
<EPS-DILUTED> 5.42
<FN>
<F1>Financial Instruments Owned includes commodity contracts but excludes
physical commodities and real estate owned totaling $140.
</FN>
</TABLE>
