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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 27, 1996 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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:
Title of each class Name of each exchange 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 New York Stock Exchange
1/400th share of 9% Cumulative
Preferred Stock, Series A
Rights to Purchase Series A New York Stock Exchange; Chicago Stock
Junior Preferred 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 New York Stock Exchange
Securities ("MITTS") due August 29,
1997; S&P 500 MITTS due July 31,
1998; S&P 500 MITTS due May 10,
2001; European Portfolio MITTS due
June 30, 1999; Global
Telecommunications Portfolio MITTS
due October 15, 1998; S&P 500 MITTS
due September 16, 2002; Technology
MITTS due August 15, 2001; Top Ten
Yield MITTS due August 15, 2006;
Healthcare/Biotechnology Portfolio
MITTS due October 31, 2001; 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; 6% STRYPES due
June 1, 1999; 6 1/4% STRYPES due
July 1, 2001; 7 1/4% STRYPES due
June 15, 1999
Japan Index Equity Participation American Stock Exchange
Securities with Minimum Return
Protection due January 31, 2000;
AMEX Oil Index SMART Notes due
December 29, 2000; 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 whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 14, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $15.1 billion.
As of March 14, 1997, there were 166,901,160 shares of Common Stock
outstanding (which amount includes 1,538,778 shares held by the Merrill Lynch &
Co., Inc. Employee Stock Ownership Plan that are not considered outstanding
for accounting purposes).
DOCUMENTS INCORPORATED BY REFERENCE:
1. Merrill Lynch & Co., Inc. 1996 Annual Report to Stockholders - Incorporated
by reference in part in this Form 10-K in Parts I, II, and IV.
2. Merrill Lynch & Co., Inc. Proxy Statement for its 1997 Annual Meeting of
Stockholders dated March 10, 1997 - Incorporated by reference in part in this
Form 10-K in Parts III and IV.
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PART I
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ITEM 1. BUSINESS
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OVERVIEW
Merrill Lynch & Co., Inc.*, a Delaware corporation formed in 1973, is a holding
company 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,
strategic services, and other corporate finance advisory activities, including
loan syndication; asset management and other investment advisory and
record-keeping services; trading of foreign exchange instruments, futures,
commodities, and derivatives; securities clearance services; banking, trust, and
lending services including mortgage lending and related services; and insurance
sales and underwriting services. Merrill Lynch's subsidiaries and affiliates,
which are organized and managed under a dual franchise consisting of the Merrill
Lynch Private Client Group ("Private Client") and the Merrill Lynch Corporate
and Institutional Client Group ("CICG"), provide these services to a wide array
of clients, including individual investors, small businesses, corporations,
governments and governmental agencies, and financial institutions. At the end of
1996, total assets in Merrill Lynch client accounts were $839 billion. Merrill
Lynch was the leading underwriter of U.S. and global debt and equity securities
for 1996.
Merrill Lynch conducts its business from its World Headquarters facility in New
York City, additional principal locations in New Jersey, London, Tokyo, Hong
Kong, Singapore, various other regional facilities located in the United States
and in other countries, and in numerous retail sales and other offices
throughout the world. At December 27, 1996, Merrill Lynch employed approximately
49,800 people.
The financial services industry, in which Merrill Lynch 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 changes in
market variables such as interest rates, currency rates, volatility in equity
and commodity prices, and credit spreads both in the United States and
throughout the world. Merrill Lynch'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 currency rate fluctuations, regulation by the U.S. government and
by non-U.S. governments, and other factors inherent in worldwide 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.
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* Unless the context otherwise requires, the term "Merrill Lynch" means Merrill
Lynch & Co., Inc. and includes the consolidated subsidiaries of Merrill Lynch
& Co., Inc. The term "ML & Co." is used herein to refer to Merrill Lynch &
Co., Inc., the parent holding company.
** In addition to historical information contained or incorporated by
reference in this report on Form 10-K, Merrill Lynch may make or publish
forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. In order to comply with the terms of the safe harbor for
such statements provided by the Private Securities Litigation Reform Act of
1995, Merrill Lynch notes that a variety of factors, many of which are
beyond its control, affect its operations, performance, business strategy,
and results and could cause actual results and experience to differ
materially from the expectations expressed in these statements. These
factors include, but are not limited to, the effect of changing economic and
market conditions, trends in business and finance and in investor sentiment,
the volume of securities transactions, securities price levels, the level and
volatility of interest rates, currency values and equity and commodity
prices, the actions undertaken by both current and potential new
competitors, the impact of current, pending, and future legislation and
regulation both in the United States and throughout the world, and the other
risks and uncertainties detailed in "Overview", "Competition", and
"Regulation" contained in this Form 10-K, and in "Management's Discussion and
Analysis" incorporated by reference herein. Merrill Lynch undertakes no
responsibility to update publicly or revise any forward-looking statements.
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Merrill Lynch conducts its worldwide business through a number of highly
integrated subsidiaries and affiliates which frequently participate together in
the facilitation and consummation of a single transaction. Financial information
concerning Merrill Lynch for each of the three fiscal years ended on the last
Friday in December of 1996, 1995 and 1994, 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 Merrill Lynch's operations by geographic area, is
set forth in Merrill Lynch's Consolidated Financial Statements and the Notes
thereto in the 1996 Annual Report to Stockholders, which are incorporated herein
by reference.
The business activities of certain significant domestic and international
Merrill Lynch subsidiaries that compose its Private Client and CICG dual
franchise 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 conducts both Private Client as well as CICG business
activities. 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 is 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(SM) program can purchase certain
equity securities, mutual funds, and precious metals at a lower cost due to
order processing efficiencies.
At December 27, 1996, there were approximately 8.1 million retail and
institutional customer accounts worldwide at MLPF&S, compared to 7.6 million
accounts at year-end 1995. These customer accounts were served by MLPF&S in the
United States and other Merrill Lynch affiliates outside the United States
through approximately 14,400 retail financial consultants and institutional
account executives, including trainees (as compared with approximately 13,900 at
year-end 1995), in more than 500 branch offices and 150 special market offices
("SMOs") in the United States and various non-U.S. locations.
During 1996, Merrill Lynch began several initiatives to enhance client service
and to support its network of financial consultants and institutional account
executives. Merrill Lynch continued
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to develop its Trusted Global Advisor(SM) technology ("TGA") in 1996, which is
designed to assist Merrill Lynch financial consultants in financial planning for
clients, client profiling, portfolio and performance modeling, news retrieval,
order entry, and inventory tracking. By accessing the Merrill Lynch OnLine(SM)
service, clients are able to access account information and communicate with
their financial consultants through their personal computers.
As part of its brokerage activities, 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 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 Merrill Lynch subsidiaries engaged in futures clearing activities.
As a result of their membership in the clearing associations of various futures
exchanges, these 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
concerning Merrill Lynch's credit management policies, see the information set
forth in "Management's Discussion and Analysis -- Risk Management -- Credit
Risk" in the 1996 Annual Report to Stockholders, which information is
incorporated herein by reference.
DEALER TRANSACTIONS. MLPF&S regularly makes a market in the equity securities
of approximately 870 U.S. corporations. In addition, it engages in
market-making for approximately 4,800 securities of non-U.S. issuers 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 as a principal, such as purchase and repurchase transactions and
precious metals consignments.
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.
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Other Merrill Lynch 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
additional information on Merrill Lynch's dealer activities, see below "Merrill
Lynch Government Securities Inc.", "Merrill Lynch's Derivative Products and
Services", and "Merrill Lynch's Banking, Trust, and Mortgage Lending and Related
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 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 transactions. It may
extend credit to clients in the form of senior and subordinated debt, as well
as bridge financing on a select 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 within a reasonable period.
Merrill Lynch, through various subsidiaries and affiliates, including Merrill
Lynch Capital Partners, Inc. ("MLCP"), 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 provides
management services for two leveraged buyout funds (the "Funds") which have
been funded primarily by private investors. Merrill Lynch, through MLPF&S and
its other subsidiaries, may underwrite, trade, invest, and make markets in
certain securities of companies in which the Funds have invested. In
addition, it may provide financial advisory services to these companies.
Merrill Lynch Capital Corporation ("ML Capital Corp.") has been a participant
in middle-market leveraged acquisitions and, as principal, provides senior
and subordinated financing to certain companies utilizing ML & Co.'s capital.
By year-end 1996, ML Capital Corp. had disposed of substantially all of its
equity investments.
For additional information on these investment banking activities, see
"Management's Discussion and Analysis -- Non-Investment Grade Holdings and
Highly Leveraged Transactions" in the 1996 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
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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 parent company borrowings), 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 concerning Merrill Lynch's risk management policies
in this area, see "Management's Discussion and Analysis -- Risk Management --
Credit Risk" in the 1996 Annual Report to Stockholders, which information is
incorporated herein by reference.
RESEARCH ACTIVITIES AND DISTRIBUTION. The Global Securities Research and
Economics Group provides equity, fixed-income, and economic research services
on a global basis to Merrill Lynch's institutional and retail sales forces
and their customers. This group covers and distributes fundamental equity and
fixed-income research, technical market and quantitative analyses,
convertible securities analyses, investment and fixed-income strategy
recommendations, high-yield debt securities research, credit research on
municipal securities, and futures research information. More than 2,800
companies located in 50 countries are covered by the group's analysts and
other professionals, with at least half of the staff now dedicated to
non-U.S. business. Information on industry sectors and countries is also
gathered, analyzed, and distributed. Current information and investment
opinions on these companies, industry sectors, and countries are available to
all of Merrill Lynch's retail and institutional customers through their
financial consultants and account executives by means of a computer-based
retrieval system available in each Merrill Lynch branch or affiliate office.
SECURITIES CLEARING SERVICES. MLPF&S provides securities clearing services
through its subsidiaries, Broadcort Capital Corp. ("BCC") and Merrill Lynch
Professional Clearing Corp. ("MLPCC"), formerly known as Wagner Stott Clearing
Corp. BCC provides these services to approximately 91 unaffiliated
broker-dealers. Those utilizing BCC's clearing services may also execute
transactions through BCC's fixed-income desk and participate in underwritings of
Defined Asset Funds(SM) sponsored by MLPF&S. While the introducing broker-dealer
firm retains all sales functions with their customers, BCC services the
customers' accounts and handles all settlement and credit aspects of
transactions. MLPCC clears transactions for specialists and market-makers on
various national and regional stock exchanges; clears commodities futures
transactions for clients through a divisional clearing arrangement with MLF; and
clears transactions of arbitrageurs, customers, and other professional trading
entities.
SALES OF INVESTMENT PRODUCTS, ADVISORY PRODUCTS AND SERVICES, AND OTHER
ACTIVITIES. In 1996, MLPF&S sold more than $34 billion of mutual funds,
including income, balanced, and growth funds, of which approximately $16.4
billion represented sales of mutual funds advised by Merrill Lynch Asset
Management, LP and Fund Asset Management, LP, its affiliates. MLPF&S sponsors
the Defined Asset Fund product. This product consists of a series of funds that
are unit investment trusts registered under the Investment Company Act of 1940
and that 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 1996, approximately $15.0 billion of
client funds were invested in Defined Asset Funds.
MLPF&S also provides a wide range of client services, including effecting trades
in equity, fixed-income and other securities through its Cash Management
Account(R) financial services
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program (the "CMA(R) account service"). Participating customers may access their
assets through VISA(R) 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, through a toll free information
service and monthly account statements, information concerning the securities
and balances in their CMA accounts and, if it includes a margin account, the
loan value of margin securities in such account. At the end of 1996, there were
more than 1.5 million CMA accounts held by Merrill Lynch's U.S. customers with
aggregate assets of approximately $368 billion and approximately 44,000 CMA
accounts held by Merrill Lynch's clients outside the United States with
aggregate assets of more than $20 billion.
MLPF&S also offers the Capital Builder(SM) Account service ("CBA(R) account"),
which was developed to meet the needs of the new investor. At the end of 1996,
MLPF&S had more than 375,000 CBA accounts with assets of approximately $18
billion.
MLPF&S offers various other services, including the Merrill Lynch Consults(R)
service, the Asset Power(R) service, the Merrill Lynch Mutual Fund
Advisor(SM) program, and the Financial Foundation(R) service. Merrill Lynch
Consults is available for an annual fee to a retail or institutional client
with at least $100,000 to invest. Through the Merrill Lynch Consults service,
MLPF&S assists in identifying such client's investment objectives so that
appropriate third party investment managers can be selected for the client's
investment. MLPF&S also provides periodic performance reports on the
investment 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 1996, approximately $21 billion was held in approximately 87,000 client
accounts subscribing to the Merrill Lynch Consults service.
The Asset Power service offers clients the option of paying an asset-based fee
instead of paying commissions, loads, or similar charges. At the end of 1996,
there were more than 21,000 Asset Power accounts with assets of approximately
$5.6 billion.
The Merrill Lynch Mutual Fund Advisor program is a discretionary investment
advisory service investing in a portfolio of mutual funds selected from the
Merrill Lynch Asset Management family of funds and many other top fund families.
MLPF&S retains day-to-day management of each client's portfolio, customizing the
asset allocation strategy where appropriate. At the end of 1996, there were more
than 50,000 Merrill Lynch Mutual Fund Advisor accounts with assets of more than
$3.1 billion.
Through the Financial Foundation program, MLPF&S offers a planning tool that
analyzes an individual client's assets, liabilities, and expectations to examine
financial goals and to develop plans to address them. Merrill Lynch's financial
consultants have provided over 500,000 Financial Foundation plans to customers.
MLPF&S also provides a wide variety of retirement plan products, particularly
investment, employee education, and record-keeping services to 401(k) and other
benefit plans. At the end of 1996, it provided these services to approximately
10,500 plans, representing $45 billion in plan assets. MLPF&S also provides
custodial services to individual investors in connection with the investors'
maintenance of Individual Retirement Accounts (IRAs), including IRAs established
under Simplified Employee Pension plans pursuant to Section 408 of the Internal
Revenue Code and related Treasury Department regulations. At the end of 1996,
there were approximately 2,010,000 accounts representing approximately $111
billion in customer assets.
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MERRILL LYNCH INTERNATIONAL INCORPORATED
Merrill Lynch International Incorporated ("MLI") and its subsidiaries and
affiliates provide comprehensive investment, financing, and related services on
a global basis outside the United States and Canada to individual investors and
to sovereign governments, corporations, and other institutional clients. 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 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. For additional information on Merrill Lynch's dealer activities, see
"Merrill Lynch Government Securities Inc.", "Merrill Lynch's Derivative Products
and Services", and "Merrill Lynch's Banking, Trust, and Mortgage Lending and
Related Activities".
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 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.
In 1996, Merrill Lynch strengthened its presence in several major global
financial markets through strategic acquisitions and initiatives.
During 1996, Merrill Lynch acquired McIntosh Securities Limited, one of
Australia's largest brokerage firms; purchased the business of a leading
Spanish financial services company, FG Inversiones Bursatiles, which is
engaged in the origination, research, trading, and distribution of Spanish
securities and in the provision of asset management and advisory services;
and acquired the Milan-based equity research and sales organization of
Carnegie Italia. In addition, Merrill Lynch also increased its presence and
the scope of its activities in India by entering into several separate joint
ventures with DSP Financial Consultants Limited and expanded its activities
in other countries, including Argentina, Brazil, France, and South Africa.
Information on the derivatives business and the international banking and
foreign exchange activities of MLI and certain of its subsidiaries is set
forth below under the captions "Merrill Lynch's Derivative Products and
Services" and "Merrill Lynch's Banking, Trust, and Mortgage Lending and
Related Activities".
MERRILL LYNCH'S ASSET MANAGEMENT ACTIVITIES
Merrill Lynch'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
Merrill Lynch and is one of the largest mutual fund managers in the world. By
the end of 1996, total assets under management at MLAM approximated $234
billion, as compared with $196 billion at year-end 1995. In 1996, sales of
equity and bond funds managed by MLAM approximated $16.4 billion.
At the end of 1996, through portfolio managers located in the United States,
Japan, Hong Kong, and throughout Europe, MLAM managed 222 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 connection with its
management activities, MLAM may access the global investment strategy,
security analysis, and
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economic research capabilities of Merrill Lynch's Global Securities Research and
Economics Group.
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(SM) System which allows investors four purchase alternatives.
MLAM's other major business activity is separate account management. Separate
account assets under management were $42.5 billion at the end of 1996 (which
includes approximately $3.5 billion of general account assets managed on behalf
of insurance companies that are affiliates of MLAM) as compared with
approximately $26.2 billion in 1995 (which amount includes approximately $3.9
billion of general account assets managed on behalf of insurance companies that
are affiliates of MLAM).
In November 1996, Merrill Lynch Capital Management Group, the institutional
asset management arm of MLAM, strengthened its institutional management
capabilities and added to its assets under management through the acquisition of
Hotchkis and Wiley, a Los Angeles-based institutional investment management
firm. Hotchkis and Wiley, with a product range that includes U.S. and non-U.S.
value-oriented equities, provides domestic and global asset management to an
expanded segment of the institutional markets.
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 provides 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'S DERIVATIVE PRODUCTS AND SERVICES
Merrill Lynch Capital Services, Inc. ("MLCS") and Merrill Lynch Derivative
Products AG ("MLDP") are Merrill Lynch'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, and, effective January 1, 1997, Merrill Lynch
International, engage in the equity derivatives business in the over-the-counter
markets. Merrill Lynch Capital Markets Bank Limited ("ML Capital Markets Bank"),
established
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in Dublin, Ireland, is a credit intermediary and handles part of Merrill Lynch'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 forward contracts primarily
to hedge its exposures. 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 counterparties that are highly rated
or otherwise acceptable to MLDP. Its activities address the desire of certain
swap customers to limit their trading with dealers having 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, and Fitch
Investors Service, L.P., 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 Merrill Lynch's derivatives business,
including its accounting, risk, and credit policies, see "Management's
Discussion and Analysis -- Derivative Financial Instruments" in the 1996 Annual
Report to Stockholders and see Note 3 to the Consolidated Financial Statements
under the caption "Trading Activities" in the 1996 Annual Report to
Stockholders, which information is incorporated herein by reference.
MERRILL LYNCH MONEY MARKETS INC.
Merrill Lynch, 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 bank 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 banks, insurance companies,
investment companies, pension plans, and state and local governments. MLMMI, in
cooperation with MLPF&S, originates certificates of deposit issued by bank and
thrift institutions that are sold to a broad range of 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(SM) 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 provides funds to customers
collateralized by whole loan mortgages, thereby providing customers with
temporary liquidity
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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. In addition, MLMCI provides to
its clients short-term financing secured by performing and non-performing
commercial real estate.
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 and alternative
investment funds 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, the
capabilities of which include research, trading services, 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 the end of 1996, approximately $1.8 billion in equity was
invested or was to be invested in 40 U.S. and non-U.S. commodity futures funds
that MLIP has sponsored or been selected to manage.
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(SM) account ("WCMA(R) 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. At the end of 1996, there were more than
131,000 WCMA accounts which, in the aggregate, had investment assets of more
than $69 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, as well as financing for owner-occupied
commercial real estate. In 1996, MLBFS originated more than $672 million in new
commercial loans for business customers and, at the end of 1996, total
outstanding loans were $886 million, of which approximately 95% were secured by
tangible assets pledged by customers.
MERRILL LYNCH'S INSURANCE ACTIVITIES
Merrill Lynch'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 of the sale
of proprietary and non-proprietary life insurance and annuity products through
Merrill Lynch Life Agency Inc. and other insurance agencies affiliated or
associated with MLPF&S.
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. These products are then marketed to MLPF&S
customers. Although authorized to do so, it does not presently underwrite
accident and health insurance. At year-end 1996, MLLIC had approximately $11.6
billion of life insurance in force. At year-end 1996, MLLIC had annuity
contracts in force of approximately $6.7 billion in value.
ML Life, a New York stock life insurance company, is authorized to underwrite
life insurance, annuities, and accident and health insurance in nine states;
however, it does not presently
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underwrite accident and health insurance. At year-end 1996, ML Life had
approximately $2.3 billion of life insurance in force, which amount included
$1.4 billion reinsured from yearly renewable term insurance of an unaffiliated
insurer. At year-end 1996, ML Life had annuity contracts in force of
approximately $504 million in value.
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 concerning Merrill Lynch's accounting policies
relating to its insurance activities, see Note 1 to the Consolidated Financial
Statements under the caption "Insurance" in the 1996 Annual Report to
Stockholders.
MERRILL LYNCH'S BANKING, TRUST, AND MORTGAGE LENDING AND RELATED ACTIVITIES
Merrill Lynch Bank & Trust Co. ("MLBT") and Merrill Lynch National Financial
("MLNF"), both Federal Deposit Insurance Corporation-insured institutions, issue
certificates of deposit and money market deposit accounts (including the Insured
Savings(SM) Account for the CMA account service); make and purchase secured
loans; and issue VISA(R) cards.
Merrill Lynch provides personal trust, employee benefit, trust, and custodial
services in certain states through seven state-chartered trust institutions.
Trust services outside of the United States are provided by Merrill Lynch Bank
and Trust Company (Cayman) Limited.
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 services, and individual client services to
international private banking clients. ML Capital Markets Bank, an Irish bank
with branch offices in Germany, Milan, and Tokyo, engages in capital markets
activities such as underwriting, foreign exchange, and swap and other derivative
transactions.
Merrill Lynch Credit Corporation ("MLCC") offers a broad selection of real
estate-based lending products enabling clients to purchase and refinance their
homes as well as to manage their other personal credit needs. MLCC, through
Merrill Lynch financial consultants, offers a variety of adjustable-rate and
fixed-rate first mortgage loans throughout the United States, including the
PrimeFirst(R) 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(SM) account, a personal line of
credit using eligible securities as collateral that is accessible by VISA(R)
card and by check. In 1996, MLCC broadened its business by acquiring Lender's
Service, Inc., a real estate appraisal, title, and closing management service
company which is directed towards the residential lending community.
COMPETITION
All aspects of Merrill Lynch's business are intensely competitive, particularly
in the current securities industry environment of global overcapacity in
underwriting, trading, and operations.
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Through its subsidiaries and affiliates, Merrill Lynch competes directly on a
worldwide basis with other U.S. and non-U.S. trading, investment banking, and
financial advisory service firms, brokers and dealers in securities and
commodities, and with commercial banks and their affiliates, particularly in
its derivative and capital markets businesses. Many of Merrill Lynch's
non-U.S. competitors may have competitive advantages in their home markets.
Through its subsidiaries and affiliates, Merrill Lynch also competes for
investment funds with mutual fund management companies, insurance companies,
finance and investment advisory companies, banks, and trust companies and
institutions. Its competitive position depends to an extent on prevailing
worldwide economic conditions and U.S. and non-U.S. governmental policies.
Merrill Lynch competes for its retail and institutional 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 Merrill Lynch's business. In addition, certain
U.S. bank regulatory changes adopted in 1996 that loosen certain restrictions on
the securities activities of "Section 20 broker-dealer affiliates" of commercial
banks may have the effect of increasing competition from commercial banks and
their affiliates in the provision of securities-related services.
Merrill Lynch'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 Merrill
Lynch's insurance subsidiaries.
REGULATION
Certain aspects of Merrill Lynch'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"), 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, other Merrill Lynch subsidiaries engaged in
securities clearing services, and Merrill Lynch Specialists Inc., which acts 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
Merrill Lynch 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 Merrill Lynch subsidiaries, including MLPF&S, are regulated as
broker-dealers under the laws of the jurisdictions in which they operate.
Merrill Lynch International, a registered
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broker-dealer in the United Kingdom, is regulated by the Securities and Futures
Authority ("SFA") and is subject to the capital requirements established by the
SFA.
Those Merrill Lynch entities that are broker-dealers registered with the SEC and
members of the U.S. 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 deemed necessary to meet broker-dealers' continuing commitments to
customers and others. Under certain circumstances, this rule limits the ability
of Merrill Lynch to make withdrawals of capital from such broker-dealers.
Additional information regarding net capital requirements set forth in Note 11
to the Consolidated Financial Statements under the caption "Regulatory
Requirements and Dividend Restrictions" in the 1996 Annual Report to
Stockholders is incorporated herein by reference.
Certain Merrill Lynch subsidiaries are 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 have the effect of increasing regulation, and
requiring greater disclosure, of financial instruments, including derivatives
positions and activities. Merrill Lynch, along with certain other major U.S.
securities firms, have implemented 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.
Merrill Lynch formed the Risk Control Committee as an extension of its risk
management process to provide general oversight of risk management for all of
its institutional trading activities and to monitor compliance with its
commitments respecting this voluntary oversight initiative. For further
information on the activities of this committee, see "Management's Discussion
and Analysis -- Risk Management" in the 1996 Annual Report to Stockholders.
Additional legislation and regulations and changes in rules promulgated by
the SEC or other U.S. federal and state governmental regulatory authorities
and self-regulatory organizations, and by non-U.S. governments and
governmental regulatory agencies may directly affect the manner of operation
and profitability of Merrill Lynch.
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MLGSI is subject to regulation by the NASD and the Chicago Board of Trade and
is required to maintain minimum net capital pursuant to rules of the U.S.
Department of the Treasury. Merrill Lynch's 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 commodity pool operator and a 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 regulation and supervision by the New York State
Insurance Department. MLLIC is subject to regulation and supervision by the
Insurance Department of the State of Arkansas. Both MLLIC and ML Life are
subject to similar regulation in the other states in which they are licensed.
MLBT is regulated primarily by the State of New Jersey and by the FDIC. Certain
of the activities of MLBFS and MLCC are regulated by the New Jersey Department
of Banking. 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. MLNF is regulated primarily by the
State of Utah and by the FDIC. MLIB Limited is regulated by the New York State
Banking Department and the Bank of England in the United Kingdom. MLIB is
regulated by the Federal Reserve Bank of New York. Merrill Lynch Bank (Suisse)
S.A. is regulated by the Swiss Federal Banking Commission. ML Capital Markets
Bank is regulated by the Central Bank of Ireland. Merrill Lynch's U.S. trust
institutions are subject to regulation by the governmental agencies in the
states in which they are incorporated.
Merrill Lynch's business is also subject to extensive regulation by various
non-U.S. governments, securities exchanges, central banks, and regulatory
bodies, particularly in those countries where it has established an office.
Merrill Lynch's subsidiaries engaged in banking and trust activities outside the
United States are regulated by various governmental entities in the particular
jurisdiction where they are chartered, incorporated and/or conduct their
business activities.
ITEM 2. PROPERTIES
----------
Merrill Lynch's executive offices and principal administrative offices are
located in leased premises at the World Financial Center located in New York
City at 250 Vesey Street in the North Tower (or Tower D) consisting of 1,799,702
square feet and at 225 Liberty Street in the South Tower (or Tower B)
consisting of 2,490,581 square feet. Each tower was separately leased in 1988 by
a different Merrill Lynch affiliate. Another Merrill Lynch affiliate is a
partner in the partnership that holds the ground lessee's interest in the North
Tower. The information regarding property lease commitments of Merrill Lynch is
set forth in Note 7 to the Consolidated Financial Statements under the caption
"Leases" in the 1996 Annual Report to Stockholders, which information is
incorporated herein by reference.
In New Jersey, separate Merrill Lynch affiliates own a 1.3 million square foot
structure on a 245 acre campus in Plainsboro and a 414,000 square foot building
on 34 acres at 300 Davidson Avenue in Somerset. MLPF&S holds a 590,174 square
foot lease at 101 Hudson in Jersey City, and a 212,680 square foot lease in
Somerset. In London, an MLI subsidiary leases
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approximately 250,000 square feet at Ropemaker Place. The lease, which commenced
in 1987, continues for 25 years with a right to cancel in 2002. This subsidiary
also leases approximately 170,000 square feet at Farringdon Road. This lease,
which has a twenty-five year term, commenced in 1990. In Tokyo, at the Ote
Centre, Merrill Lynch's Japanese subsidiary holds a 97,000 square foot office
lease which expires in 2003 but which can be canceled at any time on six months'
notice.
In New York, MLPF&S also leases 139,700 square feet at 100 Church Street,
134,803 square feet at 717 Fifth Avenue and 662,675 square feet at 570
Washington Street. Merrill Lynch affiliates own a 60 acre campus in
Jacksonville, Florida, which consists of three buildings with a fourth building
currently under construction, and a 35 acre campus in Englewood, Colorado with
two buildings currently under construction.
Substantially all other offices, including approximately 500 branch offices and
150 special market offices, of Merrill Lynch subsidiaries throughout the world,
are located in leased premises. Facilities owned or occupied by Merrill Lynch
are believed to be adequate for the purposes for which they are currently used
and are well maintained.
ITEM 3. LEGAL PROCEEDINGS
-----------------
ML & Co., certain of its subsidiaries, including MLPF&S, and other persons
have been named as parties in civil actions and arbitration proceedings,
including those described below. Each of the following actions is reported as
of March 14, 1997.
ORANGE COUNTY LITIGATION. The following actions have been filed against or on
behalf of ML & Co. in connection with Merrill Lynch'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.
On May 17, 1996, the Bankruptcy Court confirmed a plan pursuant to which Orange
County emerged from bankruptcy. The currently pending actions involving Merrill
Lynch 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
Merrill Lynch 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 by Orange County and the Pools
against ML & Co. and certain of its subsidiaries in the Bankruptcy Court
pursuant to the automatic reference by law of all civil proceedings related
to bankruptcy petitions (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 Merrill Lynch'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 ML & Co.
and its subsidiaries violated California law and are null and void; that ML &
Co. 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
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Professions Code, and 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,
punitive damages in an unspecified amount, and injunctive and declaratory
relief are sought.
On March 1, 1995, ML & Co. and Orange County entered into an agreement in
order to resolve a motion by Orange County seeking a temporary restraining
order, a preliminary injunction, and a constructive trust with respect to the
proceeds realized by Merrill Lynch from the sale of securities purchased by
Merrill Lynch from Orange County pursuant to certain master repurchase
agreements. Pursuant to this agreement, the proceeds from the sale of
securities purchased by Merrill Lynch from Orange County were used to
purchase short-term United States Treasury Bills or United States Treasury
Notes that are identifiable and held separate and subject to any rights that
Merrill Lynch may have in the master repurchase agreements. This agreement
may be terminated by ML & Co. upon 30 days' written notice.
On October 17, 1996, on Merrill Lynch's motion, the United States District
Court for the Central District of California (the "District Court") withdrew
the prior automatic reference to the Bankruptcy Court of this action. The
case now is pending in the District Court.
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 ML & Co., a subsidiary of ML & Co., and an employee of
Merrill Lynch. 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 Merrill Lynch's business activities with the Orange County
Treasurer-Tax Collector. Damages and punitive damages in unspecified amounts
are sought. On May 10, 1996, the court stayed this action pending final
resolution of 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 involving settlement funds belonging to minor children and
other legally incapacitated or incompetent persons who had been injured in
accidents and inheritances administered on behalf of minor children and other
legally incapacitated or incompetent persons from estates (the "Small
Action"). ML & Co., a subsidiary of ML & Co., an employee of Merrill Lynch,
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 Merrill Lynch's business activities with
the Orange County Treasurer-Tax Collector. Injunctive relief, damages, and
punitive damages in unspecified amounts are sought. The complaint never was
served.
On September 15, 1995, an action was commenced in the Superior Court of the
State of California, San Francisco County, by twelve California public entities
(the "Atascadero State Court Action"). On January 11, 1996, the case was
transferred to the Superior Court of the State of California, Contra Costa
County. On April 10, 1996, the plaintiffs filed an amended
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complaint which was dismissed on November 5, 1996, and, on December 2, 1996,
plaintiffs filed a second amended complaint adding two California public
entities as plaintiffs. The current plaintiffs are the City of Atascadero,
City of Buena Park, The Community Redevelopment Agency of the City of Buena
Park, City of Claremont, City of Milpitas, City of Montebello, Community
Redevelopment Agency of the City of Montebello, City of Mountain View, City
of Santa Barbara, The Redevelopment Agency of the City of Santa Barbara, City
of Yorba Linda, Yorba Linda Redevelopment Agency, Santiago County Water
District, and Yorba Linda Water District. Named as defendants are ML & Co.,
certain Merrill Lynch subsidiaries, and three past or present employees of
Merrill Lynch, two of whom were dismissed as defendants without prejudice on
July 5, 1996. As amended, the complaint alleges, among other things, that the
defendants committed fraud, deceit, and negligent misrepresentation;
conspired to commit fraud; breached fiduciary duties; aided and abetted
breaches of fiduciary duty; and violated California Penal Code Section 496
and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), in
connection with Merrill Lynch's business activities with the Orange County
Treasurer-Tax Collector. Damages, punitive damages, and treble damages in
unspecified amounts are sought. On February 10, 1997, the court dismissed
this action.
On November 27, 1995, an action was commenced in the United States District
Court for the Central District of California by the fourteen California public
entities that are plaintiffs in the Atascadero State Court Action described
above (the "Atascadero Federal Court Action"). On March 22, 1996, the plaintiffs
filed a first amended complaint, which was voluntarily dismissed without
prejudice on September 4, 1996. On February 19, 1997, plaintiffs filed a new
complaint naming as defendants ML & Co. and certain Merrill Lynch subsidiaries.
The complaint alleges, among other things, that the defendants committed
fraud, deceit, and negligent misrepresentation; conspired to commit fraud;
breached fiduciary duties; aided and abetted breaches of fiduciary duty; and
violated California Penal Code Section 496 and RICO, in connection with Merrill
Lynch's business activities with the Orange County Treasurer-Tax Collector.
Restitution and damages, treble damages, and punitive damages in unspecified
amounts are sought.
On December 20, 1996, an action was commenced in the United States District
Court for the Central District of California by Irvine Ranch Water District (the
"Irvine Action"). ML & Co. is the sole defendant. The complaint alleges, among
other things, that Merrill Lynch committed intentional and negligent
misrepresentation, concealment, and breach of fiduciary duty in connection with
Merrill Lynch's business activities with the Orange County Treasurer-Tax
Collector. Damages in excess of $130 million and punitive damages in an
unspecified amount are sought.
Beginning on December 5, 1994, five derivative actions purportedly brought on
behalf of ML & Co. were filed in the Supreme Court of the State of New York,
New York County (the "Wilson Action"). On February 21, 1995, the court
consolidated the actions and, on June 5, 1995, an amended consolidated
complaint was filed naming as defendants 22 present or past directors,
officers or employees of ML & Co. and/or certain of its subsidiaries. The
complaint alleges, among other things, breach of fiduciary duty, waste of
corporate assets, and claims for indemnification in connection with Merrill
Lynch's business activities with the Orange County Treasurer-Tax Collector.
Damages in an unspecified amount are sought on behalf of ML & Co. against the
individuals named as defendants. Because this derivative action purports to
be brought on behalf of ML & Co. and any recovery obtained by plaintiffs
would belong to ML & Co., ML & Co. is named as a nominal defendant. On August
7, 1996, the court dismissed this action. On September 11, 1996, a notice of
appeal was filed.
17
<PAGE>
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 ML & Co.'s common stock between
March 31, 1994 and December 6, 1994, and names as defendants ML & Co. 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 Merrill Lynch'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 case are ML & Co., an employee of Merrill
Lynch, 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.
Plaintiffs allege, among other things, that the defendants affiliated with
Merrill Lynch violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder and Sections 25400, 25401, 25500, 25501, and 25504.1
of the California Code 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. On July 17, 1995,
plaintiffs' state law claims were dismissed without prejudice. On April 1,
1996, all remaining claims were voluntarily dismissed without prejudice.
On September 28, 1995, a purported class action was commenced in the Superior
Court of the State of California, Orange County, asserting the state law claims
previously dismissed in the Smith Federal Court Action and a claim for fraud and
deceit (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 ML & Co., an employee of Merrill Lynch, and the same
defendants not affiliated with Merrill Lynch as in the Smith Federal Court
Action and, in addition, KPMG Peat Marwick. Damages and punitive damages in
unspecified amounts are sought. Certain of the defendants other than Merrill
Lynch and the employee of Merrill Lynch named as a defendant have entered into
settlement agreements with the plaintiffs.
Merrill Lynch 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.
NASDAQ ANTITRUST LITIGATION. On December 16, 1994, a class action complaint
consolidating a series of previously filed actions was filed in the United
States District Court for the Southern District of New York. On August 22, 1995,
plaintiffs filed a complaint entitled "refiled consolidated complaint". As
amended, the complaint alleges that 33 market-makers, including a Merrill Lynch
subsidiary, 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 alleges violations of
antitrust laws and seeks
18
<PAGE>
damages in an unspecified amount, treble damages, and declaratory and injunctive
relief. On November 27, 1996, the court certified a class consisting of certain
persons who purchased or sold certain securities on NASDAQ during specified time
periods for each security during the period from May 1, 1989 to May 27, 1994.
On July 17, 1996, the Antitrust Division of the United States Department of
Justice filed a civil antitrust complaint against firms that make markets in
NASDAQ securities, including a subsidiary of ML & Co. The complaint
alleges that the firms violated Section 1 of the Sherman Act through a "common
understanding" to follow a "quoting convention" that the complaint asserts had
inflated the "inside spread" (the difference between the best quoted buying
price and the best quoted selling price on NASDAQ) in certain NASDAQ stocks.
This allegedly resulted in investors having to pay higher transaction costs for
buying and selling stocks than they would have paid otherwise. At the same time
the complaint was filed, a proposed settlement of the action was announced,
pursuant to which the market-maker defendants in the action have agreed not to
engage in certain conduct. The proposed settlement, which is subject to court
approval, provides, among other things, for the monitoring and tape-recording by
each of the market-maker defendants of not less than 3.5 percent, or a maximum
of 70 hours per week, of telephone conversations by its over-the-counter desk
traders; the provision to the Department of Justice of any taped conversation
that may violate the terms of the settlement; and for Department of Justice
representatives to appear unannounced, during regular business hours, for the
purpose of monitoring trader conversations as the conversations occur.
In connection with its industry-wide investigations into the NASDAQ market,
Merrill Lynch, along with the other named defendants, has received inquiries
from the SEC and is cooperating with these inquiries.
GSLIC LITIGATION. In October 1991, a derivative action purportedly brought on
behalf of ML & Co. was filed in the Supreme Court of the State of New York,
New York County, involving securities trading transactions that occurred at
year-end 1984, 1985, 1986, and 1988 between subsidiaries of ML & Co. and a
Florida insurance company, Guarantee Security Life Insurance Company
("GSLIC") that later was taken into liquidation. These year-end transactions,
it is alleged, were entered into by GSLIC to distort its financial condition.
Named as defendants are directors of ML & Co. who were directors at the time
of the transactions described above and GSLIC's parent company, Transmark
USA, Inc. ("Transmark") and one of Transmark's principals. The complaint
alleges, among other things, breach of fiduciary duty by the directors of ML
& Co. who are named as defendants. Damages in an unspecified amount are
sought on behalf of ML & Co. Because this derivative action purports to be
brought on behalf of ML & Co. and any recovery obtained by plaintiffs would
belong to ML & Co., ML & Co. is named as a nominal defendant.
* * * *
ML & Co. 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 ML & Co. or its subsidiaries as of March 14, 1997 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 Merrill Lynch that the
resolution of these actions will not have a material adverse effect on the
financial condition or the results of operations of Merrill Lynch as set forth
in the Consolidated Financial Statements contained in the 1996 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 14, 1997.
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE
MARCH 1992*
Herbert M. Allison, Jr., 53 President-elect and Chief Operating
Officer-elect, effective April 15, 1997;
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.
Edward L. Goldberg, 56 Executive Vice President, Operations, Services
and Technology 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.
Stephen L. Hammerman, 58 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 from March 1981 to
June 1996.
Jerome P. Kenney, 55 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, 57 Chairman of the Board-elect, effective April
15, 1997; Chief Executive Officer since
December 1996; 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 ML & Co.
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 of ML & Co.
20
<PAGE>
NAME AND AGE PRESENT TITLE AND PRINCIPAL OCCUPATION SINCE
MARCH 1992*
Winthrop H. Smith, Jr., 47 Executive Vice President, International since
June 1992; National Sales Director of Eastern
Division from November 1990 to May 1992.
John L. Steffens, 55 Vice Chairman of the Board-elect, effective
April 15, 1997; 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, 65 Chairman of the Board since June 1993, retiring
effective April 15, 1997; Chief Executive
Officer from May 1992 to December, 1996;
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, 45 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.
Arthur Zeikel, 64 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 ML & Co.
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 of ML & Co.
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 and low sales prices per share for each full quarterly
period within the two most recent fiscal years, the approximate number of
holders of record of Common Stock, and the frequency and amount of any cash
dividends declared for the two most recent fiscal years is set forth under the
captions "Dividends Per Common Share" and "Stockholder Information" on page 68
of the 1996 Annual Report to Stockholders and such information is incorporated
herein by reference.
The Common Stock of the Registrant (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 24 of the 1996 Annual Report to Stockholders (excluding for this
purpose the financial ratio, leverage, and employee information set forth under
the headings "Financial Ratios" and "Employee Statistics"). Such information is
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto on pages 41 to 66 in the
1996 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 25 to 40 of the 1996 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis" and is
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 24
of the 1996 Annual Report to Stockholders and the information in Note 11 to the
Consolidated Financial Statements in the 1996 Annual Report to Stockholders is
incorporated herein by reference. All of such information should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto on
pages 41 to 66 in the 1996 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 1996 Annual Report to Stockholders on pages 41 to 67 and
such information is incorporated herein by reference. In addition, the
information on page 68 of the 1996 Annual Report to Stockholders under the
caption "Quarterly Information" is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None.
22
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information set forth under the caption "Election of Directors" on pages
4 to 7 of ML & Co.'s Proxy Statement dated March 10, 1997 for its 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement") and the information set
forth in Part I hereof under the caption "Executive Officers of the
Registrant" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information relating to executive compensation set forth on pages 17 to 31 of
the 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information respecting security ownership of management and certain
beneficial owners set forth on pages 1 and 2 of the 1997 Proxy Statement and
under the caption "Beneficial Ownership of Directors and Executive Officers"
on pages 9 and 10 of the 1997 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain relationships and related transactions set forth
under the caption "Certain Transactions" on pages 29 and 30 of the 1997 Proxy
Statement is 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 required to be filed hereunder are listed on
page F-1 hereof by reference to the corresponding page number in the
1996 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-8 hereof.
3. Exhibits
Certain of the following exhibits were previously filed as exhibits to
other reports or registration statements filed by the Registrant and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate
report reference date or registration statement number. For
convenience, Quarterly Reports on Form 10-Q, Annual Reports on Form
10-K, Current Reports on Form 8-K, and Registration Statements on Form
S-3 are designated herein as "10-Q", "10-K", "8-K", and "S-3",
respectively.
23
<PAGE>
(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 December 17, 1987 for
Series A Junior Preferred Stock (Exhibit 3(f) to S-3 (File
No. 33-19975)).
(h) Form of Rights Agreement dated as of December 16, 1987
between ML & Co. and The Chase Manhattan Bank (successor by
merger to Manufacturers Hanover Trust Company and Chemical
Bank) (Exhibit 3(iv) to 1992 10-K).
*(ii) By-Laws of ML & Co., effective as of December 28, 1996.
(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.
(i) Senior Indenture dated as of April 1, 1983, as amended and
restated, between ML & Co. and The Chase Manhattan Bank
(successor by merger to Manufacturers Hanover Trust Company
and Chemical Bank) 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) Supplemental Indenture dated as of October 25, 1993 to the
Senior Indenture dated as of April 1, 1983 (Exhibit 4(b)(ii)
to S-3 (File No. 33-61559)).
- ----------
* Filed herewith.
24
<PAGE>
(iii) Senior Indenture dated as of October 1, 1993 between ML &
Co. and The Chase Manhattan Bank (Exhibit 4 to 8-K dated
October 7, 1993).
(iv) Form of ML & Co.'s 7% Notes due January 15, 2007 (Exhibit 4
to 8-K dated January 13, 1997).
(v) Form of ML & Co.'s S&P 500 Market Index Target-Term
Securities due September 16, 2002 (Exhibit 4 to 8-K dated
March 14, 1997).
(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 10-K for the
fiscal year ended December 30, 1994 ("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).
(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended
through October 21, 1996 (Exhibit 10(i) to 10-Q for the
quarter ended September 27, 1996 (the "3rd Quarter 1996
10-Q")).
(iv) ML & Co. Equity Capital Accumulation Plan, as amended
through October 21, 1996 (Exhibit 10(ii) to 3rd Quarter 1996
10-Q).
(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 (Pages 27 to
29 of ML & Co.'s Proxy Statement for the 1997 Annual Meeting
of Stockholders contained in ML & Co.'s Schedule 14A filed
on March 10, 1997 ("1997 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.
(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) Amendment dated January 27, 1997 to Executive Annuity
Agreement dated July 24, 1991 by and between ML & Co. and
Daniel P. Tully.
- ----------
* Filed herewith.
25
<PAGE>
(xi) Form of Severance Agreement between ML & Co. and certain of
its directors and executive officers (Exhibit 10(x) to 10-K
for fiscal year ended December 29, 1995 ("1995 10-K")).
(xii) 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 10-K for
the fiscal year ended December 31, 1993 ("1993 10-K")).
(xiii) Written description of ML & Co.'s incentive compensation
programs (Exhibit 10(xii) to 1993 10-K).
(xiv) Written description of ML & Co.'s compensation policy for
directors (Pages 17 and 18 of ML & Co.'s 1997 Proxy
Statement).
(xv) Merrill Lynch KECALP Growth Investments Limited Partnership
1983 (Exhibit 1(b) to Registration Statement on Form N-2
(File No. 2-81619)).
(xvi) Merrill Lynch KECALP L.P. 1984 (Exhibit 1(b) to
Registration Statement on Form N-2 (File No. 2-87962)).
(xvii) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
(xviii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
(xix) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
(xx) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
(xxi) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 33-51825)).
(xxii) Merrill Lynch KECALP L.P. 1997 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 333-15035)).
*(xxiii) ML & Co. Deferred Restricted Unit Plan for Executive
Officers.
(xxiv) ML & Co. 1995 Deferred Compensation Plan for a
Select Group of Eligible Employees (Exhibit 10(xxii) to 1994
10-K).
*(xxv) ML & Co. Fee Deferral Plan for Non-Employee
Directors, as amended through December 11, 1996.
(xxvi) 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).
*(xxvii) ML & Co. 1997 Deferred Compensation Plan for a
Select Group of Eligible Employees.
- ----------
* Filed herewith.
26
<PAGE>
(xxviii) ML & Co. 1997 KECALP Deferred Compensation Plan for
a Select Group of Eligible Employees (Exhibit 10(iii) to 3rd
Quarter 1996 10-Q).
(xxix) ML & Co. Deferred Unit and Stock Unit Plan for Non-Employee
Directors (Exhibit 10(iv) to 3rd Quarter 1996 10-Q).
*(xxx) ML & Co. Long-Term Incentive Compensation Plan for Managers
and Producers.
*(xxxi) Executive Annuity Agreement dated as of January 27, 1997 by
and between ML & Co. and David H. Komansky.
*(xxxii) Amendment dated September 18, 1996 to Deferred Compensation
Plans (amending the Amended and Restated 1994 Deferred
Compensation Agreement for a Select Group of Eligible
Employees, the ML & Co. 1995 Deferred Compensation Plan for
a Select Group of Eligible Employees, and the ML & Co. 1996
Deferred Compensation Plan for a Select Group of Eligible
Employees).
AGREEMENTS RELATING TO THE WORLD FINANCIAL CENTER:
(xxxiii) The following documents relate to the Registrant's
occupation of office space in buildings at the World
Financial Center, New York, New York:
*(a) Amended and Restated Reimbursement Agreement between
WFP Tower D Co. L.P. ("WFP/D") and MLPF&S dated as of
November 21, 1996.
*(b) Amended and Restated Reimbursement Agreement between
WFP Tower B Co. L.P. ("WFP/B") and Merrill Lynch/WFC/L,
Inc. ("WFC/L") dated as of November 21, 1996.
+(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).
+(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).
- ----------
* Filed herewith.
+ Confidential treatment has been obtained for portions of this exhibit.
27
<PAGE>
(xxxiv) 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) 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).
*(b) Second Amendment of Agreement of Lease (with respect to
Parcel D) dated as of November 21, 1996 between WFP/D
and MLPF&S.
*(c) Second Amendment of Agreement of Lease (with respect to
Parcel B) dated as of November 21, 1996 between WFP/B
and WFC/L.
*(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
*(12) STATEMENT RE COMPUTATION OF RATIOS.
*(13) 1996 ANNUAL REPORT TO STOCKHOLDERS.
*(21) SUBSIDIARIES OF THE REGISTRANT.
*(23) CONSENT OF INDEPENDENT AUDITORS.
*(27) FINANCIAL DATA SCHEDULE.
(B) REPORTS ON FORM 8-K:
The following Current Reports on Form 8-K were filed by the Registrant
during the fourth quarter of 1996 with the Commission under the caption
"Item 5. Other Events":
(i) Current Report on Form 8-K dated October 15, 1996 for the purpose of
filing Preliminary Unaudited Earnings Summaries for the three- and
nine-month periods ended September 27, 1996.
(ii) Current Report on Form 8-K dated October 30, 1996 for the purpose of
filing ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet as
of September 27, 1996 and statements regarding computation of ratios.
(iii) Current Report on Form 8-K dated October 30, 1996 for the purpose of
filing the form of Registrant's Healthcare/Biotechnology Portfolio
Market Index Target-Term Securities due October 31, 2001.
- ----------
* Filed herewith.
28
<PAGE>
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.
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 14, 1997, 166,901,160 shares of Common Stock
were outstanding (including 1,538,778 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 any
qualifications, limitations, or restrictions thereon. As of March 14, 1997,
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 14, 1997, there were
42,500 shares of 9% Preferred Stock outstanding. From time to time, MLPF&S
may occasionally acquire a temporary position in the Depositary Shares. As of
March 14, 1997, the Depositary Shares held by MLPF&S for the purpose of
resale was not material. The 9% Preferred Stock has 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 The Chase Manhattan Bank (successor by merger to Manufacturers
Hanover Trust Company and Chemical Bank).
29
<PAGE>
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEMS 14(A)(1) AND 14(A)(2)
Page Reference
--------------
1996 Annual
Report to
Form 10-K Stockholders
--------- ------------
FINANCIAL STATEMENTS
- --------------------
Statements of Consolidated Earnings, Year Ended
Last Friday in December 1996, 1995, and 1994 41
Consolidated Balance Sheets, December 27, 1996
and December 29, 1995 42-43
Statements of Changes in Consolidated Stockholders'
Equity, Year Ended Last Friday in December 1996,
1995, and 1994 44-45
Statements of Consolidated Cash Flows, Year Ended
Last Friday in December 1996, 1995, and 1994 46
Notes to Consolidated Financial Statements 47-66
Independent Auditors' Report 67
FINANCIAL STATEMENT SCHEDULES
- -----------------------------
Independent Auditors' Report F-2
Schedule I Condensed Financial Information
of Registrant F-3 to F-8
Specifically incorporated elsewhere herein by
reference are certain portions of the following
unaudited items:
(i) Selected Financial Data 24
(ii) Management's Discussion and Analysis 25-40
(iii) 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 in the 1996 Annual Report to
Stockholders which are incorporated herein by reference.
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 ("Merrill Lynch") as of December 27, 1996 and December
29, 1995 and for each of the three years in the period ended December 27,
1996 and have issued our report thereon dated February 24, 1997; such
consolidated financial statements and report are included in your 1996 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 Merrill Lynch's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
February 24, 1997
F-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 27, 1996, DECEMBER 29, 1995, AND DECEMBER 30, 1994
(Dollars in Millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest (principally from affiliates)...... $ 2,507 $ 2,002 $ 1,423
Management service fees (from affiliates)... 258 282 268
Other....................................... 33 80 14
---------- -------------- ------------
Total Revenues.............................. 2,798 2,364 1,705
Interest Expense............................ 2,598 2,061 1,514
---------- -------------- ------------
Net Revenues................................ 200 303 191
---------- -------------- ------------
NON-INTEREST EXPENSES
Compensation and benefits................... 285 198 186
Other....................................... 288 206 232
---------- -------------- ------------
Total Non-Interest Expenses................. 573 404 418
---------- -------------- ------------
EQUITY IN EARNINGS OF AFFILIATES.............. 1,982 1,327 1,223
---------- -------------- ------------
INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE.... 1,609 1,226 996
Income Tax (Benefit) Expense........... (10) 112 (21)
---------- -------------- ------------
NET EARNINGS.................................. $ 1,619 $ 1,114 $ 1,017
---------- -------------- ------------
---------- -------------- ------------
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS.......................... $ 1,572 $ 1,066 $ 1,004
---------- -------------- ------------
---------- -------------- ------------
</TABLE>
See Notes to Condensed Financial Statements
F-3
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
DECEMBER 27, 1996 AND DECEMBER 29, 1995
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................................................ $ - $ 37
Loans to, receivables from and preference securities
of affiliates..................................................................... 55,435 39,366
Investments in affiliates, at equity................................................. 6,749 6,017
Property, leasehold improvements and equipment (net of accumulated
depreciation and amortization of $237 in 1996 and $223 in 1995)................... 135 153
Other receivables and assets......................................................... 1,444 1,113
----------- -----------
TOTAL ASSETS......................................................................... $ 63,763 $ 46,686
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Commercial paper and other short-term borrowings..................................... $ 24,837 $ 17,338
Loans from and payables to affiliates................................................ 1,543 2,657
Other liabilities and accrued interest............................................... 3,960 2,707
Long-term borrowings................................................................. 26,531 17,843
----------- -----------
Total
Liabilities.................................................................... 56,871 40,545
----------- -----------
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: 1996 and 1995 - 236,330,162 shares ............................... 315 315
Paid-in capital................................................................. 1,304 1,237
Foreign currency translation adjustment......................................... 10 11
Net unrealized gains on investment securities available-for-sale (net of
applicable income tax expense of $5 in 1996 and $13 in 1995)................ 9 25
Retained earnings............................................................... 7,868 6,492
----------- -----------
Subtotal...................................................................... 9,506 8,080
Less: Treasury stock, at cost:
1996- 70,705,598 shares
1995- 60,929,278 shares 2,895 2,241
Unallocated ESOP reversion shares, at cost:
1996- 1,538,778 shares
1995- 4,012,519 shares 24 63
Employee stock transactions............................................ 314 254
----------- -----------
Total Common Stockholders' Equity.................................................... 6,273 5,522
----------- -----------
Total Stockholders' Equity........................................................... 6,892 6,141
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 63,763 $ 46,686
----------- -----------
----------- -----------
See Notes to Condensed Financial Statements
</TABLE>
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 27, 1996, DECEMBER 29, 1995, AND DECEMBER 30, 1994
(Dollars in Millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings.........................................................$ 1,619 $ 1,114 $ 1,017
Noncash items included in earnings:
Equity in earnings of affiliates................................... (1,982) (1,327) (1,223)
Depreciation and amortization...................................... 31 31 38
Other.............................................................. 50 (35) 57
(Increase) decrease in:
Other operating assets, net of liabilities......................... 915 649 (12)
Dividends from affiliates and partnerships distributions............. 1,367 1,455 947
------------ ------------ -------------
Cash Provided by (Used for) Operating Activities................... 2,000 1,887 824
------------ ------------ -------------
Cash Flows from Investing Activities:
Proceeds from (payments for):
Payments for property, leasehold improvements and equipment........ (18) (12) (33)
Investments in affiliates.......................................... (132) (363) (90)
Loans to affiliates, net of payments............................... (17,171) (5,608) (435)
------------ ------------ -------------
Cash (Used for) Provided by Investing Activities................... (17,321) (5,983) (558)
------------ ------------ -------------
Cash Flows from Financing Activities:
Proceeds from (payments for):
Commercial paper and other short-term borrowings................... 7,499 2,592 (978)
Issuance and resale of long-term borrowings........................ 15,019 9,458 8,450
Settlement and repurchases of long-term borrowings................. (6,070) (6,883) (6,917)
Issuance of 9% Cumulative Preferred Stock.......................... -- -- 425
Common stock transactions.......................................... (921) (894) (1,048)
Dividends to shareholders.......................................... (243) (228) (188)
------------ ------------ -------------
Cash Provided by (Used for) Financing Activities................... 15,284 4,045 (256)
------------ ------------ -------------
(Decrease) Increase in Cash and Cash Equivalents....................... (37) (51) 10
Cash and Cash Equivalents, beginning of year........................... 37 88 78
------------ ------------ -------------
Cash and Cash Equivalents, end of year.................................$ 0 $ 37 $ 88
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes totaled $949 in 1996, $487 in 1995, and $1,057 in 1994.
Interest totaled $2,517 in 1996, $2,086 in 1995, and $1,490 in 1994.
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. Certain limited
reclassification and format changes have been made to prior years' amounts to
conform to the current year presentation.
LONG-TERM BORROWINGS AND GUARANTEES
Reference is made to pages 55 thru 57 of the Annual Report for additional
information on Parent Company long-term borrowings. At December 27, 1996,
Parent Company borrowings totaling $554 were held for purposes of resale by
affiliates, which also purchased $1,370 and resold $1,435 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 floating interest rates. These swaps and other derivatives,
generally made with an affiliated dealer in such instruments, are used to
hedge interest rate, foreign currency, and equity exposures associated with
long-term borrowings. At December 27, 1996 and December 29, 1995, the notional
amounts of these instruments were $24,737 and $20,337, 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)
EMPLOYEE INCENTIVE PLANS
The Parent Company accounts for costs of stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," rather than the fair value based method in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
Reference is made to page 64 of the Annual Report for related pro forma
disclosures.
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES AND STOCKHOLDERS' EQUITY
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
In December 1996, Merrill Lynch Preferred Capital Trust I (the "Trust") issued
$275 of its 7.75% Trust Originated Preferred Securities (the "Trust Preferred")
to unrelated parties and $9 in common securities to the Parent Company.
Concurrently, Merrill Lynch Preferred Funding I, L.P. (the "Partnership") issued
$284 of its 7.75% Partnership Preferred Securities representing limited partner
interests to the Trust, and received capital of $50 from the Parent Company
representing the general partner interest in the Partnership. The Trust and
Partnership are affiliated entities of the Parent Company.
The Partnership's assets include $330 million in Debentures issued by the Parent
Company and a subsidiary (the "Debentures"). The Debentures have a term of
approximately 20 years and bear interest at 7.75%. The interest payment dates
and redemption provisions of the Debentures include an option to redeem the
Debentures on or after December 30, 2006.
F-7
<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)
Subsequent to year-end, Merrill Lynch Capital Trust II, an affiliate of the
Parent Company, issued $300 of 8% Trust Originated Preferred Securities. The
proceeds of the offering were invested in 8% Partnership Preferred Securities of
Merrill Lynch Preferred Funding II, L.P., also an affiliate of the Parent
Company, which, in turn, invested in Debentures issued by the Parent Company.
9% CUMULATIVE PREFERRED STOCK, SERIES A
In 1994, the Parent Company 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.
REMARKETED PREFERRED STOCK, SERIES C
The Parent Company has issued 3,000 shares of Remarketed Preferred Stock, Series
C ("RP Stock"), of which 1,938 shares were outstanding as of December 27, 1996.
Dividend rates in effect during 1996 on the RP Stock ranged from 3.80% to 4.56%
per annum.
Subsequent to year-end, the Parent Company implemented a plan to redeem all of
the outstanding RP Stock. The RP Stock will be redeemed on the dividend reset
date of each series, and the redemptions are expected to be completed by March
4, 1997. As of February 19, 1997, $155 of RP Stock, representing 1,548 shares,
had been redeemed.
Reference is made to pages 57 and 58 of the Annual Report for additional
information on Stockholders' Equity.
COMMITMENTS AND CONTINGENCIES
Reference is made to page 58 and 59 of the Annual Report for additional
information on commitments and contingencies.
F-8
<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 21st day of March,
1997.
MERRILL LYNCH & CO., INC.
By: /s/ Daniel P. Tully
-------------------------------------
Daniel P. Tully
Chairman of the Board
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 21st day of March, 1997.
Signature Title
--------- -----
/s/ Daniel P. Tully Chairman of the Board and
- ------------------------------------------ Director
(Daniel P. Tully)
/s/ David H. Komansky Chief Executive Officer
- ------------------------------------------ President, Chief Operating
(David H. Komansky) Officer and 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/ Herbert M. Allison, Jr. Director
- ------------------------------------------
(Herbert M. Allison, Jr.)
/s/ William O. Bourke Director
- ------------------------------------------
(William O. Bourke)
/s/ W.H. Clark Director
- ------------------------------------------
(W.H. Clark)
<PAGE>
Signature Title
--------- -----
/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.)
/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/ David K. Newbigging Director
- ------------------------------------------
(David K. Newbigging)
/s/ Aulana L. Peters Director
- ------------------------------------------
(Aulana L. Peters)
/s/ John J. Phelan, Jr. Director
- ------------------------------------------
(John J. Phelan, Jr.)
/s/ John L. Steffens Director
- ------------------------------------------
(John L. Steffens)
/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 27, 1996
<PAGE>
FORM 10-K EXHIBIT INDEX
-----------------------
<TABLE>
<CAPTION>
<S> <C> <C>
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 December 17, 1987 for Series A
Junior Preferred Stock (Exhibit 3(f) to S-3 (File No.
33-19975)).
3(i)(h) Form of Rights Agreement dated as of December 16, 1987 between
ML & Co. and The Chase Manhattan Bank (successor by merger to
Manufacturers Hanover Trust Company and Chemical Bank) (Exhibit
3(iv) to 1992 10-K).
*3(ii) By-Laws of ML & Co., effective as of December 28, 1996.
4(i) Senior Indenture dated as of April 1, 1983, as amended and
restated, between ML & Co. and The Chase Manhattan Bank
(successor by merger to Manufacturers Hanover Trust Company
and Chemical Bank) 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) Supplemental Indenture dated as of October 25, 1993 to the
Senior Indenture dated as of April 1, 1983 (Exhibit 4(b)(ii)
to S-3 (File No. 33-61559)).
4(iii) Senior Indenture dated as of October 1, 1993 between ML & Co.
and The Chase Manhattan Bank (Exhibit 4 to 8-K dated October 7,
1993).
- -------------------------------------
Certain of the exhibits in this index were previously filed 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.
* Filed herewith.
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Description Page
- ----------- ----------- ----
4(iv) Form of ML & Co.'s 7% Notes due January 15, 2007 (Exhibit 4 to
8-K dated January 13, 1997).
4(v) Form of ML & Co.'s S&P 500 Market Index Target-Term Securities
due September 16, 2002 (Exhibit 4 to 8-K dated March 14, 1997).
10(i) ML & Co. 1978 Incentive Equity Purchase Plan, as amended
through January 16, 1995 (Exhibit 10(i) to 10-K for the fiscal
year ended December 30, 1994 ("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 October 21, 1996 (Exhibit 10(i) to 10-Q for the quarter
ended September 27, 1996 (the "3rd Quarter 1996 10-Q")).
10(iv) ML & Co. Equity Capital Accumulation Plan, as amended through
October 21, 1996 (Exhibit 10(ii) to 3rd Quarter 1996 10-Q).
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 (Pages 27 to
29 of ML & Co.'s Proxy Statement for the 1997 Annual Meeting
of Stockholders contained in ML & Co.'s Schedule 14A filed
on March 10, 1997 ("1997 Proxy Statement")).
10(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")).
* 10(viii) Executive Annuity Agreement dated July 24, 1991 by and between
ML & Co. and Daniel P. Tully.
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 10-Q for the quarter ended June 26, 1992).
* 10(x) Amendment dated January 27, 1997 to Executive Annuity Agreement
dated July 24, 1991 by and between ML & Co. and Daniel P. Tully.
10(xi) Form of Severance Agreement between ML & Co. and certain of its
directors and executive officers (Exhibit 10(x) to 10-K for
fiscal year ended December 29, 1995 ("1995 10-K")).
10(xii) 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 10-K for the fiscal
year ended December 31, 1993 ("1993 10-K")).
10(xiii) Written description of ML & Co.'s incentive compensation
programs (Exhibit 10(xii) to 1993 10-K).
- -------------------------------------
* Filed herewith.
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Description Page
- ----------- ----------- ----
10(xiv) Written description of ML & Co.'s compensation policy for
directors (Pages 17 and 18 of ML & Co.'s 1997 Proxy Statement).
10(xv) Merrill Lynch KECALP Growth Investments Limited Partnership
1983 (Exhibit 1(b) to Registration Statement on Form N-2
(File No. 2-81619)).
10(xvi) Merrill Lynch KECALP L.P. 1984 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-87962)).
10(xvii) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
10(xviii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
10(xix) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
10(xx) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
10(xxi) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 33-51825)).
10(xxii) Merrill Lynch KECALP L.P. 1997 (Exhibit 1(a)(ii) to
Registration Statement on Form N-2 (File No. 333-15035)).
* 10(xxiii) ML & Co. Deferred Restricted Unit Plan for Executive Officers.
10(xxiv) ML & Co. 1995 Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(xxii) to 1994 10-K).
* 10(xxv) ML & Co. Fee Deferral Plan for Non-Employee Directors,
as amended through December 11, 1996.
10(xxvi) 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(xxvii) ML & Co. 1997 Deferred Compensation Plan for a Select
Group of Eligible Employees.
10(xxviii) ML & Co. 1997 KECALP Deferred Compensation Plan for a
Select Group of Eligible Employees (Exhibit 10(iii) to 3rd
Quarter 1996 10-Q).
10(xxix) ML & Co. Deferred Unit and Stock Unit Plan for Non-Employee
Directors (Exhibit 10(iv) to 3rd Quarter 1996 10-Q).
* 10(xxx) ML & Co. Long-Term Incentive Compensation Plan for Managers
and Producers.
* 10(xxxi) Executive Annuity Agreement dated as of January 27, 1997 by
and between ML & Co. and David H. Komansky.
- -------------------
* File herewith.
E-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit No. Description Page
- ----------- ----------- ----
*10(xxxii) Amendment dated September 18, 1996 to Deferred Compensation
Plans (amending the Amended and Restated 1994 Deferred
Compensation Agreement for a Select Group of Eligible
Employees, the ML & Co. 1995 Deferred Compensation Plan for a
Select Group of Eligible Employees, and the ML & Co. 1996
Deferred Compensation Plan for a Select Group of Eligible
Employees).
*10(xxxiii)(a) Amended and Restated Reimbursement Agreement between WFP
Tower D Co. L.P. ("WFP/D") and MLPF&S dated as of November
21, 1996.
*10(xxxiii)(b) Amended and Restated Reimbursement Agreement between WFP
Tower B Co. L.P. ("WFP/B") and Merrill Lynch/WFC/L, Inc.
("WFC/L") dated as of November 21, 1996.
+10(xxxiii)(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(xxxiii)(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(xxxiii)(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(xxxiii)(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(xxxiv)(a) 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(xxxiv)(b) Second Amendment of Agreement of Lease (with respect to Parcel
D) dated as of November 21, 1996 between WFP/D and MLPF&S.
*10(xxxiv)(c) Second Amendment of Agreement of Lease (with respect to Parcel
B) dated as of November 21, 1996 between WFP/B and WFC/L.
*(11) Statement re computation of per share earnings.
*(12) Statement re computation of ratios.
*(13) 1996 Annual Report to Stockholders.
*(21) Subsidiaries of the Registrant.
*(23) Consent of Independent Auditors.
*(27) Financial Data Schedule.
- -------------------------------------
* Filed herewith.
+ Confidential treatment has been obtained for portions of this exhibit.
</TABLE>
E-4
<PAGE>
Exhibit 3(ii)
================================================================================
BY-LAWS
OF
MERRILL LYNCH & CO., INC.
-------------
Effective December 28, 1996
================================================================================
<PAGE>
INDEX
to
BY-LAWS
of
MERRILL LYNCH & CO., INC.
PAGE
ARTICLE I - OFFICES ........................................................ 1
ARTICLE II - MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting........................................ 1
Section 2. Special Meetings ..................................... 1
Section 3. Notice of, and Business at, Meetings.................. 1
Section 4. Waiver of Notice ..................................... 3
Section 5. Organization....,..................................... 3
Section 6. Inspectors of Election................................ 3
Section 7. Stockholders Entitled to Vote......................... 4
Section 8. Quorum and Adjournment................................ 4
Section 9. Order of Business..................................... 4
Section 10. Vote of Stockholders.................................. 4
Section 11. Shares Entitled to More or Less Than One Vote......... 5
ARTICLE III - BOARD OF DIRECTORS
Section 1. Election and Term..................................... 5
Section 2. Qualification......................................... 5
Section 3. Number................................................ 5
Section 4. General Powers........................................ 6
Section 5. Place of Meetings..................................... 6
Section 6. Organization Meetings................................. 6
Section 7. Regular Meetings ..................................... 6
Section 8. Special Meetings; Notice and Waiver of Notice......... 6
Section 9. Organization of Meetings.............................. 7
Section 10. Quorum and Manner of Acting........................... 7
Section 11. Voting................................................ 7
Section 12. Action without a Meeting.............................. 7
<PAGE>
ii
PAGE
Section 13. Resignations.......................................... 8
Section 14. Removal of Directors.................................. 8
Section 15. Vacancies............................................. 8
Section 16. Directors' Compensation............................... 8
ARTICLE IV - COMMITTEES
Section 1. Constitution and Powers............................... 8
Section 2. Place of Meetings..................................... 9
Section 3. Meetings; Notice and Waiver of Notice................. 9
Section 4. Organization of Meetings.............................. 9
Section 5. Quorum and Manner of Acting........................... 9
Section 6. Voting................................................ 10
Section 7. Records .............................................. 10
Section 8. Vacancies............................................. 10
Section 9. Members' Compensation................................. 10
Section 10. Emergency Management Committee........................ 10
ARTICLE V - THE OFFICERS
Section 1. Officers - Qualifications ............................ 11
Section 2. Term of Office; Vacancies ............................ 11
Section 3. Removal of Elected Officers........................... 11
Section 4. Resignations.......................................... 11
Section 5. Officers Holding More Than One Office................. 11
Section 6. The Chairman of the Board ............................ 11
Section 7. The President......................................... 12
Section 8. The Vice Chairmen of the Board........................ 12
Section 9. The Executive Vice Presidents......................... 12
Section 10. The Senior Vice Presidents............................ 12
Section 11. The Vice Presidents................................... 13
Section 12. The Secretary......................................... 13
Section 13. The Treasurer......................................... 13
Section 14. Additional Duties and Authority....................... 13
Section 15. Compensation.......................................... 13
<PAGE>
iii
PAGE
ARTICLE VI - STOCK AND TRANSFERS OF STOCK
Section 1. Stock Certificates.................................... 14
Section 2. Transfers of Stock.................................... 14
Section 3. Lost Certificates..................................... 14
Section 4. Determination of Holders of Record for Certain
Purposes.............................................. 14
ARTICLE VII - CORPORATE SEAL
Section 1. Seal.................................................. 15
Section 2. Affixing and Attesting................................ 15
ARTICLE VIII - MISCELLANEOUS
Section 1. Fiscal Year........................................... 15
Section 2. Signatures on Negotiable Instruments.................. 15
Section 3. References to Article and Section Numbers and to the
By-Laws and the Certificate of Incorporation.......... 15
ARTICLE IX - AMENDMENTS..................................................... 16
<PAGE>
BY-LAWS
OF
MERRILL LYNCH & CO., INC.
------------------
ARTICLE I.
OFFICES
Merrill Lynch & Co., Inc. (hereinafter called the "Corporation") may
establish or discontinue, from time to time, such offices and places of business
within or without the State of Delaware as the Board of Directors may deem
proper for the conduct of the Corporation's business.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. The annual meeting of the holders of
shares of such classes or series of stock as are entitled to notice thereof and
to vote thereat pursuant to the provisions of the Certificate of Incorporation
(hereinafter called the "Annual Meeting of Stockholders") for the purpose of
electing directors and transacting such other business as may come before it
shall be held in each year at such time, on such day and at such place, within
or without the State of Delaware, as shall be designated by the Board of
Directors.
Section 2. Special Meetings. In addition to such meetings as are
provided for by law or by the Certificate of Incorporation, special meetings of
the holders of any class or series or of all classes or series of the
Corporation's stock may be called at any time by the Board of Directors pursuant
to a resolution adopted by the affirmative vote of a majority of the entire
Board of Directors and may be held at such time, on such day and at such place,
within or without the State of Delaware, as shall be designated by the Board of
Directors.
Section 3. Notice of, and Business at, Meetings.
a. Notice. Except as otherwise provided by law, written notice of
each meeting of stockholders shall be given either by delivering a notice
personally or mailing a notice to each stockholder of record entitled to vote
thereat. If mailed, the notice shall be directed to the stockholder in a
postage-prepaid envelope at his address as it appears on the stock books of the
Corporation unless, prior to the time of mailing, he shall have filed with the
Secretary a written request that notices intended for him be mailed to some
other address, in which case it shall be mailed to the address designated in
such request. Notice of each meeting of stockholders shall be in such form as is
approved by the Board of Directors and shall state the purpose or purposes for
which the meeting is
<PAGE>
2
called, the date and time when and the place where it is to be held, and shall
be delivered personally or mailed not more than sixty (60) days and not less
than ten (10) days before the day of the meeting. Except as otherwise provided
by law, the business which may be transacted at any special meeting of
stockholders shall consist of and be limited to the purpose or purposes so
stated in such notice. The Secretary or an Assistant Secretary or the Transfer
Agent of the Corporation shall, after giving such notice, make an affidavit
stating that notice has been given, which shall be filed with the minutes of
such meeting.
b. Business. No business may be transacted at an annual meeting of
stockholders, other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (c) otherwise properly
brought before the annual meeting by any stockholder of the Corporation who (i)
is a stockholder of record on the date of the giving of the notice provided for
in this Section 3(b) and on the record date for the determination of
stockholders entitled to vote at such annual meeting and (ii) complies with the
notice procedures set forth in this Section 3(b).
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received by the Secretary of the Corporation not less
than fifty (50) days prior to the date of the annual meeting of stockholders;
provided, that in the event that less than 60 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder in order to be timely must be so received not later than the
close of business on the tenth (10th) day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure of the
date of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter such stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of such stockholder,
(iii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such stockholder, (iv)
a description of all arrangements or understandings between such stockholder and
any other person or persons (including their names) in connection with the
proposal of such business by such stockholder and any material interest of such
stockholder in such business and (v) a representation that such stockholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting.
<PAGE>
3
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 3(b), provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 3(b) shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an annual
meeting determines that business was not properly brought before the annual
meeting in accordance with the foregoing procedures, the Chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
Section 4. Waiver of Notice. Whenever notice is required to be given
under any provision of law or of the Certificate of Incorporation or the
By-Laws, a waiver thereof in writing or by telegraph, cable or other form of
recorded communication, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting of stockholders shall constitute a waiver of
notice of such meeting, except when the person attends such meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting of stockholders need be specified in any waiver of notice unless so
required by the Certificate of Incorporation.
Section 5. Organization. The Chairman of the Board shall act as
chairman at all meetings of stockholders at which he is present, and as such
chairman shall call such meetings of stockholders to order and preside thereat.
If the Chairman of the Board shall be absent from any meeting of stockholders,
the duties otherwise provided in this Section 5 of Article II to be performed by
him at such meeting shall be performed at such meeting by the officer prescribed
by Section 6 of Article V. The Secretary of the Corporation shall act as
secretary at all meetings of the stockholders, but in his absence the chairman
of the meeting may appoint any person present to act as secretary of the
meeting.
Section 6. Inspectors of Election. a. The Chairman of the Board
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The Chairman of the
Board may designate one or more persons as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at the meeting shall appoint one
or more inspectors to act at the meeting. Each inspector, before entering upon
the discharge of his duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his ability.
b. The inspectors shall: (1) ascertain the number of shares
outstanding and the voting power of each; (2) determine the shares represented
at a meeting and the validity of proxies and ballots; (3) count all votes and
ballots; (4) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors; and
(5) certify their determination of the number of
<PAGE>
4
shares represented at the meeting, and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of their duties.
Section 7. Stockholders Entitled to Vote. The Board of Directors may
fix a date not more than sixty (60) days nor less than ten (10) days prior to
the date of any meeting of stockholders, as a record date for the determination
of the stockholders entitled to notice of and to vote at such meeting and any
adjournment thereof, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting and any adjournment thereof,
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid. No record date shall precede the date
on which the Board of Directors establishes such record date. The Secretary
shall prepare and make or cause to be prepared and made, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order and showing the
address of each such stockholder and the number of shares registered in the name
of each such stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place, specified in the notice of the meeting, within the city where the meeting
is to be held, or, if not so specified, at the place where the meeting is to be
held. Such list shall be produced and kept at the time and place of the meeting
during the whole time thereof, and subject to the inspection of any stockholder
who may be present.
Section 8. Quorum and Adjournment. Except as otherwise provided by
law or by the Certificate of Incorporation, the holders of a majority of the
shares of stock entitled to vote at the meeting present in person or by proxy
without regard to class or series shall constitute a quorum at all meetings of
the stockholders. In the absence of a quorum, the holders of a majority of such
shares of stock present in person or by proxy may adjourn any meeting, from time
to time, until a quorum shall be present. At any such adjourned meeting at which
a quorum may be present, any business may be transacted which might have been
transacted at the meeting as originally called. No notice of any adjourned
meeting need be given other than by announcement at the meeting that is being
adjourned, provided that if the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, then a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 9. Order of Business. The order of business at all meetings
of stockholders shall be as determined by the chairman of the meeting.
Section 10. Vote of Stockholders. Except as otherwise required by
law or by the Certificate of Incorporation or by the By-Laws, all action by
stockholders shall be taken at a stockholders' meeting. Every stockholder of
record, as determined pursuant to Section 7 of this Article II, and who is
entitled to vote, shall, except as otherwise expressly provided in the
Certificate of Incorporation with respect to any class or series
<PAGE>
5
of the Corporation's capital stock, be entitled at every meeting of the
stockholders to one vote for every share of stock standing in his name on the
books of the Corporation. Every stockholder entitled to vote may authorize
another person or persons to act for him by proxy duly appointed by an
instrument in writing, subscribed by such stockholder and executed not more than
three (3) years prior to the meeting, unless the instrument provides for a
longer period. The attendance at any meeting of stockholders of a stockholder
who may theretofore have given a proxy shall not have the effect of revoking
such proxy. Election of directors shall be by written ballot but, unless
otherwise provided by law, no vote on any question upon which a vote of the
stockholders may be taken need be by ballot unless the chairman of the meeting
shall determine that it shall be by ballot or the holders of a majority of the
shares of stock present in person or by proxy and entitled to participate in
such vote shall so demand. In a vote by ballot each ballot shall state the
number of shares voted and the name of the stockholder or proxy voting. Except
as otherwise provided in Sections 14 and 15 of Article III or by the Certificate
of Incorporation, directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. Except as otherwise provided by law or by the
Certificate of Incorporation, the affirmative vote of a majority of shares
present in person or represented by proxy at the meeting and entitled to vote on
the subject shall be the act of the stockholders.
Section 11. Shares Entitled to More or Less than One Vote. If any
class or series of the Corporation's capital stock shall be entitled to more or
less than one vote for any share, on any matter, every reference in the By-Laws
to a majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock.
ARTICLE III.
BOARD OF DIRECTORS
Section 1. Election and Term. Except as otherwise provided by law or
by the Certificate of Incorporation, and subject to the provisions of Sections
13, 14 and 15 of this Article III, directors shall be elected at the Annual
Meeting of Stockholders to serve until the Annual Meeting of Stockholders in the
third year following their election and until their successors are elected and
qualify or until their earlier resignation or removal.
Section 2. Qualification. No one shall be a director who is not the
owner of shares of Common Stock of the Corporation. Acceptance of the office of
director may be expressed orally or in writing.
Section 3. Number. The number of directors may be fixed from time to
time by resolution of the Board of Directors but shall not be less than three
(3) nor more than thirty (30).
<PAGE>
6
Section 4. General Powers. The business, properties and affairs of
the Corporation shall be managed by, or under the direction of, the Board of
Directors, which, without limiting the generality of the foregoing, shall have
power to elect and appoint officers of the Corporation, to appoint and direct
agents, to grant general or limited authority to officers, employees and agents
of the Corporation to make, execute and deliver contracts and other instruments
and documents in the name and on behalf of the Corporation and over its seal,
without specific authority in each case, and, by resolution adopted by a
majority of the whole Board of Directors, to appoint committees of the Board of
Directors in addition to those appointed pursuant to Article IV hereof, the
membership of which may consist of one or more directors, and which may advise
the Board of Directors with respect to any matters relating to the conduct of
the Corporation's business. The Board of Directors may designate one or more
directors as alternate members of any committee, including those appointed
pursuant to Article IV hereof, who may replace any absent or disqualified member
at any meeting of the committee. In addition, the Board of Directors may
exercise all the powers of the Corporation and do all lawful acts and things
which are not reserved to the stockholders by law or by the Certificate of
Incorporation.
Section 5. Place of Meetings. Meetings of the Board of Directors may
be held at any place, within or without the State of Delaware, from time to time
designated by the Board of Directors.
Section 6. Organization Meeting. A newly elected Board of Directors
shall meet and organize, and also may transact any other business which might be
transacted at a regular meeting thereof, as soon as practicable after each
Annual Meeting of Stockholders, at the place at which such meeting of
stockholders took place, without notice of such meeting, provided a majority of
the whole Board of Directors is present. If such a majority is not present, such
organization meeting may be held at any other time or place which may be
specified in a notice given in the manner provided in Section 8 of this Article
III for special meetings of the Board of Directors, or in a waiver of notice
thereof.
Section 7. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such times as may be determined by resolution of the
Board of Directors and no notice shall be required for any regular meeting.
Except as otherwise provided by law, any business may be transacted at any
regular meeting of the Board of Directors.
Section 8. Special Meetings; Notice and Waiver of Notice. Special
meetings of the Board of Directors shall be called by the Secretary on the
request of the Chairman of the Board, the President or a Vice Chairman of the
Board, or on the request in writing of any three other directors stating the
purpose or purposes of such meeting. Notice of any special meeting shall be in
form approved by the Chairman of the Board, the President or a Vice Chairman of
the Board, as the case may be. Notices of special meetings shall be mailed to
each director, addressed to him at his residence or usual place of business, not
later than two (2) days before the day on which the meeting is to be held, or
shall be sent to him at such place by telegraph, cable or other form of recorded
communication or be delivered personally or by telephone, not later than the
<PAGE>
7
day before such day of meeting. Notice of any meeting of the Board of Directors
need not be given to any director if he shall sign a written waiver thereof
either before or after the time stated therein, or if he shall attend a meeting,
except when he attends such meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any special meeting of the Board of Directors need be
specified in any notice or written waiver of notice unless so required by the
Certificate of Incorporation or by the By-Laws. Unless limited by law, by the
Certificate of Incorporation or by the By-Laws, any and all business may be
transacted at any special meeting.
Section 9. Organization of Meetings. The Chairman of the Board shall
preside at all meetings of the Board of Directors at which he is present. If the
Chairman of the Board shall be absent from any meeting of the Board of
Directors, the duties otherwise provided in this Section 9 of Article III to be
performed by him at such meeting shall be performed at such meeting by the
officer prescribed by Section 6 of Article V. If no such officer is present at
such meeting, one of the directors present shall be chosen by the members of the
Board of Directors present to preside at such meeting. The Secretary of the
Corporation shall act as the secretary at all meetings of the Board of
Directors, and in his absence a temporary secretary shall be appointed by the
chairman of the meeting.
Section 10. Quorum and Manner of Acting. Except as otherwise
provided by Section 6 of this Article III, at every meeting of the Board of
Directors one-third (1/3) of the total number of directors constituting the
whole Board of Directors shall constitute a quorum but in no event shall a
quorum be constituted by less than two (2) directors. Except as otherwise
provided by law or by the Certificate of Incorporation, or by Section 15 of this
Article III, or by Section 1 or Section 8 of Article IV, or by Section 3 of
Article V, or by Article IX, the act of a majority of the directors present at
any such meeting, at which a quorum is present, shall be the act of the Board of
Directors. In the absence of a quorum, a majority of the directors present may
adjourn any meeting, from time to time, until a quorum is present. No notice of
any adjourned meeting need be given other than by announcement at the meeting
that is being adjourned. Members of the Board of Directors or any committee
thereof may participate in a meeting of the Board of Directors or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation by a member of the Board of Directors in a meeting pursuant to
this Section 10 of Article III shall constitute his presence in person at such
meeting.
Section 11. Voting. On any question on which the Board of Directors
shall vote, the names of those voting and their votes shall be entered in the
minutes of the meeting if any member of the Board of Directors so requests at
the time.
Section 12. Action without a Meeting. Except as otherwise provided
by law or by the Certificate of Incorporation, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a
<PAGE>
8
meeting, if prior to such action all members of the Board of Directors or of
such committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board of Directors
or the committee.
Section 13. Resignations. Any director may resign at any time upon
written notice of resignation to the Corporation. Any resignation shall be
effective immediately unless a date certain is specified for it to take effect,
in which event it shall be effective upon such date, and acceptance of any
resignation shall not be necessary to make it effective, irrespective of whether
the resignation is tendered subject to such acceptance.
Section 14. Removal of Directors. Subject to the rights of the
holders of any series of Preferred Stock or any other class of capital stock of
the Corporation (other than the Common Stock) then outstanding, (i) any
director, or the entire Board of Directors, may be removed from office at any
time, but only for cause, by the affirmative vote of the holders of record of
outstanding shares representing at least 80% of the voting power of all the
shares of capital stock of the Corporation then entitled to vote generally in
the election of directors, voting together as a single class, and (ii) any
director may be removed from office at any time, but only for cause, by the
affirmative vote of a majority of the entire Board of Directors.
Section 15. Vacancies. Subject to the rights of the holders of any
series of Preferred Stock or any other class of capital stock of the Corporation
(other than the Common Stock) then outstanding, any vacancies in the Board of
Directors for any reason, including by reason of any increase in the number of
directors, shall, if occurring prior to the expiration of the term of office of
the class in which such vacancy occurs, be filled only by the Board of
Directors, acting by the affirmative vote of a majority of the remaining
directors then in office, although less than a quorum, and any directors so
elected shall hold office until the next election of the class for which such
directors have been elected and until their successors are elected and qualify.
Section 16. Directors' Compensation. Any and all directors may
receive such reasonable compensation for their services as such, whether in the
form of salary or a fixed fee for attendance at meetings, with expenses, if any,
as the Board of Directors may from time to time determine. Nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
ARTICLE IV.
COMMITTEES
Section 1. Constitution and Powers. The Board of Directors may, by
resolution adopted by affirmative vote of a majority of the whole Board of
Directors, appoint one or more committees of the Board of Directors, which
committees shall have such powers and duties as the Board of Directors shall
properly determine. Unless otherwise provided by the Board of Directors, no such
other committee of the Board of Directors shall be composed of fewer than two
(2) directors.
<PAGE>
9
Section 2. Place of Meetings. Meetings of any committee of the Board
of Directors may be held at any place, within or without the State of Delaware,
from time to time designated by the Board of Directors or such committee.
Section 3. Meetings; Notice and Waiver of Notice. Regular meetings
of any committee of the Board of Directors shall be held at such times as may be
determined by resolution either of the Board of Directors or of such committee
and no notice shall be required for any regular meeting. Special meetings of any
committee shall be called by the secretary thereof upon request of any two
members thereof. Notice of any special meeting of any committee shall be in form
approved by the Chairman of the Board, the President or a Vice Chairman of the
Board, as the case may be. Notices of special meetings shall be mailed to each
member, addressed to him at his residence or usual place of business, not later
than two (2) days before the day on which the meeting is to be held, or shall be
sent to him at such place by telegraph, cable or any other form of recorded
communication, or be delivered personally or by telephone, not later than the
day before such day of meeting. Neither the business to be transacted at, nor
the purpose of, any special meeting of any committee, need be specified in any
notice or written waiver of notice unless so required by the Certificate of
Incorporation or the By-Laws. Notices of any such meeting need not be given to
any member of any committee, however, if waived by him as provided in Section 8
of Article III, and the provisions of such Section 8 with respect to waiver of
notice of meetings of the Board of Directors shall apply to meetings of any
committee as well.
Section 4. Organization of Meetings. The most senior officer of the
Corporation present, if any be members of the committee, and, if not, the
director present who has served the longest as a director, except as otherwise
expressly provided by the Board of Directors or the committee, shall preside at
all meetings of any committee. The Secretary of the Corporation, except as
otherwise expressly provided by the Board of Directors, shall act as secretary
at all meetings of any committee and in his absence a temporary secretary shall
be appointed by the chairman of the meeting.
Section 5. Quorum and Manner of Acting. One-third (1/3) of the
members of any committee then in office shall constitute a quorum for the
transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present, shall be the act of such committee. In the
absence of a quorum, a majority of the members of any committee present, or, if
two or fewer members shall be present, any member of the committee present or
the Secretary, may adjourn any meeting, from time to time, until a quorum is
present. No notice of any adjourned meeting need be given other than by
announcement at the meeting that is being adjourned. The provisions of Section
10 of Article III with respect to participation in a meeting of a committee of
the Board of Directors and the provisions of Section 12 of Article III with
respect to action taken by a committee of the Board of Directors without a
meeting shall apply to participation in meetings of and action taken by any
committee.
<PAGE>
10
Section 6. Voting. On any question on which any committee shall
vote, the names of those voting and their votes shall be entered in the minutes
of the meeting if any member of such committee so requests.
Section 7. Records. All committees shall keep minutes of their acts
and proceedings, which shall be submitted at the next regular meeting of the
Board of Directors unless sooner submitted at an organization or special meeting
of the Board of Directors, and any action taken by the Board of Directors with
respect thereto shall be entered in the minutes of the Board of Directors.
Section 8. Vacancies. Any vacancy among the appointed members or
alternate members of any committee of the Board of Directors may be filled by
affirmative vote of a majority of the whole Board of Directors.
Section 9. Members' Compensation. Members of all committees may
receive such reasonable compensation for their services as such, whether in the
form of salary or a fixed fee for attendance at meetings, with expenses, if any,
as the Board of Directors may from time to time determine. Nothing herein
contained shall be construed to preclude any member of any committee from
serving the Corporation in any other capacity and receiving compensation
therefor.
Section 10. Emergency Management Committee. In the event that a
quorum of the Board of Directors cannot readily be convened as a result of
emergency conditions following a catastrophe or disaster, then all the powers
and duties vested in the Board of Directors shall vest automatically in an
Emergency Management Committee which shall consist of all readily available
members of the Board of Directors and which Committee shall have and may
exercise all of the powers of the Board of Directors in the management of the
business and affairs of the Corporation. Two members shall constitute a quorum.
Other provisions of these By-Laws notwithstanding, the Emergency Management
Committee shall call a meeting of the Board of Directors as soon as
circumstances permit, for the purpose of filling vacancies on the Board of
Directors and its committees and to take such other action as may be
appropriate; and if the Emergency Management Committee determines that less than
a majority of the members of the Board of Directors are available for service,
the Emergency Management Committee shall, as soon as practicable, issue a call
for a special meeting of stockholders for the election of directors. The powers
of the Emergency Management Committee shall terminate upon the convening of the
meeting of the Board of Directors above prescribed at which a majority of the
members thereof shall be present, or upon the convening of the above prescribed
meeting of stockholders, whichever first shall occur.
<PAGE>
11
ARTICLE V.
THE OFFICERS
Section 1. Officers-Qualifications. The elected officers of the
Corporation shall be a Chairman of the Board, a President, a Secretary and a
Treasurer and may also include one or more Vice Chairmen of the Board, one or
more Executive Vice Presidents, one or more Senior Vice Presidents and one or
more Vice Presidents. The elected officers shall be elected by the Board of
Directors. The Chairman of the Board, the President and each Vice Chairman of
the Board shall be selected from the directors. Assistant Secretaries, Assistant
Treasurers and such other officers as may be deemed necessary or appropriate may
be appointed by the Board of Directors or may be appointed pursuant to Section 7
of this Article V.
Section 2. Term of Office; Vacancies. So far as is practicable, all
elected officers shall be elected at the organization meeting of the Board of
Directors in each year, and except as otherwise provided in Sections 3 and 4,
and subject to the provisions of Section 7, of this Article V, shall hold office
until the organization meeting of the Board of Directors in the next subsequent
year and until their respective successors are elected and qualify or until
their earlier resignation or removal. All appointed officers shall hold office
during the pleasure of the Board of Directors and the President. If any vacancy
shall occur in any office, the Board of Directors may elect or appoint a
successor to fill such vacancy for the remainder of the term.
Section 3. Removal of Elected Officers. Any elected officer may be
removed at any time, either for or without cause, by affirmative vote of a
majority of the whole Board of Directors, at any regular meeting or at any
special meeting called for the purpose and, in the case of any officer not more
senior than a Senior Vice President, by affirmative vote of a majority of the
whole committee of the Board of Directors so empowered at any regular meeting or
at any special meeting called for the purpose.
Section 4. Resignations. Any officer may resign at any time, upon
written notice of resignation to the Corporation. Any resignation shall be
effective immediately unless a date certain is specified for it to take effect,
in which event it shall be effective upon such date, and acceptance of any
resignation shall not be necessary to make it effective, irrespective of whether
the resignation is tendered subject to such acceptance.
Section 5. Officers Holding More Than One Office. Any officer may
hold two or more offices the duties of which can be consistently performed by
the same person.
Section 6. The Chairman of the Board. As provided in Section 5 of
Article II, the Chairman of the Board shall act as chairman at all meetings of
the stockholders at which he is present, and, as provided in Section 9 of
Article III, he shall preside at all meetings of the Board of Directors at which
he is present. In the absence of the Chairman of the Board, his duties shall be
performed and his authority may be exercised by the President, and, in the
absence of the Chairman of the Board and the President, such duties shall be
performed and such authority may be exercised by such
<PAGE>
12
officer as may have been designated by the most senior officer of the
Corporation who has made any such designation, with the right reserved to the
Board of Directors to make the designation or supersede any designation so made.
The office of Chairman of the Board shall be senior to the offices of Vice
Chairman of the Board and Executive Vice President.
Section 7. The President. The President shall be the chief executive
officer of the Corporation and, unless he shall have designated another officer
to so serve, shall also be the chief operating officer of the Corporation. He
shall direct, coordinate and control the Corporation's business and activities
and its operating expenses and capital expenditures, and shall have general
authority to exercise all the powers necessary for the chief executive officer
of the Corporation, all in accordance with basic policies established by and
subject to the control of the Board of Directors. He shall establish operating
and administrative plans and policies and direct and coordinate the
Corporation's organizational components, within the scope of the authority
delegated to him by the Board of Directors. He shall have general authority to
execute bonds, deeds and contracts in the name and on behalf of the Corporation
and responsibility for the employment or appointment of such employees, agents
and officers (except officers to be elected by the Board of Directors pursuant
to Section 1 of this Article V) as may be required for the conduct of the
business and the attainment of the objectives of the Corporation and authority
to fix compensation as provided in Section 15 of this Article V. He shall have
authority to suspend or to remove any employee, agent or appointed officer of
the Corporation and to suspend for cause any elected officer of the Corporation
and, in the case of the suspension for cause of any such elected officer, to
recommend to the Board of Directors what further action should be taken. As
provided in Section 6 of this Article V, in the absence of the Chairman of the
Board, the President shall perform all the duties and exercise the authority of
the Chairman of the Board. In the absence of the President, his duties shall be
performed and his authority may be exercised by the Chairman of the Board. In
the absence of the President and the Chairman of the Board, the duties of the
President shall be performed and his authority may be exercised by such officer
as may have been designated by the most senior officer of the Corporation who
has made any such designation, with the right reserved to the Board of Directors
to make the designation or supersede any designation so made.
Section 8. The Vice Chairmen of the Board. The several Vice Chairmen
of the Board, if any, shall perform such duties and may exercise such authority
as may from time to time be conferred upon them by the Board of Directors, the
Chairman of the Board or the President.
Section 9. The Executive Vice Presidents. The several Executive Vice
Presidents, if any, shall perform such duties and may exercise such authority as
may from time to time be conferred upon them by the Board of Directors or the
President.
Section 10. The Senior Vice Presidents. The several Senior Vice
Presidents, if any, shall perform such duties and may exercise such authority as
may from time to
<PAGE>
13
time be conferred upon them by the Board of Directors, the President, any Vice
Chairman of the Board or any Executive Vice President.
Section 11. The Vice Presidents. The several Vice Presidents, if
any, shall perform such duties and may exercise such authority as may from time
to time be conferred upon them by the Board of Directors, the President, any
Vice Chairman of the Board or any Executive Vice President.
Section 12. The Secretary. The Secretary shall attend to the giving
of notice of all meetings of stockholders and of the Board of Directors and
committees thereof, and, as provided in Section 5 of Article II and Section 9 of
Article III, shall keep minutes of all proceedings at meetings of the
stockholders and of the Board of Directors at which he is present, as well as of
all proceedings at all meetings of committees of the Board of Directors at which
he has served as secretary, and where some other person has served as secretary
thereto, the Secretary shall maintain custody of the minutes of such
proceedings. As provided in Section 2 of Article VII, he shall have charge of
the corporate seal and shall have authority to attest any and all instruments or
writings to which the same may be affixed. He shall keep and account for all
books, documents, papers and records of the Corporation, except those for which
some other officer or agent is properly accountable. He shall generally perform
all the duties usually appertaining to the office of secretary of a corporation.
In the absence of the Secretary, such person as shall be designated by the
President shall perform his duties.
Section 13. The Treasurer. The Treasurer shall have the care and
custody of all the funds of the Corporation and shall deposit the same in such
banks or other depositories as the Board of Directors or any officer or
officers, or any officer and agent jointly, thereunto duly authorized by the
Board of Directors, shall, from time to time, direct or approve. Except as
otherwise provided by the Board of Directors or in the Corporation's plan of
organization, the Treasurer shall keep a full and accurate account of all moneys
received and paid on account of the Corporation, shall render a statement of
accounts whenever the Board of Directors shall require, shall perform all other
necessary acts and duties in connection with the administration of the financial
affairs of the Corporation and shall generally perform all the duties usually
appertaining to the office of the treasurer of a corporation. Whenever required
by the Board of Directors, the Treasurer shall give bonds for the faithful
discharge of the duties of that office in such sums and with such sureties as
the Board of Directors shall approve. In the absence of the Treasurer, such
person as shall be designated by the President shall perform such duties.
Section 14. Additional Duties and Authority. In addition to the
foregoing specifically enumerated duties and authority, the several officers of
the Corporation shall perform such other duties and may exercise such further
authority as the Board of Directors may, from time to time, determine, or as may
be assigned to them by any superior officer.
Section 15. Compensation. Except as fixed or controlled by the Board
of Directors or otherwise, compensation of all officers and employees shall be
fixed by the
<PAGE>
14
President or by other officers of the Corporation exercising authority granted
to them under the plan of organization of the Corporation.
ARTICLE VI.
STOCK AND TRANSFERS OF STOCK
Section 1. Stock Certificates. The capital stock of the Corporation
shall be represented by certificates signed by, or in the name of the
Corporation by, the Chairman of the Board, the President or a Vice Chairman of
the Board, and by the Secretary or an Assistant Secretary or by the Treasurer or
an Assistant Treasurer, and sealed with the seal of the Corporation. If such
stock certificate is countersigned by a Transfer Agent other than the
Corporation or its employee or by a Registrar other than the Corporation or its
employee, any other signature on the certificate may be a facsimile, engraved or
printed. Such seal may be a facsimile, engraved or printed. In case any such
officer, Transfer Agent or Registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
Transfer Agent or Registrar before such certificate is issued by the
Corporation, it may nevertheless be issued by the Corporation with the same
effect as if such officer, Transfer Agent or Registrar had not ceased to be such
at the date of its issue. The certificates representing the capital stock of the
Corporation shall be in such form as shall be approved by the Board of
Directors.
Section 2. Transfers of Stock. Transfers of stock shall be made on
the books of the Corporation by the person named in the certificate, or by an
attorney lawfully constituted in writing, and upon surrender and cancellation of
a certificate or certificates for a like number of shares of the same class or
series of stock, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, and with such proof of the authenticity of
the signatures as the Corporation or its agents may reasonably require and with
all required stock transfer tax stamps affixed thereto and canceled or
accompanied by sufficient funds to pay such taxes.
Section 3. Lost Certificates. In case any certificate of stock shall
be lost, stolen or destroyed, the Board of Directors, in its discretion, or any
officer or officers thereunto duly authorized by the Board of Directors, may
authorize the issue of a substitute certificate in place of the certificate so
lost, stolen or destroyed; provided, however, that, in each such case, the
applicant for a substitute certificate shall furnish evidence to the
Corporation, which it determines in its discretion is satisfactory, of the loss,
theft or destruction of such certificate and of the ownership thereof, and also
such security or indemnity as may be required by it.
Section 4. Determination of Holders of Record for Certain Purposes.
In order to determine the stockholders or other holders of securities entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of capital stock or
<PAGE>
15
other securities or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, not more than sixty (60) days
prior to the date of payment of such dividend or other distribution or allotment
of such rights or the date when any such rights in respect of any change,
conversion or exchange of stock or securities may be exercised, and in such case
only holders of record on the date so fixed shall be entitled to receive payment
of such dividend or other distribution or to receive such allotment of rights,
or to exercise such rights, notwithstanding any transfer of any stock or other
securities on the books of the Corporation after any such record date fixed as
aforesaid. No record date shall precede the date on which the Board of Directors
establishes such record date.
ARTICLE VII.
CORPORATE SEAL
Section 1. Seal. The seal of the Corporation shall be in the form of
a circle and shall bear the name of the Corporation and in the center of the
circle the words "Corporate Seal, Delaware" and the figures "1973".
Section 2. Affixing and Attesting. The seal of the Corporation shall
be in the custody of the Secretary, who shall have power to affix it to the
proper corporate instruments and documents, and who shall attest it. In his
absence, it may be affixed and attested by an Assistant Secretary, or by the
Treasurer or an Assistant Treasurer or by any other person or persons as may be
designated by the Board of Directors.
ARTICLE VIII.
MISCELLANEOUS
Section 1. Fiscal Year. The fiscal year of the Corporation shall end
on the last Friday of December in each year and the succeeding fiscal year shall
begin on the day next succeeding the last day of the preceding fiscal year.
Section 2. Signatures on Negotiable Instruments. All bills, notes,
checks or other instruments for the payment of money shall be signed or
countersigned by such officers or agents and in such manner as, from time to
time, may be prescribed by resolution (whether general or special) of the Board
of Directors, or may be prescribed by any officer or officers, or any officer
and agent jointly, thereunto duly authorized by the Board of Directors.
Section 3. References to Article and Section Numbers and to the
By-Laws and the Certificate of Incorporation. Whenever in the By-Laws reference
is made to an Article or Section number, such reference is to the number of an
Article or Section of the By-Laws. Whenever in the By-Laws reference is made to
the By-Laws, such reference is to these By-Laws of the Corporation, as amended,
and whenever reference is made to the Certificate of Incorporation, such
reference is to the Certificate of
<PAGE>
16
Incorporation of the Corporation, as amended, including all documents deemed by
the General Corporation Law of the State of Delaware to constitute a part
thereof.
ARTICLE IX.
AMENDMENTS
The By-Laws may be altered, amended or repealed at any Annual
Meeting of Stockholders, or at any special meeting of holders of shares of stock
entitled to vote thereon, provided that in the case of a special meeting notice
of such proposed alteration, amendment or repeal be included in the notice of
meeting, by a vote of the holders of a majority of the shares of stock present
in person or by proxy at the meeting and entitled to vote thereon, or (except as
otherwise expressly provided in any By-Law adopted by the stockholders) by the
Board of Directors at any valid meeting by affirmative vote of a majority of the
whole Board of Directors.
The undersigned, duly qualified
Secretary of Merrill Lynch & Co., Inc., a Delaware corporation, hereby certifies
the foregoing to be a true and complete copy of the By-Laws of the said Merrill
Lynch & Co., Inc. in effect on this date.
______________________________________
Secretary
Dated:
<PAGE>
Exhibit 10(viii)
Executive Annuity Agreement
Executive Annuity Agreement dated July 24, 1991, by and between
Merrill Lynch & Co., Inc. ("ML & Co.") and Daniel P. Tully (the "Executive").
WHEREAS, the Executive has worked for ML & Co. for an extended
period and is at present President at ML & Co.; and
WHEREAS, ML & Co. desires to establish an incentive for the
Executive, based on the Executive's compensation and total period of qualifying
service, to continue to serve in the above-referenced position with ML & Co., or
in such other high senior executive position as the Board of Directors of ML &
Co. may hereafter specify, until such time as the Executive retires from ML &
Co.;
WHEREAS, the Executive's substantial expertise and knowledge
relating to the operation of the activities of ML & Co. and its affiliates is
such that ML & Co. desires that the Executive not compete with ML & Co. and its
affiliates in certain respects following the Executive's retirement from ML &
Co.; and
WHEREAS, in view of the foregoing ML & Co. has decided that an
appropriate benefit for the Executive, conditioned on continuing executive
service and non-competition after retirement, would be to provide the Executive,
and the Executive's surviving spouse, if any, with a retirement annuity which
supplements retirement benefits otherwise payable to the Executive and the
Executive's surviving spouse; and
WHEREAS, the Executive is willing to enter into this Agreement;
NOW THEREFORE, in consideration of the foregoing and the Executive's
further service with ML & Co. in a qualifying capacity, ML & Co. and the
Executive agree as follows:
SECTION 1
Definitions
In addition to the defined terms indicated above, unless otherwise
required by the context for purposes of
<PAGE>
this Agreement, each of the following terms shall have the meaning indicated for
that term:
"Affiliate" means any subsidiary or other entity that is owned at
least 50% by ML & Co. or by another such subsidiary or entity, or
that is designated by ML & Co. as an Affiliate for purposes of this
Agreement.
"Agreement" means this Executive Annuity Agreement, as it may be
amended from time to time.
"Beneficiary" means the Executive's surviving spouse, if any.
"Board" means the Board of Directors of ML & Co.
"Committee" means the Management Development and Compensation
Committee of the Board, as constituted from time to time.
"Compensation" means the highest consecutive five calendar year
average of the Executive's Eligible compensation, as defined in the
Merrill Lynch & Co., Inc. Retirement Accumulation Plan, as amended
from time to time, included in the Retirement Program, but without
regard to the $200,000 (as indexed) limit prescribed under Internal
Revenue Code Section 401(a)(17).
"Disability" means a physical or mental impairment as a result of
which the Executive is entitled to receive, or is in receipt of,
long term disability benefits under the Merrill Lynch & Co., Inc.
Basic Long Term Disability Plan, as amended from time to time.
"Executive Annuity" means the annual amount determined under Section
3.
"401(k) Savings Plan" means the Merrill Lynch & Co., Inc. 401(k)
Savings & Investment Plan, effective October 1, 1987, as amended
from time to time.
"Merrill Lynch" means ML & Co. and each Affiliate.
"Metropolitan Contract" means Group Annuity Contract No. 10438
issued as of December 29, 1988
2
<PAGE>
by Metropolitan Life Insurance Company to the Trustees of the
Pension Plan for Employees of Merrill Lynch & Co., Inc. and
Affiliates (terminated as of December 13, 1988) to provide for the
payment of Pension Plan Annuities as provided therein.
"PAYSOP" means the Payroll-Based Stock Ownership Plan for Employees
of Merrill Lynch & Co., Inc. and Affiliates, as at January 1, 1983,
as amended from time to time.
"Qualifying position" means an elected office of Merrill Lynch with
seniority level equal to or greater than that of an Executive Vice
President of ML & Co.
"Qualified Retirement Annuity" means an annual amount calculated as
the sum of the following, payable monthly for the life of the
Executive commencing as of the Retirement Date provided in Section
4:
(a) the Pension Plan Annuity, if any, of the Executive under the
provisions of the Metropolitan Contract, and
(b) the annuitized value of the aggregate of the Executive's
account balances under the Retirement Program, the 401(k)
Savings Plan as adjusted to reflect only the balance
thereunder allocable to employer contributions and investment
experience thereon (not including any amount allocable to
elective 401(k) deferrals or investment experience thereon),
and the PAYSOP, such value to be calculated by dividing such
aggregate by the applicable conversion factor for immediate
annuities payable at or after age 55 as set forth in the table
attached hereto as Appendix "A". Arithmetic interpolation (in
increments of one-twelfth for each month or any part thereof,
rounded up to the third decimal place) between the conversion
factors for two consecutive ages shall be used to determine
the conversion factor for Retirement Dates that are not
coincident with or next following the Executive's birthday.
Annuitized values shall be determined based
3
<PAGE>
upon the quarterly (in the case at the Retirement Program and
PAYSOP) or monthly (in the case of the 401(k) Savings Plan)
valuation occurring coincident with or immediately preceding
the Executive's Retirement Date or death while in Merrill
Lynch employment, as applicable.
"Retirement" means termination of the Executive's employment with
Merrill Lynch while holding a Qualifying Position, except that
Retirement shall not include such termination by (a) affirmative
vote of a majority of the whole Board, either for or without cause,
unless the Board specifically directs that such termination shall be
treated as Retirement, or (b) resignation of the Executive without
the approval of the Board, which shall not be unreasonably withheld.
"Retirement Date" means the first day of any month coincident with
or next following the Executive's Retirement as of which payment of
the Executive Annuity to or in respect of the Executive is to
commence as provided in Section 4.
"Retirement Program" means the Merrill Lynch & Co., Inc. Retirement
Accumulation Plan, effective January 1, 1969, as amended from time
to time, and the Merrill Lynch & Co., Inc. Employee Stock Ownership
Plan, effective July 1, 1969, as amended from time to time.
"Service" means the aggregate number of years and months (any
fractional part of a month being treated as a full month) of the
Executive's employment, whether or not consecutive, up to the
earliest of the Executive's 65th birthday, Retirement, or the date
or termination of this Agreement, as determined for purposes of
computing the amount of Company Retirement Contributions on behalf
of the Executive under Article III of the Merrill Lynch & Co., Inc.
Retirement Accumulation Plan, as amended from time to time, included
in the Retirement Program. Service includes all periods of
Disability.
4
<PAGE>
SECTION 2
Eligibility
An Executive Annuity shall be payable to or in respect of the
Executive only in the event of either the Retirement or death of the Executive,
in either case, while holding a Qualifying Position or, if applicable, while on
Disability, provided the Executive held a Qualifying Position immediately
preceding such Disability.
SECTION 3
Amount
Except as otherwise provided in Section 6, the amount of the
Executive Annuity to or in respect of the Executive shall be an annual sum equal
to 1.25% of the Executive's Compensation multiplied by the Executive's Service,
reduced by the Executive's Qualified Retirement Annuity, and further reduced by
(a) 10% multiplied by the number of years and months (any fractional part of a
month being treated as a full month) less than 10 years that the Executive did
not hold a Qualifying Position, up to a maximum reduction of 50%, and, (b) if
the Executive's Retirement Date or date of death is prior to the Executive's
60th birthday, 4% multiplied by the number of years and months (any fractional
part of a month being treated as a full month) between such Retirement Date or
date of death and such 60th birthday.
The amount of an Executive Annuity as determined under this Section
3 will neither be increased by any cost of living adjustments nor reduced by any
such adjustments made to the Pension Plan Annuity under the Metropolitan
Contract.
SECTION 4
Time and Forms of Payment
One-twelfth of the Executive Annuity shall be payable monthly
commencing as of the Executive's Retirement Date, which shall be at the same
time and in the same form, namely, as a Life Annuity, a 50% Joint and Survivor
Life Annuity, a 100% Joint and Survivor Life Annuity, or a 10-Year Certain and
Life Annuity, as the Pension Plan Annuity under the Metropolitan Contract that
is actually so payable to or in respect of the Executive. For purposes of
5
<PAGE>
computing an amount payable under this Agreement, the computation shall be made
in all cases by applying the relevant reduction factors provided for in the
Metropolitan Contract with reference to the Beneficiary, whether or not the
Beneficiary is also the Executive's beneficiary, if any, under the Metropolitan
Contract.
Notwithstanding the foregoing, in the event of the death of the
Executive while in Merrill Lynch employment and before Retirement, payments to
the Beneficiary, if any, shall be made as if the Executive's Retirement was on
the day before the Executive's death with the Executive having elected a 100%
Joint and Survivor Life Annuity, computed as stated in the foregoing paragraph.
SECTION 5
Administration
The Committee is authorized in its sole and absolute discretion,
without limitation, to make all determinations which it deems necessary or
advisable for the operation of this Agreement, to construe and interpret the
Agreement, to establish such rules and to delegate such of its authority as it
deems appropriate, and to perform all other acts believed reasonable and proper
in connection with this Agreement.
SECTION 6
Amendment and Termination
ML & Co. reserves the right to amend, modify, restate, or terminate
this Agreement in whole or in part, at any tine for any reason; provided,
however, that no such action shall reduce the amount of the Executive Annuity
determined under Section 3, based on the Executive's Compensation and Service as
of the effective date of such action, but with the Qualified Retirement Annuity
for purposes of the offset under Section 3 to be determined as of the
Executive's Retirement Date, or otherwise deprive the Executive or Beneficiary
of any entitlement to such Executive Annuity determined as of the effective date
of such action.
6
<PAGE>
SECTION 7
Miscellaneous
7.1 Source of Payments
The obligation of ML & Co. to pay the Executive Annuity shall be
unfunded and is solely an unsecured Promise by ML & Co. All monthly payments
shall be made, as and when due, from the general assets of ML & Co. ML a Co. is
not obligated to, but may, in its sole and absolute discretion, make
arrangements with banks or insurance companies, and establish special reserves,
accounts or funds, including a "grantor trust," and may make such investments as
deemed desirable, to assist in meeting its obligations under this Agreement. Any
such arrangements with their underlying assets, reserves, accounts, or funds
shall at all times remain general assets of ML & Co., subject to the claims of
its general creditors, and neither the Executive nor the Beneficiary shall have
any right, title, or interest whatsoever therein.
7.2 Non-Alienation
No payment or right under this Agreement is subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any
such action, shall be void and of no effect; nor are any such payments subject
to seizure, attachment, execution, garnishment, or other legal or equitable
process, or for the payment of any debts, judgments, alimony, or separate
maintenance; nor are such payments transferable by operation of law in the event
of bankruptcy, insolvency, or similar occurrence of the Executive or
Beneficiary. In the event a person who is receiving or is entitled to receive
payments under this Agreement attempts to assign, transfer, or dispose of such
payment or right, or if an attempt is made to subject said payment or right to
such process, such assignment, transfer, or disposition shall be null and void.
7.3 Forfeiture
The Executive and the Beneficiary, in the sole discretion of the
Committee, shall forfeit any right to payments under this Agreement not yet made
in the event that the Executive, following Retirement, enters into any
employment, consulting, or other relationship with any person or entity which
the Committee determines, in its sole discretion, to be in competition with
Merrill Lynch.
7
<PAGE>
Competition, for purposes of this section, means any involvement in any business
in the financial services industry, including, but not limited to, investment
banking, securities brokerage, securities trading, asset management, insurance,
and banking.
7.4 Merger, Consolidation, Sale, or Transfer of Assets
In the event ML & Co. is merged or consolidated with another entity,
or all or substantially all of the assets of ML & Co. are sold or otherwise
transferred to another entity, this Agreement shall be binding upon and inure to
the benefit of the successor or transferee resulting from or of such merger,
consolidation, sale, or transfer.
7.5 Agreement Not a Condition of Employment
Nothing in this Agreement or any action taken hereunder shall be
deemed or construed as giving the Executive any right to continued employment or
as affecting the right of Merrill Lynch to discipline (including, without
limitation, the right to discharge) the Executive at any time.
7.6 No Trust or Fiduciary Relationship Created
Nothing contained in this Agreement and no action taken pursuant to
the provisions of this Agreement shall create or be construed to create a trust
of any kind or a fiduciary relationship between Merrill Lynch, the Executive, or
any Beneficiary.
7.7 Application for Payments
An application for payments under this Agreement shall be in a form
acceptable to the Committee. The Committee may require any applicant to furnish
the Committee with such documented evidence or information as the Committee may
consider reasonably necessary or desirable.
7.8 Claims Procedure
(a) If an application for payments under this Agreement is denied,
in whole or in part, the Committee shall promptly give the
applicant written notice of the denial, setting forth the
specific reasons therefor. The notice shall include the
following:
8
<PAGE>
(i) The basis for the denial;
(ii) A reference to each Agreement provision on which the
denial is based;
(iii) A description of any additional information required of
the applicant; and
(iv) An explanation of the procedure for having a denied
application reviewed under this Agreement.
(b) The applicant may, upon receipt of a notice of a denied
application, request a review of the application by the
Committee. Such request shall be delivered in writing to any
member of the Committee. After the Committee has reviewed the
application, the final decision of the Committee shall be
communicated in writing to the applicant. Such communication
shall set forth the specific reasons for the decision with
reference to each appropriate Agreement provision.
7.9 Payments to Incompetents
If the Committee receives evidence satisfactory to it that the
Executive or Beneficiary entitled to receive any payment under this Agreement
is, at the time when such payment becomes payable, physically or mentally
incompetent to receive such payment and to give a valid release therefor and
that another person or institution is then maintaining or has custody of the
Executive or Beneficiary, and that no guardian, committee, or other
representative of the estate of the Executive or Beneficiary shall have been
duly appointed, the Committee may direct payment of such payment otherwise
payable to the Executive or Beneficiary to such other person or institution, and
the release of such other person or institution shall be a valid and complete
discharge for the payments.
7.10 Governing Law and Exclusive Venue
This Agreement shall be construed, performed and enforced under the
laws of the State of New York, without giving effect to its conflict of laws
rules, except to the extent such laws are pre-empted by federal law. The venue
with respect to any litigation involving the Agreement and a claimant shall lie
exclusively in either (a) the Supreme
9
<PAGE>
Court of the State at New York, New York County, or (b) the United States
District Court for the Southern District of New York. By continuing in
employment with Merrill Lynch after executing this Agreement, the Executive, on
behalf of the Executive and the Executive's Beneficiary, hereby waives any right
to a trial by jury in connection with any dispute relating to this Agreement.
IN WITNESS WHEREOF, the Executive and ML & Co. have duly executed
this Agreement.
Merrill Lynch & Co., Inc.
By: /s/ Patrick J. Walsh
-------------------------------
Name: Patrick J. Walsh
Title: Senior Vice President,
Director of Human Resources
Executive
/s/ Daniel P. Tully
--------------------------------
Daniel P. Tully
10
<PAGE>
APPENDIX "A"
(See "Qualified Retirement Annuity" under Section 1)
CONVERSION FACTORS FOR IMMEDIATE ANNUITIES
UP 1984 Mortality - 8% p.a. Discount Rate
Age at birthday coincident
with or immediately preceding
Retirement Date Conversion Factor
- ----------------------------- -----------------
55 9.955
56 9.801
57 9.642
58 9.477
59 9.308
60 9.133
61 8.954
62 8.770
63 8.582
64 8.39O
65 8.196
66 7.999
67 7.801
68 7.601
69 7.399
70 7.192
71 6.983
72 6.771
73 6.556
74 6.339
75 6.122
76 5.905
77 5.690
78 5.476
79 5.264
80 5.053
<PAGE>
Exhibit 10(x)
Amendment
to
Executive Annuity Agreement
---------------------------
Amending Agreement dated as of January 27, 1997 by and between Merrill
Lynch & Co., Inc. ("ML & Co.") and Daniel P. Tully (the "Executive").
WHEREAS, ML & Co. and the Executive entered into an Executive Annuity
Agreement dated July 24, 1991, which agreement was amended as of April 30, 1992,
(the "Executive Annuity Agreement"); and
WHEREAS, ML & Co. desires to further amend the Executive Annuity Agreement
to provide for an inflation adjustment to the maximum amount which may become
payable thereunder and to make a technical change to the manner in which such
maximum amount is determined; and
WHEREAS, the Executive is agreeable to such amendment;
NOW, THEREFORE, in consideration of the foregoing and the continuation of
the Executive Annuity Agreement and the Executive's further services for ML &
Co., ML & Co. and the Executive hereby agree that notwithstanding any provision
of Section 6 of the Executive Annuity Agreement to the contrary, the Executive
Annuity Agreement is hereby amended, effective as of January 27, 1997 as follow:
<PAGE>
1. Section 1 is amended by adding the following two new definitions
following the definition of "401(k) Savings Plan" therein:
"'Index Value' means the 'Personal Consumption Expenditures' index
amount published by the Economics and Statistics Administration of
the U.S. Department of Commerce for the period ending on the
December 31 or June 30 immediately prior to the relevant date or, if
such index amount is no longer published on a regular basis, such
successor index published by an agency or instrumentality of the
United States government as the Committee determines in its sole and
absolute discretion to most closely replace that index.
'Initial Index Value' means the Index Value as of January 1, 1997."
2. The last sentence of the first paragraph of Section 3 is amended to
read as follows:
"Notwithstanding the foregoing, however, the sum of the amount
payable annually to or in respect of the Executive under this
Agreement shall not exceed (i) $1,620,000, if the Executive's
Executive Annuity is payable as a Life Annuity, or a 10-year Certain
and Life Annuity as referred to in Section 4, or (ii) $1,370,000, if
the Executive's Executive Annuity is payable as a 50% or 100% Joint
and Survivor Life Annuity as referred to in Section 4, in either
case less the amount of the Executive's Qualified Retirement
Annuity."
3. Section 3 is amended by adding the following as a new second paragraph:
"The $1,620,000 and $1,370,000 limits established under the
preceding paragraph shall be adjusted as of each December 31 and
June 30 prior to the earlier of the Executive's Retirement or death
by multiplying the respective amount by a fraction, the numerator of
which is the Index Value as of the relevant date and the denominator
of which is the Initial Index Value; provided that no adjustment
shall be made as of any December 31 or June 30 if such adjustment
would result in a decrease in the limit then in effect."
<PAGE>
4. The last paragraph of Section 3 is amended by deleting the initial word
"The" and by inserting "Following the Executive's Retirement or death, the" in
lieu thereof.
IN WITNESS WHEREOF, the Executive and ML & Co. have duly executed this
Agreement.
Merrill Lynch & Co., Inc.
By: _______________________
Name: Patrick J. Walsh
Title: Senior Vice President,
Director of Human Resources
Executive
________________________________
Daniel P. Tully
<PAGE>
Exhibit 10(xxiii)
MERRILL LYNCH & CO., INC.
DEFERRED RESTRICTED UNIT PLAN
FOR EXECUTIVE OFFICERS
Purpose and Intent.
The purpose of this Deferred Restricted Unit Plan for Executive Officers
is to allow the deferral of certain Restricted Units under the Merrill Lynch &
Co., Inc. Long-Term Incentive Compensation Plan that have been awarded to
Executive Officers of Merrill Lynch & Co., Inc. ("Executive Officers"), the
terms of which awards specify that Executive Officers receiving them defer
payment of any such awards until after their Retirement from the Company. The
obligations of ML & Co. under this Plan are intended to be unfunded and
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees within the meaning of
Title I of ERISA, and all decisions concerning who is to be considered a member
of that select group and how this Agreement shall be administered and
interpreted shall be consistent with this intention.
1. Definitions.
"Account Balance" means, as of any date, Deferred Amounts credited to a
Participant's Account that are benchmarked to Benchmark Return Options other
than the KECALP Return Option, adjusted in accordance with Section 4 to reflect
the performance of the Participant's Selected Benchmark Return Options and any
payments made from the Account to the Participant prior to that date.
"Account" means the reserve account established on the books and records
of ML & Co. for each Participant to record the Participant's interest under the
Plan (other than with respect to the KECALP Return Option).
"Administrator" means the Director of Human Resources of ML & Co., or his
functional successor, or any other person or committee designated as
Administrator of the Plan by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Benchmark Return Options" means such Merrill Lynch mutual funds or other
investment vehicles as the Administrator may from time to time designate for the
purpose of indexing Accounts hereunder. In the event a Benchmark Return Option
ceases to exist or is no longer to be a Benchmark Return Option, the
Administrator may designate a substitute Benchmark Return Option for such
discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
<PAGE>
"Company" means ML & Co. and all of its Affiliates.
"Deferred Award" means the Restricted Unit Award deferred by a Participant
under this Agreement.
"Deferred Amounts" means the dollar value of the Restricted Units credited
to the Participant under Section 3 hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"KECALP Return Option" means the election to have all or a portion of
Deferred Amounts benchmarked to the performance of Merrill Lynch KECALP L.P.
1997 in accordance with the KECALP Deferred Compensation Plan.
"KECALP Deferred Compensation Plan" means the Merrill Lynch & Co., Inc.
KECALP 1997 Deferred Compensation Plan for a Select Group of Eligible Employees
attached hereto as Annex A.
"LTICP" means ML & Co.'s Long Term Incentive Compensation Plan.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the Selected Benchmark Return Option for which the value is
to be determined.
"Participant" means an Executive Officer whose Restricted Units have been
deferred under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. Deferred Restricted Unit Plan
for Executive Officers.
"Restricted Unit Award" means an award of Restricted Units, as defined in
LTICP, that was granted to the Participant in February 1994.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator,
<PAGE>
which will be granted only if the termination is found by the Administrator to
be in, or not contrary to, the best interests of the Company.
"Selected Benchmark Return Option" means a Benchmark Return Option (other
than the KECALP Return Option) selected by the Participant in accordance with
Section 4. Participants will be offered the option of using Merrill Lynch KECALP
L.P. 1997 as a benchmark, in which case, the terms of their deferral will be
governed by the KECALP Deferred Compensation Plan except to the extent provided
in Section 4.
2. Deferral.
By their terms, Restricted Unit Awards are automatically deferred upon
vesting until after Retirement. Participants may select their Benchmark Return
Options or the KECALP Return Option, as provided in Section 4, by filing out the
Election Form enclosed herewith. Deferral of the receipt of any Restricted Unit
Award is irrevocable.
3. Crediting of the Deferred Award.
In the event that a Participant's Restricted Unit Award becomes vested and
payable, the dollar amount of such vested and payable award, calculated pursuant
to Section 3.6(b) of LTICP, shall be credited to a book reserve account,
established for this purpose in your name, as soon as practicable (but in no
event later than 90 days) after the date on which such vested Restricted Unit
Award would, but for deferral, have become payable. The Account Balance will
thereafter be accounted for in accordance with Section 4 hereof (except as
provided therein).
4. Return Alternatives.
(a) Selection of Benchmark Funds. A Participant must select one or more
Benchmark Return Options and the percentage of the Participant's Account to be
adjusted to reflect the performance of each Selected Benchmark Return Option.
All elections of Selected Benchmark Return Options shall be in multiples of 10%
unless the Administrator determines that lower increments are administratively
feasible, in which case such lower increment shall apply. A Participant may, by
complying with such procedures as the Administrator may prescribe on a uniform
and nondiscriminatory basis, including procedures specifying the frequency with
respect to which such changes may be effected (but not more than twelve times in
any calendar year), change the Selected Benchmark Return Options to be
applicable with respect to a Participant's Account. For Participants who
designate Benchmark Return Options (other than the KECALP Return Option), the
amounts so deferred will be governed by this Plan.
(b) Adjustment of Account. While an Account does not represent the
ownership of, or any ownership interest in, any particular assets, the Account
shall be adjusted to reflect the investment experience of the Participant's
Selected Benchmark Return Options in the same manner as if investments in
accordance with a Participant's elections had actually been made through the ML
Benefit Services Platform and ML II Core Recordkeeping System, or any successor
system used for keeping records of Accounts (the "ML II System"). In adjusting
Accounts, the timing of receipt of the Participant's instructions by the ML II
System shall control the timing and pricing of the notional investments in the
Participant's Selected Benchmark Return Options in accordance with
<PAGE>
the rules of operation of the ML II System and its requirements for placing
corresponding investment orders, as if orders to make corresponding investments
were actually to be made, except that in connection with the crediting of
Deferred Amounts to the Participant's Account and distributions from the
Account, appropriate deferral allocation instructions shall be treated as
received from you prior to the close of transactions through the ML II System on
the relevant day. Each Selected Benchmark Return Option shall be valued using
the Net Asset Value of the Selected Benchmark Return Option as of the relevant
day; provided, that, in valuing a Selected Benchmark Return Option for which a
Net Asset Value is not computed, the value of the security involved for
determining the Participant's rights under the Plan shall be the price reported
for actual transactions in that security through the ML II System on the
relevant day, without giving effect to any transaction charges or costs
associated with such transactions; provided, further, that, if there are no such
transactions effected through the ML II System on the relevant day, the value of
the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such
security, or if such security is not traded on such principal
exchange on that day, the average of the high and low sales
prices on such exchange on the first day prior thereto on
which such security was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined
by the Administrator by whatever means he considers
appropriate in his sole discretion.
(c) Selection of the KECALP Return Option. Participants will be asked in
1997 to determine whether they wish all or a specified percentage of their
Deferred Amounts to be benchmarked to Merrill Lynch KECALP L.P. 1997. In such
event, the amounts so deferred shall be accounted for, credited to Participants,
adjusted and paid out to Participants in the manner described in the KECALP
Deferred Compensation Plan attached hereto as Annex A, except that: (1) such
Participants shall not be eligible for Leverage under the KECALP Deferred
Compensation Plan; (2) no Annual Charge shall apply to such Deferred Amounts;
and (3) Deferred Amounts indexed to the KECALP Return Option, which cannot be
paid in installments as they are payable only as there are distributions
available from Merrill Lynch KECALP L.P. 1997, shall not be paid out until after
Retirement, as defined in this Plan. For Participants who elect to index all or
a portion of their Deferred Amounts to the KECALP Return Option, such Deferred
Amounts will be indexed to the Benchmark Return Options until the closing of
Merrill Lynch KECALP L.P. 1997. Once the closing of Merrill Lynch KECALP L.P.
1997 has occurred, Participants who have chosen the KECALP Return Option will
not be able to change their election.
<PAGE>
5. No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and you, your beneficiary or estate, or any other
person. Title to and beneficial ownership of any funds represented by the
Account Balance will at all times remain in ML & Co.; such funds will continue
for all purposes to be a part of the general funds of ML & Co. and may be used
for any corporate purpose. No person will, by virtue of the provisions of this
Agreement, have any interest whatsoever in any specific assets of ML & Co.,
including any such funds. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO
RECEIVE PAYMENTS FROM ML & CO. UNDER THIS AGREEMENT, SUCH RIGHT WILL BE NO
GREATER THAN THE RIGHT OF ANY UNSECURED GENERAL CREDITOR OF ML & CO.
6. Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution.
7. Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
8.1 Payment Date.
(a) Regular Payment Elections. A Participant's Account Balance will be
paid by ML & Co., as elected by the Participant at the time of his or her
deferral election, either in a single payment to be made, or in the number of
annual installments (not to exceed 15) chosen by the Participant to commence,
(i) in the month following the month of the Participant's Retirement or death or
(ii) in any month in the calendar year following the Participant's Retirement;
provided that no election may result in the payment (in the case of a single
payment) or commencement of payment (in the case of installment payments) later
than the month following the Participant's 70th birthday. The amount of each
annual installment, if applicable, shall be determined by multiplying the
Account Balance as of the last day of the month immediately preceding the month
in which the payment is to be made by a fraction, the numerator of which is one
and the denominator of which is the number of remaining installment payments
(including the installment payment to be made). For Participants who have chosen
to have a specified portion of their Deferred Amounts benchmarked to Merrill
Lynch KECALP L.P. 1997, payment elections must be made in accordance with the
KECALP Deferred Compensation Plan, provided that no such payments shall occur
until after Retirement as defined in this Plan.
(b) Modified Installment Payments. In lieu of one of the regular payment
elections provided for in Section 8.1(a), a Participant may elect to receive the
Account Balance in at least 11 but no more than 15 annual installment payments
("modified installment payments"), such modified installment payments to
commence on the last
<PAGE>
business day in March in the year following the Participant's Retirement or
death (the "Initial Payment Date"). The modified installment payments shall be
computed in accordance with the last sentence of Section 8.1(a) and will in all
other respects be treated like regular installment payments under the Plan. By
electing modified installment payments, the Participant agrees that at any time
prior to the last day of February immediately preceding a Participant's Initial
Payment Date (the "Determination Date"), ML & Co. shall have the right, without
the consent of the Participant or any beneficiary, to change the Participant's
method of payment to 11 annuitized payments ("annuitized payments"), in the
event that the Administrator, in his sole discretion, determines that such a
change is necessary or appropriate in order to preserve the intended state tax
benefits of the modified installment payments to the Participant or any
beneficiary. In the event that the Administrator determines that annuitized
payments shall be made, the amount of the annuitized payments will be determined
by applying the Discount Rate, as defined below, to the Account Balance as of
the Determination Date to create a stream of 11 equal annual payments. If
annuitized payments are to be made, then the Account Balance shall cease to be
adjusted pursuant to Sections 4(b) as of the Determination Date and the
Company's only obligation to the Participant shall be to make the annuitized
payments when due. As used herein, Discount Rate shall mean ML & Co.'s
then-applicable cost of borrowing and is defined as the sum of: (i) the annual
yield on the then-current 5-year U.S. Treasury Note, and (ii) a spread (which
will not be less than 0.10%) indicative of ML & Co.'s borrowing cost for
transactions of similar structure and average maturity to the annuity, as
determined by ML & Co.
8.2 Termination of Employment.
(a) Death or Retirement. Upon a Participant's death or Retirement prior to
payment, the Account Balance will be paid, in accordance with the Participant's
elections and as provided in Section 8.1(a) or (b), as applicable, to the
Participant (in the event of Retirement) or to the Participant's beneficiary (in
the event of death); provided, however, that in the event that a beneficiary is
the Participant's estate or is otherwise not a natural person, then (i) if the
Participant has elected a regular payment election pursuant to Section 8.1(a),
the applicable portion of the Account Balance will be paid in a single payment
to such beneficiary notwithstanding any election of installment payments, and
(ii) if the Participant has elected modified installment payments pursuant to
Section 8.1(b), the applicable portion of the Account Balance will continue to
be payable as modified installment payments or annuitized payments, as the case
may be, but only to a single person consisting of the administrator or executor
of the Participant's estate or another person lawfully designated by the
administrator or executor (and in the event no such person is designated within
a reasonable time, payment will be made in a lump sum).
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balance will be paid to the Participant, in a single payment, as soon
thereafter as is practicable, notwithstanding the Participant's elections
hereunder.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or
<PAGE>
if the Participant is eligible to receive disability payments under the ML & Co.
Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 8.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balance be paid at some other time or that it be paid in installments; provided,
that no such direction that adversely affects the rights of the Participant or
his or her beneficiary under this Plan shall be implemented without the consent
of the affected Participant or beneficiary. This direction may be revoked by the
Administrator at any time in his sole discretion.
8.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
8.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Plan if the primary beneficiary does not
survive the Participant. The Participant may designate more than one person as
the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing, any
change in beneficiary or contingent beneficiary will automatically revoke prior
such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Plan only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan").
However, if an unmarried Participant does not have coverage in effect under the
Life Insurance Plan, or the Participant has assigned his or her death benefit
<PAGE>
under the Life Insurance Plan, any amounts payable to the Participant's
beneficiary under the Plan will be paid to the Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to Section 8.1(b), the remaining portion of the
Account Balance will continue to be paid as modified installment payments or
annuitized payments, as the case may be, but only to a single person consisting
of the administrator or executor of the beneficiary's estate or another person
lawfully designated by the administrator or executor (and in the event no such
person is designated within a reasonable time, payment will be made in a lump
sum).
8.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
8.6 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will pay
to, or to the Participant for the benefit of, the Participant's spouse or former
spouse the portion of the Participant's Account Balance specified in a valid
court order entered in a domestic relations proceeding involving the
Participant's divorce or legal separation. Such payment will be made net of any
amounts the Company may be required to withhold under applicable federal, state
or local law. After such payment, references herein to the Participant's
"Deferred Amounts" shall mean the Participant's original Deferred Amounts times
an amount equal to one minus a fraction, the numerator of which is the gross
amount (prior to withholding) paid pursuant to the order, and the denominator of
which is the Participant's Account Balance immediately prior to payment.
<PAGE>
9.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe and
administer this Plan so as to ensure that it provides deferred compensation for
the Participant as a member of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his willful misconduct or lack of good faith. The Administrator
may designate persons to carry out the specified responsibilities of the
Administrator and shall not be liable for any act or omission of a person as
designated.
9.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
9.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of the Deferred Amounts, the
Account Balance, the designation of a beneficiary, or any other matters.
10.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
10.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
10.3 Governing Law.
TO THE EXTENT NOT PREEMPTED BY APPLICABLE U.S. FEDERAL LAW, THIS PLAN WILL
BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK AS TO ALL MATTERS, INCLUDING, BUT NOT LIMITED TO, MATTERS OF VALIDITY,
CONSTRUCTION, AND PERFORMANCE.
<PAGE>
10.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balance.
<PAGE>
Exhibit 10(xxv)
As amended through December 11, 1996
MERRILL LYNCH & CO., INC.
FEE DEFERRAL PLAN
FOR NON-EMPLOYEE DIRECTORS
<PAGE>
MERRILL LYNCH & CO., INC.
FEE DEFERRAL PLAN FOR NON-EMPLOYEE DIRECTORS
Table of Contents
Page
----
I. GENERAL ...............................................................1
1.1 Purpose ........................................................1
1.2 Definitions ....................................................1
II. DEFERRAL ELECTIONS; ACCOUNT(S) ........................................5
2.1 Deferral Elections .............................................5
(a) Timing and Manner of Making of Elections .................5
(b) Irrevocability of Deferral Elections .....................5
2.2 Crediting to Accounts ..........................................5
(a) Mutual Fund Index Deferred Amounts .......................5
(b) ML Stock Unit Deferred Amounts ...........................5
(c) KECALP Deferred Amounts ..................................6
2.3 Adjustment of Mutual Fund Index Accounts; Mutual Fund
Index Account Return Options ................................6
(a) Selection of Mutual Fund Index Account
Return Options .........................................6
(b) Adjustment of Mutual Fund Index Accounts .................6
2.4 Adjustment of ML Stock Unit Accounts............................7
(a) Dividend Equivalents .....................................7
(b) Changes in Capitalization ................................7
2.5 Rescission of Mutual Fund Index Deferral Elections .............8
(a) Adverse Tax Determination ................................8
(b) Rescission For Amounts Not Yet Earned ....................8
(c) No Rescission of ML Stock Unit Deferral Elections ........8
III. STATUS OF ACCOUNT(S) ..................................................8
3.1 No Trust or Fund Created; General Creditor Status ..............8
3.2 Non-Assignability ..............................................9
3.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans .......................................9
IV. PAYMENT OF ACCOUNT(S) .................................................9
4.1 Payment ........................................................9
(a) Regular Payment Election .................................9
(b) Modified Installment Payments.............................9
(c) Payment of ML Stock Units ................................10
(d) Payment of Amounts Indexed to the KECALP
Return Option...........................................10
(e) Death Prior to Payment ...................................10
(f) Discretion to Alter Payment Date for Mutual
Fund Index Account Balance .............................10
4.2 Change in Control ..............................................10
(a) Payment of Mutual Fund Index Account Balance .............10
(b) ML Stock Unit Account Balance Unaffected .................11
4.3 Withholding of Taxes ...........................................11
i
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Page
----
4.4 Beneficiary ....................................................11
(a) Designation of Beneficiary ...............................11
(b) Change in Beneficiary ....................................11
(c) Default Beneficiary ......................................11
(d) If the Beneficiary Dies During Payment ...................11
V. ADMINISTRATION OF THE PLAN ............................................12
5.1 Powers of the Administrator ....................................12
5.2 Payments on Behalf of an Incompetent ...........................12
5.3 Corporate Books and Records Controlling ........................12
VI. MISCELLANEOUS PROVISIONS ..............................................12
6.1 Litigation .....................................................12
6.2 Headings Are Not Controlling ...................................12
6.3 Governing Law ..................................................13
6.4 Amendment and Termination ......................................13
ii
<PAGE>
MERRILL LYNCH & CO., INC.
FEE DEFERRAL PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE I
GENERAL
1.1 Purpose.
The purpose of the Plan is to provide non-employee Directors of Merrill
Lynch & Co., Inc. ("ML & Co.") with flexibility in meeting their future income
needs, and to provide an additional incentive to highly qualified individuals to
serve as Directors.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"Account(s)," with respect to any Plan Year, means the Participant's
Mutual Fund Index Account and/or ML Stock Unit Account.
"Account Balance(s)" with respect to any Plan Year means the Participant's
Mutual Fund Index Account Balance and/or ML Stock Unit Account Balance.
"Administrator" means the Director of Human Resources of ML & Co., or his
or her functional successor.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Annual Meeting" means the annual meeting of stockholders of ML & Co.
"Board of Directors" or "Board" means the Board of Directors of Merrill
Lynch & Co., Inc.
"Business Day" shall mean any day on which the New York Stock Exchange,
Inc. is open for business.
"Change in Control" means 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 Exchange Act, whether or not ML & Co. 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 ML
& Co.'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.;
<PAGE>
(b) during any period of two consecutive years (not including any
period prior to the adoption 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.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Common Stock" means the Common Stock, par value $1.33 1/3 per share, of
ML & Co., and a "share of Common Stock" means one share of Common Stock together
with, for so long as Rights are outstanding, the number of Rights then
associated with one share of Common Stock (whether trading with the Common Stock
or separately).
"Company" means ML & Co. and all of its Affiliates.
"Current Market Value" per share of Common Stock, for any date, shall mean
the average of the Daily Market Prices of a share of Common Stock for each
Business Day for which such Daily Market Prices are available during a period
commencing on a date 21 consecutive Business Days prior to such date and ending
on the second Business Day prior to such date.
"Daily Market Price" of shares of Common Stock on any given date(s) shall
be: (a) the mean of the high and low sales prices reported on the New York Stock
Exchange--Composite Tape (or, if shares of Common Stock are not traded on the
New York Stock Exchange, the mean of the high and low sales prices reported on
any securities exchange or quotation service on which the shares of Common Stock
are listed or traded) of such shares on the date(s) in question, or (b) if
shares of Common Stock are not then listed or admitted to trading on any
securities exchange as to which reported sales prices are available, the mean of
reported high bid and low asked prices on any such date(s), as reported by a
reputable quotation service, or by The Wall Street Journal, Eastern Edition or a
newspaper of general circulation in the Borough of Manhattan, City and State of
New York.
"Deferred Amounts" with respect to any Plan Year means the Participant's
Mutual Fund Index Deferred Amounts and/or ML Stock Unit Deferred Amounts and/or
KECALP Deferred Amounts.
"Director" means a member of the Board of Directors.
"Election Year" with respect to any Plan Year, means the calendar year
immediately preceding the Plan Year.
"End of Service Date" means the date on which a Participant ceases to
serve as a Director for any reason.
"Exchange Act" means the Securities Exchange Act of 1934.
"Executive Committee" means the Executive Committee of the Board of
Directors.
2
<PAGE>
"Fees" means the annual cash base compensation, committee membership fees,
if any, and committee chair fees, if any, payable to a Participant for service
on the Board and any committees of the Board during the relevant Plan Year.
"KECALP Deferral Percentage," for the 1997 Plan Year, means the percentage
specified by the Participant to be the percentage of such Participant's Annual
Fees for 1997 that he or she wishes to defer into the KECALP Unit Account.
"KECALP Deferred Compensation Plan" means the 1997 KECALP Deferred
Compensation Plan for a Select Group of Eligible Employees, attached hereto as
Exhibit A.
"KECALP Deferred Amounts," for the 1997 Plan Year, means the aggregate
dollar amount of Fees actually deferred by the Participant into a KECALP Unit
Account in the manner specified in the KECALP Deferred Compensation Plan.
"KECALP Prospective Remaining 1997 Deferred Amounts," for the 1997 Plan
Year, means aggregate dollar amount of Fees that would be paid to the
Participant in months remaining in 1997 following the closing of Merrill Lynch
KECALP L.P. 1997 multiplied by the Participant's KECALP Deferral Percentage.
"KECALP Return Option" means the option of indexing returns to the
performance of Merrill Lynch KECALP L.P. 1997, in the manner specified in the
KECALP Deferred Compensation Plan.
"KECALP Unit Account" means the account established for each Participant
electing the KECALP Return Option in the manner specified in the KECALP Deferred
Compensation Plan.
"ML Stock Unit" means a unit representing ML & Co.'s obligation to pay an
amount equal to the then Current Market Value of a share of Common Stock in cash
in accordance with the terms of the Plan.
"ML Stock Unit Account," with respect to any Plan Year, means the reserve
account established for such Plan Year on the books and records of ML & Co. to
record a Participant's ML Stock Unit Account Balance with respect to such Plan
Year.
"ML Stock Unit Account Balance," with respect to any Plan Year, means, as
of any date, the ML Stock Units credited to a Participant's ML Stock Unit
Account for such Plan Year, adjusted in accordance with Section 2.4 to reflect
the addition of dividend equivalents and any changes in capitalization and
adjusted for any payments made from the ML Stock Unit Account to the Participant
prior to that date.
"ML Stock Unit Deferral Percentage," with respect to any Plan Year, means
the percentage specified by the Participant to be the percentage of each payment
of Fees he or she wishes to defer into an ML Stock Unit Account under the Plan
during such Plan Year.
"ML Stock Unit Deferred Amounts," with respect to any Plan Year, means the
dollar amounts of Fees actually deferred by the Participant into an ML Stock
Unit Account under the Plan for such Plan Year.
"Mutual Fund Index Account," with respect to any Plan Year, means the
reserve account established for such Plan Year on the books and records of ML &
Co. to record a Participant's Mutual Fund Index Account Balance with respect to
such Plan Year.
3
<PAGE>
"Mutual Fund Index Account Balance," with respect to any Plan Year, means,
as of any date, the Mutual Fund Index Deferred Amounts credited to a
Participant's Mutual Fund Index Account for such Plan Year, adjusted in
accordance with Section 2.3 to reflect the performance of the Participant's
Selected Mutual Fund Index Account Return Options and adjusted for any payments
made from the Mutual Fund Index Account to the Participant prior to that date.
"Mutual Fund Index Account Return Options" means such Merrill Lynch mutual
funds or other investment vehicles as the Administrator may from time to time
designate for the purpose of indexing Mutual Fund Index Accounts hereunder. In
the event a Mutual Fund Index Account Return Option ceases to exist or is no
longer to be a Mutual Fund Index Account Return Option, the Administrator may
designate a substitute Mutual Fund Index Account Return Option for such
discontinued option. In no event may the Administrator designate as a Mutual
Fund Index Account Return Option any equity security of ML & Co. or any security
that would be deemed to be a "derivative security" as defined in Rule 16a-1 of
the Exchange Act with respect to any ML & Co. equity security.
"Mutual Fund Index Deferral Percentage," with respect to any Plan Year,
means the percentage specified by the Participant to be the percentage of each
payment of Fees he or she wishes to defer into a Mutual Fund Index Account under
the Plan during such Plan Year.
"Mutual Fund Index Deferred Amounts" with respect to any Plan Year means
the dollar amounts of Fees actually deferred by the Participant into a Mutual
Fund Index Account under this Plan for such Plan Year.
"Net Asset Value" means, with respect to each Mutual Fund Index Account
Return Option that is a mutual fund or other commingled investment vehicle for
which such values are determined in the normal course of business, the net asset
value, on the date in question, of the Selected Mutual Fund Index Account Return
Option for which the value is to be determined.
"Non-Employee Director" means a Director who is not an employee of the
Company.
"Participant," with respect to any Plan Year, means a Non-Employee
Director who has elected to defer Fees under the Plan for such Plan Year.
"Plan" means this Merrill Lynch & Co., Inc. Fee Deferral Plan for
Non-Employee Directors.
"Plan Year" means any calendar year for which Non-Employee Directors are
offered the opportunity to defer Fees under the Plan.
"Rights" means the Rights to Purchase Units of Series A Junior Preferred
Stock, par value $1.00 per share, of ML & Co. issued pursuant to 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.
"Selected Mutual Fund Index Account Return Option" means a Mutual Fund
Index Account Return Option selected by the Participant in accordance with
Section 2.3.
"Tender Offer" shall mean an offer to purchase all or a portion of the
outstanding shares of Common Stock that is subject to Section 14D of the
Exchange Act, provided that such offer, if consummated, would result in a Change
in Control.
4
<PAGE>
ARTICLE II
DEFERRAL ELECTIONS; ACCOUNT(S)
2.1 Deferral Elections.
(a) Timing and Manner of Making of Elections. An election to defer Fees
for payment in accordance with Section 4.1 shall be made by submitting to the
Administrator such forms as the Administrator may prescribe. Each election
submitted must specify a Mutual Fund Index Deferral Percentage and/or a ML Stock
Unit Deferral Percentage, which will be applied to reduce all payments of Fees
during the Plan Year. All elections by a Participant to defer Fees under the
Plan must be received by the Administrator or such person as he or she may
designate for the purpose by the date specified by the Administrator, which
shall be no later than the last Business Day of the Election Year; provided,
however, that any Non-Employee Director who is first nominated for election to
the Board at the Annual Meeting occurring in the Plan Year may make an election
to defer Fees for the Plan Year by submitting the appropriate forms to the
Administrator or his designee no later than ten business days prior to the date
of such Annual Meeting. For the 1997 Plan Year, Participants who have elected to
defer all or a portion of their Fees will be given the opportunity in the first
half of 1997 to elect to have all or a portion of Fees (other than those indexed
to ML Stock) indexed to the KECALP Return Option.
(b) Irrevocability of Deferral Elections. Except as provided in Section
2.5, an election to defer the receipt of any Fees made under Section 2.1(a) is
irrevocable once submitted to the Administrator or his or her designee.
Furthermore, an election to defer Fees into a Mutual Fund Index Account may not
subsequently be changed to an election to defer Fees into a ML Stock Unit
Account, and an election to defer Fees into a ML Stock Unit Account may not
subsequently be changed to an election to defer Fees into a Mutual Fund Index
Account or a KECALP Unit Account. Participants who elect to defer Fees into a
Mutual Fund Index Account will be given the opportunity in 1997 to elect that
all or a portion of those Fees may be indexed to the KECALP Return Option as of
the closing of Merrill Lynch KECALP L.P. 1997. Once Merrill Lynch KECALP L.P.
1997 has closed, such election may not be changed.
2.2 Crediting to Accounts.
(a) Mutual Fund Index Deferred Amounts. A Participant's Mutual Fund Index
Deferred Amounts will be credited to the Participant's Mutual Fund Index Account
as a dollar-denominated balance as soon as practicable (but in no event later
than the end of the following month) after the last day of the Fiscal Month
during which such Deferred Amounts would, but for deferral, have been paid and
will be accounted for in accordance with Section 2.3. No interest will accrue,
nor will any adjustment be made to the Account, for the period until the
Deferred Amounts are credited. (Mutual Fund Index Deferred Amounts may not
subsequently be converted to ML Stock Unit Deferred Amounts. After the closing
of Merrill Lynch KECALP L.P. 1997, Mutual Fund Index Deferred Amounts may not be
converted to KECALP Deferred Amounts.
(b) ML Stock Unit Deferred Amounts. A Participant's ML Stock Unit Deferred
Amounts will be converted to ML Stock Units and credited to the Participant's ML
Stock Unit Account as soon as practicable (but in no event later than the end of
the following month) after the last day of the Fiscal Month during which such
Deferred Amounts would, but for deferral, have been paid, and will be accounted
for in accordance with Section 2.4. The number of ML Stock Units to be credited
will be determined by dividing the ML Stock Unit Deferred Amounts for the
relevant calendar month by the
5
<PAGE>
Daily Market Price per share of Common Stock for the last Business Day in such
calendar month and rounding the result to the nearest 1/100th of an ML Stock
Unit (with .005 being rounded upwards). ML Stock Unit Deferred Amounts may not
subsequently be converted to Mutual Fund Index Deferred Amounts or KECALP
Deferred Amounts.
(c) KECALP Deferred Amounts. In 1997, Participants who have elected to
defer Fees under this Agreement into a Mutual Fund Index Account will be asked
if they wish to elect that all or a portion of such Deferred Amounts be indexed
to the KECALP Return Option. If such election is made, upon the closing of
Merrill Lynch KECALP L.P. 1997 an amount equal to: (i) all or a portion of such
Participant's Mutual Fund Index Account Balance plus (ii) such Participant's
KECALP Prospective Remaining 1997 Deferred Amounts shall be credited to the
Participant's KECALP Unit Account as a dollar-denominated balance as soon as
practicable, provided that, in the event that a Participant's End of Service
Date occurs prior to the end of 1997, the Participant's KECALP Unit Account
Balance shall be restated by the Administrator to reflect the forfeiture of any
KECALP Units attributable to any KECALP Remaining 1997 Deferred Amounts relating
to any full month for which Fees were not payable to such Participant. KECALP
Deferred Amounts shall be credited to such Participant, accounted for, adjusted
and paid out to Participants in the manner described in the KECALP Deferred
Compensation Plan attached hereto as Annex A, except that: (1) such Participants
shall not be eligible for Leverage under the KECALP Deferred Compensation Plan,
and (2) no Annual Charge shall apply to such Deferred Amounts. Payouts relating
to KECALP Deferred Amounts cannot be made in installments as they are payable
only as distributions become available from Merrill Lynch KECALP L.P. 1997.
KECALP Deferred Amounts may not subsequently be converted to Mutual Fund Index
Deferred Amounts or ML Stock Unit Deferred Amounts, except that, when
distributions occur under Merrill Lynch KECALP L.P. 1997 that are not by the
terms of a Participant's election immediately payable to such Participant, such
distributions will be paid into and adjusted in accordance with such
Participant's Selected Mutual Fund Index Account Return Options.
2.3 Adjustment of Mutual Fund Index Accounts; Mutual Fund Index Account Return
Options.
(a) Selection of Mutual Fund Index Account Return Options. Coincident with
the Participant's election to defer Fees into a Mutual Fund Index Account, the
Participant must select one or more Mutual Fund Index Account Return Options and
the percentage of the Participant's Mutual Fund Index Account to be adjusted to
reflect the performance of each Selected Mutual Fund Index Account Return
Option. A Participant may, by complying with such procedures as the
Administrator may prescribe, including procedures specifying the frequency with
respect to which such changes may be effected (but not more than twelve times in
any calendar year), change the Selected Mutual Fund Index Account Return Options
to be applicable with respect to his or her Mutual Fund Index Account.
(b) Adjustment of Mutual Fund Index Accounts. While a Participant's Mutual
Fund Index Account does not represent the Participant's ownership of, or any
ownership interest in, any particular assets, the Mutual Fund Index Account
shall be adjusted to reflect the investment experience of the Participant's
Selected Mutual Fund Index Account Return Options in the same manner as if
investments in accordance with the Participant's elections had actually been
made through the ML Benefit Services Platform and ML II Core Recordkeeping
System, or any successor system used for keeping records of Participants' Mutual
Fund Index Accounts (the "ML II System"). In adjusting Mutual Fund Index
Accounts, the timing of receipt of Participant instructions by the ML II System
shall control the timing and pricing of the notional investments in the
Participant's Selected Mutual Fund Index Account Return Options in accordance
with the rules of operation of the ML II System and its requirements for placing
corresponding investment orders, as if orders to make
6
<PAGE>
corresponding investments were actually to be made, except that in connection
with the crediting of Mutual Fund Index Deferred Amounts to the Participant's
Mutual Fund Index Account and distributions from the Mutual Fund Index Account,
deferral allocation instructions shall be treated as if received by the ML II
System prior to the close of transactions through the ML II System on the
relevant day. Each Selected Mutual Fund Index Account Return Option shall be
valued using the Net Asset Value of the Selected Mutual Fund Index Account
Return Option as of the relevant day, provided, that, in valuing a Selected
Mutual Fund Index Account Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions,
provided, further, that, if there are no such transactions effected through the
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such
security, or if such security is not traded on such principal
exchange on that day, the average of the high and low sales
prices on such exchange on the first day prior thereto on
which such security was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined
by the Administrator by whatever means he or she considers
appropriate in his or her sole discretion.
2.4 Adjustment of ML Stock Unit Accounts.
(a) Dividend Equivalents. Whenever a cash dividend is paid on a share of
Common Stock, a Participant's ML Stock Unit Account will be adjusted by adding
to the ML Stock Unit Account the number of ML Stock Units determined by
multiplying the per share amount of the cash dividend by the ML Stock Unit
Account Balance on the record date for the cash dividend, dividing the result by
the price per share of Common Stock used for purposes of the reinvestment of
such cash dividend in the Merrill Lynch & Co., Inc. Dividend Reinvestment
Program currently administered by Group Employee Services, or if at any time
there is no Dividend Reinvestment Program, the Daily Market Price of a share of
Common Stock on the date the cash dividend is paid, and rounding the result to
the nearest 1/100th of a ML Stock Unit (with .005 being rounded upwards);
provided that, if the Participant's ML Stock Unit Account Balance is fully
distributed (i.e., reduced to zero) in accordance with the Plan between the
record date and the payment date for such cash dividend, then, in lieu of such
adjustment, the Participant will be paid the amount of cash determined by
multiplying the per share amount of the cash dividend by the ML Stock Unit
Account Balance on the record date for the cash dividend and rounding the result
to the nearest whole cent, at the same time and in the same manner as such cash
dividend is paid to the holders of the Common Stock.
(b) 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 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),
including, without limitation, a merger or other reorganization event in which
the shares of Common Stock cease to exist, the Executive Committee or the Board
of Directors shall make such adjustments to ML Stock Unit Accounts, if any, as
shall be necessary to maintain the proportionate
7
<PAGE>
interest of the Participants and to preserve, without exceeding, the value of
their ML Stock Unit Account Balances. 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.
2.5 Rescission of Mutual Fund Index Deferral Elections.
(a) Adverse Tax Determination. Notwithstanding the provisions of Section
2.1(b), an election to defer Fees into a Mutual Fund Index Account may be
rescinded at any time if (i) a final determination is made by a court or other
governmental body of competent jurisdiction that the election was ineffective to
defer income for purposes of U.S. Federal, state, local or foreign income
taxation and the time for appeal from this determination has expired, and (ii)
the Administrator, in his or her sole discretion, decides, upon the
Participant's request and upon evidence of the occurrence of the events
described in (i) hereof that he or she finds persuasive, to rescind the
election. Upon such rescission, the Mutual Fund Index Account Balance will be
paid to the Participant as soon as practicable, and no additional amounts will
be deferred into the Participant's Mutual Fund Index Account pursuant to this
Plan.
(b) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his or her sole discretion terminate any
election to defer Fees into a Mutual Fund Index Account made hereunder with
respect to Fees not yet earned and no further amounts will be deferred into the
Participant's Mutual Fund Index Account. Fees previously deferred into the
Mutual Fund Index Account will continue to be governed by the terms of this
Plan.
(c) No Rescission of ML Stock Unit or KECALP Deferral Elections. No
rescission of an election to defer Fees into an ML Stock Unit Account or a
KECALP Unit Account shall be permitted under the Plan.
ARTICLE III
STATUS OF ACCOUNT(S)
3.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and any Participant, the Participant's beneficiary
or estate, or any other person. Title to and beneficial ownership of any funds
represented by the Account Balance(s) will at all times remain in ML & Co.; such
funds will continue for all purposes to be a part of the general funds of ML &
Co. and may be used for any corporate purpose. No person will, by virtue of the
provisions of this Plan, have any interest whatsoever in any specific assets of
the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO RECEIVE PAYMENTS
FROM ML & CO. UNDER THIS PLAN, SUCH RIGHT WILL BE NO GREATER THAN THE RIGHT OF
ANY UNSECURED GENERAL CREDITOR OF ML & CO.
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<PAGE>
3.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance(s) or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution; provided, however, that the specified portion of the Participant's
Account(s) will be paid to the Participant's spouse or former spouse to the
extent directed by a valid court order entered in a domestic relations
proceeding involving the Participant's divorce or legal separation.
3.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
ARTICLE IV
PAYMENT OF ACCOUNT(S)
4.1 Payment.
(a) Regular Payment Election. A Participant's Account Balance(s) (other
than a KECALP Unit Account Balance) will be paid in cash by ML & Co., as elected
by the Participant at the time of his or her deferral election, either in a
single payment to be made, or in the number of annual installment payments (not
to exceed 15) chosen by the Participant to commence, (i) in the month following
the month of the Participant's End of Service Date or death, (ii) in any month
and year selected by the Participant not less than seven months after the end of
the Plan Year, or (iii) in any month in the calendar year following the
Participant's End of Service Date. The amount of each annual installment
payment, if applicable, shall be determined by multiplying the Account
Balance(s) as of the last day of the month immediately preceding the month in
which the payment is to be made by a fraction, the numerator of which is one and
the denominator of which is the number of remaining installment payments
(including the installment payment to be made).
(b) Modified Installment Payments. In lieu of one of the regular payment
elections provided for in Section 4.1(a), a Participant may elect to receive the
Account Balance(s) (other than a KECALP Unit Account Balance) in at least 11 but
no more than 15 annual installment payments ("modified installment payments"),
such modified installment payments to commence on the last business day in March
in the year following the Participant's Retirement or death (the "Initial
Payment Date"). The modified installment payments shall be computed in
accordance with the last sentence of Section 4.1(a) and will in all other
respects be treated like regular installment payments under the Plan. By
electing modified installment payments, the Participant agrees that at any time
prior to the last day of February immediately preceding a Participant's Initial
Payment Date (the "Determination Date"), ML & Co. shall have the right, without
the consent of the Participant or any beneficiary, to change the Participant's
method of payment to 11 annuitized payments ("annuitized payments"), in the
event that the Administrator, in his sole discretion, determines that such a
change is necessary or appropriate in order to preserve the intended state tax
benefits of the modified installment payments to the Participant or any
beneficiary. In the event that the Administrator determines that annuitized
payments shall be made, the amount of the annuitized payments will be determined
by applying the Discount Rate, as defined below, to the Account Balance as of
the Determination Date to create a stream of 11 equal annual payments. If
annuitized payments are to be made, then the Account Balance shall cease to be
adjusted pursuant to Sections 2.3 and 2.4 as
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<PAGE>
of the Determination Date and the Company's only obligation to the Participant
shall be to make the annuitized payments when due. As used herein, Discount Rate
shall mean ML & Co.'s then-applicable cost of borrowing and is defined the sum
of: (i) the annual yield on the then-current 5-year U.S. Treasury Note, and (ii)
a spread (which will not be less than 0.10%) indicative of ML & Co.'s borrowing
cost for transactions of similar structure and average maturity to the annuity,
as determined by ML & Co.
(c) Payment of ML Stock Units. ML Stock Units will be paid only in cash.
The amount of any payment of ML Stock Units (whether pursuant to the
Participant's election or otherwise pursuant to the Plan) will be determined by
multiplying the number of ML Stock Units to be paid by the Current Market Value
per share of Common Stock for the last day of the month immediately preceding
the month in which the payment is to be made and rounding the result to the
nearest whole cent.
(d) Payment of Amounts Indexed to KECALP Return Option. Notwithstanding
any elections made under this Plan, KECALP Deferred Amounts cannot be paid in
installments as they are payable only as distributions become available from
Merrill Lynch KECALP L.P. 1997. Participants electing the KECALP Return Option
in 1997 will be asked at the time such election is made to make elections
concerning the timing of their payouts that are in accordance with the KECALP
Deferred Compensation Plan.
(e) Death Prior to Payment. If the Participant dies prior to payment, then
the Account Balance(s) ) (other than a KECALP Unit Account Balance) will be paid
to the Participant's beneficiary in accordance with the Participant's election
of either installment payments or a single payment, provided, however, that in
the event that a beneficiary of the Participant's Account is the Participant's
estate or is otherwise not a natural person, then (i) if the Participant has
elected a regular payment election pursuant to Section 4.1(a), the applicable
portion of the Account Balance will be paid in a single payment to such
beneficiary notwithstanding any election of installment payments, and (ii) if
the Participant has elected modified installment payments pursuant to Section
4.1(b), the applicable portion of the Account Balance will continue to be
payable as modified installment payments or annuitized payments, as the case may
be, but only to a single person consisting of the administrator or executor of
the Participant's estate or another person lawfully designated by the
administrator or executor (and in the event no such person is designated within
a reasonable time, payment will be made in a lump sum).
(f) Discretion to Alter Payment Date for Mutual Fund Index Account
Balance. Notwithstanding the other provisions of this Section 4.1, if the
Participant ceases to be a Director for any reason, the Administrator may, in
his or her sole discretion, direct that any Mutual Fund Index Account Balance be
paid at some other time or that it be paid in installments; provided, that no
such direction that adversely affects the rights of the Participant or his or
her beneficiary under this Plan shall be implemented without the consent of the
affected Participant or beneficiary. This direction may be revoked by the
Administrator at any time in his or her sole discretion. This Section 4.1(f)
shall not be applicable to the payment of any ML Stock Unit Account Balance.
4.2 Change in Control.
(a) Payment of Mutual Fund Index Account Balance. Notwithstanding any
other provision of this Plan, in the event that (i) ML & Co. receives a Tender
Offer Statement on Schedule 14D-1 under the Securities Exchange Act of 1934
relating to a Tender Offer or (ii) a Change in Control shall occur, any Mutual
Fund Index Account Balance will be paid to the Participant in a lump
10
<PAGE>
sum as soon as practicable after the receipt of such Tender Offer Statement or
the occurrence of such Change in Control, and in any event, not later than 30
days thereafter.
(b) ML Stock Unit Account Balance Unaffected. The occurrence of an event
specified in Section 4.2(a)(i) or (ii) hereof shall have no effect on the timing
of payment or the obligation of ML & Co. to pay a Participant's ML Stock Unit
Account Balance, which shall continue to be governed by Section 4.1 hereof.
4.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
4.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his or her designee before the
Participant's death, a beneficiary to receive payments in the event of the
Participant's death. The Participant may also designate a contingent beneficiary
to receive payments in accordance with this Plan if the primary beneficiary does
not survive the Participant. The Participant may designate more than one person
as the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his or her designee
before the Participant's death. Unless the Participant states otherwise in
writing, any change in beneficiary or contingent beneficiary will automatically
revoke such prior designations of the Participant's beneficiary or of the
Participant's contingent beneficiary, as the case may be, under this Plan only;
and any designations under other deferral agreements or plans of the Company
will remain unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. pre-retirement death benefit for Non-Employee Directors,
unless the rights to such benefit have been assigned, in which case any amounts
payable to the Participant's beneficiary under the Plan will be paid to the
Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant but before all the payments have been made, the portion of the
Account Balance(s) to which that beneficiary was entitled will be paid as soon
as practicable in a single payment to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated provided, however,
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to Section 4.1(b), the applicable portion of the
Account Balance will continue to be paid as modified installment payments or
annuitized payments, as the case may be, but only to a single person consisting
of the
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<PAGE>
administrator or executor of the beneficiary's estate or another person lawfully
designated by the administrator or executor (and in the event no such person is
designated within a reasonable time, payment will be made in a lump sum).
ARTICLE V
ADMINISTRATION OF THE PLAN
5.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe, and
administer this Plan. The Administrator's interpretations and construction
hereof, and actions hereunder, including any determinations regarding the amount
or recipient of any payments, will be binding and conclusive on all persons for
all purposes. The Administrator will not be liable to any person for any action
taken or omitted in connection with the interpretation and administration of
this Plan unless attributable to his or her willful misconduct or lack of good
faith. The Administrator may designate persons to carry out the specified
responsibilities of the Administrator and shall not be liable for any act or
omission of a person as designated.
5.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is presently entitled to
any payment hereunder is a minor or is unable to care for his or her affairs
because of disability or incompetency, payment of the Account Balance(s) may be
made to anyone found by the Administrator to be the committee or other
authorized representative of such person, or to be otherwise entitled to such
payment, in the manner and under the conditions that the Administrator
determines. Such payment will be a complete discharge of the liabilities of ML &
Co. hereunder with respect to the amounts so paid.
5.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of the Deferred Amounts, the
Account Balance(s), the designation of a beneficiary, or any other matters.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
6.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
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6.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Plan will
be construed in accordance with and governed by the laws of the State of New
York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
6.4 Amendment and Termination.
The Executive Committee or the Board of Directors may amend or terminate
this Plan at any time, provided that no amendment or termination may be made
that adversely affect the right of a Participant to his or her Account
Balance(s) as of the date of such amendment or termination.
13
e<PAGE>
Exhibit 10(xxvii)
MERRILL LYNCH & CO., INC.
1997 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF JANUARY 27, 1997
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
<PAGE>
MERRILL LYNCH & CO., INC.
1997 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
Page
----
I. GENERAL ................................................................1
1.1 Purpose and Intent .................................................1
1.2 Definitions ........................................................1
II. ELIGIBILITY ............................................................4
2.1 Eligible Employees .................................................4
(a) General Rule ...................................................4
(b) Individuals First Employed During Election Year or Plan Year ...4
(c) Disqualifying Factors ..........................................4
III. DEFERRAL ELECTIONS; ACCOUNTS ...........................................4
3.1 Deferral Elections .................................................4
(a) Timing and Manner of Making of Elections .......................4
(b) Irrevocability of Deferral Election ............................5
(c) Application of Election ........................................5
3.2 Crediting to Accounts ..............................................5
3.3 Minimum Requirements for Deferral ..................................5
(a) Minimum Requirements ...........................................5
(b) Failure to Meet Requirements ...................................5
3.4 Benchmark Return Options; Adjustment of Accounts ...................6
(a) Selection of Benchmark Return Options ..........................6
(b) Adjustment of Accounts .........................................6
(c) Annual Charge ..................................................7
3.5 Rescission of Deferral Election ....................................7
(a) Prior to December 1, 1996 ......................................7
(b) Adverse Tax Determination ......................................7
(c) Rescission For Amounts Not Yet Earned ..........................7
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT .................................8
4.1 No Trust or Fund Created; General Creditor Status ..................8
4.2 Non-Assignability ..................................................8
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans ...........................................8
V. PAYMENT OF ACCOUNT .....................................................8
5.1 Manner of Payment ..................................................8
(a) Payment Elections ..............................................8
(b) Modified Installment Payments ..................................9
5.2 Termination of Employment ..........................................9
(a) Death or Retirement ............................................9
(b) Other Termination of Employment ................................9
(c) Leave of Absence, Transfer or Disability .......................10
(d) Discretion to Alter Payment Date ...............................10
-i-
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Page
----
5.3 Withholding of Taxes ...............................................10
5.4 Beneficiary ........................................................10
(a) Designation of Beneficiary .....................................10
(b) Change in Beneficiary ..........................................10
(c) Default Beneficiary ............................................10
(d) If the Beneficiary Dies During Payment .........................11
5.5 Hardship Distributions .............................................11
5.6 Domestic Relations Orders ..........................................11
VI. ADMINISTRATION OF THE PLAN .............................................12
6.1 Powers of the Administrator ........................................12
6.2 Payments on Behalf of an Incompetent ...............................12
6.3 Corporate Books and Records Controlling ............................12
VII. MISCELLANEOUS PROVISIONS ...............................................12
7.1 Litigation .........................................................12
7.2 Headings Are Not Controlling .......................................12
7.3 Governing Law ......................................................13
7.4 Amendment and Termination ..........................................13
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
1997 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
ARTICLE I
GENERAL
1.1 Purpose and Intent.
The purpose of the Plan is to encourage the employees who are integral to
the success of the business of the Company to continue their employment by
providing them with flexibility in meeting their future income needs. It is
intended that this Plan be unfunded and maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees within the meaning of Title I of ERISA, and all decisions
concerning who is to be considered a member of that select group and how this
Plan shall be administered and interpreted shall be consistent with this
intention.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"Account Balance" means, as of any date, the Deferred Amounts credited to
a Participant's Account, adjusted in accordance with Section 3.4 to reflect the
performance of the Participant's Selected Benchmark Return Options, the Annual
Charge and any payments made from the Account to the Participant prior to that
date.
"Account" means the reserve account established on the books and records
of ML & Co. for each Participant to record the Participant's interest under the
Plan.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation or estate planning and
business insurance specialist incentive compensation, in each case exclusive of
base salary, earned by a Participant during the Fiscal Year ending in 1997, and
payable after January 1, 1997, as a result of the Participant's production
credit level, or such other similar items of compensation as the Administrator
shall designate as "Adjusted Compensation" for purposes of this Plan.
"Administrator" means the Director of Human Resources of ML & Co., or his
functional successor, or any other person or committee designated as
Administrator of the Plan by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Annual Charge" means the charge to the Participant's Account provided for
in Section 3.4(c).
"Benchmark Return Options" means such Merrill Lynch mutual funds or other
investment vehicles as the Administrator may from time to time designate for the
purpose of indexing Accounts hereunder. In the event a Benchmark Return Option
ceases to exist or is no longer to be a Benchmark Return Option, the
Administrator may designate a substitute Benchmark Return Option for such
discontinued option.
<PAGE>
"Board of Directors" means the Board of Directors of ML & Co.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation and/or Sign-On Bonus, or such other items or
items of compensation as the Administrator, in his sole discretion, may specify
in a particular instance.
"Deferral Percentage" means the percentage (which, unless the
Administrator, in his sole discretion, determines otherwise, shall be in whole
percentage increments and not more than 90%), specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Plan.
"Deferred Amounts" means, except as provided in Section 5.6, the amounts
of Compensation actually deferred by the Participant under this Plan.
"Election Year" means the 1996 calendar year.
"Eligible Compensation" means a Participant's "eligible compensation" as
determined, from time to time, for purposes of ML & Co.'s Basic Group Life
Insurance Plan.
"Eligible Employee" means an employee eligible to defer amounts under this
Plan, as determined under Section 2.1 hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiscal Month" means the monthly period used by ML & Co. for financial
accounting purposes.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"Full-Time Domestic Employee" means a full-time employee of the Company
paid from the Company's domestic based payroll (other than any U.S. citizen or
"green card" holder who is employed outside the United States).
"Full-Time Expatriate Employee" means a U.S. citizen or "green card"
holder employed by the Company outside the United States and selected by the
Administrator as eligible to participate in the Plan (subject to the other
eligibility criteria).
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Plan.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
2
<PAGE>
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the Selected Benchmark Return Option for which the value is
to be determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. 1997 Deferred Compensation
Plan for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 1997.
"Remaining Deferred Amounts" means a Participant's Deferred Amounts times
a fraction equal to the number of remaining installment payments divided by the
total number of installment payments.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
"Selected Benchmark Return Option" means a Benchmark Return Option
selected by the Participant in accordance with Section 3.4.
"Sign-On Bonus" means a single-sum amount paid or payable to a new
Eligible Employee during the Plan Year upon commencement of employment, in
addition to base pay and other Compensation, to induce him or her to become an
employee of the Company, or any similar item of compensation as the
Administrator shall designate as "Sign-On Bonus" for purposes of this Plan.
"Variable Incentive Compensation" means the variable incentive
compensation or office manager incentive compensation that is paid in cash to
certain employees of the Company generally in January or February of the Plan
Year with respect to the prior Fiscal Year, which for purposes of this Plan is
considered earned during the Plan Year regardless of when it is actually paid to
the Participant, or such other similar items of compensation as the
Administrator shall designate as "Variable Incentive Compensation" for purposes
of this Plan.
"401(k) Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan.
3
<PAGE>
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
(a) General Rule. An individual is an Eligible Employee if he or she (i)
is a Full-Time Domestic Employee or a Full-Time Expatriate Employee, (ii) has at
least $200,000 of Eligible Compensation for the Election Year, (iii) has
attained at least the title of Vice President, Director or Managing Director, or
holds a National Sales Management position with the Company (a "National Sales
Manager"), and (iv) (A) is a financial consultant or an estate planning and
business insurance specialist, who was a member in 1996 of the Chairman's Club,
the Charles E. Merrill Circle, the Society of Eagles, the Falcons Club or the
Win Smith Fellows, (B) is a National Sales Manager (C) is a member of the
International Private Banking Group, (D) is employed as an Investment Manager
for Merrill Lynch Asset Management, (E) is a non-producing employee in the
Senior Manager or Senior Consultant Band (Q Band) or above, or (F) is a
producing employee in grade 95 or above; provided, that non-producing employees
in the Director Band (R Band) or above and producing employees in grade 97 or
above (or their executive equivalents) shall not be required to meet condition
(ii) hereof, and provided, further, that employees who were 1994 Win Smith
Fellows shall not be required to meet condition (iii) hereof.
(b) Individuals First Employed During Election Year or Plan Year. Subject
to the approval of the Administrator in his sole discretion, an individual who
is first employed by the Company during the Election Year or the Plan Year is an
Eligible Employee if his or her Eligible Compensation is greater than $200,000
and he or she is either employed as a National Sales Manager or is to be
nominated for at least the title of Vice President, Director or Managing
Director at the first opportunity following his or her commencement of
employment with the Company.
(c) Disqualifying Factors. An individual shall not, however, be an
Eligible Employee if either (i) as of the deadline for submission of elections
specified in Section 3.1(a) the individual's wages have been attached or are
being garnished or are otherwise restrained pursuant to legal process or (ii)
within 13 months prior to the deadline for submission of elections specified in
Section 3.1(a), the individual has made a hardship withdrawal of Elective 401(k)
Deferrals as defined under the 401(k) Plan.
ARTICLE III
DEFERRAL ELECTIONS; ACCOUNTS
3.1 Deferral Elections.
(a) Timing and Manner of Making of Elections. An election to defer
Compensation for payment in accordance with Section 5.1 shall be made by
submitting to the Administrator such forms as the Administrator may prescribe.
Each election submitted must specify a Maximum Deferral and a Deferral
Percentage with respect to each category of Compensation to be deferred. All
elections by a Participant to defer Compensation under the Plan must be received
by the Administrator or such person as he may designate for the purpose by no
later than September 30 of the Election Year (or such later date at the
Administrator, in his sole discretion, may specify in any particular instance)
or, in the event such date is not a business day, the immediately preceding
business day; provided, however, that the Eligible Employee's election to defer
a Sign-On Bonus
4
<PAGE>
must be part of such Eligible Employee's terms and conditions of employment
agreed to prior to the Eligible Employee's first day of employment with the
Company.
(b) Irrevocability of Deferral Election. Except as provided in Sections
3.5 and 5.5, an election to defer the receipt of any Compensation made under
Section 3.1(a) is irrevocable once submitted to the Administrator or his
designee. The Administrator's acceptance of an election to defer Compensation
shall not, however, affect the contingent nature of such Compensation under the
plan or program under which such Compensation is payable.
(c) Application of Election. The Participant's Deferral Percentage will be
applied to each payment of Compensation to which the Participant's deferral
election applies, provided, that the aggregate of the Participant's Deferred
Amounts shall not exceed the Participant's Maximum Deferral. If a Participant
has made deferral elections with respect to more than one category of
Compensation, this Section 3.1(c) shall be applied separately with respect to
each such category.
3.2 Crediting to Accounts.
A Participant's Deferred Amounts will be credited to the Participant's
Account, as soon as practicable (but in no event later than the end of the
following month) after the last day of the Fiscal Month during which such
Deferred Amounts would, but for deferral, have been paid and will be accounted
for in accordance with Section 3.4. No interest will accrue, nor will any
adjustment be made to the Account, for the period until the Deferred Amounts are
credited.
3.3 Minimum Requirements for Deferral.
(a) Minimum Requirements. Notwithstanding any other provision of this
Plan, no deferral will be effected under this Plan with respect to a Participant
if:
(i) the Participant is not an Eligible Employee as of December 31, 1996,
(ii) the Participant's election as applied to the Participant's Variable
Incentive Compensation (determined by substituting the Election Year
for the Plan Year) or Adjusted Compensation (determined by
substituting the Fiscal Year immediately prior to the Fiscal Year
ending in the Election Year for the Fiscal Year ending in the Plan
Year) would have resulted in an annual deferral of less than
$15,000, or
(iii) the greater of (A) the sum of (1) the "Medicare wages" amount listed
on the Participant's W-2 form for the Plan Year and (2) any
Compensation that is accelerated which the Participant may receive
in December of the Election Year which would have been payable in
the Plan Year in the absence of the action of the Company to
accelerate the payment, and (B) the Participant's Eligible
Compensation for the Plan Year, is less than $200,000;
provided, that any Participant who first becomes an employee of the Company
during the Plan Year shall not be required to satisfy conditions (i) and (ii).
Condition (ii) shall not be construed to require a Participant's elections to
result in an actual deferral of at least $15,000.
(b) Failure to Meet Requirements. If the requirements of Section 3.3(a)(i)
or (ii) are not met by a Participant to whom such requirements are applicable,
such Participant's Deferred Amounts, if any, will be paid to such Participant,
without adjustment to reflect the performance of any Selected Benchmark Return
Option, as soon as practicable after it has been determined that
5
<PAGE>
the requirements have not been met. If the requirements of Section 3.3(a)(iii)
are not met by a Participant, the greater of such Participant's Deferred Amounts
or Account Balance will be paid to such Participant as soon as practicable after
it has been determined that the requirements have not been met.
3.4 Benchmark Return Options; Adjustment of Accounts.
(a) Selection of Benchmark Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select one or
more Benchmark Return Options and the percentage of the Participant's Account to
be adjusted to reflect the performance of each Selected Benchmark Return Option.
All elections of Selected Benchmark Return Options shall be in multiples of 10%
unless the Administrator determines that lower increments are administratively
feasible, in which case such lower increment shall apply. A Participant may, by
complying with such procedures as the Administrator may prescribe on a uniform
and nondiscriminatory basis, including procedures specifying the frequency with
respect to which such changes may be effected (but not more than twelve times in
any calendar year), change the Selected Benchmark Return Options to be
applicable with respect to his or her Account.
(b) Adjustment of Accounts. While each Participant's Account does not
represent the Participant's ownership of, or any ownership interest in, any
particular assets, the Account shall be adjusted to reflect the investment
experience of the Participant's Selected Benchmark Return Options in the same
manner as if investments in accordance with the Participant's elections had
actually been made through the ML Benefit Services Platform and ML II Core
Recordkeeping System, or any successor system used for keeping records of
Participants' Accounts (the "ML II System"). In adjusting Accounts, the timing
of receipt of Participant instructions by the ML II System shall control the
timing and pricing of the notional investments in the Participant's Selected
Benchmark Return Options in accordance with the rules of operation of the ML II
System and its requirements for placing corresponding investment orders, as if
orders to make corresponding investments were actually to be made, except that
in connection with the crediting of Deferred Amounts to the Participant's
Account and distributions from the Account, appropriate deferral allocation
instructions shall be treated as received from the Participant prior to the
close of transactions through the ML II System on the relevant day. Each
Selected Benchmark Return Option shall be valued using the Net Asset Value of
the Selected Benchmark Return Option as of the relevant day; provided, that, in
valuing a Selected Benchmark Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions;
provided, further, that, if there are no such transactions effected through the
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such
security, or if such security is not traded on such principal
exchange on that day, the average of the high and low sales
prices on such exchange on the first day prior thereto on
which such security was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
6
<PAGE>
(iii) if neither clause (i) nor (ii) applies, the value determined
by the Administrator by whatever means he considers
appropriate in his sole discretion.
(c) Annual Charge. As of the last day of each Fiscal Year or such earlier
day in December as the Administrator shall determine, an Annual Charge of 2.0%
of the Participant's Deferred Amounts (exclusive of any appreciation or
depreciation determined under Section 3.4 (b)) shall be applied to reduce the
Account Balance (but not below zero). In the event that the Participant elects
to have the Account Balance paid in installments, this Annual Charge will be
charged on the Remaining Deferred Amounts after giving effect to the installment
payments. In the event that the Account Balance is paid out completely during a
Fiscal Year prior to the date that the Annual Charge is assessed, a pro rata
Annual Charge will be deducted from amounts to be paid to the Participant to
cover that fraction of the Fiscal Year that Deferred Amounts (or Remaining
Deferred Amounts in the case of installment payments) were maintained hereunder.
The Annual Charge shall be applied as a pro rata reduction of the portion of the
Account Balance indexed to each of the Participant's Selected Benchmark Return
Options. In applying the Annual Charge, the pricing principles set forth in
Section 3.4(b) will be followed.
3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1996. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1996, and (ii) if the Administrator, in his sole discretion and upon evidence of
such basis that he finds persuasive (including a material applicable change in
the Participant's U.S. Federal and/or foreign income tax rate during the period
between October 1, 1996 and November 30, 1996), agrees to the rescission of the
election. In the event the Administrator agrees to the rescission, the Deferred
Amounts, if any, credited to the Participant's Account will be paid to the
Participant as soon as practicable thereafter subject to reduction for any
applicable withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options will be paid
to the Participant as soon as practicable, and no additional amounts will be
deferred pursuant to this Plan.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his sole discretion terminate any deferral
elections made hereunder with respect to Compensation not yet earned and no
further amounts will be deferred. In addition, in the event a Participant
receives a hardship withdrawal under the 401(k) Plan, the Administrator shall,
as of the date the Participant's Elective 401(k) Deferrals (as defined in the
401(k) Plan) are suspended under the 401(k) Plan as a result of such hardship
withdrawal, terminate the Participant's deferrals under this Plan in accordance
with the preceding sentence, as if the Participant had requested rescission in
writing. In each case, amounts previously deferred will continue to be governed
by the terms of this Plan.
7
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ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNT
4.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and any Participant, the Participant's beneficiary
or estate, or any other person. Title to and beneficial ownership of any funds
represented by the Account Balance will at all times remain in ML & Co.; such
funds will continue for all purposes to be a part of the general funds of ML &
Co. and may be used for any corporate purpose. No person will, by virtue of the
provisions of this Plan, have any interest whatsoever in any specific assets of
the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO RECEIVE PAYMENTS
FROM ML & CO. UNDER THIS PLAN, SUCH RIGHT WILL BE NO GREATER THAN THE RIGHT OF
ANY UNSECURED GENERAL CREDITOR OF ML & CO.
4.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution.
4.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
ARTICLE V
PAYMENT OF ACCOUNT
5.1 Manner of Payment.
(a) Regular Payment Elections. A Participant's Account Balance will be
paid by ML & Co., as elected by the Participant at the time of his or her
deferral election, either in a single payment to be made, or in the number of
annual installments (not to exceed 15) chosen by the Participant to commence,
(i) in the month following the month of the Participant's Retirement or death,
(ii) in any month and year selected by the Participant after the end of 1997 or
(iii) in any month in the calendar year following the Participant's Retirement;
provided that no election may result in the payment (in the case of a single
payment) or commencement of payment (in the case of installment payments) later
than the month following the Participant's 70th birthday. The amount of each
annual installment, if applicable, shall be determined by multiplying the
Account Balance as of the last day of the month immediately preceding the month
in which the payment is to be made by a fraction, the numerator of which is one
and the denominator of which is the number of remaining installment payments
(including the installment payment to be made).
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(b) Modified Installment Payments. In lieu of one of the regular payment
elections provided for in Section 5.1(a), a Participant may elect to receive the
Account Balance in at least 11 but no more than 15 annual installment payments
("modified installment payments"), such modified installment payments to
commence on the last business day in March in the year following the
Participant's Retirement or death (the "Initial Payment Date"). The modified
installment payments shall be computed in accordance with last sentence of
Section 5.1(a) and will in all other respects be treated like regular
installment payments under the Plan. By electing modified installment payments,
the Participant agrees that at any time prior to the last day of February
immediately preceding a Participant's Initial Payment Date (the "Determination
Date"), ML & Co. shall have the right, without the consent of the Participant or
any beneficiary, to change the Participant's method of payment to 11 annuitized
payments ("annuitized payments"), in the event that the Administrator, in his
sole discretion, determines that such a change is necessary or appropriate in
order to preserve the intended state tax benefits of the modified installment
payments to the Participant or any beneficiary. In the event that the
Administrator determines that annuitized payments shall be made, the amount of
the annuitized payments will be determined by applying the Discount Rate, as
defined below, to the Account Balance as of the Determination Date to create a
stream of 11 equal annual payments. If annuitized payments are to be made, then
the Account Balance shall cease to be adjusted pursuant to Sections 3.4(b) and
(c) as of the Determination Date (except that a pro rata Annual Charge will be
deducted from the Account Balance prior to calculation of the annuitized
payments to cover the fraction of the Fiscal Year preceding the Determination
Date) and the Company's only obligation to the Participant shall be to make the
annuitized payments when due. As used herein, Discount Rate shall mean ML &
Co.'s then-applicable after-tax cost of borrowing and is defined as (A) x (B),
where (A) is equal to 1 minus ML & Co.'s then-effective tax rate, expressed as a
decimal and (B) is equal to the sum of: (i) the annual yield on the then-current
5-year U.S. Treasury Note, and (ii) a spread (which will not be less than 0.10%)
indicative of ML & Co.'s borrowing cost for transactions of similar structure
and average maturity to the annuity, as determined by ML & Co.
5.2 Termination of Employment.
(a) Death or Retirement. Upon a Participant's death or Retirement prior to
payment, the Account Balance will be paid, in accordance with the Participant's
elections and as provided in Section 5.1(a) or (b), as applicable, to the
Participant (in the event of Retirement) or to the Participant's beneficiary (in
the event of death); provided, however, that in the event that a beneficiary of
the Participant's Account is the Participant's estate or is otherwise not a
natural person, then (i) if the Participant has elected a regular payment
election pursuant to Section 5.1(a), the applicable portion of the Account
Balance will be paid in a single payment to such beneficiary notwithstanding any
election of installment payments, and (ii) if the Participant has elected
modified installment payments pursuant to Section 5.1(b), the applicable portion
of the Account Balance will continue to be payable as modified installment
payments or annuitized payments, as the case may be, but only to a single person
consisting of the administrator or executor of the Participant's estate or
another person lawfully designated by the administrator or executor (and in the
event no such person is designated within a reasonable time, payment will be
made in a lump sum).
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balance will be paid to the Participant, in a single payment, as soon
thereafter as is practicable, notwithstanding the Participant's elections
hereunder.
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(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 5.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balance be paid at some other time or that it be paid in installments; provided,
that no such direction that adversely affects the rights of the Participant or
his or her beneficiary under this Plan shall be implemented without the consent
of the affected Participant or beneficiary. This direction may be revoked by the
Administrator at any time in his sole discretion.
5.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
5.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Plan if the primary beneficiary does not
survive the Participant. The Participant may designate more than one person as
the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing, any
change in beneficiary or contingent beneficiary will automatically revoke prior
such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Plan only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan").
However, if an unmarried Participant does not have coverage in effect under the
Life Insurance Plan, or the Participant has assigned his or her death benefit
under the Life Insurance Plan, any amounts payable to the Participant's
beneficiary under the Plan will be paid to the Participant's estate.
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(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to Section 5.1(b), the applicable portion of the
Account Balance will continue to be paid as modified installment payments or
annuitized payments, as the case may be, but only to a single person consisting
of the administrator or executor of the beneficiary's estate or another person
lawfully designated by the administrator or executor (and in the event no such
person is designated within a reasonable time, payment will be made in a lump
sum).
5.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
5.6 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will pay
to, or to the Participant for the benefit of, the Participant's spouse or former
spouse the portion of the Participant's Account Balance specified in a valid
court order entered in a domestic relations proceeding involving the
Participant's divorce or legal separation. Such payment will be made net of any
amounts the Company may be required to withhold under applicable federal, state
or local law. After such payment, references herein to the Participant's
"Deferred Amounts" (including, without limitation, for purposes of determining
the Annual Charge applicable to any remaining Account Balance) shall mean the
Participant's original Deferred Amounts times an amount equal to one minus a
fraction, the numerator of which is the gross amount (prior to withholding) paid
pursuant to the order, and the denominator of which is the Participant's Account
Balance immediately prior to payment.
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ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe and
administer this Plan so as to ensure that it provides deferred compensation for
the Participant as a member of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his willful misconduct or lack of good faith. The Administrator
may designate persons to carry out the specified responsibilities of the
Administrator and shall not be liable for any act or omission of a person as
designated.
6.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
6.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of Adjusted Compensation,
Incentive Compensation, Sign-On Bonus, Eligible Compensation, the Deferred
Amounts, the Account Balance, the designation of a beneficiary, or any other
matters.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
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7.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Plan will
be construed in accordance with and governed by the laws of the State of New
York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balance
(as reduced by the current year's Annual Charge, or pro rata portion thereof, as
set forth in Section 3.4(c)) as of the date of such amendment or termination.
13
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Exhibit 10(xxx)
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
FOR MANAGERS AND PRODUCERS
<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"........................................ 4
(v) "Vesting Period"...................................... 4
Section 1.3 Administration........................................... 4
Section 1.4 Shares 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
Section 2.2 Performance Objectives................................... 5
Section 2.3 Grants of Performance Shares and Performance Units....... 6
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Section 2.4 Rights and Benefits During Performance Period............ 6
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...................... 8
(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
Section 3.2 Grants of Restricted Shares and Restricted Units......... 10
Section 3.3 Rights and Restrictions Governing Restricted Shares...... 11
Section 3.4 Rights Governing Restricted Units........................ 11
Section 3.5 Adjustment with respect to Restricted Shares and
Restricted Units......................................... 11
Section 3.6 Payment of Restricted Shares and Restricted Units........ 12
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(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...................... 12
(iii) Other Terminations............................ 12
(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
Section 4.4 Exercise of Stock Options................................ 14
(a) Exercisability........................................ 14
(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............................ 15
(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...................................... 16
(c) Delivery of Shares.................................... 17
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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................................................... 18
Section 5.4 Termination of Employment................................ 18
(a) Death................................................. 18
(b) Disability............................................ 18
(c) Retirement............................................ 19
(d) Other Terminations.................................... 19
ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO.
SECURITIES..................................................... 19
Section 6.1 Grants of Other ML & Co. Securities...................... 19
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.............. 21
(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...................................... 23
Section 8.3 Effect of Agreement Resulting in Change in Control....... 24
Section 8.4 Termination for Cause.................................... 24
Section 8.5 Good Reason.............................................. 25
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(a) Inconsistent Duties................................... 25
(b) Reduced Salary or Bonus Opportunity................... 25
(c) Relocation............................................ 25
(d) Compensation Plans.................................... 25
(e) Benefits and Perquisites.............................. 26
(f) No Assumption by Successor............................ 26
Section 8.6 Effect on Plan Provisions................................ 26
ARTICLE IX - MISCELLANEOUS.................................................. 27
Section 9.1 Designation of Beneficiary............................... 27
Section 9.2 Employment Rights........................................ 27
Section 9.3 Nontransferability....................................... 27
Section 9.4 Withholding.............................................. 27
Section 9.5 Relationship to Other Benefits........................... 28
Section 9.6 No Trust or Fund Created................................. 28
Section 9.7 Expenses................................................. 28
Section 9.8 Indemnification.......................................... 28
Section 9.9 Tax Litigation........................................... 28
ARTICLE X - AMENDMENT AND TERMINATION....................................... 28
ARTICLE XI - INTERPRETATION................................................. 29
Section 11.1 Governmental and Other Regulations...................... 29
Section 11.2 Governing Law........................................... 29
ARTICLE XII - EFFECTIVE DATE AND STOCKHOLDER APPROVAL....................... 29
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MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
FOR MANAGERS AND PRODUCERS
ARTICLE I - GENERAL
Section 1.1 Purpose.
The purposes of the Long-Term Incentive Compensation Plan (the "Plan") for
Managers and Producers 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 1986, 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 or any other
Board committee that has been designated by the Board of Directors to administer
the Plan, or the Board of Directors.
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(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 or her functional successor),
renders an employee incapable of engaging in any employment or occupation for
which he is suited by reason of education or training.
(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
years, commencing with the first day of the fiscal year in which such
Performance Shares or Performance Units were granted.
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(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 (1)
after reaching age 55 and having completed at least 5 years of service; (2)
after reaching age 50 and having completed at least 10 years of service; (3)
after reaching age 45 and having completed at least 15 years of service; or (4)
having completed at least 20 years of service (in each case 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.
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(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
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 Subject to the Plan.
The total number of shares of Common Stock that may be distributed under
the Plan shall be 20,000,000 (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
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shares. 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. 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.
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
5
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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
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.
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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
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.
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(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
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
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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
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.
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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.
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,
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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.
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
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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.
(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
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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
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.
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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
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
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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).
(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
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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, limited liability corporation, family limited partnership or other
equivalent vehicle, 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
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 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 date of exercise, at least equal to the amount of tax to be withheld.
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(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 Section 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
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
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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.
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
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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.
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
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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)
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
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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:
(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").
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(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,
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
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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. 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
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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.
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.
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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
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
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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;
(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
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<PAGE>
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 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
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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
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.
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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. 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.
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.
The Plan shall not be effective unless it is approved by the Board of
Directors of the Corporation.
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Exhibit 10(xxxi)
Executive Annuity Agreement
Executive Annuity Agreement dated as of January 27, 1997, by and between
Merrill Lynch & Co., Inc. ("ML & Co.") and David H. Komansky (the "Executive").
WHEREAS, the Executive has worked for ML & Co. for an extended period and
is at present the Chief Executive Officer of ML & Co.; and
WHEREAS, ML & Co. desires to establish an incentive for the Executive,
based on the Executive's compensation and total period of qualifying service, to
continue to serve in the above-referenced position with ML & Co., or in such
other high senior executive position as the Board of Directors of ML & Co. may
hereafter specify, until such time as the Executive retires from ML & Co.;
WHEREAS, the Executive's substantial expertise and knowledge relating to
the operation of the activities of ML & Co. and its affiliates is such that ML &
Co. desires that the Executive not compete with ML & Co. and its affiliates in
certain respects following the Executive's retirement from ML & Co.; and
WHEREAS, in view of the foregoing ML & Co. has decided that an appropriate
benefit for the Executive, conditioned on continuing executive service until
retirement and non-competition after retirement, would be to provide the
Executive, and the Executive's surviving spouse, if any, with a retirement
annuity which supplements retirement benefits otherwise payable to the Executive
and the Executive's surviving spouse; and
WHEREAS, the Executive is willing to enter into this Agreement;
NOW THEREFORE, in consideration of the foregoing and the Executive's
further service with ML & Co., ML & Co. and the Executive agree as follows:
SECTION 1
Definitions
In addition to the defined terms indicated above, unless otherwise
required by the context for purposes of this Agreement, each of the following
terms shall have the meaning indicated for that term:
<PAGE>
"Affiliate" means any subsidiary or other entity that is owned at least
50% by ML & Co. or by another such subsidiary or entity, or that is
designated by ML & Co. as an Affiliate for purposes of this Agreement.
"Agreement" means this Executive Annuity Agreement, as it may be amended
from time to time.
"Beneficiary" means the Executive's surviving spouse, if any.
"Board" means that Board of Directors of ML & Co.
"Committee" means the Management Development and Compensation Committee of
the Board, as constituted from time to time.
"Compensation" means the highest consecutive five calendar year average of
the Executive's Eligible Compensation, as defined in the Merrill Lynch &
Co., Inc. Retirement Accumulation Plan, as amended from time to time,
included in the Retirement Program, but without regard to the limit
prescribed under Internal Revenue Code Section 401(a)(17) and excluding
for all years any non-recurring cash compensation awards such as awards
under the Merrill Lynch & Co., Inc. ROE Incentive Compensation Plan.
"Disability" means a physical or mental impairment as a result of which
the Executive is eligible to receive, or is in receipt of, long term
disability benefits under the Merrill Lynch & Co., Inc. Basic Long Term
Disability Plan, as amended from time to time.
"Executive Annuity" means the annual amount determined under Section 3.
"401(k) Savings Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan, as amended from time to time and any successor plans
thereto.
"Index Value" means the "Personal Consumption Expenditures" index amount
published by the Economics and Statistics Administration of the U.S.
Department of Commerce for the period ending on the December 31 or June 30
immediately prior to the relevant date or, if such index amount is no
longer published on a regular basis, such successor index published by an
agency or instrumentality of the United States government as the Committee
determines in its sole and absolute discretion to most closely replace
that index.
"Initial Index Value" means the Index Value as of January 1, 1997.
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<PAGE>
"Merrill Lynch" means ML & Co. and each Affiliate.
"Metropolitan Contract" means Group Annuity Contract No. 10438 issued as
of December 29, 1988 by Metropolitan Life Insurance Company to the
Trustees of the Pension Plan for Employees of Merrill Lynch & Co., Inc.
and Affiliates (terminated as of December 13, 1988) to provide for the
payment of Pension Plan Annuities as provided therein.
"Qualified Retirement Annuity" means an annual amount calculated as the
sum of the following, payable monthly for the life of the Executive
commencing as of the Retirement Date provided in Section 4:
(a) the single life annuity, if any, of the Executive under the
provisions of the Metropolitan Contract,
(b) the annuitized value of the aggregate of the Executive's account
balances under the Retirement Program and the 401(k) Savings Plan as
adjusted to reflect only the balance in the SIP account thereunder
allocable to employer contributions and investment experience
thereon (not including any amount allocable to elective 401(k)
deferrals or investment experience thereon), such value to be
calculated by dividing such aggregate by the applicable conversion
factor for immediate annuities payable at or after age 55 as set
forth in the table attached hereto as Appendix "A". Arithmetic
interpolation (in increments of one-twelfth for each month or any
part thereof, rounded up to the third decimal place) between the
conversion factors for two consecutive ages shall be used to
determine the conversion factor for Retirement Dates that are not
coincident with or next following the Executive's birthday, and
(c) 50% of the Executive's Social Security Primary Insurance amount
computed as of the Executive's Retirement Date.
Annuitized values shall be determined based upon the quarterly (in
the case of the Retirement Program) or monthly (in the case of the
401(k) Savings Plan) valuation occurring coincident with or
immediately preceding the Executive's Retirement Date or death while
in Merrill Lynch employment, as applicable.
"Retirement" means termination of the Executive's employment with Merrill
Lynch after attaining age 60, except that Retirement shall not include
such termination by (a) affirmative vote of a majority of the whole Board,
either for or without cause, unless the Board specifically directs that
such termination shall be treated as Retirement, or (b) resignation of
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the Executive without the approval of the Board, which shall not be
unreasonably withheld.
"Retirement Date" means the first day of any month coincident with or next
following the Executive's Retirement as of which payment of the Executive
Annuity to or in respect of the Executive is to commence as provided in
Section 4.
"Retirement Program" means the Merrill Lynch & Co., Inc. Retirement
Accumulation Plan, as amended from time to time, and the Merrill Lynch &
Co., Inc. Employee Stock Ownership Plan, as amended from time to time, and
any successor plans thereto.
"Service", shall have the same meaning as under the Retirement Program for
purposes of determining the Executive's "Basic Credits" thereunder, but
excluding any periods after the Executive's 65th birthday, Retirement, or
the date of termination of this Agreement. Service includes all periods of
Disability.
SECTION 2
Eligibility
An Executive Annuity shall be payable to or in respect of the Executive
only in the event of the Retirement or death of the Executive while in Merrill
Lynch employment.
SECTION 3
Amount
Except as otherwise provided in Section 6, the amount of the Executive
Annuity to or in respect of the Executive shall be an annual sum equal to 1.25%
of the Executive's Compensation multiplied by the Executive's Service, reduced
by the Executive's Qualified Retirement Annuity. Notwithstanding the foregoing,
however, the sum of the amount payable annually to or in respect of the
Executive under this Agreement shall not exceed (i) $1,620,000, if the
Executive's Executive Annuity is payable as a Life Annuity, or a 10-year Certain
and Life Annuity as referred to in Section 4, or (ii) $1,370,000, if the
Executive's Executive Annuity is payable as a 50% or 100% Joint and Survivor
Life Annuity as referred to in Section 4, in either case less the amount of the
Executive's Qualified Retirement Annuity.
The $1,620,000 and $1,370,000 limits established under the preceding
paragraph shall be adjusted as of each December 31 and June 30 prior to the
earlier of the Executive's Retirement or death by multiplying the respective
amount by a fraction,
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the numerator of which is the Index Value as of the relevant date and the
denominator of which is the Initial Index Value; provided that no adjustment
shall be made as of any December 31 or June 30 if such adjustment would result
in a decrease in the limit then in effect.
Following the Executive's Retirement or death, the amount of an Executive
Annuity as determined under this Section 3 will neither be increased by any cost
of living adjustments nor reduced by any such adjustments made to the Pension
Plan Annuity under the Metropolitan Contract.
SECTION 4
Time and Forms of Payment
One-twelfth of the Executive Annuity shall be payable monthly commencing
as of the Executive's Retirement Date, which shall be at the same time and in
the same form (namely, as a Life Annuity, a 50% Joint and Survivor Life Annuity,
a 100% Joint and Survivor Life Annuity, or a 10-Year Certain and Life Annuity)
as the Pension Plan Annuity under the Metropolitan Contract that is actually so
payable to or in respect of the Executive. For purposes of computing an amount
payable under this Agreement, the computation shall be made in all cases by
applying the relevant reduction factors provided for in the Metropolitan
Contract with reference to the Beneficiary, whether or not the Beneficiary is
also the Executive's beneficiary, if any, under the Metropolitan Contract.
Notwithstanding the foregoing, in the event of the death of the Executive
while in Merrill Lynch employment and before Retirement, payments to the
Beneficiary, if any, shall be made as if the Executive's Retirement was on the
day before the Executive's death with the Executive having elected a 100% Joint
and Survivor Life Annuity, computed as stated in the foregoing paragraph.
SECTION 5
Administration
The Committee is authorized in its sole and absolute discretion, without
limitation, to make all determinations which it deems necessary or advisable for
the operation of this Agreement, to construe and interpret the Agreement, to
establish such rules and to delegate such of its authority as it deems
appropriate, and to perform all other acts believed reasonable and proper in
connection with this Agreement.
SECTION 6
Amendment and Termination
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<PAGE>
ML & Co. reserves the right to amend, modify, restate, or terminate this
Agreement in whole or in part, at any time for any reason; provided, however,
that no such action shall reduce the amount of the Executive Annuity determined
under Section 3, based on the Executive's Compensation and Service as of the
effective date of such action, but with the Qualified Retirement Annuity for
purposes of the offset under Section 3 to be determined as of the Executive's
Retirement Date, or otherwise deprive the Executive or Beneficiary of any
entitlement to such Executive Annuity determined as of the effective date of
such action.
SECTION 7
Miscellaneous
7.1 Source of Payments
The obligation of ML & Co. to pay the Executive Annuity shall be unfunded
and is solely an unsecured Promise by ML & Co. All monthly payments shall be
made, as and when due, from the general assets of ML & Co. ML & Co. is not
obligated to, but may, in its sole and absolute discretion, make arrangements
with banks or insurance companies, and establish special reserve, accounts or
funds, including a "grantor trust", and may make such investments as deemed
desirable, to assist in meeting its obligations under this Agreement. Any such
arrangements with their underlying assets, reserves, accounts, or funds shall at
all times remain general assets of ML & Co., subject to the claims of its
general creditors, and neither the Executive nor the Beneficiary shall have any
right, title, or interest whatsoever therein.
7.2 Non-Alienation
No payment or right under this Agreement is subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any
such action, shall be void and of no effect; nor are any such payments subject
to seizure, attachment, execution, garnishment, or other legal or equitable
process, or for the payment of any debts, judgments, alimony, or separate
maintenance; nor are such payments transferable by operation of law in the event
of bankruptcy, insolvency, or similar occurrence of the Executive or
Beneficiary. In the event a person who is receiving or is entitled to receive
payments under this Agreement attempts to assign, transfer, or dispose of such
payment or right, or if an attempt is made to subject said payment or right to
such process, such assignment, transfer, or disposition shall be null and void.
7.3 Forfeiture
The Executive and the Beneficiary, in the sole discretion of the
Committee, shall forfeit any right to payments under this Agreement not yet made
in the event that the Executive, following Retirement, enters into any
employment,
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<PAGE>
consulting, or other relationship with any person or entity which the Committee
determines, in its sole discretion, to be in competition with Merrill Lynch.
Competition, for purposes of this section, means any involvement in any business
in the financial services industry, including, but not limited to, investment
banking, securities brokerage, securities trading, asset management, insurance,
and banking.
7.4 Merger, Consolidation, Sale, or Transfer of Assets
In the event ML & Co. is merged or consolidated with another entity, or
all or substantially all of the assets of ML & Co. are sold or otherwise
transferred to another entity, this Agreement shall be binding upon and inure to
the benefit of the successor or transferee resulting from or of such merger,
consolidation, sale or transfer.
7.5 Agreement Not a Condition of Employment
Nothing in this Agreement or any action taken hereunder shall be deemed or
construed as giving the Executive any right to continued employment or as
affecting the right of Merrill Lynch to discipline (including, without
limitation, the right to discharge) the Executive at any time.
7.6 No Trust or Fiduciary Relationship Created
Nothing contained in this Agreement and no action taken pursuant to the
provisions of this Agreement shall create or be construed to create a trust of
any kind or a fiduciary relationship between Merrill Lynch, the Executive, or
any Beneficiary.
7.7 Application for Payments
An application for payments under this Agreement shall be in a form
acceptable to the Committee. The Committee may require any applicant to furnish
the Committee with such documented evidence or information as the Committee may
consider reasonably necessary or desirable.
7.8 Claims Procedure
(a) If an application for payments under this Agreement is denied, in
whole or in part, the Committee shall promptly give the applicant
written notice of the denial, setting forth the specific reasons
therefor. The notice shall include the following:
(i) The basis for the denial;
(ii) A reference to each Agreement provision on which the denial is
based;
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(iii) A description of any additional information required of the
applicant; and
(iv) An explanation of the procedure for having a denied
application reviewed under this Agreement.
(b) The applicant may, upon receipt of a notice of a denied application,
request a review of the application by the Committee. Such request
shall be delivered in writing to any member of the Committee. After
the Committee has reviewed the application, the final decision of
the Committee shall be communicated in writing to the applicant.
Such communication shall set forth the specific reasons for the
decision with reference to each appropriate Agreement provision.
7.9 Payments to Incompetents
If the Committee receives evidence satisfactory to it that the Executive
or Beneficiary entitled to receive any payment under this Agreement is, at the
time when such payment becomes payable, physically or mentally incompetent to
receive such payment and to give a valid release therefor and that another
person or institution is then maintaining or has custody of the Executive or
Beneficiary, and that no guardian, committee, or other representative of the
estate of the Executive or Beneficiary shall have been duly appointed, the
Committee may direct payment of such payment otherwise payable to the Executive
or Beneficiary to such other person or institution, and the release of such
other person or institution shall be a valid and complete discharge for the
payments.
7.10 Governing Law and Exclusive Venue
This Agreement shall be construed, performed and enforced under the laws
of the State of New York, without giving effect to its conflict of laws rules,
except to the extent such laws are pre-empted by Federal law. The venue with
respect to any litigation involving the Agreement and a claimant shall lie
exclusively in either (a) the Supreme Court of the State of New York, New York
County, or (b) the United States District Court for the Southern District of New
York. By continuing in employment with Merrill Lynch after executing this
Agreement, the Executive, on behalf of the Executive and the Executive's
Beneficiary, hereby waives any right to a trial by jury in connection with any
dispute relating to this Agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, the Executive and ML & Co. have duly executed this
Agreement.
Merrill Lynch & Co., Inc.
By: _________________________________
Name: Patrick J. Walsh
Title: Senior Vice President,
Director of Human Resources
Executive
_____________________________________
David H. Komansky
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APPENDIX "A"
(See "Qualified Retirement Annuity" under Section 1)
CONVERSION FACTORS FOR IMMEDIATE ANNUITIES
UP 1984 Mortality - 8% p.a. Discount Rate
Age at birthday coincident with or
immediately preceding Retirement Date Conversion Factor
------------------------------------- -----------------
55 9.955
56 9.801
57 9.642
58 9.477
59 9.308
60 9.133
61 8.954
62 8.770
63 8.582
64 8.390
65 8.196
66 7.999
67 7.801
68 7.601
69 7.399
70 7.192
71 6.983
72 6.771
73 6.556
74 6.339
75 6.122
76 5.905
77 5.690
78 5.476
79 5.264
80 5.053
<PAGE>
Exhibit 10(xxxii)
AMENDMENT TO DEFERRED COMPENSATION PLANS
I, Patrick J. Walsh, as Administrator of the Merrill Lynch & Co., Inc.
Amended and Restated 1994 Deferred Compensation Agreement for a Select Group of
Eligible Employees, the Merrill Lynch & Co., Inc. 1995 Deferred Compensation
Plan for a Select Group of Eligible Employees, and the Merrill Lynch & Co., Inc.
1996 Deferred Compensation Plan for a Select Group of Eligible Employees
(collectively, the "Deferred Compensation Plans"), having determined, following
consultation with Counsel, that such amendment will not adversely affect the
Participants of the Deferred Compensation Plans, do hereby amend Sections 5.1,
5.2(a) and 5.4(d) in each of the Deferred Compensation Plans as follows:
Section 5.1 of the Plans has been amended to add the following paragraph at the
end thereof:
"Notwithstanding Section 3.1(b) hereof, any Participant may change his or
her original election regarding the timing and method of payment under the Plan,
prior to September 30, 1996 to an election to receive the Account Balance in at
least 11 but no more than 15 annual installment payments ("modified installment
payments"), such modified installment payments to commence on the last business
day in March in the year following the Participant's Retirement or death (the
"Initial Payment Date"). The modified installment payments shall be computed in
accordance with the last sentence of the first paragraph of this Section 5.1 and
will in all other respects be treated like regular installment payments under
the Plan. By electing modified installment payments, the Participant agrees that
at any time prior to the last day of February immediately preceding a
Participant's Initial Payment Date (the "Determination Date"), ML & Co. shall
have the right, without the consent of the Participant or any beneficiary, to
change the Participant's method of payment to 11 annuitized payments
("annuitized payments"), in the event that the Administrator, in his sole
discretion, determines that such a change is necessary or appropriate in order
to preserve the intended state tax benefits of the modified installment payments
to the Participant or any beneficiary. In the event that the Administrator
determines that annuitized payments shall be made, the amount of the annuitized
payments will be determined by applying the Discount Rate, as defined below, to
the Account Balance as of the Determination Date to create a stream of 11 equal
annual payments. If annuitized payments are to be made, then the Account Balance
shall cease to be adjusted pursuant to Sections 3.4 (b) and (c) as of the
Determination Date (except that a pro rata Annual Charge will be deducted from
the Account Balance prior to calculation of the annuitized payments to cover the
fraction of the Fiscal Year preceding the Determination Date) and the Company's
only obligation to the Participant shall be to make the annuitized payments when
due. As used herein, Discount Rate shall mean ML & Co.'s then-applicable
after-tax cost of borrowing and is defined as (A) x (B), where (A) is equal to 1
minus ML & Co.'s then-effective tax rate, expressed as a decimal, and (B) is
equal to the sum of: (i) the annual yield on the then-current 5-year U.S.
Treasury Note, and (ii) a
<PAGE>
spread (which will not be less than 0.10%) indicative of ML & Co.'s borrowing
cost for transactions of similar structure and average maturity to the annuity,
as determined by ML & Co. Except as provided in this paragraph and in Sections
3.5 and 5.5 hereof, such changed election, once made, will be irrevocable as
provided in Section 3.1 (b)."
Section 5.2(a) of the Plans has been amended in its entirety to read as follows:
"(a) Death or Retirement. Upon a Participant's death or Retirement prior
to payment, the Account Balance will be paid, in accordance with the
Participant's elections and as provided in Section 5.1, to the Participant (in
the event of Retirement) or to the Participant's beneficiary (in the event of
death); provided, however, that in the event that a beneficiary of the
Participant's Account is the Participant's estate or is otherwise not a natural
person, then (i) if the Participant has elected a regular payment election
pursuant to the first paragraph of Section 5.1, the applicable portion of the
Account Balance will be paid in a single payment to such beneficiary
notwithstanding any election of installment payments, and (ii) if the
Participant has elected modified installment payments pursuant to the second
paragraph of Section 5.1, the applicable portion of the Account Balance will
continue to be payable as modified installment payments or annuitized payments,
as the case may be, but only to a single person consisting of the administrator
or executor of the Participant's estate or another person lawfully designated by
the administrator or executor (and in the event no such person is designated
within a reasonable time, payment will be made in a lump sum)."
Section 5.4(d) of the Plans has been amended in its entirety to read as follows:
"(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to the second paragraph of Section 5.1, the
applicable portion of the Account Balance will continue to be paid as modified
installment payments or annuitized payments, as the case may be, but only to a
single person consisting of the administrator or executor of the beneficiary's
estate or another person lawfully designated by the administrator or executor
(and in the event no such person is designated within a reasonable time, payment
will be made in a lump sum)."
_____________________________
Patrick J. Walsh
Administrator
Date: September 18, 1996
<PAGE>
Exhibit 10(xxxiii)(a)
AMENDED AND RESTATED
REIMBURSEMENT AGREEMENT
between
WFP TOWER D CO. L.P.
and
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Premises
Parcel D
Battery Park City -- World Financial Center
New York, New York
Dated as of
November 21, 1996
<PAGE>
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT
TABLE OF CONTENTS
Page
----
Recitals 1
Article 1 - Reimbursements............................................. 3
Article 2 - [Intentionally Omitted].................................... 17
Article 3 - Assignment................................................. 17
Article 4 - Notices.................................................... 18
Article 5 - No Broker.................................................. 21
Article 6 - Amendment.................................................. 22
Article 7 - Termination................................................ 23
Article 8 - Integration; Conflict
with Other Agreements.................................... 24
Article 9 - Miscellaneous.............................................. 25
Article 10 - Definitions................................................ 29
Exhibit A - Description of Ground Lease D
Exhibit B - List of Uninsurable Casualties
Exhibit C - Form of Assignment and Assumption Agreement
<PAGE>
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT, made as of November 21, 1996
and effective as of February 26, 1988, between WFP TOWER D CO. L.P.
("Landlord"), a New York limited partnership having an office at One Liberty
Plaza, New York, New York 10006, and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED ("Tenant"), a New York corporation having an office c/o Merrill
Lynch & Co., Inc., World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10281-1219 (this "Agreement").
RECITALS
A. Landlord, the successor-in-interest to WFC Tower D Company ("WFC"), is
the owner of the interest and estate of the tenant under that certain lease
("Ground Lease D") described in Exhibit A annexed hereto and made a part hereof,
covering the land known as Parcel D ("Parcel D" or the "Parcel") more
particularly described in Ground Lease D, and the buildings and other
improvements now or hereafter erected thereon (such buildings and improvements
collectively, "Building D" or the "Building"). Parcel D is located in the
project (the "Project") known as the World Financial Center at Battery Park City
in the City, County and State of New York.
B. WFC and Merrill Lynch/WFC/L, Inc. ("ML/WFC"), the
predecessor-in-interest to Tenant, entered into that certain Agreement of Lease
dated as of February 26, 1988, as amended by the First Amendment of Lease dated
as of September 29,
<PAGE>
1988 and the Second Amendment of Lease dated as of the date hereof
(collectively, "Lease D" or the "Lease") whereby, among other things, WFC
demised and leased to ML/WFC Parcel D and Building D (except for certain
excluded portions of such Building) (collectively, the "Premises" or "Premises
D"), and ML/WFC hired Premises D from WFC, all upon and subject to the terms,
covenants and conditions set forth in the Lease. WFC's interest in the Lease has
as of the date hereof been assigned to Landlord.
C. Any capitalized term used in this Agreement which is not defined in
this Agreement shall have the meaning provided for such term in the Lease,
unless expressly provided otherwise; and all capitalized terms which are defined
in this Agreement shall be defined in or listed with cross references in Article
10 hereof.
D. Solely for purposes of facilitating Landlord's financing, the Lease
imposes upon Tenant obligations to perform certain actions and make certain
payments on behalf of and for the benefit of Landlord. In order to carry out the
true intent of Landlord and Tenant with respect to such obligations under the
Lease, Landlord and Tenant agree that Landlord shall make certain reimbursements
to Tenant, in accordance with the terms, covenants and conditions of this
Agreement, which amends and restates in its entirety the Reimbursement Agreement
between WFC and ML/WFC, dated as of August 24, 1984, as amended by the First
Amendment to
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<PAGE>
Building D Agreement to Lease, Leasehold Improvements Agreement and
Reimbursement Agreement, dated as of July 12, 1985, as further amended by the
Second Amendment to Reimbursement Agreement, dated February 26, 1988
(collectively, the "Original Reimbursement Agreement"), which has been assigned
by ML/WFC to Tenant and which has been assigned by WFC to, and assumed by,
Landlord.
ACCORDINGLY, the parties hereto hereby agree that the Original
Reimbursement Agreement is hereby amended and restated in its entirety by this
Agreement, which shall have the terms, covenants and conditions hereinafter set
forth without reference to prior agreements or amendments.
ARTICLE 1
REIMBURSEMENTS
1.1. (a) Notwithstanding anything which may be to the contrary in the
Lease, during the Original Term of the Lease (except as otherwise provided in
Section 1.1.(c) and subject to the provisions of Section 1.8. hereof), Landlord
shall reimburse Tenant for:
(i) the actual and reasonable cost of any Restoration of the Building
necessitated by damage due to any of the causes which Landlord and Tenant have
agreed are not insurable, which causes are listed in Exhibit B annexed hereto
and made a part hereof;
(ii) the actual and reasonable cost of repairing any latent defect in the
Building of which Landlord is given
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<PAGE>
notice during the Original Term of the Lease, but only to the extent such cost
is not covered by (x) any of the manufacturers' or contractors' warranties
assigned to Tenant pursuant to the Leasehold Improvements Agreement dated as of
August 24, 1984 between WFC (formerly known as Olympia & York Tower D Company)
and ML/WFC, as amended (the "LIA") which are applicable to the latent defect in
question, provided that Tenant, prior to seeking reimbursement from Landlord
under this Section 1.1.(a), shall either (1) use its reasonable efforts to
enforce such warranties or (2) reassign to Landlord and give Landlord a
reasonable period of time in which to enforce such warranties, or (y) Tenant's
casualty insurance (and would not be covered by Tenant's casualty insurance if
Tenant, subject to Exhibit B, were carrying all of the casualty insurance
required to be carried by Tenant under Article 7 of the Lease);
(iii) the actual and reasonable costs of any Restoration performed by
Tenant pursuant to Section 9.03(b) of the Lease as a result of any partial
condemnation, but only to the extent that such actual and reasonable costs
exceed the award received by or made available to Tenant for such Restoration;
(iv) the amount that the abatement of Fixed Rents on account of any
partial condemnation is less than the amount determined by the calculation
prescribed in Section 9.03(d) of the Lease because Tenant is required under such
Section
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<PAGE>
to pay Fixed Rents in a sufficient amount to cover Landlord's debt service for
the First Mortgage, which amount shall be payable in installments at the times
the installments of Fixed Rent to which such reimbursement pertains are payable
under Lease D;
(v) the actual and reasonable costs of any work performed by Tenant
pursuant to Section 30.01(b) or 30.02 of the Lease to preserve Building D from
injury or damage due to any excavation on adjacent property, provided that prior
to seeking reimbursement from Landlord under this Section 1.1.(a)(v), Tenant
shall either (x) use reasonable efforts to obtain reimbursement for such cost
from the Person who caused such excavation, or (y) assign to Landlord Tenant's
right to receive such reimbursement from such Person;
(vi) the amounts, if any, paid (and not deducted by Tenant from any other
Rental or paid to Tenant by the tenant under O&Y Lease D or on its behalf) by
Tenant pursuant to Sections 3.01(j)(ii), 3.01(m)(iv), 3.02, 3.04, 3.05, 3.08,
4.01, 4.03, 5.01, 7.01(a), 12.01, 12.02, 12.03 and 14.01 of the Lease on account
of any portions of Parcel D which are not part of the Premises, each of which
amounts shall be payable by Landlord not more often than Tenant is required to
pay the item with respect to which such reimbursement is being made; and
(vii) the amount, if any, paid by Tenant as Rental pursuant to Section
9.01(a) of the Lease with respect to the
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<PAGE>
period commencing on the date of taking (as such term is defined in the Lease)
and ending on the date payment is made to Landlord or on its behalf pursuant to
Section 9.01(c)(ii) of the Lease, which amount shall be payable in installments
at the times the installments of Fixed Rent or other Rental to which such
reimbursement pertains are payable under the Lease.
(b) For purposes of Section 1.1.(a), "latent defect" shall not include any
damage or destruction from fire or other casualty, or any damage from ordinary
or extraordinary wear and tear, or any damage caused by the negligence or wilful
misconduct of Tenant, its Affiliates or Subtenants (or their respective agents,
servants, employees, invitees and contractors), other than Landlord or its
Affiliates (or their respective agents, servants, employees, invitees and
contractors), but shall be limited to failures and flaws in the materials,
fixtures, equipment and systems included in the Work (as defined in the LIA) or
in the design thereof (unless designed by Tenant, its architect or its engineer,
provided that if by Tenant's engineer, such design was prepared for Tenant and
not for Landlord) or the installation thereof, and the failure of any such
equipment or system to perform in accordance with its design specifications,
provided (i) such materials, fixtures, equipment or systems are being used and
maintained by Tenant substantially in accordance with the manufacturer's
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<PAGE>
instructions furnished to Tenant, and (ii) such defect could not normally be
observed upon a reasonable inspection of the Premises or portion thereof in
question made within thirty (30) days after the later of (x) the date the item
or element in question was put into service for its intended use or (y) the date
Tenant (or any Person claiming by, through or under Tenant) commenced occupancy
of the Building or portion thereof in question for the conduct of its business,
but in no event later than the date which is the later of twelve (12) months
after (1) February 26, 1988 or the date Interim Rent (as defined in the LIA)
commenced under the LIA for the portion(s) of the Premises in question, if
earlier, and (2) the date the item or element in question becomes available for
use.
(c) Notwithstanding anything to the contrary in Section 1.1.(a), Landlord
shall continue to be obligated to make the reimbursements provided for (i) in
clauses (i), (iii) and (iv) of such Section during the first Extended Term or
the first and second Extended Terms if Tenant effectively exercises its option
under Section 2.02 of the Lease for such Extended Term or Terms at least
thirty-six (36) months prior to the expiration of the Original Term, and (ii) in
clauses (v) and (vi) of such Section during any Extended Term(s) of the Lease.
(d) Subject to the provisions of Sections l.1.(a)(iv), (a)(vi) and (a)
(vii) in the case of the reimbursements re-
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<PAGE>
ferred to in such Sections, with respect to any reimbursement claimed by Tenant
pursuant to this Section 1.1., Tenant shall submit a reasonably detailed
statement therefor to Landlord, together with such supporting data as Landlord
shall reasonably require (including, without limitation, copies of any
statements furnished by the Operator under the Project Operating Agreement on
which Tenant's statements hereunder are based), and, subject to the limitation
of Section 1.8.(a), within ten (10) Business Days (fifteen (15) Business Days in
the case of reimbursements claimed pursuant to Section 1.1.(a)(vi)) after
receipt of such statement and data, Landlord shall pay to Tenant the amount set
forth in such statement. If Landlord disputes such amount or any portion
thereof, such dispute shall be resolved by arbitration as provided in Article 36
of the Lease. Landlord shall, nevertheless, pay the amount set forth in such
statement, without prejudice to Landlord's right to contest the same; and if it
shall be determined that Landlord made an overpayment, Tenant shall refund to
Landlord the amount of such overpayment within (10) Business Days after notice
of the arbitrators' decision, together with interest thereon at the Prime Rate
from the date of such overpayment to the date of such refund.
(e) If an arbitration proceeding pursuant to Section 1.1.(d) involves a
dispute pertaining to a reimbursement for
-8-
<PAGE>
amounts paid by Tenant pursuant to Section 12.03(b) of Lease D, the tenant under
O&Y Lease D shall have the right, at its sole cost and expense, to participate
in such arbitration.
1.2. Notwithstanding anything which may be to the contrary in the Lease,
if Tenant is required to pay to the First Secured Lender an amount pursuant to
Section 9.01(e) of the Lease, then Landlord shall reimburse Tenant for the
amount of such payment by Tenant. Landlord shall pay such reimbursement to
Tenant, subject to the limitation of Section 1.8.(a), within ten (10) Business
Days after Tenant's statement therefor to Landlord, together with interest
thereon at the Prime Rate from the date that such payment was made by Tenant.
1.3. Intentionally Omitted.
1.4. (a) Upon the expiration or earlier termination of the Lease (unless
such earlier termination is due to an Event of Default under the Lease),
Landlord shall reimburse Tenant for the then unamortized portion of the cost to
Tenant of any repairs and replacements made by Tenant at Building D which (i)
are to (A) any of the structural components of the Building or (b) any of the
central systems or components of the central systems of the Building which in
either case (1) Tenant is required to make under the terms of the Lease, (2) is
not a repair or replacement for which Tenant is entitled to reimbursement from
Landlord pursuant to Section 1.1., (3) is not a repair or replacement
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<PAGE>
covered by insurance proceeds or condemnation awards payable to Tenant, (4) is
not a repair or replacement the need for which was caused by the negligence or
wilful misconduct of Tenant, its Affiliates or Subtenants, or their respective
agents, servants, employees, invitees or contractors (other than Landlord or its
Affiliates or their respective agents, servants, employees, invitees or
contractors) and (5) is a repair or replacement which Tenant is required to
capitalize, and may not treat as an operating expense, under generally accepted
accounting principles, (ii) are amortized over the useful life of the item(s) in
question and in a manner consistent with past practices of Merrill Lynch & Co.,
Inc. ("Merrill"), provided that prior to making such repair or replacement,
Tenant shall have obtained Landlord's written consent (which consent Landlord
shall not unreasonably withhold or delay) to the specifications, budget,
contractor and contract for such repair or replacement, and (iii) are not
recovered by Tenant pursuant to Sections 9.01(c) and/or 9.09 of the Lease (if
the Lease terminates pursuant to Section 9.01(a) thereof). Subject to Section
1.4.(b), such reimbursement shall be in the amount specified in a notice from
Tenant to Landlord requesting the same, which notice shall be accompanied by (x)
a certificate from an independent registered architect or licensed professional
engineer as to the cost to Tenant of the repairs and replacements in question,
(y) a certificate from
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<PAGE>
an authorized officer of Tenant as to the then unamortized portion of such cost
and (z) such other information and documentation as Landlord shall reasonably
require with respect to such repairs and replacements, including, without
limitation, Tenant's accounting records with respect thereto, which records
shall be kept in accordance with Merrill's past practices. Landlord shall pay
such reimbursement to Tenant, subject to the limitation of Section 1.8.(a),
within ten (10) Business Days after Tenant, pursuant to Article 33 of the Lease,
has completed vacating the Premises.
(b) If Landlord disputes the amount of the reimbursement or the compliance
of the repairs and replacements in question with any of the requirements set
forth above, such dispute shall be submitted to and resolved by arbitration in
accordance with Article 36 of the Lease. Landlord shall, nevertheless, pay the
reimbursement in accordance with Tenant's notice, without prejudice to
Landlord's right to contest the same; and if it shall be determined that Tenant
was not entitled to any reimbursement or that the reimbursement exceeded the
amount to which Tenant was entitled, Tenant shall refund to Landlord the amount
of the reimbursement, or such excess, as the case may be, within ten (10)
Business Days after notice of the arbitrators' decision, together with interest
thereon at the Prime Rate from the date such reimbursement was paid (or
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<PAGE>
dates, if the reimbursement was paid in installments) to the date of such
refund.
1.5. Except as provided in Section 1.8. of this Agreement, any payment
(other than a payment for interest) due from one party to the other under the
provisions of this Article 1 which the party obligated to make such payment
fails to pay within the period of ten (10) Business Days provided for the making
of such payment shall bear interest at an annual rate equal to the Prime Rate
plus two and one-half percent (2.5%) from the day next following the expiration
of such period of ten (10) Business Days to the date of payment.
1.6. (a) Upon at least three (3) Business Days' notice from Landlord,
Tenant shall make available to Landlord for inspection, and shall permit
Landlord (at Landlord's sole cost and expense) to audit, during business hours
on Business Days, the books and records of Tenant pertaining to or relevant to
any reimbursements requested by Tenant pursuant to this Article 1.
(b) In connection with any reimbursement for amounts paid by Tenant
pursuant to Section 12.03(b) of Lease D, Tenant shall permit the tenant under
O&Y Lease D to (i) participate with Landlord, at such tenant's sole cost and
expense, in any inspection or audit performed by Landlord pursuant to Section
1.6.(a) of this Agreement, and (ii) on at least two (2) Business Days' notice,
to inspect, during
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<PAGE>
business hours on Business Days, any submeters located in the Premises which
pertain to utilities furnished to the premises demised to the tenant under O&Y
Lease D.
1.7. If Landlord, pursuant to the separate agreement referred to in
Section 2.02(g) of the Lease (relating to the period after the Original Term),
shall pay an amount for which Landlord must reimburse Tenant in whole or in part
hereunder, then Landlord shall be relieved of such reimbursement obligation to
the extent of the amount so paid to Tenant. In the event that Tenant shall
receive a payment for all or a portion of the same item from Landlord both
hereunder and under the Lease or hereunder and from the tenant under O&Y Lease D
(or on its behalf), Tenant shall refund the extra payment to Landlord with
interest at the Prime Rate from the date such extra payment was made until the
date refunded.
1.8. (a) Until repayment in full of the loan in the aggregate principal
amount of $434,346,000 being made on the date hereof by Boatmen's National
Mortgage, Inc. to Landlord (as the same may be modified, amended or refinanced
to the extent provided in clause (a)(v) below or in Section 1.8.(b), the
"Loan"), Landlord and Tenant agree (i) with respect to any payment due Tenant
from Landlord hereunder and not paid by Landlord within the period of ten (10)
Business Days provided for the making of such payment, such payment shall accrue
and shall bear interest at an annual
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<PAGE>
rate equal to the Prime Rate plus three percent (3%), compounded monthly, from
the day next following the expiration of such period of ten (10) Business Days
to the date of payment and shall be enforceable against Landlord only in
accordance with this Section 1.8.(a) and Section 1.8.(b) hereof, (ii) Tenant
shall forbear its rights to pursue collection of such amounts due and interest
accruing thereon and shall not exercise any remedies with respect thereto or of,
under, or with respect to this Agreement against the Landlord or the Secured
Lender, even if an Event of Default has occurred under the Loan, but Tenant's
agreement to forbear shall terminate in the event of the bankruptcy of Landlord,
(iii) in connection with the exercise of any enforcement rights by Tenant
hereunder, Tenant agrees to waive any equitable right to the marshaling of the
assets of Landlord by the Secured Lender and hereby grants to Secured Lender for
its benefit an irrevocable (until the repayment in full of the Loan) power of
attorney (coupled with an interest) to vote with respect to any claims Tenant
may have hereunder in connection with a bankruptcy of Landlord (provided that
Secured Lender in exercising such power of attorney shall take reasonable steps
necessary as not to impair Tenant's claims against Landlord except to the extent
necessary to subordinate Tenant's claim to repayment in full of the Loan), (iv)
Tenant shall remit to Secured Lender any amounts collected
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<PAGE>
from Landlord in contravention of the terms and conditions hereof and shall have
not right to subrogation against Secured Lender with respect to any amounts so
remitted, and (v) Tenant's right to repayment hereunder shall be subordinate to
the Loan, whether or not an event of bankruptcy with respect to Landlord shall
have occurred, and to any modification or amendment of the Loan (including a
refinancing thereof) which does not (A) increase the principal amount of the
indebtedness thereunder or (B) change the requirement that the Loan shall be
fully amortized over the Original Term of Lease D, except that after default
thereunder, modifications or amendments (including a refinancing thereof) may
provide for the extension of the maturity date, capitalization of accrued (but
unpaid) interest (and default interest), the payment of protective advances (and
interest thereon) and resetting of the interest rate and an increase in the
principal amount to pay for the transaction costs incurred in connection with
such extension, modification or amendment. Landlord agrees that Tenant's
forbearance and subordination under this Section 1.8. shall not in any way
prejudice or impair the validity or enforceability of Tenant's claims hereunder
except to the extent provided herein and shall in no way restrict Tenant from
exercising rights against any party other than Landlord or the Secured Lender.
The rights of Tenant hereunder are subordinate in lien, right and payment
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<PAGE>
and in all other respects to the Loan, and the Tenant hereby agrees to reaffirm
from time to time such subordination of its right as required by the holder of
the Loan to confirm the foregoing. Notwithstanding anything to the contrary
contained above, Tenant may, provided an Event of Default under the Loan shall
not have occurred and be continuing, receive payment from the Landlord of
amounts due hereunder, prior to payment in full of the Loan, to the extent such
payment is made by Landlord from excess cashflow available to Landlord (i.e.,
after payment from rent received of all amounts then due under the Loan) or from
other sources.
(b) With respect to any refinancing of the Loan, if such refinancing
provides for funds available to Landlord, after any repayment of the Loan (as
the same may have previously been modified or amended) and all financing
expenses (including, without limitation, fees and expenses of counsel to
Landlord, the prior lender and the new lender in connection therewith) which are
not to be used or reserved for building expenditures at Building D, including,
without limitation, capitalized interest and costs of leasing, owning,
operating, maintaining and improving Building D and Project Operating Agreement
Common Areas or Civic Facilities, then Landlord shall to the extent of such
excess funds (i.e., above amount required for financing expenses and building
expenditures) first pay all accrued and unpaid amounts due hereunder (subject to
Landlord's
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<PAGE>
right to dispute such amounts due in accordance with Section 1.4.(b)). For
purposes of this Section 1.8.(b), any new loan to Landlord made during the
Original Term shall be considered a refinancing of the Loan.
1.9. Tenant shall in no event offset or deduct the amount of any payment
due under this Agreement from Landlord to Tenant, and/or the interest thereon,
against any Rental or other sums due or payable under the Lease. Tenant shall
have recourse solely to the property of Landlord, and the direct or indirect
partners, agents, employees, controlling persons, shareholders, trustees,
directors, officers or other principals, if any, of Landlord shall have no
personal liability under or in connection with this Agreement.
ARTICLE 2
[INTENTIONALLY OMITTED]
ARTICLE 3
ASSIGNMENT
3.1. This Agreement, and Tenant's rights hereunder, shall not be assigned
by Tenant except to a Person to whom Tenant has the right, without the consent
of Landlord, to assign the Lease pursuant to Article 10 thereof and to whom
Tenant has assigned the Lease. Any other purported assignment by Tenant shall be
null and void and of no force or effect.
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<PAGE>
3.2. If Tenant shall duly assign its rights hereunder, the assignee shall
execute and deliver to Landlord an agreement in form and substance reasonably
satisfactory to Landlord whereby the assignee shall assume the obligations
hereunder on the part of Tenant to be performed or observed but Tenant shall
remain fully liable for the payment and performance of the obligations hereunder
to be paid, performed or observed by Tenant.
3.3. Notwithstanding anything which may be to the contrary hereinabove, if
Tenant assigns its interest under the Lease to a Person to whom Tenant is not
permitted to assign this Agreement, and Tenant is not released from its
obligations under the Lease by reason of or in connection with such assignment,
this Agreement shall remain in full force and effect as between Landlord and
Tenant herein named (but not between Landlord and Tenant's assignee), and Tenant
herein named shall be entitled to a reimbursement hereunder if, after Tenant's
assignee fails to do so, Tenant herein named performs an obligation under the
Lease which gives rise to a reimbursement or loan under this Agreement.
ARTICLE 4
NOTICES
Whenever it is provided in this Agreement that a notice, demand, request,
consent, approval or other communication (each of which is herein referred to as
a "Notice") shall or may be given to or served upon either of
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the parties by the other, and whenever either of the parties shall desire to
give or serve upon the other any Notice with respect hereto or the Premises,
each such Notice shall be in writing and, any law or statute to the contrary
notwithstanding, shall be effective for any purpose if given or served as
follows:
(a) if by Landlord, by mailing the same to Tenant by certified or
registered mail, postage prepaid, return receipt requested, by delivery by
reputable overnight courier or by personal delivery, receipted on behalf of the
party to whom addressed, addressed to Tenant at:
Merrill Lynch & Co., Inc.
World Financial Center-Tower B
225 Liberty Street, 12th Floor
New York, New York 10080-6112
Attention: Michael A. Loring
Director, Headquarters New York
Real Estate
and
Merrill Lynch & Co., Inc.
World Financial Center-Tower D
250 Vesey Street, 34th Floor,
New York, New York 10281-1334
Attention: Phyllis Safer
Corporate Law Department
with copies thereof to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: James I. Black III, Esq.
or to such other address(es) and attorneys as Tenant may from time to time
designate by Notice given to Landlord by certified or registered mail, reputable
overnight courier or
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personal delivery as aforesaid, except that at no time shall Landlord be
required to give, in the aggregate, more than four Notices or copies thereof;
(b) if by Tenant, by mailing the same to Landlord by certified or
registered mail, postage prepaid, return receipt requested, by reputable
overnight courier or by personal delivery, receipted on behalf of the party to
whom addressed, addressed to Landlord at:
WFP Tower D Co. L.P.
One Liberty Plaza
New York, New York 10006
Attention: Chief Financial Officer
with copies thereof to:
(1) WFP Tower D Co. L.P.
One Liberty Plaza
New York, New York 10006
Attention: Managing Attorney
(2) Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Joshua Mermelstein, Esq.
or to such other address(es) and attorneys as Landlord may from time to time
designate by Notice given to Tenant by certified or registered mail, reputable
overnight courier or personal delivery as aforesaid, except that at no time
shall Tenant be required to give, in the aggregate, more than four Notices or
copies thereof; and
(c) as long as the Loan remains outstanding, Tenant shall send to Secured
Lender a Notice with respect to any Landlord default which Tenant has given to
or served upon Landlord.
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ARTICLE 5
NO BROKER
Landlord and Tenant each covenants, warrants and represents to the other
that no broker was instrumental in bringing about or consummating this Agreement
and that it had no dealings with any broker or other Person concerning the
transactions referred to herein, other than Cushman Realty Corporation, Tenant's
consultant, who is entitled to any brokerage commission or finder's fee by
reason thereof. Tenant shall indemnify and hold Landlord harmless against and
from, and Landlord shall indemnify and hold Tenant harmless against and from,
any claims for any such brokerage commissions or fees, and all costs, expenses
and liabilities in connection therewith, including, without limitation,
attorneys' fees and expenses, arising out of any dealings had by the
indemnifying party with any broker, consultant or other person alleging to have
acted or dealt with the indemnifying party in connection with this transaction
(including, without limitation, Cushman Realty Corporation in the case of the
indemnification by Tenant). Tenant shall pay any and all fees, commissions and
other charges of Cushman Realty Corporation.
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<PAGE>
ARTICLE 6
AMENDMENT
This Agreement may not be changed, modified, or terminated orally, nor may
any provision hereof be waived orally, but only by a written instrument of
change, modification, termination or waiver executed by the party against whom
enforcement of any change, modification, or termination is sought. Until such
time as the Loan is paid in full, Landlord and Tenant will not amend or modify
this Agreement except (a) to add additional reimbursement obligations with
respect to obligations which Tenant undertakes under Lease D, or (b) provided
(i) such amendment or modification does not adversely affect the subordination
effected by the Subordination and Forbearance Agreement (Amended and Restated
Reimbursement Agreement Tower D), made as of the date hereof by Tenant in favor
of Boatmen's National Mortgage Inc. (the "Forbearance Agreement"), (ii) such
amendment or modification does not otherwise constitute a breach of the
Forbearance Agreement, and (iii) Landlord (or any successor or assign) as
obligor under the Loan, receives written confirmation from the Rating Agencies
(as defined in the Forbearance Agreement) that such amendment or modification
will not result in the rating of the Securities (as defined in the Forbearance
Agreement) being withdrawn, downgraded or qualified.
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<PAGE>
ARTICLE 7
TERMINATION
7.1. Subject to the provisions of Section 7.3. hereof, this Agreement, and
all of the obligations hereunder of the parties hereto shall terminate upon the
termination, for any reason whatsoever, of Lease D.
7.2. Notwithstanding anything to the contrary hereinabove, Tenant shall
not be entitled to receive, and Landlord shall have no obligation to make, any
reimbursement pursuant to Article 1 hereof, at any time and for so long as an
Event of Default under and as defined in the Lease has occurred and is
continuing.
7.3. If this Agreement shall terminate as provided in Section 7.1. hereof,
Tenant's subordination and standstill obligations under Section 1.8.(a) shall
survive and the then accrued and unpaid obligations of each party to the other
shall, nevertheless, survive such termination. Further, if Lease D shall
terminate (a) pursuant to Section 9.01 of such Lease, Landlord's obligations
under Section 1.2. hereof shall survive such termination, or (b) for any reason
other than an Event of Default under the Lease, Landlord's obligations under
Section 1.4. hereof shall survive such termination.
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<PAGE>
ARTICLE 8
INTEGRATION; CONFLICT WITH OTHER AGREEMENTS
8.1. All understandings and agreements heretofore had between the parties
hereto with respect to the matters covered by this Agreement are merged in this
Agreement, which fully and completely expresses their agreement with respect to
such matters, except to the extent such matters are covered by other written
agreement between the parties dated on or prior to the date of this Agreement
(in the case of prior agreements, only to the extent the parties have agreed
such prior agreements survive pursuant to a separate agreement dated the date
hereof).
8.2. This Agreement is intended to be read together with the Lease in
determining the full rights and obligations of Landlord and Tenant under the
Lease, notwithstanding anything contained to the contrary in Article 34 of the
Lease. If there shall be any conflict between any provision of this Agreement
and the Lease or any other written agreement between the parties, this Agreement
shall prevail. However, nothing contained in this Agreement, whether express or
implied, shall give to Tenant any right of abatement, reduction, setoff,
counterclaim, defense or deduction with respect to any Rental or other sums due
or payable under the Lease, and no default or other non-performance under this
Agreement by Landlord shall
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<PAGE>
affect the validity of the Lease or Tenant's obligations under the Lease.
8.3. In no event shall this Agreement be binding upon the Ground Lessor or
any Secured Lender or any Person who succeeds to the rights of the Landlord by
foreclosure or assignment or deed/assignment in lieu of foreclosure or otherwise
(except for a voluntary transfer made without Tenant's consent) nor shall the
Ground Lessor, the Secured Lender or any such Person have any liability under
this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1. The captions and table of contents of this Agreement are for
convenience of reference only and in no way define, limit or describe the scope
or intent of this Agreement.
9.2. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without the aid of any canon or rule of law
requiring construction against the party drawing or causing this Agreement to be
drawn.
9.3. (a) Except as otherwise expressly provided in this Agreement, the
provisions of this Agreement shall bind and benefit the successors and assigns
of the parties hereto with the same effect as if mentioned in each instance
where a party is named or referred to; provided, however, that (i)
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<PAGE>
no violation of the provisions of Article 3 shall operate to vest any rights in
any successor or assignee of Tenant and (ii) the provisions of this Section 9.3.
shall not be construed to be a consent by a party to an assignment of this
Agreement by another party.
(b) The provisions of this Agreement are intended to be for the sole
benefit of the parties hereto and Merrill, and their respective successors and
assigns, and none of the provisions of this Agreement are intended to be, nor
shall they be construed to be, for the benefit of any third party, except that
the provisions of Sections 1.8. and 8.3. shall benefit any Secured Lender or any
Person who succeeds to the rights of the Landlord by foreclosure or assignment
or deed/assignment in lieu of foreclosure or otherwise (except for a voluntary
transfer made without Tenant's consent).
9.4. The parties shall and do hereby each waive trial by jury in any
action, suit or proceeding arising out of or in connection with this Agreement,
or the interpretation, construction or enforcement thereof.
9.5. (a) The parties each agrees to do such other and further acts and
things, and to execute and deliver such instruments and documents, as a party
may reasonably request from time to time, in furtherance of the purposes hereof.
(b) Without limitation of the provisions of Section 9.5.(a), the parties
hereto shall deliver to the other such evidence as may be reasonably required by
the other of the
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<PAGE>
due authorization, execution and delivery of this Agreement, including, without
limitation, legal opinions of the respective independent counsel for each party
as to such due authorization, execution and delivery.
9.6. The terms "hereof," "herein" and "hereunder," and words of similar
import, shall be construed to refer to this Agreement as a whole (including,
without limitation, the annexed Exhibits), and not to any particular Article,
Section, Exhibit or provision, unless expressly so stated.
9.7. All words or terms used in this Agreement, regardless of the number
or gender in which they are used, shall be deemed to include any other number
and any other gender, as the context may require.
9.8. Landlord and Tenant each agrees at any time and from time to time,
upon not less than ten (10) days' prior request by the other party, to execute,
acknowledge and deliver to the other party a certificate in writing stating (a)
that this Agreement is unmodified and in full force and effect (or if there have
been modifications, that the same is in full force and effect as modified and
stating the modifications) and (b) whether or not to the best knowledge of the
Landlord or Tenant, as the case may be, (i) there is any unpaid sum owed either
party to the other pursuant to this Agreement, (ii) there is any existing
default under this Agreement on the part of either party hereto and, if
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<PAGE>
so, specifying each such default, and (iii) such other matters as the requesting
party may reasonably request.
9.9. Tenant acknowledges that WFP Tower D Co. L.P. is a legal entity
separate and distinct from any other Person (including, without limitation, the
general partners of WFP Tower D Co. L.P., the tenant under O&Y Lease D, World
Financial Properties, L.P. and any Affiliates of the foregoing). Tenant shall
not seek to substantively consolidate WFP Tower D Co. L.P. with any other Person
or such Person's assets or liabilities in any action or proceeding, and Tenant
shall refrain from filing or otherwise initiating or supporting the filing of
any motion in any bankruptcy or insolvency proceeding to substantively
consolidate Landlord with any other Person or such Person's assets or
liabilities.
9.10. In determining the fair market rental value of all or any portion of
the Premises or the fair market value of the interest of Landlord in Ground
Lease D and Parcel D, to the extent either such calculation is to be made under
Lease D, then the rights of Tenant and the obligations of Landlord hereunder
shall be taken into account in making such determination.
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<PAGE>
ARTICLE 10
DEFINITIONS
10.1. "Agreement": Defined in the heading hereof.
10.2. "Building," "Building D": Defined in Recital A.
10.3. "Forbearance Agreement": Defined in Article 6.
10.4. "Ground Lease D": Defined in Recital A.
10.5. "Interim Rent": Defined in Section 1.1.(b).
10.6. "Landlord": Defined in the heading of this Agreement.
10.7. "Lease," "Lease D": Defined in Recital B.
10.8. "LIA": Defined in Section 1.1.(a)(ii).
10.9. "Loan": Defined in Section 1.8.(a).
10.10. "Merrill": Defined in Section 1.4.(a).
10.11. "ML/WFC": Defined in Recital B.
10.12. "Original Reimbursement Agreement": Defined in Recital D.
10.13. "Parcel," "Parcel D": Defined in Recital A.
10.14. "Premises," "Premises D": Defined in Recital B.
10.15. "Project": Defined in Recital A.
10.16. "Tenant": Defined in the heading of this Agreement.
10.17. "WFC": Defined in Recital A.
10.18. "Work": Defined in Section 1.1.(b).
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of this day and year first written above.
WFP TOWER D CO. L.P.
By: WFP Tower D Co. G.P. Corp.,
general partner
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<PAGE>
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
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<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this ____ day of __________, 1996, before me personally came
_____________________ to me known, who, being by me duly sworn, did depose and
say that he has an address at _________________________________________, that he
is the ______________ of MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, the
corporation described in and which executed the foregoing instrument and that he
signed his name thereto by order of the board of directors of said corporation.
__________________________
Notary Public
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this ____ day of November, 1996, before me personally came
_________________________ to me known, who, being by me duly sworn, did depose
and say that he has an address at ___________________________________________,
that he is the __________________ of WFP Tower D Co. G.P. Corp., the corporation
described in the foregoing instrument and which executed same as partner of WFP
TOWER D CO. L.P., a New York limited partnership; and that he signed his name
thereto by the order of the board of directors of said corporation.
__________________________
Notary Public
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<PAGE>
EXHIBIT A TO REIMBURSEMENT AGREEMENT
DESCRIPTION OF GROUND LEASE D
Agreement of Severance Lease for the premises known as Parcel D, Battery
Park City --Commercial Center, New York, New York, dated as of June 15, 1983,
made by the Battery Park City Authority, as landlord ("Landlord"), to and with
Olympia & York Battery Park Company, as tenant ("Tenant"), a memorandum of which
was recorded in the Office of the Register of the City of New York, New York
County (the "Register's Office"), on June 20, 1983 in Reel 696, at Page 507.
The interest of the tenant under said Severance Lease was assigned by that
certain Assignment and Assumption of Severance Lease dated as of October 7,
1983, made by Olympia & York Battery Park Company, as assignor, to and with
Olympia & York Tower D Company, as assignee, and recorded in the office of the
Register of the City of New York, New York County, on October 7, 1983 in Reel
724, at Page 1245, as amended by (i) an Unrecorded Agreement, made as of August
24, 1984, among Landlord, Tenant, and Merrill Lynch & Co., Inc. which Agreement
is referred to in the recorded memorandum described in clause (ii) below, (ii)
an Amendment of Severance Lease, made as of December 5, 1984, between Landlord
and Tenant, a memorandum of which was recorded in the Register's Office on April
1, 1985, in Reel 892, at Page 1222, (iii) an Unrecorded Agreement made as of
July 12, 1985, among Landlord, Tenant and Bankers Trust Company as Collateral
Agent, which Agreement is referred to in the recorded memorandum described in
clause (iv) below, (which agreement has been terminated according to the
recorded memorandum described in paragraph (vi) below, (iv) an Amendment of
Severance Lease, between Landlord and Tenant, made as of August 15, 1985, a
memorandum of which was recorded in the Register's Office on May 19, 1986, in
Reel 1065, Page 1567, (v) an Unrecorded Agreement made as of December 24, 1986,
among Landlord, Tenant, The Sumitomo Bank Limited New York Branch and Bankers
Trust Company as Collateral Agent, which Agreement is referred to in the
recorded memorandum described in clause (vi) below (which agreement has been
terminated according to the recorded memorandum described in clause (vi) below),
(vi) an Amendment of Severance Lease, made as of February 26, 1988, between
Landlord and Tenant, a memorandum of which was recorded in the Register's Office
on March 9, 1988, in Reel 1375, page 1520, and (vii) an Unrecorded Agreement,
made as of February 26, 1988, among Landlord, Tenant and The Sumitomo Bank
Limited New York Branch (which agreement is referred to in the recorded
memorandum described in clause (vi) above).
The interest of the tenant under said Severance Lease was assigned by that
certain Assignment and Assumption of Severance Lease, dated as of November 21,
1996, made by Olympia & York Tower D Company, as assignor, to and with, WFP
Tower D Co. L.P., which is intended to be recorded.
A-1
<PAGE>
EXHIBIT B TO REIMBURSEMENT AGREEMENT
LIST OF UNINSURABLE CASUALTIES
1. Nuclear reaction or nuclear radiation, all whether controlled or
uncontrolled, and whether such loss be direct or indirect, proximate or
remote, or be in whole or in part caused by, contributed to, or aggravated
by the peril(s) insured against in the insurance policy obtained by Tenant
pursuant to Article 7 of the Lease.
2. Except as otherwise provided in Section 7.01.(a)(i) of the Lease, hostile
or warlike action in time of peace or war, including action in hindering,
combating, or defending against an actual, impending, or expected attack
(a) by any government or sovereign power, (de jure or de facto) or by
any authority maintaining or using military, naval or air forces;
(b) or by military, naval, or air forces;
(c) or by an agent of any such government, power authority, or forces,
3. Any weapon employing atomic fission.
4. Except as otherwise provided in Section 7.01 (a)(i) of the Lease,
rebellion, revolution, civil war, usurped power, or action taken by
governmental authority in hindering, combating, or defending against such
occurrence.
5. Seizure or destruction by order of public authority.
6. Inherent vice, termites and other insects, wet or dry rot, vermin and
contamination.
B-1
<PAGE>
Exhibit 10(xxxiii)(b)
AMENDED AND RESTATED
REIMBURSEMENT AGREEMENT
between
WFP TOWER B CO. L.P.
and
MERRILL LYNCH/WFC/L, INC.
Premises
Parcel B
Battery Park City - World Financial Center
New York, New York
Dated as of
November 21, 1996
<PAGE>
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT
TABLE OF CONTENTS
Page
----
Recitals......................................................................1
Article 1 - Reimbursements.................................................3
Article 2 - [Intentionally Omitted].......................................21
Article 3 - Assignment....................................................21
Article 4 - Notices.......................................................22
Article 5 - No Broker.....................................................26
Article 6 - Amendment.....................................................26
Article 7 - Termination...................................................28
Article 8 - Integration; Conflict with Other Agreements...................29
Article 9 - Miscellaneous.................................................30
Article 10 - Definitions...................................................33
Exhibit A - Description of Ground Lease B
Exhibit B - List of Uninsurable Casualties
Exhibit C - Form of Assignment and Assumption Agreement
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<PAGE>
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT, made as of November 21, 1996
and effective as of September 29, 1988, between WFP TOWER B CO. L.P.
("Landlord"), a New York limited partnership having an office at One Liberty
Plaza, New York, New York 10006, and MERRILL LYNCH/WFC/L, INC. ("Tenant"), a New
York corporation having an office at One Liberty Plaza, New York, New York 10080
(this "Agreement").
RECITALS
A. Landlord, the successor-in-interest to Olympia & York Tower B Company
("O&Y"), is the owner of the interest and estate of the tenant under that
certain lease ("Ground Lease B") described in Exhibit A annexed hereto and made
a part hereof, covering the land known as Parcel B ("Parcel B" or the "Parcel")
more particularly described in Ground Lease B, and the buildings and other
improvements now or hereafter erected thereon (such buildings and improvements
collectively, "Building B" or the "Building"). Parcel B is located in the
project (the "Project") known as the World Financial Center at Battery Park City
in the City, County and State of New York.
B. O&Y and Tenant entered into that certain Agreement of Lease dated as of
September 29, 1988, as amended by the First Amendment of Lease dated as of
December 14, 1988 and the Second Amendment of Lease dated as of the date hereof
(collectively, "Lease B" or the "Lease") whereby, among other things, O&Y
demised and leased to Tenant Parcel B and
<PAGE>
Building B (except for certain excluded portions of such Building)
(collectively, the "Premises" or "Premises B"), and Tenant hired Premises B from
O&Y, all upon and subject to the terms, covenants and conditions set forth in
the Lease. O&Y's interest in the Lease has, as of the date hereof, been assigned
to Landlord.
C. Any capitalized term used in this Agreement which is not defined in
this Agreement shall have the meaning provided for such term in the Lease,
unless expressly provided otherwise; and all capitalized terms which are defined
in this Agreement shall be defined in or listed with cross references in Article
10 hereof.
D. Solely for purposes of facilitating Landlord's financing, the Lease
imposes upon Tenant obligations to perform certain actions and make certain
payments on behalf of and for the benefit of Landlord. In order to carry out the
true intent of Landlord and Tenant with respect to such obligations under the
Lease, Landlord and Tenant agree that Landlord shall make certain reimbursements
to Tenant, in accordance with the terms, covenants and conditions of this
Agreement, which amends and restates in its entirety the Reimbursement Agreement
between O&Y and Tenant, dated as of August 24, 1984, as amended by the First
Amendment to Building B Agreement to Lease and Reimbursement Agreement and
Second Amendment to Leasehold Improvements Agreement, dated as of July 12, 1985,
as further amended by the Third
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<PAGE>
Amendment to Building B Agreement to Lease, Fourth Amendment to Leasehold
Improvements Agreement and Second Amendment to Reimbursement Agreement, dated
September 23, 1987, as amended and restated by an Amended and Restated Third
Amendment to Building B Agreement to Lease, Fourth Amendment to Leasehold
Improvements Agreement and Second Amendment to Reimbursement Agreement, dated as
of September 29, 1988, and by the Amended and Restated Second Amendment to
Reimbursement Agreement, dated as of September 29, 1988 (collectively, the
"Original Reimbursement Agreement"), which has been assigned by O&Y to, and
assumed by, Landlord.
ACCORDINGLY, the parties hereto hereby agree that the Original
Reimbursement Agreement is hereby amended and restated in its entirety by this
Agreement, which shall have the terms, covenants and conditions hereinafter set
forth, without reference to prior agreements or amendments.
ARTICLE I
REIMBURSEMENTS
1.1. (a) Notwithstanding anything which may be to the contrary in the
Lease, during the Original Term of the Lease (except as otherwise provided in
Section 1.1.(c) and subject to the provisions of Section 1.8. hereof), Landlord
shall reimburse Tenant for:
(i) the actual and reasonable cost of any Restoration of the Building
necessitated by damage due to any of the causes which Landlord and Tenant have
agreed are not
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<PAGE>
insurable, which causes are listed in Exhibit B annexed hereto and made a part
hereof;
(ii) the actual and reasonable cost of repairing any latent defect in the
Building of which Landlord is given notice during the Original Term of the
Lease, but only to the extent such cost is not covered by (x) any of the
manufacturers' or contractors' warranties assigned to Tenant pursuant to the
Leasehold Improvements Agreement dated as of August 24, 1984 between O&Y and
Tenant, as amended (the "LIA") which are applicable to the latent defect in
question, provided that Tenant, prior to seeking reimbursement from Landlord
under this Section 1.1.(a)(ii), shall either (1) use its reasonable efforts to
enforce such warranties or (2) reassign to Landlord and give Landlord a
reasonable period of time in which to enforce such warranties, or (y) Tenant's
casualty insurance (and would not be covered by Tenant's casualty insurance if
Tenant, subject to Exhibit B, were carrying all of the casualty insurance
required to be carried by Tenant under Article 7 of the Lease); provided,
however, that if Landlord is required to reimburse Tenant pursuant to this
clause (ii) with respect to latent defects of which Landlord is not given notice
before the end of the period (the "Warranty Period") that begins on the later to
occur of the date that Tenant (or any person claiming by, through or under
Tenant) commences occupancy of the Building or portion thereof in
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<PAGE>
question for the conduct of its business or the date the defective item or
element is put into service in the Building for its intended use, but in no
event shall the Warranty Period begin more than twelve (12) months after the
later to occur of September 29, 1988 (or the date the Interim Rent commenced for
the portion(s) of the Building in question, if earlier) or the date the item or
element in question is available for use in such portion(s) of the Building, and
ends (i) two (2) years thereafter in the case of non-structural elements of the
Building (the parties acknowledging that this period has expired) and (ii) ten
(10) years thereafter in the case of structural elements or the roof of the
Building, then Landlord shall only be obligated hereunder with respect to
fifty-one percent (51%) of the amount that would otherwise be reimbursed to
Tenant;
(iii) the actual and reasonable costs of any Restoration performed by
Tenant pursuant to Section 9.03(b) of the Lease as a result of any partial
condemnation, but only to the extent that such actual and reasonable costs
exceed the award received by or made available to Tenant for such Restoration;
(iv) the amount that the abatement of Fixed Rents on account of any
partial condemnation is less than the amount determined by the calculation
prescribed in Section 9.03(d) of the Lease because Tenant is required under such
Section to pay Fixed Rents in a sufficient amount to cover
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<PAGE>
Landlord's debt service for the First Mortgage, which amount shall be payable in
installments at the times the installments of Fixed Rent to which such
reimbursement pertains are payable under Lease B;
(v) the actual and reasonable costs of any work performed by Tenant
pursuant to Section 30.01(b) or 30.02 of the Lease to preserve Building B from
injury or damage due to any excavation on adjacent property, provided that prior
to seeking reimbursement from Landlord under this Section 1.1.(a)(v), Tenant
shall either (x) use reasonable efforts to obtain reimbursement for such cost
from the Person who caused such excavation, or (y) assign to Landlord Tenant's
right to receive such reimbursement from such Person;
(vi) the amounts, if any, paid (and not deducted by Tenant from any other
Rental or paid to Tenant by the tenant under O&Y Lease B or on its behalf) by
Tenant pursuant to Sections 3.01(j)(ii), 3.01(m)(iv), 3.02, 3.04, 3.05, 3.08,
4.01, 4.03, 5.01, 7.01(a), 12.01, 12.02, 12.03 and 14.01 of the Lease on account
of any portions of Parcel B which are not part of the Premises, each of which
amounts shall be payable by Landlord not more often than Tenant is required to
pay the item with respect to which such reimbursement is being made; and
(vii) the amount, if any, paid by Tenant as Rental pursuant to Section
9.01 of the Lease with respect to the
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<PAGE>
period commencing on the date of taking (as such term is defined in the Lease)
and ending on the date payment is made to Landlord or on its behalf pursuant to
Section 9.01(c)(ii) of the Lease, which amount shall be payable in installments
at the times the installments of Fixed Rent or other Rental to which such
reimbursement pertains are payable under the Lease.
(b) For purposes of Section 1.1.(a), "latent defect" shall not include any
damage or destruction from fire or other casualty, or any damage from ordinary
or extraordinary wear and tear, or any damage caused by negligence or wilful
misconduct of Tenant, its Affiliates or Subtenants (or their respective agents,
servants, employees, invitees and contractors), other than Landlord or its
Affiliates (or their respective agents, servants, employees, invitees and
contractors), but shall be limited to failures and flaws in the materials,
fixtures, equipment and systems included in the Work (as defined in the LIA) or
in the design thereof (unless designed by Tenant, its architect or its engineer,
provided that if by Tenant's engineer, such design was prepared for Tenant and
not for Landlord) or the installation thereof, and the failure of any such
equipment or system to perform in accordance with its design specifications,
provided (i) such materials, fixtures, equipment or systems are being used and
maintained by Tenant substantially in accordance with the manufacturer's
instruc-
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<PAGE>
tions furnished to Tenant, and (ii) such defect could not normally be observed
upon a reasonable inspection of the Premises or portion thereof in question made
within thirty (30) days after the later of (x) the date the item or element in
question was put into service for its intended use or (y) the date Tenant (or
any Person claiming by, through or under Tenant) commenced occupancy of the
Building or portion thereof in question for the conduct of its business, but in
no event later than the date which is the later of twelve (12) months after (1)
September 29, 1988 or the date Interim Rent (as defined in the LIA) commenced
under the LIA for the portion(s) of the Premises in question, if earlier and (2)
the date the item or element in question becomes available for use.
(c) Notwithstanding anything to the contrary in Section 1.1.(a), Landlord
shall continue to be obligated to make the reimbursements provided for (i) in
clauses (i), (iii) and (iv) of such Section during the first Extended Term or
the first and second Extended Terms if Tenant effectively exercised its option
under Section 2.02 of the Lease for such Extended Term or Terms at least
thirty-six (36) months prior to the expiration of the Original Term, and (ii) in
clauses (v) and (vi) of such Section during any Extended Term(s) of the Lease.
(d) Subject to the provisions of Sections 1.1.(a)(iv), (a)(vi) and
(a)(vii) in the case of the reimbursements
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referred to in such Sections, with respect to any reimbursement claimed by
Tenant pursuant to this Section 1.1., Tenant shall submit a reasonably detailed
statement therefor to Landlord, together with such supporting data as Landlord
shall reasonably require (including, without limitation, copies of any
statements furnished by the Operator under the Project Operating Agreement on
which Tenant's statements hereunder are based, and, subject to the limitation of
Section 1.8.(a), within ten (10) Business Days (fifteen (15) Business Days in
the case of reimbursements claimed pursuant to Section 1.1.(a)(vi)) after
receipt of such statement and data, Landlord shall pay to Tenant the amount set
forth in such statement. If Landlord disputes such amount or any portion
thereof, such dispute shall be resolved by arbitration as provided in Article 36
of the Lease. Landlord shall, nevertheless, pay the amount set forth in such
statement, without prejudice to Landlord's right to contest the same; and if it
shall be determined that Landlord made an overpayment, Tenant shall refund to
Landlord the amount of such overpayment within ten (10) Business Days after
notice of the arbitrators' decision, together with interest thereon at the Prime
Rate from the date of such overpayment to the date of such refund.
(e) If an arbitration proceeding pursuant to Section 1.1(d) involves a
dispute pertaining to a reimbursement for
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amounts paid by Tenant pursuant to Section 12.03(b) of Lease B, the tenant under
O&Y Lease B shall have the right, at its sole cost and expense, to participate
in such arbitration.
1.2. Notwithstanding anything which may be to the contrary in the Lease,
if Tenant is required to pay to the First Secured Lender an amount pursuant to
Section 9.01(e) of the Lease, then Landlord shall reimburse Tenant for the
amount of such payment by Tenant. Landlord shall pay such reimbursement to
Tenant, subject to the limitation of Section 1.8.(a), within ten (10) Business
Days after Tenant's statement therefor to Landlord, together with interest
thereon at the Prime Rate from the date that such payment was made by Tenant.
1.3. Intentionally Omitted.
1.4. (a) Upon the expiration or earlier termination of the Lease (unless
such earlier termination is due to an Event of Default under the Lease),
Landlord shall reimburse Tenant for the then unamortized portion of the cost to
Tenant of any repairs and replacements made by Tenant at Building B which (i)
are to (A) any of the structural components of the Building or (B) any of the
central systems or components of the central systems of the Building which in
either case (1) Tenant is required to make under the terms of the Lease, (2) is
not a repair or replacement for which Tenant is entitled to reimbursement from
Landlord pursuant to Section 1.1., (3) is not a repair or replacement
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covered by insurance proceeds or condemnation awards payable to Tenant, (4) is
not a repair or replacement the need for which was caused by the negligence or
wilful misconduct of Tenant, its Affiliates or Subtenants, or their respective
agents, servants, employees, invitees or contractors (other than Landlord or its
Affiliates or their respective agents, servants, employees, invitees or
contractors) and (5) is a repair or replacement which Tenant is required to
capitalize, and may not treat as an operating expense, under generally accepted
accounting principles, (ii) are amortized over the useful life of the items(s)
in question and in a manner consistent with past practices of Merrill Lynch &
Co., Inc. ("Merrill"), provided that prior to making such repair or replacement,
Tenant shall have obtained Landlord's written consent (which consent Landlord
shall not unreasonably withhold or delay) to the specifications, budget,
contractor and contract for such repair or replacement, and (iii) are not
recovered by Tenant pursuant to Sections 9.01(c) and/or 9.09 of the Lease (if
the Lease terminates pursuant to Section 9.01(a) thereof). Subject to Section
1.4.(b), such reimbursement shall be in the amount specified in a notice from
Tenant to Landlord requesting the same, which notice shall be accompanied by (x)
a certificate from an independent registered architect or licensed professional
engineer as to the cost to Tenant of the repairs and replacements in question,
(y) a certificate from
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an authorized officer of Tenant as to the then unamortized portion of such cost
and (z) such other information and documentation as Landlord shall reasonably
require with respect to such repairs and replacements, including, without
limitation, Tenant's accounting records with respect thereto, which records
shall be kept in accordance with Merrill's past practices. Landlord shall pay
such reimbursement to Tenant, subject to the limitation of Section 1.8.(a),
within ten (10) Business Days after Tenant, pursuant to Article 33 of the Lease,
has completed vacating the Premises.
(b) If Landlord disputes the amount of the reimbursement or the compliance
of the repairs and replacements in question with any of the requirements set
forth above, such dispute shall be submitted to and resolved by arbitration in
accordance with Article 36 of the Lease. Landlord shall, nevertheless, pay the
reimbursement in accordance with Tenant's notice, without prejudice to
Landlord's right to contest the same; and if it shall be determined that Tenant
was not entitled to any reimbursement or that the reimbursement exceeded the
amount to which Tenant was entitled, Tenant shall refund to Landlord the amount
of the reimbursement, or such excess, as the case may be, within ten (10)
Business Days after notice of the arbitrators' decision, together with interest
thereon at the Prime Rate from the date such reimbursement was paid (or
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dates, if the reimbursement was paid in installments) to the date of such
refund.
1.5. Except as provided in Section 1.8. of this Agreement, any payment
(other than a payment for interest) due from one party to the other under the
provisions of this Article 1 which the party obligated to make such payment
fails to pay within the period of ten (10) Business Days provided for the making
of such payment shall bear interest at an annual rate equal to the Prime Rate
plus two and one-half percent (2.5%) from the day next following the expiration
of such period of ten (10) Business Days to the date of payment.
1.6. (a) Upon at least three (3) Business Days' notice from Landlord,
Tenant shall make available to Landlord for inspection, and shall permit
Landlord (at Landlord's sole cost and expense) to audit, during business hours
on Business Days, the books and records of Tenant pertaining to or relevant to
any reimbursements requested by Tenant pursuant to this Article 1.
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(b) In connection with any reimbursement for amounts paid by Tenant
pursuant to Section 12.03(b) of Lease B, Tenant shall permit the tenant under
O&Y Lease B to (i) participate with Landlord, at such tenant's sole cost and
expense, in any inspection or audit performed by Landlord pursuant to Section
1.6.(a) of this Agreement, and (ii) on at least two (2) Business Days' notice,
to inspect, during business hours on Business Days, any submeters located in the
Premises which pertain to utilities furnished to the premises demised to the
tenant under O&Y Lease B.
1.7. If Landlord, pursuant to the separate agreement referred to in
Section 2.02(g) of the Lease (relating to the period after the Original Term),
shall pay an amount for which Landlord must reimburse Tenant in whole or in part
hereunder, then Landlord shall be relieved of such reimbursement obligation to
the extent of the amount so paid to Tenant. In the event that Tenant shall
receive a payment for all or a portion of the same item from Landlord both
hereunder and under the Lease or hereunder and from the tenant under O&Y Lease B
(or on its behalf), Tenant shall refund the extra payment to Landlord with
interest at the Prime Rate from the date such extra payment was made until the
date refunded.
1.8. (a) Until repayment in full of the loan in the aggregate principal
amount of $873,436,000 being made on the date hereof by Boatmen's National
Mortgage, Inc. to Landlord
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(as the same may be modified, amended or refinanced to the extent provided in
clause (a)(v) below or in Section 1.8.(b), the "Loan"), Landlord and Tenant
agree (i) with respect to any payment due Tenant from Landlord hereunder and not
paid by Landlord within the period of ten (10) Business Days provided for the
making of such payment, such payment shall accrue and shall bear interest at an
annual rate equal to the Prime Rate plus three percent (3%), compounded monthly,
from the day next following the expiration of such period of ten (10) Business
Days to the date of payment and shall be enforceable against Landlord only in
accordance with this Section 1.8.(a) and Section 1.8.(b) hereof, (ii) Tenant
shall forbear its rights to pursue collection of such amounts due and interest
accruing thereon and shall not exercise any remedies with respect thereto or of,
under, or with respect to this Agreement against the Landlord or the Secured
Lender, even if an Event of Default has occurred under the Loan, but Tenant's
agreement to forbear shall terminate in the event of the bankruptcy of Landlord,
(iii) in connection with the exercise of any enforcement rights by Tenant
hereunder, Tenant agrees to waive any equitable right to the marshaling of the
assets of Landlord by the Secured Lender and hereby grants to Secured Lender for
its benefit an irrevocable (until the repayment in full of the Loan) power of
attorney (coupled with an interest) to vote with respect to any claims Tenant
may have
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hereunder in connection with a bankruptcy of Landlord (provided that Secured
Lender in exercising such power of attorney shall take reasonable steps
necessary so as not to impair Tenant's claims against Landlord except to the
extent necessary to subordinate Tenant's claim to repayment in full of the
Loan), (iv) Tenant shall remit to Secured Lender any amounts collected from
Landlord in contravention of the terms and conditions hereof and shall have no
right of subrogation against Secured Lender with respect to any amounts so
remitted, and (v) Tenant's right to payment hereunder shall be subordinate to
the Loan, whether or not an event of bankruptcy with respect to Landlord shall
have occurred, and to any modification or amendment of the Loan (including a
refinancing thereof) which does not (A) increase the principal amount of the
indebtedness thereunder or (B) change the requirement that the Loan shall be
fully amortized over the Original Term of Lease B, except that after default
thereunder, modifications or amendments (including a refinancing thereof) may
provide for the extension of the maturity date, capitalization of accrued (but
unpaid) interest (and default interest), the payment of protective advances (and
interest thereon) and resetting of the interest rate and an increase in the
principal amount to pay for the transaction costs incurred in connection with
such extension, modification or amendment. Landlord agrees that Tenant's
forbearance and subordination under this Sec-
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tion 1.8. shall not in any way prejudice or impair the validity or
enforceability of Tenant's claims hereunder except to the extent provided herein
and shall in no way restrict Tenant from exercising rights against any party
other than Landlord or the Secured Lender. The rights of Tenant hereunder are
subordinate in lien, right and payment and in all other respects to the Loan,
and Tenant hereby agrees to reaffirm from time to time such subordination of its
rights (including, without limitation, on the date of the securitization of the
Loan) as required by the holder of the Loan to confirm the foregoing.
Notwithstanding anything to the contrary contained above, Tenant may, provided
an Event of Default under the Loan shall not have occurred and be continuing,
receive payment from the Landlord of amounts due hereunder, prior to payment in
full of the Loan, to the extent such payment is made by Landlord from excess
cashflow available to Landlord (i.e., after payment from rent received of all
amounts then due under the Loan) or from other sources.
(b) With respect to any refinancing of the Loan, if such refinancing
provides for funds available to Landlord, after any repayment of the Loan (as
the same may have previously been modified or amended) and the Zero Coupon Note,
as defined in the mortgage securing the Loan, and all financing expenses
(including, without limitation, fees and expenses of counsel to Landlord, the
prior lender and the
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new lender in connection therewith), which are not to be used or reserved for
building expenditures at Building B, including, without limitation, costs of
leasing, owning, operating, maintaining and improving, Building B and Project
Operating Agreement Common Areas or Civic Facilities, then Landlord shall to the
extent of such excess funds (i.e., above amount required for financing expenses
and building expenditures) first pay all accrued and unpaid amounts due
hereunder and provide such reserves or other security or credit support
reasonably satisfactory to Tenant so that all amounts which Tenant believes are
reasonably likely to be payable hereunder during the Original Term based on all
of the applicable facts and circumstances, including the fact that other parties
may be liable for such obligations (i.e., the Retail Tenant with respect to the
obligations of Landlord under Section 1.1.(a)(vi) hereof), will be paid when
due. Within ten (10) days after Landlord shall request the same, Tenant shall
deliver to Landlord and any proposed new lender specified by Landlord, a written
instrument executed by Tenant regarding characterization of any use of funds
from a refinancing referenced by Landlord in its request, whether reserves (or
other security) are required, and, if so, in what amount. Such instrument shall
be binding on Tenant. Other than making the payments of accrued amounts
referenced above and providing the reserves (or other security) referenced
above, there shall be no
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other restrictions on distributions by Landlord or on the use of refinancing
proceeds. Any dispute as to the amounts, if any, to be paid under this Section
1.8.(b) or whether reserves (or other security) are required or the amount or
nature thereof, shall be submitted to and resolved by arbitration in accordance
with Article 36 of the Lease. If Landlord, pending such arbitration, elects to
close on a proposed refinancing and pay Tenant such amounts and provide Tenant
with such reserves or other security as Tenant requires (although any of the
same is the subject of such arbitration) and Landlord is successful in such
arbitration, Tenant shall refund to Landlord any amounts determined in such
arbitration not to be due to Tenant by Landlord hereunder together with interest
thereon at the Prime Rate from the date paid by Landlord, Tenant shall return to
Landlord any reserves or other security not required hereunder as determined in
such arbitration and Tenant shall allow Landlord to substitute alternate
security, as may be determined in such arbitration to be permitted hereunder.
For purposes of this Section 1.8.(b), any new loan to Landlord made during the
Original Term shall be considered a refinancing of the Loan.
(c) Landlord agrees that Landlord shall not sell or otherwise voluntarily
transfer without Tenant's consent Landlord's interest in Lease B to any Person
unless such transferee shall execute and deliver to Tenant an agreement
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substantially in the form annexed hereto as Exhibit C whereby the transferee
shall assume the obligations hereunder on the part of Landlord to be performed
or observed, including all accrued payment obligations, and, if such agreement
is not so delivered, any such purported sale or transfer shall be null and void
and of no force or effect; provided, however, that no such consent shall be
necessary with respect to an assignment to a transferee (a "Foreclosure
Transferee") in lieu of foreclosure or to a purchaser at a foreclosure sale. At
Landlord's request, Tenant shall deliver an acknowledgement at the closing that
it received such agreement, but Tenant's failure to deliver such acknowledgement
shall not affect the sale or the validity of the release as provided above. Upon
Landlord's delivery of such agreement, Landlord shall be released from all
liability arising under or in connection with this Agreement. In the event of a
voluntary transfer of the Property made without Tenant's consent, Landlord
agrees that any proceeds thereof, after any repayment of amounts owed to Secured
Lenders (including holders of the Loan and the Zero Coupon Note) and payment of
all expenses of sale or transfer, shall first be used to pay all accrued and
unpaid amounts due hereunder. This Section 1.8.(c) shall not apply to any
transfer of the type described in Section 8.3. Notwithstanding anything herein
contained to the contrary, a Foreclosure Transferee shall take Landlord's
interest in
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Lease B free and clear of Landlord's obligations hereunder and any lien or
security interest which may arise in connection therewith.
1.9. Tenant shall in no event offset or deduct the amount of any payment
due under this Agreement from Landlord to Tenant, and/or the interest thereon,
against any Rental or other sums due or payable under the Lease. Tenant shall
have recourse solely to the property of Landlord, and the direct or indirect
partners, agents, employees, controlling persons, shareholders, trustees,
directors, officers or other principals, if any, of Landlord shall have no
personal liability under or in connection with this Agreement.
ARTICLE 2
[INTENTIONALLY OMITTED]
ARTICLE 3
ASSIGNMENT
3.1. This Agreement, and Tenant's rights hereunder, shall not be assigned
by Tenant except to a Person to whom Tenant has the right, without the consent
of Landlord, to assign the Lease pursuant to Article 10 thereof and to whom
Tenant has assigned the Lease. Any other purported assignment by Tenant shall be
null and void and of no force or effect.
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3.2. If Tenant shall duly assign its rights hereunder, the assignee shall
execute and deliver to Landlord an agreement in form and substance reasonably
satisfactory to Landlord whereby the assignee shall assume the obligations
hereunder on the part of Tenant to be performed or observed but Tenant shall
remain fully liable for the payment and performance of the obligations hereunder
to be paid, performed or observed by Tenant.
3.3. Notwithstanding anything which may be to the contrary hereinabove, if
Tenant assigns its interest under the Lease to a Person to whom Tenant is not
permitted to assign this Agreement, and Tenant is not released from its
obligations under the Lease by reason of or in connection with such assignment,
this Agreement shall remain in full force and effect as between Landlord and
Tenant herein named (but not between Landlord and Tenant's assignee), and Tenant
herein named shall be entitled to a reimbursement hereunder if, after Tenant's
assignee fails to do so, Tenant herein named performs an obligation under the
Lease which gives rise to a reimbursement or loan under this Agreement.
ARTICLE 4
NOTICES
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Whenever it is provided in this Agreement that a notice, demand, request,
consent, approval or other communication (each of which is herein referred to as
a "Notice") shall or may be given to or served upon either of the parties by the
other, and whenever either of the parties shall desire to give or serve upon the
other any Notice with respect hereto or the Premises, each such Notice shall be
in writing and, any law or statute to the contrary notwithstanding, shall be
effective for any purpose if given or served as follows:
(a) if by Landlord, by mailing the same to Tenant by certified or
registered mail, postage prepaid, return receipt requested, by delivery by
reputable overnight courier or by personal delivery, receipted on behalf of the
party to whom addressed, addressed to Tenant at:
Merrill Lynch & Co., Inc.
World Financial Center-Tower B
225 Liberty Street, 12th Floor
New York, New York 10080-6112
Attention: Michael A. Loring
Director, Headquarters New York
Real Estate
and
Merrill Lynch & Co., Inc.
World Financial Center-Tower D
250 Vesey Street, 34th Floor,
New York, New York 10281-1334
Attention: Phyllis Safer
Corporate Law Department
with copies thereof to:
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Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: James I. Black III, Esq.
or to such other address(es) and attorneys as Tenant may from time to time
designate by Notice given to Landlord by certified or registered mail, reputable
overnight courier or personal delivery as aforesaid, except that at no time
shall Landlord be required to give, in the aggregate, more than four Notices or
copies thereof;
(b) if by Tenant, by mailing the same to Landlord by certified or
registered mail, postage prepaid, return receipt requested, by reputable
overnight courier or by personal delivery, receipted on behalf of the party to
whom addressed, addressed to Landlord at:
WFP Tower B Co. L.P.
One Liberty Plaza
New York, New York 10006
Attention: Chief Financial Officer
with copies thereof to:
(1) WFP Tower B Co. L.P.
One Liberty Plaza
New York, New York 10006
Attention: Managing Attorney
(2) Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Attention: Joshua Mermelstein, Esq.
or to such other address(es) and attorneys as Landlord may from time to time
designate by Notice given to Tenant by certified or registered mail, reputable
overnight courier or personal delivery as aforesaid, except that at no time
shall
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Tenant be required to give, in the aggregate, more than four Notices or copies
thereof; and
(c) as long as the Loan remains outstanding, Tenant shall send to Secured
Lender a Notice with respect to any Landlord default which Tenant has given to
or served upon Landlord.
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ARTICLE 5
NO BROKER
Landlord and Tenant each covenants, warrants and represents to the other
that no broker was instrumental in bringing about or consummating this Agreement
and that it had no dealings with any broker or other Person concerning the
transactions referred to herein, other than Cushman Realty Corporation, Tenant's
consultant, who is entitled to any brokerage commission or finder's fee by
reason thereof. Tenant shall indemnify and hold Landlord harmless against and
from, and Landlord shall indemnify and hold Tenant harmless against and from,
any claims for any such brokerage commissions or fees, and all costs, expenses
and liabilities in connection therewith, including, without limitation,
attorney's fees and expenses, arising out of any dealing had by the indemnifying
party with any broker, consultant or other person alleging to have acted or
dealt with the indemnifying party in connection with this transaction
(including, without limitation, Cushman Realty Corporation in the case of the
indemnification by Tenant). Tenant shall pay any and all fees, commissions and
other charges of Cushman Realty Corporation.
ARTICLE 6
AMENDMENT
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This Agreement may not be changed, modified, or terminated orally, nor may
any provision hereof be waived orally, but only by a written instrument of
change, modification, termination or waiver executed by the party against whom
enforcement of any change, modification, or termination is sought. Until such
time as the Loan is paid in full, Landlord and Tenant will not amend or modify
this Agreement except (a) to add additional reimbursement obligations with
respect to obligations which Tenant undertakes under Lease B, or (b) provided
(i) such amendment or modification does not adversely affect the subordination
effected by the Subordination and Forbearance Agreement (Amended and Restated
Reimbursement Agreement Tower B), made as of the date hereof by Tenant in favor
of Boatmen's National Mortgage Inc. (the "Forbearance Agreement"), (ii) such
amendment or modification does not otherwise constitute a breach of the
Forbearance Agreement, and (iii) Landlord (or any successor or assign) as
obligor under the Loan, receives written confirmation from the Rating Agencies
(as defined in the Forbearance Agreement) that such amendment or modification
will not result in the rating of the Securities (as defined in the Forbearance
Agreement) being withdrawn, downgraded or qualified.
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ARTICLE 7
TERMINATION
7.1. Subject to the provisions of Section 7.3. hereof, this Agreement, and
all of the obligations hereunder of the parties hereto shall terminate upon the
termination, for any reason whatsoever, of Lease B.
7.2. Notwithstanding anything to the contrary hereinabove, Tenant shall
not be entitled to receive, and Landlord shall have no obligation to make, any
reimbursement pursuant to Article 1 hereof, at any time and for so long as an
Event of Default under and as defined in the Lease has occurred and is
continuing.
7.3. If this Agreement shall terminate as provided in Section 7.1. hereof,
Tenant's subordination and standstill obligations under Section 1.8.(a) shall
survive and the then accrued and unpaid obligations of each party to the other
shall, nevertheless, survive such termination. Further, if Lease B shall
terminate (a) pursuant to Section 9.01. of such Lease, Landlord's obligations
under Section 1.2. hereof shall survive such termination, or (b) for any reason
other than an Event of Default under the Lease, Landlord's obligations under
Section 1.4. hereof shall survive such termination.
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ARTICLE 8
INTEGRATION; CONFLICT WITH OTHER AGREEMENTS
8.1. All understandings and agreements heretofore had between the parties
hereto with respect to the matters covered by this Agreement are merged in this
Agreement, which fully and completely expresses their agreement with respect to
such matters, except to the extent such matters are covered by any other written
agreement between the parties dated on or prior to the date of execution of this
Agreement (in the case of prior agreements, only to the extent the parties have
agreed such prior agreements survive pursuant to a separate agreement dated the
date hereof).
8.2. This Agreement is intended to be read together with the Lease in
determining the full rights and obligations of Landlord and Tenant under the
Lease, notwithstanding anything contained to the contrary in Article 34 of the
Lease. If there shall be any conflict between any provision of this Agreement
and the Lease, or any other written agreement between the parties, this
Agreement shall prevail. However, nothing contained in this Agreement, whether
express or implied, shall give to Tenant any right of abatement, reduction,
setoff, counterclaim, defense or deduction with respect to any Rental or other
sums due or payable under the Lease, and no default or other non-performance
under this Agreement by Landlord shall affect
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the validity of the Lease or Tenant's obligations under the Lease.
8.3. In no event shall this Agreement be binding upon the Ground Lessor or
any Secured Lender or any Person who succeeds to the rights of the Landlord by
foreclosure or assignment or deed/assignment in lieu of foreclosure or otherwise
(except for a voluntary transfer made without Tenant's consent) nor shall the
Ground Lessor, the Secured Lender or any such Person have any liability under
this Agreement.
ARTICLE 9
MISCELLANEOUS
9.1. The captions and table of contents of this Agreement are for
convenience of reference only and in no way define, limit or describe the scope
or intent of this Agreement.
9.2. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without the aid of any canon or rule of law
requiring construction against the party drawing or causing this Agreement to be
drawn.
9.3. (a) Except as otherwise expressly provided in this Agreement, the
provisions of this Agreement shall bind and benefit the successors and assigns
of the parties hereto with the same effect as if mentioned in each instance
where a party is named or referred to; provided, however, that
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(i) no violation of the provisions of Article 3 shall operate to vest any rights
in any successor or assignee of Tenant and (ii) the provisions of this Section
9.3. shall not be construed to be a consent by a party to an assignment of this
Agreement by another party.
(b) The provisions of this Agreement are intended to be for the sole
benefit of the parties hereto and Merrill, and their respective successors and
assigns, and none of the provisions of this Agreement are intended to be, nor
shall they be construed to be, for the benefit of any third party, except that
the provisions of Sections 1.8. and 8.3. shall benefit any Secured Lender or any
Person who succeeds to the rights of the Landlord by foreclosure or assignment
or deed/assignment in lieu of foreclosure or otherwise (except for a voluntary
transfer made without Tenant's consent).
9.4. The parties shall and do hereby each waive trial by jury in any
action, suit or proceeding arising out of or in connection with this Agreement,
or the interpretation, construction or enforcement thereof.
9.5. (a) The parties each agree to do such other and further acts and
things, and to execute and deliver such instruments and documents, as a party
may reasonably request from time to time, in furtherance of the purposes hereof.
(b) Without limitation of the provisions of Section 9.5.(a), the parties
hereto shall deliver to the other such evidence as may be reasonably required by
the
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other of the due authorization, execution and delivery of this Agreement,
including, without limitation, legal opinions of the respective independent
counsel for each party as to such due authorization, execution and delivery.
9.6. The terms "hereof," "herein" and "hereunder," and words of similar
import, shall be construed to refer to this Agreement as a whole (including,
without limitation, the annexed Exhibits), and not to any particular Article,
Section, Exhibit or provision, unless expressly so stated.
9.7. All words or terms used in this Agreement, regardless of the number
or gender in which they are used, shall be deemed to include any other number
and any other gender, as the context may require.
9.8. Landlord and Tenant each agrees at any time and from time to time,
upon not less than ten (10) days prior request by the other party, to execute,
acknowledge and deliver to the other party a certificate in writing stating (a)
that this Agreement is unmodified and in full force and effect (or if there have
been modifications that the same is in full force and effect as modified and
stating the modifications) and (b) whether or not to the best knowledge of the
Landlord or Tenant, as the case may be, (i) there is any unpaid sum owed by
either party to the other pursuant to this Agreement, (ii) there is any existing
default under this Agreement on the part of either party hereto and, if
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so, specifying each such default, and (iii) such other matters as the requesting
party may reasonably request.
9.9. Tenant acknowledges that WFP Tower B Co. L.P. is a legal entity
separate and distinct from any other Person (including, without limitation, the
general partner of WFP Tower B Co. L.P., the tenant under O&Y Lease B, World
Financial Properties, L.P. and any Affiliates of the foregoing). Tenant shall
not seek to substantively consolidate WFP Tower B Co. L.P. with any other Person
or such Person's assets or liabilities in any action or proceeding, and Tenant
shall refrain from filing or otherwise initiating or supporting the filing of
any motion in any bankruptcy or insolvency proceeding to substantively
consolidate Landlord with any other Person or such Person's assets or
liabilities.
9.10. In determining the fair market rental value of all or any portion of
the Premises or the fair market value of the interest of Landlord in the Ground
Lease B and Parcel B, to the extent either such calculation is to be made under
Lease B, then the rights of Tenant and the obligations of Landlord hereunder
shall be taken into account in making such determination.
ARTICLE 10
DEFINITIONS
10.1. "Agreement": Defined in the heading hereof.
10.2. "Building," "Building B": Defined in Recital A.
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<PAGE>
10.3. "Forbearance Agreement": Defined in Article 6.
10.4. "Foreclosure Transferee": Defined in Section 1.8.(c).
10.5. "Ground Lease B": Defined in Recital A.
10.6. "Interim Rent": Defined in Section 1.1.(b).
10.7. "Landlord": Defined in the heading of this Agreement.
10.8. "Lease," "Lease B": Defined in Recital B.
10.9. "LIA": Defined in Section 1.1.(a)(ii).
10.10. "Loan": Defined in Section 1.8.(a).
10.11. "Merrill": Defined in Section 1.4.(a).
10.12. "Original Reimbursement Agreement": Defined in Recital D.
10.13. "O&Y": Defined in Recital A.
10.14. "Parcel," "Parcel B": Defined in Recital A.
10.15. "Premises," "Premises B": Defined in Recital B.
10.16. "Project": Defined in Recital A.
10.17. "Tenant": Defined in the heading of this Agreement.
10.18. "Work": Defined in Section 1.1.(b).
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of this day and year first written above.
WFP TOWER B CO. L.P.
By: WFP Tower B Co. G.P. Corp.,
general partner
By:_________________________________
Name:_________________________________
Title:_________________________________
MERRILL LYNCH/WFC/L, INC.
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<PAGE>
By:_________________________________
Name:_________________________________
Title:_________________________________
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<PAGE>
STATE OF NEW YORK )
: ss:
COUNTY OF NEW YORK )
On this ___th day of ________, 1996, before me personally came
___________________ to me known, who, being by me duly sworn, did depose and say
that he has an address at __________________________________________, that he is
the _________ of MERRILL LYNCH/WFC/L, INC., the corporation described in and
which executed the foregoing instrument; and that he signed his name thereto by
order of the board of directors of said corporation.
_______________________________
Notary Public
STATE OF NEW YORK )
: ss:
COUNTY OF NEW YORK )
On this ___th day of November, 1996, before me personally came ___________
to me known, who, being by me duly sworn, did depose and say that he has an
address at _____________________, that he is the ____________________ of WFP
Tower B Co. G.P. Corp., the corporation described in the foregoing instrument
and which executed same as general partner of WFP TOWER B CO. L.P., a New York
limited partnership; and that he signed his name thereto by order of the board
of directors of said corporation.
_______________________________
Notary Public
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<PAGE>
EXHIBIT A TO REIMBURSEMENT AGREEMENT
DESCRIPTION OF GROUND LEASE B
Agreement of Severance Lease for the premises known as Parcel B, Battery
Park City -- Commercial Center, New York, New York, dated as of June 15, 1983,
made by the Battery Park City Authority, as Landlord, to and with Olympia & York
Battery Park Company, as Tenant, a memorandum of which was recorded in the
Office of the Register of the City of New York, New York County ("Register's
Office"), on June 20, 1983 in Reel 696, at Page 495, as assigned and assumed
pursuant to that certain Assignment and Assumption of Severance Lease dated as
of October 7, 1983, made by Olympia & York Battery Park Company, as assignor, to
and with Olympia & York Tower B Company, as assignee, and recorded on October 7,
1983 in Reel 724, at Page 1258, as amended by (i) an Unrecorded Agreement, dated
as of August 24, 1984, among Battery Park City Authority, Olympia & York Tower B
Company and Merrill Lynch & Co., Inc. as referred to in the recorded memorandum
described in clause (ii) below, (ii) an Amendment of Severance Lease, dated as
of December 5, 1984, between Battery Park City Authority and Olympia & York
Tower B Company, a memorandum of which was recorded in the Register's Office on
April 1, 1985, in Reel 892, at Page 1204, (iii) an Unrecorded Agreement, dated
July 12, 1985, among Battery Park City Authority, Olympia & York Tower B Company
and Bankers Trust Company, as Collateral Agent as referred to in the recorded
memorandum described in clause (iv) below, (iv) an Amendment of Severance Lease,
dated as of August 15, 1985, between Battery Park City Authority and Olympia &
York Tower B Company, a memorandum of which was recorded in the Register's
Office on May 19, 1986, in Reel 1065, at Page 1548, (v) an Unrecorded Agreement,
dated as of January 30, 1987, by and among Battery Park City Authority, Olympia
& York Tower B Company and Bankers Trust Company, as Collateral Agent as
referred to in the recorded memorandum described in clause (ix) below, (vi) an
Unrecorded Agreement, dated as of September 23, 1987, among Battery Park City
Authority, Olympia & York Tower B Company, Bankers Trust Company, as Collateral
Agent, ML Guarantor and Merrill Lynch/WFC/L, Inc. as referred to in the recorded
memorandum described in clause (ix) below, (vii) an Unrecorded Agreement dated
December 1987 between Battery Park City Authority and Olympia & York Tower B
Company as referred to in the recorded memorandum described in clause (ix)
below, (viii) an Unrecorded Agreement dated June 30, 1988 between Battery Park
City Authority and Olympia & York Tower B Company as referred to in the recorded
memorandum described in clause (ix) below, (ix) an Amendment of Severance Lease,
A-1
<PAGE>
dated as of July 14, 1988, between Battery Park City Authority and Olympia &
York Tower B Company, a memorandum of which was recorded in the Register's
Office on October 4, 1988 in Reel 1473, Page 2124, and (x) an Unrecorded Letter
Agreement dated December 14, 1988, between Bankers Trust Company as Collateral
Agent, Olympia & York Tower B Company and Battery Park City Authority. The
interest of the tenant under said Severance Lease was assigned by that certain
Assignment and Assumption of Severance Lease, dated as of November 21, 1996,
made by Olympia & York Tower B Company, as assignor, to and with, WFP Tower B
Co. L.P., which is intended to be recorded.
A-2
<PAGE>
EXHIBIT B TO REIMBURSEMENT AGREEMENT
LIST OF UNINSURABLE CASUALTIES
1. Nuclear reaction or nuclear radiation all whether controlled or
uncontrolled, and whether such loss be direct or indirect, proximate or
remote, or be in whole or in part caused by, contributed to, or aggravated
by the peril(s) insured against in the insurance policy obtained by Tenant
pursuant to Article 7 of the Lease.
2. Except as otherwise provided in Section 7.01.(a)(i) of the Lease, hostile
or warlike action in time of peace or war, including action in hindering,
combating, or defending against an actual, impending, or expected attack.
(a). By any government or sovereign power (de jure or de facto) or by any
authority maintaining or using military, naval or air forces;
(b). or by military, naval, or air forces;
(c). or by an agent of any such government, power, authority, or forces.
3. Any weapon employing atomic fission.
4. Except as otherwise provided in Section 7.01.(a)(i) of the Lease,
rebellion, revolution, civil war, usurped power, or action taken by
governmental authority in hindering, combating, or defending against such
occurrence.
5. Seizure or destruction by order of public authority.
6. Inherent vice, termites and other insects, wet or dry rot, vermin and
contamination.
B-1
<PAGE>
EXHIBIT C TO REIMBURSEMENT AGREEMENT
Form of Assignment and Assumption Agreement
This Assignment and Assumption Agreement is made and entered into as of
_________, ____ by and between ___________________, a ______________________
("Assignor") having an address at ___________________________________ and
___________________, a ______________________ having an address at
____________________ ("Assignee").
W I T N E S S E T H :
WHEREAS, Assignor, as successor-in-interest to WFP Tower B Co. L.P., and
Merrill Lynch/WFC/L, Inc., a New York corporation ("Merrill") are parties to
that certain Amended and Restated Reimbursement Agreement, dated as of November
21, 1996 (the "Reimbursement Agreement"), a copy of which is attached hereto;
and
WHEREAS, Assignor is, simultaneously herewith, assigning Lease B (as
defined in the Reimbursement Agreement) to Assignee; and
WHEREAS, Assignor desires to transfer and assign to Assignee all of its
rights and interests in and all of its obligations under the Reimbursement
Agreement, and Assignee is willing to accept and assume all of said rights,
interests and obligations;
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Assignor and Assignee hereby agree as follows:
1. Assignor hereby assigns to Assignee all of Assignor's rights, title,
interests in and obligations under the Reimbursement
Agreement.
2. Assignee hereby accepts the foregoing assignment of the Reimbursement
Agreement and agrees with Assignor that, effective as of the date hereof,
Assignee unconditionally will, and hereby does, assume and shall pay for,
satisfy, perform and observe any and all duties, liabilities and
obligations under the Reimbursement Agreement (whether the same have
accrued before or will accrue after the date hereof), and agrees to abide
by and be bound by all of the terms and conditions of the Reimbursement
Agreement in the place and stead of Assignor.
3. The assignment by Assignor in Paragraph 1 and the acceptance and
assumption by Assignee in Paragraph 2
C-1
<PAGE>
are made subject to all of the terms and conditions of the Reimbursement
Agreement.
4. Assignor represents and warrants to Assignee, and Assignee represents and
warrants to Assignor, that as of the date hereof:
(A) Such party has full power, authority and legal right to execute, deliver,
perform and observe the provisions of this Assignment.
(B) The execution, delivery and performance by such party of this Assignment
has been duly authorized.
(C) This Assignment constitutes the legal, valid and binding obligation of
such party, enforceable in accordance with its terms.
(D) No authorization, approval, consent or permission (governmental or
otherwise) of any court, agency, commission or other authority or entity
is required for the due execution, delivery, performance or observance by
such party of this Assignment which has not been obtained.
5. All Notices (as defined in the Reimbursement Agreement) to Assignee should
be served as provided in Article 4 of the Reimbursement Agreement to the
following address:
___________________________________
___________________________________
___________________________________
[to be filled in by Assignee]
6. This Assignment and Assumption Agreement may be separately executed in one
or more counterparts, all of which taken together shall constitute one
instrument.
7. This Assignment and Assumption Agreement shall be governed by the laws of
the State of New York.
8. This Assignment shall bind and inure to the benefit of the parties'
respective successors and assigns.
9. Merrill is an intended third party beneficiary of this Agreement and shall
have any rights or remedies available to Assignor by reason of this
Assignment.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment
and Assumption Agreement as of the date first above written.
C-2
<PAGE>
ASSIGNOR:
By:_______________________________
Name:_______________________________
Title:_______________________________
ASSIGNEE:
By:_______________________________
Name:_______________________________
Title:_______________________________
C-3
<PAGE>
Exhibit 10(xxxiv)(b)
SECOND AMENDMENT OF LEASE
Agreement, dated as of November 21, 1996, between WFP TOWER D CO.
L.P., a New York limited partnership having an office at One Liberty Plaza, New
York, New York 10006 ("Landlord"), and MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, a New York corporation having an office c/o Merrill Lynch & Co.,
Inc., World Financial Center, North Tower, 250 Vesey Street, New York, New York
10281-1219 ("Tenant").
WITHNESSETH
WHEREAS, WFC Tower D Company ("WFC"), the predecessor-in-interest of
Landlord, and Merrill Lynch/WFC/L, Inc., the predecessor-in-interest of Tenant
("ML/WFC"), entered into an Agreement of Lease, dated as of February 26, 1988
("Original Lease D"), covering certain premises more particularly described in
Original Lease D, consisting of (i) the parcel of land known as Parcel D at the
World Financial Center of Battery Park City, New York, New York, and (ii) the
buildings and improvements constructed on said parcel of land (collectively,
"Building D"), except for certain retail and parking space at Building D, a
memorandum of which lease was recorded in the Office of the Register of the City
of New York, County of New York, on March 9, 1988, in Reel 1375, at Page 1549;
and
WHEREAS, WFC and ML/WFC entered into an Amendment of Lease, dated as of
September 29, 1988 (the "First Amendment"; Original Lease D, as modified by the
First Amendment, is hereinafter referred to as "Lease D"), a memorandum of which
amendment was recorded in the Office of the Register of the City of New York,
County of New York, on May 12, 1995, in Reel 2206, at Page 2395; and
WHEREAS, Landlord and Tenant now desire to further amend Lease D as more
particularly set forth in this Agreement.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. Capitalized Terms. All capitalized terms used in this Agreement which
are not otherwise defined herein shall have the meanings ascribed to them in
Lease D.
2. Modifications to Lease D. Effective as of the date this Agreement,
Lease D is hereby modified as follows:
(a) Section 1.13 of Original Lease D is deleted in its entirety and
the following is inserted in its place:
"1.13 "Business Days" shall mean all days which are not a
Saturday, Sunday or a day observed as a holiday by either the State
of New York or the federal government."
<PAGE>
(b) The term "limited liability company" is inserted after the word
"association" in the third line of Section 1.96 of Original Lease D.
(c) The clause "prime rates by Citibank, N.A., Manufacturers Hanover
Trust Company and Chemical Bank" is deleted in the third and fourth lines
of Section 1.105 of Original Lease D and the clause " base rate, prime
rate or term of similar import by Citibank, N.A. and The Chase Manhattan
Bank " is inserted in its place. The reference to "prime rates" on the
fifth line of Section 1.107 of Original Lease D is replaced with the
following: "base rate, prime rate or term of similar import."
(d) Section 3.01(a)(i) of Original Lease D is deleted in its
entirety and the following is inserted in its place:
"(i) during the period (x) beginning on the Commencement Date
and ending on November 30, 1996, Forty Five Million Eight Hundred
Forty-One Thousand Six Hundred Fourteen and 84/100 Dollars
($45,841,614.84), (y) during the period commencing December 1, 1996
and ending on November 30, 2001, Thirty Nine Million Four Hundred
Thirteen Thousand Six Hundred Seventy and 48/100 Dollars
($39,413,670.48) and (z) during the period commencing on December 1,
2001, and ending on the day immediately preceding the fifteenth
(15th) anniversary of the Commencement Date, Forty Five Million
Eight Hundred Forty-One Thousand Six Hundred Fourteen and 84/100
Dollars ($45,841,614.84), as shown for each such period on "Exhibit
I-1" annexed hereto and made a part hereof."
(e) Article 6 of Original Lease D is amended by inserting on the
twenty-third line thereof after the word "to" the words "and including."
(f) The following is inserted at the end of Section 9.01(a) of
Original Lease D:
"In each case under this Section 9.01(a) in which the Rental payable
by Tenant is required to be apportioned, the entire amount of Fixed
Rent that was due and payable on the first day of the month in which
such apportionment occurs shall be retained by Landlord, and Tenant
shall pay to Landlord on the date of such apportionment an
additional payment of Fixed Rent (in the abated amount described
above) in respect of the month in which such apportionment occurs,
appropriately prorated to the date of apportionment."
(g) Section 9.01(e) of Original Lease D is amended by inserting the
following sentence at the end thereof:
"Any amount payable by Tenant under this Section 9.01(e) shall be
due within 15 days after Tenant is given notice that the award has
been so paid to Landlord or Secured Lender."
(h) Sections 25.01(a) and (b) of Original Lease D are deleted in
their entirety and the following is inserted in their place:
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<PAGE>
"(a) If by Tenant or Merrill, (i) by personal delivery of the
same to and receipted on behalf of Landlord or (ii) by mailing the
same to Landlord by certified or registered mail, postage prepaid,
return receipt requested, addressed to Landlord at One Liberty
Plaza, New York, New York 10006, Attention: Chief Financial Officer,
with a copy thereof by personal delivery or certified or registered
mail as aforesaid to (x) Landlord at One Liberty Plaza, New York,
New York 10006, Attention: Managing Attorney and (y) Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York
10004, Attention: Joshua Mermelstein, Esq., and/or to such other
addressee(s) as Landlord may from time to time designate by Notice
given to Tenant and Merrill by personal delivery of certified or
registered mail as aforesaid, except that at no time shall Tenant
and Merrill be required to give, in the aggregate, more than five
(5) Notices or copies thereof.
(b) If by Landlord, (i) by personal delivery of the same to
and receipted on behalf of Tenant and Merrill or (ii) by mailing the
same to Tenant and Merrill by certified or registered mail, postage
prepaid, return receipt requested, addressed to Tenant and Merrill
at c/o Merrill Lynch & Co., Inc., Director, Corporate Real Estate,
World Financial Center, 225 Liberty Street, 14th Floor, New York,
New York 10080, Attention: H. Allen White, with a copy thereof by
personal delivery or certified or registered mail as aforesaid to
(w) Merrill Lynch & Co., Inc., Corporate Law Department, World
Financial Center, 250 Vesey Street, 34th Floor, New York, New York
10281-1334, Attention: Phyllis Safer, Esq., and (x) Merrill Lynch &
Co., Inc., World Financial Center, 225 Liberty Street, 12th Floor,
New York, New York 10080-6105, Attention: Director, Headquarters
Real Estate, (y) Sullivan & Cromwell, 125 Broad Street, New York,
New York 10004, Attention: James I. Black III, Esq., and/or (z) such
other addressee(s) as Tenant and Merrill may from time to time
designate by Notice given to Landlord by personal delivery of
certified or registered mail as aforesaid, except that at no time
shall Landlord be required to give, in the aggregate, more than five
(5) Notices or copies thereof."
(i) Exhibit "I-1" of Original Lease D is deleted in its entirety and
Exhibit A annexed hereto is inserted in its place.
(j) Exhibit "M" of Original Lease D is deleted in its entirety and
Exhibit B annexed hereto is inserted in its place.
3. Miscellaneous. (a) Except as specifically provided herein, nothing
contained in this Agreement shall be deemed to modify in any respect the terms,
provisions or conditions of Lease D, and such terms, provisions and conditions
are hereby ratified and shall remain in full force and effect as modified
hereby.
(b) If there is any inconsistency between the terms of this
Agreement and the terms of Lease D, the terms of this Agreement shall govern and
be controlling.
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<PAGE>
(c) This Agreement contains the sole and entire understanding and
agreement of the parties with respect to its entire subject matter and all prior
negotiations, discussions, representations, agreements, and understandings
heretofore had among the parties with respect thereto are merged herein.
(d) This Agreement may be executed in duplicate counterparts, each
of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same instrument.
(e) This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and permitted assigns under Lease
D.
4. Reaffirmation of Guaranty. By its execution of this Agreement, Merrill
hereby confirms that its obligations under the Guaranty are hereby ratified and
shall remain and continue in full force and effect with respect to Lease D, as
modified by this Agreement.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of
the date first above written.
LANDLORD: WFP TOWER D CO. L.P.
By: WFP Tower D Co. G.P. Corp., general partner
By: _____________________________________
Name:
Title:
TENANT: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:___________________________________
Name:
Title:
The undersigned agrees to be bound by the
provisions of Section 4 of the foregoing
Agreement:
MERRILL LYNCH & CO., INC.
By:___________________________________
Name:
Title:
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<PAGE>
EXHIBIT A
EXHIBIT "I-1"
[CALCULATIONS BASED ON A SUM OF $26,400,000 PLUS INTEREST AT THE RATE OF 9% PER
ANNUM FOR THE PERIOD COMMENCING ON JULY 1, 1996 AND ENDING ON THE DATE OF
EXECUTION, AMORTIZED OVER A PERIOD OF 5 YEARS USING AN ANNUAL DISCOUNT RATE
(PAYABLE MONTHLY IN ADVANCE) OF 6.73%]
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<PAGE>
EXHIBIT B
EXHIBIT M
[TO MATCH THE PRINCIPAL AMOUNT AND AMORTIZATION SCHEDULE OF THE REFINANCED
SECURITIZED LOAN TO ENCUMBER TOWER D WHICH SHALL BE SELF AMORTIZING OVER
ORIGINAL TERM OF LEASE D]
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<PAGE>
Exhibit 10(xxxiv)(c)
SECOND AMENDMENT OF LEASE
Agreement, dated as of November 21, 1996, between WFP TOWER B CO.
L.P., a New York limited partnership having an office at One Liberty Plaza, New
York, New York 10006 ("Landlord"), and MERRILL LYNCH/WFC/L, INC., a New York
corporation having an office c/o Merrill Lynch & Co., Inc., World Financial
Center, North Tower, 250 Vesey Street, New York, New York 10281-1219 ("Tenant").
WITNESSETH
WHEREAS, Olympia & York Tower B Company ("O&Y"), the predecessor-in-
interest of Landlord, and Tenant entered into an Agreement of Lease, dated as of
September 29, 1988 ("Original Lease B"), covering certain premises more
particularly described in Original Lease B consisting of (i) the parcel of land
known as Parcel B at the World Financial Center of Battery Park City, New York,
New York, and (ii) the buildings and improvements constructed on said parcel of
land (collectively, "Building B"), except for certain retail and storage space
at Building B, a memorandum of which lease was recorded in the Office of the
Register of the City of New York, County of New York, on October 4, 1988, in
Reel 1473, at Page 2138; and
WHEREAS, O&Y and Tenant entered into an Amendment of Lease, dated as of
December 14, 1988 (the "First Amendment"; Original Lease B, as modified by the
First Amendment, is hereinafter referred to as "Lease B"), a memorandum of which
amendment was recorded in the Office of the Register of the City of New York,
County of New York, on December 14, 1988, in Reel 1506, at Page 2144; and
WHEREAS, Landlord and Tenant now desire to further amend Lease B as more
particularly set forth in this Agreement.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. Capitalized Terms. All capitalized terms used in this Agreement which
are not otherwise defined herein shall have the meanings ascribed to them in
Lease B.
2. Modifications to Lease B. Effective as of the date of this Agreement,
Lease B is hereby modified as follows:
(a) Section 1.13 of Original Lease B is deleted in its entirety and
the following is inserted in its place:
"1.13 "Business Days" shall mean all days which are not a
Saturday, Sunday or a day observed as a holiday by either the State
of New York or the federal government."
(b) The term "limited liability company" is inserted after the word
"association" in the third line of Section 1.97 of Original Lease B.
<PAGE>
(c) The clause "prime rates by Citibank, N.A., Manufacturers Hanover
Trust Company and Chemical Bank" is deleted in the third and fourth lines
of Section 1.107 of Original Lease B and the clause "base rate, prime rate
or term of similar import by Citibank, N.A. and The Chase Manhattan Bank"
is inserted in its place. The reference to "prime rates" on the fifth line
of Section 1.107 of Original Lease B is replaced with the following "base
rate, prime rate or term of similar import."
(d) Landlord and Tenant acknowledge that the Tower Sublease no
longer is in existence and, accordingly, agree as follows: (i) the
provisions of Section 2.02(d) of Original Lease B will apply as if the
Tower Sublease terminated as a result of a default by the Tenant
thereunder and, accordingly, the Non-Subleased Premises will include all
of the space originally leased under the Tower Sublease, (ii) all
references in Section 2.02(g) of Original Lease B to the Tower Sublease
shall continue to apply notwithstanding that the Tower Sublease is no
longer in existence but shall refer to the form of Tower Sublease executed
on September 29, 1988, (iii) the words "but only if at the time in
question such floor is part of the Non-Subleased Premises" in the fourth
and fifth lines of Section 3.01(o) of Original Lease B are hereby deleted,
(iv) the words "the tenant under the Tower Sublease" in the fourth and
fifth lines of Section 7.01(b) of Original Lease B and in the fifteenth
and sixteenth lines of Section 7.02(j) of Original Lease B are hereby
deleted, (v) all references to the Tower Sublease in Section 10.08 of
Original Lease B are hereby deleted, other than the provisions of clause
(c) thereof, which will continue to apply as if the Tower Sublease had
continued in effect, and (vi) the provisions of Section 26.01(a) of
Original Lease B shall be of no further force or effect.
(e) Landlord and Tenant acknowledge that as of December 14, 1988,
the original schedule for the payment of Fixed Office Rent set forth in
Sections 3.01(a)(i) - (iv) and Part A of Exhibit I-1 of Original Lease B
was no longer applicable (the conditions therefor set forth in Original
Lease B having been satisfied) and that since such date Fixed Office Rent
has been and continues to be payable in accordance with Sections
3.01(a)(1) - (3) and Part B of Exhibit I-1 of Original Lease B. Landlord
and Tenant acknowledge that this Section 2(e) fully incorporates the
provisions of that certain letter agreement, dated December 14, 1988,
among O&Y, Tenant and Bankers Trust Company, as collateral agent,
concerning the subject matter of this Section 2(e), and that no further
reference to such letter agreement as an amendment of Original Lease B
shall be required.
(f) Article 6 of the Original Lease is amended by inserting on the
twenty-third line thereof after the word "to" the words "and including."
(g) The following is inserted at the end of Section 9.01(a) of
Original Lease B:
"In each case under this Section 9.01(a) in which the Rental payable
by Tenant is required to be apportioned, the entire amount of Fixed
Rent that was due and payable on the first day of the month in which
such apportionment occurs shall be retained by Landlord, and Tenant
shall pay to Landlord on the date of such apportionment an
additional payment of Fixed Rent (in the abated amount described
above) in respect of the month in which such apportionment occurs,
appropriately prorated to the date of apportionment."
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<PAGE>
(h) Section 9.01(e) of Original Lease B, as amended by the First
Amendment, is hereby amended to replace "$800,000,000" which constitutes
clause (x) thereof with the following:
"(x) the amount for the period in which such Shortfall is paid
set forth on the schedule annexed as Exhibit A to the Second
Amendment of Lease, dated November 21, 1996, between Landlord
and Tenant"
(i) Section 9.01(e) of Original Lease B, as amended pursuant to
Section 2(g) above, is hereby further amended by inserting the following
sentence at the end thereof:
"Any amount payable by Tenant under this Section 9.01(e) shall
be due within 15 days after Tenant is given notice that the
award has been so paid to Landlord or the Secured Lender."
(j) For purposes of Section 9.01(e) of Original Lease B, the term
"Secured Lender" shall not include the holder of the Zero Coupon Note (as
defined in Section 2(l) below).
(k) Sections 25.01(a) and (b) of Original Lease B are deleted in
their entirety and the following is inserted in their place:
"(a) If by Tenant or Merrill, (i) by personal delivery of the
same to and receipted on behalf of Landlord or (ii) by mailing the
same to Landlord by certified or registered mail, postage prepaid,
return receipt requested, addressed to Landlord at One Liberty
Plaza, New York, New York 10006, Attention: Chief Financial Officer,
with a copy thereof by personal delivery or certified or registered
mail as aforesaid to (x) Landlord at One Liberty Plaza, New York,
New York 10006, Attention: Managing Attorney and (y) Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York
10004, Attention: Joshua Mermelstein, Esq., and/or to such other
addressee(s) as Landlord may from time to time designate by Notice
given to Tenant and Merrill by personal delivery of certified or
registered mail as aforesaid, except that at no time shall Tenant
and Merrill be required to give, in the aggregate, more than five
(5) Notices or copies thereof.
(b) If by Landlord, (i) by personal delivery of the same to
and receipted on behalf of Tenant and Merrill or (ii) by mailing the
same to Tenant and Merrill by certified or registered mail, postage
prepaid, return receipt requested, addressed to Tenant and Merrill
c/o Merrill Lynch & Co., Inc., Director, Corporate Real Estate,
World Financial Center, 225 Liberty Street, 14th Floor, New York,
New York 10080, Attention: H. Allen White, with a copy thereof by
personal delivery or certified or registered mail as aforesaid to
(w) Merrill Lynch & Co., Inc., Corporate Law Department, World
Financial Center, 250 Vesey Street, 34th Floor, New York, New York
10281-1334, Attention: Phyllis Safer, Esq., and (x) Merrill Lynch &
Co., Inc., World Financial Center, 225 Liberty Street, 12th Floor,
New York, New York 10080-6105, Attention: Director, Headquarters
Real
-3-
<PAGE>
Estate, (y) Sullivan & Cromwell, 125 Broad Street, New York, New
York 10004, Attention: James I. Black III, Esq., and/or (z) such
other addressee(s) as Tenant and Merrill may from time to time
designate by Notice given to Landlord by personal delivery of
certified or registered mail as aforesaid, except that at no time
shall Landlord be required to give, in the aggregate, more than five
(5) Notices or copies thereof."
(l) Tenant hereby waives all rights it may have (including, without
limitation, any right it may have to receive a Conveyance Notice or to
have Landlord (or the owner of the applicable Interest) negotiate and/or
enter into a Sale and Purchase Agreement in connection therewith), if any,
in connection with (i) the Conveyance of the lessee's interest in
Severance Lease B and/or the landlord's interest in Lease B by O&Y to
Landlord, (ii) the Conveyance of any Interests that may be effectuated
pursuant to the First Amended Joint Plan of Reorganization of Olympia &
York Tower B Company and Olympia & York World Financial Center Finance
Corp. dated July 26, 1996, as amended to date, and pursuant to the Second
Amended Joint Plan of Reorganization of Olympia & York Realty Corp., et
al., dated August 9, 1996, as amended to date, including, without
limitation, in connection with the financing occurring on the date of this
Agreement, or (iii) any Conveyance of an Interest or Interests to the then
holder of that certain Zero Coupon Note, dated the date of this Agreement,
made by WFP Tower B Co. L.P. in favor of TBR Finance Inc. in the face
principal amount of $150,000,000 (the "Zero Coupon Note") or some or all
of the beneficial holders thereof (including the beneficial holders of the
notes issued pursuant to a certain Trust Indenture, dated as of November
21, 1996, between TBR Finance Inc., as issuer, and Marine Midland Bank, as
trustee), or any of their successors, assigns or designees, where such
Conveyance is in connection with (or effectuates) the repayment of said
Zero Coupon Note. Without limiting the provisions of Sections 44.03, 44.04
or 44.07 of Original Lease B, for the avoidance of doubt the parties
confirm that upon any Conveyance described in clause (iii) above, the
Interests governed thereby shall no longer be subject to the terms of
Article 44 of Original Lease B and they may thereafter be Conveyed without
any requirement to deliver a Conveyance Notice and free of any obligation
to negotiate and/or enter into a Sale and Purchase Agreement or any other
right of Tenant under Article 44 of Original Lease B in connection
therewith. The reference in Section 44.01(a)(iv) of Original Lease B to
"the originally named Landlord (Olympia & York Tower B Company)" shall be
deemed a reference to "WFP Tower B Co. L.P." References in Section
44.04(a)(i) of Original Lease B to Exhibit "P-1" and Exhibit "P-2" shall
be deemed references to Exhibit "O-1" and Exhibit "O-2" respectively. The
provisions of Section 44.10 of Original Lease B are hereby deleted in
their entirety.
3. Miscellaneous. (a) Except as specifically provided herein, nothing
contained in this Agreement shall be deemed to modify in any respect the terms,
provisions or conditions of Lease B, and such terms, provisions and conditions
are hereby ratified and shall remain in full force and effect as modified
hereby.
(b) If there is any inconsistency between the terms of this
Agreement and the terms of Lease B, the terms of this Agreement shall govern and
be controlling.
-4-
<PAGE>
(c) This Agreement contains the sole and entire understanding and
agreement of the parties with respect to its entire subject matter and all prior
negotiations, discussions, representations, agreements, and understandings
heretofore had among the parties with respect thereto are merged herein.
(d) This Agreement may be executed in duplicate counterparts, each
of which shall be deemed an original and all of which, when taken together,
shall constitute one and the same instrument.
(e) This Agreement shall bind and inure to the benefit of the
parties hereto and their respective successors and permitted assigns under Lease
B.
4. Reaffirmation of Guaranty. By its execution of this Agreement, Merrill
hereby confirms that its obligations under the Guaranty are hereby ratified and
shall remain and continue in full force and effect with respect to Lease B, as
modified by this Agreement.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of
the date first above written.
LANDLORD: WFP TOWER B CO. L.P.
By: WFP Tower B Co. G.P. Corp., general partner
By: ____________________________________
Name:
Title:
TENANT: MERRILL LYNCH/WFC/L, INC.
By:___________________________________
Name:
Title:
The undersigned agrees to be bound
by the provisions of Section 4 of the
foregoing Agreement:
MERRILL LYNCH & CO., INC.
By:________________________________
Name:
Title:
-5-
<PAGE>
EXHIBIT A
[TO MATCH THE PRINCIPAL AMOUNT AND AMORTIZATION SCHEDULE OF THE REFINANCED LOAN
TO ENCUMBER TOWER B WHICH SHALL BE SELF AMORTIZING OVER ORIGINAL TERM OF LEASE
B]
-6-
<PAGE>
<TABLE>
<CAPTION>
Exhibit 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Amounts)
Year Ended Last Friday in December
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
Earnings
Earnings before cumulative effect of
changes in accounting principles $ 1,619 $ 1,114 $ 1,017 $ 1,394 $ 952
Cumulative effect of changes in
accounting principles -- -- -- (35) (58)
--------- --------- --------- --------- ---------
Net earnings 1,619 1,114 1,017 1,359 894
Preferred stock dividends (47) (48) (13) (5) (7)
--------- --------- --------- --------- ---------
Net earnings applicable to
common stockholders $ 1,572 $ 1,066 $ 1,004 $ 1,354 $ 887
========= ========= ========= ========= =========
Primary Weighted Average Shares
Common stock 168.9 176.6 195.7 209.3 207.7
Assuming issuance of shares relating
to employee incentive plans 22.9 19.4 15.5 17.0 18.7
--------- --------- --------- --------- ---------
Total shares 191.8 196.0 211.2 226.3 226.4
========= ========= ========= ========= =========
Primary Earnings Per Share
Earnings before cumulative effect of
changes in accounting principles $ 8.20 $ 5.44 $ 4.75 $ 6.14 $ 4.18
Cumulative effect of changes in
accounting principles -- -- -- (.16) (.26)
--------- --------- --------- --------- ---------
Net earnings $ 8.20 $ 5.44 $ 4.75 $ 5.98 $ 3.92
========= ========= ========= ========= =========
Fully Diluted Weighted Average Shares
Common stock 168.9 176.6 195.7 209.3 207.7
Assuming issuance of shares relating
to employee incentive plans 26.3 20.1 16.0 18.2 19.2
--------- --------- --------- --------- ---------
Total shares 195.2 196.7 211.7 227.5 226.9
========= ========= ========= ========= =========
Fully Diluted Earnings Per Share
Earnings before cumulative effect of
changes in accounting principles $ 8.06 $ 5.42 $ 4.74 $ 6.11 $ 4.17
Cumulative effect of changes in
accounting principles -- -- -- (.16) (.26)
--------- --------- --------- --------- ---------
Net earnings $ 8.06 $ 5.42 $ 4.74 $ 5.95 $ 3.91
========= ========= ========= ========= =========
</TABLE>
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.
Primary and fully diluted earnings per share are based on actual numbers
before rounding.
<PAGE>
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(52 Weeks) (52 Weeks) (52 Weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Pretax earnings from
continuing operations $ 2,566 $ 1,811 $ 1,730 $ 2,425 $ 1,621
Deduct equity in undistributed
net earnings of unconsolidated
subsidiaries -- -- (19) (13) (13)
--------- --------- --------- --------- --------
Total pretax earnings from
continuing operations 2,566 1,811 1,711 2,412 1,608
--------- --------- --------- --------- --------
Add:
Fixed charges
Interest 11,886 11,238 8,586 6,009 4,823
Other(A) 173 144 138 152 152
--------- --------- --------- --------- --------
Total fixed charges 12,059 11,382 8,724 6,161 4,975
Preferred stock dividend
requirements 73 77 22 9 11
--------- --------- --------- --------- --------
Total combined fixed charges and
preferred stock dividends 12,132 11,459 8,746 6,170 4,986
--------- --------- --------- --------- --------
Pretax earnings before fixed charges $ 14,625 $ 13,193 $ 10,435 $ 8,573 $ 6,583
========= ========= ========= ========= =========
Pretax earnings before combined
fixed charges and preferred
stock dividends $ 14,698 $ 13,270 $ 10,457 $ 8,582 $ 6,594
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.21 1.16 1.20 1.39 1.32
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.21 1.16 1.20 1.39 1.32
</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.
<PAGE>
Graph Titled "NET EARNINGS"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s net earnings of
$894, $1,359, $1,017, $1,114, and $1,619 for the years 1992 through 1996,
respectively. Graph is shown in millions.
Graph Titled "STOCKHOLDERS' EQUITY"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s stockholders'
equity of $4,569, $5,486, $5,818, $6,141, and $6,892 for the years ended 1992
through 1996, respectively. Graph is shown in millions.
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 of 22.0%, 27.3%, 18.6%, 20.1%, and 26.8%
for the years 1992 through 1996, respectively.
Graph Titled "PRIMARY EARNINGS PER SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s primary earnings
per share of $3.92, $5.98, $4.75, $5.44, and $8.20 for the years 1992 through
1996, respectively.
Graph Titled "DIVIDENDS PAID PER COMMON SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s dividends paid
per common share of $.575, $.70, $.89, $1.01, and $1.16 for the years 1992
through 1996, respectively.
Graph Titled "BOOK VALUE PER COMMON SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s book value per
common share of $21.37, $26.17, $28.87, $32.41, and $38.38 for the years ended
1992 through 1996, respectively.
<TABLE>
<CAPTION>
Year Ended Last Friday in December
----------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1992 1993 1994 1995 1996
- --------------------------------------------------------------------------------------------------------------------
(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Revenues $ 13,413 $ 16,588 $ 18,234 $ 21,513 $ 25,011
Net Revenues $ 8,577 $ 10,558 $ 9,625 $ 10,265 $ 13,116
Net Earnings $ 894 $ 1,359 $ 1,017 $ 1,114 $ 1,619
Pretax Margin (a) 18.9% 23.0% 18.0% 17.6% 19.6%
Profit Margin (b) 11.1% 13.2% 10.6% 10.8% 12.3%
Return on Average Common
Stockholders' Equity 22.0% 27.3% 18.6% 20.1% 26.8%
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $107,024 $152,910 $163,749 $176,857 $213,016
Total Stockholders' Equity $ 4,569 $ 5,486 $ 5,818 $ 6,141 $ 6,892
- --------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Primary Earnings $ 3.92 $ 5.98 $ 4.75 $ 5.44 $ 8.20
Fully Diluted Earnings $ 3.91 $ 5.95 $ 4.74 $ 5.42 $ 8.06
Dividends Paid $ .575 $ .70 $ .89 $ 1.01 $ 1.16
Book Value $ 21.37 $ 26.17 $ 28.87 $ 32.41 $ 38.38
- --------------------------------------------------------------------------------------------------------------------
CLIENT ASSETS (IN BILLIONS)
Assets in Worldwide Client
Accounts $ 487 $ 557 $ 568 $ 703 $ 839
Assets Under Management $ 139 $ 161 $ 164 $ 196 $ 234
- --------------------------------------------------------------------------------------------------------------------
UNDERWRITING (DOLLARS IN BILLIONS)(c)
Global Debt and Equity:
Volume $ 149.9 $ 191.9 $ 137.1 $ 147.0 $ 187.7
Market Share 13.0% 12.9% 12.6% 13.7% 12.9%
U.S. Debt and Equity:
Volume $ 139.6 $ 172.5 $ 116.1 $ 126.6 $ 155.9
Market Share 16.4% 16.4% 16.4% 17.8% 16.3%
- --------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES 40,100 41,900 43,800 46,000 49,800
- --------------------------------------------------------------------------------------------------------------------
COMMON SHARES
OUTSTANDING (d)(in Millions) 207.2 204.0 181.5 171.4 164.1
(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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year Ended Last Friday in December
----------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues $ 25,011 $ 21,513 $ 18,234 $ 16,588 $ 13,413
Interest Expense 11,895 11,248 8,609 6,030 4,836
-------- -------- -------- -------- --------
Net Revenues 13,116 10,265 9,625 10,558 8,577
Non-Interest Expenses 10,550 8,454 7,895 8,133 6,956
-------- -------- -------- -------- --------
Earnings Before Income Taxes and Cumulative Effect
of Changes in Accounting Principles 2,566 1,811 1,730 2,425 1,621
Income Tax Expense 947 697 713 1,031 669
-------- -------- -------- -------- --------
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 1,619 $ 1,114 $ 1,017 $ 1,394 $ 952
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net Earnings $ 1,619 $ 1,114 $ 1,017 $ 1,359 $ 894
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net Earnings Applicable to Common Stockholders $ 1,572 $ 1,066 $ 1,004 $ 1,354 $ 887
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $213,016 $176,857 $163,749 $152,910 $107,024
Short-Term Borrowings (a) $102,002 $ 86,363 $ 78,304 $ 79,632 $ 51,180
Long-Term Borrowings $ 26,102 $ 17,340 $ 14,863 $ 13,469 $ 10,871
Preferred Securities Issued by Subsidiaries $ 327 $ 51 $ 51 $ 51 $ 51
Total Stockholders' Equity $ 6,892 $ 6,141 $ 5,818 $ 5,486 $ 4,569
- ------------------------------------------------------------------------------------------------------------------
TAX INFORMATION
Other Taxes, Principally Payroll and Property $ 341 $ 291 $ 255 $ 223 $ 222
Total Taxes (b) $ 1,288 $ 988 $ 968 $ 1,254 $ 891
- ------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Primary:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 8.20 $ 5.44 $ 4.75 $ 6.14 $ 4.18
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net Earnings $ 8.20 $ 5.44 $ 4.75 $ 5.98 $ 3.92
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Fully Diluted:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 8.06 $ 5.42 $ 4.74 $ 6.11 $ 4.17
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net Earnings $ 8.06 $ 5.42 $ 4.74 $ 5.95 $ 3.91
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted-Average Shares Outstanding:
Primary 191,836 195,997 211,241 226,331 226,402
Fully Diluted 195,175 196,660 211,695 227,480 226,854
Shares Outstanding at Year-End (c) 164,086 171,388 181,479 203,990 207,203
Shares Repurchased 18,579 20,012 29,989 16,346 10,654
Average Share Repurchase Price $ 62.60 $ 46.95 $ 37.96 $ 42.55 $ 24.36
Book Value $ 38.38 $ 32.41 $ 28.87 $ 26.17 $ 21.37
Total Taxes (b) $ 6.72 $ 5.04 $ 4.58 $ 5.54 $ 3.94
Dividends Paid $ 1.16 $ 1.01 $ .89 $ .70 $ .575
- ------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pretax Margin (d) 19.6% 17.6% 18.0% 23.0% 18.9%
Profit Margin (e) 12.3% 10.8% 10.6% 13.2% 11.1%
Common Dividend Payout Ratio 12.5% 16.9% 17.5% 10.9% 13.5%
Return on Average Assets 0.7% 0.6% 0.6% 1.0% 0.8%
Return on Average Common Stockholders' Equity 26.8% 20.1% 18.6% 27.3% 22.0%
Average Leverage (f) 33.5x 32.4x 31.7x 27.1x 24.8x
Average Adjusted Leverage (g) 19.9x 19.3x 18.7x 16.4x 15.7x
- -------------------------------------------------------------------------------------------------------------------
EMPLOYEE STATISTICS
Full-Time Employees:
U.S 42,200 39,250 38,750 37,500 36,100
Non-U.S 7,600 6,750 5,050 4,400 4,000
-------- -------- -------- -------- --------
Total 49,800 46,000 43,800 41,900 40,100
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Financial Consultants and Account Executives Worldwide 14,400 13,900 13,500 13,200 12,700
</TABLE>
<PAGE>
(a) Short-Term Borrowings include repurchase agreements and commercial paper
and other short-term borrowings.
(b) Excludes the effect of $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 1,539, 4,013, 6,427, 8,932, and 11,202 unallocated
reversion shares held in the Employee Stock Ownership Plan at year-end
1996, 1995, 1994, 1993, and 1992, 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 to average total stockholders' equity and preferred
securities issued by subsidiaries.
(g) Average total assets less average resale agreements and securities borrowed
to average total stockholders' equity and preferred securities issued by
subsidiaries.
BUSINESS ENVIRONMENT
Merrill Lynch & Co., Inc. and its subsidiaries (collectively referred to as
"Merrill Lynch") is a client-focused, financial management and advisory company,
concentrating on client relationships and on integrated delivery of services
worldwide. Merrill Lynch serves its clients and conducts its businesses in
global financial markets that are influenced by many 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 high volatility increases
risk, it may also increase order flow, which drives many of Merrill Lynch's
businesses. Earnings also can be affected by 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. As a
result, revenues and net earnings can vary significantly from quarter to
quarter, and from year to year.
The robust global financial markets of 1995 continued in 1996, led by a stable
U.S. economy and heightened individual and institutional investor activity. Low
interest rates, a favorable economic environment, and strong cash flows into
mutual funds combined to make 1996 a record year in U.S. equity markets and led
to significant gains in most non-U.S. markets.
U.S. equity markets continued to post significant gains in 1996, as evidenced by
a 26% rise in the Dow Jones Industrial Average. Individuals invested record
amounts into mutual funds, boosting demand for new issuances and driving both
average daily trading volumes and stock indices to record levels.
U.S. bond markets, which advanced on steady declines in interest rates
throughout 1995, were more volatile in 1996. Expectations that the Federal
Reserve Board would raise rates, combined with inflationary fears and a
stronger-than-expected economy, led to a modest rise in long-term rates in the
first half of the year. This trend reversed late in the third quarter as
inflationary fears eased, leading to a decrease in long-term interest rates. The
yield on the 30-year bond ended the year at 6.54%, higher than the 1995 year-end
rate of 5.95%, but lower than the high of 7.20%, which occurred in June.
The Dow Jones World Index rose approximately 11% during 1996. Relatively low
inflation and interest rates, combined with growing investor confidence in
emerging markets, contributed to year-over-year gains in many non-U.S. equity
and bond markets.
Global underwriting volume rose from the first quarter of 1995 throughout most
of 1996. Rising stock prices and relatively low interest rates created
attractive market conditions for issuers, while demand for new issues benefited
from record inflows of cash into mutual funds. Industrywide disclosed fees from
U.S. and global debt and equity underwriting reached records of $9.2 billion and
$17.6 billion, respectively, according to Securities Data Co. ("SDC").
Strategic services activities in 1996 also reached record levels, reflecting
a continuation of the high degree of mergers and acquisitions activity seen
in 1995. Driven by globalization and other competitive and economic factors,
companies continued to seek strategic alliances to increase earnings growth
and expand into new markets and businesses.
Fiscal 1996 was characterized by strong financial markets and favorable economic
conditions. Due to the cyclical nature of the financial services industry,
however, Merrill Lynch continually evaluates its businesses across market cycles
for profitability and alignment with long-term strategic objectives. Merrill
Lynch seeks to mitigate the effect of market downturns by expanding its global
presence, developing and maintaining long-term client relationships, closely
monitoring costs and risks, and continuing to diversify revenue sources.
<PAGE>
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT 1996 vs.
--------
PER SHARE AMOUNTS) 1996 1995 1994 1995 1994
- -------------------------------------------------------------------------------
Total revenues $25,011 $21,513 $18,234 16.3% 37.2%
Net revenues 13,116 10,265 9,625 27.8 36.3
Net earnings 1,619 1,114 1,017 45.3 59.2
Net earnings
applicable to
common
stockholders 1,572 1,066 1,004 47.5 56.6
Earnings per
common share:
Primary 8.20 5.44 4.75 50.7 72.6
Fully diluted 8.06 5.42 4.74 48.7 70.0
Return on
average common
stockholders' equity 26.8% 20.1% 18.6% 33.3 44.1
- -------------------------------------------------------------------------------
Merrill Lynch's record net earnings for 1996 surpassed its previous record in
1993 of $1.4 billion by 19%. Record revenues in all major categories, partially
offset by increased costs, particularly compensation and technology-related
expenses, led to record net earnings.
Merrill Lynch made several strategic acquisitions in 1996 to help expand its
global presence and client base for aggregate consideration paid of $232
million, recognizing $167 million of goodwill. The impact of these acquisitions
was not material to Merrill Lynch's 1996 results of operations.
In 1995, Merrill Lynch acquired Smith New Court PLC ("Smith New Court"), a
U.K.-based global securities firm, for $803 million. Merrill Lynch recorded $533
million of goodwill related to the acquisition. Merrill Lynch's 1995 results
included Smith New Court operations since mid-August 1995 and related goodwill
amortization.
<PAGE>
The following discussion provides details of major categories of revenues and
expenses and other pertinent information regarding Merrill Lynch'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
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Listed and over-the-counter $2,039 $1,678 $1,437
Mutual funds 1,192 906 879
Other 555 542 555
------ ------ ------
TOTAL $3,786 $3,126 $2,871
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
Commissions revenues advanced 21% in 1996 to a record $3.8 billion due primarily
to higher levels of listed and over-the-counter securities transactions and
mutual fund commissions.
Commissions from listed and over-the-counter securities increased 21% from 1995
as a result of higher trading volumes on the New York Stock Exchange, Nasdaq,
and most non-U.S. exchanges. Mutual fund commissions revenues rose 32% to a
record $1.2 billion, primarily benefiting from strong sales of U.S. funds and
higher distribution fees from deferred-charge funds.
Other commissions revenues rose 2% in 1996 largely due to increased sales of
over-the-counter options and third party annuity contracts.
Commissions revenues in 1995 increased 9% over 1994 levels. Higher revenues
from listed and over-the-counter securities and mutual fund sales were
partially offset by lower revenues from commodities.
<PAGE>
- --------------------------------------------------------------------------------
INTEREST AND DIVIDENDS
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Trading assets $ 4,170 $ 3,832 $3,431
Securities borrowed 2,821 2,940 2,285
Resale agreements 2,977 2,810 1,807
Margin lending 1,542 1,394 1,018
Other 1,389 1,245 1,037
- --------------------------------------------------------------------------------
Subtotal 12,899 12,221 9,578
- --------------------------------------------------------------------------------
INTEREST EXPENSE
Borrowings 4,873 4,330 3,381
Repurchase agreements 3,576 3,680 2,414
Trading liabilities 2,451 2,205 1,997
Other 995 1,033 817
- --------------------------------------------------------------------------------
Subtotal 11,895 11,248 8,609
- --------------------------------------------------------------------------------
NET INTEREST AND DIVIDEND PROFIT $ 1,004 $ 973 $ 969
------- ------- ------
------- ------- ------
- --------------------------------------------------------------------------------
Merrill Lynch hedges its long- and short-term payment obligations with interest
rate and currency swaps. The effect of these hedges, which is included in
"Borrowings" above, decreased interest expense for 1996, 1995, and 1994 by $64
million, $45 million, and $153 million, respectively (see Note 5 to the
Consolidated Financial Statements).
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 up 3% from 1995 resulting from increases
in interest spreads as the U.S. Treasury yield curve steepened for a portion
of the year.
In 1995, interest and dividend profit was virtually unchanged from 1994 with
increases in net interest-earning assets offset by declining interest spreads
due to the flattening of the U.S. Treasury yield curve.
- -----------------------------------------------------------------------------
PRINCIPAL TRANSACTIONS
- -----------------------------------------------------------------------------
The table that follows provides information on aggregate trading profits,
including related net interest. Interest revenue and expense amounts 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.
<PAGE>
NET
PRINCIPAL INTEREST NET
TRANSACTIONS REVENUES TRADING
(IN MILLIONS) REVENUES (EXPENSES) REVENUES
- --------------------------------------------------------------------------------
1996
Equities and equity derivatives $1,138 $ (87) $1,051
Taxable fixed-income 966 250 1,216
Interest rate and currency swaps 893 (56) 837
Municipals 323 12 335
Foreign exchange and
commodities 134 (16) 118
------ ----- ------
TOTAL $3,454 $ 103 $3,557
------ ----- ------
------ ----- ------
- --------------------------------------------------------------------------------
1995
Equities and equity derivatives $ 912 $ (89) $ 823
Taxable fixed-income 516 256 772
Interest rate and currency swaps 732 (65) 667
Municipals 273 1 274
Foreign exchange and
commodities 86 (9) 77
------ ----- ------
TOTAL $2,519 $ 94 $2,613
------ ----- ------
------ ----- ------
- --------------------------------------------------------------------------------
1994
Equities and equity derivatives $ 625 $(106) $ 519
Taxable fixed-income 471 359 830
Interest rate and currency swaps 750 (14) 736
Municipals 380 7 387
Foreign exchange and
commodities 109 (8) 101
------ ----- ------
TOTAL $2,335 $ 238 $2,573
------ ----- ------
------ ----- ------
- --------------------------------------------------------------------------------
Principal transactions revenues rose 37% from 1995 to a record $3.5 billion due
to favorable market conditions highlighted by rising stock prices, low interest
rates, and narrowing credit spreads. These conditions led to increased customer
demand for higher-yielding securities.
Trading and related 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, Merrill Lynch aggregates
net interest and principal transactions revenues. For financial reporting
purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest 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.
Equities and equity derivative trading revenues were up 25% from 1995 due
principally to higher revenues from non-U.S. equities and over-the-counter
securities. Non- U.S. equities trading revenues benefited primarily from
improved market conditions and increased capacity related to the acquisition of
Smith New Court in the second half of 1995. Trading revenues from
over-the-counter securities were up as a result of record Nasdaq volume.
Taxable fixed-income trading revenues increased 87% from 1995, primarily due to
higher revenues from mortgage-backed products, non-U.S. governments and agencies
securities, and money market instruments. The increase in mortgage-backed
securities trading revenues was attributable to improved liquidity in this
market and increased customer demand compared with a year ago. Improved
economies in many emerging market countries and low interest rates contributed
to the increase in trading revenues from non-U.S. governments and agencies
securities as customers sought higher-yielding securities. Trading revenues from
money market instruments benefited from increased floating-rate note activity in
European markets.
<PAGE>
Interest rate and currency swaps trading revenues rose 22% due to higher
revenues from both non-U.S. and U.S. dollar-denominated transactions. In
particular, increased customer demand for higher-yielding instruments led to
considerable growth in the trading activity of derivatives related to emerging
market securities. Municipal securities trading revenues were up 19% from 1995
primarily due to increased investor demand for tax-advantaged products. Foreign
exchange and commodities trading revenues, in the aggregate, increased 56% from
1995. Higher volume led to increased foreign exchange trading revenues as the
U.S. dollar strengthened versus most currencies, particularly the Japanese yen
and German mark.
In 1995, principal transactions revenues were up 8% from 1994. Higher stock
prices and the acquisition of Smith New Court led to increases in equities
and equity derivatives trading revenues (up 46%). Lower interest rates and
tighter credit spreads in 1995 led to increased demand and higher inventory
values for taxable fixed-income products (up 10%). Offsetting these increases
were declines in trading revenues from municipal securities (down 28%),
foreign exchange and commodities (down 22%), and interest rate and currency
swaps (down 2%), due in part to reduced demand for these products.
- --------------------------------------------------------------------------------
INVESTMENT BANKING
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Underwriting revenues $1,514 $ 964 $ 989
Strategic services revenues 431 344 251
------ ------ ------
TOTAL $1,945 $1,308 $1,240
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
Investment banking revenues advanced 49% in 1996 to a record $1.9 billion,
benefiting from record levels of equity and debt underwriting and mergers and
acquisitions activity industrywide. Merrill Lynch was the first investment bank
to underwrite over 1,000 U.S. issues in a single year, retaining its position as
top underwriter of total debt and equity securities for the ninth consecutive
year in the U.S. and for the eighth consecutive year globally. Merrill Lynch's
U.S. and global market shares of debt and equity underwriting volume in 1996
were 16.3% and 12.9%, respectively, compared with 17.8% and 13.7% in 1995,
according to SDC. SDC statistics are based on full credit to book manager.
<PAGE>
Strategic services revenues increased 25% from 1995 to a record $431 million,
benefiting from strong mergers and acquisitions activity and significant gains
in market share. Merrill Lynch's market share information regarding mergers and
acquisitions activity for the last three years, according to SDC, is summarized
as follows:
- ----------------------------------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
MARKET MARKET MARKET
SHARE RANK SHARE RANK SHARE RANK
- ----------------------------------------------------------------------------
COMPLETED
TRANSACTIONS
U.S. 24.7% 2 9.0% 8 17.3% 4
Global 16.3 3 6.4 9 12.1 5
ANNOUNCED
TRANSACTIONS
U.S. 27.9 1 17.7 4 13.3 3
Global 18.6 2 11.3 4 9.8 4
- ---------------------------------------------------------------------------
SDC gives full credit to both target and acquiring companies' advisors based on
transaction value.
Investment banking revenues increased 5% in 1995 from 1994, mainly due to a
37% increase in strategic services revenues resulting from stronger mergers
and acquisitions activity. This increase was offset by a 3% decline in
underwriting revenues due to decreases in equities, private placements,
high-yield debt, and mortgage-backed securities underwritings, partially
offset by increased revenues from corporate bonds and preferred stock and
defined asset funds.
- -------------------------------------------------------------------------------
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
- -------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Asset management fees $ 997 $ 856 $ 794
Portfolio service fees 609 477 437
Account fees 373 338 323
Other fees 282 219 185
------ ------ ------
TOTAL $2,261 $1,890 $1,739
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
Revenues from asset management and portfolio service fees rose 20% in 1996 to a
record $2.3 billion primarily due to strong client asset growth. Assets under
management and total client assets for the last three years are summarized as
follows:
- --------------------------------------------------------------------------------
1996 vs.
-------------
(IN BILLIONS) 1996 1995 1994 1995 1994
- --------------------------------------------------------------------------------
Assets in U.S.
client accounts $ 792 $ 665 $ 537 19.1% 47.4%
Assets in non-U.S
client accounts 47 38 31 24.8 50.2
---- ----- ----
Total assets in
client accounts $ 839 $ 703 $ 568 19.4 47.6
---- ----- ----
---- ----- ----
Assets under
management:
Money market $ 90 $ 82 $ 67 9.4 34.3
Equity 59 47 37 25.9 61.4
Fixed-income 43 41 36 6.0 21.2
Private portfolio 38 22 20 70.0 90.1
Insurance 4 4 4 -- --
------ ------ ------
Total assets under
management $ 234 $ 196 $ 164 19.2 42.9
------ ------ ------
------ ------ ------
Merrill Lynch Consults
(Registered trademark) $ 21 $ 17 $ 14 22.4 44.4
Mutual Fund Advisor(Service mark)
and Asset Power
(Registered trademark) $ 9 $ 6 $ 3 50.0 191.9
- -------------------------------------------------------------------------------
Asset management fees in 1996, which primarily include fees earned on mutual
funds sponsored by Merrill Lynch, increased 16% due to strong inflows during
the year and net asset appreciation. New money investments accounted for
approximately 51% of the 1996 increase in client assets and approximately 61%
of the increase in assets under management by Merrill Lynch Asset Management.
In addition to new money investments, the fourth quarter acquisition of
Hotchkis and Wiley, a Los Angeles-based asset management company, added
approximately $10 billion of assets, principally in private portfolio funds.
Portfolio service fees increased 28% in 1996, benefiting from inflows of client
assets. Increases in the number of accounts and asset levels led to higher fee
revenues from asset-based fee products, primarily Merrill Lynch Consults, Asset
Power, and Mutual Fund Advisor.
Account fees rose 10% principally due to an increase in the number of customer
and custodial accounts. Other fee-based revenues were up 29%, due primarily to
increased revenues from transfer agency and mortgage servicing activities.
In 1995, asset management and portfolio service fees increased 9% from 1994, due
principally to growth in equity and money market funds and higher revenues from
Asset Power and Mutual Fund Advisor.
<PAGE>
- --------------------------------------------------------------------------------
OTHER REVENUES
- --------------------------------------------------------------------------------
Other revenues were $666 million in 1996, up $217 million (48%) from 1995. Other
revenues include investment gains and losses, partnership distributions, and
fees from transaction processing and proxy activities. The increase in 1996 was
primarily attributable to incremental realized investment gains of $171 million,
of which $155 million related to the sale of one-third of Merrill Lynch's
minority interest in Bloomberg L.P., and a $40 million increase in gains from
real estate transactions, primarily sales of mortgages to Real Estate Mortgage
Investment Conduits.
In 1995, other revenues decreased 5% to $449 million. A decrease in net
investment gains related to merchant banking activities was partially offset by
distributions from partnership investments and revenues generated from
transaction processing and other activities.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Compensation and benefits $ 6,704 $5,270 $4,952
------- ------ ------
Non-interest expenses, excluding
compensation and benefits:
Communications and
equipment rental 559 487 432
Occupancy 508 449 436
Depreciation and amortization 411 367 325
Professional fees 582 425 367
Advertising and market
development 514 398 375
Brokerage, clearing, and
exchange fees 413 361 338
Other 859 697 670
------ ------ ------
Total non-interest expenses,
excluding compensation
and benefits 3,846 3,184 2,943
------- ------ ------
Total non-interest expenses $10,550 $8,454 $7,895
------- ------ ------
------- ------ ------
Compensation and benefits
as a percentage of net revenues 51.1% 51.3% 51.5%
Compensation and benefits as a
percentage of pretax earnings
before compensation and benefits 72.3% 74.4% 74.1%
- --------------------------------------------------------------------------------
Non-interest expenses were up 25% over the prior year. A significant
component of this increase related to ongoing strategic investments to
upgrade technology and processing capabilities - particularly the Merrill
Lynch Trusted Global Advisor(Service Mark) initiative, a new technology
platform designed to enable Financial Consultants to provide enhanced
services to clients.
The largest expense category, compensation and benefits, increased 27% from 1995
due to higher incentive and production-related compensation and an 8% increase
in the number of full-time employees. Incentive compensation rose as a result of
Merrill Lynch's increased profitability and return on average common
stockholders' equity, while production-related compensation was up due to higher
business activity.
Full-time employees totaled 49,800 at year-end 1996, compared with 46,000 a year
ago. Selective hirings, which consisted primarily of revenue producers and sales
assistants in Private Client and non-U.S. business areas, were responsible for
approximately 70% of the increase. The remainder of the increase resulted from
business acquisitions and additional technology support personnel. As a result,
the ratio of support employees and sales assistants to producers increased from
1.43 to 1 in 1995 to 1.50 to 1 in 1996.
Communications and equipment rental expense was up 15% from 1995 due to
increased computer maintenance costs related to systems initiatives, as well
as higher levels of business activity. Depreciation and amortization expense
rose 12% from 1995 primarily as a result of purchases of technology-related
equipment during the past year. Higher systems development and management
consulting costs led to a 37% increase in professional fees.
Occupancy costs rose $59 million (13%) primarily as a result of a nonrecurring
pretax charge of $40 million. This charge related to the rejection in bankruptcy
of the long-term sublease agreement with Olympia & York for space in the World
Financial Center South Tower, which led to a difference between expected rents
from subleases and Merrill Lynch's lease obligation for the space.
Advertising and market development expense rose 29% due to increased
international travel and higher production-related recognition programs.
Brokerage, clearing, and exchange fees were up 15% as a result of higher
securities volume, particularly in non-U.S. markets. Other expenses were up 23%
from 1995, due in part to provisions related to various business activities and
goodwill amortization.
In 1995, non-interest expenses increased 7% to $8.5 billion. Higher
production-related and incentive compensation and 5% growth in the number of
full-time employees, led to a 6% increase in compensation and benefits expense.
Communications and equipment rental expense was up 13% due to heightened levels
of business activity and expanded use of market data services. Occupancy costs
increased 3% due to international growth and the addition of Smith New Court
facilities. Depreciation and amortization expense rose 13% due primarily to
purchases of technology-related equipment. Professional fees increased 16% as a
result of higher legal fees and systems development costs. Brokerage, clearing,
and exchange fees were up 7% due to increased trading volume, particularly in
non-U.S. equity markets. Other expenses rose 4%, resulting from a first quarter
charge for the write-off of assets related to a technology contract and goodwill
amortization related to the Smith New Court acquisition.
The following graph illustrates fee-based revenues as a percentage of fixed and
semi-fixed expenses.
Graph Titled "FEE-BASED REVENUES AS A PERCENTAGE OF FIXED AND SEMI-FIXED
EXPENSES"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s fee-based
revenues as a percentage of fixed and semi-fixed expenses. The graph is
presented in millions with fixed and semi-fixed expenses of $3,656, $4,085,
$4,255, $4,664, and $5,440 for the years 1992 through 1996, respectively.
Fee-based revenues as a percentage of fixed and semi-fixed expenses are
expressed as points on the bars and were 55%, 59%, 67%, 65%, and 65% for
the years 1992 through 1996, respectively. Fee-based revenues principally
include asset management and portfolio service fees and net margin interest.
<PAGE>
- --------------------------------------------------------------------------------
INCOME TAXES
- --------------------------------------------------------------------------------
Merrill Lynch's 1996 income tax provision of $947 million represented a 36.9%
effective tax rate. In 1995 and 1994, income tax provisions were $697 million
and $713 million, respectively, resulting in effective tax rates of 38.5% in
1995 and 41.2% in 1994. The effective tax rate decreased in 1996 due in part to
tax benefits associated with non-U.S. operations.
Deferred tax assets are recorded for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. Merrill Lynch assessed its ability to realize deferred tax
assets primarily on a strong earnings history and the absence of negative
evidence as discussed in Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." During the last 10 years, average pretax
earnings were $1.2 billion per year. Accordingly, it is more likely than not
that the deferred tax assets will be realized.
- --------------------------------------------------------------------------------
GLOBAL OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch's non-U.S. operations are organized into three geographic regions:
Europe, Africa, and the Middle East; Asia and Australia; and the Americas,
excluding the U.S. In 1996, Merrill Lynch continued to strategically expand its
non-U.S. operations. This expansion coupled with previous acquisitions enabled
Merrill Lynch to continue to benefit from the globalization of financial
markets, the increase in cross-border transactions, and client demand for global
investments.
In 1996, Merrill Lynch's non-U.S. businesses were influenced by many of the same
market conditions that positively impacted U.S. operating results, including
rising stock prices, relatively low interest rates, and narrowing credit
spreads, which led to increased demand for higher-yielding securities. The
combination of these favorable market conditions, synergies from acquisitions,
and expanded global presence resulted in increases from 1995 levels in total
revenues, net revenues, and earnings before income taxes in each geographic
region.
- --------------------------------------------------------------------------------
EUROPE, AFRICA, AND THE MIDDLE EAST
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Total revenues $ 5,336 $ 3,981 $ 3,464
Net revenues $ 1,837 $ 1,319 $ 1,134
Earnings before income taxes $ 387 $ 155 $ 176
Total assets $75,901 $56,948 $44,297
Total full-time employees 4,600 4,100 2,850
- --------------------------------------------------------------------------------
<PAGE>
Merrill Lynch operates in Europe, Africa, and the Middle East as a dealer in a
full range of debt and equity products and also provides investment banking,
private banking, and research services.
Merrill Lynch continued its commitment to expand its presence in Europe, Africa,
and the Middle East through the 1996 acquisition of the business of FG
Inversiones Bursatiles, the largest independent Spanish broker-dealer, and its
agreement to purchase the business of Carnegie Italia, a Milan-based equity
research and sales team. In addition, the integration of Smith New Court, which
was acquired in the second half of 1995, led to significant expansion of global
equity trading and research capabilities during 1996. These factors contributed
to record results for the region.
In 1996, total and net revenues for the region increased 34% and 39% from 1995,
respectively, while earnings before income taxes more than doubled from 1995.
The increases were primarily due to higher trading, underwriting, and
commissions revenues. Trading revenues rose due to higher revenues from
equities, foreign exchange, and emerging market trading activities. Equities
trading revenues were up due to improved market conditions and increased
capacity related to the acquisition of Smith New Court. Investment banking
revenues increased in the region as Merrill Lynch retained the leading position
in underwriting new bond issues. Merrill Lynch was also a leader in underwriting
new equity issues and in providing mergers and acquisitions advisory services to
clients across the region. In addition, the region benefited from strong
commission revenues, particularly sales of mutual funds, and higher fees from
private banking products.
The increase in earnings before income taxes from 1995 resulted from both higher
revenues and strong cost control measures across the region. Compensation and
benefits costs rose due to increased headcount and improved regional
profitability. Occupancy costs were up due to the new and expanded facilities in
the region.
<PAGE>
In 1995, total and net revenues for Europe, Africa, and the Middle East
increased 15% and 16% from 1994, respectively. The region's earnings before
income taxes decreased 12%. Trading results for the region improved from 1994
due in part to higher equity trading revenues resulting from strong European
equity market activity and the Smith New Court acquisition. Earnings before
income taxes decreased due to higher trading-related costs, compensation and
benefits expenses, and start-up costs resulting from ongoing expansion.
- --------------------------------------------------------------------------------
ASIA AND AUSTRALIA
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Total revenues $ 1,539 $ 1,232 $ 963
Net revenues $ 984 $ 701 $ 554
Earnings before income taxes $ 199 $ 81 $ 75
Total assets $17,905 $16,914 $11,389
Total full-time employees 2,075 1,775 1,400
- --------------------------------------------------------------------------------
Merrill Lynch serves a broad retail and institutional client base throughout
the Asia and Australia region. 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 activities are conducted. Merrill Lynch has securities and
futures exchange memberships in the major regional financial centers and has
increased its trading and product capacity in Australia, Hong Kong,
Singapore, and Tokyo. In 1996, "Euromoney" named Merrill Lynch Foreign
Securities Firm of the Year in Japan. In December 1996, Merrill Lynch
acquired McIntosh Securities Limited, one of the largest securities brokerage
firms in Australia with approximately 500 employees (not included in the
table above). Additionally, Merrill Lynch continued to make strategic
investments in the region by entering into joint ventures.
Total and net revenues in Asia and Australia were up 25% and 40% from 1995,
respectively. In Japan, trading revenues for local products were negatively
impacted by difficult financial market conditions, mostly offset by increased
sales of cross-border products. Results in the rest of the region, particularly
Hong Kong, benefited from increased investment banking and trading revenues.
Investment banking revenues were up from the prior year due to higher equity
underwriting activity, while the integration of Smith New Court added
significantly to equity trading activities. Increased commissions on regional
equities and mutual funds also contributed to higher revenues.
Earnings before income taxes more than doubled in 1996. Variable costs, such as
incentive and production-related compensation, increased with higher revenues;
however, fixed costs remained relatively constant with 1995 levels.
<PAGE>
Total and net revenues in Asia and Australia in 1995 were up 28% and 27% from
1994, respectively. Earnings before income taxes rose 8% from 1994. An improved
bond market led to increased trading revenues from Japanese Government bonds and
other fixed-income securities. In addition, equity trading increased as a result
of improved corporate earnings and more favorable market conditions.
- --------------------------------------------------------------------------------
AMERICAS
- --------------------------------------------------------------------------------
(IN MILLIONS) 1996 1995 1994
- --------------------------------------------------------------------------------
Total revenues $ 826 $ 704 $ 617
Net revenues $ 472 $ 347 $ 333
Earnings before income taxes $ 139 $ 127 $ 137
Total assets $5,205 $4,997 $4,216
Total full-time employees 925 875 800
- --------------------------------------------------------------------------------
In Latin America, Merrill Lynch provides varied brokerage and investment
services. Included in the Latin America region are certain U.S. offices that
primarily serve Latin American clients. The economic environment in this region
improved in 1996 as inflation steadily declined and equity indices increased
significantly. Merrill Lynch also continued its commitment to expand its
business in Latin America by initiating an equity trading presence in Argentina.
In Canada, Merrill Lynch provides investment banking and fixed-income sales and
trading services.
Total and net revenues for the Americas increased 17% and 36% from 1995,
respectively. Trading and underwriting activities in Latin America were up from
1995 levels due to the stronger economic environment, increased investor demand
for higher-yielding securities, and rising bond prices. In addition, Latin
American results benefited from increased commissions due to higher mutual fund
sales and trading volume for equity and fixed-income products. Canadian results
increased due to higher trading revenues resulting from the favorable
interest-rate environment, and strong cross-border revenues for debt and equity
underwriting.
Earnings before income taxes rose 9%. Higher regional trading, sales, and
underwriting activities led to increases in variable expenses, such as
compensation costs and brokerage, clearing, and exchange fees. Higher
compensation and infrastructure costs also resulted from the additional
commitment of resources to the region in 1996.
Total and net revenues in the Americas in 1995 increased 14% and 4% from 1994,
respectively, while earnings before income taxes decreased 7% from 1994.
Increased revenues from high-yield financing and advisory activity, mergers and
acquisitions, global bond issuances, and fixed-income sales to private banking
clients were partially offset by reduced investment banking activity due to
market and political uncertainty. The reduction in earnings before income taxes
resulted from higher compensation and benefits expenses and initial start-up
costs, both associated with the growth in the region.
<PAGE>
- --------------------------------------------------------------------------------
BALANCE SHEET
- --------------------------------------------------------------------------------
Securities trading, derivatives dealing, and related activities result in
trading asset/liability, repurchase/resale, securities borrowed/loaned, and
certain receivable/payable balances. As presented below, these trading-related
balances accounted for approximately 88% of assets and 64% of liabilities at
December 27, 1996.
Presented are two pie charts showing Merrill Lynch & Co., Inc.'s
trading-related balances as percentages of assets and liabilities. At
December 27, 1996, 88% of assets (consisting of trading assets, resale
agreements, securities borrowed, and receivables which were 36%, 27%, 12%,
and 13% of assets, respectively) and 64% of liabilities (consisting of
trading liabilities, repurchase agreements, securities loaned, and payables
which were 21%, 30%, 2%, and 11% of liabilities, respectively) were
considered trading-related. Non-trading-related assets and liabilities at
December 27, 1996 were 12% and 36%, respectively.
Although the trading-related balances represent a significant portion of the
balance sheet, these amounts do not necessarily convey the risks assumed or
mitigated by Merrill Lynch. Hedging strategies and compliance with collateral
maintenance policies, as further discussed, are used to mitigate exposures.
- --------------------------------------------------------------------------------
TRADING ASSETS AND LIABILITIES
Trading assets and liabilities principally represent securities purchased
("long" positions) and securities sold but not yet purchased ("short"
positions), respectively. Trading assets and liabilities also include
receivables and payables, respectively, that represent the fair value of
derivatives (see Note 1 to the Consolidated Financial Statements).
Merrill Lynch acts as a market maker in many securities, maintaining a
significant amount of trading inventory to facilitate customer transaction flow.
To a lesser degree, Merrill Lynch also maintains proprietary trading inventory
in seeking to profit from existing or projected market opportunities.
Traders use hedging techniques to manage trading inventory market risks (see
Note 3 to the Consolidated Financial Statements). A significant portion of
trading assets and liabilities, including derivatives, represents hedges of
other trading positions. Many short U.S. Government securities and futures
positions, for example, hedge various interest-sensitive trading assets. Hedging
techniques at the trading unit level are supplemented by corporate risk
management policies and procedures (see "Risk Management" section).
The effectiveness of hedging techniques and corporate risk management
policies and procedures is illustrated by analyzing actual net
trading-related revenues over time. The nature of Merrill Lynch's
trading-related activities, which are principally client order flow-driven,
combined with its risk management strategies, help reduce volatility in
earnings. A distribution of weekly net trading-related revenues (which
include principal transactions revenues, net interest, and selling
concessions) by product for the last four 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 last four years. The graph illustrates
the percentage of weeks that net trading-related revenues (which include
principal transactions revenues, net interest, and selling concessions) fell
within the specified dollar ranges (in millions) 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 1% 14% 61% 19% 5%
Municipals 2 98 - - -
Interest Rate & Currency Swaps 3 87 10 - -
Foreign Exchange & Commodities 11 89 - - -
Equities & Equity Derivatives - 3 50 41 6
</TABLE>
- --------------------------------------------------------------------------------
REPURCHASE/RESALE AGREEMENTS AND SECURITIES LOANED/BORROWED TRANSACTIONS
Repurchase agreements and securities loaned transactions are used to fund a
significant portion of trading assets. Likewise, Merrill Lynch uses resale
agreements or securities borrowed transactions to obtain the securities needed
for delivery on short positions. "Matched-book" repurchase and resale agreements
or securities borrowed and loaned transactions use the same underlying
securities, with different counterparties, to generate a spread between the
interest revenue on the resale agreements or securities borrowed transactions
and the interest expense on the repurchase agreements or securities loaned
transactions. Exposures on these transactions are limited by their typically
short-term nature and collateral maintenance policies (see "Collateral"
section). The following graph illustrates the balances related to these
activities at December 27, 1996.
Graph Titled "REPURCHASE/RESALE AGREEMENTS AND SECURITIES LOANED/BORROWED
TRANSACTIONS"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s
repurchase/resale agreements and securities loaned/borrowed balances
separated between matched-book and other activity. The graph is presented
in millions with resale agreements, repurchase agreements, securities
borrowed, and securities loaned balances of $58,402, $62,669, $24,692, and
$2,751, respectively, at December 27, 1996. Matched-book activity represented
74%, 68%, 10% and 91% of resale agreements, repurchase agreements, securities
borrowed, and securities loaned balances at year end, respectively.
<PAGE>
- --------------------------------------------------------------------------------
TRADING-RELATED RECEIVABLES AND PAYABLES
Securities trading transactions may result in various customer or broker-dealer
balances. Broker-dealer balances may result from recording trading inventory on
a trade date basis. Certain receivable and payable balances also arise when
customers or broker-dealers fail to pay for securities purchased or fail to
deliver securities sold, respectively. These receivables are generally fully
collateralized by the securities that the customer or broker-dealer purchased
but did not receive. Customer receivables also include margin loans
collateralized by customer-owned securities held by Merrill Lynch. Collateral
policies significantly limit Merrill Lynch's credit exposure to customers and
broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will
sell securities that have not been paid for, or purchase securities sold but not
delivered, after a relatively short period of time, or will require additional
margin collateral as necessary. These measures reduce market risk exposure
related to these balances.
Interest receivable and payable balances related to trading inventory are
principally short-term in nature. Interest balances for repurchase and resale
agreements, securities borrowed and loaned transactions, and customer margin
loans are generally considered when determining the collateral requirements
related to these transactions.
- --------------------------------------------------------------------------------
COLLATERAL
The table below presents reported assets at December 27, 1996 and the related
collateral maintained to reduce default risk exposure.
- -------------------------------------------------------------------------------
BALANCE COLLATERAL
(IN MILLIONS) SHEET MAINTAINED
- --------------------------------------------------------------------------------
Cash and cash equivalents $ 3,375 $ --
Cash and securities segregated for
regulatory purposes or deposited
With clearing organizations 5,628 --
Marketable investment securities 2,180 --
Trading assets, at fair value(a) 75,524 3,213
Resale agreements(b) 58,402 60,213
Securities borrowed(b) 24,692 24,167
Receivables (net)(c) 29,794 22,288
Investments of insurance
subsidiaries 5,107 --
Loans, notes, and mortgages (net)(d) 3,334 4,308
Other investments 1,125 --
Property, leasehold improvements,
and equipment (net) 1,670 --
Other assets 2,185 --
-------- --------
Total Assets $213,016 $114,189
-------- --------
-------- --------
(a) Various techniques reduce credit risk on trading assets, including
maintaining collateral on derivative contract receivables.
(b) The risk of default on receivables under resale agreements and securities
borrowed arrangements is substantially eliminated by maintaining related
securities with fair values in accordance with specific collateral
guidelines.
(c) To the extent possible, collateral is taken to secure receivables. For
instance, Merrill Lynch maintains collateral substantially in excess of
customer margin loan receivables, and broker-dealer receivables are
substantially collateralized by the related securities.
(d) Merrill Lynch generally maintains collateral on these extensions of credit
in the form of liens on real estate, perfected security interests in other
assets of the borrower, and guarantees.
Besides requiring collateral, Merrill Lynch's Corporate Credit group uses
other techniques to manage credit risk (see "Risk Management" section).
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
Merrill Lynch monitors changes in its balance sheet using average daily balances
which are determined on a settlement date basis and reported for management
information purposes. Financial statement balances are recorded on a trade date
basis as required under generally accepted accounting principles. The following
discussion compares changes in settlement date average daily balances. These
changes were consistent with the growth in the year-end financial statement
balances.
In 1996, average daily assets were $216 billion, up 13% from $191 billion in
1995. Average daily liabilities in 1996 rose 14% to $209 billion from $185
billion in 1995.
The major components in the growth of average assets and liabilities are
summarized as follows:
- --------------------------------------------------------------------------------
INCREASE
IN AVERAGE PERCENT
(IN MILLIONS) ASSETS INCREASE
- --------------------------------------------------------------------------------
Resale agreements and
securities borrowed $10,402 12%
Trading assets 9,390 15
Customer receivables 2,494 13
- --------------------------------------------------------------------------------
INCREASE
IN AVERAGE PERCENT
LIABILITIES INCREASE
- --------------------------------------------------------------------------------
Repurchase agreements and
securities loaned $7,737 10%
Long-term borrowings 6,702 42
Commercial paper and other
short-term borrowings 5,201 20
Trading liabilities 4,306 29
- --------------------------------------------------------------------------------
During 1996, trading assets and liabilities (which include on-balance-sheet
hedges used to manage trading risks) and customer receivables rose as trading
activity increased to meet higher customer demand. Customer receivables were
also up as a result of higher secured lending in the form of margin and other
collateralized loans.
Repurchase agreements and securities loaned transactions and resale agreements
and securities borrowed transactions rose to meet higher funding requirements
for increased trading activity. In addition, these transactions increased as a
result of expanded matched-book activity, primarily involving governments and
agencies securities.
Assets are funded through diversified sources which include repurchase
agreements, commercial paper and other unsecured short-term borrowings,
long-term borrowings, and equity. In addition to the increases in repurchase
agreements and securities loaned transactions, the growth in average assets was
also funded by higher long-term borrowings, particularly medium-term notes, and
commercial paper.
<PAGE>
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Stockholders' equity at December 27, 1996 increased 12% to $6.9 billion from
$6.1 billion at year-end 1995. The 1996 increase resulted from net earnings,
partially offset by common share repurchases and dividends. In 1996, Merrill
Lynch repurchased 18.6 million common shares at an average price of $62.60 per
share for employee benefit plans and general corporate purposes.
At December 27, 1996, total common shares outstanding, excluding the unallocated
Employee Stock Ownership Plan ("ESOP") reversion shares of 1.5 million, were
164.1 million, 4% lower than the 171.4 million shares (excluding unallocated
ESOP reversion shares of 4.0 million) outstanding at December 29, 1995. The
decrease was principally attributable to common share repurchases, partially
offset by employee stock grants and option exercises.
Subsequent to year-end, the parent company implemented a plan to redeem all
of the outstanding Remarketed Preferred(Service mark) Stock, Series C ("RP
Stock"). Redemptions of RP Stock commenced on January 22, 1997 and are
expected to be completed by March 4, 1997. As of February 19, 1997, $155
million of RP Stock, representing 1,548 shares, had been redeemed.
- --------------------------------------------------------------------------------
LIQUIDITY AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
The primary objective of Merrill Lynch's funding policies is to assure liquidity
at all times. Merrill Lynch's liquidity management strategy has three key
components: (i) to maintain alternative funding sources such that all debt
obligations maturing within one year can be funded when due without issuing new
unsecured debt or liquidating any business assets; (ii) to concentrate
unsecured, general purpose borrowings at the parent company level; and (iii) to
expand and diversify Merrill Lynch's funding programs.
Merrill Lynch's primary alternative funding sources to unsecured borrowings
are repurchase agreements and secured bank loans, which require pledging
unhypothecated marketable securities. Other funding sources include
liquidating cash equivalents; securitizing loan assets; and drawing on
committed, unsecured credit facilities ("Credit Facilities") provided by
banks, which at December 27, 1996, totaled $6.2 billion and were not drawn
upon. Merrill Lynch regularly reviews the level and mix of its assets and
liabilities to assess its ability to conduct core business activities without
issuing new unsecured debt or drawing upon the Credit Facilities. The mix of
assets and liabilities provides flexibility in managing liquidity since a
significant portion of assets turn over frequently and are typically
match-funded with liabilities having similar maturities and cash flow
characteristics. At December 27, 1996, substantially all of Merrill Lynch's
assets were considered readily marketable by management.
Merrill Lynch concentrates its unsecured, general purpose borrowings at the
parent company level, except where tax regulations, time zone differences, or
other business considerations make this impractical. The benefits of this
strategy are reduced financing costs; simplicity, control, and wider name
recognition by creditors of Merrill Lynch; and enhanced flexibility to meet
fluctuating funding requirements across subsidiaries.
<PAGE>
Finally, Merrill Lynch strives to expand and diversify its funding programs and
investor and creditor base. Merrill Lynch benefits by distributing its debt
through its own sales force to a large, diversified customer base. Additionally,
Merrill Lynch maintains strict concentration standards for short-term
borrowings, including limits for any single investor.
Commercial paper is the major source of short-term general purpose funding.
Commercial paper outstanding totaled $23.6 billion at December 27, 1996 and
$17.0 billion at December 29, 1995, which represented 11% and 10% of total
assets at year-end 1996 and 1995, respectively.
Outstanding long-term debt at December 27, 1996 increased to $26.1 billion
from $17.3 billion at December 29, 1995. Long-term debt issuance of $15.0
billion in 1996 exceeded 1995 issuance of $9.6 billion as financing activity
expanded in both U.S. and non-U.S. markets. During 1996, maturities and
repurchases of long-term debt were $6.1 billion, while subsidiaries purchased
and sold $1.4 billion of the parent company's long-term debt securities. At
December 27, 1996, $20.1 billion of long-term debt had maturities beyond one
year. The average maturity of outstanding long-term debt was 3.5 years at
both year-end 1996 and 1995, when measured to maturity, and 3.2 years and 3.1
years, respectively, when measured to the earlier of the call or put date.
Merrill Lynch's senior long-term debt and preferred stock were upgraded by
several credit rating agencies during 1996, and were rated by recognized credit
rating agencies at December 27, 1996 as follows:
- --------------------------------------------------------------------------------
SENIOR PREFERRED
DEBT STOCK
RATING AGENCY RATING RATING
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch Investors Service, L.P. AA AA-
IBCA Inc. AA- Not Rated
The Japan Bond Research Institute AA Not Rated
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- --------------------------------------------------------------------------------
Approximately $53.0 billion of indebtedness at December 27, 1996 is considered
senior indebtedness as defined under various indentures.
As part of Merrill Lynch's overall liquidity management strategy, 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.
Insurance subsidiaries market primarily 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 27, 1996, approximately 85% of invested assets of
insurance subsidiaries were considered liquid by management.
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL RESOURCES AND CAPITAL ADEQUACY
- --------------------------------------------------------------------------------
Merrill Lynch remains one of the most highly capitalized U.S. institutions in
the global financial services business, with $6.3 billion in common equity
and $619 million in preferred stock at December 27, 1996 (see "Stockholders'
Equity" in the "Balance Sheet" section). In December 1996, a subsidiary of
Merrill Lynch issued $275 million of perpetual Trust Originated Preferred
Securities(Service mark) ("TOPrS"). These subsidiary-issued preferred
securities, in addition to $52 million of preferred securities outstanding in
other subsidiaries, further strengthen Merrill Lynch's equity capital base.
Subsequent to year end, a Merrill Lynch subsidiary issued an additional $300
million of TOPrS.
Merrill Lynch's leverage ratios were as follows:
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------------
YEAR END
December 27, 1996 29.5x 18.0x
December 29, 1995 28.6x 18.1x
AVERAGE FOR YEAR ENDED(3)
December 27, 1996 33.5x 19.9x
December 29, 1995 32.4x 19.3x
- --------------------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less resale agreements and securities borrowed to total
stockholders' equity and preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
Overall capital needs are continually reviewed to ensure that Merrill Lynch's
capital base can support the estimated risks of its businesses as well as the
regulatory and legal capital requirements of its subsidiaries. Statistically
based product risk models are used to estimate potential losses arising from
market and credit risks. These dynamic models incorporate changes in business
risk into Merrill Lynch's equity requirements. Based upon these analyses and
other criteria, management believes that Merrill Lynch's equity base is
adequate.
Merrill Lynch operates in many regulated businesses that require various minimum
levels of capital (see Note 11 to the Consolidated Financial Statements).
Merrill Lynch's broker-dealer, banking, insurance, and futures commission
merchant activities are subject to regulatory requirements that may restrict the
free flow of funds to affiliates. Regulatory approval is generally required for
paying dividends in excess of certain established levels, making affiliated
investments, and entering into management and service agreements with affiliated
companies.
<PAGE>
- --------------------------------------------------------------------------------
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Merrill Lynch's operating activities expose it to many risks that are
continually monitored, evaluated, and managed. Proper management of these risks
helps reduce the likelihood of earnings volatility. Trading units typically
hedge risks arising either from individual transactions or portfolios of similar
transactions to manage risk at the legal entity level. Hedging techniques will
vary based on many factors, including the nature and extent of the risks
involved.
To supplement risk management at the trading unit level, Merrill Lynch has
developed corporate governance policies and procedures that require specific
areas and units to assist in the identification, assessment, and control of
these risks. These policies and procedures are performed by many units,
including the Global Risk Management Group ("Risk Management"), the Credit
Division ("Corporate Credit"), and other control units, including Finance,
Audit, Operations, and Law and Compliance ("Control Units"). In addition to
independent risk management responsibilities, senior management from Risk
Management, Corporate Credit, and the Control Units take an active role in the
oversight of the risk management process through the Risk Control and Reserve
Committees.
The Risk Control Committee and Risk Management provide general risk oversight
for all institutional trading activities. The Risk Control Committee reports
periodically to the Audit and Finance Committee of the Board of Directors and is
independent of Merrill Lynch's trading units. The Risk Control Committee's
activities are designed to ensure compliance with Merrill Lynch'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. Merrill Lynch 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 acts on specific issues. Merrill
Lynch's reserves take into account management's judgment and are generally based
on (i) identification of risks and exposures, (ii) formulas, and (iii) aging,
concentration, and liquidity analyses.
The following discussions of "Market Risk", "Credit Risk", and "Other Risks"
highlight the corporate policies and procedures for risk identification,
assessment, and control. Further discussion of market and credit risk is
contained in Note 3 to the Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
MARKET RISK
Market risk is the potential change in a financial instrument's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, and credit spreads. Over the last several years, measuring market risk
with mathematical models has become the focal point of many risk management
efforts worldwide, with the term "risk management" becoming almost synonymous
with "risk measurement."
Merrill Lynch believes that the use of mathematical risk models alone may
provide a greater sense of security than warranted and therefore reliance on
these models should be limited. In fact, because of the inability of
mathematical risk models to quantify large-scale potential financial events with
any precision, Merrill Lynch only employs these models to supplement other risk
management efforts.
In general, Merrill Lynch believes that the primary risk of a product is not in
the product itself, but in the way in which the product is managed. Breaches of
discipline or lapses in supervision can result in losses irrespective of the
products involved or the mathematical models used.
Nearly ten years ago, Merrill Lynch implemented a firmwide risk process based on
the belief that there is more to risk management than identifying and measuring
risk. The process itself has been strengthened by experience, but the underlying
philosophy is essentially unchanged. This philosophy is based on the following
six principles:
o The most important tools in any risk process are experience, judgment, and
constant communication with risk-takers.
o Vigilance, discipline, and an awareness of risk must be continuously
emphasized throughout the firm.
o Management must provide a clear and simple statement as to what can and
cannot be done in committing capital.
o Risk Management must consider the unexpected, to probe for potential
problems, to test for weaknesses, and to help identify potential for loss.
o The process must be flexible, to permit adaptation to changing
environments, including the evolving goals of Merrill Lynch itself.
o The key objective must be to minimize the possibility of incurring
unacceptable loss. Such losses usually arise from unexpected events that
most statistical and model-based risk methodologies cannot predict.
- --------------------------------------------------------------------------------
RISK MANAGEMENT PROCESS
In keeping with these principles, Merrill Lynch's risk management process relies
on three key elements: (i) communication, (ii) controls and guidelines, and
(iii) risk technology.
Risk Management is organized along geographic and product lines to ensure
direct, frequent communication with specific trading areas. In addition, Risk
Management performs regular, formal risk reviews with senior trading
managers.
Risk Management has established certain controls and guidelines to supplement
hedging techniques at the trading unit level (see "Trading Assets and
Liabilities" in the "Balance Sheet" section for further information on these
techniques). Risk Management sets and monitors trading limits, which may not
be exceeded without prior approval. In addition, Risk Management and
representatives from other Control Units approve new types of transactions as
part of the new product review process. The commitment process subjects
certain commitments, including equity, high-yield, and emerging market
securities underwritings; real estate financings; and bridge loans, to prior
approval from Risk Management and other Control Units. Risk Management also
has the authority to require reductions in specific trading desk exposures or
to veto proposed transactions.
<PAGE>
Risk Management uses several risk technology tools, including a risk
inventory database, a trading limit monitoring system, trading systems
access, and stress scenarios. The risk inventory database provides a daily
consolidation of securities inventory exposure by product, credit rating,
country, etc., along with concentrations of exposure. The trading limit
monitoring system enables Risk Management to review compliance with
established limits. Access to trading systems allows Risk Management to
monitor positions and perform computerized analytics.
Stress scenarios estimate gains or losses under both moderate and severe market
movements. Each scenario considers a specific change in key risk factors, such
as interest and currency exchange rates, equity and commodity prices, credit
spreads, and volatilities, holding all other variables constant. Based on these
scenarios, market risks can be monitored firmwide and portfolios rebalanced, as
necessary.
- --------------------------------------------------------------------------------
CREDIT RISK
Credit risk represents the amount of loss that Merrill Lynch would incur if a
counterparty or client failed to perform its contractual obligations. Policies
and procedures have been established with the objective of protecting against
such losses, which include reviewing and establishing limits for credit
exposures, limiting transactions with specific counterparties or clients,
obtaining rights to collect collateral or terminate transactions in the event of
a credit downgrade, maintaining collateral, and continually assessing the
creditworthiness of counterparties and clients. The responsibility for
compliance with these policies and procedures rests with business units, and is
monitored by Corporate Credit.
Corporate Credit is centralized and organized geographically. Credit officers
analyze and determine the creditworthiness of counterparties and clients, which,
in many cases, is enhanced by due diligence meetings. Credit officers also set
initial and ongoing credit limits by counterparty or client, recommend credit
reserves, manage credit exposures, and participate in the new product review
process.
Many types of transactions, including most derivatives and syndicated
loans, are subject to prior approval from Corporate Credit. Within Corporate
Credit, required approval levels have been established based on counterparty or
client credit quality and the potential risk of the transaction. Transactions
that exceed prescribed levels must be approved by the Credit Committee, which
includes several Directors of Credit and the Chief Credit Officer.
The credit system tracks information from automated and manual sources to enable
Corporate Credit to monitor counterparty/client, product, and country
concentrations. This system aggregates credit exposure by counterparty/client,
maintains overall counterparty/client and specific product limits, and
identifies limit review dates by counterparty/client. 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 credit exposure, is obtained as needed and tracked on
the credit system.
Corporate Credit works with the trading units to develop and refine credit risk
measurement models and to analyze potential credit exposures for complex
derivative transactions. Corporate Credit also monitors credit exposures related
to Merrill Lynch's retail customer business, including mortgages and home equity
lines of credit, customer margin accounts, and working capital facilities to
small businesses.
<PAGE>
- --------------------------------------------------------------------------------
OTHER RISKS
Concentration risk, the risk that Merrill Lynch's businesses will be dependent
upon a single source of revenue, product, or market, is periodically reviewed as
part of Merrill Lynch's ongoing strategic and business planning process. In
recent years, Merrill Lynch has diversified its global revenue sources to help
ensure that it is less dependent on any single financial product, customer base,
or market to generate revenues.
Operational risk focuses on Merrill Lynch's ability to accumulate, process, and
communicate information necessary to conduct business in a global market
environment. Merrill Lynch manages operational risk in many ways, including
maintaining backup facilities, using technology, and employing experienced
personnel. Information systems provide operational risk assessments on
transactions in major markets which allow Merrill Lynch to promptly respond to
changing market conditions worldwide. Management information reports enable
senior management to effectively identify potential risk and control risk
exposures, and promote compliance with both internal management policies and
regulatory requirements. Experienced operations personnel provide support and
control for trading, clearance, and settlement activities, and perform custodial
functions for customer and proprietary assets. Operations and trading personnel
report independently to senior management.
- --------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Merrill Lynch trades derivative financial instruments and provides clients with
customized derivative products. These transactions allow clients to manage their
exposure to interest and currency exchange rate, equity and commodity price, and
credit spread risks. Merrill Lynch also uses derivative instruments to manage
its own risks related to its proprietary trading strategies, client
transactions, and financing activities. See Notes 1, 3, and 5 to the
Consolidated Financial Statements for a description of derivatives, accounting
and valuation policies for derivatives, and further details on the role of
derivatives in trading and financing activities.
Derivatives activities are conducted through a number of subsidiaries as part of
client-driven and proprietary business transactions. Merrill Lynch Capital
Services, Inc. ("MLCS") is Merrill Lynch's principal swaps dealer. Merrill Lynch
Derivative Products AG, a "AAA" rated entity, is a swap subsidiary that provides
credit intermediation for interest rate and currency swaps, options, and similar
transactions between highly-rated or otherwise acceptable counterparties and
MLCS. Various subsidiaries deal in currency derivatives, including certain
banking subsidiaries and MLCS. Effective January 1997, Merrill Lynch
International became the primary equity derivatives dealer for new business,
replacing Merrill Lynch Capital Markets PLC. In connection with these derivative
activities, certain of these subsidiaries purchase and sell securities for
hedging purposes.
<PAGE>
As a dealer, Merrill Lynch enters into derivative transactions to hedge certain
inventory positions, including other derivatives. As an end-user, Merrill Lynch
enters into interest rate, currency, or other derivative contracts with its
derivatives dealer subsidiaries to hedge exposures arising from debt issuances.
These subsidiaries then enter into contracts with third parties as part of
Merrill Lynch's trading and risk management strategies.
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.
Expanded market participation and competition have helped increase liquidity
in conventional derivatives, such as interest rate swaps. Greater familiarity
with, and increased understanding of the benefits of derivatives have also
contributed to the continued development of complex products structured for
specific clients. Increasing complexity and highly publicized losses,
however, have led to concerns that these products possess greater risk to
users and to financial markets. Although different in form, both derivative
and cash instruments are subject to market, credit, and operational risks.
Credit considerations, for example, exist for a corporate bond as well as 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 are managed in a
manner consistent with a company's overall risk management policies (see "Risk
Management" section).
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. During the past year,
non-investment grade trading inventories increased to satisfy growing client
demand for higher-yielding investments, including emerging market and other
non-U.S. 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. Non-investment grade trading inventories are carried at
fair value.
<PAGE>
Merrill Lynch's insurance subsidiaries also hold non-investment grade securities
that are classified as available-for-sale and are carried at fair value.
A summary of positions with non-investment grade issuers (for cash instruments)
or counterparties (for derivatives in a gain position) follows:
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $7,585 $4,605
Derivatives(1) 2,470 1,808
Trading liabilities - cash instruments 905 351
Insurance subsidiaries' investments 206 234
- --------------------------------------------------------------------------------
(1) Collateral of $848 and $672 was obtained at December 27, 1996 and December
29, 1995, respectively, to reduce risk related to these derivative
balances.
Included in the preceding table are debt and equity securities and bank loans of
companies in various stages of bankruptcy proceedings or in default. At December
27, 1996, the carrying value of such debt and equity securities totaled $133
million, of which 58% resulted from Merrill Lynch's market-making activities in
such securities. This compared with $189 million at December 29, 1995, of which
66% related to market-making activities. In addition, Merrill Lynch held
distressed bank loans totaling $351 million and $274 million at year-end 1996
and 1995, respectively.
Derivatives may also expose Merrill Lynch to credit risk related to the
underlying security where a derivative contract can either synthesize ownership
of the underlying security (e.g., long total return swap) or potentially force
ownership of the underlying security (e.g., short put option). In addition,
derivatives may subject Merrill Lynch to credit spread risk in that changes in
the credit quality of the underlying securities may impact the derivatives' fair
values. A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Derivative fair values:
Trading assets(1) $ 63 $ 10
Trading liabilities 64 --
Derivative notionals (off-balance-sheet)(2) 2,895 1,259
- --------------------------------------------------------------------------------
(1) Included in these amounts are $9 and $6 at year-end 1996 and 1995,
respectively, that are also exposed to credit risk related to a
non-investment grade counterparty, which are included in the preceding
table.
(2) Calculated as notional subject to strike or reference price.
<PAGE>
Merrill Lynch engages in hedging strategies to reduce its exposure associated
with non-investment grade positions by purchasing an option to sell the related
security or by entering into other offsetting derivative contracts. Merrill
Lynch also uses non-investment grade trading inventories, principally non-U.S.
governments and agencies securities, to hedge the exposure arising from
structured derivative transactions.
A summary of cash instruments and derivatives used to hedge the credit risk of
non-investment grade positions follows:
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Trading assets - cash instruments $ 905 $580
Derivative notionals (off-balance-sheet)(1) 1,311 611
- --------------------------------------------------------------------------------
(1) Calculated as notional subject to strike or reference price.
At December 27, 1996, the largest non-investment grade concentration consisted
of various sovereign and corporate issues of a South American country totaling
$1.0 billion, which primarily represented hedges of other financial instruments.
- --------------------------------------------------------------------------------
HIGHLY LEVERAGED TRANSACTIONS
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be determined on a select
basis. A summary of loans, investments, and commitments related to highly
leveraged transactions follows:
(in millions) 1996 1995
- --------------------------------------------------------------------------------
Loans (net of allowance for loan losses)(1) $340 $489
Equity investments(2) 113 211
Partnership interests 104 91
Bridge loan(3) 31 --
Additional commitments to invest in partnerships 82 79
Unutilized revolving lines of credit and other
lending commitments(4) 301 127
- --------------------------------------------------------------------------------
(1) Represented outstanding loans to 36 and 30 medium-sized companies at
year-end 1996 and 1995, respectively.
(2) Invested in 48 and 62 enterprises at year-end 1996 and 1995, respectively.
(3) Repaid subsequent to year end.
(4) Subsequent to year end, a $125 million loan was extended which was reduced
to $10 million through syndication.
At December 27, 1996, no one industry sector accounted for more than 24% of
total non-investment grade positions and highly leveraged transactions.
<PAGE>
- --------------------------------------------------------------------------------
CASH FLOWS
- --------------------------------------------------------------------------------
Merrill Lynch's cash flows are principally associated with operating and
financing activities, which support Merrill Lynch's trading, customer, and
investment banking activities. Merrill Lynch's cash and cash equivalents totaled
$3.4 billion at December 27, 1996, up $284 million and $1.1 billion,
respectively, from 1995 and 1994.
Cash flows of $8.7 billion in 1996 were used for operating activities, primarily
to fund higher net trading assets generated by increased levels of business
activity. Merrill Lynch's investing activities used cash of $593 million in
1996, primarily to acquire technology-related equipment and other assets.
Financing activities provided Merrill Lynch with $9.6 billion of cash in 1996,
reflecting proceeds from net issuances of long-term debt and commercial paper,
partially offset by increases in net resale/repurchase agreements.
In 1995, cash and cash equivalents increased $779 million to $3.1 billion. Cash
used for operating and investing activities totaled $7.9 billion and $873
million, respectively, while cash provided by financing activities totaled $9.5
billion.
Cash and cash equivalents increased $529 million to $2.3 billion in 1994.
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.
- --------------------------------------------------------------------------------
LITIGATION
- --------------------------------------------------------------------------------
Certain actions have been filed against Merrill Lynch by Orange County,
California and others in connection with Merrill Lynch'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 Merrill Lynch's
subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated. The information
set forth under the caption "Litigation" in Note 7 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 Merrill Lynch as set
forth in the Consolidated Financial Statements contained herein.
- --------------------------------------------------------------------------------
RECENT DEVELOPMENTS
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which is effective for transactions occurring
after December 31, 1996. SFAS No. 125 provides guidance for determining whether
a transfer of a financial asset is treated as a sale versus a financing.
Additionally, if a transfer qualifies as a financing transaction, the statement
contains provisions that may require the recognition of collateral received or
provided, in addition to the financing balance.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date
of Certain Provisions of FASB Statement No. 125", which defers for one year the
effective date of the collateral provisions for all transactions and the sale
provisions for repurchase agreement, securities lending, and similar
transactions. These provisions will be applied prospectively to transactions
entered into after December 31, 1997; accordingly, the expected impact of
adopting such provisions on Merrill Lynch's results of operations cannot be
determined.
The provisions of SFAS No. 125 not deferred by SFAS No. 127 have been adopted as
of January 1, 1997. Since these provisions are only applicable to future
transactions, the impact of adoption cannot be quantified.
<PAGE>
STATEMENTS OF CONSOLIDATED EARNINGS
Year Ended Last Friday in December
----------------------------------
(Dollars in Millions, Except Per Share Amounts) 1996 1995 1994
- --------------------------------------------------------------------------------
REVENUES
Commissions $ 3,786 $ 3,126 $ 2,871
Interest and dividends 12,899 12,221 9,578
Principal transactions 3,454 2,519 2,335
Investment banking 1,945 1,308 1,240
Asset management and portfolio service fees 2,261 1,890 1,739
Other 666 449 471
------ ------- -------
TOTAL REVENUES 25,011 21,513 18,234
Interest Expense 11,895 11,248 8,609
------ ------- -------
NET REVENUES 13,116 10,265 9,625
------ ------- -------
NON-INTEREST EXPENSES
Compensation and benefits 6,704 5,270 4,952
Communications and equipment rental 559 487 432
Occupancy 508 449 436
Depreciation and amortization 411 367 325
Professional fees 582 425 367
Advertising and market development 514 398 375
Brokerage, clearing, and exchange fees 413 361 338
Other 859 697 670
------- ------- -------
TOTAL NON-INTEREST EXPENSES 10,550 8,454 7,895
------- ------- -------
EARNINGS BEFORE INCOME TAXES 2,566 1,811 1,730
Income Tax Expense 947 697 713
------- ------- -------
NET EARNINGS $ 1,619 $ 1,114 $ 1,017
------- ------- -------
------- ------- -------
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,572 $ 1,066 $ 1,004
------- ------- -------
------- ------- -------
EARNINGS PER COMMON SHARE
Primary $ 8.20 $ 5.44 $ 4.75
------- ------- -------
------- ------- -------
Fully Diluted $ 8.06 $ 5.42 $ 4.74
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 27, December 29,
(Dollars in Millions, Except Per Share Amounts) 1996 1995
- -------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 3,375 $ 3,091
-------- --------
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations 5,628 5,412
-------- --------
Marketable investment securities 2,180 2,365
-------- --------
Trading assets, at fair value
Corporate debt and preferred stock 24,270 17,581
Contractual agreements 13,465 11,833
Equities and convertible debentures 13,153 10,843
U.S. Government and agencies 9,304 6,672
Non-U.S. governments and agencies 7,758 6,744
Mortgages, mortgage-backed, and asset-backed 5,189 3,749
Money markets 1,209 1,680
Municipals 1,176 1,001
-------- --------
Total 75,524 60,103
-------- --------
Resale agreements 58,402 44,257
-------- --------
Securities borrowed 24,692 20,645
-------- --------
Receivables
Customers (net of allowance for doubtful
accounts of $39 in 1996 and $37 in 1995) 18,309 14,783
Brokers and dealers 6,205 9,267
Interest and other 5,280 4,741
-------- --------
Total 29,794 28,791
-------- --------
Investments of insurance subsidiaries 5,107 5,619
Loans, notes, and mortgages (net of allowance for
loan losses of $117 in 1996 and $131 in 1995) 3,334 2,172
Other investments 1,125 961
Property, leasehold improvements, and equipment
(net of accumulated depreciation and amortization
of $2,523 in 1996 and $2,239 in 1995) 1,670 1,605
Other assets 2,185 1,836
-------- --------
TOTAL ASSETS $213,016 $176,857
-------- --------
-------- --------
<PAGE>
December 27, December 29,
1996 1995
- --------------------------------------------------------------------------------
LIABILITIES, PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY
LIABILITIES
Repurchase agreements $ 62,669 $ 56,817
-------- --------
Commercial paper and other short-term borrowings 39,333 29,546
-------- --------
Trading liabilities, at fair value
U.S. Government and agencies 13,965 9,089
Contractual agreements 11,221 10,907
Equities and convertible debentures 8,332 6,642
Non-U.S. governments and agencies 7,135 4,418
Corporate debt and preferred stock 2,762 2,199
Municipals 130 95
-------- --------
Total 43,545 33,350
-------- --------
Customers 11,758 11,391
Insurance 5,010 5,391
Brokers and dealers 3,407 6,366
Other liabilities and accrued interest 13,973 10,464
Long-term borrowings 26,102 17,340
-------- --------
Total Liabilities 205,797 170,665
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 327 51
-------- --------
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:
1996 and 1995-236,330,162 shares 315 315
Paid-in capital 1,304 1,237
Foreign currency translation adjustment 10 11
Net unrealized gains on investment securities
available-for-sale (net of applicable income
tax expense of $5 in 1996 and $13 in 1995) 9 25
Retained earnings 7,868 6,492
-------- --------
Subtotal 9,506 8,080
Less:
Treasury stock, at cost:
1996-70,705,598 shares
1995-60,929,278 shares 2,895 2,241
Unallocated ESOP reversion shares, at cost:
1996-1,538,778 shares
1995-4,012,519 shares 24 63
Employee stock transactions 314 254
-------- --------
Total Common Stockholders' Equity 6,273 5,522
-------- --------
Total Stockholders' Equity 6,892 6,141
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $213,016 $176,857
-------- --------
-------- --------
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
<PAGE>
- -------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Year Ended Last Friday in December
----------------------------------
(Dollars in Millions, Except Per Share Amounts) 1996 1995 1994
- -------------------------------------------------------------------------------
PREFERRED STOCKHOLDERS' EQUITY
9% Cumulative Preferred Stock, Series A
$10,000 liquidation preference per share
Balance, beginning of year $ 425 $ 425 $ --
Issued (42,500 shares in 1994) -- -- 425
------- ------- -------
BALANCE, END OF YEAR (42,500 shares in 1996,
1995, and 1994) 425 425 425
------- ------- -------
Remarketed Preferred Stock, Series C
$100,000 liquidation preference per share
Balance, beginning and end of year (3,000
shares in 1996, 1995, and 1994) 300 300 300
Remarketed Preferred Treasury Stock, at cost
Balance, beginning and end of year (1,062
shares in 1996, 1995, and 1994) (106) (106) (106)
------- ------- -------
BALANCE, END OF YEAR 194 194 194
------- ------- -------
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 619 $ 619 $ 619
------- ------- -------
------- ------- -------
COMMON STOCKHOLDERS' EQUITY
Common Stock, par value $1.33 1/3
Balance, beginning and end of year
(236,330,162 shares in 1996,
1995, and 1994) $ 315 $ 315 $ 315
------- ------- -------
------- ------- -------
Paid-In Capital
Balance, beginning of year $ 1,237 $ 1,196 $ 1,156
Issuance of stock:
To employees (8) (2) (9)
For other activity, including employee
stock grants (8) (13) 13
To ESOP, including share allocations 83 56 36
------- ------- -------
BALANCE, END OF YEAR $ 1,304 $ 1,237 $ 1,196
------- ------- -------
------- ------- -------
Foreign Currency Translation Adjustment
Balance, beginning of year $ 11 $ 4 $ (18)
Translation adjustment (a) (1) 7 22
------- ------- -------
BALANCE, END OF YEAR $ 10 $ 11 $ 4
------- ------- -------
------- ------- -------
<PAGE>
<TABLE>
<CAPTION>
Year Ended Last Friday in December
----------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Unrealized Gains (Losses) on Investment Securities
Available-for-Sale (net of applicable income taxes)
Balance, beginning of year $ 25 $ (57) $ 21
Net unrealized (losses) gains on investment
securities available-for-sale (97) 335 (410)
Other adjustments (b) 81 (253) 332
------- ------- -------
BALANCE, END OF YEAR $ 9 $ 25 $ (57)
------- ------- -------
------- ------- -------
Retained Earnings
Balance, beginning of year $ 6,492 $ 5,606 $ 4,777
Net earnings 1,619 1,114 1,017
Cash dividends declared:
9% Cumulative Preferred stock (38) (38) (6)
Remarketed Preferred stock (9) (10) (7)
Common stock ($1.16 per share in 1996;
$1.01 in 1995; $.89 in 1994) (196) (180) (175)
------- ------- -------
BALANCE, END OF YEAR $ 7,868 $ 6,492 $ 5,606
------- ------- -------
------- ------- -------
Common Treasury Stock, at cost
Balance, beginning of year (60,929,278 shares
in 1996; 48,423,944 in 1995; 23,408,139 in 1994) $(2,241) $(1,627) $ (696)
Treasury stock purchased (18,578,817 shares in
1996; 20,011,821 in 1995; 29,988,523 in 1994) (1,163) (939) (1,138)
Issued out of treasury (net of reacquisitions):
Employees (844,887 shares in 1996; 822,818
in 1995; 1,026,321 in 1994) 51 37 42
Employee stock grants (7,957,610 shares in
1996; 6,683,669 in 1995; 3,946,397 in 1994) 458 288 165
------- ------- -------
BALANCE, END OF YEAR (70,705,598 shares in 1996;
60,929,278 in 1995; 48,423,944 in 1994) $(2,895) $(2,241) $(1,627)
------- ------- -------
------- ------- -------
Unallocated ESOP Reversion Shares, at cost
Balance, beginning of year (4,012,519 shares in
1996; 6,427,091 in 1995; 8,932,332 in 1994) $ (63) $ (101) $ (140)
Allocation of shares to participants (2,473,741
shares in 1996; 2,414,572 in 1995; 2,505,241 in 1994) 39 38 39
------- ------- -------
BALANCE, END OF YEAR (1,538,778 shares in 1996;
4,012,519 in 1995; 6,427,091 in 1994) $ (24) $ (63) $ (101)
------- ------- -------
------- ------- -------
Employee Stock Transactions
Balance, beginning of year $ (254) $ (137) $ (123)
Net issuance of employee stock grants (251) (192) (121)
Amortization of employee stock grants 183 68 100
Repayment of employee loans 8 7 7
------- ------- -------
BALANCE, END OF YEAR $ (314) $ (254) $ (137)
------- ------- -------
------- ------- -------
TOTAL COMMON STOCKHOLDERS' EQUITY $ 6,273 $ 5,522 $ 5,199
------- ------- -------
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY $ 6,892 $ 6,141 $ 5,818
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------------------------------
</TABLE>
(a) Net of income tax benefit (expense) of $16 in 1996, $19 in 1995, and $(8) in
1994.
(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) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings $ 1,619 $ 1,114 $ 1,017
Noncash items included in earnings:
Depreciation and amortization 411 367 325
Policyholder reserves 269 297 354
Other 919 672 658
(Increase) decrease in operating assets:
Trading assets (15,378) (6,375) 6,610
Cash and securities segregated for regulatory
purposes or deposited with clearing organizations (198) (459) (884)
Securities borrowed (4,047) 348 (1,992)
Customers (3,543) (771) (826)
Maturities and sales of trading investment
securities 98 -- 197
Purchases of trading investment securities (67) -- (213)
Other 1,125 250 (273)
Increase (decrease) in operating liabilities:
Trading liabilities 10,195 (2,608) 5,642
Customers 366 (1,377) (1,962)
Insurance (587) (732) (1,855)
Other 75 1,405 607
----- ----- -----
Cash (Used for) Provided by Operating Activities (8,743) (7,869) 7,405
----- ----- -----
Cash Flows from Investing Activities:
Proceeds from (payments for):
Maturities of available-for-sale securities 3,057 1,453 2,610
Sales of available-for-sale securities 1,341 1,029 1,377
Purchases of available-for-sale securities (4,374) (2,387) (2,296)
Maturities of held-to-maturity securities 920 1,217 1,965
Purchases of held-to-maturity securities (555) (1,094) (2,537)
Acquisitions, net of cash acquired (135) (601) --
Other investments and other assets (384) (138) (391)
Property, leasehold improvements, and equipment (463) (352) (406)
----- ----- -----
Cash (Used for) Provided by Investing Activities (593) (873) 322
----- ----- -----
Cash Flows from Financing Activities:
Proceeds from (payments for):
Resale agreements, net of repurchase agreements (8,293) 5,155 (10,875)
Commercial paper and other short-term borrowings 9,787 3,106 3,225
Issuance and resale of long-term borrowings 16,454 10,353 10,353
Settlement and repurchases of long-term borrowings (7,440) (7,971) (9,090)
Issuance of subsidiaries' preferred securities 276 -- --
Issuance of 9% Cumulative Preferred Stock -- -- 425
Common stock transactions (921) (894) (1,048)
Dividends (243) (228) (188)
----- ------ ------
Cash Provided by (Used for) Financing Activities 9,620 9,521 (7,198)
----- ------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 284 779 529
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,091 2,312 1,783
----- ------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,375 $ 3,091 $ 2,312
----- ------ ------
----- ------ ------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for:
Income taxes totaled $1,108 in 1996, $557 in 1995, and $1,190 in 1994.
Interest totaled $11,612 in 1996, $11,229 in 1995, and $8,452 in 1994.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY
In 1995, as part of the consideration for Smith New Court, Merrill Lynch 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. (the "Company") and subsidiaries (collectively, "Merrill Lynch"). 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.
Merrill Lynch 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, banking, insurance, 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 consist of cash instruments, such as
securities, and derivative instruments used for trading purposes or to hedge
trading inventory. Included in trading liabilities are securities that Merrill
Lynch has sold but does not currently own and will therefore be obligated to
purchase at a future date ("short sales"). Trading inventory is 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.
<PAGE>
- -------------------------------------------------------------------------------
Derivatives
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument or index, such as a future, forward, swap, or option
contract, or other financial instrument with similar characteristics. The
derivative definition excludes all cash instruments, including those that derive
their values or contractually required cash flows from an underlying instrument
or index, such as mortgage-backed securities, interest-only and principal-only
obligations, and indexed debt instruments. It also excludes option features
embedded in cash instruments such as conversion features and call provisions
embedded in bonds.
Derivative contracts often involve future commitments to exchange interest
payment streams or currencies based on a notional or contractual amount (e.g.,
interest rate swaps or currency forwards) or to purchase or sell other financial
instruments at specified terms on a specified date (e.g., options to buy or sell
securities, currencies, and commodities). Different types of derivatives can
also be combined to meet specialized needs (e.g., swap options).
Derivatives are often referred to as off-balance-sheet instruments since their
notional amounts or underlying instruments are not reflected on the balance
sheet; however, the fair values of trading derivatives are recorded in trading
inventory.
Fair values for certain exchange-traded derivatives, principally futures and
certain options, are based on quoted market prices. Fair values for
over-the-counter ("OTC") derivative financial instruments, principally forwards,
options, and swaps, represent amounts that would be received from or paid to a
third party in settlement of the instruments. These amounts are determined using
pricing models based on the present value of future cash flows using mid-market
valuations with appropriate adjustments. These adjustments are integral
components of the mark-to-market process and relate to credit quality and
concentration, market liquidity, and exposure close-out costs associated with
unmatched positions. Adjustments are also made for administrative costs incurred
to service periodic cash flows and maintain hedges over the life of the
contract. A portion of income related to longer-term contracts is recognized as
the administrative costs pertaining to these contracts are incurred.
New, complex products may have immature or limited two-way markets. The
precision of the pricing model for a complex product, which involves multiple
variables and assumptions, will evolve over time. As these products develop,
Merrill Lynch continually refines its pricing models based on experience to
correlate more closely to the market risk of these instruments.
Derivatives are reported separately as assets and liabilities unless a legal
right of setoff exists under a master netting agreement enforceable at law.
Balances related to swap and forward transactions and foreign currency options
are included in "Contractual agreements" on the Consolidated Balance Sheets. All
other derivative balances are recorded in the related cash instrument caption.
The fair value of equity options purchased, for example, is recorded in the
"Equities and convertible debentures" trading asset caption.
Merrill Lynch enters into when-issued and delayed delivery transactions.
Unrealized gains and losses from these forward transactions are recorded in
the related cash instrument caption.
<PAGE>
- -------------------------------------------------------------------------------
Revenue Recognition
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
Merrill Lynch strives to match-fund the interest rate sensitivity of its
assets and liabilities. Funding is principally obtained from repurchase
agreements, commercial paper, and long-term borrowings. Merrill Lynch
utilizes derivatives to reduce risk by managing interest rate, foreign
currency, and other exposures. Derivatives that modify the interest rate
characteristics of specified non-trading assets and liabilities are accounted
for on an accrual basis, with amounts to be paid or received recognized as
adjustments to the related interest income or expense. Unrealized gains and
losses on 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 27, 1996, 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. Merrill Lynch'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. To ensure that the market value of the underlying collateral remains
sufficient, collateral is valued daily, and Merrill Lynch may require
counterparties to deposit additional collateral or return collateral pledged,
when appropriate. Substantially all repurchase and resale activities are
transacted under master netting agreements that give Merrill Lynch the right, in
the event of default, to liquidate collateral held and to set off receivables
and payables with the same counterparty. Merrill Lynch offsets certain
repurchase and resale agreement balances with the same counterparty on the
Consolidated Balance Sheets.
Securities borrowed and loaned are recorded at the amount of cash collateral
advanced or received. Securities borrowed transactions require Merrill Lynch
to provide the counterparty with collateral in the form of cash, letters of
credit, or other securities. Merrill Lynch receives collateral in the form of
cash or other securities for securities loaned transactions. For these
transactions, the fee received or paid by Merrill Lynch is recorded as
interest revenue or expense. On a daily basis, Merrill Lynch monitors the
market value of securities borrowed or loaned against the collateral value.
Although substantially all securities borrowing and lending activities are
transacted under master netting agreements, Merrill Lynch does not offset
such receivables and payables with the same counterparty on the Consolidated
Balance Sheets.
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT SECURITIES
Merrill Lynch 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 Merrill Lynch 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 classified 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 are 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.
- -------------------------------------------------------------------------------
RECEIVABLES FROM AND PAYABLES TO CUSTOMERS
Customer securities and commodities transactions are recorded on a settlement
date basis. Receivables from and payables to customers include amounts due on
cash and margin transactions. Securities owned by customers, including those
that collateralize margin or other transactions, are not reflected on the
Consolidated Balance Sheets.
<PAGE>
- -------------------------------------------------------------------------------
INCOME TAXES
The Company and certain of its wholly-owned subsidiaries file a consolidated
Federal income tax return. Merrill Lynch uses the asset and liability method in
providing income taxes on all transactions that have been recognized in the
Consolidated Financial Statements. The asset and liability method requires that
deferred taxes be adjusted to reflect the tax rates at which future taxable
amounts 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. Merrill Lynch 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
Merrill Lynch's fixed assets are technology-based and have short lives,
generally three to five years. Maintenance and repair costs are expensed as
incurred.
Facilities-related depreciation and amortization expense was $151, $142, and
$135 in 1996, 1995, and 1994, respectively. Non-facilities-related depreciation
and amortization expense for 1996, 1995, and 1994 was $260, $225, and $190,
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.
<PAGE>
- -------------------------------------------------------------------------------
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. Liabilities for unpaid claims
consist of the mortality benefit for reported claims and an estimate of
unreported claims based upon prior experience.
Substantially all investments of insurance subsidiaries, principally debt
securities, are classified as available-for-sale and recorded at fair value.
These investments support Merrill Lynch's in-force, universal life-type
contracts. Merrill Lynch records adjustments to deferred acquisition costs and
policyholder account balances which, when combined, are equal to the adjustment
that would have been recorded if those available-for-sale investments had been
sold at their estimated fair values and the proceeds reinvested at current
yields. The corresponding credits or charges for these adjustments are recorded
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 deemed recoverable, and
amortized over the lives of the contracts in proportion to the estimated gross
profit for each group of contracts.
Merrill Lynch maintains separate accounts representing segregated funds held for
purposes of funding variable life and annuity contracts. Separate account assets
are accounted for as customer assets since the contract holders bear the risk of
ownership, consistent with Merrill Lynch's other investment products.
Accordingly, separate account assets and the related liabilities are not
consolidated with the assets and liabilities of Merrill Lynch.
- -------------------------------------------------------------------------------
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, Merrill Lynch defines
cash equivalents as short-term, highly liquid securities and interest-earning
deposits with original maturities of 90 days or less, other than those used for
trading purposes.
<PAGE>
- -------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 27, 1996 and December 29, 1995, substantially all financial
instrument assets are carried at fair value or amounts that approximate fair
value. Fair values of financial instruments are disclosed in Notes 3, 4, 5, and
7.
- -------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense includes payments in lieu of dividends of $9, $10, and $23 in
1996, 1995, and 1994, respectively.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 2. OTHER SIGNIFICANT EVENTS
- --------------------------------------------------------------------------------
ACCOUNTING CHANGES
In 1995, Merrill Lynch 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 was not material.
- -------------------------------------------------------------------------------
ACQUISITIONS
Merrill Lynch completed several acquisitions in 1996, including two non-U.S.
securities firms and a U.S. asset manager, for aggregate consideration paid of
$232. Goodwill of $167 was recorded in connection with these acquisitions.
In 1995, Merrill Lynch acquired Smith New Court PLC ("Smith New Court"), a
U.K.-based global securities firm, for $803, and recorded $533 of goodwill
related to the acquisition.
The operating results of acquired companies are included in Merrill Lynch's
results of operations as of the acquisition date.
- --------------------------------------------------------------------------------
NOTE 3. TRADING ACTIVITIES
- --------------------------------------------------------------------------------
Merrill Lynch's trading activities include providing securities brokerage,
derivatives dealing, and underwriting services to clients. While trading
activities are primarily generated by client order flow, Merrill Lynch also
takes proprietary positions based on expectations of future market movements and
conditions. Merrill Lynch's trading strategies rely on the integrated management
of its client-driven and proprietary transactions, along with the hedging and
financing of these positions.
<PAGE>
Principal transactions revenues by product category follow(1):
1996 1995 1994
------ ------ -----
Equities and equity derivatives $1,138 $ 912 $ 625
Taxable fixed-income 966 516 471
Interest rate and currency swaps 893 732 750
Municipals 323 273 380
Foreign exchange and commodities 134 86 109
------ ------ ------
TOTAL $3,454 $2,519 $2,335
------ ------ ------
------ ------ ------
(1) The revenue amounts presented include gains and losses from both cash and
related derivative instruments.
Interest revenue and expense are integral components of trading activities. In
assessing the profitability of trading activities, Merrill Lynch views net
interest and principal transactions revenues in the aggregate. For further
information on Merrill Lynch's net trading results, see "Principal Transactions"
in Management's Discussion and Analysis (unaudited).
Certain trading activities expose Merrill Lynch to market and credit risks.
These risks are managed in accordance with established risk management policies
and procedures that are described in the "Risk Management" section of
Management's Discussion and Analysis (unaudited).
- -------------------------------------------------------------------------------
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, and credit spreads. The level of market risk is influenced by the
volatility and the liquidity in the markets in which financial instruments are
traded.
Merrill Lynch seeks to mitigate market risk associated with trading inventories
by employing hedging strategies that correlate rate, price, and spread movements
of trading inventories and related financing and hedging activities. Merrill
Lynch uses a combination of cash instruments and derivatives to hedge its market
exposures. The following discussion describes the types of market risk faced by
Merrill Lynch.
<PAGE>
- -------------------------------------------------------------------------------
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
and Eurodollar and U.S. Treasury securities and futures are common interest rate
risk management tools. The decision to manage interest rate risk using futures
or swap contracts, as opposed to buying or selling short U.S. Treasury or other
securities, depends on current market conditions and funding considerations.
Interest rate swap agreements used by Merrill Lynch include caps, collars,
floors, basis swaps, and leveraged swaps. Interest rate caps and floors provide
the purchaser protection against rising and falling interest rates,
respectively. Interest rate collars combine a cap and a floor, providing the
purchaser with a predetermined interest rate range. Basis swaps are a type of
interest rate swap agreement where 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).
Merrill Lynch's exposure to interest rate risk resulting from these leverage
factors is typically hedged with other financial instruments.
- -------------------------------------------------------------------------------
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange
rates will impact the value of financial instruments. Currency forwards and
options are commonly used to manage currency risk. Currency swaps are also used
in situations where a long-dated forward market is not available or where the
end-user needs a customized instrument to hedge a foreign currency cash flow
stream. Typically, parties to a currency swap initially exchange principal
amounts
<PAGE>
in two currencies, agreeing to exchange interest payments and to re-exchange
the currencies at a future date and exchange rate. Merrill Lynch's currency
contracts relate primarily to major currencies such as the Japanese yen,
German mark, Swiss franc, British pound, and French franc.
- -------------------------------------------------------------------------------
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will
fluctuate, affecting the value of equity securities and other instruments that
derive their value from a particular stock, a defined basket of stocks, or a
stock index. Typical instruments used to manage equity price risk include equity
options and warrants. Equity options, for example, can require the writer to
purchase or sell a specified stock or to make a cash payment based on changes in
the market price of that stock, basket of stocks, or stock index.
- -------------------------------------------------------------------------------
Commodity Price Risk
Merrill Lynch views its commodity contracts as financial instruments since they
are generally settled in cash and not by delivery of the underlying commodity.
Commodity price risk results from the possibility that the price of the
underlying commodity may rise or fall. Cash flows from commodity contracts are
based on the difference between an agreed-upon fixed price and a price that
varies with changes in a specified commodity price or index. Commodity contracts
held by Merrill Lynch principally relate to energy, precious metals, and base
metals.
<PAGE>
- -------------------------------------------------------------------------------
Credit Spread Risk
Credit spread risk arises from the possibility that changes in an issuer's
credit rating or credit perception affect the value of financial instruments.
Certain derivatives may be used to manage this type of credit risk. Total return
swaps, for instance, are typically designed to transfer all the risks and
rewards of ownership of an underlying debt instrument from one party in the swap
agreement to the other party, in exchange for a specified interest rate. Credit
risk resulting from default on counterparty obligations is discussed in the
following "Credit Risk" section.
- -------------------------------------------------------------------------------
CREDIT RISK
Merrill Lynch is exposed to the risk of loss if an issuer or a counterparty
failed to perform its obligations under contractual terms and the collateral
held, if any, were deemed worthless ("default risk"). Both cash instruments and
derivatives expose Merrill Lynch to default risk. Credit risk arising from
changes in credit spreads is discussed in the "Market Risk" section.
Merrill Lynch has established policies and procedures for mitigating credit
risk on principal transactions, including reviewing and establishing limits
for credit exposure, obtaining the right to collect collateral or terminate
transactions in the event of a credit rating downgrade, limiting transactions
with specific counterparties, maintaining collateral, and continually
assessing the creditworthiness of counterparties. For further information,
see "Credit Risk" in the "Risk Management" section of Management's Discussion
and Analysis (unaudited).
In the normal course of business, Merrill Lynch executes, settles, and finances
various customer securities transactions. Execution of these transactions
includes the purchase and sale of securities by Merrill Lynch. These activities
may expose Merrill Lynch to default risk arising from the potential that
customers or counterparties may fail to satisfy their obligations. In these
situations, Merrill Lynch may be required to purchase or sell financial
instruments at unfavorable market prices to satisfy obligations to other
customers or counterparties. In addition, Merrill Lynch seeks to control the
risks associated with its customer margin activities by requiring customers to
maintain collateral in compliance with regulatory and internal guidelines.
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, Merrill
Lynch may purchase the underlying security in the market and seek reimbursement
for losses from the counterparty.
Merrill Lynch uses repurchase and resale agreements and securities loaned and
borrowed transactions to finance securities, to facilitate settlement
processes, and to meet customers' needs. Under these agreements and
transactions, Merrill Lynch either receives or provides collateral, including
U.S. Government and agencies, asset-backed, corporate debt, equity, and
non-U.S. government and agencies securities. When providing collateral for
these transactions, Merrill Lynch delivers its own securities, securities
borrowed from counterparties, and securities owned by customers
collateralizing margin loans and other obligations.
The market value of securities owned by Merrill Lynch that have been loaned
or pledged to counterparties as collateral for obligations of Merrill Lynch,
primarily related to repurchase agreements, were $27,810 and $27,501 at
December 27, 1996 and December 29, 1995, respectively.
<PAGE>
- -------------------------------------------------------------------------------
Concentrations of Credit Risk
Merrill Lynch's exposure to credit risk, both default and credit spread,
associated with its trading and other activities is measured on an individual
counterparty basis, as well as by groups of counterparties that share similar
attributes. Concentrations of credit risk can be affected by changes in
political, industry, or economic factors. To reduce the potential for risk
concentration, credit limits are established and monitored in light of changing
counterparty and market conditions.
At December 27, 1996, Merrill Lynch's most significant concentration of credit
risk was with the U.S. Government and its agencies. This concentration, which
primarily arises from taking trading asset and investment security positions and
maintaining collateral on resale agreements, totaled $41,482 at December 27,
1996 and $35,769 at December 29, 1995.
<PAGE>
At December 27, 1996, Merrill Lynch had concentrations of credit risk with
other counterparties, including a European and a South American sovereign
rated AA and B+, respectively, by recognized credit rating agencies and an
investment company whose holdings primarily consist of various sovereign debt
instruments. The total exposure to these counterparties, excluding collateral
held, was $3,912, or 1.8% of total assets. At December 29, 1995, Merrill
Lynch had concentrations of credit risk with an Asian and a European
sovereign totaling $3,642 or 2.1% of total assets, excluding collateral held.
Merrill Lynch's most significant industry credit concentration is with U.S.
and non-U.S. financial institutions. Financial institutions include other
brokers and dealers, commercial banks, financing companies, insurance
companies, and mutual funds. This concentration arises in the normal course
of Merrill Lynch's brokerage, trading, financing, and underwriting
activities. Merrill Lynch also monitors credit exposures worldwide by region.
Within these regions, sovereign governments represent the most significant
concentration, followed by financial institutions and non-financial
institutions.
In the normal course of business, Merrill Lynch purchases, sells,
underwrites, and makes markets in non-investment grade instruments. In
conjunction with merchant banking activities, Merrill Lynch also provides
extensions of credit and makes equity investments to facilitate leveraged
transactions. These activities expose Merrill Lynch to a higher degree of
credit risk than is associated with trading, investing in, and underwriting
investment grade instruments and extending credit to investment grade
counterparties. See "Non-Investment Grade Holdings and Highly Leveraged
Transactions" in Management's Discussion and Analysis (unaudited) for further
information.
<PAGE>
- -------------------------------------------------------------------------------
DERIVATIVES USED IN TRADING ACTIVITIES
The fair values of derivatives used in trading activities at year-end 1996 and
1995 follow:
DECEMBER 27, 1996 DECEMBER 29, 1995
----------------- -----------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Swap agreements $11,553 $9,370 $10,008 $8,966
Forward contracts 1,304 1,403 1,159 1,506
Options 2,618 3,203 2,631 1,261
The table below presents the average fair values of Merrill Lynch's trading
derivatives for 1996 and 1995, calculated on a monthly basis:
- -------------------------------------------------------------------------------
AVERAGE FAIR VALUE
---------------------------------------------
1996 1995
--------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Swap agreements $9,872 $8,404 $10,226 $9,049
Forward contracts 1,192 1,260 1,543 1,915
Options 2,573 1,964 2,400 1,368
- -------------------------------------------------------------------------------
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments. The notional or contractual amounts of derivatives used
for trading purposes by type of risk follow:
- -------------------------------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE CURRENCY PRICE PRICE
(in billions) RISK(1)(2) RISK(3) RISK RISK
- -------------------------------------------------------------------------------
DECEMBER 27, 1996
- -----------------
Swap agreements $1,212 $140 $13 $ 3
Forward contracts 24 147 1 17
Futures contracts 126 2 7 5
Options purchased 85 76 21 3
Options written 118 72 31 3
DECEMBER 29, 1995
- -----------------
Swap agreements $ 851 $106 $ 7 $ 3
Forward contracts 33 118 -- 25
Futures contracts 215 1 2 2
Options purchased 45 24 38 5
Options written 64 24 41 6
- -------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread 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 that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
Most of Merrill Lynch's trading derivative transactions are short-term
in duration with a weighted-average maturity of approximately 2.66 years at
December 27, 1996 and 2.24 years at December 29, 1995. For trading
derivatives outstanding at December 27, 1996, the following table presents
the notional or contractual amounts that would be outstanding at subsequent
year ends based on contractual maturities.
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s trading
derivatives at December 27, 1996 that would be outstanding at subsequent year
ends based on contractual maturities. The graph is presented in billions
with trading derivatives comprised of swap agreements, forward contracts,
futures contracts, options purchased, and options written. Remaining
maturities for these products in the aggregate total $2,106, $1,220, $925,
$711, $546, $407, $327 and $244 at year-end December 1996 through December
2003, respectively.
<PAGE>
The notional or contractual values of derivatives do not represent default risk
exposure. Default risk is limited to the current cost of replacing derivative
contracts in a gain position.
Default risk exposure varies by type of derivative. Swap agreements and forward
contracts are generally OTC-transacted and thus are exposed to default risk to
the extent of their replacement cost. Since futures contracts are
exchange-traded and usually require daily cash settlement, the related risk of
accounting loss is generally limited to a one-day net positive change in market
value. Option contracts can be exchange-traded or OTC-transacted contracts.
Purchased options have default risk to the extent of their replacement cost.
Written options represent a potential obligation to counterparties and,
accordingly, do not subject Merrill Lynch to default risk.
Merrill Lynch attempts to enter into International Swaps and Derivatives
Association, Inc. master agreements or their equivalent ("master netting
agreements") with each of its counterparties. 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.
To reduce default risk, Merrill Lynch requires collateral, principally U.S.
Government and agencies securities, on certain derivative transactions. From
an economic standpoint, Merrill Lynch evaluates default risk exposures net of
related collateral. Presented below is a summary of counterparty credit
ratings for the replacement cost (net of $3,213 of collateral) of trading
derivatives in a gain position by maturity at December 27, 1996.
- -------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
--------------------------------- MATURITY
0-3 3-5 5-7 OVER 7 NETTING(1) TOTAL
---------------------------------------------------------
CREDIT
RATING(2)
AAA $ 437 $ 89 $ 28 $ 284 $ (42) $ 796
AA+/AA 993 189 160 359 (99) 1,602
AA- 1,501 514 483 385 (669) 2,214
A+/A 1,591 631 535 279 (390) 2,646
A- 1,906 601 259 341 (809) 2,298
BBB 762 289 123 137 (227) 1,084
BB 475 170 41 193 (164) 715
Other 529 138 21 240 (21) 907
------ ------ ------ ------ ------- -------
TOTAL $8,194 $2,621 $1,650 $2,218 $(2,421) $12,262
------ ------ ------ ------ ------- -------
------ ------ ------ ------ ------- -------
(1) Represents netting of payable balances with receivable balances for the
same counterparty across maturity year 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.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate default
risk on derivatives by entering into transactions with provisions that enable
Merrill Lynch to terminate or reset the terms of the derivative contract.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENTS AND OTHER NON-TRADING ASSETS
- --------------------------------------------------------------------------------
INVESTMENTS
Merrill Lynch 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 primarily held for rating agency purposes or to
manage cash flows related to certain liabilities of Merrill Lynch's banking
subsidiaries. Other investments consist principally of equity and debt
securities that were acquired primarily in connection with merchant banking
activities. Certain merchant banking investments are subject to restrictions
that may limit Merrill Lynch's ability to realize its investment until such
restrictions expire.
Marketable investment securities and certain insurance subsidiaries' and other
investments are carried as held-to-maturity, trading, or available-for-sale
securities as described in Note 1. Investment securities reported on the
Consolidated Balance Sheets at December 27, 1996 and December 29, 1995 are
presented below:
- -------------------------------------------------------------------------------
1996 1995
------ ------
INVESTMENTS OF INSURANCE SUBSIDIARIES
Available-for-sale $3,624 $4,145
Non-qualifying(1) 1,483 1,474
------ ------
TOTAL $5,107 $5,619
------ ------
------ ------
MARKETABLE INVESTMENT SECURITIES
Available-for-sale $1,523 $1,064
Held-to-maturity 653 1,268
Trading 4 33
------ ------
TOTAL $2,180 $2,365
------ ------
------ ------
OTHER INVESTMENTS
Available-for-sale $ 142 $ 165
Held-to-maturity 328 43
Trading 3 --
Non-qualifying(2) 652 753
------ ------
TOTAL $1,125 $ 961
------ ------
------ ------
- -------------------------------------------------------------------------------
(1) Primarily consists of insurance policy loans.
(2) Includes merchant banking investments.
<PAGE>
Information regarding investment securities subject to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 27, 1996 December 29, 1995
-------------------------------------------------- --------------------------------------------------
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 $3,016 $ 72 $(12) $3,076 $2,999 $145 $(7) $3,137
U.S. Government and agencies 399 3 (1) 401 631 8 -- 639
Municipals 276 3 -- 279 168 1 -- 169
Mortgage-backed securities 1,029 21 (3) 1,047 1,290 35 (2) 1,323
Other debt securities 417 8 (9) 416 57 1 -- 58
------ ---- ---- ------ ------ ---- ---- ------
Total debt securities 5,137 107 (25) 5,219 5,145 190 (9) 5,326
Equity securities 70 5 (5) 70 50 5 (7) 48
------ ---- ---- ------ ------ ---- ---- ------
TOTAL $5,207 $112 $(30) $5,289 $5,195 $195 $(16) $5,374
------ ---- ---- ------ ------ ---- ---- ------
------ ---- ---- ------ ------ ---- ---- ------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 27, 1996 December 29, 1995
-------------------------------------------------- --------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate debt $483 $ 4 -- $ 487 $1,051 $13 -- $1,064
U.S. Government and agencies 37 -- -- 37 23 -- -- 23
Municipals 122 15 -- 137 1 -- -- 1
Mortgage-backed securities 281 2 -- 283 169 -- -- 169
Other debt securities 58 -- -- 58 67 1 -- 68
---- ---- ---- ------ ------ --- ---- ------
TOTAL $981 $21 -- $1,002 $1,311 $14 -- $1,325
---- ---- ---- ------ ------ --- ---- ------
---- ---- ---- ------ ------ --- ---- ------
</TABLE>
- -------------------------------------------------------------------------------
(1) In accordance with Financial Accounting Standards Board implementation
guidance on SFAS No. 115, Merrill Lynch 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.
The amortized cost and estimated fair value of debt securities at December 27,
1996, 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 $1,118 $1,119 $417 $ 418
Due after one year
through five years 1,691 1,729 149 153
Due after five years
through ten years 808 826 99 100
Due after ten years 491 498 35 48
------ ------ ---- -----
Subtotal 4,108 4,172 700 719
Mortgage-backed
securities 1,029 1,047 281 283
------ ------ ----- ------
TOTAL(1) $5,137 $5,219 $981 $1,002
------ ------ ----- ------
------ ------ ----- ------
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Merrill Lynch'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.
<PAGE>
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Net unrealized (losses) gains
on investment securities
available-for-sale $(97) $ 335 $(410)
Adjustments for policyholder
liabilities 64 (137) 215
Adjustments for deferred
policy acquisition costs 9 (72) 74
Deferred income taxes 8 (44) 43
---- ---- ----
Net activity (16) 82 (78)
Net unrealized gains (losses)
on investment securities
classified as available-for-sale:
Beginning of year 25 (57) 21
---- ------ -----
End of year $ 9 $ 25 $ (57)
---- ------ -----
---- ------ -----
- --------------------------------------------------------------------------------
<PAGE>
The proceeds and gross realized gains (losses) from the sale of
available-for-sale investments are as follows:
- -------------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
Proceeds $ 1,341 $ 1,029 $ 1,377
Gross realized gains 41 26 31
Gross realized losses (12) (28) (34)
- -------------------------------------------------------------------------------
Net unrealized (losses) gains from trading investment securities included in the
1996 and 1995 Statements of Consolidated Earnings were $(1) and $1,
respectively.
- -------------------------------------------------------------------------------
OTHER NON-TRADING ASSETS
Most other financial instrument assets are carried at amounts that approximate
fair value. Such assets include cash and cash equivalents, cash and securities
segregated for regulatory purposes or deposited with clearing organizations,
most resale agreements, securities borrowed, and receivables.
<PAGE>
Other financial instrument assets with carrying values that differ from their
fair values are presented below:
- -------------------------------------------------------------------------------
December 27, 1996 December 29, 1995
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- -------- -------
Merchant banking
equity investment
and loan portfolio(1) $ 202 $ 362 $ 394 $ 595
Loans, notes, and
mortgages(2) 3,313 3,347 2,082 2,149
Mortgage servicing
assets and related
residual interests 374 393 255 303
- -------------------------------------------------------------------------------
(1) Equity investments are non-qualifying for SFAS No. 115 purposes.
(2) Excludes loans related to merchant banking activities.
In connection with its merchant banking activities, Merrill Lynch holds certain
equity instruments, including partnership interests (included in Other
investments on 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., consent of other investors)
that may limit Merrill Lynch's ability to realize currently the estimated fair
value. Accordingly, Merrill Lynch's current estimate of fair value and the
ultimate realization on these instruments may differ.
Loans made in the course of merchant banking activities are carried at unpaid
principal balances. Fair value for loans made in connection with merchant
banking activities is estimated using discounted cash flows. Merrill Lynch's
estimate of fair value for other loans, notes, and mortgages is determined
based on loan characteristics. For certain homogeneous categories of loans,
including residential mortgages and home equity loans, fair value is
estimated using market price quotations or previously executed transactions
for securities backed by similar loans, adjusted for credit risk and other
individual loan characteristics. For Merrill Lynch's variable-rate loan
receivables, carrying value approximates fair value.
<PAGE>
Mortgage servicing assets and residual interests in the mortgage loans
underlying various Real Estate Mortgage Investment Conduits ("REMICS") and
revolving trusts are primarily included in Other assets on the Consolidated
Balance Sheets. Servicing assets and residual interests are (i) recognized upon
sales of loans for which servicing is retained, (ii) amortized in proportion to
and over the estimated life of the projected servicing revenues, and (iii)
periodically evaluated for impairment. Fair value of servicing assets is
computed based on the present value of estimated future normal servicing
revenues (net of servicing expenses), using current market assumptions for
discount rates, prepayment speeds, default estimates, and interest rates. Fair
value of residual interests in REMICS and revolving trusts is calculated based
on the present value of estimated future servicing revenues in excess of normal
servicing revenues, using current market assumptions for discount rates,
prepayment speeds, default estimates, and interest rates.
Merrill Lynch holds a passive minority interest in Bloomberg L.P., a privately
held limited partnership that provides information services. In 1996, Merrill
Lynch sold one-third of its interest to the majority interest holder, resulting
in a gain of $155. Due to the nature and terms of the sale, the sale price is
not necessarily indicative of the fair value of Merrill Lynch's remaining
investment. In addition, given the contractual restrictions on the disposition
of Merrill Lynch's interest, the fair value of the remaining investment is not
readily determinable as of December 27, 1996. Management believes, however, that
the fair value of this investment significantly exceeds its carrying value of
$28.
Merrill Lynch enters into derivative hedges of interest rate risk on various
non-trading assets, including certain long-term resale agreements. At December
27, 1996 and December 29, 1995, the notional amounts of derivatives hedging
these assets were $7 billion. The combined carrying value of hedged non-trading
assets and related hedges approximates their combined fair value at both dates.
- -------------------------------------------------------------------------------
NOTE 5. SHORT-TERM AND LONG-TERM BORROWINGS AND OTHER NON-TRADING LIABILITIES
- -------------------------------------------------------------------------------
SHORT-TERM AND LONG-TERM BORROWINGS
Merrill Lynch issues U.S. dollar- and foreign currency-denominated debt
instruments with both variable and fixed interest rates. These financing
activities may create exposure to market risk, most notably interest rate and
currency risk. To better match the interest rate characteristics of assets and
liabilities, Merrill Lynch 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 borrowings and
commercial paper may also be modified through swap agreements that change the
underlying interest rate basis or reset frequency. Foreign currency payments on
debt obligations may be swapped to U.S. dollar payments.
<PAGE>
Merrill Lynch also issues debt containing embedded options that link the
repayment of these obligations to the performance of an equity or other index
(e.g., S&P 500), an industry basket of stocks, or an individual stock. The
contingent components of these indexed debt obligations are hedged with
derivatives.
Borrowings at December 27, 1996 and December 29, 1995 are presented below:
- --------------------------------------------------------------------------------
1996 1995
------- -------
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS
Commercial paper $23,558 $16,969
Demand and time deposits 9,311 8,182
Securities loaned 2,751 2,857
Bank loans and other 3,713 1,538
------- -------
TOTAL $39,333 $29,546
------- -------
------- -------
LONG-TERM BORROWINGS
Fixed-rate obligations(1):
U.S. dollar-denominated $ 5,770 $ 4,670
Foreign currency-denominated 1,737 1,157
Variable-rate obligations(2)(3):
U.S. dollar-denominated 1,944 630
Foreign currency-denominated 690 222
Medium-term notes(4):
U.S. dollar-denominated 10,532 7,650
Foreign currency-denominated 5,429 3,011
------- -------
TOTAL $26,102 $17,340
------- -------
------- -------
- --------------------------------------------------------------------------------
(1) At December 27, 1996, U.S. dollar-denominated fixed-rate obligations are
due 1997 to 2019 at interest rates ranging from 5.50% to 10.38%; foreign
currency-denominated fixed-rate obligations are due 1997 to 2002 at
interest rates ranging from 2.55% to 12.10%.
(2) Variable interest rates are generally based on rates such as LIBOR, the
U.S. Treasury Bill Rate, or the Federal Funds Rate.
(3) Included in variable-rate obligations are various equity-linked or indexed
instruments issued by Merrill Lynch.
(4) Medium-term notes may bear fixed or variable interest rates and have
maturities that may range from nine months to 30 years from the date of
issue.
<PAGE>
Maturities of long-term borrowings at December 27, 1996 consisted of the
following:
- -------------------------------------------------------------------------------
1997 $5,986
1998 4,150
1999 4,353
2000 2,945
2001 3,214
2002 and thereafter 5,454
-------
TOTAL $26,102
-------
-------
- --------------------------------------------------------------------------------
The notional or contractual amounts of derivatives used to hedge exposures
related to borrowings at December 27, 1996 and December 29, 1995 follow:
- -------------------------------------------------------------------------------
(IN BILLIONS) 1996 1995
----- -----
Interest rate derivatives(1) $32 $26
Currency derivatives(1) 4 3
Equity derivatives 2 1
- -------------------------------------------------------------------------------
(1) Includes swap contracts totaling $1 billion notional that contain
embedded options hedging callable debt at both dates.
Most of these derivatives are entered into with Merrill Lynch's derivative
dealer subsidiaries, which intermediate interest rate, currency, and equity
risks with third parties in the normal course of their trading activities.
Effective weighted-average interest rates for borrowings, which include the
impact of hedges, at December 27, 1996 and December 29, 1995 were:
- -------------------------------------------------------------------------------
1996 1995
------ ------
SHORT-TERM BORROWINGS(1) 5.69% 6.18%
LONG-TERM BORROWINGS
Fixed-rate obligations 7.41% 6.47%
Variable-rate obligations 5.82% 6.38%
Medium-term notes 5.68% 5.87%
- -------------------------------------------------------------------------------
(1) Consists of repurchase agreements, commercial paper, and other short-term
borrowings.
<PAGE>
The fair value of borrowings 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 27, 1996 December 29, 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------- -------------------
COMMERCIAL PAPER
AND OTHER SHORT-TERM
BORROWINGS $ 39,333 $ 39,342 $ 29,546 $ 29,567
Related derivative:
Assets (15) (12) (19) (21)
Liabilities 5 5 1 2
-------- -------- -------- --------
TOTAL $ 39,323 $ 39,335 $ 29,528 $ 29,548
-------- -------- -------- --------
-------- -------- -------- --------
LONG-TERM
BORROWINGS $ 26,102 $ 26,850 $ 17,340 $ 17,901
Related derivative:
Assets (257) (769) (260) (781)
Liabilities 370 448 176 154
-------- -------- -------- --------
TOTAL $ 26,215 $ 26,529 $ 17,256 $ 17,274
-------- -------- -------- --------
-------- -------- -------- --------
- --------------------------------------------------------------------------------
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 1996, and through February 20, 1997, long-term
borrowings, net of repayments and repurchases, increased approximately $2,810.
- -------------------------------------------------------------------------------
Borrowing Facilities
Merrill Lynch has obtained committed, unsecured revolving credit facilities
aggregating $6,225 under agreements with 73 banks. The agreements contain
covenants requiring, among other things, that Merrill Lynch maintain specified
levels of net worth, as defined in the agreements, on the date of an advance. At
December 27, 1996, none of these credit facilities had been drawn upon.
<PAGE>
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: $1,120 in February 1997;
$1,540 in May 1997; $1,760 in June 1997; and $1,805 in October 1997. At
maturity, Merrill Lynch may convert amounts borrowed, if any, into term loans
which would mature in two years.
- --------------------------------------------------------------------------------
OTHER NON-TRADING LIABILITIES
Other financial instrument liabilities are carried at amounts that approximate
fair value. Such liabilities include repurchase agreements, payables to
customers and brokers and dealers, and insurance and other liabilities.
- --------------------------------------------------------------------------------
NOTE 6. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
In December 1996, Merrill Lynch Preferred Capital Trust I (the "Trust") issued
$275 of its 7.75% Trust Originated Preferred Securities (the "Trust Preferred")
to unrelated parties and $9 in common securities to the Company. Concurrently,
Merrill Lynch Preferred Funding I, L.P. (the "Partnership") issued $284 of its
7.75% Partnership Preferred Securities representing limited partner interests
(the "LP Interests") to the Trust, and received capital of $50 from the Company
representing the general partner interest in the Partnership. The Trust and
Partnership are consolidated subsidiaries of the Company.
The Trust's sole asset is the Partnership's LP Interests. The Partnership's
assets consist of $330 million in debentures issued by the Company and a
subsidiary (the "Debentures") and $4 million in other debt securities. The
Debentures have a term of approximately 20 years and bear interest at 7.75%.
The interest payment dates and redemption provisions of the Debentures, which
include an option to redeem the debentures on or after December 30, 2006,
correspond to the distribution payment dates and redemption provisions of
both the LP Interests and the Trust Preferred.
The Company has guaranteed the payment in full of all distributions and other
payments on the Trust Preferred to the extent that the Trust has funds legally
available. The Company has also guaranteed the payment of distributions by the
Partnership on the LP Interests if, as, and when declared out of funds legally
available and payments upon liquidation of the Partnership or the redemption of
LP Interests to the extent of funds legally available. In addition, payments in
respect of the subsidiary Debentures are guaranteed by the Company for the
benefit of the LP Interest holders. The guarantees are subordinated to all other
liabilities and rank pari passu with the most senior preferred stock of the
Company and, when taken together with the Debentures and the Company's
obligations to pay all fees and expenses of the Trust and the Partnership,
constitute a full and unconditional guarantee of the distribution, redemption,
and liquidation payments payable to the holders of the Trust Preferred.
Subsequent to year-end, Merrill Lynch Capital Trust II, a consolidated Merrill
Lynch subsidiary, issued $300 of 8% Trust Originated Preferred Securities. The
proceeds of the offering were invested in 8% Partnership Preferred Securities of
Merrill Lynch Preferred Funding II, L.P., also a consolidated Merrill Lynch
subsidiary, which, in turn, invested in debentures issued by the Company and a
subsidiary.
- --------------------------------------------------------------------------------
PREFERRED EQUITY
The Company is authorized to issue 25,000,000 shares of undesignated
preferred stock, $1.00 par value per share. All shares of currently
outstanding preferred stock constitute one and the same class 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 Company 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 Company, 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 Company has issued 3,000 shares of Remarketed Preferred Stock, Series C ("RP
Stock"), of which 1,938 shares were outstanding as of December 27, 1996.
Dividend rates in effect during 1996 on the RP Stock ranged from 3.80% to 4.56%
per annum.
Subsequent to year-end, the Company implemented a plan to redeem all of the
outstanding RP Stock. The RP Stock will be redeemed on the dividend reset date
of each series, and the redemptions are expected to be completed by March 4,
1997. As of February 19,1997, $155 of RP Stock, representing 1,548 shares, had
been redeemed.
- --------------------------------------------------------------------------------
STOCKHOLDER RIGHTS PLAN
The Company's Stockholder Rights Plan provides for the distribution of preferred
purchase rights ("Rights") to common stockholders. The Rights separate from the
common stock ten days following: (a) an announcement of an acquisition by a
person or group ("acquiring party") of 20% or more of the
<PAGE>
outstanding common shares of the Company; 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 Company's outstanding shares or the Company 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 Company at $.01 per Right at any
time until the tenth day following an announcement of the acquisition of 20% or
more of the Company's common stock.
<PAGE>
- --------------------------------------------------------------------------------
PER COMMON SHARE COMPUTATION
Earnings per common share were computed using the modified treasury stock method
("modified method") in accordance with Accounting Principles Board Opinion
("APB") 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 Company's outstanding common stock.
Under this method, all options, warrants, and their equivalents are assumed
exercised (whether dilutive or antidilutive), using the aggregate exercise
proceeds to repurchase up to 20% of the Company'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 $47, $48, and $13, for 1996,
1995, and 1994, 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 incentive plans are considered common
stock equivalents ("incremental shares").
<PAGE>
The weighted-average number of common shares and incremental shares included in
the primary and fully diluted earnings per common share computations follow:
- --------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
------ ------ ------
PRIMARY
Weighted-average
common shares 168,897 176,563 195,661
Incremental shares 22,939 19,434 15,580
------- ------- -------
TOTAL 191,836 195,997 211,241
------- ------- -------
------- ------- -------
FULLY DILUTED
Weighted-average
common shares 168,897 176,563 195,661
Incremental shares 26,278 20,097 16,034
------- ------- -------
TOTAL 195,175 196,660 211,695
------- ------- -------
------- ------- -------
- -------------------------------------------------------------------------------
NOTE 7. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
LITIGATION
There are civil actions, arbitration proceedings, and claims pending against
Merrill Lynch as of December 27, 1996, some of which involve claims for
substantial amounts.
Included among these matters is an action that is pending in the United States
District Court for the Central District of California, commenced on January 12,
1995 by Orange County, California (the "County") and the Orange County
Investment Pools (the "Pools"), both of which filed bankruptcy petitions in the
United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court") on December 6, 1994. The Company and certain of its
subsidiaries are named as defendants in connection with Merrill Lynch's business
activities with the Orange County Treasurer-Tax Collector. The Pools' bankruptcy
petition subsequently was dismissed. On May 17, 1996, the Bankruptcy Court
confirmed a plan pursuant to which Orange County emerged from bankruptcy.
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 Company and its
subsidiaries. As subsequently amended, the complaint alleges, among other
things, that these transactions violated California law and should be
adjudged null and void, that the Company 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
Company and its subsidiaries breached a fiduciary duty owed to the County and
conspired to make unauthorized use of public funds.
In addition, other actions are pending against or on behalf of the Company,
and/or against 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 state courts in California and New York. These
include class actions and stockholder derivative actions brought by persons
alleging harm to themselves or to Merrill Lynch arising out of
<PAGE>
Merrill Lynch's dealings with the Orange County Treasurer-Tax Collector, or
the purchase of debt instruments issued by Orange County or other public
entities with funds controlled by the Orange County Treasurer-Tax Collector
that were underwritten by the Company'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 management that the resolution of these matters will not
have a material adverse effect on the Consolidated Financial Statements of
Merrill Lynch contained herein.
<PAGE>
- --------------------------------------------------------------------------------
LENDING
Merrill Lynch enters into commitments to extend credit, predominantly at
variable interest rates, in connection with certain merchant banking and loan
syndication transactions. Customers may also be extended loans or lines of
credit collateralized by first and second mortgages on real estate, certain
liquid assets of small businesses, or securities. Merrill Lynch also issues
various guarantees to counterparties in connection with certain leasing, 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, Merrill
Lynch may require the counterparty to post collateral depending upon the
counterparty's creditworthiness and market conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements, as guarantees and commitments may expire without being drawn upon.
At December 27, 1996 and December 29, 1995, Merrill Lynch had the following
commitments and guarantees:
- --------------------------------------------------------------------------------
1996 1995
------ ------
Commitments to extend credit(1) $4,780 $3,555
Third party guarantees 1,975 887
- --------------------------------------------------------------------------------
(1) Subsequent to year end, Merrill Lynch entered into a $1.9 billion loan
commitment to a company in connection with a proposed acquisition.
If extended, Merrill Lynch intends to syndicate the loan but may retain a
residual portion.
The fair value of the outstanding guarantees was $24 and $31 at December 27,
1996 and December 29, 1995, respectively.
<PAGE>
- --------------------------------------------------------------------------------
LEASES
Merrill Lynch has entered into various noncancelable long-term lease agreements
for premises and equipment that expire through 2024, including the World
Financial Center Headquarters ("WFC"). During 1996, Merrill Lynch incurred a
pretax charge of $40 million related to the resolution of Olympia & York's
bankruptcy that affected Merrill Lynch's long-term sublease agreements in the
WFC. Merrill Lynch has also entered into various noncancelable short-term lease
agreements which are primarily commitments of less than one year under equipment
leases.
At December 27, 1996, future minimum rental commitments under noncancelable
leases with initial or remaining terms exceeding one year are presented below:
- --------------------------------------------------------------------------------
WFC Other Total
------ ------ ------
1997 $ 119 $ 264 $ 383
1998 125 263 388
1999 140 262 402
2000 144 261 405
2001 145 256 401
2002 and thereafter 2,009 2,052 4,061
------ ------ ------
TOTAL $2,682 $3,358 $6,040
------ ------ ------
------ ------ ------
- -------------------------------------------------------------------------------
The minimum rental commitments shown above have not been reduced by $838 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:
- --------------------------------------------------------------------------------
1996 1995 1994
----- ----- -----
Rent expense $ 420 $ 399 $ 395
Less: sublease revenue (48) (87) (79)
----- ----- -----
Net rent expense $ 372 $ 312 $ 316
----- ----- -----
----- ----- -----
- --------------------------------------------------------------------------------
OTHER COMMITMENTS
In the normal course of business, Merrill Lynch enters into commitments for
securities underwriting and when-issued transactions. Settlement of these
transactions as of December 27, 1996 would not have a material effect on the
consolidated financial condition of Merrill Lynch.
<PAGE>
In connection with financing activities, Merrill Lynch had commitments at
December 27, 1996 and December 29, 1995 to enter into resale and repurchase
agreements as follows:
- --------------------------------------------------------------------------------
1996 1995
------ ------
Resale agreements $3,653 $1,845
Repurchase agreements 976 --
- --------------------------------------------------------------------------------
Merrill Lynch also obtains letters of credit from issuing banks to satisfy
various counterparty collateral requirements in lieu of depositing collateral of
cash or securities. Letters of credit aggregated $2,065 and $2,352 at December
27, 1996 and December 29, 1995, respectively.
In connection with merchant banking activities, Merrill Lynch has committed to
purchase $101 and $107 of partnership interests at December 27, 1996 and
December 29, 1995, respectively.
Merrill Lynch has entered into agreements with providers of market data,
communications, and systems consulting services. At December 27, 1996 and
December 29, 1995, minimum fee commitments under these contracts aggregated $481
and $30, respectively.
<PAGE>
- -------------------------------------------------------------------------------
NOTE 8. EMPLOYEE BENEFIT PLANS
- -------------------------------------------------------------------------------
Merrill Lynch provides retirement and other postemployment benefits to its
employees worldwide through defined contribution and defined benefit pension
plans and other postretirement and postemployment benefit plans. Merrill Lynch
reserves the right to amend or terminate these plans at any time.
<PAGE>
- --------------------------------------------------------------------------------
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.
Merrill Lynch established the RAP and the ESOP, collectively known as 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 from Merrill Lynch 24,341,470 shares of the
Company's common stock with residual funds from a terminated defined benefit
pension plan ("Reversion Shares") and loan proceeds from a subsidiary of Merrill
Lynch ("Leveraged Shares").
Merrill Lynch credits a participant's account and records pension expense under
the Retirement Program based on years of service and eligible compensation. This
expense is funded by quarterly allocations of Leveraged and Reversion Shares
and, 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 is less than the formula
allocation to 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 June 1997. Leveraged Shares are allocated to
participants' accounts as principal is repaid on the loan to the ESOP, which
matures in 1999. 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 to be either allocated (contributed to
participants' accounts), committed (scheduled to be contributed at a
specified future date but not yet released), or unallocated (not committed or
allocated). Share information at December 27, 1996 is as follows:
- --------------------------------------------------------------------------------
REVERSION LEVERAGED
SHARES SHARES
---------- ---------
Allocated 17,923,585 2,689,896
Committed 434,663 92,805
Unallocated 1,538,778 1,661,743
- --------------------------------------------------------------------------------
The remaining cost of the unallocated Reversion and Leveraged Shares of $24 and
$25, respectively, at December 27, 1996 is recorded as a reduction of
stockholders' equity. The remaining cost of unallocated Leveraged Shares
represents the ESOP loan balance.
<PAGE>
Additional information on ESOP activity follows:
- --------------------------------------------------------------------------------
1996 1995 1994
----- ----- ----
Dividends used for debt service(1) $ 8 $ 9 $ 11
Compensation costs funded
with ESOP shares 190 143 109
- --------------------------------------------------------------------------------
(1) Dividends on all Leveraged and unallocated and committed Reversion Shares
are used for debt service on the ESOP loan. 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. Merrill Lynch'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
(see Note 9).
In addition, Merrill Lynch sponsors various non-U.S. defined contribution plans.
The costs of benefits under the RAP, SIP, and non-U.S. plans are expensed during
the related service period.
- -------------------------------------------------------------------------------
DEFINED BENEFIT PENSION PLANS
Merrill Lynch has purchased a group annuity contract that guarantees the payment
of benefits vested under a U.S. defined benefit plan that was terminated in
accordance with the applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). At December 27, 1996 and December 29, 1995, a
substantial portion of the assets supporting the annuity contract was invested
in U.S. Government and agencies securities. Merrill Lynch, under a supplemental
agreement, may be responsible for, or benefit from, actuarial experience and
investment performance of these annuity assets. Merrill Lynch also maintains
supplemental defined benefit plans for certain U.S. employees.
Employees of certain non-U.S. subsidiaries participate in various local defined
benefit plans. These plans provide benefits that are generally based on years of
credited service and a percentage of the employee's eligible compensation during
the final years of employment. Merrill Lynch's funding policy has been to
contribute annually the amount necessary to satisfy local funding standards.
<PAGE>
The funded status of the defined benefit plans (including the terminated plan)
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995
----------------------- -----------------------
PENSION PLANS IN WHICH: PENSION PLANS IN WHICH:
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS(1) BENEFITS ASSETS(1)
<S> <C> <C> <C> <C>
ACCUMULATED BENEFIT OBLIGATION ------- ----- ------- -----
Vested $(1,447) $(118) $(1,429) $(110)
Non-vested (3) (8) (3) (7)
------- ----- ------- -----
TOTAL (1,450) (126) (1,432) (117)
Effect of assumed increase in compensation levels (24) (25) (23) (29)
------- ----- ------- -----
Projected benefit obligation (1,474) (151) (1,455) (146)
Plan assets at fair value 1,673 85 1,735 72
------- ----- ------- -----
Plan assets in excess of (less than) projected benefit obligation 199 (66) 280 (74)
Unrecognized net liability at transition 3 2 3 2
Unrecognized prior service benefit (3) (1) (7) (1)
Unrecognized net (gain) loss (4) 14 (106) 27
------- ----- ------- -----
Prepaid (accrued) benefit cost $ 195 $ (51) $ 170 $ (46)
------- ----- ------- -----
------- ----- ------- -----
- -------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
Net periodic pension cost includes the following components:
- --------------------------------------------------------------------------------
1996 1995 1994
----- ----- -----
Defined contribution plan cost $ 223 $ 169 $ 165
----- ----- -----
Defined benefit plans(1):
Service cost for benefits earned
during the year 24 19 16
Interest cost on projected
benefit obligation 103 105 92
Actual return on plan assets 19 (480) 146
Deferral and amortization
of unrecognized items (133) 373 (243)
----- ----- ------
Total defined benefit plan cost 13 17 11
----- ----- ------
Total pension cost $ 236 $ 186 $ 176
----- ----- ------
----- ----- ------
- -------------------------------------------------------------------------------
(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:
1997 1996 1995
------ ------ ------
Weighted-average discount rate 6.7% 6.5% 8.1%
Rate of compensation increase 5.4% 5.5% 6.0%
Expected long-term rate of return
on plan assets 6.9% 6.7% 8.2%
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Merrill Lynch provides health and life insurance benefits to retired employees
under a plan that covers substantially all U.S. employees who have met age and
service requirements. The health care component is contributory, with retiree
contributions adjusted periodically; the life insurance component of the plan is
noncontributory. The accounting for costs of health care benefits anticipates
future changes in cost-sharing provisions. Merrill Lynch pays claims as
incurred. Full-time employees of Merrill Lynch become eligible for these
benefits upon attainment of age 55 and completion of ten years of service.
Merrill Lynch also sponsors similar plans that provide health care benefits to
retired employees of certain non-U.S. subsidiaries. As of December 27, 1996,
none of these plans had been funded.
<PAGE>
Net periodic postretirement benefit expense included the following components:
- --------------------------------------------------------------------------------
1996 1995 1994
----- ----- -----
Service cost $ 6 $ 4 $ 4
Interest cost on accumulated
postretirement benefit obligation 11 10 9
Amortization of unrecognized gain -- (1) --
----- ----- -----
Total postretirement benefit cost $ 17 $ 13 $ 13
----- ----- -----
----- ----- -----
- --------------------------------------------------------------------------------
The amounts recognized for Merrill Lynch's postretirement benefit plans follow:
- --------------------------------------------------------------------------------
1996 1995
----- -----
ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION
Retirees $ (73) $ (80)
Fully eligible active plan participants (37) (34)
Other active plan participants (62) (57)
----- ----
TOTAL (172) (171)
Unrecognized net (gain) loss (7) 3
----- ----
Postretirement benefits accrued liability $(179) $(168)
----- ----
----- ----
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
1997 1996 1995
------ ------ ------
Weighted-average discount rate 6.8% 6.5% 8.2%
Health care cost trend rates(1) :
Initial 8.0% 9.0% 11.0%
2011 and thereafter 5.5% 5.5% 6.0%
- -------------------------------------------------------------------------------
(1) Assumed to decrease gradually until the year 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 at
December 27, 1996 and December 29, 1995 by $28 and $29, respectively, and
increase the aggregate of service and interest costs for 1996 and 1995 by $3 for
both years.
- --------------------------------------------------------------------------------
<PAGE>
POSTEMPLOYMENT BENEFITS
Merrill Lynch provides certain postemployment benefits for employees on extended
leave due to injury or illness and for terminated employees. Employees who are
disabled due to non-work-related illness or injury are entitled to disability
income, medical coverage, and life insurance. Merrill Lynch also provides
severance benefits to terminated employees. In addition, Merrill Lynch is
mandated by state and Federal regulations to provide certain other
postemployment benefits. Merrill Lynch funds these benefits through a
combination of self-insured and insured plans.
Merrill Lynch recognized $30, $76, and $76 in 1996, 1995, and 1994,
respectively, of postemployment benefits expense, which included severance costs
for terminated employees of $14, $54, and $66 in 1996, 1995, and 1994,
respectively. Although all full-time employees are eligible for severance
benefits, no additional amounts were accrued as of December 27, 1996 since
future severance costs are not estimable.
- --------------------------------------------------------------------------------
NOTE 9. EMPLOYEE INCENTIVE PLANS
- --------------------------------------------------------------------------------
To align the interests of employees with those of stockholders, Merrill Lynch
sponsors several employee compensation plans that provide eligible employees
with stock or options to purchase shares. The total compensation cost recognized
in earnings for stock-based compensation plans for 1996, 1995, and 1994 was
$269, $131, and $138, respectively. Merrill Lynch also sponsors deferred cash
compensation plans for eligible employees.
- --------------------------------------------------------------------------------
LONG-TERM INCENTIVE COMPENSATION PLANS ("LTIC PLANS") AND EQUITY CAPITAL
ACCUMULATION PLAN ("ECAP")
LTIC Plans and ECAP provide for grants of equity and equity-related instruments
to certain key employees. LTIC Plans provide for the issuance of Restricted
Shares, Restricted Units, and Nonqualified Stock Options, as well as Incentive
Stock Options, Performance Shares, Performance Units, Stock Appreciation Rights,
and other securities of Merrill Lynch. ECAP provides for the issuance of
Restricted Shares, as well as Performance Shares. As of December 27, 1996, no
instruments other than Restricted Shares, Restricted Units, and Nonqualified
Stock Options had been granted.
<PAGE>
- --------------------------------------------------------------------------------
Restricted Shares and Units
Restricted Shares are shares of Merrill Lynch's common stock carrying voting and
dividend rights. A Restricted Unit is deemed equivalent in fair market value to
one share of Merrill Lynch's common stock, is payable in cash, and receives cash
payments equivalent to dividends. 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 a vesting period for grants under
LTIC Plans or the restricted period for grants under ECAP.
The activity for Restricted Shares and Units under these plans during 1996 and
1995 follows:
- --------------------------------------------------------------------------------
LTIC PLANS ECAP
------------------------- ----------
RESTRICTED RESTRICTED RESTRICTED
SHARES UNITS SHARES
---------- ---------- ----------
Authorized for issuance at:
December 27, 1996 100,000,000 --(1) 26,200,000
----------- ----------- ----------
----------- ----------- ----------
December 29, 1995 80,000,000 80,000,000 26,200,000
----------- ----------- ----------
----------- ----------- ----------
Available for issuance at(2):
December 27, 1996 30,945,605 --(1) 1,349,415
----------- ----------- ----------
----------- ----------- ----------
December 29, 1995 18,266,797 67,179,006 2,821,181
----------- ----------- ----------
----------- ----------- ----------
Outstanding, beginning of 1995 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 3,271,760 3,323,774 605,991
Granted - 1996 1,457,422 1,555,285 1,677,854
Paid, forfeited, or released
from contingencies (247,701) (241,609) (217,973)
----------- ----------- ----------
Outstanding, end of 1996(3) 4,481,481 4,637,450 2,065,872
----------- ----------- ----------
----------- ----------- ----------
- --------------------------------------------------------------------------------
(1) Due to changes in regulatory requirements, authorization limits for LTIC
Plans are no longer required.
(2) Includes shares reserved for issuance upon the exercise of stock options.
(3) Subsequent to year end through February 1, 1997, 1,432,771 and 1,583,974
Restricted Shares and Units under LTIC Plans, respectively, and 925 ECAP
Restricted Shares were granted to eligible employees.
<PAGE>
The weighted-average fair value per share or unit for 1996, 1995, and 1994
grants follow:
- --------------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
LTIC Plans:
Restricted Shares $57.94 $41.71 $43.99
Restricted Units 57.38 41.44 44.63
ECAP Restricted Shares 57.52 52.46 37.41
- --------------------------------------------------------------------------------
<PAGE>
Merrill Lynch sponsors other plans similar to LTIC Plans in which restricted
shares and units are granted to employees and non-employee directors. At
December 27, 1996, 850,000 restricted shares and 200,000 restricted units were
authorized under these plans. At that date, 60,745 restricted shares and 8,067
restricted units were outstanding under these plans.
- --------------------------------------------------------------------------------
Nonqualified Stock Options
Nonqualified Stock Options granted under LTIC Plans in 1989 through 1995
generally become exercisable over four years in equal installments commencing
one year after the date of grant. Options granted in 1996 and thereafter
generally are exercisable over five years. The exercise price of these options
is equal to 100% of the fair market value (as defined in LTIC Plans) of a share
of common stock on the date of grant. Nonqualified Stock Options expire ten
years after their grant date.
The activity for Nonqualified Stock Options under LTIC Plans for 1996, 1995, and
1994 follows:
- --------------------------------------------------------------------------------
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
Outstanding, beginning ------------ ----------------
of 1994 27,004,771 $19.60
Granted - 1994 4,527,100 40.63
Exercised (2,649,411) 14.20
Forfeited (474,527) 28.10
-----------
Outstanding, end of 1994 28,407,933 23.31
Granted - 1995 6,456,462 39.63
Exercised (3,959,949) 16.79
Forfeited (831,129) 36.96
-----------
Outstanding, end of 1995 30,073,317 27.29
Granted - 1996 6,816,970 54.56
Exercised (4,240,515) 20.89
Forfeited (743,444) 50.85
-----------
Outstanding, end of 1996(1) 31,906,328 33.43
-----------
-----------
- --------------------------------------------------------------------------------
(1) In January 1997, eligible participants were granted stock options for
7,102,360 shares.
At December 27, 1996, December 29, 1995, and December 30, 1994, options
exercisable under LTIC Plans were 17,766,167, 17,059,375, and 14,301,246,
respectively.
<PAGE>
The table below summarizes information related to outstanding and exercisable
options at December 27, 1996.
- --------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------
WEIGHTED- WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE (YEARS)(1) EXERCISABLE PRICE
- --------------- ----------- -------- --------------- ----------- ------
$10.00 - $20.99 8,367,975 $11.28 3.6 8,367,975 $11.28
$21.00 - $30.99 3,400,359 29.66 5.1 3,400,357 29.66
$31.00 - $40.99 12,723,883 36.32 7.1 5,829,299 36.07
$41.00 - $50.99 -- -- -- -- --
$51.00 - $63.99 7,414,111 55.22 9.0 168,536 59.92
- --------------------------------------------------------------------------------
(1) Based on contractual life of ten years.
The weighted-average fair value of options granted in 1996 and 1995 is $15.16
and $11.34 per option, respectively. Fair value is estimated as of the grant
date based on a Black-Scholes option pricing model using the following
weighted-average assumptions:
- --------------------------------------------------------------------------------
1996 1995
------ ------
Risk-free interest rate 5.68% 7.61%
Expected life 5 yrs. 5 yrs.
Expected volatility 26.35% 25.00%
Dividend yield 1.91% 2.45%
- --------------------------------------------------------------------------------
See "Pro Forma Compensation Expense" in the following "Employee Stock
Purchase Plan" section for additional information.
<PAGE>
- --------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
ESPP allows eligible employees to invest from 1% to 10% of their eligible
compensation to purchase Merrill Lynch'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
Merrill Lynch's common stock have been authorized for issuance under ESPP.
The activity in ESPP during 1996 and 1995 follows:
- --------------------------------------------------------------------------------
ESPP SHARES
---------------------------
1996 1995
--------- ---------
Available, beginning of year 4,996,263 5,857,449
Purchased through plan (862,583) (861,186)
--------- ---------
Available, end of year 4,133,680 4,996,263
--------- ---------
--------- ---------
- --------------------------------------------------------------------------------
<PAGE>
The weighted-average fair value of ESPP stock purchase rights exercised by
employees in 1996, 1995, and 1994 is $8.76, $7.20, and $5.61 per right,
respectively.
- --------------------------------------------------------------------------------
Pro Forma Compensation Expense
Merrill Lynch accounts for costs of stock-based compensation in accordance
with APB No. 25, "Accounting for Stock Issued to Employees", rather than the
fair value based method in SFAS No. 123, "Accounting for Stock-Based
Compensation". No compensation expense has been recognized for Merrill
Lynch's grants of stock options under LTIC Plans or ESPP purchase rights.
Based on the fair value of stock options and purchase rights, Merrill Lynch
would have recognized compensation expense, net of taxes, of $26 and $12 for
1996 and 1995, respectively, resulting in pro forma net earnings and earnings
per share as follows:
- --------------------------------------------------------------------------------
1996 1995
------- -------
NET EARNINGS
As reported $ 1,619 $ 1,114
Pro forma 1,593 1,102
EARNINGS PER COMMON SHARE
As reported:
Primary $ 8.20 $ 5.44
Fully diluted 8.06 5.42
Pro forma:
Primary 8.06 5.38
Fully diluted 7.93 5.36
- --------------------------------------------------------------------------------
<PAGE>
Pro forma compensation expense associated with option grants is recognized over
the vesting period. The initial impact of applying SFAS No. 123 on pro forma
disclosure is not representative of the potential impact on pro forma net
earnings for future years, which will include compensation expense related to
vesting of 1995, 1996, and subsequent grants.
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT CAPITAL ACCUMULATION AWARD PLANS ("FCCAAP")
Under FCCAAP, eligible employees in Merrill Lynch's private client group are
granted awards generally based upon their prior year's performance. Payment for
an award is contingent upon continued employment for a period of time and is
subject to forfeiture during that period. The award is generally payable ten
years from the date of grant in a fixed number of shares of Merrill Lynch'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. Eligible participants may defer awards beyond the scheduled payment
date.
A total of 30,207,642 shares of Merrill Lynch'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 27, 1996, shares subject to
outstanding awards totaled 16,550,574, while 12,316,183 shares were available
for issuance through future awards. The fair value of awards granted under
FCCAAP during 1996, 1995, and 1994 is $50.69, $36.13, and $42.25 per award,
respectively.
- --------------------------------------------------------------------------------
INCENTIVE EQUITY PURCHASE PLAN ("IEPP")
IEPP allowed selected employees to purchase shares of Merrill Lynch's common
stock ("Book Value Shares") at a price equal to book value per common share.
Book Value Shares, which otherwise may not be resold, may be sold back to
Merrill Lynch at book value or exchanged at any time for a specified number of
freely transferable common shares. Book Value Shares outstanding under IEPP were
1,137,200 at December 27, 1996 and 1,221,500 at December 29, 1995,
respectively. In 1995, IEPP was amended to reduce the authorized shares to zero
and prohibit the reuse of any surrendered shares. No further offerings will be
made under this plan.
- --------------------------------------------------------------------------------
MERRILL LYNCH INVESTMENT CERTIFICATE PROGRAM ("MLICP")
Under MLICP, eligible employees in Merrill Lynch'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 on which the performance requirements are achieved. As
of December 27, 1996 and December 29, 1995, $235 and $188, respectively, were
accrued under this plan.
- --------------------------------------------------------------------------------
OTHER DEFERRED COMPENSATION PLANS
Merrill Lynch sponsors other deferred compensation plans in which eligible
employees may participate. Generally, contributions to the plans are made on a
tax-deferred basis to participants. Contributions are invested by Merrill Lynch,
principally in mutual funds sponsored by Merrill Lynch. The plans' investments
and the amounts accrued by Merrill Lynch under the plans are both included in
the Consolidated Balance Sheets. Plan investments totaled $211 and $133,
respectively, at December 27, 1996 and December 29, 1995. Accrued liabilities at
those dates were $220 and $142, respectively.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 10. INCOME TAXES
- --------------------------------------------------------------------------------
Income tax provisions (benefits) on earnings consisted of:
- --------------------------------------------------------------------------------
1996 1995 1994
----- ----- -----
FEDERAL
Current $ 515 $ 788 $ 680
Deferred (119) (164) (150)
STATE AND LOCAL
Current 198 81 158
Deferred (54) (30) 2
FOREIGN
Current 460 (39) 5
Deferred (53) 61 18
----- ------ ------
Total $ 947 $ 697 $ 713
----- ------ ------
----- ------ ------
- --------------------------------------------------------------------------------
<PAGE>
The corporate statutory tax rate was 35.0% for the three years presented. A
reconciliation of statutory Federal income taxes to Merrill Lynch's income tax
provisions for earnings follows:
- --------------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
Federal income tax
at statutory rate $ 898 $ 634 $ 605
State and local income
taxes, net 94 33 104
Pension plan transaction 12 13 14
Foreign operations (8) (4) 23
Tax-exempt interest (21) (14) (18)
Dividends received deduction (34) (19) (17)
Other, net 6 54 2
------ ------ ------
Total $ 947 $ 697 $ 713
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
For financial reporting purposes, Merrill Lynch had no unrecognized net
operating loss or alternative minimum tax benefit carryforwards at December 27,
1996.
<PAGE>
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. Details of Merrill Lynch's deferred tax
assets and liabilities follow:
- --------------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
DEFERRED TAX ASSETS
Valuation and other reserves(1) $ 831 $ 700 $ 638
Deferred compensation 349 228 192
Other 429 364 338
------ ------ ------
Total deferred tax assets 1,609 1,292 1,168
------ ------ ------
DEFERRED TAX LIABILITIES
Lease transactions 114 100 113
Accelerated tax depreciation 44 70 92
Unrealized gains on inventory 9 18 29
Other 131 88 73
------ ------ ------
Total deferred tax liabilities 298 276 307
------ ------ ------
NET DEFERRED TAX ASSET $1,311 $1,016 $ 861
------ ------ ------
------ ------ ------
- --------------------------------------------------------------------------------
(1) Primarily related to Trading assets and Other liabilities.
Income tax benefits of $30, $34, and $5 were allocated to stockholders' equity
related to employee compensation transactions for 1996, 1995, and 1994,
respectively.
Earnings before income taxes included approximately $738, $128, and $48 of
earnings attributable to foreign entities for 1996, 1995, and 1994,
respectively. Cumulative undistributed earnings of foreign subsidiaries were
approximately $1,206 at December 27, 1996. No deferred Federal income taxes have
been provided for the undistributed earnings as these earnings have been
reinvested in Merrill Lynch's foreign operations. Assuming utilization of
foreign tax credits, Merrill Lynch estimates that approximately $118 of Federal
income taxes and $52 of foreign withholding taxes would be incurred on the
repatriation of the foreign subsidiaries' earnings.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 11. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
- --------------------------------------------------------------------------------
MLPF&S, a registered broker-dealer and a subsidiary of the Company, is subject
to the net capital requirements of Rule 15c3-1 of the Securities Exchange Act of
1934. Under the alternative method permitted by this rule, the minimum required
net capital, as defined, shall not be less than 2% of aggregate debit items
arising from customer transactions. At December 27, 1996, MLPF&S's regulatory
net capital of $1,598 was 10% of aggregate debit items, and its regulatory net
capital in excess of the minimum required was $1,276.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities and a subsidiary of the Company, 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 27, 1996,
MLGSI's liquid capital of $886 was 240% of its total market and credit risk, and
liquid capital in excess of the minimum required was $442.
Merrill Lynch International ("MLI"), a registered U.K. broker-dealer and a
subsidiary of Merrill Lynch, is subject to capital requirements of the
Securities and Futures Authority ("SFA"). Financial resources, as defined, must
exceed the total financial resources requirement of the SFA. At December 27,
1996, MLI's financial resources were $1,374, and exceeded the minimum
requirement by $335.
Merrill Lynch Capital Markets PLC ("MLCM"), a U.K. subsidiary of Merrill Lynch
and a dealer in over-the-counter equity derivatives, became subject to the
capital requirements of the SFA on January 1, 1997. In anticipation, MLCM had
$855 of regulatory capital at December 27, 1996 and received another $600 on
December 31, 1996 from Merrill Lynch. Subsequent to year end, MLI became the
primary equity derivatives dealer for new business.
Merrill Lynch's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. As
of December 27, 1996, $436, representing 88% of the insurance subsidiaries' net
assets, was unavailable for distribution to Merrill Lynch.
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 Merrill Lynch. At December 27, 1996, restricted
net assets of all subsidiaries were $5,985.
In addition, to satisfy rating agency standards, a credit intermediary
subsidiary of Merrill Lynch must also meet certain minimum capital requirements.
At December 27, 1996, this minimum capital requirement was $350.
<PAGE>
With the exception of regulatory restrictions on subsidiaries' abilities to pay
dividends, there are no restrictions on Merrill Lynch's present ability to pay
dividends on common stock, other than (a) Merrill Lynch's obligation first to
make dividend payments on its preferred stock and (b) the governing provisions
of the Delaware General Corporation Law.
<PAGE>
- --------------------------------------------------------------------------------
NOTE 12. INDUSTRY AND GLOBAL OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch operates principally in the financial services industry and
provides services to individual and institutional clients. These services, due
to certain legal requirements, are conducted through various subsidiaries,
including those operating as brokers, dealers, banks, insurance, and other
financial services companies.
Merrill Lynch operates in both U.S. and non-U.S. markets. Merrill Lynch's
non-U.S. business activities are conducted through offices in three regions:
Europe, Africa, and the Middle East; Asia 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.
Merrill Lynch's Asian and Australian operations conduct business throughout
various countries including Australia, China, Hong Kong, Japan, and Singapore.
Merrill Lynch has exchange memberships in the region's major financial centers.
Traditional retail and institutional services are provided in virtually all
locations.
In Canada, Merrill Lynch is a broker for securities and commodities and a market
maker for bonds and money market instruments. Merrill Lynch also provides
investment banking and research for Canadian customers. In Latin America,
Merrill Lynch provides international banking, brokerage, and trust services and
has been instrumental in the privatization of many Latin American companies. For
further information, see "Global Operations" in Management's Discussion and
Analysis (unaudited).
The principal methodology used in preparing the geographic data in the table
below 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>
The information presented below, in management's judgment, provides a reasonable
representation of each region's contribution to the consolidated amounts.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994
--------------------------------- ----------------------------------
TOTAL REVENUES NET REVENUES
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Europe, Africa, and Middle East $ 5,336 $ 3,981 $ 3,464 $ 1,837 $ 1,319 $ 1,134
Asia and Australia 1,539 1,232 963 984 701 554
Americas 826 704 617 472 347 333
-------- -------- -------- -------- -------- -------
Subtotal 7,701 5,917 5,044 3,293 2,367 2,021
United States 19,221 16,107 13,754 10,603 8,092 7,703
Eliminations (1,911) (511) (564) (780) (194) (99)
-------- -------- -------- -------- -------- -------
TOTAL $ 25,011 $ 21,513 $ 18,234 $ 13,116 $ 10,265 $ 9,625
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
EARNINGS BEFORE INCOME TAXES TOTAL ASSETS
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Europe, Africa, and Middle East $ 387 $ 155 $ 176 $ 75,901 $ 56,948 $ 44,297
Asia and Australia 199 81 75 17,905 16,914 11,389
Americas 139 127 137 5,205 4,997 4,216
-------- -------- -------- -------- -------- -------
Subtotal 725 363 388 99,011 78,859 59,902
United States 1,841 1,448 1,342 126,784 105,702 108,147
Eliminations -- -- -- (12,779) (7,704) (4,300)
-------- -------- -------- -------- -------- -------
TOTAL $2,566 $1,811 $1,730 $ 213,016 $ 176,857 $ 163,749
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MERRILL LYNCH & CO., INC.:
We have audited the accompanying consolidated balance sheets of Merrill Lynch
& Co.,Inc. and subsidiaries ("Merrill Lynch") as of December 27,1996 and
December 29,1995 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 27, 1996. These
financial statements are the responsibility of Merrill Lynch's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merrill Lynch at December 27, 1996
and December 29, 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 27, 1996 in conformity with
generally accepted accounting principles.
/S/ Deloitte & Touche LLP
New York, New York
February 24, 1997
<PAGE>
- --------------------------------------------------------------------------------
QUARTERLY INFORMATION
- --------------------------------------------------------------------------------
The unaudited quarterly results of operations of Merrill Lynch for 1996 and 1995
are prepared in conformity with generally accepted accounting principles and
reflect all adjustments (which consist of only normal recurring accruals and the
nonrecurring $40 million pretax lease charge related to the resolution of
Olympia & York's bankruptcy in the fourth quarter of 1996) that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the periods presented. Results of any interim period are not
necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
(Dollars in Millions, For the Quarter Ended
Except Per Share Amounts) -------------------------------------------------------------------------------------
Dec. 27, Sept. 27, June 28, Mar. 29, Dec. 29, Sept. 29, June 30, Mar. 31,
1996 1996 1996 1996 1995 1995 1995 1995
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $6,601 $6,201 $6,190 $6,019 $5,293 $5,431 $5,585 $5,204
Interest Expense 3,219 3,108 2,810 2,758 2,680 2,749 3,036 2,783
------ ------ ------ ------ ------ ------ ------ ------
Net Revenues 3,382 3,093 3,380 3,261 2,613 2,682 2,549 2,421
Non-Interest Expenses 2,707 2,571 2,682 2,590 2,131 2,197 2,085 2,041
------ ------ ------ ------ ------ ------ ------ ------
Earnings Before Income Taxes 675 522 698 671 482 485 464 380
Income Tax Expense 230 191 265 261 179 185 181 152
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings $ 445 $ 331 $ 433 $ 410 $ 303 $ 300 $ 283 $ 228
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Earnings Per Common Share:
Primary $ 2.29 $ 1.69 $ 2.19 $ 2.03 $ 1.49 $ 1.47 $ 1.40 $ 1.08
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Fully Diluted $ 2.27 $ 1.68 $ 2.19 $ 2.03 $ 1.49 $ 1.46 $ 1.39 $ 1.08
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE
- --------------------------------------------------------------------------------
(Declared and paid)
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
1996 $.26 $.30 $.30 $.30
1995 .23 .26 .26 .26
- --------------------------------------------------------------------------------
With the exception of regulatory restrictions on subsidiaries' abilities to pay
dividends, there are no restrictions on Merrill Lynch's present ability to pay
dividends on common stock, other than (a) Merrill Lynch'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 11 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>
1996 $62 1/2 $49 3/8 $68 1/8 $56 1/4 $66 3/4 $54 1/4 $85 1/8 $65 1/8
1995 45 34 5/8 53 1/4 42 5/8 63 3/4 51 7/8 64 3/4 50 1/8
- -------------------------------------------------------------------------------------------------
</TABLE>
The approximate number of record holders of common stock as of February 7,
1997 was 13,300.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following are subsidiaries of ML & Co. as of March 21, 1997 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 Incorporated(1)..............Delaware
Broadcort Capital Corp. .........................................Delaware
Merrill Lynch & Co., Canada Ltd. ................................Ontario
Merrill Lynch Canada Inc. .....................................Nova Scotia
Merrill Lynch Life Agency Inc.(2)................................Washington
Merrill Lynch Professional Clearing Corp.(3).....................Delaware
Merrill Lynch Bank & Trust Co. ....................................New Jersey
Merrill Lynch Capital Services, Inc. ..............................Delaware
Merrill Lynch Government Securities Inc. ..........................Delaware
Merrill Lynch Money Markets Inc. ................................Delaware
Merrill Lynch Group, Inc. .........................................Delaware
Merrill Lynch Capital Partners, Inc. ............................Delaware
Merrill Lynch Futures Inc. ......................................Delaware
Merrill Lynch Group Holdings Limited.............................Ireland
Merrill Lynch Capital Markets Bank Limited.....................Ireland
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 Company(4)...................................New Jersey
Merrill Lynch Business Financial Services Inc. ................Delaware
Merrill Lynch Credit Corporation...............................Delaware
Merrill Lynch Investment Partners Inc. ..........................Delaware
MLDP Holdings, Inc.(5)...........................................Delaware
Merrill Lynch Derivative Products AG...........................Switzerland
- --------
(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) Similarly named affiliates and subsidiaries that provide trust and
custodial services are incorporated in various other jurisdictions.
(5) Merrill Lynch Group, Inc. owns 100% of this corporation's outstanding
common voting stock. 100% of the outstanding preferred voting stock is
held by outside parties. The board of directors consists of 12 members, 10
of whom are Merrill Lynch employees and 2 of whom represent outside
parties.
<PAGE>
State or Juris-
Name diction of Entity
- ---- -----------------
Merrill Lynch & Co., Inc.
Merrill Lynch Group, Inc. (cont'd)
ML IBK Positions Inc.(6).................................Delaware
Merrill Lynch Capital Corporation......................Delaware
ML Leasing Equipment Corp.(7).............................Delaware
Princeton Services, Inc.(8)..............................Delaware
Merrill Lynch International Incorporated..................Delaware
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.(9)..................Netherlands Antilles
Merrill Lynch Capital Markets A.G. ....................Switzerland
Merrill Lynch Europe PLC...............................England
Merrill Lynch International..........................England
Merrill Lynch Capital Markets PLC....................England
Merrill Lynch, Pierce, Fenner & Smith (Brokers &
Dealers) Limited...................................England
Merrill Lynch Trust Company (Jersey) Limited.........Jersey,
Channel Islands
Merrill Lynch Europe Ltd. .............................Cayman Islands,
British West Indies
Merrill Lynch Holding GmbH.............................Germany
Merrill Lynch GmbH...................................Germany
Merrill Lynch France...................................France
Merrill Lynch Capital Markets (France) S.A. .........France
Merrill Lynch Far East Limited.........................Hong Kong
Merrill Lynch Japan Incorporated.........................Delaware
- ----------
(6) This company has 7 subsidiaries holding or having a direct or indirect
interest in specific investments on its behalf.
(7) 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.
(8) 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.).
(9) A partnership among subsidiaries of ML & Co.
2
<PAGE>
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 24, 1997
included in and incorporated by reference in this Annual Report on Form 10-K of
Merrill Lynch & Co., Inc. for the year ended December 27, 1996.
Filed on Form S-8:
Registration Statement No. 33-41942 (1986 Employee Stock Purchase Plan)
Registration Statement No. 33-17908 (Incentive Equity Purchase Plan)
Registration Statement No. 33-33336 (Long Term Incentive Compensation Plan)
Registration Statement No. 33-51831 (Long Term Incentive Compensation Plan)
Registration Statement No. 33-51829 (401(k) Savings and Investment Plan)
Registration Statement No. 33-54154 (Non-Employee Directors' Equity Plan)
Registration Statement No. 33-54572 (401(k) Savings and Investment Plan
(Puerto Rico))
Registration Statement No. 33-56427 (Amended and Restated 1994 Deferred
Compensation Plan for a Select Group of Eligible Employees)
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan
for a Select Group of Eligible Employees)
<PAGE>
Registration Statement No. 333-09779 (1997 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-00863 (401(k) Savings & Incentive Plan)
Registration Statement No. 333-13367 (Restricted Stock Plan For Former
Employees of Hotchkis and Wiley)
Registration Statement No. 333-15009 (1997 KECALP Deferred Compensation
Plan for a Select Group of Eligible Employees)
Registration Statement No. 333-17099 (Deferred Unit and Stock Unit Plan for
Non-Employee Directors)
Registration Statement No. 333-18915 (Long Term Incentive Compensation Plan
for Managers & Producers)
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
<PAGE>
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
Registration Statement No. 333-13649
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)
Registration Statement No. 333-02275 (Long Term Incentive Compensation
Plan)
Registration Statement No. 333-16603 (TOPrS)
<PAGE>
Registration Statement No. 333-20137 (TOPrS)
/s/ Deloitte & Touche LLP
New York, New York
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1996
<PERIOD-START> DEC-30-1995
<PERIOD-END> DEC-27-1996
<CASH> 3,375
<RECEIVABLES> 29,794
<SECURITIES-RESALE> 58,402
<SECURITIES-BORROWED> 24,692
<INSTRUMENTS-OWNED> 87,130
<PP&E> 1,670
<TOTAL-ASSETS> 213,016
<SHORT-TERM> 36,582
<PAYABLES> 15,165
<REPOS-SOLD> 62,669
<SECURITIES-LOANED> 2,751
<INSTRUMENTS-SOLD> 43,545
<LONG-TERM> 26,102
0
619
<COMMON> 315
<OTHER-SE> 5,958
<TOTAL-LIABILITY-AND-EQUITY> 213,016<F1>
<TRADING-REVENUE> 3,454
<INTEREST-DIVIDENDS> 12,899
<COMMISSIONS> 3,786
<INVESTMENT-BANKING-REVENUES> 1,945
<FEE-REVENUE> 2,261
<INTEREST-EXPENSE> 11,895
<COMPENSATION> 6,704
<INCOME-PRETAX> 2,566
<INCOME-PRE-EXTRAORDINARY> 1,619
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,619
<EPS-PRIMARY> 8.20
<EPS-DILUTED> 8.06
<FN>
<F1>Includes $327 in Preferred Securities Issued by Subsidiaries, which is
classified between Total Liabilities and Stockholders' Equity.
</FN>
</TABLE>
