<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1997
-------------
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,
NEW YORK, NEW YORK 10281-1332
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
- -----------------------------------------------------------------------------
Registrant's telephone number, including area code
- -----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
- -----------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
331,375,776 shares of Common Stock
(as of the close of business on August 1, 1997)
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------
JUNE 27, JUNE 28, PERCENT(1)
(Dollars in Millions, Except Per Share Amounts) 1997 1996 INCREASE
---------- ---------- ----------
REVENUES
<S> <C> <C> <C>
Commissions................................... $ 1,078 $ 970 11.2%
Interest and dividends........................ 4,330 3,040 42.4
Principal transactions........................ 1,151 908 26.7
Investment banking............................ 625 580 7.8
Asset management and portfolio
service fees................................. 670 553 21.2
Other........................................ 157 139 12.8
------- ------ -------
Total Revenues................................ 8,011 6,190 29.4
Interest Expense............................ 4,044 2,810 43.9
------- ------ -------
Net Revenues.................................. 3,967 3,380 17.3
------- ------ -------
NON-INTEREST EXPENSES
Compensation and benefits..................... 2,004 1,741 15.1
Communications and equipment rental........... 170 137 24.2
Occupancy..................................... 124 113 9.8
Depreciation and amortization................. 108 98 9.7
Professional fees............................. 197 140 40.6
Advertising and market development............ 156 124 25.3
Brokerage, clearing, and exchange fees........ 112 101 10.7
Other......................................... 312 228 36.9
------- ------ --------
Total Non-Interest Expenses................... 3,183 2,682 18.6
------- ------ --------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS
ON PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES............................... 784 698 12.4
Income Tax Expense............................ 290 265 9.7
Dividends on Preferred Securities
Issued by Subsidiaries....................... 13 - N/M
------- ------ --------
NET EARNINGS.................................. $ 481 $ 433 11.1%
======= ====== ========
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS................................. $ 472 $ 422 11.9%
======= ====== ========
EARNINGS PER COMMON SHARE (2):
Primary..................................... $ 1.24 $ 1.09
======= ======
Fully diluted............................... $ 1.23 $ 1.09
======= ======
DIVIDEND PAID PER COMMON SHARE................ $ .20 $ .15
======= ======
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE (2):
Primary..................................... 379.4 385.9
======= ======
Fully diluted............................... 384.4 385.9
======= ======
</TABLE>
(1) Percentages are based on actual numbers before rounding.
(2) 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, paid on May 30, 1997.
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 27, JUNE 28, PERCENT(1)
(Dollars in Millions, Except Per Share Amounts) 1997 1996 INCREASE
---------- ------------ ----------
REVENUES
<S> <C> <C> <C>
Commissions................................... $ 2,193 $ 1,959 11.9%
Interest and dividends........................ 8,178 6,050 35.2
Principal transactions........................ 2,215 1,891 17.1
Investment banking............................ 1,233 958 28.8
Asset management and portfolio
service fees................................. 1,316 1,090 20.7
Other......................................... 327 261 25.5
------- ------- -----
Total Revenues................................ 15,462 12,209 26.6
Interest Expense............................ 7,654 5,568 37.5
------- ------- -----
Net Revenues.................................. 7,808 6,641 17.6
------- ------- -----
NON-INTEREST EXPENSES
Compensation and benefits..................... 3,991 3,432 16.3
Communications and equipment rental........... 328 268 22.5
Occupancy..................................... 244 229 6.7
Depreciation and amortization................. 213 196 8.5
Professional fees............................. 395 270 45.9
Advertising and market development............ 300 239 25.7
Brokerage, clearing, and exchange fees........ 230 207 10.8
Other......................................... 556 431 28.8
------- ------- -----
Total Non-Interest Expenses................... 6,257 5,272 18.7
------- ------- -----
EARNINGS BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES...................... 1,551 1,369 13.3
Income Tax Expense............................ 581 526 10.5
Dividends on Preferred Securities
Issued by Subsidiaries...................... 23 - N/M
------- ------- -----
NET EARNINGS.................................. $ 947 $ 843 12.3%
======= ======= =====
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS................................. $ 927 $ 820 13.1%
======= ======= =====
EARNINGS PER COMMON SHARE (2):
Primary..................................... $ 2.41 $ 2.11
======= =======
Fully diluted............................... $ 2.40 $ 2.11
======= =======
DIVIDENDS PAID PER COMMON SHARE............... $ .35 $ .28
======= =======
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE (2):
Primary..................................... 384.2 388.7
======= =======
Fully diluted............................... 386.8 389.2
======= =======
</TABLE>
(1) Percentages are based on actual numbers before rounding.
(2) 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, paid on May 30, 1997.
See Notes to Consolidated Financial Statements
3
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
JUNE 27, DEC. 27,
ASSETS 1997 1996
----------------------------------------------------------------- --------- ---------
<S> <C> <C>
CASH AND CASH EQUIVALENTS........................................ $ 4,528 $ 3,375
-------- --------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS........................ 9,707 5,628
-------- --------
MARKETABLE INVESTMENT SECURITIES................................. 2,659 2,180
-------- --------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock............................... 32,950 24,270
Contractual agreements........................................... 16,219 13,465
Equities and convertible debentures.............................. 22,288 13,153
U.S. Government and agencies..................................... 9,595 9,304
Non-U.S. governments and agencies................................ 13,236 7,758
Mortgages, mortgage-backed, and asset-backed..................... 7,018 5,189
Money markets.................................................... 1,609 1,209
Municipals....................................................... 1,419 1,176
-------- --------
Total............................................................ 104,334 75,524
-------- --------
RESALE AGREEMENTS................................................ 60,447 58,402
-------- --------
SECURITIES BORROWED.............................................. 36,287 24,692
-------- --------
RECEIVABLES
Customers (net of allowance for doubtful accounts of
$45 in 1997 and $39 in 1996).................................... 22,810 18,309
Brokers and dealers.............................................. 6,683 6,205
Interest and other............................................... 6,541 5,280
-------- --------
Total............................................................ 36,034 29,794
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES............................ 5,034 5,107
LOANS, NOTES, AND MORTGAGES (net of allowance for
loan losses of $122 in 1997 and $117 in 1996)................... 3,866 3,334
OTHER INVESTMENTS................................................ 1,203 1,125
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(net of accumulated depreciation and amortization
of $2,709 in 1997 and $2,523 in 1996)........................... 1,857 1,670
OTHER ASSETS..................................................... 2,080 2,185
-------- --------
TOTAL ASSETS..................................................... $268,036 $213,016
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in Millions, Except Per Share Amounts)
LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, JUNE 27, DEC. 27,
AND STOCKHOLDERS' EQUITY 1997 1996
--------------------------------------------------------------- --------- --------
<S> <C> <C>
LIABILITIES
REPURCHASE AGREEMENTS.......................................... $ 68,058 $ 62,669
-------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS............... 57,431 39,333
-------- --------
TRADING LIABILITIES, AT FAIR VALUE
U.S. Government and agencies................................... 16,436 13,965
Contractual agreements......................................... 12,810 11,221
Equities and convertible debentures............................ 16,234 8,332
Non-U.S. governments and agencies.............................. 9,012 7,135
Corporate debt and preferred stock............................. 4,799 2,762
Municipals..................................................... 122 130
-------- --------
Total ......................................................... 59,413 43,545
-------- --------
CUSTOMERS...................................................... 13,677 11,758
INSURANCE...................................................... 4,859 5,010
BROKERS AND DEALERS............................................ 7,097 3,407
OTHER LIABILITIES AND ACCRUED INTEREST......................... 15,643 13,973
LONG-TERM BORROWINGS........................................... 33,963 26,102
-------- --------
TOTAL LIABILITIES.............................................. 260,141 205,797
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 627 327
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY................................. 425 619
-------- --------
COMMON STOCKHOLDERS' EQUITY (1)
Common stock, par value $1.33 1/3 per share;
authorized: 500,000,000 shares;
issued: 1997 and 1996 - 472,660,324 shares................... 630 630
Paid-in capital................................................ 1,065 989
Foreign currency translation adjustment........................ 5 10
Net unrealized gains on investment securities
available-for-sale (net of applicable income tax
expense of $17 in 1997 and $5 in 1996)....................... 31 9
Retained earnings.............................................. 8,678 7,868
-------- --------
Subtotal................................................... 10,409 9,506
Less:
Treasury stock, at cost:
1997 - 143,611,883 shares; 1996 - 141,411,196 shares..... 3,099 2,895
Unallocated ESOP reversion shares, at cost:
1996 - 3,077,556 shares.................................. - 24
Employee stock transactions................................. 467 314
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY.............................. 6,843 6,273
-------- --------
TOTAL STOCKHOLDERS' EQUITY..................................... 7,268 6,892
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY........................ $268,036 $213,016
======== ========
BOOK VALUE PER COMMON SHARE.................................... $ 20.86 $ 19.19
======== ========
</TABLE>
(1) 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,
paid on May 30, 1997.
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
(Dollars in Millions) JUNE 27, JUNE 28,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 947 $ 843
Noncash items included in earnings:
Depreciation and amortization.................................. 213 196
Policyholder reserves.......................................... 122 138
Other.......................................................... 590 307
(Increase) decrease in operating assets:
Trading assets................................................. (28,710) (8,999)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations...................... (4,079) 401
Securities borrowed............................................ (11,595) (3,340)
Customers...................................................... (4,506) (2,638)
Sales of trading investment securities......................... 501 -
Purchases of trading investment securities..................... (431) -
Other.......................................................... (2,504) (6,460)
Increase (decrease) in operating liabilities:
Trading liabilities............................................ 15,868 5,604
Customers...................................................... 1,919 (1,280)
Insurance...................................................... (251) (330)
Other.......................................................... 5,197 9,326
------- -------
CASH USED FOR OPERATING ACTIVITIES............................... (26,719) (6,232)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities.................... 1,551 1,570
Sales of available-for-sale securities......................... 1,063 784
Purchases of available-for-sale securities..................... (3,283) (2,160)
Maturities of held-to-maturity securities...................... 556 385
Purchases of held-to-maturity securities....................... (320) (244)
Other investments and other assets............................. (247) (340)
Property, leasehold improvements, and equipment................ (400) (173)
------- -------
CASH USED FOR INVESTING ACTIVITIES............................... (1,080) (178)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements................ 3,343 (2,017)
Commercial paper and other short-term borrowings............... 18,098 3,156
Issuance and resale of long-term borrowings.................... 11,874 9,371
Settlement and repurchase of long-term borrowings.............. (3,868) (3,842)
Issuance of subsidiaries' preferred securities................. 300 -
Redemption of remarketed preferred stock....................... (194) -
Common stock transactions...................................... (465) (479)
Dividends...................................................... (136) (119)
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES............................ 28,952 6,070
------- -------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS.................. 1,153 (340)
Cash and cash equivalents, beginning of year..................... 3,375 3,091
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 4,528 $ 2,751
======= =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes totaled $413 in 1997 and $633 in 1996.
Interest totaled $7,294 in 1997 and $5,359 in 1996.
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 27, 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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. The December 27, 1996 consolidated balance sheet was derived
from the audited financial statements. The interim consolidated financial
statements for the three- and six-month periods are unaudited; however,
in the opinion of the management of Merrill Lynch, all adjustments,
consisting only of normal recurring accruals, necessary for a fair
statement of the results of operations have been included.
These unaudited financial statements should be read in conjunction with
the audited financial statements included in Merrill Lynch's Annual
Report on Form 10-K for the year ended December 27, 1996. The nature of
Merrill Lynch's business is such that the results of any interim period
are not necessarily indicative of results for a full year. Prior period
financial statements have been reclassified, where appropriate, to
conform to the 1997 presentation.
ACCOUNTING CHANGE
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 125 provides guidance for determining whether a
transfer of financial assets is treated as a sale or 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 agreements,
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.
Merrill Lynch adopted the provisions of SFAS No. 125 not deferred by SFAS
No. 127 for all transactions entered into subsequent to December 31,
1996. This resulted in a net increase in trading assets and repurchase
agreements of approximately $3 billion at the end of the 1997 second
quarter.
7
<PAGE>
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share",
which is effective for fiscal years ending after December 15, 1997.
SFAS No. 128 simplifies the guidance for computing earnings per share
("EPS") and replaces the presentation of primary and fully diluted EPS
with basic and diluted EPS.
Basic EPS excludes dilution related to incremental shares (common share
equivalents) and is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS includes incremental shares.
Presented below is basic and diluted EPS under SFAS No. 128 compared
with primary and fully diluted EPS:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Pro Forma SFAS No. 128:
Basic $ 1.43 $ 1.24 $ 2.80 $ 2.39
Diluted 1.25 1.10 2.41 2.13
As Currently Reported:
Primary 1.24 1.09 2.41 2.11
Fully diluted 1.23 1.09 2.40 2.11
</TABLE>
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings at June 27, 1997 and
December 27, 1996 are presented below:
<TABLE>
<CAPTION>
June 27, Dec. 27,
1997 1996
------- -------
<S> <C> <C>
Commercial paper $32,486 $23,558
Demand and time deposits 9,524 9,311
Securities loaned 7,014 2,751
Bank loans and other 8,407 3,713
------- -------
Total $57,431 $39,333
======= =======
</TABLE>
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
On February 6, 1997, Merrill Lynch Preferred Capital Trust II (the
"Trust"), a subsidiary of the Company, issued $300 of 8% Trust
Originated Preferred Securities (Service Mark). The Trust holds preferred
securities of a partnership, which is also a subsidiary of Merrill Lynch.
The assets of the partnership consist primarily of debt securities of the
Company and one of its subsidiaries. The Company has guaranteed, on a
subordinated basis, certain payments by the Trust and the partnership.
8
<PAGE>
REMARKETED PREFERRED (SERVICE MARK) STOCK, SERIES C ("RP STOCK")
Merrill Lynch redeemed all outstanding shares of RP Stock in the first
quarter of 1997.
COMMON EQUITY
On April 15, 1997, Merrill Lynch's Board of Directors declared a
two-for-one common stock split, effected in the form of a 100% stock
dividend. The new shares were distributed on May 30, 1997 to stockholders
of record on May 2, 1997. The par value of these shares remained at $1.33
1/3 per share. Accordingly, an adjustment totaling $315 from paid-in
capital to common stock was required to preserve the par value of the
post-split shares. All share and per share data presented in these
financial statements have been restated for the effect of the split.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Merrill Lynch enters into various derivative contracts to meet clients'
needs and to manage its own market risks. Derivative contracts often
involve future commitments to exchange interest payment streams or
currencies (such as interest rate and currency swaps or foreign exchange
forwards) or to purchase or sell other financial instruments at specified
terms on a specified date. Options, for example, can be purchased or
written on a wide range of financial instruments such as securities,
currencies, futures, and various market indices.
The notional or contractual amounts of derivatives provide only a
measure of involvement in these types of transactions and represent
neither the amounts subject to the various types of market risk nor the
future cash requirements under these instruments. The notional or
contractual amounts of derivatives used for trading purposes by type of
risk follow:
9
<PAGE>
<TABLE>
<CAPTION>
(in billions) Interest Equity Commodity
Rate Currency Price Price
Risk (1)(2) Risk (3) Risk Risk
----------- -------- ------- ---------
June 27, 1997
-------------
<S> <C> <C> <C> <C>
Swap agreements $1,362 $ 161 $ 17 $ 3
Forward contracts 39 198 1 19
Futures contracts 151 2 13 2
Options purchased 114 77 32 2
Options written 126 77 46 4
<CAPTION>
December 27, 1996
-----------------
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
The notional or contractual amounts of derivatives used to hedge exposure
related to borrowings or other non-trading activities follow:
(in billions) June 27, Dec. 27,
1997 1996
-------- ------------
Interest rate derivatives(1) $49 $36
Currency derivatives(1) 7 7
Equity derivatives 2 2
(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.
In the normal course of business, Merrill Lynch enters into underwriting
commitments, when-issued transactions, and commitments to extend credit.
Settlement of these commitments as of June 27, 1997 would not have a
material effect on the consolidated financial condition of Merrill Lynch.
REGULATORY REQUIREMENTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
registered broker-dealer and a subsidiary of the Company, is subject to
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 June 27, 1997,
MLPF&S's regulatory net capital of $1,638 was 9% of aggregate debit
items, and its
10
<PAGE>
regulatory net capital in excess of the minimum required was $1,264.
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 June 27, 1997, MLGSI's liquid capital of $978 was 246% of
its total market and credit risk, and liquid capital in excess of the
minimum required was $501.
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 June 27, 1997, MLI's financial resources were $3,647, and
exceeded the minimum requirement by $938.
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. At June 27,
1997, MLCM's financial resources were $1,545, and exceeded the minimum
requirement by $562. In 1997, MLI became Merrill Lynch's primary dealer
for new global equity derivatives business.
INTEREST EXPENSE
Interest expense includes payments in lieu of dividends of $6.2 and $1.4
for the second quarters of 1997 and 1996, respectively. For the six-month
periods ended June 27, 1997 and June 28, 1996, payments in lieu of
dividends were $8.3 and $3.0, respectively.
LITIGATION MATTER
An action is pending in the United States District Court for the Central
District of California by Orange County, California (the "County") which
filed a bankruptcy petition in the United States Bankruptcy Court for the
Central District of California on December 6, 1994, against the Company
and certain of its subsidiaries in connection with Merrill Lynch's
business activities with the Orange County Treasurer-Tax Collector. In
addition, other actions are pending against the Company and/or certain of
its officers, directors, and employees and certain of its subsidiaries in
federal and 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 Merrill Lynch's
dealings with the Orange County Treasurer-Tax Collector, or from the
purchase of debt instruments issued by the County that were underwritten
by the Company's subsidiary, MLPF&S. See "Commitments and Contingencies"
in the notes to Merrill Lynch's audited consolidated financial statements
contained in the 1996 10-K as well as "Legal Proceedings" in the 1996
10-K and this Quarterly Report on Form 10-Q.
11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of June 27,
1997, and the related condensed statements of consolidated earnings for the
three- and six-month periods ended June 27, 1997 and June 28, 1996 and
consolidated cash flows for the six-month periods ended June 27, 1997 and
June 28, 1996. These financial statements are the responsibility of the
management of Merrill Lynch & Co., Inc.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch as of December 27,
1996, and the related statements of consolidated earnings, changes in
consolidated stockholders' equity and consolidated cash flows for the year
then ended (not presented herein); and in our report dated February 24,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 27, 1996 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
August 8, 1997
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Merrill Lynch & Co., Inc. ("the Company" and, together with its subsidiaries
and affiliates, "Merrill Lynch") is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance, and
related services worldwide. Merrill Lynch conducts its businesses in global
financial markets that are influenced by numerous unpredictable factors.
These factors include economic conditions and monetary policy, the liquidity
of global markets, international and regional political events, regulatory
developments, the competitive environment, and investor sentiment. These
conditions or events can significantly impact the volatility of financial
markets. While greater volatility increases risk, it may also increase order
flow, which in turn may benefit Merrill Lynch businesses, such as trading and
brokerage. Revenues and net earnings may vary significantly from period to
period due to these unpredictable factors and the resulting market volatility.
Global financial markets continued to flourish for much of 1997, after generally
robust performances in 1995 and 1996. This trend has been led by a stable U.S.
economy, heightened investor and issuer activity, low inflation, and relatively
low interest rates.
U.S. equity markets, except for a mild downturn that began in March and
continued into April, were bullish in the second quarter of 1997, perpetuating
the trend started more than two years ago. The Dow Jones Industrial Average
("DJIA"), despite the April retraction, posted its largest second-quarter
percentage gain since 1938 and reached record levels for the tenth consecutive
quarter.
U.S. bond prices increased in the second quarter of 1997 as long-term
interest rates decreased. Although interest rates were slightly lower at
quarter-end compared to the same point a year ago, interest rates for much of
the 1997 second quarter were higher relative to the 1996 second quarter.
Overall, global equity prices, as measured by the Dow Jones World Index,
increased during the 1997 second quarter. For the first half of 1997, equity
prices in many countries were up more than U.S. equity prices when
measured in local currency terms; however, in U.S. dollar terms, most of these
increases did not exceed the U.S. increase due to the overall strengthening of
the U.S. dollar versus many local currencies during the period.
Global underwriting volume in the 1997 first half was up moderately compared
with the same period a year ago. The second quarter increase was fueled by
debt issuances, but concerns about sustainability of U.S. equity market price
levels dampened underwriting volume in equities. U.S. initial public
offerings, in particular, fell nearly 42%, to $11.1 billion, from $18.9
billion in the second quarter of 1996, according to Securities Data Co.
("SDC").
Strategic services activities remained strong during the 1997 second quarter,
reflecting a continuation of the high level of mergers and acquisitions
activity experienced throughout 1996 and the 1997 first quarter. 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.
13
<PAGE>
Due to the cyclicality of the financial services industry, 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.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(in millions, except For the Three Months Ended
per share amounts) ----------------------------------- Increase
June 27, March 28, June 28, 2Q97 Versus
------------
1997 1997 1996 1Q97 2Q96
-------- ---------- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $8,011 $7,451 $6,190 7.5% 29.4%
Net revenues 3,967 3,841 3,380 3.3 17.3
Net earnings 481 465 433 3.5 11.1
Net earnings applicable to
common stockholders 472 455 422 3.8 11.9
Earnings per common share (1):
Primary 1.24 1.17 1.09 6.0 13.8
Fully diluted 1.23 1.17 1.09 5.1 12.8
Return on average
common stockholders'
equity 28.5% 28.3% 29.2%
</TABLE>
(1) "All per share amounts have been restated for the two-for-one common stock
split, effected in the form of a 100% stock dividend, paid on May 30,
1997."
The discussion that follows emphasizes the comparison between the second
quarters of 1997 and 1996 and presents additional information on the comparison
between the six-month periods, where appropriate.
Merrill Lynch's net earnings were a record $481 million in second quarter 1997,
up 3% from the previous record of $465 million in first quarter 1997 and 11%
above the $433 million earned in the 1996 second quarter. Record revenues were
achieved in principal transactions, investment banking, and asset management and
portfolio service fees. Increases in revenues were partially offset by increased
costs, particularly performance-based compensation, technology-related expenses,
and provisions for various business activities.
For the 1997 first half, net earnings were a record $947 million, up 12% from
the previous record of $843 million in the first half of 1996. Year-to-date
earnings per common share were $2.41 primary and $2.40 fully diluted, compared
with $2.11 primary and fully diluted for the 1996 period, as restated for the
common stock split. Annualized return on average common equity was 28.3% for the
1997 first half versus 28.7% in the prior year period.
14
<PAGE>
Commissions revenues are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- --------------------------------
(in millions) June 27, June 28, % June 27, June 28, %
1997 1996 Inc. 1997 1996 Inc.
-------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Listed and
over-the-counter $ 605 $517 17% $1,230 $1,064 16%
Mutual funds 321 309 4 665 608 9
Other 152 144 5 298 287 4
------ ---- ------ ------
Total $1,078 $970 11 $2,193 $1,959 12
====== ==== ====== ======
</TABLE>
Commissions revenues from listed securities increased 24% from second quarter
1996 as a result of higher trading volumes on many global exchanges. Mutual fund
commissions revenues rose due to higher distribution fees, primarily related to
prior period sales.
Significant components of interest and dividend revenues and interest expense
follow:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ---------------------
(in millions) June 27, June 28, June 27, June 28,
1997 1996 1997 1996
-------- -------- -------- --------
Interest and dividend
revenues:
<S> <C> <C> <C> <C>
Trading assets $1,329 $ 986 $2,555 $1,945
Resale agreements 1,155 714 2,086 1,404
Securities borrowed 931 644 1,763 1,319
Margin lending 507 369 958 742
Other 408 327 816 640
------ ------ ------ ------
Total 4,330 3,040 8,178 6,050
------ ------ ------ ------
Interest expense:
Borrowings 1,699 1,131 3,213 2,248
Repurchase agreements 1,302 854 2,366 1,702
Trading liabilities 738 580 1,490 1,132
Other 305 245 585 486
------ ------ ------ ------
Total 4,044 2,810 7,654 5,568
------ ------ ------ ------
Net interest and
dividend profit $ 286 $ 230 $ 524 $ 482
====== ====== ====== ======
</TABLE>
Net interest and dividend profit increased 24% from the 1996 second quarter.
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.
Merrill Lynch hedges certain of its long- and short-term payment obligations
with interest rate and currency swaps. The effect of these hedges, which is
included in "Borrowings" above, increased (decreased) interest expense by
approximately $7 and $(23) million for the 1997 and 1996 second quarters,
respectively.
15
<PAGE>
Principal transactions revenues were up 27% from the 1996 second quarter to $1.2
billion due to higher trading revenues from equities and equity derivatives,
fixed-income products, interest rate and currency swaps, and foreign exchange
instruments.
The table that follows provides information on aggregate trading revenues,
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.
<TABLE>
<CAPTION>
Principal Net Interest Net
(in millions) Transactions Revenue Trading
Revenues (Expense) Revenue
--------------- --------------- ---------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
Second Quarter
- --------------
<S> <C> <C> <C> <C> <C> <C>
Equities and equity
derivatives $ 391 $ 290 $ 4 $ (27) $ 395 $ 263
Taxable fixed-income 342 243 76 66 418 309
Interest rate and
currency swaps 287 249 (50) (24) 237 225
Municipals 84 94 3 2 87 96
Foreign exchange and
commodities 47 32 1 (5) 48 27
------ ------ ------ ------ ------ ------
Total $1,151 $ 908 $ 34 $ 12 $1,185 $ 920
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
First Half
- ----------
<S> <C> <C> <C> <C> <C> <C>
Equities and equity
derivatives $ 707 $ 637 $ (28) $ (55) $ 679 $ 582
Taxable fixed-income 667 509 153 125 820 634
Interest rate and
currency swaps 597 505 (75) (35) 522 470
Municipals 167 168 8 3 175 171
Foreign exchange and
commodities 77 72 2 (8) 79 64
------ ------ ------ ------ ------ ------
Total $2,215 $1,891 $ 60 $ 30 $2,275 $1,921
====== ====== ====== ====== ====== ======
</TABLE>
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.
16
<PAGE>
Equities and equity derivatives trading revenues were $391 million, up 35%
from the 1996 second quarter due to higher revenues from global equity
derivatives and U.S. equities and convertibles, partially offset by a decline
in non-U.S. equities trading revenues. Increased profitability on equity
derivative transactions and price appreciation in the U.S. equity market
resulted in higher revenues. The decline in non-U.S. equities was primarily
driven by lower values for Japanese positions.
Taxable fixed-income trading revenues were $342 million, up 40% from the 1996
second quarter. Trading revenues from taxable fixed-income products, except for
U.S. Government and agency securities, benefited from the declining interest
rate environment as investors sought higher yielding instruments.
Interest rate and currency swap trading revenues increased 15% to $287 million
primarily due to improved performance in the U.S. dollar-denominated derivatives
market, as well as higher revenues from currency-related products. Municipal
securities trading revenues were down 11% from last year's second quarter to $84
million primarily due to lower margins on sales of shorter term instruments.
Foreign exchange and commodities trading revenues were up 49% to $47 million,
attributable mainly to fluctuations in the U.S. dollar versus European
currencies and the Japanese yen.
A summary of Merrill Lynch's investment banking revenues follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- --------------------------------
(in millions) June 27, June 28, % June 27, June 28, %
1997 1996 Inc.(Dec.) 1997 1996 Inc.
-------- -------- ---------- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Underwriting $452 $469 (4)% $ 903 $762 18%
Strategic services 173 111 56 330 196 69
---- ---- ------ ----
Total $625 $580 8 $1,233 $958 29
==== ==== ====== ====
</TABLE>
Underwriting revenues, while strong, declined from the 1996 second quarter
due to lower equity underwriting volume as compared to the record level of
the 1996 second quarter. This decline was partially offset by higher debt
issuances. Merrill Lynch's underwriting market share information follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 27, 1997 June 28, 1996
------------------- --------------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
<S> <C> <C> <C> <C>
U.S.
Debt 16.3% 1 16.2% 1
Equity 13.6 2 13.4 3
Debt and Equity 16.6 1 15.8 1
GLOBAL
Debt 12.8 1 12.5 1
Equity 12.3 3 12.4 3
Debt and Equity 13.2 1 12.7 1
</TABLE>
"Source: SDC statistics based on full credit to book manager."
17
<PAGE>
Strategic services revenues advanced to a record $173 million, attributable to
an increase in mergers and acquisitions activity industrywide. Merrill Lynch's
mergers and acquisitions market share information based on transaction value
follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 27, 1997 June 28, 1996
--------------------- -----------------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
<S> <C> <C> <C> <C>
COMPLETED
TRANSACTIONS
U.S. 26.3% 2 34.8% 2
Global 20.9 2 21.5 2
ANNOUNCED
TRANSACTIONS
U.S. 15.8 3 38.4 1
Global 10.0 4 26.1 1
</TABLE>
"Source: SDC statistics based on full credit to both target and acquiring
companies' advisors."
Merrill Lynch's asset management and portfolio service fees are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- -------------------------------
(in millions) June 27, June 28, % June 27, June 28, %
1997 1996 Inc. 1997 1996 Inc.
-------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Asset management fees $291 $245 19% $ 575 $ 483 19%
Portfolio service fees 190 147 28 367 288 28
Account fees 107 100 8 212 196 8
Other fees 82 61 35 162 123 32
---- ---- ------ ------
Total $670 $553 21 $1,316 $1,090 21
==== ==== ====== ======
</TABLE>
Asset management fees, which include primarily fees earned on mutual funds
sponsored by Merrill Lynch, increased due to strong inflows of client assets and
net asset appreciation. Total assets in worldwide client accounts reached a
record $940 billion at quarter-end, compared with $756 billion at the end of the
1996 second quarter. Assets under management were $257 billion at quarter-end,
compared with $207 billion a year ago. New money investments accounted for
approximately 39% of the increase from a year ago in client assets and
approximately 34% of the increase in assets under management. In addition to new
money investments, the 1996 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 also benefited from inflows of client assets. Increases
in the number of accounts and asset levels led to higher revenues from
asset-based fee products, primarily Merrill Lynch Consults (Registered
Trademark), Asset Power (Registered Trademark), and Mutual Fund
Advisor (Service Mark).
Account fees rose due to an increase in the number of customer and custodial
accounts. Other fee-based revenues were up due primarily to increased revenues
from mortgage servicing and transfer agency activities.
18
<PAGE>
Other revenues were $157 million, up 13% from $139 million in the 1996 second
quarter. The increase was principally due to realized merchant banking
investment gains.
Merrill Lynch's non-interest expenses are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 27, June 28, June 27, June 28,
(in millions) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Compensation and benefits $2,004 $1,741 $3,991 $3,432
------ ------ ------- -------
Non-interest expenses,
excluding compensation and
benefits:
Communications and
equipment rental 170 137 328 268
Occupancy 124 113 244 229
Depreciation and amortization 108 98 213 196
Professional fees 197 140 395 270
Advertising and market
development 156 124 300 239
Brokerage, clearing, and
exchange fees 112 101 230 207
Other 312 228 556 431
------ ------ ------ ------
Total non-interest expenses,
excluding compensation
and benefits 1,179 941 2,266 1,840
------ ------ ------ ------
Total non-interest expenses $3,183 $2,682 $6,257 $5,272
====== ====== ====== ======
Compensation and benefits
as a percentage of net revenues 50.5% 51.5% 51.1% 51.7%
Compensation and benefits as a
percentage of pretax earnings
before compensation and benefits 71.9% 71.4% 72.0% 71.5%
</TABLE>
Non-interest expenses were up 19% from the 1996 second quarter. The largest
expense category, compensation and benefits expense, rose 15% from the 1996
second quarter due to higher incentive compensation and increased headcount.
Incentive compensation was up primarily due to higher profitability. The
increase in salary costs was primarily due to the addition of approximately
5,400 employees since the end of the 1996 second quarter, resulting in
approximately 52,400 employees at the end of the 1997 second quarter. Hirings of
technical and other support personnel, together with headcount added by business
acquisitions, were responsible for approximately 77% of the increase. The ratio
of support employees and sales assistants to producers increased from 1.47 in
second quarter 1996 to 1.55 in second quarter 1997.
Facilities-related costs, which include communications and equipment rental,
occupancy, and depreciation and amortization, rose 15% in the aggregate to $402
million as increased business volumes, continued emphasis on technology
initiatives, and expansion of facilities worldwide led to higher costs.
19
<PAGE>
Professional fees increased 41%, partly due to higher management and systems
consulting costs related to various strategic market development and
technology projects. Advertising and market development expense rose 25% due
in part to increased international travel. Brokerage, clearing, and exchange
fees were up 11% due to higher global securities trading volume. Other
expenses rose 37%. This increase was attributable to provisions for various
business activities, including $30 million for a settlement with the Orange
County District Attorney's office and $45 million for the costs of certain
client claims arising in Asia which were quantifiable at quarter-end.
[See Part II, Item 1, Legal Proceedings for further information on the Orange
County settlement.]
Income tax expense was $290 million in the 1997 second quarter. The effective
tax rate in the 1997 second quarter was 37.0%, compared with 37.9% in the
year-ago period.
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 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 June 27,
1997 totaled $6.6 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 June 27, 1997, substantially all of
Merrill Lynch's assets were considered readily marketable by management.
Merrill Lynch concentrates its unsecured, general purpose borrowings at the
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.
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 $32.5 billion at June 27, 1997 and $23.6
20
<PAGE>
billion at December 27, 1996, which was equal to 12% and 11% of total assets at
second quarter-end 1997 and year-end 1996, respectively.
Outstanding long-term debt at June 27, 1997 increased to $34.0 billion, from
$26.1 billion at year-end 1996.
At June 27, 1997, the Company's senior long-term debt and preferred stock
were rated by recognized credit rating agencies, 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
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
During the first six months of 1997, the Company issued $11.1 billion in
long-term debt. During the same period, maturities and repurchases were $3.3
billion. In addition, approximately $789 million of the Company's long-term
debt securities held by subsidiaries were sold and $595 million were
purchased. At June 27, 1997, $25.0 billion of term debt had maturity dates
beyond one year.
Approximately $68.5 billion of the Company's indebtedness at June 27, 1997 is
considered senior indebtedness as defined in its subordinated indenture.
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 June 27, 1997, approximately 87% of invested assets of
insurance subsidiaries were considered liquid by management.
CAPITAL RESOURCES AND CAPITAL ADEQUACY
Merrill Lynch is one of the most highly capitalized U.S. institutions
primarily involved in the global securities business, with $6.9 billion in
common equity and $425 million in preferred stock at June 27, 1997. During
the first quarter of 1997, the Company redeemed all of its $194 million
Remarketed Preferred (Service Mark) Stock, Series C shares, and a subsidiary
of the Company issued $300 million of perpetual Trust Originated Preferred
Securities (Service Mark). These subsidiary-issued preferred securities, in
addition to $327 million of preferred securities outstanding of other
subsidiaries, further strengthened Merrill Lynch's equity capital base.
21
<PAGE>
Merrill Lynch's leverage ratios were as follows:
Adjusted
Leverage Leverage
Ratio(1) Ratio(2)
-------- --------
Period-end
June 27, 1997 33.9x 21.7x
December 27, 1996 29.5x 18.0x
Average (3)
Six months ended June 27, 1997 34.7x 20.7x
Year ended December 27, 1996 33.5x 19.9x
(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) Based on 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 "Regulatory Requirements" section in Notes to the
Consolidated Financial Statements - Unaudited). 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.
CAPITAL PROJECTS AND EXPENDITURES
Merrill Lynch continually prepares for the future by expanding its operations
and investing in new technology to improve service to our clients. To support
business expansion, for example, Merrill Lynch plans to build a new European
headquarters in London for approximately $650 million. Completion of this
facility is expected to occur in 2001. Significant technology initiatives
include Trusted Global Advisor (Service Mark) and Year 2000 systems
compliance. Trusted Global Advisor (Service Mark), a new technology platform
for Financial Consultants, is expected to be completed in fourth quarter
1998, with estimated remaining costs of approximately $400 million. The Year
2000 systems modifications are expected to be completed in early 1999. The
remaining costs are estimated at $200 million and will cover hardware and
software upgrades, systems consulting, and computer maintenance.
AVERAGE ASSETS AND LIABILITIES
Merrill Lynch monitors changes in its balance sheet using average daily balances
that are determined on a settlement date basis and reported for management
information purposes. 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.
For the first six months of 1997, average daily assets were $264 billion, up 11%
versus $237 billion for the 1996 fourth quarter. Average daily liabilities rose
11% to $256 billion from $230 billion for the 1996 fourth
22
<PAGE>
quarter. The major components in the growth of average daily assets and
liabilities for the first half of 1997 are summarized as follows:
(in millions) Increase in Percent
Average Assets Increase
-------------- --------
Trading assets $13,393 16%
Resale agreements and
securities borrowed 8,911 9
Increase in Percent
Average Liabilities Increase
------------------- --------
Trading liabilities $ 9,008 19%
Repurchase agreements and
securities loaned 6,573 7
Long-term borrowings 5,129 20
Commercial paper and other
short-term borrowings 3,883 10
Due to the adoption of SFAS No. 125, average balances of trading assets and
repurchase agreements increased by approximately $2 billion (for more
information on SFAS No. 125, see "Accounting Change" section in Notes to
Consolidated Financial Statements - Unaudited). In addition, during the first
half of 1997, trading assets and liabilities (which include on-balance-sheet
hedges used to manage trading risks) rose as volume increased, benefiting
from higher customer demand. Repurchase agreements and securities loaned
transactions and resale agreements and securities borrowed transactions rose
to fund the increase in 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 increase in repurchase
agreements and securities loaned transactions, the growth in average assets was
funded by higher short- and long-term borrowings, particularly commercial paper
and medium-term notes.
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. Non-investment grade
trading inventories have continued to increase to satisfy growing client demand
for higher-yielding investments, including emerging market and other
23
<PAGE>
non-U.S. securities. Non-investment grade securities have been defined as debt
and preferred equity securities rated 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.
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) June 27, Dec. 27,
1997 1996
-------- --------
Trading assets:
Cash instruments $9,149 $7,585
Derivatives(1) 2,463 2,470
Trading liabilities - cash instruments 2,387 905
Insurance subsidiaries' investments 227 206
(1) Collateral of $728 and $848 was held at June 27, 1997 and December 27,
1996, 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
June 27, 1997, the carrying value of such debt and equity securities totaled
$106 million, of which 54% resulted from Merrill Lynch's market-making
activities in such securities. This compared with $133 million at December
27, 1996, of which 58% related to market-making activities. In addition,
Merrill Lynch held distressed bank loans totaling $481 million and $351
million at June 27, 1997 and year-end 1996, 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, since changes in
credit quality of the underlying securities may affect the derivatives' fair
values.
24
<PAGE>
A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
(in millions) June 27, Dec. 27,
1997 1996
-------- --------
Derivative fair values:
Trading assets(1) $ 269 $ 63
Trading liabilities 245 64
Derivative notionals (off-balance-sheet)(2) 2,501 2,895
(1) Included in these amounts are $12 and $9 at June 27, 1997 and year-end
1996, 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.
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) June 27, Dec. 27,
1997 1996
-------- --------
Trading assets - cash instruments $ 759 $ 905
Derivative notionals (off-balance-sheet)(1) 2,164 1,311
(1) Calculated as notional subject to strike or reference price.
At June 27, 1997, the largest non-investment grade concentration consisted of
various sovereign and corporate issues of a South American country totaling $1.3
billion, some of which 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.
25
<PAGE>
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) June 27, Dec. 27,
1997 1996
-------- --------
Loans (net of allowance for loan losses)(1) $258 $340
Equity investments(2) 137 113
Partnership interests 100 104
Bridge loan - 31
Additional commitments to invest in partnerships 77 82
Unutilized revolving lines of credit and other
lending commitments(3) 146 301
(1) Represented outstanding loans to 33 and 36 companies at June 27, 1997
and year-end 1996, respectively.
(2) Invested in 51 and 48 enterprises at June 27, 1997 and year-end 1996,
respectively.
(3) Subsequent to quarter-end, Merrill Lynch committed to extend a $450
million senior secured credit facility and a $215 million senior
subordinated bridge loan to a counterparty in connection with its
proposed acquisition transaction. Merrill Lynch plans to syndicate the
loan but may retain a residual portion.
At June 27, 1997, no one industry sector accounted for more than 23% of total
non-investment grade positions and highly leveraged transactions.
26
<PAGE>
STATISTICAL DATA
Selected statistical data for the last five quarters are presented below for
informational purposes:
<TABLE>
<CAPTION>
2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR.
1996 1996 1996 1997 1997
-------- -------- -------- -------- --------
CLIENT ACCOUNTS
(IN BILLIONS):
<S> <C> <C> <C> <C>
Assets in U.S. Client Accounts $ 714 $ 735 $ 792 $ 818 $ 886
Assets in Non-U.S.
Client Accounts 42 44 47 50 54
-------- -------- -------- -------- --------
Total Assets in Client Accounts $ 756 $ 779 $ 839 $ 868 $ 940
======== ======== ======== ======== ========
Assets Under Management:
Money Market $ 84 $ 86 $ 90 $ 99 98
Equity 53 54 59 62 68
Fixed-Income 41 42 43 43 45
Private Portfolio 25 27 38 40 43
Insurance 4 4 4 3 3
-------- -------- -------- -------- --------
Total Assets Under Management $ 207 $ 213 $ 234 $ 247 $ 257
======== ======== ======== ======== ========
ML Consults(Registered
Trademark) $ 19 $ 20 $ 21 $ 21 $ 24
Mutual Fund Advisor(Service
Mark) and Asset
Power(Registered Trademark) $ 7 $ 8 $ 9 $ 10 $ 13
401(k) Assets $ 40 $ 41 $ 45 $ 47 $ 51
UNDERWRITING
(DOLLARS IN BILLIONS)(A):
Global Debt and Equity:
Volume $ 47 $ 45 $ 50 $ 56 $ 59
Market Share 12.7% 14.0% 13.2% 13.2% 13.2%
U.S. Debt and Equity:
Volume $ 39 $ 36 $ 42 $ 45 $ 48
Market Share 15.8% 16.9% 16.7% 16.1% 16.6%
- -----------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 39,900 41,400 42,200 42,900 43,600
Non-U.S. 7,100 7,400 7,600 8,400 8,800
-------- -------- -------- -------- --------
TOTAL 47,000 48,800 49,800 51,300 52,400
======== ======== ======== ======== ========
Financial Consultants and
Account Executives Worldwide 14,000 14,300 14,400 14,600 14,800
Support Personnel to
Producer ratio (B) 1.47 1.48 1.51 1.53 1.55
INCOME STATEMENT:
Net Earnings (in millions) $ 433 $ 331 $ 445 $ 465 $ 481
Annualized Return on Average
Common Stockholders' Equity 29.2% 21.5% 28.5% 28.3% 28.5%
Earnings per Common Share(C):
Primary $ 1.09 $ .84 $ 1.14 $ 1.17 $ 1.24
Fully Diluted $ 1.09 $ .84 $ 1.14 $ 1.17 $ 1.23
BALANCE SHEET (IN MILLIONS):
Total Assets $205,175 $207,911 $213,016 $247,603 $268,036
Total Stockholders' Equity $ 6,514 $ 6,618 $ 6,892 $ 6,925 $ 7,268
SHARE INFORMATION
(IN THOUSANDS)(C):
Weighted Average Shares
Outstanding:
Primary 385,866 378,420 378,889 389,067 379,429
Fully Diluted 385,866 381,268 381,405 389,067 384,450
Common Shares Outstanding (D) 337,849 331,258 328,172 330,921 329,048
Shares Repurchased 12,120 9,104 6,848 7,538 5,632
- -------------------------------------------------------------------------------------------------------
</TABLE>
(A) Full credit to book manager. Market share data derived from
Securities Data Co.
(B) Support personnel includes sales assistants.
(C) Earnings per common share amounts and other share information have been
adjusted for the two-for-one common stock split, paid May 30, 1997.
(D) Does not include 5,059, 4,187, 3,077 and 936 unallocated reversion
shares held in the Employee Stock Ownership Plan at period end
June 28, 1996, September 27, 1996, December 27, 1996, and
March 28, 1997, respectively, which are not considered outstanding for
accounting purposes. At June 27, 1997, these shares had been fully
allocated.
27
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since the filing of the Company's 1996 Form 10-K and of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 28, 1997 (the "First
Quarter 1997 10-Q"), the following events have taken place with respect to
several of the actions reported therein. Capitalized terms used herein without
definition have the meanings set forth in the 1996 10-K.
ORANGE COUNTY LITIGATION.
On April 17, 1997, the court in the Atascadero Federal Court Action granted
defendants' motion to abstain from deciding the Action pending final
resolution of the Atascadero State Court Action. On May 20, 1997, plaintiffs
filed a notice of appeal. On May 6, 1997, plaintiffs in the Atascadero State
Court Action filed a notice of appeal.
On June 17, 1997, a subsidiary of the Company, MLPF&S, entered into an
Agreement of Settlement and Release with the District Attorney of Orange
County (the "District Attorney") that resolved the District Attorney's
factual inquiry into MLPF&S' role in underwriting three debt offerings of
Orange County and one debt offering of Orange County Flood Control District
in 1994 (the "Settlement"). MLPF&S expressly denied and did not admit any
wrongdoing or liability in connection with the Settlement. In connection
with the Settlement, MLPF&S agreed to pay $30 million to the General Fund of
Orange County. The Settlement provides, among other things, for MLPF&S to
implement certain internal procedures when it acts pursuant to negotiated
underwritings as the managing or sole underwriter of securities issued by the
State of California and/or any county, municipality, district, special
governmental agency or other entity or authority located in California.
NASDAQ ANTITRUST LITIGATION.
On May 20, 1997, the plaintiffs in the NASDAQ Antitrust Litigation class
action, who have intervened in the civil antitrust action filed by the
Antitrust Division of the United States Department of Justice in order to
object to the
28
<PAGE>
settlement of that action, filed an appeal of the district court's approval of
the settlement. On May 21, 1997, the district court granted a stay, pending
completion of the appeal, of the portion of the district court's order approving
the settlement that provided for the tape recording of telephone conversations
by defendants' over-the-counter desk traders.
On June 30, 1997, the plaintiffs in the class action filed in connection with
the NASDAQ Antitrust Litigation filed a motion seeking court approval of
settlements entered into by the plaintiffs and certain of the defendants in
that action. The settling defendants do not include MLPF&S, a defendant in
the action.
GSLIC LITIGATION.
On July 28, 1997, the plaintiffs in the derivative action filed a notice of
appeal.
For more detailed information regarding litigation matters involving the
Company, see "Item 3. -- Legal Proceeding" in the 1996 10-K
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 15, 1997, the Company held its Annual Meeting of Stockholders.
Further details concerning matters submitted for vote of security holders can be
found in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 28, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the
Company hereby undertakes to furnish to the Securities and
Exchange Commission (the "Commission"), upon request, copies of
the instruments defining the rights of holders of long-term debt
securities of the Company that authorize an amount of
securities constituting 10% or less of the total assets of the
Company and its subsidiaries on a consolidated basis.
(10)(i) Merrill Lynch & Co., Inc. 1997 KECALP Deferred Compensation Plan
for a Select Group of Eligible Employees
(11) Statement re: computation of per common share earnings.
(12) Statement re: computation of ratios.
(15) Letter re: unaudited interim financial information.
(27) Financial Data Schedule.
29
<PAGE>
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the Company
with the Commission during the quarterly period covered by this Report:
(i) Current Report dated April 15, 1997 for the purpose of filing the
Preliminary Unaudited Earnings Summary of the Company for the
three-month period ended March 28, 1997.
(ii) Current Report dated May 2, 1997 for the purpose of filing the
Preliminary Unaudited Consolidated Balance Sheet of the
Company as of March 28, 1997.
(iii) Current Report dated May 30, 1997 for the purpose of filing
restated common share data to give effect to the Company's
two-for-one common stock split.
(iv) Current Report dated June 3, 1997 for the purpose of filing the
form of Registrant's Nikkei 225 Market Index Target-Term
Securities due June 14, 2002.
30
<PAGE>
INDEX TO EXHIBITS
Exhibits
10(i) Merrill Lynch & Co., Inc. 1997 KECALP Deferred Compensation Plan
for a Select Group of Eligible Employees
11 Statement re: computation of per share earnings
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
27 Financial Data Schedule
<PAGE>
Exhibit 10(i)
MERRILL LYNCH & CO., INC.
1997 KECALP DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF JUNE 11, 1997
<PAGE>
MERRILL LYNCH & CO., INC.
1997 KECALP 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2.1 Eligible Employees . . . . . . . . . . . . . . . . . . . . . . . .6
(a) General Rule. . . . . . . . . . . . . . . . . . . . . . . . .6
(b) Individuals First Employed During Election
Year or Plan Year . . . . . . . . . . . . . . . . . . . . . .6
(c) Disqualifying Factors . . . . . . . . . . . . . . . . . . . .6
III. DEFERRAL ELECTIONS; ACCOUNTS. . . . . . . . . . . . . . . . . . . . . .6
3.1 Deferral Elections . . . . . . . . . . . . . . . . . . . . . . . .6
(a) Timing and Manner of Making of Elections. . . . . . . . . . .6
(b) Irrevocability of Deferral Election . . . . . . . . . . . . .7
(c) Application of Election . . . . . . . . . . . . . . . . . . .7
3.2 Crediting to Accounts. . . . . . . . . . . . . . . . . . . . . . .7
(a) Benchmark Return Account. . . . . . . . . . . . . . . . . . .7
(b) KECALP Unit Account . . . . . . . . . . . . . . . . . . . . .7
3.3 Requirements for Deferral. . . . . . . . . . . . . . . . . . . . .7
(a) Requirements. . . . . . . . . . . . . . . . . . . . . . . . .7
(b) Failure to Meet Requirements. . . . . . . . . . . . . . . . .8
(c) Pro Rata Reduction of Deferred Amounts. . . . . . . . . . . .8
3.4 Return Options; Adjustment of Accounts . . . . . . . . . . . . . .8
(a) Selection of KECALP Return Option . . . . . . . . . . . . . .8
(b) Selection of Benchmark Return Options . . . . . . . . . . . .9
(c) Selection of the Leverage Percentage. . . . . . . . . . . . .9
(d) Adjustment of KECALP Unit Account . . . . . . . . . . . . . .9
(e) Adjustment of Debit Account . . . . . . . . . . . . . . . . .10
(f) Adjustment of Benchmark Return Account. . . . . . . . . . . .10
(g) Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3.5 Rescission of Deferral Election. . . . . . . . . . . . . . . . . .11
(a) Adverse Tax Determination . . . . . . . . . . . . . . . . . .11
(b) Rescission During the Interim Period For
Amounts Not Yet Earned. . . . . . . . . . . . . . . . . . . .11
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT. . . . . . . . . . . . . . . . .12
4.1 No Trust or Fund Created; General Creditor Status. . . . . . . . .12
4.2 Non-Assignability. . . . . . . . . . . . . . . . . . . . . . . . .12
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans. . . . . . . . . . . . . . . . . . . . . . .12
V. PAYMENT OF ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.1 Manner of Payment. . . . . . . . . . . . . . . . . . . . . . . . .12
5.2 Termination of Employment. . . . . . . . . . . . . . . . . . . . .13
(a) Death or Retirement . . . . . . . . . . . . . . . . . . . . .13
(b) Other Termination of Employment - Forfeiture
of Leverage . . . . . . . . . . . . . . . . . . . . . . . . .13
(c) Leave of Absence, Transfer or Disability. . . . . . . . . . .13
(d) Discretion to Alter Payment Date. . . . . . . . . . . . . . .13
i.
<PAGE>
PAGE
5.3 Withholding of Taxes . . . . . . . . . . . . . . . . . . . . . . .13
5.4 Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . .14
(a) Designation of Beneficiary. . . . . . . . . . . . . . . . . .14
(b) Change in Beneficiary . . . . . . . . . . . . . . . . . . . .14
(c) Default Beneficiary . . . . . . . . . . . . . . . . . . . . .14
(d) If the Beneficiary Dies During Payment. . . . . . . . . . . .14
5.5 Hardship Distributions . . . . . . . . . . . . . . . . . . . . . .14
5.6 Domestic Relations Orders. . . . . . . . . . . . . . . . . . . . .15
VI. ADMINISTRATION OF THE PLAN. . . . . . . . . . . . . . . . . . . . . . .15
6.1 Powers of the Administrator. . . . . . . . . . . . . . . . . . . .15
6.2 Payments on Behalf of an Incompetent . . . . . . . . . . . . . . .15
6.3 Corporate Books and Records Controlling. . . . . . . . . . . . . .15
VII. MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . .16
7.1 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
7.2 Headings Are Not Controlling . . . . . . . . . . . . . . . . . . .16
7.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . .16
7.4 Amendment and Termination. . . . . . . . . . . . . . . . . . . . .16
2.
<PAGE>
MERRILL LYNCH & CO., INC.
1997 KECALP 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 purposes of the Plan, the following terms shall have the meanings
indicated.
"Account Balances" means, as of any date, the Benchmark Return Account
Balance, the Debit Account Balance and the KECALP Unit Account Balance.
"Accounts" means the Benchmark Return Account, the KECALP Unit Account and
the Debit Account.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation or estate planning and
business insurance specialist (or other similar titles established by National
Sales Management) 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 provided for in Section 3.4(g)(i).
"Applicable Federal Rate" means the applicable federal rate for short-term
(0-3 years) obligations of the United States Treasury established in January of
each year.
"Available Benchmark Return Account Balance" means amounts in the
Benchmark Return Account after each of the debit balances recorded in the Debit
Account has been reduced to zero.
<PAGE>
"Average Leveraged Principal Amount" means, for each Participant, for any
period, the sum of the Leveraged Principal Amounts outstanding at the end of
each day in the period divided by the number of days in such period.
"Benchmark Return Account" means the reserve account for each Participant
established on the books and records of ML & Co. to record the Participant's
Benchmark Return Account Balance under the Plan.
"Benchmark Return Account Balance" means, as of any date, the Deferred
Amounts credited to a Participant's Benchmark Return Account, adjusted to
reflect (1) the performance of the Participant's Selected Benchmark Return
Options as provided in Section 3.4(f); (2) balances transferred to the KECALP
Unit Account, as provided in Section 3.2(b) at the closing of Merrill Lynch
KECALP L.P. 1997; (3) distributions with respect to units in the KECALP Unit
Account made in accordance with Section 3.4(d); (4) chargeoffs of any debit
balance (the aggregate accrued Annual Charge or the Leveraged Principal Amount,
as the case may be) recorded the Debit Account as provided in Section 3.4(e);
and (5) any payouts to the Participant under Article V hereof.
"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 Benchmark Return Accounts hereunder. In the event a
Benchmark Return Option ceases to exist or is no longer to be a Benchmark Return
Option, the Administrator may designate a substitute Benchmark Return Option for
such discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Career Retirement" means a Participant's termination of employment with
the Company for reasons other than for cause on or after: (i) the Participant's
55th birthday, if the Participant has at least 5 years of service; (ii) the
Participant's 50th birthday, if the Participant has at least 10 years of
service; (iii) the Participant's 45th birthday, if the Participant has at least
15 years of service, or (iv) at any age, if the Participant has at least 20
years of service, provided that, in each case, following such termination such
Participant does not engage in any activity that, in the sole judgment of the
Administrator, is in competition with the business of the Company.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation and/or Sign-On Bonus. In no event shall a
Participant's base pay be considered Compensation (i.e., an amount subject to
deferral under this Plan).
"Debit Account" means, as, the debit account established for each
Participant on the books and records of ML & Co. with a KECALP Unit Account to
record the Participant's Debit Account Balance under the Plan.
"Debit Account Balance" means, as of any date the negative balance, if
any, representing each of: (1) the aggregate Annual Charge, accrued in
accordance with Section 3.4(g)(i); and (2) any Leveraged Principal Amount
(together with any pro rata Interest Amounts determined in accordance with
Section 3.4(g)(ii), if applicable), as reduced by any distributions from the
KECALP Unit Account or chargeoffs against the Benchmark Return Account, in
accordance with Section 3.4(e).
2
<PAGE>
"Deferral Percentage" means the percentage (which shall be in whole
percentage increments and not more than 90%), specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Plan.
"Deferred Amounts" means the amounts of Compensation actually deferred by
the Participant under this Plan.
"Election Year" means the 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.
"Excess Deferral Amounts" means, for each Participant deferring Adjusted
Compensation, the additional amounts advanced to the Participant by the Company
for crediting to the Participant's KECALP Unit Account, such amounts to equal
the amounts that would actually have been deferred under the Plan from the
Participant's Projected Remaining Adjusted Compensation (taking into account
deferrals under other deferred compensation plans) if such Projected Remaining
Adjusted Compensation had been earned prior to the closing of Merrill Lynch
KECALP L.P. 1997.
"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).
"Initial Leveraged Amount" means the initial dollar amount by which of a
Participant's deferral is leveraged as determined in accordance with Section
3.4(c).
"Interim Period" means the period beginning on the date the Participant
elects to defer compensation under the Plan and ending on either (1) the date of
the closing of Merrill Lynch KECALP L.P. 1997 or (2) the date that KECALP Inc.,
the general partner of Merrill Lynch KECALP L.P. 1997 receives notice from the
SEC that its request to amend the exemptive order for the KECALP partnerships to
allow ML & Co. to invest in Merrill Lynch KECALP L.P. 1997 has been denied.
"Interest" means the interest accruing on a Participant's Average
Leveraged Principal Amount at the Applicable Federal Rate.
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"Interest Amounts" means, for any Participant, as of any date, the amount
of Interest that has accrued to such date on such Participant's Average
Leveraged Principal Amount, from the date on which a Participant's Leveraged
Principal Amount is established, or from the most recent date that Interest
Amounts were added to the Leverage Principal Amount.
"KECALP Return Option" means the option of indexing returns hereunder to
the performance of Merrill Lynch KECALP L.P. 1997, on a leveraged or unleveraged
basis.
"KECALP Unit Account" means the reserve account for each Participant who
has chosen the KECALP Return Option, established on the books and records of ML
& Co. to record such Participant's KECALP Unit Account Balance.
"Leveraged or Unleveraged Unit Distributions" means the distributions from
the KECALP Unit Account attributable to the leveraged or unleveraged portion (as
the case may be) of a Participant's KECALP Unit Account.
"Leverage-Eligible Participants" means persons who have at least $400,000
of Total Compensation for the Election Year and otherwise qualify, in accordance
with standards determined by the Administrator, to select the KECALP Return
Option on a leveraged basis.
"Leverage Percentage" means the percentage of leverage chosen by a
Leverage-Eligible Participant, which percentage will be subject to the limits
determined by the Administrator.
"Leveraged Principal Amount" means a Participant's Initial Leveraged
Amount, if any, plus, to the extent applicable, the amount of any Excess
Deferral Amounts not repaid with actual deferrals of Adjusted Compensation by
the end of January 1998, or any as adjusted to reflect the addition of Interest
Amounts (or any pro rata Interest Amounts) determined in accordance with Section
3.4(g)(ii).
"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.
"Net Asset Value" means, (1) 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, and (2) with respect to the KECALP Return Option, the
net asset value as determined periodically by the General Partner of Merrill
Lynch KECALP L.P. 1997.
"Partial Year Adjusted Compensation" means the actual amount of Adjusted
Compensation earned by a Participant during the period from December 28, 1996 to
the last day of the fiscal month prior to the closing of Merrill Lynch KECALP
L.P. 1997.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
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"Plan" means this Merrill Lynch & Co., Inc. 1997 KECALP Deferred
Compensation Plan for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 1997.
"Projected Remaining Adjusted Compensation" means, for any Participant,
the amount determined by annualizing such Participant's Partial Year Adjusted
Compensation and subtracting such Participant's Partial Year Adjusted
Compensation from such annualized amount.
"Retirement" means a Participant's termination of employment with the
Company for reasons other than for cause (i) on or after the Participant's 65th
birthday, or (ii) on or after the Participant's 55th birthday, if the
Participant has at least 10 years of service; or (iii) with the express approval
of the Administrator, which will be granted only if such termination is found by
the Administrator to be in, or not contrary to, the best interests of the
Company.
"SEC" means the Securities and Exchange Commission.
"Selected Benchmark Return Option" means a Benchmark Return Option
selected by the Participant in accordance with Section 3.4(b).
"Sign-On Bonus" means a single-sum amount paid or payable to a new
Eligible Employee during the Plan Year upon commencement of employment that is
to be paid during the Interim Period, in addition to base pay and other
Compensation, to induce him or her to become an employee of the Company, or any
similar item of compensation as the Administrator shall designate as "Sign-On
Bonus" for purposes of this Plan.
"Total Compensation" means Eligible Compensation plus the grant value, as
determined by ML & Co. at the time of grant, of stock-based awards that are
granted to certain employees of the Company generally in January or February of
the Plan Year with respect to the prior Fiscal Year, which, for purposes of this
Plan, are considered earned during the Plan Year regardless of when they are
actually granted or paid to the Participant.
"Undistributed Deferred Amounts" means, as on any date on which the Annual
Charge is determined, a Participant's Deferred Amounts (exclusive of any
appreciation or depreciation) minus for each distribution from the Plan prior to
such date, an amount equal to the product of the Deferred Amounts and a fraction
the numerator of which is the amount of such distribution and the denominator of
which is the combined Net Asset Value (prior to distribution) of the
Participant's Benchmark Return Account and KECALP Unit Account as of the date of
the relevant distribution.
"Variable Incentive Compensation" means the variable incentive
compensation or office manager incentive compensation that is paid in cash to
certain employees of the Company, generally in January or February of the Plan
Year with respect to the prior Fiscal Year, which, for purposes of this Plan, is
considered earned during the Plan Year regardless of when it is actually paid to
the Participant, or such other similar items of compensation as the
Administrator shall designate as "Variable Incentive Compensation" for purposes
of this Plan.
"401(k) Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan.
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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 (or other similar title established by National
Sales Management), 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 Band 1 or 2, or (F)
is a producing employee in grade 95 or above; PROVIDED, that non-producing
employees in Band 1 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
during the Interim Period of 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 November 18th of the Election Year 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 during the Interim
Period 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; and providing further; that the
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Administrator may permit Eligible Employees who are Participants in the Merrill
Lynch & Co., Inc. 1997 Deferred Compensation Plan for a Select Group of Eligible
Employees to transfer out a portion of their account balances thereunder to this
Plan upon such terms and conditions he deems appropriate.
(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.
3.2 CREDITING TO ACCOUNTS.
(a) BENCHMARK RETURN ACCOUNT. A Participant's Deferred Amounts will be
credited to the Participant's Benchmark Return Account (to the extent they are
not credited directly to the Participant's KECALP Unit Account or applied
against the Participant's Excess Deferral Amount as provided in Section 3.2(b)),
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 a
Benchmark Return Account, for the period until the Deferred Amounts are
credited.
(b) KECALP UNIT ACCOUNT. Upon the closing of Merrill Lynch KECALP L.P.
1997, Participants will have their KECALP Unit Accounts credited with a whole
number of units determined by dividing by $1,000 the sum of the following: (1)
the Benchmark Return Account Balance, as of the day prior to the closing date;
(2) any additional Deferred Amounts which have not yet been credited to the
Benchmark Return Account as of such date; (3) the Participant's Excess Deferral
Amounts, if applicable; and (4) the Participant's Initial Leveraged Amount
(computed in accordance with Section 3.4(c)). Any amounts not applied to the
KECALP Unit Account will remain in the Benchmark Return Account (or be applied
to reduce negative balances in the Debit Account). No fractional units will be
credited.
Excess Deferral Amounts shall be deemed advances of Deferred Amounts
hereunder. Accordingly, actual amounts of Adjusted Compensation deferred, in
accordance with a Participant's elections, after the crediting of the
Participant's KECALP Unit Account, will be applied against such advances and no
such deferrals shall be credited to the Participant's Benchmark Return Account
until such advances are repaid. To the extent that Excess Deferral Amounts have
not been repaid at the end of the Plan Year, such unpaid Excess Deferral Amounts
shall be added to the Debit Account as either an Initial Leveraged Amount or
Leveraged Principal Amount (whether or not such Participant was initially a
Leverage-Eligible Participant).
3.3 REQUIREMENTS FOR DEFERRAL.
(a) REQUIREMENTS. Notwithstanding any other provision of this Plan, no
deferral will be effected under this Plan with respect to a Participant if:
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(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,
(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 that the Participant may receive
in December of the Election Year that 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 (except in
the circumstances provided for in the proviso to Section 2.1(a); or
(iv) it is determined by the Administrator that the SEC will not agree
by September 30, 1997 to allow an investment by ML & Co. in Merrill
Lynch KECALP L.P. 1997;
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. In the event that condition
(iv) has not occurred by September 30, 1997, but occurrence is expected within
1997, the Administrator shall have the discretion to extend the date to a later
date in 1997.
(b) FAILURE TO MEET REQUIREMENTS. If the requirements of Section
3.3(a)(i) or (ii) are not met by a Participant to whom such requirements are
applicable, such Participant's Deferred Amounts, if any, will be paid to such
Participant, without adjustment to reflect the performance of any Selected
Benchmark Return Option, as soon as practicable after it has been determined
that the requirements have not been met. If the requirements of Section
3.3(a)(iii) are not met by a Participant, the greater of such Participant's
Deferred Amounts or Benchmark Return Account Balance will be paid to such
Participant as soon as practicable after it has been determined that the
requirements have not been met. If the requirements of Section 3.3(a)(iv) are
not met, such Participant's Benchmark Return Account Balance will be paid to
such Participant as soon as practicable after it has been determined that the
requirements have not been met.
(c) PRO RATA REDUCTION OF DEFERRED AMOUNTS. In addition, in the event
that the Administrator determines that, as a result of amounts deferred that are
benchmarked to the KECALP Return Option, the size of Merrill Lynch KECALP L.P.
1997 would exceed $250 million, the Administrator may direct that the number of
unleveraged units to be credited to the KECALP Unit Accounts for all persons who
have chosen the KECALP Return Option, be reduced proportionately to reduce the
size of Merrill Lynch KECALP L.P. to less than $250 million. In such event, to
the extent that actual Deferred Amounts are reduced, the related Deferred
Amounts will be returned to Participants as soon as practicable and the
Participant's Initial Leveraged Amount will be recomputed in accordance with
Section 3.4(c) based on such reduced Deferred Amounts.
3.4 RETURN OPTIONS; ADJUSTMENT OF ACCOUNTS.
(a) SELECTION OF KECALP RETURN OPTION. Coincident with the
Participant's election to defer Compensation, the Participant will give a
preliminary indication of interest in selecting the KECALP Return Option. During
a 30-day period following the receipt by a Participant of the final
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Prospectus for Merrill Lynch KECALP L.P. 1997, Participants will be required to
confirm their selection of the KECALP Return Option (and designate any Leverage
Percentage) or may instead elect to have their Deferred Amounts benchmarked to
the Benchmark Return Options, provided that such benchmarking shall be on an
unleveraged basis. PARTICIPANTS SHOULD BE AWARE THAT CHOOSING TO DEFER USING THE
KECALP RETURN OPTION IS CONTINGENT UPON THE AGREEMENT BY THE SEC THAT THE
EXEMPTIVE ORDER FOR THE KECALP PARTNERSHIPS CAN BE AMENDED TO ALLOW ML & CO. TO
INVEST IN MERRILL LYNCH KECALP L.P. 1997 TO HEDGE ITS OBLIGATIONS TO
PARTICIPANTS. IN ADDITION, 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.
(b) 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 Benchmark
Return Account to be adjusted to reflect the performance of each Selected
Benchmark Return Option during the Interim Period and at all other times when
there is a positive Benchmark Return Account Balance. 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. WHEN SELECTING SELECTED BENCHMARK RETURN OPTIONS,
PARTICIPANTS SHOULD BE AWARE THAT THE PERFORMANCE OF THE SELECTED BENCHMARK
RETURN OPTIONS WILL AFFECT THEIR BENCHMARK RETURN ACCOUNT BALANCE DURING THE
INTERIM PERIOD, WHICH MAY RESULT IN A SMALLER OR LARGER ALLOCATION TO THE KECALP
RETURN OPTION THAN WAS ORIGINALLY INTENDED.
(c) SELECTION OF THE LEVERAGE PERCENTAGE. Prior to the closing of the
offering of Merrill Lynch KECALP L.P. 1997, Leverage-Eligible Participants will
commit to selecting the KECALP Return Option on a leveraged basis and will
choose the Leverage Percentage, in accordance with standards determined by the
Administrator, by submitting such forms as the Administrator shall prescribe. On
the day prior to the closing of Merrill Lynch KECALP L.P. 1997, the
Administrator will determine each Leverage-Eligible Participant's Initial
Leveraged Amount by applying such Participant's Leverage Percentage to the sum
of (1) the dollar value of a Participant's Benchmark Return Account Balance (and
any additional Deferred Amounts not credited to such Benchmark Return Account)
plus, if applicable, (2) such Participant's Excess Deferral Amounts. This
Initial Leveraged Amount will be converted into units in the KECALP Unit Account
in accordance with Section 3.2(b) at the closing of Merrill Lynch KECALP L.P.
1997. The Initial Leveraged Amount will be recorded as the Leveraged Principal
Amount, to which amount Interest Amounts will be added annually in accordance
with Section 3.4(g)(ii).
(d) ADJUSTMENT OF KECALP UNIT ACCOUNT. While a Participant with a
KECALP Unit Account will receive quarterly statements of the estimated value of
the KECALP Unit Account, such statement will be for recordkeeping purposes only
and will not represent the Participant's ownership of, or any ownership interest
in, Merrill Lynch KECALP L.P. 1997. Whenever a distribution is paid on an actual
unit of Merrill Lynch KECALP L.P. 1997, an amount equal to such per unit
distribution times the number of units in the Participant's KECALP Unit Account
will be applied first against any Debit Account Balance, as provided in Section
3.4(e) and then, if any portion of such distribution remains after each debit
balance in the Debit Account is reduced to zero, be credited to the
Participant's Benchmark Return Account. BECAUSE THE KECALP RETURN OPTION IS
ILLIQUID, NO PAYOUTS SHALL BE MADE FROM THE KECALP UNIT ACCOUNT. PAYOUTS TO
PARTICIPANTS UNDER ARTICLE V HEREOF WILL BE MADE ONLY FROM AMOUNTS CREDITED TO A
PARTICIPANT'S BENCHMARK RETURN ACCOUNT AFTER THE
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DEBIT ACCOUNT BALANCE IS REDUCED TO ZERO. The KECALP Unit Account and the Debit
Account will also be adjusted in accordance with Section 5.2 hereof in the event
of a Participant's termination of his employment at Merrill Lynch, (other than
as a result of death, disability, Career Retirement, or Retirement).
(e) ADJUSTMENT OF DEBIT ACCOUNT. Any negative Debit Account Balance
shall be charged off as soon as possible against either (i) any positive balance
in a Participant's Benchmark Return Account or (ii) any distributions from the
KECALP Unit Account. Reductions of the Debit Account Balance, as provided in the
foregoing sentence shall be deemed to be applied first to reduce the debit
balance attributable to accrued Annual Charges and then, after all such accrued
Annual Charges have been satisfied, to reduce any Leverage Principal Amount.
(f) ADJUSTMENT OF BENCHMARK RETURN ACCOUNT. While the Participant's
Accounts do not represent the Participant's ownership of, or any ownership
interest in, any particular assets, the Benchmark Return Account shall be
adjusted to reflect credits or debits relating to distributions with respect to
the KECALP Unit Account or the chargeoffs against the Debit Account and to
reflect the investment experience of the Participant's Selected Benchmark Return
Options in the same manner as if investments or dispositions in accordance with
the Participant's elections had actually been made through the ML Benefit
Services Platform and ML II Core Recordkeeping System, or any successor system
used for keeping records of Participants' Accounts (the "ML II System"). In
adjusting Benchmark Return Accounts, the timing of receipt of Participant
instructions or credits or debits relating to distributions or chargeoffs with
respect to the KECALP Unit Account or the Debit Account 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 or
dispositions were actually to be made, except that in connection with the
crediting of Deferred Amounts or distributions to the Participant's Benchmark
Return Account and distributions from or debits to the Benchmark Return Account,
appropriate deferral allocation instructions shall be treated as received from
the Participant prior to the close of transactions through the ML II System on
the relevant day. Each Selected Benchmark Return Option shall be valued using
the Net Asset Value of the Selected Benchmark Return Option as of the relevant
day; PROVIDED, that, in valuing a Selected Benchmark Return Option for which a
Net Asset Value is not computed, the value of the security involved for
determining Participants' rights under the Plan shall be the price reported for
actual transactions in that security through the ML II System on the relevant
day, without giving effect to any transaction charges or costs associated with
such transactions; PROVIDED, FURTHER, that, if there are no such transactions
effected through the ML II System on the relevant day, the value of the security
shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale prices
for that day on the principal exchange for such security, or if
such security is not traded on such principal exchange on that day,
the average of the high and low sales prices on such exchange on
the first day prior thereto on which such security was so traded;
(ii) if the security is not listed for trading on a national securities
exchange but is traded in the over-the-counter market, the average
of the highest and lowest bid prices for such security on the
relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined by the
Administrator by whatever means he considers appropriate in his
sole discretion.
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All debits and charges against the Benchmark Return Account shall be applied as
a PRO RATA reduction of the portion of the Benchmark Return Account Balance
indexed to each of the Participant's Selected Benchmark Return Options.
(g) CHARGES:
(i) 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
Undistributed Deferred Amounts (exclusive of any
appreciation or depreciation) shall be applied to reduce the
Benchmark Return Account Balance (but not below zero). To
the extent the Benchmark Return Account Balance is
insufficient to satisfy the Annual Charge, the unpaid
portion will accrue as a negative balance in the Debit
Account.
(ii) INTEREST AMOUNTS. As of the last day of each Fiscal Year,
Interest Amounts computed by the Administrator shall be
added to the Leveraged Principal Amount. If on any date the
Leveraged Principal Amount would be discharged completely as
a result of distributions or chargeoffs, Interest Amounts
will be computed though such date and added to the Leveraged
Principal Amount as of such date.
3.5 RESCISSION OF DEFERRAL ELECTION.
(a) ADVERSE TAX DETERMINATION. Notwithstanding the provisions of
Section 3.1(b), 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. In the event that such rescission occurs during the
Interim Period or in the event that a Participant has chosen not to select the
KECALP Return Option, upon such rescission, the Benchmark Return 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. In the event that
such rescission occurs after the Interim Period, the Available Benchmark Return
Account Balance will be repaid to the Participant and further payments will be
made as additional amounts become credited to the Benchmark Return Account.
(b) RESCISSION DURING THE INTERIM PERIOD FOR AMOUNTS NOT YET EARNED.
During the Interim Period, 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.
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ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNTS
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 any 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 Account
Balances 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 ACCOUNTS
5.1 MANNER OF PAYMENT.
By choosing the KECALP Return Option, Participants are electing to receive
payouts as amounts become available as a result of distributions with respect to
the KECALP Unit Account. Participants will be able to elect either (A) to
receive payouts as the distributions with respect to the KECALP Unit Account are
made (once a Participant's Debit Account Balance has been reduced to zero) or
(B) to receive payouts as the distributions with respect to the KECALP Unit
Account are made (once a Participant's Debit Account Balance has been reduced to
zero) but in no event prior to a month and year specified by the Participant or
the month of March in the year following Retirement, provided that no election
may result in the commencement of payment later than the month following the
Participant's 70th birthday (other than as a result of the timing of
distributions with respect to the KECALP Unit Account). Persons who decline to
confirm their choice of the KECALP Return Option following the receipt of a
final Prospectus for Merrill Lynch KECALP L.P. 1997 will receive their Benchmark
Return Account Balance in a lump sum on a date specified in their initial
election, which may be either (X) a month and date specified by such Participant
or (Y) the month of March in the year following such Participant's Retirement,
provided that, in each case such payment shall not occur until after January 31,
2000.
12
<PAGE>
5.2 TERMINATION OF EMPLOYMENT.
(a) DEATH OR RETIREMENT. Upon a Participant's death or Retirement
prior to payment, the Available Benchmark Return Account Balance will be paid,
in accordance with the Participant's elections and as provided in Section 5.1,
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 Participant, who has died, had specified a date prior to which
payments would not be made and the beneficiary of the Participant's Account is
the Participant's estate or is otherwise not a natural person, then, such
specified date will be ignored and such payments made as available in accordance
with clause (A) of the first sentence of Section 5.1.
(b) OTHER TERMINATION OF EMPLOYMENT - FORFEITURE OF LEVERAGE. If the
Participant's employment terminates at any time for any reason other than death
or Retirement, then, notwithstanding the Participant's elections hereunder, any
Available Benchmark Return Account Balance will be paid to the Participant, as
soon as practicable, in a single payment if all distributions have been made
with respect to the KECALP Unit Account or as available, as soon thereafter as
is practicable, notwithstanding the Participant's elections hereunder. In the
event that a Participant's employment terminates at any time for any reason
other than death, disability, Career Retirement, or Retirement, such Participant
will forfeit all rights to the leveraged portion of such Participant's KECALP
Unit Account, including any future Leveraged Distributions, unless the
Administrator, in his sole discretion, determines that such forfeiture would be
detrimental to Merrill Lynch based on the Net Asset Value of the KECALP Unit
Account. In the event of such forfeiture, the Participant's KECALP Unit Account
Balance and Debit Account Balance will be restated by the Administrator, as of
the date of termination, to reflect what such balances would have been had the
Participant selected no leverage under Section 3.4(c). To the extent necessary,
the Participant's Benchmark Return Account Balance will also be adjusted, as of
the date of the termination, to credit the Participant with the amount of any
Unleveraged Distributions that were previously applied to the repayment of the
Leveraged Principal Amount and any Interest Amounts and, to the extent
necessary, any Leveraged Distributions paid out to the Participant will be
stated as a negative balance in the Participant's Debit Account. Leveraged and
Unleveraged Distributions shall be deemed to have been applied and distributed
proportionately. All calculations hereunder shall be made by the Administrator
and shall be final and determinative.
(c) LEAVE OF ABSENCE, TRANSFER OR DISABILITY. The Participant's
employment will not be considered 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 Section 5.2, if the Participant's employment terminates for any reason, the
Administrator may, in his sole discretion, direct that any Available Benchmark
Return Account Balance be paid at some other time; 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 may require the Participant or the
Participant's beneficiary to pay any amount, or the balance of any amount,
required to be withheld.
13
<PAGE>
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 will 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 either 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 the person or persons
designated to receive benefits on account of the Participant's death under the
ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan"). However,
if an unmarried Participant does not have coverage in effect under the Life
Insurance Plan, or the Participant has assigned his or her death benefit under
the Life Insurance Plan, any amounts payable to the Participant's beneficiary
under the Plan will be paid to the Participant's estate.
(d) IF A 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 payments have been made, the portion of the
Benchmark Return Account to which that beneficiary was entitled will be paid as
soon as practicable in one lump sum or as available (in the event that all
distributions have not been made with respect to the KECALP Unit Account) to
such beneficiary's estate and not to any contingent beneficiary the Participant
may have designated.
5.5 HARDSHIP DISTRIBUTIONS.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of a Participant's Available
Benchmark Return 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
Participant's Accounts, 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
14
<PAGE>
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 Available Benchmark Return 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. Any such payment shall be deemed a
distribution under the Plan for purposes of the definition of Undistributed
Deferred Amounts.
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.
15
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 LITIGATION.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 HEADINGS ARE NOT CONTROLLING.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
7.3 GOVERNING LAW.
To the extent not preempted by applicable U.S. Federal law, this Plan will
be construed in accordance with and governed by the laws of the State of New
York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 AMENDMENT AND TERMINATION.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balances
(as reduced by the current year's Charges, or pro rata portion thereof, as set
forth in Section 3.4(g)) as of the date of such amendment or termination.
16
<PAGE>
<TABLE>
Exhibit 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Amounts)
Three Months Ended Six Months Ended
-------------------- --------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS
Net earnings.................................... $ 481 $ 433 $ 947 $ 843
Preferred stock dividends....................... (9) (11) (20) (23)
-------- -------- -------- --------
Net earnings applicable to common stockholders.. $ 472 $ 422 $ 927 $ 820
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY WEIGHTED AVERAGE SHARES
Common stock.................................... 329.9 341.3 330.5 343.4
Assuming issuance of shares relating to
employee incentive plans...................... 49.5 44.6 53.7 45.3
-------- -------- -------- --------
Total shares.................................... 379.4 385.9 384.2 388.7
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY EARNINGS PER SHARE...................... $1.24 $1.09 $2.41 $2.11
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED WEIGHTED AVERAGE SHARES
Common stock.................................... 329.9 341.3 330.5 343.4
Assuming issuance of shares relating to
employee incentive plans...................... 54.5 44.6 56.3 45.8
-------- -------- -------- --------
Total shares.................................... 384.4 385.9 386.8 389.2
-------- -------- -------- --------
-------- -------- -------- --------
FULLY DILUTED EARNINGS PER SHARE................ $1.23 $1.09 $2.40 $2.11
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
NOTE: 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, paid
on May 30, 1997.
<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)
Three Months Ended Six Months Ended
--------------------- --------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
---------- --------- -------- --------
Pretax earnings from
continuing operations .... $ 784 $ 698 $1,551 $1,369
Add: Fixed charges ......... 4,101 2,846 7,772 5,642
------- ------- ------- -------
Pretax earnings before fixed
charges .................. $4,885 $3,544 $9,323 $7,011
------- ------- ------- -------
------- ------- ------- -------
Fixed charges:
Interest ................. $4,038 $2,808 $7,646 $5,565
Other (A) ................ 63 38 126 77
------- ------- ------- -------
Total fixed charges ...... 4,101 2,846 7,772 5,642
Preferred stock dividend
requirements ........... 15 19 32 37
------- ------- ------- -------
Total combined fixed
charges and preferred
stock dividends ........ $4,116 $2,865 $7,804 $5,679
------- ------- ------- -------
------- ------- ------- -------
Ratio of earnings to fixed
charges .................. 1.19 1.25 1.20 1.24
Ratio of earnings to combined
fixed charges and
preferred stock
dividends ................ 1.19 1.24 1.19 1.23
(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>
Exhibit 15
August 8, 1997
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, NY 10281
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
consolidated financial information of Merrill Lynch & Co., Inc. and
subsidiaries as of June 27, 1997 and for the three- and six-month periods
ended June 27, 1997 and June 28, 1996 as indicated in our report dated August
8, 1997; because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 27, 1997, is
incorporated by reference in the following documents, as amended:
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)
<PAGE>
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-09779 (1997 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-32209 (1998 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)
Registration Statement No. 333-33125 (Employee Stock Purchase Plan for
Employees of Merrill Lynch Partnerships)
Filed on Form S-3:
Debt Securities:
Registration Statement No. 33-54218
Registration Statement No. 2-78338
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
Registration Statement No. 33-17965
Registration Statement No. 33-27512
Registration Statement No. 33-35456
Registration Statement No. 33-42041
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
<PAGE>
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
Registration Statement No. 333-13649
Registration Statement No. 333-25255
Registration Statement No. 333-28537
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)
Registration Statement No. 333-20137 (TOPrS)
<PAGE>
Registration Statement No. 333-24889 (LTIC and LTICPMP)
We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
/s/ Deloitte & Touche LLP
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-END> JUN-27-1997
<CASH> 4,528
<RECEIVABLES> 36,034
<SECURITIES-RESALE> 60,447
<SECURITIES-BORROWED> 36,287
<INSTRUMENTS-OWNED> 116,698
<PP&E> 1,857
<TOTAL-ASSETS> 268,036
<SHORT-TERM> 50,417
<PAYABLES> 20,774
<REPOS-SOLD> 68,058
<SECURITIES-LOANED> 7,014
<INSTRUMENTS-SOLD> 59,413
<LONG-TERM> 33,963
0
425
<COMMON> 630
<OTHER-SE> 6,213
<TOTAL-LIABILITY-AND-EQUITY> 268,036<F1>
<TRADING-REVENUE> 2,215
<INTEREST-DIVIDENDS> 8,178
<COMMISSIONS> 2,193
<INVESTMENT-BANKING-REVENUES> 1,233
<FEE-REVENUE> 1,316
<INTEREST-EXPENSE> 7,654
<COMPENSATION> 3,991
<INCOME-PRETAX> 1,551
<INCOME-PRE-EXTRAORDINARY> 947
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 947
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.40
<FN>
<F1>Includes $627 in Preferred Securities Issued by Subsidiaries.
</FN>
</TABLE>