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 SEPTEMBER 26, 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.
333,155,321 shares of Common Stock
(as of the close of business on October 31, 1997)
<PAGE>
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------
SEPT. 26, SEPT. 27, PERCENT(1)
(Dollars in Millions, Except Per Share Amounts) 1997 1996 INCREASE
------ ------ ----------
REVENUES
Commissions ................................... $1,244 $ 860 44.7%
Interest and dividends ........................ 4,397 3,357 31.0
Principal transactions ........................ 951 818 16.2
Investment banking ............................ 691 471 46.7
Asset management and portfolio
service fees ................................. 722 570 26.6
Other ......................................... 141 125 13.0
------ ------ -------
Total Revenues ................................ 8,146 6,201 31.4
Interest Expense ............................ 4,153 3,108 33.6
------ ------ -------
Net Revenues .................................. 3,993 3,093 29.1
------ ------ -------
NON-INTEREST EXPENSES
Compensation and benefits ..................... 2,008 1,612 24.6
Communications and equipment rental ........... 175 141 24.1
Occupancy ..................................... 124 116 6.6
Depreciation and amortization ................. 115 104 10.9
Professional fees ............................. 211 152 39.2
Advertising and market development ............ 145 125 15.9
Brokerage, clearing, and exchange fees ........ 137 103 32.9
Other ......................................... 307 218 40.5
------ ------ -------
Total Non-Interest Expenses ................... 3,222 2,571 25.3
------ ------ -------
EARNINGS BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES ....................... 771 522 47.7
Income Tax Expense ............................ 266 191 38.8
Dividends on Preferred Securities
Issued by Subsidiaries ....................... 12 -- N/M
------ ------ -------
NET EARNINGS .................................. $ 493 $ 331 49.0%
====== ====== =======
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS .......................... $ 484 $ 319 51.4%
====== ====== =======
EARNINGS PER COMMON SHARE (2):
Primary ..................................... $ 1.25 $ 0.84
====== ======
Fully diluted ............................... $ 1.24 $ 0.84
====== ======
DIVIDEND PAID PER COMMON SHARE (2) ............ $ .20 $ .15
====== ======
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE (2):
Primary ..................................... 387.6 378.4
====== ======
Fully diluted ............................... 389.7 381.3
====== ======
(1) Percentages are based on actual numbers before rounding.
(2) 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 Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
FOR THE NINE MONTHS ENDED
------------------------------
SEPT. 26, SEPT. 27, PERCENT(1)
(Dollars in Millions, Except Per Share Amounts) 1997 1996 INCREASE
------- ------- ---------
REVENUES
Commissions .................................... $ 3,437 $ 2,819 21.9%
Interest and dividends ......................... 12,575 9,407 33.7
Principal transactions ......................... 3,166 2,709 16.8
Investment banking ............................. 1,924 1,428 34.7
Asset management and portfolio
service fees .................................. 2,038 1,661 22.7
Other .......................................... 468 386 21.4
------- ------- -------
Total Revenues ................................. 23,608 18,410 28.2
Interest Expense ............................. 11,807 8,675 36.1
------- ------- -------
Net Revenues ................................... 11,801 9,735 21.2
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits ...................... 6,000 5,044 19.0
Communications and equipment rental ............ 503 409 23.1
Occupancy ...................................... 368 345 6.7
Depreciation and amortization .................. 328 300 9.3
Professional fees .............................. 606 422 43.5
Advertising and market development ............. 445 364 22.3
Brokerage, clearing, and exchange fees ......... 367 310 18.2
Other .......................................... 862 650 32.7
------- ------- -------
Total Non-Interest Expenses .................... 9,479 7,844 20.9
------- ------- -------
EARNINGS BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES ........................ 2,322 1,891 22.8
Income Tax Expense ............................. 847 717 18.0
Dividends on Preferred Securities
Issued by Subsidiaries ....................... 35 -- N/M
------- ------- -------
NET EARNINGS ................................... $ 1,440 $ 1,174 22.7%
======= ======= =======
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS ........................... $ 1,410 $ 1,139 23.8%
======= ======= =======
EARNINGS PER COMMON SHARE (2):
Primary ...................................... $ 3.66 $ 2.96
======= =======
Fully diluted ................................ $ 3.62 $ 2.95
======= =======
Dividends Paid Per Common Share (2) ............ $ .55 $ .43
======= =======
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE (2):
Primary ...................................... 385.4 385.3
======= =======
Fully diluted ................................ 389.5 386.5
======= =======
(1) Percentages are based on actual numbers before rounding.
(2) 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)
(Dollars in Millions, Except Per Share Amounts)
SEPT. 26, DEC. 27,
ASSETS 1997 1996
- ---------------------------------------------------------- -------- --------
CASH AND CASH EQUIVALENTS ................................ $ 4,559 $ 3,375
-------- --------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS ................ 10,606 5,628
-------- --------
MARKETABLE INVESTMENT SECURITIES ......................... 2,342 2,180
-------- --------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock ....................... 35,440 24,270
Contractual agreements ................................... 17,004 13,465
Equities and convertible debentures ...................... 24,974 13,153
U.S. Government and agencies ............................. 9,378 9,304
Non-U.S. governments and agencies ........................ 12,744 7,758
Mortgages, mortgage-backed, and asset-backed ............. 8,038 5,189
Money markets ............................................ 1,474 1,209
Municipals ............................................... 1,451 1,176
-------- --------
Total .................................................... 110,503 75,524
-------- --------
RESALE AGREEMENTS ........................................ 68,559 58,402
-------- --------
SECURITIES BORROWED ...................................... 36,252 24,692
-------- --------
RECEIVABLES
Customers (net of allowance for doubtful accounts of
$55 in 1997 and $39 in 1996) ............................ 25,263 18,309
Brokers and dealers ...................................... 7,404 6,205
Interest and other ....................................... 7,783 5,280
-------- --------
Total .................................................... 40,450 29,794
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES .................... 4,962 5,107
LOANS, NOTES, AND MORTGAGES (net of allowance for
loan losses of $124 in 1997 and $117 in 1996) ........... 4,454 3,334
OTHER INVESTMENTS ........................................ 1,600 1,125
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(net of accumulated depreciation and amortization
of $2,805 in 1997 and $2,523 in 1996) ................... 1,939 1,670
OTHER ASSETS ............................................. 2,204 2,185
-------- --------
TOTAL ASSETS ............................................. $288,430 $213,016
======== ========
See Notes to Consolidated Financial Statements
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions, Except Per Share Amounts)
LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, SEPT. 26, DEC. 27,
AND STOCKHOLDERS' EQUITY 1997 1996
- ---------------------------------------------------------- --------- --------
LIABILITIES
REPURCHASE AGREEMENTS .................................... $ 74,872 $ 62,669
--------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS ......... 58,240 39,333
--------- --------
TRADING LIABILITIES, AT FAIR VALUE
U.S. Government and agencies ............................. 15,694 13,965
Contractual agreements ................................... 13,815 11,221
Equities and convertible debentures ...................... 17,724 8,332
Non-U.S. governments and agencies ........................ 9,362 7,135
Corporate debt and preferred stock ....................... 6,675 2,762
Municipals ............................................... 129 130
--------- --------
Total .................................................... 63,399 43,545
--------- --------
CUSTOMERS ................................................ 14,818 11,758
INSURANCE ................................................ 4,807 5,010
BROKERS AND DEALERS ...................................... 6,375 3,407
OTHER LIABILITIES AND ACCRUED INTEREST ................... 17,497 13,973
LONG-TERM BORROWINGS ..................................... 39,998 26,102
--------- --------
TOTAL LIABILITIES ........................................ 280,006 205,797
--------- --------
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 .......................................... 1,031 989
Foreign currency translation adjustment .................. (39) 10
Net unrealized gains on investment securities
available-for-sale (net of applicable income tax
expense of $19 in 1997 and $5 in 1996) .................. 37 9
Retained earnings ........................................ 9,095 7,868
--------- --------
Subtotal ............................................ 10,754 9,506
Less:
Treasury stock, at cost:
1997 - 140,308,114 shares; 1996 - 141,411,196 shares 2,932 2,895
Unallocated ESOP reversion shares, at cost:
1996 - 3,077,556 shares ............................ -- 24
Employee stock transactions ............................. 450 314
--------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY ........................ 7,372 6,273
--------- --------
TOTAL STOCKHOLDERS' EQUITY ............................... 7,797 6,892
--------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY .................. $ 288,430 $213,016
========= ========
BOOK VALUE PER COMMON SHARE(1) ........................... $ 22.24 $ 19.19
========= ========
(1) 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 NINE MONTHS ENDED
-------------------------
(Dollars in Millions) SEPT. 26, SEPT. 27,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ...................................................... $ 1,440 $ 1,174
Noncash items included in earnings:
Depreciation and amortization .................................. 328 300
Policyholder reserves .......................................... 180 204
Other .......................................................... 1,038 519
(Increase) decrease in operating assets:
Trading assets ................................................. (34,824) (13,460)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations ...................... (4,978) 173
Securities borrowed ............................................ (11,560) (5,323)
Customers ...................................................... (6,969) (2,445)
Sales of trading investment securities ......................... 59 --
Purchases of trading investment securities ..................... (22) --
Other .......................................................... (5,345) 917
Increase (decrease) in operating liabilities:
Trading liabilities ............................................ 19,854 7,984
Customers ...................................................... 3,060 (1,301)
Insurance ...................................................... (372) (463)
Other .......................................................... 6,110 1,911
-------- --------
CASH USED FOR OPERATING ACTIVITIES ................................ (32,001) (9,810)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities .................... 2,330 2,205
Sales of available-for-sale securities ......................... 1,447 867
Purchases of available-for-sale securities ..................... (4,623) (2,973)
Maturities of held-to-maturity securities ...................... 868 638
Purchases of held-to-maturity securities ....................... (569) (353)
Other investments and other assets ............................. (392) (385)
Property, leasehold improvements, and equipment ................ (596) (323)
-------- --------
CASH USED FOR INVESTING ACTIVITIES ................................ (1,535) (324)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements ................ 2,045 (3,310)
Commercial paper and other short-term borrowings ............... 18,907 7,153
Issuance and resale of long-term borrowings .................... 19,768 11,992
Settlement and repurchase of long-term borrowings .............. (5,516) (5,046)
Issuance of subsidiaries' preferred securities ................. 300 --
Redemption of remarketed preferred stock ....................... (194) --
Common stock transactions ...................................... (377) (729)
Dividends ...................................................... (213) (182)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES ............................. 34,720 9,878
-------- --------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ................... 1,184 (256)
Cash and cash equivalents, beginning of year ...................... 3,375 3,091
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD .......................... $ 4,559 $ 2,835
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes totaled $621 in 1997 and $867 in 1996.
Interest totaled $10,576 in 1997 and $8,387 in 1996.
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 26, 1997
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Merrill Lynch &
Co., Inc. (the "Parent 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
nine-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 $4 billion at the end of the 1997 third 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.
Diluted EPS includes incremental shares.
Presented below is basic and diluted EPS under SFAS No. 128, compared with
primary and fully diluted EPS:
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
-------- -------- -------- --------
Pro Forma SFAS No. 128:
Basic $1.46 $0.95 $4.26 $3.34
Diluted 1.25 0.84 3.66 2.97
As Currently Reported:
Primary 1.25 0.84 3.66 2.96
Fully diluted 1.24 0.84 3.62 2.95
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings at September 26, 1997 and
December 27, 1996 are presented below:
Sept. 26, Dec. 27,
1997 1996
------- -------
Commercial paper $34,777 $23,558
Demand and time deposits 9,340 9,311
Securities loaned 7,905 2,751
Bank loans and other 6,218 3,713
------- -------
Total $58,240 $39,333
======= =======
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
On February 6, 1997, Merrill Lynch Preferred Capital Trust II (the "Trust"), a
subsidiary of the Parent 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 the Parent Company. The assets of the partnership
consist primarily of debt securities of the Parent Company and one of its
subsidiaries. The Parent 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")
The Parent Company 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. 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>
(in billions) Interest Equity Commodity
Rate Currency Price Price
Risk (1)(2) Risk (3) Risk Risk
----------- -------- ------ ---------
September 26, 1997
- ------------------
Swap agreements $1,296 $147 $12 $ 2
Forward contracts 40 197 1 16
Futures contracts 197 2 16 3
Options purchased 96 72 32 3
Options written 117 67 38 3
December 27, 1996
- -----------------
Swap agreements $1,212 $140 $13 $ 3
Forward contracts 24 147 1 17
Futures contracts 126 2 7 5
Options purchased 85 76 21 3
Options written 118 72 31 3
(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) Sept. 26, 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 September 26, 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 Parent Company, is subject to the net
capital requirements of Rule 15c3-1 of the Securities Exchange Act of 1934.
Under the alternative method permitted by this rule, the minimum required net
capital, as defined, shall not be less than 2% of aggregate debit items arising
from customer transactions. At September 26, 1997, MLPF&S's
10
<PAGE>
regulatory net capital of $1,529 was 8% of aggregate debit items, and its
regulatory net capital in excess of the minimum required was $1,149.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities and a subsidiary of the Parent 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 September 26,
1997, MLGSI's liquid capital of $1,308 was 233% of its total market and credit
risk, and liquid capital in excess of the minimum required was $633.
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. During 1997, MLI
became Merrill Lynch's primary dealer for global equity derivatives business. As
a result, at September 26, 1997, MLI's financial resources were $5,201, an
increase of $3,827 since year end, and exceeded the minimum requirement by
$1,195.
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 September 26, 1997,
MLCM's financial resources were $1,599, and exceeded the minimum requirement by
$1,363. Subsequent to quarter-end, MLI completed the purchase of the equity
derivatives business of MLCM.
INTEREST EXPENSE
Interest expense includes payments in lieu of dividends of $5.2 and $3.0 for the
third quarters of 1997 and 1996, respectively. For the nine-month periods ended
September 26, 1997 and September 27, 1996, payments in lieu of dividends were
$13.4 and $6.1, 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 Parent 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 Parent 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 Parent 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 September 26,
1997, and the related condensed statements of consolidated earnings for the
three- and nine-month periods ended September 26, 1997 and September 27, 1996
and consolidated cash flows for the nine-month periods ended September 26, 1997
and September 27, 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
November 7, 1997
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Merrill Lynch & Co., Inc. (the "Parent 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 in businesses such
as trading and brokerage. Revenues and net earnings may vary significantly from
period to period due to these unpredictable factors and the resulting market
volatility.
Global financial markets, generally strong during 1996, continued to perform
well throughout the first nine months of 1997. Increased industrywide revenues
from underwriting, trading, asset management, and merger and acquisition
services resulted from heightened issuer and investor demand and relatively low
interest rates. In late October, global equity markets, triggered by the decline
in the Hong Kong market and devaluations of certain Asian currencies,
experienced overall decreases and significant volatility. These events resulted
in the widening of credit spreads, particularly in emerging market and
investment grade debt instruments.
U.S. equity markets rose to record price levels in the 1997 third quarter.
Although the rate of advance for the Dow Jones Industrial Average ("DJIA")
slowed in the third quarter, the increase in price levels for small and
mid-capitalization issues was strong. The DJIA rose just 3.6% in the third
quarter, its third-worst quarterly performance since 1994 and well below the
10-year best of 16.5% recorded in the 1997 second quarter. In contrast, the
Nasdaq Composite Index was up 16.9% during the quarter and 37.4% from a year
ago.
U.S. bond prices increased during the third quarter of 1997 as long-term
interest rates were generally lower relative to both the 1997 second quarter and
the year-ago period. The decrease in interest rates was attributable to minimal
inflation despite strong economic growth and low unemployment.
Global equity markets rose on average approximately 17% during the first nine
months of 1997, as measured by the Dow Jones World Index. Most European markets
advanced during the 1997 third quarter due in part to low interest rates, while
the Japanese market and most of Asia's smaller markets decreased due to
prospects of slower growth and significant currency fluctuations. For the nine
months of 1997, equity prices in many countries, when measured in local currency
terms, were up more than U.S. equity prices; however, in U.S. dollar terms, only
a few of these increases exceeded the U.S. advance due to the overall
strengthening of the U.S. dollar versus many local currencies.
Global underwriting volume in the 1997 third quarter was up compared to a year
ago, resulting in a record number of stock and bond issuances and record
proceeds from those offerings. The third quarter increase was fueled by
declining interest rates and a steady flow of cash into mutual funds.
13
<PAGE>
Strategic services activities remained strong during the 1997 third quarter,
reflecting a continuation of the high level of merger and acquisition activity
experienced throughout the first half of the year. Driven by globalization and
consolidation within various industries, as well as other competitive and
economic factors, companies continued to seek strategic alliances to increase
earnings growth and expand into new markets and businesses.
Due to the volatility of the financial services industry, Merrill Lynch
continually evaluates its businesses across varying market conditions 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.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(in millions, For the Three Months Ended Increase/(Decrease)
except per share ------------------------------- 3Q97 Versus
amounts) Sept. 26, June 27, Sept. 27, -------------------
1997 1997 1996 2Q97 3Q96
--------- -------- --------- ---- ----
<S> <C> <C> <C> <C> <C>
Total revenues $8,146 $8,011 $6,201 1.7% 31.4%
Net revenues 3,993 3,967 3,093 0.7 29.1
Pretax earnings 771 784 522 (1.7) 47.7
Net earnings 493 481 331 2.4 49.0
Net earnings applicable
to common stockholders 484 472 319 2.5 51.4
Earnings per common share (1):
Primary 1.25 1.24 0.84 0.8 48.8
Fully diluted 1.24 1.23 0.84 0.8 47.6
Return on average common
stockholders' equity 27.3% 28.5% 21.5%
Effective tax rate 34.4% 37.0% 36.6%
</TABLE>
"(1) 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 third quarters
of 1997 and 1996 and presents additional information on the comparison between
the respective nine-month periods, where appropriate.
Merrill Lynch's net earnings were a record $493 million in third quarter 1997,
up 49% from $331 million in third quarter 1996. Record revenues were achieved in
commissions, investment banking, and asset management and portfolio service
fees. Increases in revenues were partially offset by higher costs, particularly
variable compensation associated with increased production and profitability,
technology-related expenses, and provisions for various business activities and
legal matters.
Despite significant revenue growth in the U.S., non-U.S. net revenues continued
to increase to approximately 25% of Merrill Lynch's total net revenues in the
1997 third quarter, compared with approximately 22% in the 1996 third quarter.
This advance is driven by Merrill Lynch's continued global growth initiatives.
14
<PAGE>
For the 1997 nine months, net earnings were a record $1.4 billion, up 23% from
the previous record of $1.2 billion in the corresponding 1996 period.
Year-to-date earnings per common share were $3.66 primary and $3.62 fully
diluted, compared with $2.96 primary and $2.95 fully diluted for the 1996
period, as restated for the common stock split in 1997. Annualized return on
average common equity was 28.0% for the 1997 nine months versus 26.3% in the
prior year period.
Commissions revenues are summarized as follows:
Three Months Ended Nine Months Ended
-------------------------- ----------------------------
(in millions) Sept. 26, Sept. 27, % Sept. 26, Sept. 27, %
1997 1996 Inc. 1997 1996 Inc.
--------- --------- ---- --------- --------- ----
Listed and
over-the-counter $ 690 $444 56% $1,920 $1,508 27%
Mutual funds 392 285 37 1,057 894 18
Other 162 131 24 460 417 10
------ ---- ------ ------
Total $1,244 $860 45 $3,437 $2,819 22
====== ==== ====== ======
Commissions revenues from listed and over-the-counter securities increased as a
result of higher trading volume on many global exchanges. Mutual fund
commissions revenues rose due to higher distribution fees, primarily related to
prior period sales, and strong quarterly sales of U.S. funds.
Significant components of interest and dividend revenues and interest expense
follow:
Three Months Ended Nine Months Ended
--------------------- ----------------------
(in millions) Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
--------- --------- --------- ---------
Interest and dividend
revenues:
Trading assets $1,344 $1,096 $ 3,900 $3,040
Resale agreements 1,191 756 3,276 2,160
Securities borrowed 820 778 2,583 2,098
Margin lending 596 379 1,554 1,120
Other 446 348 1,262 989
------ ------ ------- ------
Total 4,397 3,357 12,575 9,407
------ ------ ------- ------
Interest expense:
Borrowings 1,640 1,312 4,854 3,559
Repurchase agreements 1,409 915 3,774 2,617
Trading liabilities 753 656 2,243 1,788
Other 351 225 936 711
------ ------ ------- ------
Total 4,153 3,108 11,807 8,675
------ ------ ------- ------
Net interest and
dividend profit $ 244 $ 249 $ 768 $ 732
====== ====== ======= ======
Net interest and dividend profit decreased 2% from the 1996 third 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 $14 million and $15 million for the 1997 three- and nine-month
15
<PAGE>
periods, respectively, and approximately $(17) million and $(62) million for the
1996 three- and nine-month periods, respectively.
Principal transactions revenues were up 16% from the 1996 third quarter to $951
million due to higher trading revenues from interest rate and currency swaps,
equities and equity derivatives, high yield debt and corporate bonds, and
foreign exchange instruments, partially offset by lower revenues from many fixed
income products and municipal securities and a modest loss in mortgage-backed
products.
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.
Principal Net Interest Net
(in millions) Transactions Revenue Trading
Revenues (Expense) Revenue
-------------- ------------- --------------
1997 1996 1997 1996 1997 1996
------ ------ ----- ----- ------ ------
Three Months
- ------------
Equities and equity
derivatives $ 303 $ 236 $ (16) $ (1) $ 287 $ 235
Taxable fixed-income 216 262 43 68 259 330
Interest rate and
currency swaps 296 193 (53) (21) 243 172
Municipals 73 89 4 5 77 94
Foreign exchange and
commodities 63 38 -- (3) 63 35
------ ------ ----- ----- ------ ------
Total $ 951 $ 818 $ (22) $ 48 $ 929 $ 866
====== ====== ===== ===== ====== ======
Nine Months
- -----------
Equities and equity
derivatives $1,010 $ 874 $ (55) $ (55) $ 955 $ 819
Taxable fixed-income 883 771 196 194 1,079 965
Interest rate and
currency swaps 894 698 (125) (57) 769 641
Municipals 239 257 11 8 250 265
Foreign exchange and
commodities 140 109 2 (12) 142 97
------ ------ ----- ----- ------ ------
Total $3,166 $2,709 $ 29 $ 78 $3,195 $2,787
====== ====== ===== ===== ====== ======
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 $303 million, up 28% from
the 1996 third quarter due to higher revenues from U.S. equities and convertible
securities, partially offset by a decline in non-U.S. equities trading revenues.
The increase in U.S. equities revenues was attributable to higher volume from
market-making activity.
Taxable fixed-income trading revenues were $216 million, down 18% from the 1996
third quarter. Lower trading revenues from non-U.S. governments and agencies
securities and the loss in mortgage-backed products were partially offset by
increased revenues from high yield debt and corporate bonds. Trading revenues
from non-U.S. governments and agencies securities were lower primarily due to
weak economic conditions resulting from volatility in many emerging markets. The
loss in trading revenues from mortgage-backed products resulted from a less
favorable market environment compared to the year-ago period. Nevertheless, net
trading results from mortgage-backed products, which include net interest
revenues, were positive. The increase in trading revenues from high yield debt
and corporate bonds was attributable to investors seeking higher yielding
instruments as government and sovereign interest rates generally remained low.
Interest rate and currency swap trading revenues rose 53% to $296 million,
primarily due to higher revenues from emerging market-related derivatives,
improved customer demand from market volatility, and increased activity in
credit derivatives. Municipal securities trading revenues were down 18% to $73
million due to lower margins on sales of shorter term instruments. Foreign
exchange and commodities trading revenues were up 69% to $63 million,
attributable mainly to fluctuations in the U.S. dollar versus the German mark
and the Japanese yen.
A summary of Merrill Lynch's investment banking revenues follows:
Three Months Ended Nine Months Ended
-------------------------- ----------------------------
(in millions) Sept. 26, Sept. 27, % Sept. 26, Sept. 27, %
1997 1996 Inc. 1997 1996 Inc.
--------- --------- ---- --------- --------- ----
Underwriting $442 $346 28% $1,345 $1,108 21%
Strategic services 249 125 100 579 320 81
---- ---- ------ ------
Total $691 $471 47 $1,924 $1,428 35
==== ==== ====== ======
Underwriting revenues were up from 1996 third quarter levels due to increased
issuances in most security categories, particularly high-yield debt. Merrill
Lynch's underwriting market share information follows:
Three Months Ended
---------------------------------------------
September 26, 1997 September 27, 1996
------------------ ------------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
U.S. PROCEEDS
Debt 16.1% 1 14.6% 1
Equity 14.3 2 23.0 1
Debt and Equity 15.9 1 16.2 1
GLOBAL PROCEEDS
Debt 13.4 1 12.3 1
Equity 13.3 2 19.9 1
Debt and Equity 13.4 1 13.5 1
"Source: Securities Data Co. ("SDC") statistics based on full credit to book
manager."
17
<PAGE>
Strategic services revenues advanced to a record $249 million, benefiting from
strong merger and acquisition activity industrywide and significant gains in
market share of completed transactions from a year ago. Merrill Lynch's merger
and acquisition market share information based on transaction value follows:
Three Months Ended
---------------------------------------------
September 26, 1997 September 27, 1996
------------------ ------------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
COMPLETED
TRANSACTIONS
U.S. 40.2% 1 26.7% 2
Global 26.9 1 16.8 3
ANNOUNCED
TRANSACTIONS
U.S. 24.0 1 20.3 3
Global 15.1 4 14.9 3
"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:
Three Months Ended Nine Months Ended
-------------------------- ----------------------------
(in millions) Sept. 26, Sept. 27, % Sept. 26, Sept. 27, %
1997 1996 Inc. 1997 1996 Inc.
--------- --------- ---- --------- --------- ----
Asset management fees $312 $247 26% $ 887 $ 731 21%
Portfolio service fees 219 157 40 586 445 32
Account fees 102 90 13 313 286 9
Other fees 89 76 18 252 199 27
---- ---- ------ ------
Total $722 $570 27 $2,038 $1,661 23
==== ==== ====== ======
Total assets in worldwide client accounts reached an industry record $1.018
trillion at quarter end. Major components of the change in client assets and
assets under management follow:
Net Changes due to
----------------------
(in billions) Sept. 27, New Asset Sept. 26,
1996 Money(1) Appreciation 1997
-------- -------- ------------ --------
Assets in client accounts $779 $101(2) $138 $1,018
Assets under management 213 32 27 272
"(1) Includes $10 billion of assets related to the 1996 fourth quarter
acquisition of Hotchkis and Wiley, a Los Angeles-based asset management
company."
"(2) Includes $16.5 billion of assets related to the 1997 third quarter
acquisition of MasterWorks, a 401(k) service provider."
18
<PAGE>
Asset management fees, which include primarily fees earned on mutual funds
sponsored by Merrill Lynch, increased due to net asset appreciation and strong
inflows of client assets. Portfolio service fees benefited from the increase in
the number of accounts and asset levels from asset-based fee products, primarily
Merrill Lynch Consults(Registered Trademark), Mutual Fund Advisor(Service Mark),
and Asset Power(Registered Trademark). Account fees rose due to an increase in
the number of customer and custodial accounts. Other fee-based revenues were up
due primarily to higher revenues from transfer agency activities.
Other revenues were $141 million, up 13% from $125 million in the 1996 third
quarter.
Merrill Lynch's non-interest expenses are summarized below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
(in millions) Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Compensation and benefits $2,008 $1,612 $6,000 $5,044
------ ------ ------ ------
Non-interest expenses,
excluding compensation and
benefits:
Communications and
equipment rental 175 141 503 409
Occupancy 124 116 368 345
Depreciation and amortization 115 104 328 300
Professional fees 211 152 606 422
Advertising and market
development 145 125 445 364
Brokerage, clearing, and
exchange fees 137 103 367 310
Other 307 218 862 650
------ ------ ------ ------
Total non-interest expenses,
excluding compensation
and benefits 1,214 959 3,479 2,800
------ ------ ------ ------
Total non-interest expenses $3,222 $2,571 $9,479 $7,844
====== ====== ====== ======
Compensation and benefits
as a percentage of net revenues 50.3% 52.1% 50.8% 51.8%
Compensation and benefits as a
percentage of pretax earnings
before compensation and benefits 72.3% 75.5% 72.1% 72.7%
</TABLE>
Non-interest expenses were up 25% from the 1996 third quarter. The largest
expense category, compensation and benefits expense, rose 25% from the 1996
third quarter due to higher production-related and incentive compensation and
increased headcount. Production-related compensation was up due to strong
business volume, while incentive compensation rose as a result of increased
profitability. In addition, approximately 5,400 employees were added since the
end of the 1996 third quarter, resulting in total employees of approximately
54,200 at the end of the 1997 third quarter. Hirings of technical and other
support personnel, together with headcount added by business acquisitions, were
responsible for approximately 72% of the increase. The ratio of support
employees and sales assistants to producers
19
<PAGE>
increased from 1.48 at third quarter-end 1996 to 1.53 at third quarter-end 1997.
Communications and equipment rental expense rose 24% to $175 million. Expanded
use of market data services, increased business volume, and higher technology
maintenance costs contributed to the increase. Other facilities-related costs,
which include occupancy and depreciation and amortization, rose 9% in the
aggregate to $239 million as continued global expansion led to higher costs.
Professional fees were up 39% to $211 million, principally attributable to
higher systems and management consulting costs related to various technology
projects. Advertising and market development expense rose 16% primarily as a
result of increased global travel and client promotion costs. Brokerage,
clearing, and exchange fees increased 33% due to higher global securities
trading volume. Other expenses were up 40% as a result of increases in
provisions related to various business activities and legal matters.
Income tax expense was $266 million in the 1997 third quarter. The effective tax
rate declined to 34.4% in the 1997 third quarter, compared with 36.6% in the
year-ago period, as a result of reductions in state and local taxes arising from
the settlement of many prior year tax audits.
LIQUIDITY AND LIABILITY MANAGEMENT
The primary objective of Merrill Lynch's funding policies is to assure liquidity
at all times. Merrill Lynch's liquidity management strategy has three key
components: (i) to maintain alternative funding sources such that all debt
obligations maturing within one year can be funded when due without issuing new
unsecured debt or liquidating any business assets; (ii) to concentrate
unsecured, general purpose borrowings at the Parent Company level; and (iii) to
expand and diversify Merrill Lynch's funding programs.
Merrill Lynch's primary alternative funding sources to unsecured borrowings are
repurchase agreements and secured bank loans, which require pledging
unhypothecated marketable securities. Other funding alternatives include
liquidating cash equivalents; securitizing loan assets; and drawing on
committed, unsecured bank credit facilities, which at September 26, 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 its bank
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 September 26, 1997, substantially all of Merrill
Lynch's assets were considered readily marketable by management.
Merrill Lynch concentrates its unsecured, general purpose borrowings at the
Parent Company level, except where tax regulations, time zone differences, or
other business considerations make this impractical. The benefits of this
strategy are enhanced control, reduced financing costs, wider name recognition
by creditors of Merrill Lynch, and flexibility to meet variable funding
requirements of subsidiaries.
20
<PAGE>
Finally, Merrill Lynch strives to expand and diversify its funding programs and
investor and creditor base. Merrill Lynch benefits by distributing its debt
through its own sales force to a large, diversified customer base. Additionally,
Merrill Lynch maintains strict concentration standards for short-term
borrowings, including limits for any single investor.
Commercial paper is the major source of short-term general purpose funding.
Commercial paper outstanding totaled $34.8 billion at September 26, 1997 and
$23.6 billion at December 27, 1996, which was equal to 12% and 11% of total
assets at third quarter-end 1997 and year-end 1996, respectively.
Outstanding long-term debt at September 26, 1997 increased to $40.0 billion from
$26.1 billion at year-end 1996.
At September 26, 1997, Merrill Lynch's senior long-term debt, preferred stock,
and trust-originated preferred securities were rated by recognized credit rating
agencies, as follows:
Preferred Stock
and
Senior Trust-Originated
Debt Preferred Security
Rating Agency Rating Ratings
------------- ------ ------------------
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 nine months of 1997, the Parent Company issued $18.7 billion in
long-term debt. During the same period, maturities and repurchases were $4.6
billion. In addition, approximately $1.1 billion of the Parent Company's
long-term debt securities held by subsidiaries were sold and $0.9 billion were
purchased. At September 26, 1997, $29 billion of term debt had maturity dates
beyond one year.
Approximately $77.4 billion of the Parent Company's indebtedness at September
26, 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 September 26, 1997, approximately 84% of invested assets of
insurance subsidiaries were considered liquid by management.
21
<PAGE>
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 $7.4 billion in common equity
and $425 million in preferred stock at September 26, 1997. During the first
quarter of 1997, the Parent Company redeemed all of its $194 million Remarketed
Preferred(Service Mark) stock, Series C shares, and a subsidiary of the Parent
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 strengthen Merrill Lynch's equity capital base.
Merrill Lynch's leverage ratios were as follows:
Adjusted
Leverage Leverage
Ratio(1) Ratio(2)
-------- --------
Period-end
September 26, 1997 34.2x 21.8x
December 27, 1996 29.5x 18.0x
Average (3)
Nine months ended September 26, 1997 35.5x 21.3x
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 repurchased 0.4 and 13.6 million shares of Parent Company common
stock for the 1997 three- and nine-month periods, respectively, and 9.1 and 30.3
million shares for the corresponding 1996 periods. Remaining authority to
repurchase shares under the share repurchase program is 10.0 million shares.
Merrill Lynch will continue to manage share repurchases, taking into account
capital needs and the effect of employee stock issuances.
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.
22
<PAGE>
CAPITAL PROJECTS AND EXPENDITURES
Merrill Lynch continually prepares for the future by expanding its operations
and investing in new technology to improve service to 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. Subsequent to quarter end, Merrill Lynch
approved a plan to construct an office complex in central New Jersey to
consolidate operations. Construction costs are estimated at approximately $325
million, and completion of this facility is anticipated in 2000.
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 $340
million. The Year 2000 systems modifications are anticipated to be completed in
early 1999. Based on information currently available, the remaining costs are
estimated at $175 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 nine months of 1997, average daily assets were $277 billion, up
17% from $237 billion for the 1996 fourth quarter. Average daily liabilities
rose 17% to $269 billion from $230 billion for the 1996 fourth quarter. The
major components in the growth of average daily assets and liabilities for the
first nine months of 1997 are summarized as follows:
(in millions) Increase in Percent
Average Assets Increase
-------------- --------
Trading assets $22,129 27%
Resale agreements and
securities borrowed 10,983 11
Customer receivables 2,512 10
Increase in Percent
Average Liabilities Increase
------------------- --------
Repurchase agreements and
securities loaned $12,219 14%
Trading liabilities 10,960 23
Long-term borrowings 7,419 29
Commercial paper and other
short-term borrowings 5,421 14
23
<PAGE>
Due to the adoption of SFAS No. 125, average balances of trading assets and
repurchase agreements increased by approximately $2.4 billion (for more
information on SFAS No. 125, see "Accounting Change" section in Notes to the
Consolidated Financial Statements - Unaudited). In addition, during the first
nine months 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. Customer receivables were also up
as a result of higher secured lending in the form of margin and other
collateralized loans.
Assets are funded through diversified sources that 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 non-U.S.
securities. Non-investment grade holdings are 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
derivative contracts from non-investment grade counterparties, and other
financial 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.
24
<PAGE>
A summary of positions with non-investment grade issuers (for cash instruments)
or counterparties (for derivatives in a gain position) follows:
(in millions) Sept. 26, Dec. 27,
1997 1996
--------- --------
Trading assets:
Cash instruments $13,053 $7,585
Derivatives(1) 2,363 2,470
Trading liabilities - cash instruments 2,424 905
Insurance subsidiaries' investments 236 206
(1) Collateral of $467 and $848 was held at September 26, 1997 and year-end
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
September 26, 1997, the carrying value of such instruments totaled $125 million,
of which 53% 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 $532 million and $351 million at September 26, 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 require
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.
A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
(in millions) Sept. 26, Dec. 27,
1997 1996
--------- --------
Derivative fair values:
Trading assets(1) $ 25 $ 63
Trading liabilities 222 64
Derivative notionals (off-balance-sheet)(2) 3,124 2,895
(1) Included in these amounts are $7 and $9 at September 26, 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.
25
<PAGE>
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) Sept. 26, Dec. 27,
1997 1996
-------- -------
Trading assets - cash instruments $ 380 $ 905
Derivative notionals (off-balance-sheet)(1) 3,692 1,311
(1) Calculated as notional subject to strike or reference price.
At September 26, 1997, the largest non-investment grade concentration consisted
of various sovereign and corporate issues of a South American country totaling
$2.4 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.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
A summary of loans, investments, and commitments related to highly leveraged
transactions follows:
(in millions) Sept. 26, Dec. 27,
1997 1996
-------- -------
Loans (net of allowance for loan losses)(1) $392 $340
Equity investments(2) 164 113
Partnership interests 98 104
Bridge loan 30 31
Additional commitments to invest in partnerships 64 82
Unutilized revolving lines of credit and other
lending commitments 265 301
(1) Represented outstanding loans to 39 and 36 companies at September 26, 1997
and year-end 1996, respectively.
(2) Invested in 59 and 48 enterprises at September 26, 1997 and year-end 1996,
respectively.
At September 26, 1997, no one industry sector accounted for more than 26% 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>
3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
1996 1996 1997 1997 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLIENT ACCOUNTS
(IN BILLIONS):
Assets in U.S. Client Accounts $ 735 $ 792 $ 818 $ 886 $ 960
Assets in Non-U.S.
Client Accounts 44 47 50 54 58
-------- -------- -------- -------- --------
Total Assets in Client Accounts $ 779 $ 839 $ 868 $ 940 $ 1,018
======== ======== ======== ======== ========
Assets Under Management:
Money Market $ 86 $ 90 $ 99 $ 98 $ 105
Equity 54 59 62 68 73
Fixed-Income 42 43 43 45 46
Private Portfolio 27 38 40 43 45
Insurance 4 4 3 3 3
-------- -------- -------- -------- --------
Total Assets Under Management $ 213 $ 234 $ 247 $ 257 $ 272
======== ======== ======== ======== ========
ML Consults(Registered Trademark) $ 20 $ 21 $ 21 $ 24 $ 26
Mutual Fund Advisor(Service
Mark) and Asset
Power(Registered Trademark) $ 8 $ 9 $ 10 $ 13 $ 15
401(k) Assets $ 41 $ 45 $ 47 $ 51 $ 71
UNDERWRITING
(DOLLARS IN BILLIONS)(A):
Global Debt and Equity:
Volume $ 44 $ 50 $ 57 $ 61 $ 65
Market Share 13.5% 13.0% 13.0% 13.0% 13.4%
U.S. Debt and Equity:
Volume $ 35 $ 43 $ 47 $ 49 $ 57
Market Share 16.2% 16.3% 15.9% 15.8% 15.9%
- ---------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S 41,400 42,200 42,900 43,600 44,900
Non-U.S 7,400 7,600 8,400 8,800 9,300
-------- -------- -------- -------- --------
TOTAL 48,800 49,800 51,300 52,400 54,200
======== ======== ======== ======== ========
Financial Consultants and
Account Executives Worldwide 14,300 14,400 14,600 14,800 15,200
Support Personnel to
Producer ratio (B) 1.48 1.51 1.52 1.54 1.53
INCOME STATEMENT:
Net Earnings (in millions) $ 331 $ 445 $ 465 $ 481 $ 493
Annualized Return on Average
Common Stockholders' Equity 21.5% 28.5% 28.3% 28.5% 27.3%
Earnings per Common Share(C):
Primary $ .84 $ 1.14 $ 1.17 $ 1.24 $ 1.25
Fully Diluted $ .84 $ 1.14 $ 1.17 $ 1.23 $ 1.24
BALANCE SHEET (IN MILLIONS):
Total Assets $207,911 $213,016 $247,603 $268,036 $288,430
Total Stockholders' Equity $ 6,618 $ 6,892 $ 6,925 $ 7,268 $ 7,797
SHARE INFORMATION
(IN THOUSANDS)(C):
Weighted Average Shares
Outstanding:
Primary 378,420 378,889 389,067 379,429 387,643
Fully Diluted 381,268 381,405 389,067 384,450 389,736
Common Shares Outstanding (D) 331,258 328,172 330,921 329,048 332,352
Shares Repurchased 9,104 6,848 7,538 5,632 433
- ---------------------------------------------------------------------------------------
</TABLE>
(A) Full credit to book manager. Market share data derived from Securities
Data Co.
(B) Support personnel includes sales assistants.
(C) 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.
(D) Does not include 4,187, 3,078 and 936 unallocated reversion shares held in
the Employee Stock Ownership Plan at September 27, 1996, December 27,
1996, and March 28, 1997, respectively, which are not considered
outstanding for accounting purposes. As of June 27, 1997, these shares had
been fully allocated.
27
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Since the filing of Merrill Lynch's 1996 10-K and Merrill Lynch's Quarterly
Report on Form 10-Q for the quarter ended June 27, 1997 (the "Second 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.
NASDAQ Antitrust Litigation. On June 30 and August 27, 1997, plaintiffs in the
class action filed in connection with the NASDAQ Antitrust Litigation filed
motions seeking court approval of settlements totaling nearly $100 million
entered into by plaintiffs and certain of the defendants in this action. On
October 14, 1997, the court approved those settlements. The settling defendants
do not include MLPF&S, a defendant in the action.
For more detailed information regarding litigation matters involving Merrill
Lynch, see "Item 3. - Legal Proceedings" in the 1996 10-K.
Item 5. Other Information
The 1998 Annual Meeting of Stockholders will be held at 10:00 a.m. on Tuesday,
April 14, 1998 at the Merrill Lynch & Co., Inc. Conference and Training Center,
800 Scudders Mill Road, Plainsboro, New Jersey. Any stockholder of record
entitled to vote generally for the election of directors may nominate one or
more persons for election as a director at such meeting only if proper written
notice of such stockholder's intent to make such nomination or nominations, in
accordance with the provisions of Merrill Lynch's Certificate of
Incorporation, has been given to the Secretary of Merrill Lynch, 100 Church
Street, 12th Floor, New York, New York 10080-6512, no earlier than January 29,
1998 and no later than February 23, 1998. In addition, in accordance with
provisions of Merrill Lynch's By-Laws, any stockholder intending to bring any
other business before the meeting must advise Merrill Lynch in writing of the
stockholder's intent to do so on or before February 23, 1997. In order to be
included in Merrill Lynch's proxy statement, stockholder proposals must be
submitted in writing to Merrill Lynch on or before November 10, 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, Merrill Lynch
hereby undertakes to furnish to the SEC, upon request,
copies of the instruments defining the rights of holders of
long-term debt securities of Merrill Lynch that authorize an
amount of securities constituting 10% or less of the total assets of
Merrill Lynch and its subsidiaries on a consolidated basis.
28
<PAGE>
(10)(i) Merrill Lynch & Co., Inc. 1998 Deferred Compensation Plan for
a Select Group of Eligible Employees
(10)(ii) Merrill Lynch & Co., Inc. Program for Deferral of Stock Option
Gains 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
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by Merrill Lynch
with the SEC during the quarterly period covered by this Report:
(i) Current Report dated July 16, 1997 for the purpose of filing Merrill
Lynch's Preliminary Unaudited Earnings Summary for the three-month
period ended June 27, 1997.
(ii) Current Report dated July 30, 1997 for the purpose of filing Merrill
Lynch's Preliminary Unaudited Consolidated Balance Sheet as of June
27, 1997.
(iii) Current Report dated August 1, 1997 for the purpose of filing the
form of Merrill Lynch's Major 8 European Index Market Index Target-
Term Securities due August 30, 2002.
(iv) Current Report dated August 1, 1997 for the purpose of filing the
form of Merrill Lynch's 6.55% Notes due August 1, 2004.
(v) Current Report dated September 24, 1997 for the purpose of filing
the form of Merrill Lynch's S&P 500 Inflation Adjusted Market Index
Target-Term Securities due September 24, 2007.
29
<PAGE>
INDEX TO EXHIBITS
Exhibits
10(i) Merrill Lynch & Co., Inc. 1998 Deferred Compensation Plan for a Select
Group of Eligible Employees
10(ii) Merrill Lynch & Co., Inc. Program for Deferral of Stock Option Gains 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>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-------------------------
(Registrant)
Date: November 7, 1997 By: /s/ Joseph T. Willett
------------------------------
Joseph T. Willett
Senior Vice President
Chief Financial Officer
30
Exhibit 10(i)
MERRILL LYNCH & CO., INC.
1998 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF AUGUST 22, 1997
<PAGE>
MERRILL LYNCH & CO., INC.
1998 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
Page
----
I. GENERAL ..............................................................1
1.1 Purpose and Intent ............................................1
1.2 Definitions ...................................................1
II. ELIGIBILITY ..........................................................4
2.1 Eligible Employees ............................................4
(a) General Rule ............................................4
(b) Individuals First Employed During Election
Year or Plan Year ....................................4
(c) Disqualifying Factors ...................................4
III. DEFERRAL ELECTIONS; ACCOUNTS .........................................4
3.1 Deferral Elections ............................................4
(a) Timing and Manner of Making of Elections ................4
(b) Irrevocability of Deferral Election .....................5
(c) Application of Election .................................5
3.2 Crediting to Accounts .........................................5
3.3 Minimum Requirements for Deferral .............................5
(a) Minimum Requirements ....................................5
(b) Failure to Meet Requirements ............................6
3.4 Benchmark Return Options; Adjustment of Accounts ..............6
(a) Selection of Benchmark Return Options ...................6
(b) Adjustment of Accounts ..................................6
(c) Annual Charge ...........................................7
3.5 Rescission of Deferral Election ...............................7
(a) Prior to December 1, 1997 ...............................7
(b) Adverse Tax Determination ...............................7
(c) Rescission For Amounts Not Yet Earned ...................7
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT ...............................8
4.1 No Trust or Fund Created; General Creditor Status .............8
4.2 Non-Assignability .............................................8
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans ......................................8
V. PAYMENT OF ACCOUNT ...................................................8
5.1 Manner of Payment .............................................8
(a) Regular Payment Elections ...............................8
(b) Modified Installment Payments ...........................9
5.2 Termination of Employment .....................................9
(a) Death or Retirement .....................................9
(b) Other Termination of Employment .........................10
(c) Leave of Absence, Transfer or Disability ................10
(d) Discretion to Alter Payment Date ........................10
-i-
<PAGE>
Page
----
5.3 Withholding of Taxes ..........................................10
5.4 Beneficiary ...................................................10
(a) Designation of Beneficiary ..............................10
(b) Change in Beneficiary ...................................10
(c) Default Beneficiary .....................................11
(d) If the Beneficiary Dies During Payment ..................11
5.5 Hardship Distributions ........................................11
5.6 Domestic Relations Orders .....................................11
VI. ADMINISTRATION OF THE PLAN ...........................................12
6.1 Powers of the Administrator ...................................12
6.2 Payments on Behalf of an Incompetent ..........................12
6.3 Corporate Books and Records Controlling .......................12
VII. MISCELLANEOUS PROVISIONS .............................................12
7.1 Litigation ....................................................12
7.2 Headings Are Not Controlling ..................................13
7.3 Governing Law .................................................13
7.4 Amendment and Termination .....................................13
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
1998 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
ARTICLE I
GENERAL
1.1 Purpose and Intent.
The purpose of the Plan is to encourage the employees who are integral to
the success of the business of the Company to continue their employment by
providing them with flexibility in meeting their future income needs. It is
intended that this Plan be unfunded and maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees within the meaning of Title I of ERISA, and all decisions
concerning who is to be considered a member of that select group and how this
Plan shall be administered and interpreted shall be consistent with this
intention.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"Account Balance" means, as of any date, the Deferred Amounts credited to
a Participant's Account, adjusted in accordance with Section 3.4 to reflect the
performance of the Participant's Selected Benchmark Return Options, the Annual
Charge and any payments made from the Account to the Participant prior to that
date.
"Account" means the reserve account established on the books and records
of ML & Co. for each Participant to record the Participant's interest under the
Plan.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation or estate planning and
business insurance specialist incentive compensation, in each case exclusive of
base salary, earned by a Participant during the Fiscal Year ending in 1998, and
payable after January 1, 1998, as a result of the Participant's production
credit level, or such other similar items of compensation as the Administrator
shall designate as "Adjusted Compensation" for purposes of this Plan.
"Administrator" means the Director of Human Resources of ML & Co., or his
functional successor, or any other person or committee designated as
Administrator of the Plan by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Annual Charge" means the charge to the Participant's Account provided for
in Section 3.4(c).
"Benchmark Return Options" means such Merrill Lynch mutual funds or other
investment vehicles as the Administrator may from time to time designate for the
purpose of indexing Accounts hereunder. In the event a Benchmark Return Option
ceases to exist or is no longer to
<PAGE>
be a Benchmark Return Option, the Administrator may designate a substitute
Benchmark Return Option for such discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation and/or Sign-On Bonus, or such other items or
items of compensation as the Administrator, in his sole discretion, may specify
in a particular instance.
"Deferral Percentage" means the percentage (which, unless the
Administrator, in his sole discretion, determines otherwise, shall be in whole
percentage increments and not more than 90%) specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Plan.
"Deferred Amounts" means, except as provided in Section 5.6, the amounts
of Compensation actually deferred by the Participant under this Plan.
"Election Year" means the 1997 calendar year.
"Eligible Compensation" means a Participant's "eligible compensation"
determined in the manner prescribed for ML & Co.'s Basic Group Life Insurance
Plan as of August 1, 1997.
"Eligible Employee" means an employee eligible to defer amounts under this
Plan, as determined under Section 2.1 hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiscal Month" means the monthly period used by ML & Co. for financial
accounting purposes.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"Full-Time Domestic Employee" means a full-time employee of the Company
paid from the Company's domestic based payroll (other than any U.S. citizen or
"green card" holder who is employed outside the United States).
"Full-Time Expatriate Employee" means a U.S. citizen or "green card"
holder employed by the Company outside the United States and selected by the
Administrator as eligible to participate in the Plan (subject to the other
eligibility criteria).
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Plan.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
<PAGE>
"ML & Co." means Merrill Lynch & Co., Inc.
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the Selected Benchmark Return Option for which the value is
to be determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. 1998 Deferred Compensation
Plan for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 1998.
"Remaining Deferred Amounts" means a Participant's Deferred Amounts times
a fraction equal to the number of remaining installment payments divided by the
total number of installment payments.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
"Selected Benchmark Return Option" means a Benchmark Return Option
selected by the Participant in accordance with Section 3.4.
"Sign-On Bonus" means a single-sum amount paid or payable to a new
Eligible Employee during the Plan Year upon commencement of employment, in
addition to base pay and other Compensation, to induce him or her to become an
employee of the Company, or any similar item of compensation as the
Administrator shall designate as "Sign-On Bonus" for purposes of this Plan.
"Variable Incentive Compensation" means the variable incentive
compensation or office manager incentive compensation that is paid in cash to
certain employees of the Company generally in January or February of the Plan
Year with respect to the prior Fiscal Year, which for purposes of this Plan is
considered earned during the Plan Year regardless of when it is actually paid to
the Participant, or such other similar items of compensation as the
Administrator shall designate as "Variable Incentive Compensation" for purposes
of this Plan.
"401(k) Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan.
<PAGE>
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
(a) General Rule. An individual is an Eligible Employee if he or she (i)
is a Full-Time Domestic Employee or a Full-Time Expatriate Employee, (ii) has at
least $200,000 of Eligible Compensation for the Election Year, (iii) has
attained at least the title of Vice President, Director or Managing Director, or
holds a National Sales Management position with the Company (a "National Sales
Manager"), and (iv) (A) is a financial consultant or an estate planning and
business insurance specialist, who was a member in 1997 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 an employee in the 2 Band or above,
or (F) is a producing employee in grade 95 or above; provided, that employees in
the 1 Band or above and producing employees in grade 97 or above (or their
executive equivalents) shall not be required to meet condition (ii) hereof, and
provided, further, that employees who were 1997 Win Smith Fellows shall not be
required to meet condition (iii) hereof.
(b) Individuals First Employed During Election Year or Plan Year. Subject
to the approval of the Administrator in his sole discretion, an individual who
is first employed by the Company during the Election Year or the Plan Year is an
Eligible Employee if his or her Eligible Compensation, together, if applicable,
with the amount of any Variable Incentive Compensation that will be payable to
such individual in the next annual bonus cycle pursuant to a written bonus
guarantee, 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
<PAGE>
received by the Administrator or such person as he may designate for the purpose
by no later than September 30 of the Election Year (or such later date at the
Administrator, in his sole discretion, may specify in any particular instance)
or, in the event such date is not a business day, the immediately preceding
business day; provided, however, that the Eligible Employee's election to defer
a Sign-On Bonus must be part of such Eligible Employee's terms and conditions of
employment agreed to prior to the Eligible Employee's first day of employment
with the Company.
(b) Irrevocability of Deferral Election. Except as provided in Sections
3.5 and 5.5, an election to defer the receipt of any Compensation made under
Section 3.1(a) is irrevocable once submitted to the Administrator or his
designee. The Administrator's acceptance of an election to defer Compensation
shall not, however, affect the contingent nature of such Compensation under the
plan or program under which such Compensation is payable.
(c) Application of Election. The Participant's Deferral Percentage will be
applied to each payment of Compensation to which the Participant's deferral
election applies, provided, that the aggregate of the Participant's Deferred
Amounts shall not exceed the Participant's Maximum Deferral. If a Participant
has made deferral elections with respect to more than one category of
Compensation, this Section 3.1(c) shall be applied separately with respect to
each such category.
3.2 Crediting to Accounts.
A Participant's Deferred Amounts will be credited to the Participant's
Account, as soon as practicable (but in no event later than the end of the
following month) after the last day of the Fiscal Month during which such
Deferred Amounts would, but for deferral, have been paid and will be accounted
for in accordance with Section 3.4. No interest will accrue, nor will any
adjustment be made to the Account, for the period until the Deferred Amounts are
credited.
3.3 Minimum Requirements for Deferral.
(a) Minimum Requirements. Notwithstanding any other provision of this
Plan, no deferral will be effected under this Plan with respect to a Participant
if:
(i) the Participant is not an Eligible Employee as of December 31,
1997,
(ii) the Participant's election as applied to the Participant's
Variable Incentive Compensation (determined by substituting
the Election Year for the Plan Year) or Adjusted Compensation
(determined by substituting the Fiscal Year immediately prior
to the Fiscal Year ending in the Election Year for the Fiscal
Year ending in the Plan Year) would have resulted in an annual
deferral of less than $15,000, or
(iii) the greater of (A) the sum of (1) the "Medicare wages" amount
listed on the Participant's W-2 form for the Plan Year and (2)
any Compensation that is accelerated which the Participant may
receive in December of the Election Year which would have been
payable in the Plan Year in the absence of the action of the
Company to accelerate the payment, and (B) the Participant's
Eligible Compensation for the Plan Year, is less than
$200,000;
<PAGE>
provided, that any Participant who first becomes an employee of the Company
during the Plan Year shall not be required to satisfy conditions (i) and (ii).
Condition (ii) shall not be construed to require a Participant's elections to
result in an actual deferral of at least $15,000.
(b) Failure to Meet Requirements. If the requirements of Section 3.3(a)(i)
or (ii) are not met by a Participant to whom such requirements are applicable,
such Participant's Deferred Amounts, if any, will be paid to such Participant,
without adjustment to reflect the performance of any Selected Benchmark Return
Option, as soon as practicable after it has been determined that the
requirements have not been met. If the requirements of Section 3.3(a)(iii) are
not met by a Participant, the greater of such Participant's Deferred Amounts or
Account Balance will be paid to such Participant as soon as practicable after it
has been determined that the requirements have not been met.
3.4 Benchmark Return Options; Adjustment of Accounts.
(a) Selection of Benchmark Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select one or
more Benchmark Return Options and the percentage of the Participant's Account to
be adjusted to reflect the performance of each Selected Benchmark Return Option.
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
on not more than twelve days in any calendar year), change the Selected
Benchmark Return Options to be applicable with respect to his or her Account.
(b) Adjustment of Accounts. While each Participant's Account does not
represent the Participant's ownership of, or any ownership interest in, any
particular assets, the Account shall be adjusted to reflect the investment
experience of the Participant's Selected Benchmark Return Options in the same
manner as if investments in accordance with the Participant's elections had
actually been made through the ML Benefit Services Platform and ML II Core
Recordkeeping System, or any successor system used for keeping records of
Participants' Accounts (the "ML II System"). In adjusting Accounts, the timing
of receipt of Participant instructions by the ML II System shall control the
timing and pricing of the notional investments in the Participant's Selected
Benchmark Return Options in accordance with the rules of operation of the ML II
System and its requirements for placing corresponding investment orders, as if
orders to make corresponding investments were actually to be made, except that
in connection with the crediting of Deferred Amounts to the Participant's
Account and distributions from the Account, appropriate deferral allocation
instructions shall be treated as received from the Participant prior to the
close of transactions through the ML II System on the relevant day. Each
Selected Benchmark Return Option shall be valued using the Net Asset Value of
the Selected Benchmark Return Option as of the relevant day; provided, that, in
valuing a Selected Benchmark Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions;
provided, further, that, if there are no such transactions effected through the
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such
security, or if such security is not traded on such principal
exchange on that day, the average of the high and low sales
prices
<PAGE>
on such exchange on the first day prior thereto on which such
security was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined
by the Administrator by whatever means he considers
appropriate in his sole discretion.
(c) Annual Charge. As of the last day of each Fiscal Year or such earlier
day in December as the Administrator shall determine, an Annual Charge of 2.0%
of the Participant's Deferred Amounts (exclusive of any appreciation or
depreciation determined under Section 3.4 (b)) shall be applied to reduce the
Account Balance (but not below zero). In the event that the Participant elects
to have the Account Balance paid in installments, this Annual Charge will be
charged on the Remaining Deferred Amounts after giving effect to the installment
payments. In the event that the Account Balance is paid out completely during a
Fiscal Year prior to the date that the Annual Charge is assessed, a pro rata
Annual Charge will be deducted from amounts to be paid to the Participant to
cover that fraction of the Fiscal Year that Deferred Amounts (or Remaining
Deferred Amounts in the case of installment payments) were maintained hereunder.
The Annual Charge shall be applied as a pro rata reduction of the portion of the
Account Balance indexed to each of the Participant's Selected Benchmark Return
Options. In applying the Annual Charge, the pricing principles set forth in
Section 3.4(b) will be followed.
3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1997. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1997, and (ii) if the Administrator, in his sole discretion and upon evidence of
such basis that he finds persuasive (including a material applicable change in
the Participant's U.S. Federal and/or foreign income tax rate during the period
between October 1, 1997 and November 30, 1997), agrees to the rescission of the
election. In the event the Administrator agrees to the rescission, the Deferred
Amounts, if any, credited to the Participant's Account will be paid to the
Participant as soon as practicable thereafter subject to reduction for any
applicable withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options will be paid
to the Participant as soon as practicable, and no additional amounts will be
deferred pursuant to this Plan.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his sole discretion terminate any deferral
elections made hereunder with respect to Compensation not yet earned and no
further amounts will be deferred. In addition, in the event a Participant
receives a hardship withdrawal under the 401(k) Plan, the
<PAGE>
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.
ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNT
4.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and any Participant, the Participant's beneficiary
or estate, or any other person. Title to and beneficial ownership of any funds
represented by the Account Balance will at all times remain in ML & Co.; such
funds will continue for all purposes to be a part of the general funds of ML &
Co. and may be used for any corporate purpose. No person will, by virtue of the
provisions of this Plan, have any interest whatsoever in any specific assets of
the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO RECEIVE PAYMENTS
FROM ML & CO. UNDER THIS PLAN, SUCH RIGHT WILL BE NO GREATER THAN THE RIGHT OF
ANY UNSECURED GENERAL CREDITOR OF ML & CO.
4.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution.
4.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
ARTICLE V
PAYMENT OF ACCOUNT
5.1 Manner of Payment.
(a) Regular Payment Elections. A Participant's Account Balance will be
paid by the Company, as elected by the Participant at the time of his or her
deferral election, either in a single payment to be made, or in the number of
annual installments (not to exceed 15) chosen by the Participant to commence,
(i) in the month following the month of the Participant's Retirement or death,
(ii) in any month and year selected by the Participant after the end of 1998 or
(iii) in any month in the calendar year following the Participant's Retirement;
provided that, if a
<PAGE>
Participant's election would result in payment (in the case of a single payment)
or commencement of payment (in the case of installment payments) after the
Participant's 70th birthday, then, notwithstanding the Participant's elections,
the Company will pay, or commence payment of, the Participant's Account Balance
in the month following the Participant's 70th birthday unless the Participant
continues to be an active full time employee at such time, in which case the
Company will pay, or commence payment of, the Participant's Account Balance in
the month following the Participant's cessation of active service (to the extent
payment has not already been made or commenced).. The amount of each annual
installment, if applicable, shall be determined by multiplying the Account
Balance as of the last day of the month immediately preceding the month in which
the payment is to be made by a fraction, the numerator of which is one and the
denominator of which is the number of remaining installment payments (including
the installment payment to be made).
(b) Modified Installment Payments. In lieu of one of the regular payment
elections provided for in Section 5.1(a), a Participant may elect to receive the
Account Balance in at least 11 but no more than 15 annual installment payments
("modified installment payments"), such modified installment payments to
commence on the last business day in March in the year following the
Participant's Retirement or death (the "Initial Payment Date"). The modified
installment payments shall be computed in accordance with last sentence of
Section 5.1(a) and will in all other respects be treated like regular
installment payments under the Plan. By electing modified installment payments,
the Participant agrees that at any time prior to the last day of February
immediately preceding a Participant's Initial Payment Date (the "Determination
Date"), ML & Co. shall have the right, without the consent of the Participant or
any beneficiary, to change the Participant's method of payment to 11 annuitized
payments ("annuitized payments"), in the event that the Administrator, in his
sole discretion, determines that such a change is necessary or appropriate in
order to preserve the intended state tax benefits of the modified installment
payments to the Participant or any beneficiary. In the event that the
Administrator determines that annuitized payments shall be made, the amount of
the annuitized payments will be determined by applying the Discount Rate, as
defined below, to the Account Balance as of the Determination Date to create a
stream of 11 equal annual payments. If annuitized payments are to be made, then
the Account Balance shall cease to be adjusted pursuant to Sections 3.4(b) and
(c) as of the Determination Date (except that a pro rata Annual Charge will be
deducted from the Account Balance prior to calculation of the annuitized
payments to cover the fraction of the Fiscal Year preceding the Determination
Date) and the Company's only obligation to the Participant shall be to make the
annuitized payments when due. As used herein, Discount Rate shall mean ML &
Co.'s then-applicable after-tax cost of borrowing and is defined as (A) x (B),
where (A) is equal to 1 minus ML & Co.'s then-effective tax rate, expressed as a
decimal and (B) is equal to the sum of: (i) the annual yield on the then-current
5-year U.S. Treasury Note, and (ii) a spread (which will not be less than 0.10%)
indicative of ML & Co.'s borrowing cost for transactions of similar structure
and average maturity to the annuity, as determined by ML & Co.
5.2 Termination of Employment.
(a) Death or Retirement. Upon a Participant's death or Retirement prior to
payment, the Account Balance will be paid, in accordance with the Participant's
elections and as provided in Section 5.1(a) or (b), as applicable, to the
Participant (in the event of Retirement) or to the Participant's beneficiary (in
the event of death); provided, however, that in the event that a beneficiary of
the Participant's Account is the Participant's estate or is otherwise not a
natural person, then (i) if the Participant has
<PAGE>
elected a regular payment election pursuant to Section 5.1(a), the applicable
portion of the Account Balance will be paid in a single payment to such
beneficiary notwithstanding any election of installment payments, and (ii) if
the Participant has elected modified installment payments pursuant to Section
5.1(b), the applicable portion of the Account Balance will continue to be
payable as modified installment payments or annuitized payments, as the case may
be, but only to a single person consisting of the administrator or executor of
the Participant's estate or another person lawfully designated by the
administrator or executor (and in the event no such person is designated within
a reasonable time, payment will be made in a lump sum).
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balance will be paid to the Participant, in a single payment, as soon
thereafter as is practicable, notwithstanding the Participant's elections
hereunder.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 5.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balance be paid at some other time or that it be paid in installments; provided,
that no such direction that adversely affects the rights of the Participant or
his or her beneficiary under this Plan shall be implemented without the consent
of the affected Participant or beneficiary. This direction may be revoked by the
Administrator at any time in his sole discretion.
5.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
5.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Plan if the primary beneficiary does not
survive the Participant. The Participant may designate more than one person as
the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing, any
change in beneficiary or contingent beneficiary will automatically revoke prior
such designations of the Participant's beneficiary or of the Participant's
contingent
<PAGE>
beneficiary, as the case may be, under this Plan only; and any designations
under other deferral agreements or plans of the Company will remain unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan").
However, if an unmarried Participant does not have coverage in effect under the
Life Insurance Plan, or the Participant has assigned his or her death benefit
under the Life Insurance Plan, any amounts payable to the Participant's
beneficiary under the Plan will be paid to the Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to Section 5.1(b), the applicable portion of the
Account Balance will continue to be paid as modified installment payments or
annuitized payments, as the case may be, but only to a single person consisting
of the administrator or executor of the beneficiary's estate or another person
lawfully designated by the administrator or executor (and in the event no such
person is designated within a reasonable time, payment will be made in a lump
sum).
5.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
5.6 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will pay
to, or to the Participant for the benefit of, the Participant's spouse or former
spouse the portion of the Participant's Account Balance specified in a valid
court order entered in a domestic relations proceeding involving the
Participant's divorce or legal separation. Such payment will be made net of any
amounts the Company may be required to withhold under applicable federal, state
or
<PAGE>
local law. After such payment, references herein to the Participant's "Deferred
Amounts" (including, without limitation, for purposes of determining the Annual
Charge applicable to any remaining Account Balance) shall mean the Participant's
original Deferred Amounts times an amount equal to one minus a fraction, the
numerator of which is the gross amount (prior to withholding) paid pursuant to
the order, and the denominator of which is the Participant's Account Balance
immediately prior to payment.
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe and
administer this Plan so as to ensure that it provides deferred compensation for
the Participant as a member of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his willful misconduct or lack of good faith. The Administrator
may designate persons to carry out the specified responsibilities of the
Administrator and shall not be liable for any act or omission of a person as
designated.
6.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
6.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of Adjusted Compensation,
Incentive Compensation, Sign-On Bonus, Eligible Compensation, the Deferred
Amounts, the Account Balance, the designation of a beneficiary, or any other
matters.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator
<PAGE>
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 Balance
(as reduced by the current year's Annual Charge, or pro rata portion thereof, as
set forth in Section 3.4(c)) as of the date of such amendment or termination.
Exhibit 10(ii)
MERRILL LYNCH & CO., INC.
PROGRAM FOR DEFERRAL OF STOCK OPTION GAINS
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Dated as of September 17, 1997
<PAGE>
MERRILL LYNCH & CO., INC.
PROGRAM FOR DEFERRAL OF STOCK OPTION GAINS
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 ...........................................................3
2.1 Eligible Employees .............................................3
2.2 Representation and Warranty by Participant .....................3
III. DEFERRAL ELECTIONS.....................................................3
3.1 Deferral Elections .............................................3
(a) Making Elections .........................................3
(b) Deemed Exercise...........................................4
(c) Effect of Deferral Followed by a Deemed Exercise..........4
(d) Irrevocability of Deferral Election ......................4
3.2 Minimum Requirements for Deferral ..............................4
3.3 Recission of Deferral Election..................................5
(a) Prior to Deemed Exercise..................................5
(b) Adverse Tax Determination.................................5
IV. CASH/STOCK UNIT ACCOUNTS ..............................................5
4.1 Creation and Crediting to Accounts .............................5
4.2 Dividend Equivalents ...........................................5
4.3 Changes in Capitalization ......................................5
V. STATUS OF ACCOUNT......................................................6
5.1 Status .........................................................6
5.2 Non-Assignability ..............................................6
5.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans...........................................6
VI. PAYMENT OF ACCOUNT ....................................................7
6.1 Payment Date ...................................................7
(a) Regular Payment Elections.................................7
(b) Modified Installment Payments.............................7
6.2 Manner of Payment ..............................................7
6.3 Termination of Employment ......................................7
(a) Death or Retirement ......................................7
(b) Other Termination of Employment ..........................8
(c) Leave of Absence, Transfer or Disability .................8
(d) Discretion to Alter Payment Date .........................8
6.4 Withholding of Taxes ...........................................8
-i-
<PAGE>
Page
----
6.5 Beneficiary ....................................................8
(a) Designation of Beneficiary ...............................8
(b) Change in Beneficiary ....................................8
(c) Default Beneficiary ......................................9
(d) If the Beneficiary Dies During Payment ...................9
6.6 Hardship Distributions .........................................9
6.7 Domestic Relations Orders ......................................9
VII. ADMINISTRATION OF THE PLAN ............................................10
7.1 Powers of the Committee and the Administrator ..................10
(a) General...................................................10
(b) Limitation of Liability...................................10
7.2 Optional Rabbi Trust............................................10
7.3 Payments on Behalf of an Incompetent ...........................10
7.4 Corporate Books and Records Controlling ........................10
VII. MISCELLANEOUS PROVISIONS ..............................................11
8.1 Litigation .....................................................11
8.2 Headings Are Not Controlling ...................................11
8.3 Governing Law ..................................................11
8.4 Amendment and Termination ......................................11
Exhibit A Form of Deferral Agreement
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
PROGRAM FOR DEFERRAL OF STOCK OPTION GAINS
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
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 and their
alignment with Merrill Lynch & Co., Inc. Common Stock by providing them with the
ability to defer receipt of option gains with respect to non-qualified stock
options granted under the Merrill Lynch & Co., Inc. Long-Term Incentive
Compensation Plan and the Merrill Lynch & Co., Inc. Long-Term Incentive
Compensation Plan for Managers and Producers (collectively, "LTICP").
It is intended that the 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 the Plan shall be administered and interpreted shall be consistent with this
intention.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"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 Management Development and Compensation
Committee of the Board of Directors.
"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.
"Account Balances" means the Participant's Stock Unit Account Balance and
Cash Unit Account Balance.
"Board of Directors" means the Board of Directors of ML & Co. or any duly
authorized Committee thereof.
"Cash/Stock Unit Account" means the reserve account established on the
books and records of ML & Co. to record the Participant's Stock Unit Account
Balance and Cash Unit Account Balance.
"Cash Unit" means an entry in a Participant's Cash Unit Account Balance
representing the Company's obligation to pay an amount in cash equal to the
value of one share of Common Stock.
"Cash Unit Account Balance" means, as of any date, the number of Cash
Units credited to the Participant in connection with the payment of dividend
equivalents on Stock Units and/or Cash Units in accordance with Section 4.2, as
adjusted to any changes in capitalization in accordance with Section 4.2 and any
payments made from the Cash Unit Account Balance to the Participant prior to
that date.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
<PAGE>
"Committee" means the Management Development and Compensation Committee of
the Board of the Directors. Except as may be required by law, any function of
the Committee may be delegated to the Administrator.
"Common Stock" means the Common Stock, par value $1.33 1/3 per share of ML
& Co., together with (for so long they are outstanding) one Right to Purchase
Units of Series A Junior Preferred Stock, par value $1.00 per share, of ML & Co.
issued pursuant to the Rights Agreement dated as of December 16, 1987 between ML
& Co. and Manufacturers Hanover Trust Company, Rights Agent, as amended.
"Company" means ML & Co. and all of its Affiliates.
"Covered Options" means the particular non-qualified options granted under
LTICP as to which a Participant has elected to defer gains.
"Deemed Exercise" means the conversion of Covered Options to the right to
receive the Stock Units.
"Deferral Election" means a Participant's election to defer the gain on
non qualified stock options granted under LTICP as described in Section 3.1 and
Exhibit A hereto.
"Eligible Employee" means an employee eligible to make a deferral under
the Plan, as determined in Article II hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fair Market Value" of Common Stock on any given date means (a) the mean
of the high and low sales prices on the New York Stock Exchange--Composite Tape
on the date(s) in question, or, if the Common Stock shall not have been traded
on any such date(s), the mean of the high and low sales prices on the New York
Stock Exchange--Composite Tape on the first day prior thereto on which the
Common Stock was so traded; or (b) such other amount as may be determined by the
Administrator by any fair and reasonable means.
"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.
"ML & Co." means Merrill Lynch & Co., Inc.
"Officer(s)" means all officers of ML & Co., as such term is defined in
Rule 16a-1 under the Securities Exchange Act of 1934.
"Participant" means an Eligible Employee who elects to defer under the
Plan.
"Plan" means this Merrill Lynch & Co., Inc. Program for Deferral of Stock
Option Gains for a Select Group of Eligible Employees.
"Rabbi Trust" means the Trust that may be established, at the option of
the Administrator, to receive the delivery of shares otherwise issuable upon the
exercise of Covered Options as provided
<PAGE>
hereunder and to hold such shares (or the proceeds thereof) until payment of
amounts pursuant to this Plan.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
"Stock Unit" means an entry in a Participant's Stock Unit Account Balance
representing the Company's obligation to make payment to a Participant in the
form of one share of Common Stock in accordance with the Plan.
"Stock Unit Account Balance" means, as of any date, the number of Stock
Units credited to a Participant's Cash/Stock Unit Account as adjusted to any
changes in capitalization in accordance with Section 4.2 and any payments made
from the Stock Unit Account Balance to the Participant prior to that date.
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
Initially participation in this Plan shall be limited to employees of the
Company who were granted non-qualified Stock Options in 1989, provided that the
Administrator, in his sole discretion, may expand such eligibility to include
additional employees who are generally eligible to participate in the Merrill
Lynch & Co., Inc. Deferred Compensation Plans for a Select Group of Eligible
Employees, and such other employees as the Administrator may, in sole
discretion, determined.
2.2 Representation and Warranty by Participant.
The deferral opportunity being offered hereby has not been and will not be
registered under the Securities Act of 1933 (the "Securities Act") and is being
offered to "accredited investors" (within the meaning of Rule 501(a)(6) under
the Securities Act) in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act. Accordingly, when submitting his or her
election form to the Administrator or his designee, each Participant must
represent and warrant to ML & Co. that he or she is a natural person who had an
individual income in excess of $200,000 in the most recent calendar year then
ended and has a reasonable expectation of reaching the same income level in the
current calendar year. This requirement is in addition to, and not a substitute
for, the eligibility requirements set forth in Section 2.1.
ARTICLE III
DEFERRAL ELECTIONS
3.1 Deferral Elections.
(a) Making Elections. Eligible employees can elect to defer receipt of the
gain to which such Participant would otherwise be entitled on exercise of any
non-qualified options granted to
<PAGE>
such employees under LTICP. Deferral Elections shall be made by submitting to
the Administrator or his designee the form attached hereto as Exhibit A.
(i) Each Deferral Election must be made at least 90 days prior to
the Deemed Exercise of the Covered Options to which the
Deferral Election relates and must specify the particular
Stock Options (including the date of grant) to which such
Deferral Election relates and the number of Shares issuable
upon exercise of such Stock Options.
(ii) To be effective, each Deferral Election must be made (A) in or
prior to the taxable year immediately prior to the expiration
of such Covered Option and (B) at least six (6) months prior
to the date of such expiration.
(iii) To be effective, each Deferral Election must defer the gain on
a minimum of 1,000 options.
(b) Deemed Exercise. When a Deferral Election has been made, Covered
Options, while remaining subject to all other terms and conditions of LTICP, may
only be exercised subject to the Deemed Exercise procedures in this Plan.
Covered Options will not be converted to Units in accordance with Section 4.1
until a Deemed Exercise has occurred. To effect a Deemed Exercise, Participants
must prove ownership of previously held shares of Common Stock (owned for a
period of not less than six months) having a Fair Market Value on the Deemed
Exercise date equal to the total Exercise Price. The date on which such Deemed
Exercise occurs will determine the number of Stock Units credited to a
Participant in accordance with Section 4.1.
(c) Effect of a Deferral Followed by a Deemed Exercise. Upon a Deemed
Exercise of all or a portion of the Covered Options to which such Deferral
Election relates, a Participant will be credited with a number of Stock Units
determined in accordance with Section 4.1 [and a like number of shares of Common
Stock shall be held for delivery in the Treasury of ML & Co.] and, if the
Administrator determines, delivered to a Rabbi Trust established in accordance
with Section 8.1 hereof for payment to the Participant in accordance with
Article VI hereof.
(d) Irrevocability of Deferral Election. Except as provided in Sections
3.3 and 6.6 and 6.7, an election made under Section 3.1(a) is irrevocable once
submitted to the Administrator or his designee. Once a Participant elects to
defer the gains on all or a portion of a Stock Option, any gains will be
deferred whenever a Deemed Exercise of a Stock Option occurs.
3.2 Minimum Requirements for Deferral.
Minimum Requirements. Notwithstanding any other provision of the Plan, no
deferral will be effected under the Plan with respect to a Participant if:
(a) the Participant is not an Eligible Employee when the election is
made,
(b) the greater of (A) the sum of (1) the compensation amount listed on
the Participant's W-2 form for the most recent calendar year, and
(2) any incentive compensation that is accelerated which the
Participant may receive in the current calendar year that would have
been payable in next calendar year in the absence of the action of
the Company to accelerate the payment, and (B) the Participant's
Eligible Compensation for the next calendar year, is less than
$200,000.
<PAGE>
3.3 Rescission of Deferral Election.
(a) Prior to Deemed Exercise. A deferral election hereunder will be
rescinded if a Participant's employment terminates prior to a Deemed Exercise.
In addition, a deferral election may be rescinded at the request of the
Participant prior to a Deemed Exercise, if the Administrator, in his sole
discretion and upon evidence of such basis that he finds persuasive (including a
material applicable change in the Participant's U.S. Federal and/or foreign
income tax rate during the relevant period), agrees to the rescission of the
election. In the event of a rescission under this Section 3.3(a), no deferral
will be effected under the Plan.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.3(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon any such rescission, the Account Balance will be paid
to the Participant as soon as practicable.
ARTICLE IV
CASH/STOCK UNIT ACCOUNTS
4.1 Creation and Crediting to Accounts
A Cash/Stock Unit Account shall be created for each Participant who has
deferred under the Plan and effected a Deemed Exercise. As soon as practicable
after the Deemed Exercise (but in no event later than the end of the following
month), a Participant's Stock Unit Account Balance will be credited with a
number of Stock Units (or fractions thereof) equal to: (1) the aggregate Fair
Market Value (on the date of Deemed Exercise) of the number of Covered Option
shares that are the subject of the Deemed Exercise; (2) minus: (A) the aggregate
Exercise Price of the shares subject to the Covered Option; and (B) any FICA or
Medicare taxes due upon such exercise (unless the Administrator determines that
such taxes should be payable in some other manner); (3) divided by the Fair
Market Value of the Common Stock on such Date. Cash Units will be credited to a
Participant's Cash Unit Account Balance in accordance with Section 4.2.
4.2 Dividend Equivalents.
Whenever a cash dividend is paid on a share of Common Stock, the
Participant's Cash/Stock Unit Account shall be credited, on the payment date for
such cash dividend, with the number of Cash Units determined by multiplying the
per share amount of the cash dividend by the Participant's Stock Unit Account
Balance and Cash Unit Account Balance (expressed in Stock Units and Cash Units,
respectively), on the record date for such cash dividend and dividing the result
by the price per share of Common Stock used for purposes of the reinvestment of
such cash dividend in the Merrill Lynch & Co., Inc. Dividend Reinvestment
Program, and rounding the result to the nearest 1/100th of a Unit (with .005
being rounded upwards).
4.3 Changes in Capitalization.
Any other provision of the Plan to the contrary notwithstanding, if any
change shall occur in or affect shares of Common Stock on account of a merger,
consolidation, reorganization, stock
<PAGE>
dividend, stock split or combination, reclassification, recapitalization, or
distribution to holders of shares of Common Stock (other than cash dividends)
including, without limitation, a merger or other reorganization event in which
the shares of Common Stock cease to exist, or, if in the opinion of the Board of
Directors, after consultation with the Company's independent public accountants,
changes in the Company's accounting policies, acquisitions, divestitures,
distributions, or other unusual or extraordinary items have disproportionately
and materially affected the value of shares of Common Stock or Stock or Cash
Units, the Committee shall make such adjustments, if any, that it may deem
necessary or equitable in each Participant's Cash/Stock Unit Account in order to
preserve the full benefits of the Plan for the Participants, taking into account
any factors that the Committee, in its sole discretion, considers relevant. In
the event of a change in the presently authorized shares of Common Stock that is
limited to a change in the designation thereof or a change of authorized shares
with par value into the same number of shares with a different par value or into
the same number of shares without par value, the shares resulting from any such
change shall be deemed to be shares of Common Stock within the meaning of the
Plan. In the event of any other change affecting the shares of Common Stock or
Stock or Cash Units, such adjustment shall be made as may be deemed equitable by
the Committee to give proper effect to such event.
ARTICLE V
STATUS OF ACCOUNT
5.1 Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create 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 with the Company, or in the event a Rabbi Trust
is established, in the Rabbi Trust, and available to the creditors of the
Company in the event of a bankruptcy. No person will, by virtue of the
provisions of the 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 THE COMPANY UNDER THE PLAN, SUCH RIGHT WILL BE NO GREATER THAN THE RIGHT OF
ANY UNSECURED GENERAL CREDITOR OF THE COMPANY.
5.2 Non-Assignability.
The Participant's right or the right of any other person to any Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under the Plan, by written will, or by the laws of descent and
distribution.
5.3 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.
<PAGE>
ARTICLE VI
PAYMENT OF ACCOUNT
6.1 Payment Date.
(a) Regular Payment Elections. Subject to Section 7.1(b), the
Participant's Account Balances will be paid by ML & Co., as elected by the
Participant at the time of his or her deferral election, either in a single
payment to be made, or in the number of annual installment payments (not to
exceed 15) chosen by the Participant to commence, (i) in the month following the
month of the Participant's Retirement or death, (ii) in any month and year
selected by the Participant after the end of 1998 or (iii) in any month in the
calendar year following the Participant's Retirement; provided that no member of
Executive Management shall elect to receive the payment (in the case of a single
payment) or commencement of payment (in the case of installment payments)
earlier than a date which is six months and one day after the earliest to occur
of Retirement, Death or other termination of employment. The amount of each
annual installment payment, if applicable, shall be determined by multiplying
the Fair Market Value of the Account Balances as of the last day of the month
immediately preceding the month in which the payment is to be made by a
fraction, the numerator of which is one and the denominator of which is the
number of remaining installment payments (including the installment payment to
be made) and rounding the result to the nearest whole Stock Unit of Cash Unit as
the case may be.
(b) Modified Installment Payments. If the Participant had elected
(at the time of deferral) to receive at least 11 but no more than 15 annual
Installment Payments in accordance with Section 7.1(a), then such Participant's
Account Balances, will be paid in modified installment payments, such modified
installment payments to commence at least six months and one day following the
Participant's Retirement or upon the Participant's death. The modified
installment payments shall be computed in accordance with the last sentence of
Section 7.1(a) and will in all other respects be treated like regular
installment payments under the Plan.
6.2 Manner of Payment. Payments of Stock Unit Account Balances will be made in
the form of one share of Common Stock for each Stock Unit to be paid, [with any
fractional Stock Units paid in cash.] Payments of Cash Units will be made in
cash. The amount of such cash payment shall be determined by multiplying the
number of Cash Units to be paid by the Fair Market Value of a share of Common
Stock on the last business day immediately prior to the day on which payment is
to be made and rounding the result up to the nearest whole cent.
6.3 Termination of Employment.
(a) Death or Retirement. If the Participant dies or begins Retirement
prior to payment, then the Account Balances will be paid, in accordance with the
Participant's elections and as provided in Sections 6.1 and 6.2, to the
Participant (in the event of Retirement) or to the Participant's beneficiary (in
the event of death), provided, however, that in the event that a beneficiary of
the Participant's Account is the Participant's estate or is otherwise not a
natural person, then (i) if the Participant has elected a regular payment
election pursuant to Section 6.1(a), the applicable portion of the Account
Balances will be paid in a single payment to such beneficiary notwithstanding
any election of installment payments, and (ii) if the Participant has elected
modified installment payments pursuant to Section 6.1(b), the applicable portion
of the Cash/Stock Unit Account, if applicable, will continue to be payable as
modified installment payments, but only to a single person consisting of the
administrator or executor of the Participant's estate or another
<PAGE>
person lawfully designated by the administrator or executor (and in the event no
such person is designated within a reasonable time, payment will be made in a
lump sum).
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balances will be paid to the Participant in a single payment in the
manner specified in Section 6.2, as soon thereafter as is practicable,
notwithstanding the Participant's elections hereunder.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 6.3(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balances be paid at some other time or that it be paid in installments;
provided, that no such direction that adversely affects the rights of the
Participant or his or her beneficiary under the 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.
6.4 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld, provided that when any payments are made to Participants in connection
with a deferral (either as a result of a revocation of such deferral by the
Corporation or otherwise) all federal state or local taxes required by law that
arise as a result of such payout shall be paid either (A) by applying the cash
payable from the Cash Unit Account Balance or, (B) in the event (A) does not
yield sufficient cash to pay such taxes, by withholding from the number of
shares otherwise deliverable, such number of shares as shall have a Fair Market
Value (as such term is defined in LTICP) on the date of such payout at least
equal to the amount of tax to be withheld
6.5 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 the Plan if the primary beneficiary does not survive
the Participant. The Participant may designate more than one person as the
Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing, any
change in beneficiary or contingent beneficiary will automatically revoke such
prior designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the
<PAGE>
case may be, under the Plan only; and any designations under other deferral
agreements or plans of the Company will remain unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan").
However, if an unmarried Participant does not have coverage in effect under the
Life Insurance Plan, or the Participant has assigned his or her death benefit
under the Life Insurance Plan, any amounts payable to the Participant's
beneficiary under the Plan will be paid to the Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant but before all the payments have been made, the portion of the
Account Balances to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
that if the beneficiary was receiving modified installment payments pursuant to
Section 6.1(b), the applicable portion of the Index Account Balances will
continue to be paid as modified installment payments, but only to a single
person consisting of the administrator or executor of the beneficiary's estate
or another person lawfully designated by the administrator or executor (and in
the event no such person is designated within a reasonable time, payment will be
made in a lump sum).
6.6 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balances 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 in the case of an Officer of ML & Co., with the approval
of the Committee, and will be made on the date selected by the Administrator in
his sole discretion. The Account Balances remaining, if any, will continue to be
governed by the terms of the Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
6.7 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will pay
to, or to the Participant for the benefit of, the Participant's spouse or former
spouse the portion of the Participant's Account Balances 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.
<PAGE>
ARTICLE VII
ADMINISTRATION OF THE PLAN
7.1 Powers of the Committee and the Administrator.
(a) General. The Committee and the Administrator shall administer the Plan
in accordance with its terms, and will have all powers necessary to accomplish
said purpose. The Administrator shall have full power, discretion and authority
to interpret and construe, and to administer all aspect of the Plan that do not
relate to Executive Officers of the Company. The Administrator shall administer
the 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.
(b) Limitation of Liability. Each member of the Committee and the
Administrator shall be entitled to, in good faith, rely or act upon any report
or other information furnished to him or her by any officer or other employee of
the Company, independent certified accountants, consultants, legal counsel or
other professional retained by the Company to assist in the administration of
the Plan. No member of the Committee, the Administrator, or any officers or
employee of the Company acting on behalf of the Committee shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Plan, and such persons shall, to the extent permitted
by law, be fully indemnified and protected by the Company with respect to such
action determination or interpretation.
7.2 Optional Rabbi Trust
Creation of Trust. The Administrator, at any time, may authorize the
establishment of a Rabbi Trust to hold shares representing the shares deferred
under this Plan on such terms and conditions as the Administrator shall approve.
The trustee of the Rabbi Trust shall be a party unaffiliated with the Company.
If a Rabbi Trust has been established, upon any Deemed Exercise, a number of
shares equal to the number of Stock Units credited in Section 4.1 hereof shall
be delivered by the Company to the Rabbi Trust.
7.3 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 Unit 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.
7.4 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of the Account Balance(s),
Eligible Compensation, the designation of a beneficiary, or any other matters.
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 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.
8.2 Headings Are Not Controlling.
The headings contained in the Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of the Plan.
8.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, the 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.
8.4 Amendment and Termination.
ML & Co. reserves the right to amend or terminate the Plan at any time
through the Administrator, except that no such amendment or termination shall
adversely affect the right of the Participant to his or her Account Balance(s)
as of the date of such amendment or termination. In addition, this Plan may be
terminated by the Company and all deferrals hereunder will be rescinded in the
event that the Administrator determines in good faith, after consultation with
the Controller of ML & Co. (or such person's functional successor) and the
Company's independent public accountants, that generally accepted accounting
principles are likely to require the Company to recognize the net exercise value
of such Stock Options as a charge to Earnings on ML & Co.'s consolidated
financial statements. In the event such termination, the Account Balances will
be paid to the Participant as soon as practicable.
<PAGE>
Exhibit A
MERRILL LYNCH & CO., INC.
Agreement for the Deferral of Stock Option Gains
Agreement, made as of ______________, between Merrill Lynch & Co., Inc. (ML &
Co.) and _________________
I. Stock Option Deferral Conversions
The Participant hereby irrevocably elects (a "Deferral Election") to defer,
pursuant to this Agreement the outstanding nonqualified stock options ("Stock
Options") specified in Section II, and upon Deemed Exercise of such Stock
Options, receive an unfunded and unsecured right to receive shares of Common
Stock otherwise issuable upon the exercise of the Stock Options ("Shares") as
deferred compensation.
For the specified Stock Options, the term "Deemed Exercise" will be used to
describe the process where instructions are received from the Participant to
convert these Stock Options on a specific day into a right to receive Shares
from ML & Co. on a deferred basis.
II. Election of Covered Options
Each Deferral Election must be made at least 90 days prior to the Deemed
Exercise of the Covered Options to which it the Deferral Election relates and
must specify the particular Stock Options (including the date of grant) to which
such Deferral Election relates and the number of Shares issuable upon exercise
of such Stock Options.
To be effective each Deferral Election must be made must be made (A) in or prior
to the taxable year immediately prior to the expiration of such Covered Option
and (B) at least six (6) months prior to the date of such expiration.
To make a Deferral Election, the Participant shall select by grant year the
number of Stock Options (minimum 1,000 options for each grant) from which the
gain will be deferred. Such options must be then currently outstanding and will
be deferred in accordance with this Agreement and the Merrill Lynch & Co., Inc.
Program for the Deferral of Stock Option Gains. The irrevocable election made in
Section I above shall cover the Stock Option grants selected by the Participants
and the selected Option grants shall be referred to collectively as the "Covered
Options". This election is irrevocable unless your employment terminates prior
to the Deemed Exercise.
I elect to defer the gain from the Deemed Exercise of my stock option grants as
follows:
Option # of Options
Grant Date (Minimum 1,000)
---------- ---------------
------------------------ ---------------------------
------------------------ ---------------------------
------------------------ ---------------------------
III. Form of Distribution
Check one of the following boxes and, if applicable, enter the number of
installment payments.
|_| Lump Sum
|_| Annual Installments for |_| |_| years (maximum of 15)
|_| Modified Installment payments for |_| |_| years (minimum of 11;
maximum of 15)
IV. Timing of Distribution
Check one of the following boxes and, if applicable, enter the specific month
and year in which you want to receive your distribution.
Note: If you selected Modified Installment Payments in Section III, do not fill
out this section. Your annual
<PAGE>
distributions will commence on the last business day of the sixth month
following your retirement or death. You do not have the option of specifying
some other time for commencement of payment.
I elect that my benefits under the plan be distributed as soon as practicable in
(or beginning):
|_| The sixth month following my retirement.
|_| The month of ________________ in the calendar year following my
retirement, but no earlier than six months after my retirement.
|_| The month and year of ____________________ , _______________, which will
not be earlier than six months after my retirement.
- --------------------------------------------------------------------------------
By executing this Agreement, the Employee acknowledges that he or she will not
exercise Covered Options in any manner other than as specified herein and that
the Employee had read the Merrill Lynch & Co., Inc. Program for the Deferral of
Stock Option Gains ("Plan") and agrees that the terms and conditions of such
Plan are incorporated herein by reference and made part of this Agreement.
- ------------------ -------------------- --------------
Employee Name Employee Signature Date
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
--------------------- ---------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EARNINGS
Net earnings ................................... $ 493 $ 331 $ 1,440 $ 1,174
Preferred stock dividends ...................... (9) (12) (30) (35)
--------- --------- --------- ---------
Net earnings applicable to common stockholders . $ 484 $ 319 $ 1,410 $ 1,139
========= ========= ========= =========
PRIMARY WEIGHTED AVERAGE SHARES
Common stock ................................... 330.9 335.5 330.7 340.8
Assuming issuance of shares relating to
employee incentive plans ...................... 56.7 42.9 54.7 44.5
--------- --------- --------- ---------
Total shares ................................... 387.6 378.4 385.4 385.3
========= ========= ========= =========
PRIMARY EARNINGS PER SHARE ..................... $ 1.25 $ .84 $ 3.66 $ 2.96
========= ========= ========= =========
FULLY DILUTED WEIGHTED AVERAGE SHARES
Common stock ................................... 330.9 335.5 330.7 340.8
Assuming issuance of shares relating to
employee incentive plans ...................... 58.8 45.8 58.8 45.7
--------- --------- --------- ---------
Total shares ................................... 389.7 381.3 389.5 386.5
========= ========= ========= =========
FULLY DILUTED EARNINGS PER SHARE ............... $ 1.24 $ .84 $ 3.62 $ 2.95
========= ========= ========= =========
</TABLE>
Note: 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.
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pretax earnings from
continuing operations $ 771 $ 522 $ 2,322 $ 1,891
Add: Fixed charges (excluding
capitalized interest) 4,209 3,144 11,980 8,786
------ ------ ------- -------
Pretax earnings before fixed charges $4,980 $3,666 $14,302 $10,677
====== ====== ======= =======
Fixed charges:
Interest $4,147 $3,104 $11,793 $ 8,669
Other(A) 63 40 188 117
------ ------ ------- -------
Total fixed charges 4,210 3,144 11,981 8,786
Preferred stock dividend
requirements 14 18 47 56
------ ------ ------- -------
Total combined fixed charges and
preferred stock dividends $4,224 $3,162 $12,028 $ 8,842
====== ====== ======= =======
Ratio of earnings to fixed charges 1.18 1.17 1.19 1.22
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.18 1.16 1.19 1.21
</TABLE>
(A) Other fixed charges consist of the interest factor in rentals,
amortization of debt expense, preferred stock dividend requirements of
majority-owned subsidiaries, and capitalized interest.
EXHIBIT 15
November 7. 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
September 26, 1997 and for the three- and nine-month periods ended September
26, 1997 and September 27, 1996 as indicated in our report dated November 7,
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 September 26, 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
<PAGE>
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
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. 33-33335 (Common Stock)
Registration Statement No. 33-45777 (Common Stock)
Registration Statement No. 33-55363 (Preferred Stock)
<PAGE>
Registration Statement No. 333-02275 (Long Term Incentive Compensation
Plan)
Registration Statement No. 333-16603 (TOPrS)
Registration Statement No. 333-20137 (TOPrS)
Registration Statement No. 333-24889 (LTIC and LTICPMP)
Registration Statement No. 333-36651 (Hotchkis and Wiley Resale)
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>
<ARTICLE> BD
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-26-1997
<PERIOD-START> DEC-28-1996
<PERIOD-END> SEP-26-1997
<CASH> 4,559
<RECEIVABLES> 40,450
<SECURITIES-RESALE> 68,559
<SECURITIES-BORROWED> 36,252
<INSTRUMENTS-OWNED> 123,390
<PP&E> 1,939
<TOTAL-ASSETS> 288,430
<SHORT-TERM> 50,335
<PAYABLES> 21,193
<REPOS-SOLD> 74,872
<SECURITIES-LOANED> 7,905
<INSTRUMENTS-SOLD> 63,399
<LONG-TERM> 39,998
0
425
<COMMON> 630
<OTHER-SE> 6,742
<TOTAL-LIABILITY-AND-EQUITY> 288,430<F1>
<TRADING-REVENUE> 3,166
<INTEREST-DIVIDENDS> 12,575
<COMMISSIONS> 3,437
<INVESTMENT-BANKING-REVENUES> 1,924
<FEE-REVENUE> 2,038
<INTEREST-EXPENSE> 11,807
<COMPENSATION> 6,000
<INCOME-PRETAX> 2,322
<INCOME-PRE-EXTRAORDINARY> 1,440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,440
<EPS-PRIMARY> 3.66
<EPS-DILUTED> 3.62
<FN>
<F1> Includes $627 in Preferred Securities issued by Subsidiaries.
</FN>
</TABLE>
