<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1998
------------------
COMMISSION FILE NUMBER 1-7182
------
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer 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
- --------------------------------------------------------------------------------
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.
354,712,004 shares of Common Stock and 4,618,013 Exchangeable Shares as of
the close of business on October 30, 1998. The Exchangeable Shares, which
were issued by Merrill Lynch & Co., Canada Ltd. in connection with the merger
with Midland Walwyn Inc., are exchangeable at any time into Common Stock on a
one-for-one basis and entitle holders to dividend, voting, and other rights
equivalent to Common Stock.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements (restated for the Midland Walwyn merger)
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
SEPTEMBER 25, SEPTEMBER 26, PERCENT (1)
(dollars in millions, except per share amounts) 1998 1997 INC. (DEC.)
------------ ------------- -----------
<S> <C> <C> <C>
REVENUES
Commissions $ 1,449 $ 1,328 9.2%
Interest and dividends 5,079 4,447 14.2
Principal transactions 279 964 (71.1)
Investment banking 711 724 (1.8)
Asset management and portfolio service fees 995 731 36.0
Other 199 144 38.4
------ ------ ----
Total Revenues 8,712 8,338 4.5
Interest Expense 4,863 4,196 15.9
------ ------ ----
Net Revenues 3,849 4,142 (7.1)
------ ------ ----
NON-INTEREST EXPENSES
Compensation and benefits 2,010 2,101 (4.3)
Communications and technology 487 328 48.7
Occupancy and related depreciation 227 188 20.7
Professional fees 165 131 25.3
Advertising and market development 203 148 36.7
Brokerage, clearing, and exchange fees 186 143 30.5
Goodwill amortization 55 16 N/M
Provision for costs related to staff reductions 430 - N/M
Other 292 298 (2.0)
------ ------ ----
Total Non-Interest Expenses 4,055 3,353 20.9
------ ------ ----
EARNINGS (LOSS) BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES (206) 789 (126.2)
Income Tax Expense (Benefit) (75) 275 (127.4)
Dividends on Preferred Securities Issued by Subsidiaries 33 12 162.6
------- ------- ------
NET EARNINGS (LOSS) $ (164) $ 502 (132.6)%
======= ======= ======
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (173) $ 493 (135.2)%
======= ======= ======
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (.49) $ 1.45
======= =======
Diluted $ (.49) $ 1.24
======= =======
DIVIDEND PAID PER COMMON SHARE $ .24 $ .20
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS (LOSS) PER COMMON SHARE
Basic 357.6 339.8
======= =======
Diluted 357.6 396.9
======= =======
</TABLE>
- ------------------------------------------------------
(1) Percentages are based on actual numbers before rounding.
N/M Not meaningful.
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 25, SEPTEMBER 26, PERCENT (1)
(dollars in millions, except per share amounts) 1998 1997 INC. (DEC.)
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Commissions $ 4,375 $ 3,691 18.5%
Interest and dividends 14,903 12,734 17.0
Principal transactions 2,439 3,211 (24.0)
Investment banking 2,440 2,015 21.1
Asset management and portfolio service fees 3,013 2,063 46.0
Other 511 474 7.8
------- ------- -----
Total Revenues 27,681 24,188 14.4
Interest Expense 14,215 11,942 19.0
------- ------- -----
Net Revenues 13,466 12,246 10.0
------- ------- -----
NON-INTEREST EXPENSES
Compensation and benefits 6,956 6,281 10.7
Communications and technology 1,311 920 42.4
Occupancy and related depreciation 645 548 17.7
Professional fees 459 398 15.2
Advertising and market development 580 456 27.3
Brokerage, clearing, and exchange fees 509 383 32.8
Goodwill amortization 165 47 N/M
Provision for costs related to staff reductions 430 - N/M
Other 809 837 (3.4)
------- ------- -----
Total Non-Interest Expenses 11,864 9,870 20.2
------- ------- -----
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,602 2,376 (32.6)
Income Tax Expense 605 875 (30.8)
Dividends on Preferred Securities Issued by Subsidiaries 82 35 134.8
------- ------- -----
NET EARNINGS $ 915 $ 1,466 (37.6)%
======= ======= =====
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 887 $ 1,437 (38.3)%
======= ======= =====
EARNINGS PER COMMON SHARE
Basic $ 2.50 $ 4.24
======= =======
Diluted $ 2.18 $ 3.64
======= =======
DIVIDENDS PAID PER COMMON SHARE $ .68 $ .55
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 354.1 339.2
======= =======
Diluted 406.7 394.4
======= =======
</TABLE>
- ----------------------------------------------------------
(1) Percentages are based on actual numbers before rounding.
N/M Not meaningful.
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)
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 26,
ASSETS 1998 1997
------------------------------------------------------------------ ------------- ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 8,965 $ 5,046
-------- --------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 12,583 12,384
-------- --------
MARKETABLE INVESTMENT SECURITIES 4,213 3,309
-------- --------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock 26,908 32,537
Equities and convertible debentures 28,326 24,031
Contractual agreements 25,491 21,205
U.S. Government and agencies 14,139 9,848
Non-U.S. governments and agencies 9,001 10,221
Mortgages, mortgage-backed, and asset-backed 10,529 7,312
Other 3,542 2,937
-------- --------
117,936 108,091
Securities received as collateral, net of securities pledged as collateral 5,202 -
-------- --------
Total 123,138 108,091
-------- --------
SECURITIES PLEDGED AS COLLATERAL 18,386 -
-------- --------
RECEIVABLES UNDER RESALE AGREEMENTS 73,125 71,904
-------- --------
RECEIVABLES UNDER SECURITIES BORROWED TRANSACTIONS 43,176 35,539
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of
$55 in 1998 and $50 in 1997) 29,881 27,319
Brokers and dealers 7,319 5,182
Interest and other 9,096 8,185
-------- --------
Total 46,296 40,686
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,507 4,833
LOANS, NOTES, AND MORTGAGES (net of allowance for
loan losses of $148 in 1998 and $130 in 1997) 7,161 4,310
OTHER INVESTMENTS 2,144 1,829
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(net of accumulated depreciation and amortization
of $3,338 in 1998 and $2,955 in 1997) 2,570 2,099
GOODWILL (net of accumulated amortization of
$284 in 1998 and $131 in 1997) 5,413 5,467
OTHER ASSETS 1,742 1,483
-------- --------
TOTAL ASSETS $353,419 $296,980
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, SEPTEMBER 25, DECEMBER 26,
AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $100,174 $ 79,167
-------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 43,409 45,052
-------- --------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 22,733 20,632
U.S. Government and agencies 10,572 18,186
Equities and convertible debentures 19,677 15,817
Non-U.S. governments and agencies 10,893 10,460
Corporate debt, preferred stock, and other 6,049 6,119
-------- --------
Total 69,924 71,214
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 23,588 -
-------- --------
OTHER PAYABLES
Customers 20,727 17,514
Brokers and dealers 5,772 4,224
Interest and other 18,785 22,784
-------- --------
Total 45,284 44,522
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,404 4,716
LONG-TERM BORROWINGS 55,064 43,143
-------- --------
TOTAL LIABILITIES 341,847 287,814
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,777 627
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 71 66
Common stock, par value $1.33 1/3 per share;
authorized: 1,000,000,000 shares; issued: 472,660,324 shares 630 630
Paid-in capital 1,405 1,001
Accumulated other comprehensive loss (net of tax) (59) (47)
Retained earnings 10,227 9,579
-------- --------
12,274 11,229
Less: Treasury stock, at cost:
1998 - 119,242,755 shares; 1997 - 133,400,971 shares 2,190 2,677
Employee stock transactions 714 438
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 9,370 8,114
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,795 8,539
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $353,419 $296,980
======== ========
BOOK VALUE PER COMMON SHARE $ 26.16 $ 23.63
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------
(dollars in millions) SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 915 $ 1,466
Noncash items included in earnings:
Depreciation and amortization 428 347
Policyholder reserves 171 180
Goodwill amortization 165 47
Other 403 936
(Increase) decrease in operating assets:
Trading assets (9,845) (35,092)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (199) (4,978)
Receivables under securities borrowed transactions (7,637) (11,397)
Customer receivables (2,564) (7,197)
Sales of trading investment securities 1,220 59
Purchases of trading investment securities (964) (22)
Other (5,539) (5,583)
Increase (decrease) in operating liabilities:
Trading liabilities (1,290) 20,063
Payables under securities loaned transactions 4,394 5,172
Customer payables 3,213 3,333
Liabilities of insurance subsidiaries (485) (372)
Other 2,947 5,939
---------- ----------
CASH USED FOR OPERATING ACTIVITIES (14,667) (27,099)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 3,011 2,330
Sales of available-for-sale securities 2,227 1,447
Purchases of available-for-sale securities (6,204) (4,623)
Maturities of held-to-maturity securities 628 868
Purchases of held-to-maturity securities (643) (569)
Acquisitions, net of cash acquired (5,227) -
Property, leasehold improvements, and equipment (888) (624)
Other investments and other assets (724) (391)
---------- ----------
CASH USED FOR INVESTING ACTIVITIES (7,820) (1,562)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements 15,603 2,031
Commercial paper and other short-term borrowings (1,643) 14,072
Issuances and resales of long-term borrowings 22,611 19,768
Settlements and repurchases of long-term borrowings (11,052) (5,566)
Issuances of subsidiaries' preferred securities 1,150 300
Redemption of remarketed preferred stock - (194)
Common stock transactions 4 (358)
Dividends (267) (216)
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 26,406 29,837
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,919 1,176
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,046 3,395
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,965 $ 4,571
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 432 $ 621
Interest 13,642 10,708
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 25, 1998
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
Note 1. Basis of Presentation
- --------------------------------------------------------------------------------
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 26, 1997
consolidated balance sheet was derived from the audited financial statements, as
restated for a pooling-of-interests (see Note 2). The interim consolidated
financial statements for the three- and nine-month periods are unaudited;
however, in the opinion of Merrill Lynch management, all adjustments, consisting
only of normal recurring accruals and a provision for costs related to staff
reductions, 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 26, 1997. 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 1998 presentation.
- --------------------------------------------------------------------------------
Note 2. Midland Walwyn Merger
- --------------------------------------------------------------------------------
In August 1998, Merrill Lynch acquired the outstanding shares of Midland Walwyn
Inc. ("Midland") in a share exchange. Each Midland shareholder received either
0.24 shares of ML & Co. common stock or 0.24 exchangeable shares of Merrill
Lynch & Co., Canada Ltd. ("Exchangeable Shares") for every Midland share held
(see Note 6). In the exchange, Merrill Lynch issued 4,177,064 shares of ML & Co.
common stock and 4,831,224 Exchangeable Shares.
The merger has been accounted for as a pooling-of-interests, and accordingly,
prior period financial statements and footnotes have been restated to
reflect the results of operations, financial position, and cash flows as if
Merrill Lynch and Midland had always been combined. The effect of combining
Midland into the results of operations, financial position, and cash flows of
Merrill Lynch was not material.
- --------------------------------------------------------------------------------
Note 3. New Accounting Pronouncements
- --------------------------------------------------------------------------------
Merrill Lynch adopted Statement of Financial Accounting Standards ("SFAS") No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125", which requires balance sheet recognition of collateral related to certain
secured financing transactions entered into after December 31, 1997. The
adoption of such provisions creates the following additional captions on Merrill
Lynch's balance sheet:
- - Securities received as collateral, net of securities pledged as collateral;
- - Securities pledged as collateral; and
- - Obligation to return securities received as collateral.
The balances recognized in these captions primarily represent securities
received as collateral in term resale and repurchase agreements for which the
collateral provider does not have the explicit contractual right to substitute.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires capitalization of certain internal use software costs. The SOP,
which would have been effective for Merrill Lynch beginning in 1999, was early
adopted by Merrill Lynch and was not material to the results of operations for
the three- and nine-month periods ended September 25, 1998.
7
<PAGE>
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that all start-up costs be expensed as
incurred. Closed-end mutual fund distribution costs, previously deferred and
amortized by Merrill Lynch over a four-year period, should be expensed under
the SOP. Merrill Lynch is currently evaluating the effect of adopting SOP
98-5.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which
requires all derivatives to be recorded on the balance sheet at fair value.
SFAS No. 133 is effective for years beginning after June 15, 1999. The
expected impact of adoption on Merrill Lynch's results of operations has not
yet been determined.
- --------------------------------------------------------------------------------
Note 4. Short-Term Borrowings
- --------------------------------------------------------------------------------
Short-term borrowings at September 25, 1998 and December 26, 1997 are
presented below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $ 88,740 $72,127
Securities loaned transactions 11,434 7,040
-------- -------
Total $100,174 $79,167
======== =======
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 27,247 $30,379
Demand and time deposits 13,642 10,712
Bank loans and other 2,520 3,961
-------- -------
Total $ 43,409 $45,052
======== =======
- -----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Note 5. Preferred Securities Issued by Subsidiaries
- --------------------------------------------------------------------------------
In January and June 1998, Merrill Lynch Preferred Capital Trust III and IV
(the "Trusts"), subsidiaries of ML & Co., issued $750 and $400 of Trust
Originated Preferred Securities(Service Mark), respectively. The Trusts hold
preferred securities of limited partnerships, which are also subsidiaries of
ML & Co. The assets of the limited partnerships consist primarily of debt
securities of ML & Co. and certain of its subsidiaries. ML & Co. has
guaranteed, on a subordinated basis, certain payments by the Trusts and the
limited partnerships.
Subsequent to quarter end, Merrill Lynch Preferred Capital Trust V issued $850
of Trust Originated Preferred Securities.
- --------------------------------------------------------------------------------
Note 6. Shares Exchangeable into Common Stock
- --------------------------------------------------------------------------------
In August 1998, Merrill Lynch & Co., Canada Ltd. issued 4,831,224
Exchangeable Shares in connection with Merrill Lynch's merger with Midland
(see Note 2). Holders of Exchangeable Shares receive dividend, voting, and
other rights equivalent to those of ML & Co. common stockholders.
Exchangeable Shares are exchangeable at any time, at the option of the
holder, on a one-for-one basis into ML & Co. common stock. Merrill Lynch may
redeem all outstanding Exchangeable Shares for ML & Co. common stock after
January 31, 2011, or earlier under certain circumstances.
8
<PAGE>
- --------------------------------------------------------------------------------
Note 7. Common Stock
- --------------------------------------------------------------------------------
On April 14, 1998, stockholders approved an amendment of ML & Co.'s
certificate of incorporation to increase the authorized number of shares of
common stock from 500 million to 1 billion.
- --------------------------------------------------------------------------------
Note 8. Provision for Costs Related to Staff Reductions
- --------------------------------------------------------------------------------
Merrill Lynch recognized a $430 provision for costs related to staff
reductions ($288 after-tax) during the 1998 third quarter. The provision
covers primarily severance costs, but also includes costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. The staff reduction program includes reductions in the workforce
of approximately 3,400 personnel, or about 5% of the global workforce.
Approximately 25% of these reductions are producers in certain debt markets
and other Corporate and Institutional Client Group businesses. The remaining
reductions are in direct business support staff. In addition, full-time
equivalent consultants, mainly involved in technology projects, are being
reduced by approximately 900.
- --------------------------------------------------------------------------------
Note 9. Interest Expense
- --------------------------------------------------------------------------------
Interest expense includes payments in lieu of dividends of $2.8 and $5.2 for the
third quarters of 1998 and 1997, respectively. For the nine-month periods ended
September 25, 1998 and September 26, 1997, payments in lieu of dividends were
$15.6 and $13.4, respectively.
- --------------------------------------------------------------------------------
Note 10. Comprehensive Income
- --------------------------------------------------------------------------------
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $(164) $502 $915 $1,466
----- ---- ---- ------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (8) (44) (3) (52)
Net unrealized gains (losses) on investment
securities available-for-sale (9) 5 (9) 27
----- ---- ---- ------
Total other comprehensive loss, net (17) (39) (12) (25)
----- ---- ---- ------
Comprehensive income (loss) $(181) $463 $903 $1,441
===== ==== ==== ======
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
- --------------------------------------------------------------------------------
Note 11. Earnings Per Common Share
- --------------------------------------------------------------------------------
Information relating to earnings (loss) per common share computations
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) $ (164) $ 502 $ 915 $ 1,466
Preferred stock dividends 9 9 28 29
-------- ------- ------- --------
Net earnings (loss) applicable to
common stockholders $ (173) $ 493 $ 887 $ 1,437
======== ======= ======= ========
- --------------------------------------------------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares outstanding 357,620 339,799 354,134 339,214
-------- ------- ------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 29,546 30,575 30,853 29,167
FCCAAP shares 16,232 21,124 16,710 20,773
Restricted units 5,023 5,352 4,947 5,043
ESPP shares 32 26 52 53
Convertible debt - - - 180
------- ------- ------- --------
Dilutive potential common shares 50,833 57,077 52,562 55,216
------- ------- ------- --------
Total weighted-average diluted shares 408,453 (3) 396,876 406,696 394,430
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (.49) $ 1.45 $ 2.50 $ 4.24
Diluted earnings (loss) per share (.49) (3) 1.24 2.18 3.64
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At September 25, 1998, there were 19,497 instruments that were considered
antidilutive and were not included in the above computations.
(2) See Note 9 in the Notes to Consolidated Financial Statements in the 1997
Annual Report for a description of these instruments.
(3) Since accounting principles require that a net loss not be diluted by
potential common shares, diluted loss per share for the 1998 third quarter
is calculated using weighted-average shares outstanding only.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 12. Derivatives and Other Commitments
- --------------------------------------------------------------------------------
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.
10
<PAGE>
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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE CURRENCY PRICE PRICE
(in billions) RISK (1)(2) RISK (3) RISK RISK
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPTEMBER 25, 1998
------------------
Swap agreements $1,823 $172 $18 $ 5
Forward contracts 91 246 - 5
Futures contracts 256 5 7 3
Options purchased 223 119 76 3
Options written 178 122 65 4
DECEMBER 26, 1997
-----------------
Swap agreements $1,482 $159 $17 $ 2
Forward contracts 59 196 1 15
Futures contracts 202 1 15 2
Options purchased 99 71 60 3
Options written 133 73 44 3
- -----------------------------------------------------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread or default risk of the underlying financial instrument.
(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.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The notional or contractual amounts of derivatives used to hedge exposure
related to borrowings or other non-trading activities follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in billions) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest rate derivatives(1) $66 $53
Currency derivatives(1) 23 10
Equity derivatives 4 3
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes swap contracts totaling $2 billion in notional amount 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 25, 1998 would not have a
material effect on the consolidated financial condition of Merrill Lynch.
11
<PAGE>
- --------------------------------------------------------------------------------
Note 13. Regulatory Requirements
- --------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer and a subsidiary of ML & Co., 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 25, 1998, MLPF&S's regulatory net capital of
$3,263 was 14% of aggregate debit items, and its regulatory net capital in
excess of the minimum required was $2,796.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities and a subsidiary of ML & Co., 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 25, 1998,
MLGSI's liquid capital of $1,484 was 217% of its total market and credit risk,
and liquid capital in excess of the minimum required was $661.
Merrill Lynch International ("MLI"), a registered U.K. broker-dealer and a
subsidiary of Merrill Lynch, is subject to the capital requirements of the
Securities and Futures Authority ("SFA"). Financial resources, as defined, must
exceed the total financial resources requirement of the SFA. At September 25,
1998, MLI's financial resources were $3,529 and exceeded the minimum requirement
by $904.
- --------------------------------------------------------------------------------
Note 14. Litigation Matters
- --------------------------------------------------------------------------------
An action was brought in the United States District Court for the Central
District of California by Orange County, California, which filed a bankruptcy
petition in the United States Bankruptcy Court for the Central District of
California on December 6, 1994, against ML & Co. and certain of its
subsidiaries in connection with Merrill Lynch's business activities with the
Orange County Treasurer-Tax Collector. In June 1998, an agreement to settle
this action was reached, which had no impact on the 1998 nine-month results
of operations. Execution of the terms of the settlement agreement, including
dismissal of the action, is conditioned upon court approval of an order
barring certain claims for contribution and indemnity. See Item 1, "Legal
Proceedings," in Part II of ML & Co.'s Quarterly Report on Form 10-Q for the
quarter ended June 26, 1998.
12
<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
25, 1998, and the related condensed consolidated statements of earnings for
the three- and nine-month periods ended September 25, 1998 and September 26,
1997, and condensed consolidated statements of cash flows for the nine-month
periods ended September 25, 1998 and September 26, 1997. These financial
statements are the responsibility of the management of Merrill Lynch. The
accompanying condensed consolidated financial statements give retroactive
effect to the 1998 merger of Merrill Lynch and Midland Walwyn Inc., which has
been accounted for as a pooling-of-interests, as described in Note 2 to the
condensed consolidated financial statements.
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 26,
1997, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 23, 1998, we expressed an
unqualified opinion on those consolidated financial statements. We also have
previously audited the consolidated financial statements of Midland Walwyn
Inc. for the year ended December 31, 1997, and in our report
dated February 17, 1998 we expressed an unqualified opinion on those
consolidated financial statements (not presented herein). We also audited the
adjustments to the condensed statements that were applied to restate the
December 26, 1997 consolidated balance sheet of Merrill Lynch (not presented
herein). In our opinion, such adjustments are appropriate and have been
properly applied and the information set forth in the accompanying condensed
consolidated balance sheet as of December 26, 1997 is fairly stated, in all
material respects, in relation to the restated consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
November 9, 1998
13
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, advisory,
insurance, and related services worldwide. Merrill Lynch conducts its
businesses in global financial markets that are influenced by numerous
unpredictable factors including economic conditions, monetary policies, the
liquidity of global markets, international and regional political events,
regulatory developments, the competitive environment, and investor sentiment.
These conditions or events can significantly affect 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.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but
are not limited to, the factors listed in the previous paragraph hereof,
actions and initiatives taken by both current and potential competitors, the
impact of current, pending, and future legislation and regulation both in the
United States and throughout the world, and the other risks and uncertainties
detailed in the following sections. MERRILL LYNCH UNDERTAKES NO
RESPONSIBILITY TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
Business Environment
- --------------------------------------------------------------------------------
Global financial markets experienced significant turmoil during the 1998 third
quarter, particularly in August and September, after mixed performances during
the first six months of the year. The collapse of the Russian economy, combined
with currency controls in Malaysia and delays in International Monetary Fund
support for Brazil, led to a "flight to quality" by investors. This credit
quality movement resulted in a significant increase in credit risk premiums, a
general absence of liquidity in emerging and other debt markets, and defaults by
certain highly leveraged counterparties, including hedge funds. These adverse
conditions significantly affected global debt markets, which suffered declines
during the 1998 third quarter and into the 1998 fourth quarter.
Credit spreads, which represent the risk premiums paid by issuers based on
credit rating or perception, widened significantly during the 1998 third quarter
relative to the corresponding 1997 period. The unprecedented movement in credit
spreads during the 1998 third quarter led to large valuation losses on debt
instruments in many global markets. These valuation losses were not offset by
the typical hedge for these instruments, U.S. Treasury securities, because the
market volatility reduced the effectiveness of these hedges.
Long-term U.S. interest rates, as evidenced by the yield on 30-year U.S.
Treasury bond, decreased during the 1998 third quarter to 4.96%, marking the
first time since 1967 that this rate fell below 5%. This decline resulted from
continued low inflation and the flight to quality, as well as low levels of
unemployment. Similar to long-term U.S. interest rates, European and Japanese
interest rates declined during the 1998 third quarter and were lower relative
to the 1997 third quarter.
14
<PAGE>
During the 1998 third quarter, U.S. equity markets suffered their worst price
declines since 1990, primarily due to declining corporate earnings in certain
sectors and global financial unrest. These events precipitated a Dow Jones
Industrial Average market correction of 6.4%, or 513 points, on August 31,
the second largest point loss on record. Volatile market conditions
throughout the 1998 third quarter also led to record net outflows from mutual
funds in August, the first month in almost a decade when withdrawals exceeded
purchases. As a result of reduced investor confidence and market volatility,
the Dow Jones Industrial Average and Nasdaq Composite fell 12.4% and 10.6%,
respectively, from the end of the 1998 second quarter. Despite the U.S.
market volatility, commissions revenues industrywide were strong during the
1998 third quarter, reflecting near-record volumes.
Security prices in many global equity markets declined during the 1998 third
quarter, with the Dow Jones World Index (Registered Trademark) falling 12.6%
from the end of the 1998 second quarter and 4.3% from the corresponding 1997
period. Slower global earnings growth, combined with the collapse of the
Russian economy, led to continued declines in most non-U.S. markets,
particularly Russia, Asia, and Latin America. European markets, which had
strong performances throughout the first six months of 1998, also declined as
a result of these events. Despite third quarter declines, most European
markets were up significantly from the end of the 1997 third quarter.
Global underwriting volume decreased significantly during the 1998 third
quarter from first half 1998 levels as volatile market conditions led to a
significant decline in bond and equity issuances during the latter half of
August and throughout September. Despite this slowdown, underwriting fees for
the 1998 third quarter were higher compared with the corresponding 1997
period, due to strong debt and equity issuances in July.
Strategic services activities declined during the 1998 third quarter,
particularly in late August and throughout September, as deteriorating market
conditions made financing mergers and acquisitions more difficult.
Industrywide disclosed fees for mergers and acquisitions were down 50% from
the 1998 second quarter; 1998 third quarter industrywide revenues, however,
surpassed the amount recorded in the comparable 1997 period due to an
increase in the number of completed deals.
Subsequent to quarter end, a group of 14 financial institutions, including
Merrill Lynch, recapitalized Long-Term Capital Portfolio, L.P., a highly
leveraged hedge fund. The aggregate recapitalization of $3.6 billion, of which
Merrill Lynch contributed $300 million, was undertaken to avoid immediate
liquidation of the hedge fund's positions in an illiquid market and the likely
resulting market disruptions.
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 effects of market downturns by expanding its global
presence, developing and maintaining long-term client relationships, monitoring
costs and risks, and continuing to diversify revenue sources.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as diminishing margins in many mature products and
services. In addition, the recent relaxation of banks' barriers to entry into
the securities industry and expansion by insurance companies into traditional
brokerage products, coupled with the potential repeal of the laws separating
commercial and investment banking activities in the future, have increased the
number of companies competing for a similar customer base.
15
<PAGE>
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED INCREASE (DECREASE)
---------------------------------------- 3Q98 VERSUS
SEPTEMBER 25, JUNE 27, SEPTEMBER 26, -------------------
(dollars in millions, except per share amounts) 1998 1998(1) 1997(1) 2Q98 3Q97
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $8,712 $9,581 $8,338 (9.1)% 4.5%
Net revenues 3,849 4,855 4,142 (20.7) (7.1)
Pre-tax earnings (loss) (206) 918 789 (122.5) (126.2)
Net earnings (loss) (164) 551 502 (129.8) (132.6)
Net earnings (loss) applicable
to common stockholders (173) 541 493 (132.1) (135.2)
Earnings (loss) per common share
Basic (.49) 1.52 1.45 (132.2) (133.8)
Diluted (.49) 1.32 1.24 (137.1) (139.5)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts have been restated to reflect the Midland Walwyn merger as
required under pooling-of-interests accounting.
The following discussion emphasizes the comparison between the third quarters of
1998 and 1997 and presents additional information comparing the nine-month
periods where appropriate.
Merrill Lynch reported a 1998 third quarter net loss of $164 million, which
included an after-tax provision for costs related to staff reductions of $288
million ($430 million pre-tax). Excluding the staff reduction provision, 1998
third quarter net earnings were $124 million. These results compare with net
earnings of $502 million in the 1997 third quarter and $551 million in the 1998
second quarter.
Excluding the staff reduction provision, earnings per common share were $.32
basic and $.28 diluted. Return on average common equity excluding the provision
was 4.8%. Earnings excluding the effects of goodwill amortization and the
after-tax staff reduction provision were $179 million for the 1998 third
quarter, or $.42 per diluted share.
The staff reduction program is designed to reduce expenses and selectively
resize certain Merrill Lynch businesses; management anticipates annual
savings of $500 million from the annualized level of fixed and semi-fixed
costs experienced during the 1998 third quarter. The program includes
reductions in the workforce through severance and attrition of approximately
3,400 personnel, or about 5% of Merrill Lynch's global workforce of
approximately 65,000. Approximately 25% of these reductions are producers in
certain debt markets and other Corporate and Institutional Client Group
businesses. The remaining reductions are in direct business support staff. In
addition, full-time equivalent consultants, mainly involved in technology
projects, are being reduced by approximately 900. The staff reduction
provision covers primarily severance costs, as well as costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. Despite these near-term staff reductions, Merrill Lynch will
continue to hire Financial Consultants and other producers in certain
business lines.
For the 1998 nine months, net earnings were $915 million, compared with $1.5
billion for the corresponding 1997 period. Nine-month earnings before the staff
reduction provision were $1.2 billion, down 18% from the 1997 nine months.
Year-to-date earnings per common share including and excluding the staff
reduction provision were $2.18 and $2.89, respectively, down from $3.64 in the
comparable 1997 period.
16
<PAGE>
Despite difficult market conditions during the 1998 third quarter, Merrill Lynch
continued to execute its global strategy with the following initiatives:
- - the merger with Midland Walwyn Inc., Canada's largest independent
full-service securities firm;
- - the opening of 33 retail offices in Japan;
- - the purchase of a 51% interest in Phatra Securities Company Limited,
Thailand's leading investment bank; and
- - the announcement of an agreement to purchase Howard Johnson & Co., a
benefits consulting and actuarial firm, which was consummated subsequent to
quarter end.
These measures continue to enhance Merrill Lynch's global presence, and,
combined with other acquisitions including Mercury Asset Management ("Mercury"),
Smith New Court PLC, and McIntosh Securities Limited, are expected to further
Merrill Lynch's key strategic priorities.
Non-U.S. net revenues were approximately 21% of Merrill Lynch's total net
revenues in the 1998 third quarter, compared with approximately 27% in the 1997
third quarter, reflecting the volatility that has adversely affected most
non-U.S. markets. The percentage of net revenues for the 1998 third quarter and
nine months by strategic priority was as follows:
- --------------------------------------------------------------------------------
PERCENTAGE OF NET REVENUES BY STRATEGIC PRIORITY
- --------------------------------------------------------------------------------
[PIE CHARTS]
<TABLE>
<S> <C> <C>
1998 1998
Third Quarter Nine Months
------------- -----------
U.S. Private Client 50% 43%
Corporate and
Institutional Client 28% 38%
Asset Management 13% 11%
International
Private Client 9% 8%
</TABLE>
- --------------------------------------------------------------------------------
Commissions revenues are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Listed and over-the-counter $ 818 $ 730 12% $2,386 $2,044 17%
Mutual funds 445 430 4 1,442 1,170 23
Other 186 168 11 547 477 15
------ ------ ------ ------
Total $1,449 $1,328 9 $4,375 $3,691 19
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commissions revenues remained at near-record levels as a result of record global
listed securities volume and increased mutual fund activity. Listed securities
revenues benefited from increased trading volumes on most European and U.S.
stock exchanges.
17
<PAGE>
Significant components of interest and dividend revenues and interest expense
follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- --------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND REVENUES
Trading assets $1,392 $1,352 $ 4,126 $ 3,925
Resale agreements 1,550 1,191 4,298 3,277
Securities borrowed 786 853 2,643 2,683
Margin lending 712 601 2,105 1,569
Other 639 450 1,731 1,280
------ ------ ------- -------
Total 5,079 4,447 14,903 12,734
------ ------ ------- -------
INTEREST EXPENSE
Repurchase agreements 1,887 1,409 5,037 3,774
Borrowings 1,458 1,264 4,250 3,331
Trading liabilities 673 761 2,160 2,271
Securities loaned 389 408 1,428 1,616
Other 456 354 1,340 950
------ ------ ------- -------
Total 4,863 4,196 14,215 11,942
------ ------ ------- -------
NET INTEREST AND DIVIDEND PROFIT $ 216 $ 251 $ 688 $ 792
====== ====== ======= =======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and dividend revenues and expenses are a function of the level and mix
of interest-earning assets and interest-bearing liabilities and the prevailing
level, term structure, and volatility of interest rates. Net interest and
dividend profit decreased 14% from the 1997 third quarter, primarily due to
additional financing costs related to the Mercury acquisition.
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate and
currency characteristics of the borrowings to the assets funded by borrowing
proceeds. The effect of this hedging activity, which is included in "Borrowings"
above, increased interest expense by $52 million and $14 million for the 1998
and 1997 third quarters and by $120 million and $15 million for the 1998 and
1997 nine months, respectively.
Principal transactions revenues were $279 million in the 1998 third quarter,
down 71% from the 1997 corresponding period, reflecting significant economic
turmoil in global debt markets. Losses in most fixed-income and credit-sensitive
products and lower revenues in interest rate and currency swaps and foreign
exchange contracts were partially offset by higher revenues from non-U.S.
equities.
18
<PAGE>
The following table provides information on aggregate trading revenues,
including related net interest. Interest revenue and expense amounts are based
on financial reporting categories and management's assessment of the cost to
finance trading positions, after consideration of the underlying liquidity of
these positions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL NET INTEREST NET
TRANSACTIONS REVENUES TRADING
REVENUES (EXPENSES) REVENUES
---------------- --------------- ---------------
(in millions) 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THIRD QUARTER
- -------------
Taxable fixed-income $ (368) $ 216 $ 14 $ 38 $ (354) $ 254
Equities and equity derivatives 341 327 (27) (26) 314 301
Interest rate and currency swaps 179 297 (56) (52) 123 245
Municipals 83 73 3 3 86 76
Foreign exchange and commodities 44 51 2 2 46 53
------ ------ ----- ----- ------ ------
Total $ 279 $ 964 $ (64) $ (35) $ 215 $ 929
====== ====== ===== ===== ====== ======
NINE MONTHS
- -----------
Taxable fixed-income $ (48) $ 876 $ 155 $ 203 $ 107 $1,079
Equities and equity derivatives 1,233 1,079 (81) (73) 1,152 1,006
Interest rate and currency swaps 889 894 (179) (153) 710 741
Municipals 224 239 15 11 239 250
Foreign exchange and commodities 141 123 47 7 188 130
------ ------ ----- ----- ------ ------
Total $2,439 $3,211 $ (43) $ (5) $2,396 $3,206
====== ====== ===== ===== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Trading and related hedging and financing activities affect the recognition of
both principal transactions revenues and net interest and dividend profit. In
assessing the profitability of its trading activities, Merrill Lynch aggregates
net interest and principal transactions revenues. For financial reporting
purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest profit, depending on the nature
of the specific instruments. Changes in the composition of trading inventories
and hedge positions can cause the recognition of revenues within these
categories to fluctuate.
Taxable fixed-income trading losses were $368 million during the 1998 third
quarter, down 270% from the 1997 third quarter revenues, primarily due to
lower revenues from corporate and emerging market bonds and non-U.S.
governments and agencies securities. Many of these instruments were
significantly impacted by an unprecedented widening of credit spreads and a
virtual absence of liquidity. Revenues from these instruments were also
affected by the reduced effectiveness of U.S. Treasury hedges caused by
market volatility. Slightly offsetting these decreases were positive results
in U.S. Government and agencies revenues as investors sought higher quality
debt instruments.
Equities and equity derivatives trading revenues were $341 million, up 4% from
the 1997 third quarter due to sharply higher revenues from non-U.S. equities,
particularly in Europe. Revenues from U.S. equities declined modestly from the
1997 third quarter, but were up from the 1998 second quarter.
Interest rate and currency swap trading revenues declined 40% to $179 million
as a result of credit losses, including counterparty default, on emerging
market and credit derivatives. Municipal securities trading revenues were up
14% to $83 million due to higher customer demand. Foreign exchange and
commodities trading revenues declined 15% to $44 million, primarily due to
fluctuations in the U.S. dollar versus the Malaysian ringgit, Indonesian
rupiah, and Thai baht.
19
<PAGE>
Investment banking revenues were down 2% from the 1997 third quarter to $711
million in the 1998 third quarter as a decline in underwriting was substantially
offset by an increase in strategic services fees. A summary of Merrill Lynch's
investment banking revenues follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. (DEC.) 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Underwriting $384 $473 (19)% $1,648 $1,431 15%
Strategic services 327 251 31 792 584 36
---- ---- ------ ------
Total $711 $724 (2) $2,440 $2,015 21
==== ==== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Underwriting revenues in the 1998 third quarter were $384 million, down 19% from
1997 third quarter levels. An industrywide slowdown in debt and equity issuances
resulting from global market volatility led to lower revenues, particularly from
high-yield and equity products. Merrill Lynch maintained its position as the
leading underwriter of total U.S. and global debt and equity offerings for the
1998 third quarter. Merrill Lynch's underwriting market share information based
on transaction value follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
-------------------- --------------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. PROCEEDS
Debt 14.8% 1 16.0% 1
Equity 12.3 2 12.8 2
Debt and Equity 15.2 1 15.8 1
GLOBAL PROCEEDS
Debt 13.4 1 13.4 1
Equity 9.5 4 10.5 3
Debt and Equity 13.6 1 13.3 1
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Securities Data Co. ("SDC") statistics based on full credit to book
manager.
For the 1998 nine months, Merrill Lynch ranked No. 1 in both U.S. and global
debt and equity underwritings.
Strategic services fees advanced to a record $327 million in the 1998 third
quarter, benefiting from an increase in completed merger and acquisition
transactions compared to the corresponding 1997 period. Merrill Lynch
continued to lead the industry in U.S. completed mergers and acquisitions for
both the 1998 third quarter and year-to-date periods.
20
<PAGE>
Merrill Lynch's merger and acquisition market share information for the 1998 and
1997 third quarters based on transaction value follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
------------------ ------------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPLETED TRANSACTIONS
U.S. 41.5% 1 38.8% 1
Global 29.9 2 25.6 1
ANNOUNCED TRANSACTIONS
U.S. 47.1 2 24.1 2
Global 33.5 2 14.5 4
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: SDC statistics based on full credit to both target and acquiring
companies' advisors.
Merrill Lynch's asset management and portfolio service fees are summarized
below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. (DEC.) 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset management fees(1) $501 $319 57% $1,553 $ 903 72%
Portfolio service fees 310 219 41 850 586 45
Account fees 110 104 5 344 322 7
Other fees 74 89 (17) 266 252 6
---- ---- ------ -----
Total $995 $731 36 $3,013 $2,063 46
==== ==== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Approximately three-quarters of the increases in asset management fees is
attributable to the Mercury acquisition.
Total assets in client accounts or under management increased $275 billion from
the end of the 1997 third quarter to $1.3 trillion at the end of the 1998 third
quarter. The changes in these balances are described as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
-------------------------
SEPTEMBER 26, NEW ASSET SEPTEMBER 25,
(in billions) 1997 MONEY(1) DEPRECIATION 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets in client accounts or
under management $1,044 $ 276 $ (1) $1,319
Total assets under management 274 205 (12) 467
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $167 billion of assets related to the fourth quarter 1997
acquisition of Mercury.
Asset management fees significantly increased from the 1997 third quarter due
to growth in assets under management, primarily from the acquisition of
Mercury. Both assets under management and total assets in client accounts or
under management increased sharply from the end of the 1997 third quarter,
but were down from the end of the 1998 second quarter due to declines in net
asset values caused by global market downturns. Portfolio service fees were
considerably higher than the corresponding 1997 period due to increased
revenues from various fee-based products including Merrill Lynch
Consults(Registered Trademark), Financial Advantage(Service Mark), Mutual
Fund Advisor(Service Mark), and Asset Power(Registered Trademark). Account
fees rose due to an increase in the number of customer accounts. Other
fee-based revenues were down primarily due to lower revenues from
mortgage-related activities, attributable in part to the sale of a
controlling interest in a real estate services subsidiary (see discussion in
the next paragraph).
21
<PAGE>
Other revenues were up 38% from the 1997 third quarter to $199 million in the
1998 third quarter, attributable in part to a gain on the sale of a majority
interest in Lender's Service, Inc., a residential real estate services
provider.
Merrill Lynch's non-interest expenses are summarized below. Certain of these
expenses have been reclassified from prior periods to conform to the current
period presentation.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ----------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $2,010 $2,101 $ 6,956 $6,281
------ ------ ------- ------
Non-interest expenses,
excluding compensation and benefits:
Communications and technology 487 328 1,311 920
Occupancy and related depreciation 227 188 645 548
Professional fees 165 131 459 398
Advertising and market development 203 148 580 456
Brokerage, clearing, and exchange fees 186 143 509 383
Goodwill amortization 55 16 165 47
Provision for costs related to staff reductions 430 - 430 -
Other 292 298 809 837
------ ------ ------- ------
Total non-interest expenses,
excluding compensation and benefits 2,045 1,252 4,908 3,589
------ ------ ------- ------
Total non-interest expenses $4,055 $3,353 $11,864 $9,870
====== ====== ======= ======
Compensation and benefits
as a percentage of net revenues 52.2% 50.7% 51.7% 51.3%
Compensation and benefits as a percentage of
pre-tax earnings before compensation and benefits 90.0%(1) 72.7% 77.4%(1) 72.6%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes provision for costs related to staff reductions.
Non-interest expenses increased 21% from the 1997 third quarter to $4.1
billion. Excluding the staff reduction provision, $78 million of costs
related to the launch of Merrill Lynch Japan Securities Co. ("MLJS"), and
goodwill amortization, non-interest expenses rose 5%. Non-interest expenses
excluding the staff reduction provision decreased 8% from the 1998 second
quarter.
Compensation and benefits, the largest expense category, was down 4% from the
1997 third quarter to $2.0 billion. Lower incentive compensation from reduced
profitability was partially offset by higher Financial Consultant
productivity and increased headcount attributable in part to recent
acquisitions. Compensation and benefits expense was 52.2% of net revenues in
the 1998 third quarter, compared with 50.7% in the corresponding 1997 period.
Headcount increased by approximately 7,500 employees since the end of the
1997 third quarter, resulting in 64,800 employees at the end of the 1998
third quarter. This increase, which does not reflect staff reductions
associated with business resizing, is attributable to Merrill Lynch's recent
acquisitions and strategic business expansion.
Communications and technology expense was $487 million, up 49% from the 1997
third quarter because of increased systems consulting costs related to the Year
2000 and European Monetary Union initiatives, and higher technology-related
depreciation. Occupancy and related depreciation expense rose 21% to $227
million as a result of global expansion, including a combined total of $23
million associated with MLJS and Mercury.
22
<PAGE>
Professional fees increased 25% to $165 million due in part to higher costs for
various strategic market studies and one-time integration costs for Midland
Walwyn. Advertising and market development expense was $203 million, up 37% from
the 1997 third quarter as a result of higher sales promotion and recognition
program costs and increased travel. Brokerage, clearing, and exchange fees rose
31% to $186 million, primarily due to $28 million in custody and clearing costs
for Mercury. Goodwill amortization, a non-cash expense, increased from $16
million in the 1997 third quarter to $55 million in the 1998 third quarter as a
result of the Mercury acquisition. Other expenses were $292 million in the 1998
third quarter, down 2% from the comparable 1997 period.
The income tax benefit was $75 million for the 1998 third quarter as compared
with expense of $275 million in the year-ago period. The effective tax rate was
36.4% in the 1998 third quarter compared with 34.8% in the corresponding 1997
period.
Subsequent to quarter end, Merrill Lynch announced that it entered into an
agreement to sell its New York Stock Exchange specialist business. The sale,
subject to various regulatory approvals and other conditions, is expected to
be completed in the 1998 fourth quarter.
- --------------------------------------------------------------------------------
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
objectives:
1. Maintain alternative funding sources such that all debt obligations
maturing within one year can be repaid when due without issuing new
unsecured debt or liquidating any business assets;
2. Concentrate unsecured, general purpose borrowings at the ML & Co. level;
and
3. 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 that, at September 25, 1998,
totaled $6.9 billion and were not drawn upon. To finance the purchase of
Mercury, Merrill Lynch obtained additional short-term bank credit facilities
totaling 2.0 billion British pounds (approximately $3.3 billion), which were
drawn upon and repaid in full during the 1998 first half from the proceeds of
long-term financings.
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 turns over frequently and is typically
match-funded with liabilities having similar maturities and cash flow
characteristics. At September 25, 1998, a significant portion of Merrill
Lynch's assets were considered readily marketable by management.
Merrill Lynch concentrates its unsecured, general purpose borrowings at the
ML & Co. 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, and enhanced flexibility to meet variable funding requirements of
subsidiaries.
Merrill Lynch also strives to expand and diversify its funding programs and
investor and creditor base. Merrill Lynch benefits by distributing most of
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.
23
<PAGE>
Commercial paper is the major source of short-term general purpose funding.
Commercial paper outstanding totaled $27.2 billion at September 25, 1998 and
$30.4 billion at December 26, 1997, which was equal to 8% and 10% of total
assets at third quarter-end 1998 and year-end 1997, respectively. Commercial
paper outstanding at September 25, 1998 decreased $8 billion from the end of the
1998 second quarter as a result of the increased use of repurchase agreements,
securities loaned transactions, and long-term borrowings, combined with reduced
asset levels.
Outstanding long-term debt at September 25, 1998 increased to $55.1 billion from
$43.1 billion at December 26, 1997. Major components of the change in long-term
debt for the 1998 nine months follow:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(in millions)
- --------------------------------------------------------------------------------
<S> <C>
Balance at December 26, 1997 $ 43,143
Issuances and resales 22,611
Settlements and repurchases (11,052)
Other 362
--------
Balance at September 25, 1998 (1) $ 55,064
========
- ------------------------------------------------------------------------------
</TABLE>
(1) At the end of the 1998 third quarter, $41.8 billion of long-term debt had
maturity dates that extend beyond one year.
Approximately $83.7 billion of indebtedness at September 25, 1998 is considered
senior indebtedness as defined under various indentures.
At September 25, 1998, Merrill Lynch's senior long-term debt, preferred
stock, and Trust Originated Preferred Securities (Service Mark)
("TOPrS" (Registered Trademark)) were rated by recognized credit rating agencies
as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPRS
RATING AGENCY RATINGS RATINGS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA, Inc. AA AA-
Japan Rating & Investment Information, Inc. AA Not Rated
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
As part of an overall liquidity management strategy, Merrill Lynch's insurance
subsidiaries regularly review the funding requirements of their contractual
obligations for in-force, fixed-rate life insurance and annuity contracts as
well as expected future acquisition and maintenance expenses for all contracts.
The insurance subsidiaries market primarily variable life insurance and variable
annuity products. These products are not subject to the interest rate,
asset/liability matching, or credit risks attributable to fixed-rate products,
thereby reducing the insurance subsidiaries' risk profile and liquidity demands.
At September 25, 1998, approximately 81% of invested assets of insurance
subsidiaries were considered readily marketable by management.
24
<PAGE>
- --------------------------------------------------------------------------------
Capital Resources and Capital Adequacy
- --------------------------------------------------------------------------------
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $9.4 billion in
common equity and $425 million in preferred stock at September 25, 1998. In
January and June 1998, certain subsidiaries of ML & Co. issued $750 million
and $400 million of perpetual TOPrS, respectively. These subsidiary-issued
preferred securities, in addition to $627 million in outstanding preferred
securities of other subsidiaries, further strengthen Merrill Lynch's equity
capital base. Subsequent to the 1998 third quarter end, $850 million of
perpetual TOPrS were issued by a subsidiary.
During the 1998 third quarter, Merrill Lynch acquired the outstanding shares of
Midland Walwyn. A combination of ML & Co. common stock and exchangeable
shares of a subsidiary was issued as consideration, resulting in a $210 million
increase to common equity (see Notes 2 and 6 to the Consolidated Financial
Statements - Unaudited for further information).
Merrill Lynch's leverage ratios were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO (1) RATIO (2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PERIOD-END
September 25, 1998 30.5x 18.5x
December 26, 1997 32.4x 20.7x
AVERAGE (3)
Nine months ended September 25, 1998 35.0x 20.0x
Year ended December 26, 1997 35.3x 21.3x
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less (a) securities received as collateral, net of securities
pledged as collateral, (b) securities pledged as collateral, (c)
receivables under (i) resale agreements and (ii) securities borrowed
transactions, to total stockholders' equity and preferred securities issued
by subsidiaries.
(3) Computed using month-end balances.
Overall capital needs are continually reviewed to ensure that Merrill Lynch's
capital base can support the estimated risks of its businesses as well as the
regulatory and legal capital requirements of its subsidiaries. Statistic-based
product risk models are used to estimate potential losses arising from market
and credit risks. These 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 capital base of $11.6 billion is
adequate.
There were no common stock repurchases during the 1998 three- and nine-month
periods; Merrill Lynch repurchased 0.2 and 13.6 million shares of common stock
during the corresponding 1997 periods. In July 1998, Merrill Lynch rescinded its
share repurchase authority in order to facilitate pooling-of-interests
accounting for the Midland Walwyn merger.
Merrill Lynch operates in many regulated businesses that require various minimum
levels of capital (see Note 13 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.
25
<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 is building a new European
headquarters in London with expected costs of approximately $650 million; $125
million has been spent to date related primarily to land. Completion of this
facility is expected to occur in 2001. During 1997, Merrill Lynch approved a
plan to construct an office complex in central New Jersey to consolidate certain
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) ("TGA" (Service Mark)) and Year 2000 and European Economic and Monetary
Union systems compliance. The TGA system, a technology platform which is now
available to virtually all Financial Consultants, was completed during the
1998 third quarter. In the future, new system applications and system
upgrades will continue to be added to the platform as necessary.
- --------------------------------------------------------------------------------
Year 2000 Compliance
As the millennium approaches, Merrill Lynch has undertaken initiatives to
address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly interpret the year
as 1900. Left uncorrected, the Y2K problem may cause information technology
systems (e.g., computer databases) and non-information technology systems
(e.g., elevators) to produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal Y2K
problem and that the company is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. Merrill Lynch
expects the renovation phase (as discussed below) of its Year 2000 efforts to
be substantially completed by January 31, 1999, thereby allowing the company
to focus on additional testing efforts and integration of the Year 2000
programs of recent acquisitions during the remainder of the year. In order to
focus attention on the Y2K problem, management has deferred certain other
technology projects; however this deferral is not expected to have a material
adverse effect on the company's business, rseults of operations, or financial
condition.
The failure of Merrill Lynch's technology systems relating to a Y2K problem
would likely have a material adverse effect on the company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies,
and other assets. The Y2K problem could also increase Merrill Lynch's
exposure to risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative, which
is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been
organized into six segments or phases: planning, pre-renovation, renovation,
production testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000 Compliance
Initiative, including its annual budget and strategy, and determining the
level of expert knowledge available within Merrill Lynch regarding particular
systems or applications. The pre-renovation phase involved developing a
detailed enterprisewide inventory of applications and systems, identifying
the scope of necessary renovations to each application or system, and
establishing a conversion schedule. During the renovation phase, source
codes are
26
<PAGE>
actually converted, date fields are expanded or windowed (windowing is used
on an exception basis only), test data is prepared, and each system or
application is tested using a variety of Year 2000 scenarios. The production
testing phase validates that a renovated system is functionally the same as
the existing production version, that renovation has not introduced defects,
and that expanded or windowed date fields continue to handle current dates
properly. The certification phase validates that a system can run
successfully in a Year 2000 environment. Finally, the integration testing
phase, which will occur throughout 1999, validates that a system can
successfully interface with both internal and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has
been accomplished by Merrill Lynch employees, with the assistance of
consultants where necessary.
As part of the production testing and certification phases, Merrill Lynch has
performed, and will continue to perform, both internal and external Year 2000
testing intended to address the risks from the Y2K problem. In July 1998,
Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates
in December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also participated in a test sponsored by the Bank
of England's Central Gilts Office.
Each business area within Merrill Lynch also continues to develop specific
contingency plans, with the particular choice of contingency action dependent
on the severity of the problem being addressed, the availability of
alternative products, and the level of importance of the business activity
supported by the problematic system. As part of the Year 2000 Compliance
Initiative, Merrill Lynch has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order to
develop plans to reduce risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with whom it has
important relationships that may be associated with information technology Y2K
problems, as well as parties with whom it has important relationships that may
be associated with non-information technology Y2K problems, such as landlords.
Management is unable, at this point, to ascertain whether all such third
parties will successfully address the Y2K problem, particularly parties
outside the U.S., where it is believed that remediation efforts relating to
the Y2K problem may be less advanced than in the U.S. Merrill Lynch will
continue to monitor third parties' Year 2000 readiness to determine whether
additional or alternative measures are necessary. Such measures may include
the selection of alternate third parties or other efforts designed to mitigate
some of the effects of a third party's noncompliance. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation efforts will be
successful. The failure of securities exchanges, clearing organizations,
vendors, clients, or regulators to resolve their own processing issues in a
timely manner could have a material adverse effect on Merrill Lynch's business,
results of operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated to the
Year 2000 Compliance Initiative. As of the end of the 1998 third quarter, the
total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160
million is remaining. The majority of these remaining expenditures are
expected to cover software remediation, testing, and contingency planning.
There can be no assurance that the costs associated with such remediation
efforts will not exceed those currently anticipated by Merrill Lynch, or that
the costs associated with the remediation efforts or the possible failure of
27
<PAGE>
such remediation efforts would not have a material adverse effect on Merrill
Lynch's business, results of operations, or financial condition.
- ------------------------------------------------------------------------------
European Economic and Monetary Union ("EMU") Initiatives
As of January 1, 1999, the "euro" will be adopted as the common legal
currency of participating member states of the EMU. The euro and
participating member currencies will co-exist through July 1, 2002, with the
euro gradually replacing member national currencies. The introduction of and
conversion to the euro is expected to have significant implications for the
business, as well as the computer systems and operational processes, of
Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the European financial markets, including the
creation of a unified, more liquid capital market in Europe. As financial
markets in EMU member states converge and local barriers are removed,
competition is expected to increase. Merrill Lynch does not expect the
introduction of the euro to have a negative effect on its business, currency
risk, or competitive positioning in the European markets. The International
Swaps and Derivatives Association, Inc. has established an EMU protocol
agreement that parties to derivatives contracts may use to amend their
agreements to ensure continuity of contract during the conversion period.
Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to the
euro and the associated systems and operational implications and challenges
has been divided into three phases: analysis, mobilization, and
implementation. The analysis phase began in the third quarter of 1997 and
focused upon analyzing the likely implications of the EMU and assessing the
operational and systems impact on Merrill Lynch. During this phase, a
database containing the primary compliance challenges of the EMU was
developed, and working groups were established to drive the EMU preparation
effort within the different product lines and principal operating locations.
The mobilization phase began in the fourth quarter of 1997 and focused upon
developing project plans and establishing an organizational and project
structure to address various business requirements. The implementation phase,
which began in December 1997, is concerned with implementing the operational
and systems changes identified as necessary to ensure Merrill Lynch's
compliance with EMU. The implementation phase is expected to continue into
the first quarter of 1999 to resolve any post-conversion issues.
With respect to operational and systems matters, the introduction of the euro
will affect all Merrill Lynch facilities that transact, distribute, or
provide custody or recordkeeping for securities or cash denominated in the
currency of a participating member state. Merrill Lynch systems or procedures
that handle such securities or cash may require modification. The procedural
and systems modifications that Merrill Lynch has identified as necessary for
conversion to the euro include, but are not limited to, such activities as:
- modification of application systems to enable the systems to recognize
and process the euro on an ongoing basis;
- conversion of data, which will require updates to master files to
reflect redenomination;
- alteration of transaction data that includes converting trading and
cash positions from member currency to the euro;
- procedural modifications to reflect the replacement of member currency
bank accounts and settlement instructions with euro equivalents; and
- development of the capability for certain business functions to
translate member currencies into euro at a fixed exchange rate until
July 2002.
28
<PAGE>
The introduction of the euro exposes Merrill Lynch to operational and systems
risks in that the necessary systems modifications will affect clearance,
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper
accounting for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent on
the euro-compliance of third parties, such as trading counterparties,
financial intermediaries (for example, securities and commodities exchanges,
depositories, clearing organizations, and commercial banks), and vendors.
Merrill Lynch will monitor risks associated with third parties on a regular
basis, including, for example, performing assessments of counterparties'
readiness.
In anticipation of the introduction of the euro, the financial authorities
and securities exchanges of certain of the EMU member states are conducting
market tests to assess euro-conversion readiness. Merrill Lynch is
participating in such testing procedures as required, and to date the outcome
of each of those tests has been satisfactory. In addition to participating in
the testing procedures of the EMU member states' financial authorities and
securities exchanges, Merrill Lynch also is implementing its own internal
testing procedures, including four systemwide practice sessions, to prepare
for the conversion. The purpose of these practice sessions is to better
ensure that the conversion plans are comprehensive and that the schedule is
acceptable. The results of such practice sessions will be evaluated and used
to identify those areas in which further modification or remediation is
necessary. While Merrill Lynch will engage in these testing procedures,
certain elements of the conversion process can only be undertaken for the
first time during the conversion. Accordingly, there can be no assurances
that the tests will identify all system deficiencies and necessary
modifications prior to the conversion.
Due to the unprecedented scale of change, including the volume and magnitude
of transactions affected and the number of third parties involved, market
participants are anticipating a period of some disruption immediately
following the conversion. Merrill Lynch has developed, and is continuing to
develop, contingency plans in an effort to reduce the impact of such
disruptions on its business.
As of the end of the 1998 third quarter, the total estimated expenditures
associated with the introduction of and conversion to the euro are expected
to be approximately $79 million, of which approximately $20 million is
remaining (of these amounts, $71 million and $19 million, respectively,
pertain to 1998). These remaining expenditures are expected to be spent on
EMU compliance efforts and project administration. Merrill Lynch expects to
become fully EMU-compliant during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those systems and
operational modifications necessary for the conversion to the euro and is in
the process of implementing the identified modifications. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will
not have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
29
<PAGE>
- --------------------------------------------------------------------------------
Risk Management
- --------------------------------------------------------------------------------
As discussed more fully in Merrill Lynch's 1997 Annual Report on Form 10-K,
Merrill Lynch's Global Risk Management Group and Credit Division provide
independent risk management oversight to supplement the risk management
procedures performed at the business unit level.
The turmoil in global debt markets during the 1998 third quarter resulted in
unprecedented volatility, as noted in the preceding sections of this
Management's Discussion and Analysis. Unprecedented volatility reduces the
effectiveness of risk measurement models that predict current market risk
exposure based on historical volatilities and statistical analysis, such as
value-at-risk.
For instance, prior to this recent market volatility, the largest widening of
credit spreads in emerging markets ever experienced over a period of
approximately one month was approximately 200 basis points, including during
the peso crisis in 1994. In contrast, emerging markets spreads recently
widened by approximately 900 basis points in a three-week period. A common
risk measurement tool such as value-at-risk, even using a 99% confidence
level, would only have considered a widening of approximately 200 basis
points.
Merrill Lynch continuously reviews and assesses its risk management policies
and procedures and risk measurement models in order to improve firmwide risk
management capabilities. Subsequent to quarter end, management of the Global
Risk Management Group and the Credit Division has been consolidated under a
single head of Global Risk and Credit Management.
- --------------------------------------------------------------------------------
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. These
changes were consistent with the growth in the financial statement balances from
fourth quarter 1997 to third quarter 1998.
For the first nine months of 1998, average total assets were $387 billion, up
27% from $304 billion for the 1997 fourth quarter. Average total liabilities
rose 27% to $375 billion from $295 billion for the 1997 fourth quarter. The
major components in the growth of average total assets and liabilities for the
first nine months of 1998 are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in millions) INCREASE GROWTH
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE ASSETS
Trading assets $32,170 28%
Securities pledged as collateral 19,179 N/M
Receivables under resale agreements
and securities borrowed transactions 16,924 14
Goodwill 4,882 N/M
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE LIABILITIES
Obligation to return securities
received as collateral $36,221 N/M
Payables under repurchase agreements
and securities loaned transactions 22,282 22%
Trading liabilities 8,792 14
Long-term borrowings 7,465 18
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/M - Not meaningful.
30
<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 127 requires Merrill
Lynch to recognize collateral on certain resale and repurchase agreements. Due
to the adoption of SFAS No. 127, trading assets and securities pledged as
collateral increased $17 billion and $19 billion, respectively. The offset to
the growth in average assets was a $36 billion increase in the obligation to
return securities received as collateral (for more information on SFAS No. 127,
see Note 3 to the Consolidated Financial Statements - Unaudited).
In addition, during the nine months of 1998, trading assets and liabilities
(which include on-balance-sheet hedges used to manage trading risks) rose as
volume increased, benefiting from higher customer demand. Receivables under
resale agreements and securities borrowed transactions and payables under
repurchase agreements and securities loaned transactions rose to meet higher
funding requirements for increased trading activity. These transactions also
increased as a result of expanded matched-book activity, primarily involving
non-U.S. governments and agencies securities. Goodwill was higher primarily
as a result of the Mercury acquisition.
Assets are funded through diversified sources which include repurchase
agreements and securities loaned transactions, commercial paper and other
unsecured short-term borrowings, long-term borrowings, preferred securities
issued by subsidiaries, and equity. In addition to the increase in repurchase
agreements and securities loaned transactions, the growth in average assets was
funded by higher long-term borrowings, particularly 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 generally continued to increase to satisfy
growing client demand for higher-yielding investments, including emerging
market and other non-U.S. securities. During the 1998 third quarter, these
exposures were intentionally reduced as a result of market volatility.
Non-investment grade holdings have been defined as debt and preferred equity
securities rated as BB+ or lower, or equivalent ratings by recognized credit
rating agencies, certain sovereign debt in emerging markets, amounts due
under derivative contracts from non-investment grade counterparties, and
other instruments that, in the opinion of management, are non-investment
grade.
31
<PAGE>
The following table summarizes positions with non-investment grade issuers (for
cash instruments) or counterparties (for derivatives in a gain position), which
are carried at fair value.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trading assets:
Cash instruments $10,885 $12,993
Derivatives(1) 5,489 3,079
Trading liabilities - cash instruments 2,898 2,962
Marketable investment securities 198 648
Insurance subsidiaries' investments 186 192
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Collateral of $2,597 and $599 was held at September 25, 1998 and
December 26, 1997, 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 25, 1998, the carrying value of such debt and equity securities
totaled $58 million, of which 93% resulted from Merrill Lynch's market-making
activities in such securities. This compared with $142 million at December
26, 1997, of which 56% related to market-making activities. In addition,
Merrill Lynch held distressed bank loans totaling $207 million and $432
million at September 25, 1998 and December 26, 1997, respectively.
At September 25, 1998, the largest non-investment grade counterparty
concentration was to Long-Term Capital Portfolio, L.P. totaling
$1.4 billion, which is primarily comprised of derivative contract receivables
and is fully collateralized.
Derivatives may also expose Merrill Lynch to credit risk related to the
underlying security where a derivative contract can either synthesize
ownership of the underlying security (e.g., long total return swap) or
potentially force ownership of the underlying security (e.g., short put
option). In addition, derivatives may subject Merrill Lynch to credit spread
or issuer default risk, in that changes in credit spreads or in the credit
quality of the underlying securities may adversely affect the derivatives'
fair values.
A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivative fair values:
Trading assets(1) $ 89 $ 62
Trading liabilities 27 62
Derivative notionals (off-balance-sheet)(2) 1,987 3,257
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The preceding table includes $28 and $42 at September 25, 1998 and
December 26, 1997, respectively, of credit risk exposures to
non-investment grade counterparties.
(2) Represents amount subject to strike or reference price.
Merrill Lynch engages in various hedging strategies to reduce its exposure
associated with non-investment grade positions, such as purchasing an option
to sell the related security or entering into other offsetting derivative
contracts. Merrill Lynch also uses non-investment grade trading inventories,
principally non-U.S. governments and agencies securities, to hedge the
exposure arising from structured derivative transactions.
32
<PAGE>
A summary of derivatives used to hedge the credit risk of non-investment grade
positions follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivative notionals (off-balance-sheet)(1) $4,339 $5,548
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents amount subject to strike or reference price.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans (net of allowance for loan losses)(1) $717 $467
Equity investments(2) 372 170
Partnership interests 567 82
Bridge loan 65 -
Additional commitments to invest in partnerships 490(3) 60
Unutilized revolving lines of credit and other
lending commitments 2,251(4) 485
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represented outstanding loans to 81 and 48 companies at September 25, 1998
and December 26, 1997, respectively.
(2) Invested in 79 and 72 enterprises at September 25, 1998 and December 26,
1997, respectively.
(3) Included in this amount is a $300 commitment related to the
recapitalization of the hedge fund Long-Term Capital Portfolio, L.P.
This commitment was funded subsequent to quarter end.
(4) Included in this amount is a $1,210 senior secured loan commitment and a
$350 bridge loan commitment to a counterparty in connection with a
proposed acquisition transaction. If extended, Merrill Lynch intends to
syndicate a significant portion of these loans. Also included is a $50
bridge loan commitment to another counterparty that was funded subsequent
to quarter end.
At September 25, 1998 the largest industry exposure was to the financial
services sector which accounted for 46% of total non-investment grade positions
and highly leveraged transactions.
33
<PAGE>
- --------------------------------------------------------------------------------
Statistical Data (restated for the Midland Walwyn merger)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
1997 1997 1998 1998 1998
-------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
CLIENT ACCOUNTS (in billions):
U.S. Client Assets $ 960 $ 985 $ 1,086 $ 1,110 $ 1,066
Non-U.S. Client Assets 84 244 269 269 253
-------- -------- -------- -------- --------
Total Assets in Client Accounts or
Under Management $ 1,044 $ 1,229 $ 1,355 $ 1,379 $ 1,319
======== ======== ======== ======== ========
Assets Under Management:
MLAM (a):
Money Market $ 105 $ 107 $ 117 $ 118 $ 125
Equity 73 72 80 77 65
Fixed-Income 46 48 53 54 53
Private Portfolio 45 49 55 58 50
Insurance 3 3 3 3 3
-------- -------- -------- -------- --------
Total $ 272 $ 279 $ 308 $ 310 $ 296
Mercury - 167 180 179 169
Atlas Funds (b) 2 2 2 2 2
-------- -------- -------- -------- --------
Total Assets Under Management $ 274 $ 448 $ 490 $ 491 $ 467
======== ======== ======== ======== ========
ML Consults(Registered Trademark) $ 26 $ 27 $ 31 $ 33 $ 31
Mutual Fund Advisor(Service Mark) and
Asset Power(Registered Trademark) $ 14 $ 15 $ 18 $ 19 $ 18
401(k) Assets $ 71 $ 74 $ 80 $ 82 $ 75
- ------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (in billions) $ 68 $ 64 $ 93 $ 109 $ 72
Market Share 13.3% 14.6% 12.7% 15.3% 13.6%
U.S. Debt and Equity:
Volume (in billions) $ 59 $ 56 $ 79 $ 96 $ 60
Market Share 15.8% 16.7% 15.5% 18.5% 15.2%
- -------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 45,000 45,800 46,000 47,000 47,700
Non-U.S. 12,300 13,900 14,300 16,600 17,100
------ ------ ------ ------ ------
Total 57,300 59,700 60,300 63,600 64,800
====== ====== ====== ====== ======
Financial Consultants and
Account Executives Worldwide 16,400 16,600 16,600 17,600 17,800
- ------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (Loss) (in millions) $ 502 $ 469 $ 528 $ 551 $ (164)
Annualized Return on Average
Common Stockholders' Equity 27.1% 23.4% 24.7% 23.6% (7.3)%
Earnings (Loss) per Common Share:
Basic $ 1.45 $ 1.34 $ 1.48 $ 1.52 $ (.49)
Diluted $ 1.24 $ 1.15 $ 1.30 $ 1.32 $ (.49)
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $ 293,602 $ 296,980 $ 358,919 $ 370,597 $ 353,419
Total Stockholders' Equity $ 8,012 $ 8,539 $ 9,223 $ 9,913 $ 9,795
- ------------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted Average Shares Outstanding:
Basic 339,799 342,740 349,495 355,289 357,620
Diluted 396,876 400,132 400,249 411,385 357,620
Common Shares Outstanding 341,226 343,977 353,680 356,280 358,492
Shares Repurchased (c) 240 - - - -
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Merrill Lynch Asset Management.
(b) Managed by Midland Walwyn.
(c) Does not include shares either (i) owned by employees and used to pay for
the exercise of stock options or (ii) stock withheld from employee stock
option exercises to pay associated taxes.
34
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NASDAQ Antitrust Litigation. Since the filing of ML & Co.'s Annual Report on
Form 10-K for 1997, the following events have taken place with respect to the
NASDAQ Antitrust Litigation described therein. On August 6, 1998, the United
States Court of Appeals for the Second Circuit affirmed the district court's
order approving the settlement of the civil antitrust action filed by the
Antitrust Division of the United States Department of Justice.
October 1998 Derivative Action. On October 13, 1998, a derivative action
purportedly brought on behalf of ML & Co. was filed by stockholder Charles
Miller in the Supreme Court of the State of New York, New York County. Named
as defendants are 15 present or former ML & Co. directors. ML & Co. is
named as a nominal defendant. The complaint alleges, among other things, that
the defendants breached their fiduciary duties in that they allegedly failed
to prevent ML & Co. from engaging in excessively risky business transactions
with hedge funds. Damages in an unspecified amount are sought.
Item 5. Other Information
The 1999 Annual Meeting of Stockholders will be held at 10:00 a.m. on Wednesday,
April 14, 1999 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 ML & Co.'s Certificate of Incorporation, has
been given to the Secretary of ML & Co., 100 Church Street, 12th Floor, New
York, New York 10080-6512, no earlier than January 29, 1999 and no later than
February 23, 1999. In addition, in accordance with provisions of ML & Co.'s
By-laws, any stockholder intending to bring any other business before the
meeting must advise ML & Co. in writing of the stockholder's intent to do so on
or before February 23, 1999. In order to be included in ML & Co.'s proxy
statement, stockholder proposals must have been submitted in writing to ML & Co.
on or before November 5, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) Articles of Incorporation and By-laws
Certificate of Designation dated August 20, 1998 for
Special Voting Stock, relating to ML & Co.'s Restated
Certificate of Incorporation effective as of April 28,
1998 (incorporated by reference to Exhibit (3)(i) to ML
& Co.'s Quarterly Report on Form 10-Q for the period
ended March 27, 1998)
(4) Instruments defining the rights of security holders,
including indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML
& Co. hereby undertakes to furnish to the SEC, upon
request, copies of the instruments defining the rights
of holders of long-term debt securities of ML & Co. that
authorize an amount of securities constituting 10% or
less of the total assets of ML & Co. and its
subsidiaries on a consolidated basis.
35
<PAGE>
(10) Merrill Lynch & Co., Inc. 1999 Deferred Compensation
Plan for a Select Group of Eligible Employees
(11) Statement re: computation of per common share earnings
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
(27) Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by ML & Co. with
the SEC during the quarterly period covered by this Report:
(i) Current Report dated July 2, 1998 for the purpose of filing
the First Supplemental Indenture, between ML & Co. and the
Chase Manhattan Bank, dated as of June 1, 1998, and the form
of ML & Co.'s Medium-Term Notes, Series B due July 3, 2000,
linked to the common stock of Travelers Group, Inc.
(ii) Current Report dated July 14, 1998 for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summary for the
three- and six-month periods ended June 26, 1998.
(iii) Current Report dated July 15, 1998 for the purpose of filing
the forms of ML & Co.'s 6% Notes due July 15, 2005 and ML &
Co.'s 6 1/2% Notes due July 15, 2018.
(iv) Current Report dated July 29, 1998 for the purpose of filing
ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet
as of June 26, 1998.
(v) Current Report dated September 3, 1998 for the purpose of
filing the form of ML & Co.'s Merrill Lynch EuroFund Market
Index Target-Term Securities (Service Mark) due
February 28, 2006.
(vi) Current Report dated September 8, 1998 for the purpose of
reporting ML & Co.'s net earnings for July and August, 1998.
36
<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 9, 1998 By: /s/ E. Stanley O'Neal
-------------------------------
E. Stanley O'Neal
Executive Vice President and
Chief Financial Officer
37
<PAGE>
INDEX TO EXHIBITS
Exhibits
3 Certificate of Designation dated August 20, 1998 for Special Voting
Stock
10 Merrill Lynch & Co., Inc. 1999 Deferred Compensation Plan for a
Select Group of Eligible Employees
11 Statement re: computation of per common share earnings
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
27 Financial Data Schedule
<PAGE>
Exhibit 3
MERRILL LYNCH & CO., INC.
CERTIFICATE OF DESIGNATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
SPECIAL VOTING STOCK
MERRILL LYNCH & CO., INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), HEREBY
CERTIFIES that, the following resolutions were duly adopted by the Board of
Directors of the Corporation and by the Executive Committee of the Board of
Directors pursuant to authority conferred upon the Board of Directors by the
provisions of the Restated Certificate of Incorporation of the Corporation, as
amended, (the "Certificate of Incorporation"), and pursuant to authority
conferred upon the Executive Committee of the Board of Directors in accordance
with Section 141(c) of the General Corporation Law of the State of Delaware, by
Article IV, Section 1 of the Bylaws of the Corporation and by the resolutions of
the Board of Directors set forth herein, at a meeting of the Board of Directors
duly held on June 22, 1998 and by unanimous written consent of the Executive
Committee dated August 18, 1998:
1. The Board of Directors on June 22, 1998 adopted the
following resolutions authorizing the Executive Committee of the Board of
Directors to act on behalf of the Board of Directors in connection with the
issuance of the Special Voting Share and fixing the relative powers,
preferences, rights, qualifications, limitations and restrictions of such share:
"FURTHER RESOLVED, that in connection with the Transaction and
the Arrangement the Corporation, directly or indirectly, through one or more
foreign or domestic subsidiaries of the Corporation, is hereby authorized to
undertake and complete and cause to be undertaken and completed each of the
following actions:
. . . g) the Executive Committee is hereby authorized to take
any and all action that the Executive Committee may
deem necessary or desirable under applicable law,
including without limitation, the execution of one or
more Certificates of Designation under Section 151 of
the General Corporation Law of the State of Delaware,
to create and issue one Special Voting Share in the
capital of the Corporation, to have the rights,
privileges, restrictions and
<PAGE>
conditions substantially as set forth in and
contemplated by the MWI Plan of Arrangement and the
Voting and Exchange Trust Agreement, in each case, as
discussed at this meeting, such share to be issued
for an aggregate consideration of $1.00, and upon
receipt by the Corporation of the consideration
therefor such Special Voting Share shall be issued to
the trustee under the Voting and Exchange Trust
Agreement hereinafter approved, to be held and
exercised by such trustee as therein contemplated;"
2. The Executive Committee of the Board of Directors, by
unanimous written consent to corporate action dated August 18, 1998 adopted the
following resolution pursuant to authority conferred upon the Executive
Committee by the resolution of the Board of Directors set forth in paragraph 1:
"RESOLVED, that Special Voting Stock of the Corporation is
hereby authorized, and the Executive Committee hereby fixes the number, powers,
designations, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations and restrictions of such
Special Voting Stock as follows:
I. AUTHORIZED NUMBER AND DESIGNATION. There is hereby created
out of the authorized and unissued shares of Preferred Stock of the Corporation
a series of Preferred Stock designated as "Special Voting Stock". The number of
shares constituting the Special Voting Stock shall be one (the "Special Voting
Share").
II. DIVIDENDS. Neither the holder nor, if different, the owner
of the Special Voting Share shall be entitled to receive Corporation dividends
in its capacity as holder or owner thereof.
III. VOTING RIGHTS. The holder of record of the Special Voting
Share shall be entitled to all of the voting rights, including the right to vote
in person or by proxy, of the Special Voting Share on any matters, questions,
proposals or propositions whatsoever that may properly come before the
shareholders of the Corporation at a Corporation meeting or in connection with a
Corporation consent.
IV. LIQUIDATION PREFERENCE. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, the holder of the
Special Voting Share shall be entitled to receive out of the assets of the
Corporation available for distribution to the stockholders, an amount equal to
$1.00 before any distribution is made on the common stock of the Corporation or
any other stock ranking junior to the Special Voting Share as to distribution of
assets upon liquidation, dissolution or winding-up.
V. RANKING. The Special Voting Share shall, with respect to
rights on liquidation, winding up and dissolution, rank (i) senior to all
classes of common stock
<PAGE>
of the Corporation and (i) junior to any other class of capital stock of the
Corporation.
VI. REDEMPTION. The Special Voting Share shall not be subject
to redemption, except that at such time as no exchangeable shares ("Exchangeable
Shares") of Merrill Lynch & Co., Canada Ltd. (other than Exchangeable Shares
owned by the Corporation and its affiliates) shall be outstanding, the Special
Voting Share shall automatically be redeemed and canceled, for an amount equal
to $1.00 due and payable upon such redemption.
VII. OTHER PROVISIONS. Pursuant to the terms of that certain
Voting and Exchange Trust Agreement by and between Merrill Lynch & Co., Canada
Ltd., the Corporation, and Montreal Trust Company of Canada, as such agreement
may be amended, modified or supplemented from time to time (the "Trust
Agreement"):
(i) During the term of the Trust Agreement, the Corporation
may not, without the consent of the holders of the Exchangeable Shares
(as defined in the Trust Agreement), issue any shares of its Special
Voting Stock in addition to the Special Voting Share;
(ii) the Special Voting Share entitles the holder of record to
a number of votes at meetings of holders of Corporation common shares
equal to the number of Exchangeable Shares (as defined by the Trust
Agreement) outstanding from time to time (other than the Exchangeable
Shares held by the Corporation and its affiliates);
(iii) the Trustee (as defined by the Trust Agreement) shall
exercise the votes held by the Special Voting Share pursuant to and in
accordance with the Trust Agreement;
(iv) the voting rights attached to the Special Voting Share
shall terminate pursuant to and in accordance with the Trust Agreement;
and
(v) the powers, designations, preferences and relative,
participating, optional and other special rights, and the
qualifications, limitations and restrictions of such Special Voting
Share shall be as otherwise provided in the Trust Agreement."
<PAGE>
Exhibit 10
MERRILL LYNCH & CO., INC.
1999 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF OCTOBER 1, 1998
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
<PAGE>
MERRILL LYNCH & CO., INC.
1999 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. GENERAL ...........................................................................................1
1.1 Purpose and Intent .........................................................................1
1.2 Definitions ................................................................................1
II. ELIGIBILITY .......................................................................................5
2.1 Eligible Employees .........................................................................5
(a) General Rule .........................................................................5
(b) Individuals First Employed During Election Year or Plan Year .........................6
(c) Disqualifying Factors ................................................................6
III. DEFERRAL ELECTIONS; ACCOUNTS ......................................................................6
3.1 Deferral Elections .........................................................................6
(a) Timing and Manner of Making of Elections .............................................6
(b) Irrevocability of Deferral Election ..................................................6
(c) Application of Election ..............................................................6
3.2 Crediting to Accounts ......................................................................7
(a) Initial Deferrals ....................................................................7
(b) KECALP ...............................................................................7
(c) Hedge Fund(s).........................................................................7
3.3 Minimum Requirements for Deferral ..........................................................7
(a) Minimum Requirements .................................................................7
(b) Failure to Meet Requirements .........................................................8
3.4 Return Options; Adjustment of Accounts .....................................................8
(a) Selection of KECALP 1999 or Hedge Fund Return Options ................................8
(b) Selection of Mutual Fund Return Options ..............................................8
(c) Selection of the KECALP Leverage Percentage
by Eligible Participants.......................................................8
(d) Adjustments of KECALP.................................................................8
(e) Adjustment of Debit Balance...........................................................9
(f) Adjustment of Mutual Fund Return Balances.............................................9
(g) Annual Charge.........................................................................10
(h) Rollover Option.......................................................................10
3.5 Rescission of Deferral Election ............................................................11
(a) Prior to December 1, 1998 ............................................................11
(b) Adverse Tax Determination ............................................................11
(c) Rescission For Amounts Not Yet Earned ................................................11
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT ............................................................11
4.1 No Trust or Fund Created; General Creditor Status ..........................................11
4.2 Non-Assignability ..........................................................................12
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans ...................................................................12
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
V. PAYMENT OF ACCOUNT ................................................................................12
5.1 Manner of Payment ..........................................................................12
(a) Regular Payment Elections ............................................................12
(b) Modified Installment Payments ........................................................12
5.2 Termination of Employment ..................................................................13
(a) Death or Retirement ..................................................................13
(b) Other Termination of Employment - Forfeiture of Leverage .............................13
(c) Leave of Absence, Transfer or Disability .............................................14
(d) Discretion to Alter Payment Date .....................................................14
5.3 Withholding of Taxes .......................................................................14
5.4 Beneficiary ................................................................................14
(a) Designation of Beneficiary ...........................................................14
(b) Change in Beneficiary ................................................................15
(c) Default Beneficiary ..................................................................15
(d) If the Beneficiary Dies During Payment ...............................................15
5.5 Hardship Distributions .....................................................................15
5.6 Domestic Relations Orders ..................................................................16
VI. ADMINISTRATION OF THE PLAN ........................................................................16
6.1 Powers of the Administrator ................................................................16
6.2 Payments on Behalf of an Incompetent .......................................................16
6.3 Corporate Books and Records Controlling ....................................................16
VII. MISCELLANEOUS PROVISIONS ..........................................................................17
7.1 Litigation .................................................................................17
7.2 Headings Are Not Controlling ...............................................................17
7.3 Governing Law ..............................................................................17
7.4 Amendment and Termination ..................................................................17
</TABLE>
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
1999 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" 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.
"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.
"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 1999, and
payable after January 1, 1999, 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 or her 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 a Participant's Account provided
for in Section 3.4(g).
"Applicable Federal Rate" means the applicable federal rate for
short-term (0-3 years) obligations of the United States Treasury established in
January of each year.
<PAGE>
"Available Balance" means amounts in a Participant's Account after the
Debit Balance has been reduced to zero.
"Average Leveraged Principal Amount" means, for each Participant, for
any period, the sum of the Leveraged Principal Amounts outstanding at the end of
each day in the period divided by the number of days in such period.
"Benchmark Return Options" means such investment vehicles as the
Administrator may from time to time designate for the purpose of indexing
Accounts hereunder. In the event a Benchmark Return Option ceases to exist or is
no longer to be a Benchmark Return Option, the Administrator may designate a
substitute Benchmark Return Option for such discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Career Retirement" means a Participant's termination of employment
with the Company for reasons other than for cause on or after: (i) the
Participant's 55th birthday, if the Participant has at least 5 years of service;
(ii) the Participant's 50th birthday, if the Participant has at least 10 years
of service; (iii) the Participant's 45th birthday, if the Participant has at
least 15 years of service, or (iv) at any age, if the Participant has at least
20 years of service, provided that, in each case, following such termination
such Participant does not engage in any activity that, in the sole judgment of
the Administrator, is in competition with the business of the Company.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from
time to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted
Compensation, Variable Incentive Compensation and/or Sign-On Bonus, or such
other items or items of compensation as the Administrator, in his sole
discretion, may specify in a particular instance.
"Debit Balance" means, as of any date the negative dollar amount, if
any, representing each of: (1) the aggregate Annual Charge, accrued in
accordance with Section 3.4(g)(i); and (2) any Leveraged Principal Amount
(together with any pro rata Interest Amounts determined in accordance with
Section 3.4(g)(ii), if applicable), as reduced by any distributions recorded
from KECALP Units recorded in a Participant's Account or chargeoffs against the
Liquid Balance in such Account in accordance with Section 3.4(e).
"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 1998 calendar year.
"Eligible Compensation" means (1) for persons eligible for the Variable
Incentive Compensation Program or other similar programs: (A) a Participant's
1997 base earnings (and/or 1997 Adjusted Compensation) plus (B) any cash bonus
awarded in early 1998, and (2) for persons ineligible for such bonus programs, a
Participant's 1997 Adjusted Compensation.
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"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).
"Hedge Fund Return Option(s)" means one or more multi-advisor hedge
funds structured and managed by Merrill Lynch Investment Partners Inc. that are
offered as Benchmark Return Options.
"Hedge Fund Unit(s)" means the record-keeping units credited to the
Accounts of Participants who have chosen one or more Hedge Fund Return Options.
"Initial Leveraged Amount" means the initial dollar amount by which a
Participant's deferral into KECALP Units is leveraged as determined in
accordance with Section 3.4(c).
"Interest" means the hypothetical interest accruing on a Participant's
Average Leveraged Principal Amount at the Applicable Federal Rate.
"Interest Amounts" means, for any Participant, as of any date, the
amount of Interest that has accrued to such date on such Participant's Average
Leveraged Principal Amount, from the date on which a Participant's Leveraged
Principal Amount is established, or from the most recent date that Interest
Amounts were added to the Leveraged Principal Amount.
"KECALP 1999 Return Option" means the option of indexing returns
hereunder to the performance of Merrill Lynch KECALP L.P. 1999, on a leveraged
or unleveraged basis.
"KECALP Units" means the record-keeping units credited to the Accounts
of Participants who have chosen the KECALP Return Option.
"Leveraged or Unleveraged Distributions" means the distributions to a
Participant's Account attributable to the leveraged or unleveraged portion (as
the case may be) of a Participant's KECALP Units.
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"Leverage-Eligible Participants" means persons who have at least
$400,000 of Total Compensation for the Election Year and otherwise qualify, in
accordance with standards determined by the Administrator, to select the KECALP
1999 Return Option on a leveraged basis.
"Leverage Percentage" means the percentage of leverage chosen by a
Leverage-Eligible Participant, which percentage will be subject to limits
determined by the Administrator.
"Leveraged Principal Amount" means a Participant's Initial Leveraged
Amount, if any, as adjusted to reflect the addition of Interest Amounts (or any
pro rata Interest Amounts).
"Liquid Balance" means, as of any date, the Deferred Amounts credited
to a Participant's Account, adjusted (either up or down) to reflect: (1) the
performance of the Participant's Mutual Fund Return Balances as provided in
Section 3.4(f); (2) distributions with respect to KECALP Units made in
accordance with Section 3.4(d); (3) reduction of any Debit Balance as provided
in Section 3.4(e); and (4) any payments to the Participant under Article V
hereof.
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Plan.
"MDCC" means the Management Development and Compensation Committee of
the Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
"Mutual Fund Return Options" means the mutual funds chosen as Benchmark
Return Options by the Administrator.
"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 vehicle for which such value is being determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. 1999 Deferred Compensation
Plan for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 1999.
"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.
"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.
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"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.
"Total Compensation" means Eligible Compensation plus the grant value,
as determined by ML & Co. at the time of grant, of stock-based awards that are
granted to certain employees of the Company generally in January or February of
the Plan Year with respect to the prior Fiscal Year, which, for purposes of this
Plan, are considered earned during the Plan Year regardless of when they are
actually granted or paid to the Participant.
"Undistributed Deferred Amounts" means, as of any date on which the
Annual Charge is determined, a Participant's Deferred Amounts (exclusive of any
appreciation or depreciation) minus, for each distribution to a Participant
prior to such date, an amount equal to the product of the Deferred Amounts and a
fraction the numerator of which is the amount of such distribution and the
denominator of which is the combined Net Asset Value (prior to distribution) of
the Participant's Account as of the date of the relevant distribution.
"Variable Incentive Compensation" means the variable incentive
compensation or office manager incentive compensation that is paid in cash to
certain employees of the Company generally in January or February of the Plan
Year with respect to the prior Fiscal Year, which for purposes of this Plan is
considered earned during the Plan Year regardless of when it is actually paid to
the Participant, or such other similar items of compensation as the
Administrator shall designate as "Variable Incentive Compensation" for purposes
of this Plan.
"401(k) Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan.
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 $225,000 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 (A) is a financial consultant or an estate planning and business
insurance specialist, who was a member in 1998 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 member of the International Private Banking Group, (C)
is employed as an Investment Manager for Merrill Lynch Asset Management, (D) is
an employee in the 2 Band or above, or (E) 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 1998 Win Smith Fellows shall not be required to meet condition (iii)
hereof.
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(b) Individuals First Employed During Election Year or Plan Year.
Subject to the approval of the Administrator in his or her 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 $225,000, 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 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 Article V shall be made by
submitting to the Administrator such forms as the Administrator may prescribe.
Each election submitted must specify a Maximum Deferral and a Deferral
Percentage with respect to each category of Compensation to be deferred. All
elections by a Participant to defer Compensation under the Plan must be received
by the Administrator or such person as he may designate for the purpose by no
later than October 30 of the Election Year (or such later date as 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.
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3.2 Crediting to Accounts.
(a) Initial Deferrals. 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 an Account, for the period until the
Deferred Amounts are credited. For Participants who have chosen the KECALP
Return Option, Deferred Amounts will be indexed automatically to a special
benchmark titled "KECALP Reserves" until the closing of Merrill Lynch KECALP
L.P. 1999. For Participants who have chosen a Hedge Fund Return Option, Deferred
Amounts will be indexed automatically to a special benchmark titled "Hedge
Reserves".
(b) KECALP. Upon the closing of Merrill Lynch KECALP L.P. 1999, a
Participant's Account will be credited with a number of units determined by
dividing by $1,000 the sum of the following: (1) the portion of the Account
Balance that the Participant has elected to allocate to the KECALP Return
Option, as of the day prior to the closing date; and (2) the Participant's
Initial Leveraged Amount (computed in accordance with Section 3.4(c)). Any
amounts not applied to the KECALP Unit Account will remain in a Participant's
Account (or be applied to reduce a Participant's Debit Balance). No fractional
units will be credited.
(c) Hedge Fund(s). Upon the closing of any Hedge Fund Return Option
chosen by a Participant, a Participant's Account will be credited with a number
of Hedge Fund Units determined by dividing $100 by the portion of the
Participant's Account Balance that the Participant has elected to be indexed to
the applicable Hedge Fund Return Option as of the day prior to the closing date.
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,
1998,
(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, or (B) the
Participant's Eligible Compensation for the Plan Year, is less
than $225,000;
provided, that any Participant who first becomes an employee of the Company
during the Plan Year shall not be required to satisfy conditions (i) and (ii).
Condition (ii) shall not be construed to require a Participant's elections to
result in an actual deferral of at least $15,000.
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(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 Return Options; Adjustment of Accounts.
(a) Selection of KECALP 1999 or Hedge Fund Return Options. Coincident
with the Participant's election to defer Compensation, eligible Participants may
select the KECALP 1999 Option (and designate any Leverage Percentage) or may
instead elect to have their Deferred Amounts benchmarked to the other available
Benchmark Return Options, including a Hedge Fund Return Option, provided that
such benchmarking shall be on an unleveraged basis. Participants should be aware
that once the closing of Merrill Lynch KECALP L.P. 1999 and/or the applicable
Hedge Fund Return Option has occurred, Participants will not be able to change
their elections of such options.
(b) Selection of Mutual Fund Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select the
percentage of the Participant's Account to be adjusted to reflect the
performance of Mutual Fund Return Options, for use when a Participant's Account
has a Liquid Balance. All elections shall be in multiples of 1%. A Participant
may, by complying with such procedures as the Administrator may prescribe on a
uniform and nondiscriminatory basis, including procedures specifying the
frequency with respect to which such changes may be effected (but not more than
12 times in any calendar year), change the Selected Benchmark Return Options to
be applicable with respect to his or her Account.
(c) Selection of the KECALP Leverage Percentage by Eligible
Participants. Prior to the closing of the offering of Merrill Lynch KECALP L.P.
1999, Leverage-Eligible Participants who select the KECALP 1999 Return Option on
a leveraged basis must choose their Leverage Percentage, in accordance with
standards determined by the Administrator, by submitting such forms as the
Administrator shall prescribe. Prior to the closing of Merrill Lynch KECALP L.P.
1999, the Administrator will determine each Leverage-Eligible Participant's
Initial Leveraged Amount by applying such Participant's Leverage Percentage to
the dollar value of the portion of the Participant's Account Balance allocated
to the KECALP Return Option. The Initial Leveraged Amount will be recorded as
the Leveraged Principal Amount, to which amount Interest Amounts will be added
annually in accordance with Section 3.4(e).
(d) Adjustments of KECALP. Whenever a distribution is paid on an actual
unit of Merrill Lynch KECALP L.P. 1999, an amount equal to such per unit
distribution times the number of units in the Participant's Account will first
be applied against any Debit Balance, as provided in Section 3.4(e), and then,
if any portion of such distribution remains after the Debit Balance is reduced
to zero, be credited to the Participant's Account to be indexed to the Mutual
Fund Return Option(s) chosen by the Participant. Because the KECALP Return
Option is illiquid, payouts to Participants under Article V hereof will be made
only from amounts credited to a Participant's Account after the Debit Balance is
reduced to zero. The KECALP Units and the Debit Balance will also be adjusted in
accordance with Section 5.2 hereof in the event of a Participant's termination.
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(e) Adjustment of Debit Balance. Any Debit Balance shall be reduced as
soon as possible against either (i) any Liquid Balance, or (ii) any
distributions relating to KECALP Units. Reductions of the Debit Balance, as
provided in the foregoing sentence, shall be applied first to reduce the Debit
Balance attributable to accrued Annual Charges and then, after all such accrued
Annual Charges have been satisfied, to reduce any Leveraged Principal Amount. As
of the last day of each Fiscal Year, Interest Amounts computed by the
Administrator shall be added to the Leveraged Principal Amount. If on any date
the Leveraged Principal Amount would be discharged completely as a result of
distributions or chargeoffs, Interest Amounts will be computed though such date
and added to the Leveraged Principal Amount as of such date.
(f) Adjustment of Mutual Fund Return Balances. While the Participant's
Balances do not represent the Participant's ownership of, or any ownership
interest in, any particular assets, the Balances attributable to Mutual Fund
Return Options shall be adjusted to reflect credits or debits relating to
distributions with respect to the KECALP Units or chargeoffs against the Debit
Balance and to reflect the investment experience of the Participant's Mutual
Fund Return Options in the same manner as if investments or dispositions in
accordance with the Participant's elections had actually been made through the
ML Benefit Services Platform and ML II Core Recordkeeping System, or any
successor system used for keeping records of Participants' Accounts (the "ML II
System"). In adjusting Accounts, the timing of receipt of Participant
instructions or credits or debits by the ML II System shall control the timing
and pricing of the notional investments in the Participant's Mutual Fund Return
Options in accordance with the rules of operation of the ML II System and its
requirements for placing corresponding investment orders, as if orders to make
corresponding investments or dispositions were actually to be made, except that
in connection with the crediting of Deferred Amounts or distributions to the
Participant's Account and distributions from or debits to 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 Mutual Fund Return Option shall be valued using the Net
Asset Value of the Mutual Fund Return Option as of the relevant day; provided,
that, in valuing a Mutual Fund Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions;
provided, further, that, if there are no such transactions effected through the
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale prices
for that day on the principal exchange for such security, or if
such security is not traded on such principal exchange on that
day, the average of the high and low sales prices on such
exchange on the first day prior thereto on which such security
was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter market,
the average of the highest and lowest bid prices for such
security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined by
the Administrator by whatever means he considers appropriate in
his sole discretion.
All debits and charges against the Account shall be applied as a pro rata
reduction of the portion of the Account Balance indexed to each of the
Participant's Mutual Fund Return Options.
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(g) 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 (f)) shall be applied to reduce the
Account Balance.
(i) In the event that all or any portion of the Account Balance is
indexed to a Benchmark Return Option with less than daily
liquidity, the Annual Charge will accrue as a Debit Balance and be
paid out of future amounts credited to the Account Balance.
(ii) In the event that the Participant elects to have the Account
Balance paid in installments, the Annual Charge will be charged on
the Remaining Deferred Amounts after giving effect to the
installment payments.
(iii)In the event that the Account Balance is paid out completely
during a Fiscal Year prior to the date upon which 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(f) will be followed.
(h) Rollover Option. In the discretion of the Administrator or a
designee, additional Benchmark Return Options, including Return Options with
less than daily liquidity, may be offered to all Participants under the Plan or
to a more limited group of Participants, if appropriate because of regulatory
requirements. In such event, Participants will be entitled, in such manner as
the Administrator shall determine, to elect that all or a portion of Account
Balances be indexed to such Benchmark Return Options.
(i) With respect to Benchmark Return Options that do not provide
daily liquidity: (A) payments under Article V will be made in
accordance with a Participant's election at the time of the
Participant's original deferral, with any adjustments required
for the more limited liquidity of such Return Option; (B)
Participants may be limited in their ability to elect, change
or continue their Benchmark Return Options in accordance with
such terms and conditions as the Administrator or a designee
may determine; and (C) the Annual Charge shall be accrued and
paid, when possible, upon liquidation of all or any portion of
the Benchmark Return Option, provided that no payment shall be
made to a Participant under Article V hereof until all accrued
Annual Charges have been paid.
(ii) In the event that such limited liquidity options include
future KECALP Partnerships, the designated amounts shall be
credited to such Participant, accounted for, adjusted and paid
out to such Participant in accordance with the terms and
conditions of this Plan as they related to the KECALP 1999
Return Option.
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3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1998. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1998, 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 30, 1998 and November 30, 1998), agrees to the rescission of the
election. In the event that the Administrator agrees to the rescission, the
Deferred Amounts, if any, credited to the Participant's Account will be paid to
the Participant as soon as practicable thereafter, subject to reduction for any
applicable withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of
Section 3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options, will be
paid to the Participant as soon as practicable, and no additional amounts will
be deferred pursuant to this Plan.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's
written request, the Administrator may in his sole discretion terminate any
deferral elections made hereunder with respect to Compensation not yet earned
and no further amounts will be deferred. In addition, in the event a Participant
receives a hardship withdrawal under the 401(k) Plan, the Administrator shall,
as of the date the Participant's Elective 401(k) Deferrals (as defined in the
401(k) Plan) are suspended under the 401(k) Plan as a result of such hardship
withdrawal, terminate the Participant's deferrals under this Plan in accordance
with the preceding sentence, as if the Participant had requested rescission in
writing. In each case, amounts previously deferred will continue to be governed
by the terms of this Plan.
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.
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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 participate 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 1999, or
(iii) in any month in the calendar year following the Participant's Retirement;
provided that, if a 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). In the event that immediately prior to the lump sum payment or the
initial installment payment, all or any portion of a Participant's Account
Balance remains indexed to a Benchmark Return Option with less than daily
liquidity, such payment shall be adjusted, if necessary, for the liquidity
restraints of the Benchmark Return Option and, in the case of an election of 11
or more installment payments commencing upon Retirement or a date certain
coincident with Retirement, shall be delayed until such Account Balance is fully
liquid.
(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"),
provided that, in the event that immediately prior to the initial payment of
such installment payments, all or any
12
<PAGE>
portion of a Participant's Account Balance remains indexed to a Benchmark Return
Option with less than daily liquidity, such initial payment shall be delayed
until such Account Balance is fully liquid. 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, in the sole discretion of the Administrator, it
is determined 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 Section 3.4 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, Career Retirement,
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 Career Retirement or Retirement)
or to the Participant's beneficiary (in the event of death); provided, however,
that in the event that a beneficiary of the Participant's Account is the
Participant's estate or is otherwise not a natural person, then (i) if the
Participant has elected a regular payment election pursuant to Section 5.1(a),
the applicable portion of the Account Balance will be paid in a single payment
to such beneficiary notwithstanding any election of installment payments, and
(ii) if the Participant has elected modified installment payments pursuant to
Section 5.1(b), the applicable portion of the Account Balance will continue to
be payable as modified installment payments or annuitized payments, as the case
may be, in accordance with Section 5.1(b), 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 - Forfeiture of Leverage. If the
Participant's employment terminates at any time for any reason other than death,
Career Retirement or Retirement, then, notwithstanding the Participant's
elections hereunder, any Available Benchmark Return Account Balance will be paid
to the Participant, as soon as practicable, in a single payment if the Account
Balance is fully liquid, or as available, as soon thereafter as is practicable,
notwithstanding the Participant's elections hereunder. In the event that a
Participant's employment
13
<PAGE>
terminates at any time for any reason other than death, disability, Career
Retirement or Retirement, such Participant will forfeit all rights to the
leveraged portion of such Participant's KECALP Unit Account, including any
future Leveraged Distributions, unless the Administrator, in his sole
discretion, determines that such forfeiture would be detrimental to Merrill
Lynch based on the Net Asset Value of the KECALP Units; provided, however, that
such forfeiture will not occur: if (1) the Participant is terminated by ML & Co.
as the result of a reduction in staff, (2) the Participant delivers to ML & Co.
a release of claims (in a form approved by the Director of Human Resources of ML
& Co. and counsel) he or she may have against the corporation or any of its
subsidiaries and (3) such Participant complies with the terms of such release.
In the event of such forfeiture, the Participant's Account Balance and Debit
Balance will be restated by the Administrator, as of the date of termination, to
reflect what such balances would have been had the Participant selected no
leverage under Section 3.4(c). To the extent necessary, the Participant's
Account Balance will also be adjusted, as of the date of the termination, to
credit the Participant with the amount of any Unleveraged Distributions that
were previously applied to the repayment of the Leveraged Principal Amount and
any Interest Amounts and, to the extent necessary, any Leveraged Distributions
paid out to the Participant will be restated as a Debit Balance. Leveraged and
Unleveraged Distributions shall be deemed to have been applied and distributed
proportionately. All calculations hereunder shall be made by the Administrator
and shall be final and determinative.
(c) Leave of Absence, Transfer or Disability. The Participant's
employment will not be considered 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.
14
<PAGE>
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing, any
change in beneficiary or contingent beneficiary will automatically revoke prior
such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Plan only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. In the event that 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, in accordance with Section 5.1(b), 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.
15
<PAGE>
5.6 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will
pay to, or to the Participant for the benefit of, the Participant's spouse or
former spouse the portion of the Participant's Account Balance specified in a
valid court order entered in a domestic relations proceeding involving the
Participant's divorce or legal separation. Such payment will be made net of any
amounts the Company may be required to withhold under applicable federal, state
or local law. After such payment, references herein to the Participant's
"Deferred Amounts" (including, without limitation, for purposes of determining
the Annual Charge applicable to any remaining Account Balance) shall mean the
Participant's original Deferred Amounts times an amount equal to one minus a
fraction, the numerator of which is the gross amount (prior to withholding) paid
pursuant to the order, and the denominator of which is the Participant's Account
Balance immediately prior to payment.
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 Participants as members 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
that 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.
16
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling
or decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will
not control or affect the meaning or construction of any of the terms or
provisions of this Plan.
7.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Plan
will be construed in accordance with and governed by the laws of the State of
New York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balance
(as reduced by the Annual Charge, the Debit Balance or the Leveraged Principal
Amount and Interest thereon, as set forth in Section 3.4) as of the date of such
amendment or termination.
17
<PAGE>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF PER COMMON SHARE EARNINGS
(in millions, except per share amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
-------------------------- -----------------------
Sept. 25, Sept. 26, Sept. 25, Sept.26,
1998 1997 1998 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
EARNINGS (LOSS)
Net earnings (loss) $(164) $ 502 $ 915 $1,466
Preferred stock dividends (9) (9) (28) (29)
----- ----- ----- ------
Net earnings (loss) applicable to
common stockholders $(173) $ 493 $ 887 $1,437
===== ===== ===== ======
WEIGHTED-AVERAGE SHARES OUTSTANDING 357.6 339.8 354.1 339.2
----- ----- ----- ------
EFFECT OF DILUTIVE INSTRUMENTS
Employee stock options 29.6 30.6 30.9 29.2
FCCAAP shares 16.2 21.1 16.7 20.8
Restricted units 5.0 5.4 4.9 5.0
ESPP shares - - .1 .1
Convertible debt - - - .1
----- ----- ----- ------
DILUTIVE POTENTIAL COMMON SHARES 50.8 57.1 52.6 55.2
----- ----- ----- ------
TOTAL WEIGHTED-AVERAGE DILUTED SHARES 408.5 (1) 396.9 406.7 394.4
===== ===== ===== ======
BASIC EARNINGS (LOSS) PER SHARE $(.49) $1.45 $2.50 $ 4.24
===== ===== ===== ======
DILUTED EARNINGS (LOSS) PER SHARE $(.49)(1) $1.24 $2.18 $ 3.64
===== ===== ===== ======
</TABLE>
(1) Since accounting principles require that a net loss not be diluted by
potential common shares, diluted loss per share for the 1998 third
quarter is calculated using weighted-average shares outstanding only.
Notes:
Basic and diluted earnings per share are based on actual numbers before
rounding.
Prior periods have been restated for the Midland Walwyn merger, as
required under pooling-of-interests accounting.
<PAGE>
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(dollars in millions)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Ended
------------------------- ------------------------
Sept. 25, Sept. 26, Sept.25, Sept. 26,
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Pretax earnings (loss) from
continuing operations $ (206) $ 789 $ 1,602 $ 2,376
Add: Fixed charges 4,954 4,249 14,448 12,106
------ ------ ------- -------
Pretax earnings before fixed
charges $4,748 $5,038 $16,050 $14,482
====== ====== ======= =======
Fixed charges:
Interest $4,860 $4,190 $14,199 $11,929
Other (A) 94 59 249 177
------ ------ ------- -------
Total fixed charges $4,954 $4,249 $14,448 $12,106
====== ====== ======= =======
Preferred stock dividend `
requirements $ 15 $ 15 $ 46 $ 47
------ ------ ------- -------
Total combined fixed charges and
preferred stock dividends $4,969 $4,264 $14,494 $12,153
====== ====== ======= =======
Ratio of earnings to fixed
charges (B) .96 1.19 1.11 1.20
Ratio of earnings to combined
fixed charges and preferred
stock dividends (B) .96 1.18 1.11 1.19
</TABLE>
(A) Other fixed charges consist of the interest factor in rentals,
amortization of debt expense, and preferred stock dividend requirements of
majority-owned subsidiaries.
(B) The ratio calculations indicate a less than one-to-one coverage for the
three months ended September 25, 1998. Pretax loss from continuing
operations for the three months ended September 25, 1998 is inadequate to
cover fixed charges. The deficient amounts for the respective ratios are
$206 and $221.
Note: Prior periods have been restated for the Midland Walwyn merger, as
required under pooling-of-interests accounting.
<PAGE>
Exhibit 15
November 9, 1998
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
condensed consolidated financial information of Merrill Lynch & Co., Inc. and
subsidiaries as of September 25, 1998 and for the three- and nine-month
periods ended September 25, 1998 and September 26, 1997 as indicated in our
report dated November 9, 1998; because we did not perform an audit, we
expressed no opinion on that information. The unaudited interim condensed
consolidated financial information gives retroactive effect to the 1998
merger of Merrill Lynch and Midland Walwyn Inc., which has been accounted for
as a pooling-of-interests, as described in Note 2 to the condensed
consolidated financial statements.
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 25, 1998, 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)
<PAGE>
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan
for a Select Group of Eligible Employees)
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 & Investment 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 and Producers)
Registration Statement No. 333-33125 (Employee Stock Purchase Plan for
Employees of Merrill Lynch Partnerships)
Registration Statement No. 333-41425 (401(k) Savings & Investment Plan)
Registration Statement No. 333-56291 (Long-Term Incentive Compensation
Plan for Managers and Producers)
Registration Statement No. 333-60211 (1999 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-62311 (Replacement Options; Midland
Walwyn Inc.)
Filed on Form S-3:
Debt Securities:
Registration Statement No. 33-54218
Registration Statement No. 2-78338
<PAGE>
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
Registration Statement No. 33-17965
Registration Statement No. 33-27512
Registration Statement No. 33-35456
Registration Statement No. 33-42041
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
Registration Statement No. 333-13649
Registration Statement No. 333-25255
Registration Statement No. 333-28537
Registration Statement No. 333-44173
Registration Statement No. 333-59997
Medium Term Notes:
Registration Statement No. 2-96315
Registration Statement No. 33-03079
Registration Statement No. 33-05125
Registration Statement No. 33-09910
<PAGE>
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)
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 (Long-Term Incentive Compensation
Plan, and Long-Term Incentive Compensation Plan for Managers and
Producers)
Registration Statement No. 333-36651 (Hotchkis and Wiley Resale)
Registration Statement No. 333-42859 (TOPrS)
Registration Statement No. 333-59263 (Merrill Lynch & Co., Canada Ltd.,
Midland Walwyn Inc.)
We are also aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.
/s/ Deloitte & Touche LLP
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-END> SEP-25-1998
<CASH> 8,965
<RECEIVABLES> 46,296
<SECURITIES-RESALE> 73,125
<SECURITIES-BORROWED> 43,176
<INSTRUMENTS-OWNED> 159,739<F1>
<PP&E> 2,570
<TOTAL-ASSETS> 353,419
<SHORT-TERM> 43,409
<PAYABLES> 26,499
<REPOS-SOLD> 88,740
<SECURITIES-LOANED> 11,434
<INSTRUMENTS-SOLD> 93,512<F2>
<LONG-TERM> 55,064
0
425
<COMMON> 630
<OTHER-SE> 8,740
<TOTAL-LIABILITY-AND-EQUITY> 353,419<F3>
<TRADING-REVENUE> 2,439
<INTEREST-DIVIDENDS> 14,903
<COMMISSIONS> 4,375
<INVESTMENT-BANKING-REVENUES> 2,440
<FEE-REVENUE> 3,013
<INTEREST-EXPENSE> 14,215
<COMPENSATION> 6,956
<INCOME-PRETAX> 1,602
<INCOME-PRE-EXTRAORDINARY> 915
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.18
<FN>
<F1>Includes $5,202 of securities received as collateral, net of securities
pledged as collateral, and $18,386 of securities pledged as collateral, recorded
pursuant to the provisions of Statement of Financial Accounting Standards
No. 127 ("SFAS No. 127").
<F2>Includes $23,588 of obligation to return securities received as collateral,
recorded pursuant to the provisions of SFAS No. 127.
<F3>Includes $1,777 of Preferred Securities issued by Subsidiaries.
</FN>
</TABLE>
