SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 26, 1998
-------------
COMMISSION FILE NUMBER 1-7182
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MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WORLD FINANCIAL CENTER, NORTH TOWER,
NEW YORK, NEW YORK 10281-1332
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
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Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
348,250,990 shares of Common Stock
(as of the close of business on July 31, 1998)
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE
MONTHS ENDED
------------------
(Dollars in Millions, JUNE 26, JUNE 27, PERCENT(1)
Except Per Share Amounts) 1998 1997 INC./(DEC.)
-------- -------- -----------
REVENUES
Commissions $1,386 $1,078 28.6%
Interest and dividends 4,948 4,330 14.3
Principal transactions 972 1,151 (15.6)
Investment banking 869 625 39.0
Asset management and portfolio
service fees 1,022 670 52.5
Other 184 157 17.6
------ ------ -----
Total Revenues 9,381 8,011 17.1
Interest Expense 4,672 4,044 15.5
------ ------ -----
Net Revenues 4,709 3,967 18.7
------ ------ -----
NON-INTEREST EXPENSES (2)
Compensation and benefits 2,378 2,004 18.7
Communications and technology 408 294 38.6
Occupancy and related depreciation 207 174 19.1
Professional fees 151 131 15.5
Advertising and market development 195 156 25.1
Brokerage, clearing, and exchange fees 161 112 44.4
Goodwill amortization 56 16 N/M
Other 246 296 (16.8)
------ ------ -----
Total Non-Interest Expenses 3,802 3,183 19.5
------ ------ -----
EARNINGS BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES 907 784 15.6
Income Tax Expense 336 290 15.7
Dividends on Preferred Securities
Issued by Subsidiaries 26 13 106.3
------ ------ -----
NET EARNINGS $ 545 $ 481 13.1%
====== ====== =====
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $ 535 $ 472 13.4%
====== ====== =====
EARNINGS PER COMMON SHARE
Basic $ 1.55 $ 1.43
====== ======
Diluted $ 1.33 $ 1.25
====== ======
DIVIDEND PAID PER COMMON SHARE $ .24 $ .20
====== ======
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE
Basic 346.3 329.9
====== ======
Diluted 402.0 378.9
====== ======
(1) Percentages are based on actual numbers before rounding.
(2) Certain prior period non-interest expenses have been reclassified to
conform to the current period presentation.
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE SIX
MONTHS ENDED
------------------
(Dollars in Millions, JUNE 26, JUNE 27, PERCENT(1)
Except Per Share Amounts) 1998 1997 INC./(DEC.)
-------- -------- -----------
REVENUES
Commissions $2,763 $2,193 26.0%
Interest and dividends 9,690 8,178 18.5
Principal transactions 2,123 2,215 (4.1)
Investment banking 1,670 1,233 35.4
Asset management and portfolio
service fees 1,993 1,316 51.4
Other 308 327 (5.9)
------ ------ -----
Total Revenues 18,547 15,462 20.0
Interest Expense 9,236 7,654 20.7
------ ------ -----
Net Revenues 9,311 7,808 19.3
------ ------ -----
NON-INTEREST EXPENSES (2)
Compensation and benefits 4,753 3,991 19.1
Communications and technology 773 571 35.2
Occupancy and related depreciation 399 344 16.2
Professional fees 316 265 19.5
Advertising and market development 367 300 22.4
Brokerage, clearing, and exchange fees 311 230 35.5
Goodwill amortization 111 31 N/M
Other 500 525 (4.8)
------ ------ -----
Total Non-Interest Expenses 7,530 6,257 20.4
------ ------ -----
EARNINGS BEFORE INCOME TAXES AND
DIVIDENDS ON PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES 1,781 1,551 14.8
Income Tax Expense 668 581 14.9
Dividends on Preferred Securities
Issued by Subsidiaries 50 23 119.5
------ ------ -----
NET EARNINGS $1,063 $ 947 12.3%
====== ====== =====
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS $1,044 $ 927 12.6%
====== ====== =====
EARNINGS PER COMMON SHARE
Basic $ 3.04 $ 2.80
====== ======
Diluted $ 2.63 $ 2.41
====== ======
DIVIDENDS PAID PER COMMON SHARE $ .44 $ .35
====== ======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 343.4 330.5
====== ======
Diluted 396.5 384.3
====== ======
(1) Percentages are based on actual numbers before rounding.
(2) Certain prior period non-interest expenses have been reclassified to
conform to the current period presentation.
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)
JUNE 26, DECEMBER 26,
ASSETS 1998 1997
- ------------------------------------------------------ -------- --------
CASH AND CASH EQUIVALENTS $ 6,281 $ 5,032
-------- --------
CASH AND SECURITIES SEGREGATED FOR
REGULATORY PURPOSES OR DEPOSITED
WITH CLEARING ORGANIZATIONS 11,933 12,384
-------- --------
MARKETABLE INVESTMENT SECURITIES 4,176 3,309
-------- --------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock 32,589 32,501
Equities and convertible debentures 30,054 23,617
Contractual agreements 24,765 21,205
U.S. Government and agencies 10,245 9,832
Non-U.S. governments and agencies 11,409 9,755
Mortgages, mortgage-backed, and asset-backed 11,196 7,312
Other 4,281 2,556
-------- --------
124,539 106,778
Securities received as collateral, net
of securities pledged as collateral 12,162 -
-------- --------
Total 136,701 106,778
-------- --------
SECURITIES PLEDGED AS COLLATERAL 15,694 -
-------- --------
RECEIVABLES UNDER RESALE AGREEMENTS 77,828 70,262
-------- --------
RECEIVABLES UNDER SECURITIES BORROWED
TRANSACTIONS 42,876 35,366
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful
accounts of $50 in 1998 and 1997) 30,398 26,529
Brokers and dealers 7,114 5,100
Interest and other 8,915 8,114
-------- --------
Total 46,427 39,743
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,590 4,833
LOANS, NOTES, AND MORTGAGES (net of
allowance for loan losses of $138
in 1998 and $130 in 1997) 7,621 4,310
OTHER INVESTMENTS 1,970 1,826
PROPERTY, LEASEHOLD IMPROVEMENTS, AND
EQUIPMENT (net of accumulated
depreciation and amortization
of $3,146 in 1998 and $2,910 in 1997) 2,295 2,074
GOODWILL (net of accumulated amortization
of $234 in 1998 and $131 in 1997) 5,368 5,455
OTHER ASSETS 1,691 1,447
-------- --------
TOTAL ASSETS $365,451 $292,819
======== ========
See Notes to Consolidated Financial Statements
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Millions, Except Per Share Amounts)
LIABILITIES, PREFERRED SECURITIES ISSUED BY JUNE 26, DECEMBER 26,
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY 1998 1997
- ---------------------------------------------------- -------- -----------
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $ 99,710 $ 77,875
--------- ---------
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS 50,891 44,850
--------- ---------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 21,547 20,632
U.S. Government and agencies 14,652 18,182
Equities and convertible debentures 20,641 15,724
Non-U.S. governments and agencies 11,444 9,720
Corporate debt, preferred stock, and other 5,383 5,818
--------- ---------
Total 73,667 70,076
--------- ---------
OBLIGATION TO RETURN SECURITIES RECEIVED
AS COLLATERAL 27,856 -
--------- ---------
OTHER PAYABLES
Customers 18,900 16,519
Brokers and dealers 5,540 4,112
Interest and other 20,857 22,625
--------- ---------
Total 45,297 43,256
--------- ---------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,487 4,716
LONG-TERM BORROWINGS 52,075 43,090
--------- ---------
TOTAL LIABILITIES 353,983 283,863
--------- ---------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,777 627
--------- ---------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
--------- ---------
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $1.33 1/3 per share;
authorized: 1,000,000,000;
issued: 472,660,324 shares 630 630
Paid-in capital 1,438 1,065
Accumulated other comprehensive income (net of tax) (23) (34)
Retained earnings 10,377 9,485
--------- ---------
12,422 11,146
Less: Treasury stock, at cost:
1998-125,416,789 shares;
1997-137,578,035 shares 2,371 2,804
Employee stock transactions 785 438
--------- ---------
TOTAL COMMON STOCKHOLDERS' EQUITY 9,266 7,904
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 9,691 8,329
--------- ---------
TOTAL LIABILITIES, PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES, AND
STOCKHOLDERS' EQUITY $ 365,451 $ 292,819
========= =========
BOOK VALUE PER COMMON SHARE $ 26.72 $ 23.64
========= =========
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
------------------------
(Dollars in Millions) JUNE 26, JUNE 27,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,063 $ 947
Noncash items included in earnings:
Depreciation and amortization 260 213
Policyholder reserves 115 122
Goodwill amortization 111 31
Other 406 559
(Increase) decrease in operating assets:
Trading assets (17,761) (28,710)
Cash and securities segregated for
regulatory purposes or deposited with
clearing organizations 451 (4,079)
Receivables under securities borrowed
transactions (7,510) (11,595)
Customer receivables (3,867) (4,506)
Sales of trading investment securities 689 501
Purchases of trading investment securities (728) (431)
Other (6,551) (2,504)
Increase (decrease) in operating liabilities:
Trading liabilities 3,591 15,868
Payables under securities loaned transactions 4,273 4,262
Liabilities of insurance subsidiaries (339) (251)
Customer payables 2,381 1,919
Other 5,074 5,197
-------- --------
CASH USED FOR OPERATING ACTIVITIES (18,342) (22,457)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 1,953 1,551
Sales of available-for-sale securities 1,346 1,063
Purchases of available-for-sale securities (3,916) (3,283)
Maturities of held-to-maturity securities 360 556
Purchases of held-to-maturity securities (446) (320)
Acquisition, net of cash acquired (5,220) -
Other investments and other assets (631) (247)
Property, leasehold improvements,
and equipment (481) (400)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (7,035) (1,080)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale
agreements 10,205 3,343
Commercial paper and other short-term
borrowings 6,041 13,836
Issuance and resale of long-term borrowings 17,174 11,874
Settlement and repurchase of long-term
borrowings (7,771) (3,868)
Issuance of subsidiaries' preferred securities 1,150 300
Redemption of remarketed preferred stock - (194)
Common stock transactions (2) (465)
Dividends (171) (136)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 26,626 24,690
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,249 1,153
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,032 3,375
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,281 $ 4,528
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for:
Income taxes $ 307 $ 413
Interest 8,894 7,294
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 26, 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
================================================================================
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.
The interim consolidated financial statements for the three- and six-month
periods are unaudited; however, in the opinion of Merrill Lynch management, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the results of operations have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report on Form
10-K for the year ended December 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.
================================================================================
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:
o Securities received as collateral, net of securities pledged as collateral;
o Securities pledged as collateral; and
o 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's Accounting Standards Executive Committee 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
six-month periods ended June 26, 1998.
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.
7
<PAGE>
================================================================================
Earnings Per Common Share
- --------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- --------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $ 545 $ 481 $ 1,063 $ 947
Preferred stock dividends 10 9 19 20
-------- -------- -------- --------
Net earnings applicable to
common stockholders $ 535 $ 472 $ 1,044 $ 927
======== ======== ======== ========
- ----------------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares
outstanding 346,299 329,901 343,435 330,529
-------- -------- -------- --------
Effect of dilutive
instruments(1)(2):
Employee stock options 33,250 25,518 31,099 28,184
FCCAAP shares 17,066 19,003 16,948 20,597
Restricted units 5,323 4,439 4,910 4,888
ESPP shares 34 40 62 66
-------- -------- -------- --------
Dilutive potential
common shares 55,673 49,000 53,019 53,735
-------- -------- -------- --------
Total weighted-average
diluted shares 401,972 378,901 396,454 384,264
======== ======== ======== ========
- ----------------------------------------------------------------------------------------
Basic earnings per share $ 1.55 $ 1.43 $ 3.04 $ 2.80
Diluted earnings per share 1.33 1.25 2.63 2.41
- ----------------------------------------------------------------------------------------
</TABLE>
(1) At June 26, 1998, there were 3,163 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 further description of these instruments.
================================================================================
Comprehensive Income
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings $545 $481 $1,063 $947
---- ---- ------ ----
Other comprehensive income, net of tax:
Foreign currency translation
adjustment (4) (3) 11 (5)
Net unrealized gains on investment
securities available-for-sale 6 18 - 22
---- ---- ------ ----
Total other comprehensive income, net 2 15 11 17
---- ---- ------ ----
Comprehensive income $547 $496 $1,074 $964
==== ==== ====== ====
- --------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
================================================================================
Short-Term Borrowings
- --------------------------------------------------------------------------------
Short-term borrowings at June 26, 1998 and December 26, 1997 are presented
below:
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
1998 1997
- --------------------------------------------------------------------------------
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $88,606 $71,044
Securities loaned transactions 11,104 6,831
------- -------
Total $99,710 $77,875
======= =======
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $34,873 $30,379
Demand and time deposits 11,642 10,531
Bank loans and other 4,376 3,940
------- -------
Total $50,891 $44,850
======= =======
- --------------------------------------------------------------------------------
================================================================================
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.
================================================================================
Common Stock
- --------------------------------------------------------------------------------
On April 14, 1998, stockholders approved the proposal to amend ML & Co.'s
certificate of incorporation to increase the authorized number of shares of
common stock from 500 million to 1 billion.
================================================================================
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.
9
<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:
- --------------------------------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE CURRENCY PRICE PRICE
(in billions) RISK(1)(2) RISK(3) RISK RISK
- --------------------------------------------------------------------------------
JUNE 26, 1998
- -------------
Swap agreements $1,671 $166 $11 $ 5
Forward contracts 100 239 - 4
Futures contracts 280 5 27 3
Options purchased 213 97 71 3
Options written 184 101 53 5
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 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.
The notional or contractual amounts of derivatives used to hedge exposure
related to borrowings or other non-trading activities follow:
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
(in billions) 1998 1997
- --------------------------------------------------------------------------------
Interest rate derivatives(1) $62 $53
Currency derivatives(l) 18 10
Equity derivatives 4 3
- --------------------------------------------------------------------------------
(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 June 26, 1998 would not have a material
effect on the consolidated financial condition of Merrill Lynch.
10
<PAGE>
================================================================================
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 June 26, 1998, MLPF&S's regulatory net capital of
$2,179 was 9% of aggregate debit items, and its regulatory net capital in excess
of the minimum required was $1,683.
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 June 26, 1998,
MLGSI's liquid capital of $1,352 was 201% of its total market and credit risk,
and liquid capital in excess of the minimum required was $543.
Merrill Lynch International ("MLI"), a registered U.K. broker-dealer and a
subsidiary of Merrill Lynch, is subject to capital requirements of the
Securities and Futures Authority ("SFA"). Financial resources, as defined, must
exceed the total financial resources requirement of the SFA. At June 26, 1998,
MLI's financial resources were $3,940 and exceeded the minimum requirement by
$1,054.
================================================================================
Interest Expense
- --------------------------------------------------------------------------------
Interest expense includes payments in lieu of dividends of $7.8 and $6.2 for the
second quarters of 1998 and 1997, respectively. For the six-month periods ended
June 26, 1998 and June 27, 1997, payments in lieu of dividends were $12.8 and
$8.3, respectively.
================================================================================
Litigation Matters
- --------------------------------------------------------------------------------
An action is pending 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. On June 2, 1998, an agreement to settle this action was
reached, which had no impact on the 1998 second quarter results of operations.
See Item 1, "Legal Proceedings," in Part II of this Quarterly Report on Form
10-Q.
11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of June 26,
1998, and the related condensed consolidated statements of earnings for the
three- and six-month periods ended June 26, 1998 and June 27, 1997 and
consolidated cash flows for the six-month periods ended June 26, 1998 and June
27, 1997. These financial statements are the responsibility of the management of
Merrill Lynch.
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. In our opinion, 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 consolidated balance sheet from which it has been derived.
August 7, 1998
/s/ Deloitte & Touche LLP
New York, New York
12
<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.
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 possible repeal of the Glass-Steagall Act
separating commercial and investment banking activities, have increased the
number of companies competing for a similar customer base.
Global financial markets, which were generally strong during 1997, had mixed
performances during the first half of 1998. U.S. and European markets continued
to advance, led by stable economies and low interest rates and inflation. Record
volumes on many U.S. and European stock exchanges pushed commissions revenues to
new highs during the 1998 second quarter. Asian markets steadily weakened
throughout the 1998 second quarter after partially recovering from 1997 third
and fourth quarter declines earlier this year. Devaluations of certain Asian
currencies led to declines in many global equity markets, particularly in June,
when the Japanese yen fell to an eight-year low against the dollar.
U.S. bond prices increased during the 1998 second quarter as the yield on
30-year U.S. Treasury bonds fell to a record low of 5.56%. The decreases in U.S.
interest rates during the 1998 and 1997 second quarters were attributable to
continued low inflation and record low levels of unemployment. Global interest
rates, following the U.S. trend, were generally lower than the 1998 first
quarter and the 1997 second quarter. Credit spreads, which represent the risk
premiums paid by issuers based on credit rating or perception, widened
considerably on a global basis during the 1998 second quarter relative to the
corresponding 1997 period.
U.S. equity markets advanced in 1998 to record price levels through April,
encouraged by continued low interest rates and inflation, but retreated in May
and June, due to uncertainties surrounding Asia and concerns over corporate
earnings. Despite these uncertainties and concerns, blue-chip stock indices
ended the quarter higher, with the Dow Jones Industrial Average and S&P
500 (Registered Trademark) up 1.7% and 2.9%, respectively, from the end of the
1998 first quarter and 16.7% and 28.1%, respectively, from the end of the 1997
second quarter. In contrast, prices for small capitalization issues declined
during the 1998 second quarter, with the Russell 2000 Index down 4.9% from the
end of the 1998 first quarter.
Global equity markets rose approximately 2% during the 1998 second quarter, as
measured by the Dow Jones World Index (Registered Trademark). A favorable
interest rate and moderate economic growth environment drove many European
markets to record highs during the 1998 second quarter. Asian markets continued
to struggle during the 1998 second quarter as worries over the yen's declining
value, the pace of corporate restructurings, and political unrest in certain
Asian countries led to significant volatility and reduced investor confidence.
Lingering concerns over Asian market turmoil, as well as investor preference for
higher credit quality instruments, led to further declines in Latin American
markets during the 1998 second quarter.
13
<PAGE>
Strong issuer activity in the 1998 second quarter led to increased underwriting
volume, generating near record revenues from both equity and debt issuances.
Investor demand for equities and higher credit quality debt instruments and
issuers' reaction to low interest rates led to record underwriting volume and
fees for the 1998 first half.
Strategic services activities remained strong during the 1998 second quarter,
reflecting the record level of merger and acquisition volume experienced during
the 1998 first half. Driven by a generally favorable stock market, ongoing
industry consolidations, and other competitive and economic factors, companies
continued to seek strategic alliances to increase earnings growth and expand
into new markets and businesses.
Due to the volatility of the financial services industry, Merrill Lynch
continually evaluates its businesses across varying market conditions for
profitability and alignment with long-term strategic objectives. Merrill Lynch
seeks to mitigate the effects of market downturns by expanding its global
presence, developing and maintaining long-term client relationships, closely
monitoring costs and risks, and continuing to diversify revenue sources.
================================================================================
Results of Operations
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED INCREASE
----------------------------- 2Q98 VERSUS
(dollars in millions, JUNE 26, MARCH 27, JUNE 27, -------------
except per share amounts) 1998 1998 1997 1Q98 2Q97
- --------------------------------------------------------------------------------
Total revenues $9,381 $9,166 $8,011 2.3% 17.1%
Net revenues 4,709 4,602 3,967 2.3 18.7
Pretax earnings 907 874 784 3.8 15.6
Net earnings 545 518 481 5.1 13.1
Net earnings applicable
to common stockholders 535 509 472 5.2 13.4
Earnings per
common share
Basic 1.55 1.49 1.43 4.0 8.4
Diluted 1.33 1.30 1.25 2.3 6.4
Return on average common
stockholders' equity 23.9% 24.8% 28.5%
Effective tax rate 37.0% 38.0% 37.0%
- --------------------------------------------------------------------------------
The following discussion emphasizes the comparison between the second quarters
of 1998 and 1997 and presents additional information comparing the six-month
periods where appropriate.
Merrill Lynch's net earnings were a record $545 million in the 1998 second
quarter, up 5% from the previous record of $518 million in the 1998 first
quarter and 13% above the $481 million in the 1997 second quarter. These
earnings included $75 million (after-tax) of pre-opening costs related to
Merrill Lynch Japan Securities Co. ("MLJS"), which reduced diluted earnings by
19 cents per common share. Record revenues were achieved in commissions,
investment banking, and asset management and portfolio service fees. Increases
in revenues were partially offset by increased costs related primarily to higher
variable compensation and technology-related expenses.
Net earnings excluding the effect of goodwill amortization were $601 million in
the 1998 second quarter, 21% above the 1997 second quarter results. On the same
basis, diluted earnings per share were $1.47 in the 1998 second quarter, up 14%
from $1.29 in the 1997 period. Return on average common equity excluding
goodwill amortization was 25.8% for the 1998 second quarter, compared with 28.9%
in the corresponding 1997 period.
14
<PAGE>
For the 1998 first half, net earnings reached a record $1.1 billion, up 12% from
the previous record of $947 million in the 1997 first half. Year-to-date
earnings per common share were $3.04 basic and $2.63 diluted, compared with
$2.80 basic and $2.41 diluted for the corresponding 1997 period. Annualized
return on common equity was 24.4% for the 1998 six months versus 28.3% in the
1997 six months. Earnings excluding goodwill amortization increased 20% to $1.2
billion for the 1998 six months. Return on equity excluding goodwill
amortization was 26.3% and 28.8%, respectively, for the 1998 and 1997 six-month
periods.
Non-U.S. net revenues continued to increase to approximately 28% of Merrill
Lynch's total net revenues in the 1998 second quarter, compared with
approximately 24% in the 1997 second quarter. In the 1998 second quarter,
Merrill Lynch continued to expand its non-U.S. presence with the following
initiatives:
o a commitment to acquire Midland Walwyn Inc., Canada's largest independent
full-service securities firm;
o the start-up of MLJS, the new Private Client business in Japan; and
o an agreement to purchase 51% interest in Phatra Securities Company
Limited, Thailand's leading investment bank, which was consummated
subsequent to the 1998 second quarter end.
These measures will further enhance Merrill Lynch's global presence, and,
combined with the acquisitions of Mercury Asset Management ("Mercury"), Smith
New Court PLC, and McIntosh Securities Limited, are expected to benefit Merrill
Lynch's key strategic priorities. The percentage of net revenues for the 1998
second quarter by strategic priority was as follows:
- --------------------------------------------------------------------------------
PERCENTAGE OF NET REVENUES BY STRATEGIC PRIORITY
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
Corporate and Institutional Client 42%
U.S. Private Client 42%
International Private Client 5%
Asset Management 11%
- --------------------------------------------------------------------------------
Commissions revenues are summarized as follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 26, JUNE 27, % JUNE 26, JUNE 27, %
(in millions) 1998 1997 INC. 1998 1997 INC.
- --------------------------------------------------------------------------------
Listed and
over-the-counter $ 730 $ 605 21% $1,501 $1,230 22%
Mutual funds 476 321 48 906 665 36
Other 180 152 19 356 298 19
------ ------ ------ ------
Total $1,386 $1,078 29 $2,763 $2,193 26
====== ====== ====== ======
- --------------------------------------------------------------------------------
Commissions revenues from mutual funds increased primarily due to strong sales
of U.S. funds. Listed securities revenues rose as a result of increased trading
volumes on the New York Stock Exchange, NASDAQ, and many European exchanges.
15
<PAGE>
Significant components of interest and dividend revenues and interest expense
follow:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
INTEREST AND DIVIDEND
REVENUES
Trading assets $1,403 $1,329 $2,715 $2,555
Resale agreements 1,389 1,155 2,748 2,086
Securities borrowed 874 931 1,768 1,763
Margin lending 721 507 1,382 958
Other 561 408 1,077 816
------ ------ ------ ------
Total 4,948 4,330 9,690 8,178
------ ------ ------ ------
INTEREST EXPENSE
Repurchase agreements 1,609 1,302 3,150 2,366
Borrowings 1,431 1,087 2,792 2,067
Trading liabilities 711 738 1,471 1,490
Securities loaned 468 612 952 1,146
Other 453 305 871 585
------ ------ ------ ------
Total 4,672 4,044 9,236 7,654
------ ------ ------ ------
NET INTEREST AND DIVIDEND
PROFIT $ 276 $ 286 $ 454 $ 524
====== ====== ====== ======
- --------------------------------------------------------------------------------
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 4% from the 1997 second quarter, as additional
financing costs related to the Mercury acquisition were partially offset by
higher interest income from certain products.
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate
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 $39 million and $7 million for the 1998 and 1997
second quarters and by $68 million and $1 million for the 1998 and 1997 six
months, respectively.
16
<PAGE>
Principal transactions revenues decreased 16% from the 1997 second quarter to
$972 million as revenues continued to be affected by volatility in the Asian and
Latin American markets, particularly in June. Lower revenues from most fixed
income products and foreign exchange instruments were partially offset by higher
revenues from non-U.S. equities, which more than doubled from the 1997 second
quarter. Non-U.S. trading revenues accounted for 56% and 42% of total principal
transactions revenues in the 1998 and 1997 second quarters, respectively.
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>
SECOND QUARTER
- --------------
Taxable fixed-income $ 125 $ 342 $ 66 $ 95 $ 191 $ 437
Equities and equity derivatives 428 391 (3) (1) 425 390
Interest rate and currency swaps 315 287 (34) (73) 281 214
Municipals 77 84 6 3 83 87
Foreign exchange and commodities 27 47 42 2 69 49
------ ------ ------ ------ ------ ------
Total $ 972 $1,151 $ 77 $ 26 $1,049 $1,177
====== ====== ====== ====== ====== ======
FIRST HALF
- ----------
Taxable fixed-income $ 307 $ 667 $ 125 $ 166 $ 432 $ 833
Equities and equity derivatives 868 707 (39) (37) 829 670
Interest rate and currency swaps 710 597 (101) (89) 609 508
Municipals 141 167 11 7 152 174
Foreign exchange and commodities 97 77 45 6 142 83
------ ------ ------ ------ ------ ------
Total $2,123 $2,215 $ 41 $ 53 $2,164 $2,268
====== ====== ====== ====== ====== ======
- ----------------------------------------------------------------------------------------
</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 revenues in the 1998 second quarter were down 63%
to $125 million as a result of lower trading revenues from corporate bonds,
money market instruments, non-U.S. government and agencies securities, and
mortgage products. Corporate bond revenues were lower due to significant
volatility in Asian markets combined with movements in credit spreads, which
expanded considerably compared to the year-ago period. Money market instruments
revenues, which include medium-term notes, decreased primarily as a result of
weakening in certain Asian positions. Modest losses in non-U.S. governments and
agencies securities were attributable primarily to weak economic conditions in
certain Latin American and Eastern European markets; lower revenues in mortgage
products resulted from higher loan prepayments driven by the low U.S. interest
rate environment, as well as lower transaction volume.
17
<PAGE>
Equities and equity derivatives trading revenues were $428 million, up 10% from
the 1997 second quarter due to significantly higher revenues from non-U.S.
equities. Increased transaction volume, resulting from favorable European market
conditions, contributed to the growth in non-U.S. equities revenues.
Interest rate and currency swap trading revenues rose 10% to $315 million as
favorable market conditions in Europe led to increased customer demand for
complex derivative products. Municipal securities trading revenues were down 8%
to $77 million due to lower margins on sales of shorter term instruments.
Foreign exchange and commodities trading revenues decreased 43% to $27 million,
due primarily to losses on certain currency positions, which were more than
offset by related interest income.
A summary of Merrill Lynch's investment banking revenues follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ --------------------
JUNE 26, JUNE 27, % JUNE 26, JUNE 27, %
(in millions) 1998 1997 INC. 1998 1997 INC.
- --------------------------------------------------------------------------------
Underwriting $626 $452 38% $1,214 $ 904 34%
Strategic services 243 173 41 456 329 39
---- ---- ------ ------
Total $869 $625 39 $1,670 $1,233 35
==== ==== ====== ======
- --------------------------------------------------------------------------------
Underwriting revenues in the 1998 second quarter were a record $626 million, up
38% from 1997 second quarter levels due to increased fees from defined asset
funds, convertibles, high yield debt, and equity issuances. As a result of
continued high levels of underwriting volume, Merrill Lynch maintained its
position as the leading underwriter of total U.S. and global debt and equity
offerings. Merrill Lynch's underwriting market share information based on
transaction value follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------------------
JUNE 26, 1998 JUNE 27, 1997
--------------- ---------------
MARKET MARKET
SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 18.6% 1 16.2% 1
Equity 15.6 2 12.5 3
Debt and Equity 18.5 1 16.5 1
GLOBAL PROCEEDS
Debt 15.4 1 13.7 1
Equity 13.0 2 12.1 3
Debt and Equity 15.4 1 13.9 1
- --------------------------------------------------------------------------------
Source: Securities Data Co. ("SDC") statistics based on full credit to book
manager.
For the 1998 first half, Merrill Lynch ranked No. 1 in both U.S. and global debt
and equity underwritings.
18
<PAGE>
Strategic services revenues advanced to $243 million in the 1998 second quarter,
benefiting from record merger and acquisition activity attributable to
consolidations in various industries. Merrill Lynch's merger and acquisition
market share information for the 1998 and 1997 second quarters based on
transaction value follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------------------
JUNE 26, 1998 JUNE 27, 1997
--------------- ---------------
MARKET MARKET
SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------
COMPLETED
TRANSACTIONS
U.S. 28.8% 1 25.4% 2
Global 25.4 2 19.6 3
ANNOUNCED
TRANSACTIONS
U.S. 23.4 3 23.6 2
Global 21.7 2 14.1 4
- --------------------------------------------------------------------------------
Source: SDC statistics based on full credit to both target and acquiring
companies' advisors.
For the 1998 first half, Merrill Lynch ranked No. 1 and No. 2, respectively, in
U.S. completed and announced mergers and acquisitions.
Merrill Lynch's asset management and portfolio service fees are summarized
below:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ --------------------
JUNE 26, JUNE 27, % JUNE 26, JUNE 27, %
(in millions) 1998 1997 INC. 1998 1997 INC.
- --------------------------------------------------------------------------------
Asset management fees(1) $ 521 $291 79% $1,033 $ 575 80%
Portfolio service fees 289 190 52 540 367 47
Account fees 115 107 7 228 212 7
Other fees 97 82 18 192 162 18
------ ---- ------ ------
Total $1,022 $670 53 $1,993 $1,316 51
====== ==== ====== ======
- --------------------------------------------------------------------------------
(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 reached an industry record
$1.4 trillion at the end of the 1998 second quarter. The changes in these
balances are described as follows:
- --------------------------------------------------------------------------------
NET CHANGES DUE TO
-----------------------
JUNE 27, NEW ASSET JUNE 26,
(in billions) 1997 MONEY(1) APPRECIATION 1998
- --------------------------------------------------------------------------------
Total assets in client accounts or
under management $940 $283(2) $129 $1,352
Total assets under management 257 202 30 489
- --------------------------------------------------------------------------------
(1) Includes $167 billion of assets related to the fourth quarter 1997
acquisition of Mercury.
(2) Includes $17 billion of assets related to the third quarter 1997
acquisition of MasterWorks, a 401(k) service provider.
19
<PAGE>
Asset management fees significantly increased from the 1997 second quarter due
to growth in assets under management, primarily from the acquisition of Mercury,
strong inflows of client assets, and net asset appreciation. Assets under
management rose $1 billion from the end of the 1998 first quarter to $489
billion at the end of the 1998 second quarter, reflecting a net increase in
non-Mercury assets under management partially offset by a net decrease in
Mercury assets under management. Portfolio service fees were considerably higher
than the corresponding 1997 period due to increases in the number of accounts
and asset levels from various fee-based products including Merrill Lynch
Consults (Registered Trademark), Mutual Fund Advisor (Service Mark), Asset Power
(Registered Trademark), and Financial Advantage (Service Mark). Account fees
rose due to an increase in the number of customer and custodial accounts. Other
fee-based revenues were up due primarily to higher revenues from transfer agency
activities.
Other revenues were $184 million, up 18% from the 1997 second quarter due
primarily to gains from investment activities.
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.
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------- ----------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
(in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits $2,378 $2,004 $4,753 $3,991
------ ------ ------ ------
Non-interest expenses,
excluding compensation and benefits:
Communications and technology 408 294 773 571
Occupancy and related depreciation 207 174 399 344
Professional fees 151 131 316 265
Advertising and market development 195 156 367 300
Brokerage, clearing, and exchange fees 161 112 311 230
Goodwill amortization 56 16 111 31
Other 246 296 500 525
------ ------ ------ ------
Total non-interest expenses,
excluding compensation and benefits 1,424 1,179 2,777 2,266
------ ------ ------ ------
Total non-interest expenses $3,802 $3,183 $7,530 $6,257
====== ====== ====== ======
Compensation and benefits
as a percentage of net revenues 50.5% 50.5% 51.0% 51.1%
Compensation and benefits as a
percentage of pretax earnings
before compensation and benefits 72.4% 71.9% 72.7% 72.0%
- --------------------------------------------------------------------------------
Non-interest expenses increased 19% from the 1997 second quarter to $3.8
billion. Excluding the pre-opening costs related to MLJS and goodwill
amortization from acquisitions, non-interest expenses rose 16%.
The largest expense category, compensation and benefits expense, rose 19% from
the 1997 second quarter to $2.4 billion due to higher incentive and
production-related compensation and increased headcount. Incentive compensation
was up attributable to improved profitability, while production-related
compensation rose as a result of strong business volume. Headcount increased by
approximately 7,900 employees since the end of the 1997 second quarter,
resulting in 60,300 employees at the end of the 1998 second quarter. This
increase is attributable to Merrill Lynch's recent acquisitions, strategic
business expansion, and growth in existing businesses. The ratio of support
employees and sales assistants to producers increased to 1.58 at the end of the
1998 second quarter from 1.54 at the end of the 1997 second quarter.
20
<PAGE>
Communications and technology expense was up 39% to $408 million because of
increased systems consulting costs, primarily associated with continued progress
on the Year 2000 and various Private Client initiatives, as well as higher
technology-related depreciation. Occupancy and related depreciation expense rose
19% to $207 million due to global expansion, including a combined total of $21
million associated with MLJS and Mercury.
Professional fees increased 16% to $151 million due in part to costs related to
various strategic initiatives. Advertising and market development expense was up
25% to $195 million due in part to increased business development and higher
global travel costs. Brokerage, clearing, and exchange fees rose 44% to $161
million as a result of $24 million in custody and clearing costs for Mercury and
higher trading volume. Goodwill amortization, a non-cash charge, increased $40
million to $56 million due to the Mercury acquisition. Other expenses were down
17% to $246 million primarily as a result of non-recurring loss provisions in
the 1997 second quarter totaling $75 million.
Income tax expense was $336 million in the 1998 second quarter, up 16% from the
same period a year ago. The effective tax rate was 37.0%, unchanged from the
1997 second quarter. A tax benefit for MLJS pre-opening costs was not recognized
in the 1998 second quarter since the ultimate deductibility of these costs is
not yet certain.
================================================================================
Liquidity and Liability Management
- --------------------------------------------------------------------------------
The primary objective of Merrill Lynch's funding policies is to assure liquidity
at all times. Merrill Lynch's liquidity management strategy has three key
components:
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 June 26, 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 June 26,
1998, substantially all 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.
21
<PAGE>
Commercial paper is the major source of short-term general purpose funding.
Commercial paper outstanding totaled $34.9 billion at June 26, 1998 and $30.4
billion at December 26, 1997, which was equal to 10% of total assets at second
quarter-end 1998 and year-end 1997, respectively.
Outstanding long-term debt at June 26, 1998 increased to $52.1 billion from
$43.1 billion at December 26, 1997. Major components of the change in long-term
debt for the 1998 six months follow:
- --------------------------------------------------------------------------------
(in millions)
- --------------------------------------------------------------------------------
Balance at December 26, 1997 $43,090
Issuances and resales 17,174
Settlements and repurchases (7,771)
Other (418)
-------
Balance at June 26, l998(1) $52,075
=======
- --------------------------------------------------------------------------------
(1) At the end of the 1998 second quarter, $37.8 billion of long-term debt had
maturity dates beyond one year.
Approximately $90.2 billion of indebtedness at June 26, 1998 is considered
senior indebtedness as defined under various indentures.
At June 26, 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:
- --------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPrS
RATING AGENCY RATINGS RATINGS
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA, Inc. AA AA-
Japan Rating & Investment Information, Inc.(1) AA Not Rated
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- --------------------------------------------------------------------------------
(1) Effective April 1, 1998, the Japan Bond Research Institute merged with
Nippon Investors Service to form the Japan Rating & Investment Information,
Inc.
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 June 26, 1998, approximately 79% of invested assets of insurance subsidiaries
were considered liquid by management.
22
<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 $9.3 billion in common
equity and $425 million in preferred stock at June 26, 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.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------------
PERIOD-END
June 26, 1998 31.9x 18.9x
December 26, 1997 32.7x 20.9x
AVERAGE(3)
Six months ended June 26, 1998 36.1x 20.3x
Year ended December 26, 1997 35.5x 21.5x
- --------------------------------------------------------------------------------
(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 dynamic models incorporate changes in business risk into
Merrill Lynch's equity requirements. Based upon these analyses and other
criteria, management believes that Merrill Lynch's capital base of $11.5 billion
is adequate.
No common stock repurchases were made during the 1998 three- and six-month
periods; Merrill Lynch repurchased 5.6 and 13.2 million shares of common stock
during the corresponding 1997 periods. At June 26, 1998, remaining authority to
repurchase shares under the share repurchase program was 10.0 million shares.
Subsequent to quarter end, Merrill Lynch rescinded its share repurchase
authority in order to facilitate pooling-of-interests accounting.
Merrill Lynch operates in many regulated businesses that require various minimum
levels of capital (see "Regulatory Requirements" section in Notes to the
Consolidated Financial Statements - Unaudited). Merrill Lynch's broker-dealer,
banking, insurance, and futures commission merchant activities are subject to
regulatory requirements that may restrict the free flow of funds to affiliates.
Regulatory approval is generally required for paying dividends in excess of
certain established levels, making affiliated investments, and entering into
management and service agreements with affiliated companies.
23
<PAGE>
================================================================================
Capital Projects and Expenditures
- --------------------------------------------------------------------------------
Merrill Lynch continually prepares for the future by expanding its operations
and investing in new technology to improve service to clients. To support
business expansion, for example, Merrill Lynch plans to build a new European
headquarters in London with expected costs of approximately $650 million;
$115 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 systems compliance. The TGA system, a
technology platform for Financial Consultants, is expected to be available to
virtually all U.S. Financial Consultants by the end of the 1998 third quarter.
In addition, new system applications will continue to be added to the platform.
The projected remaining expenditures for development and installation of the TGA
system as of June 26, 1998 are approximately $150 million.
The modifications for Year 2000 systems compliance are proceeding according to
plan and are expected to be completed in early 1999. Merrill Lynch's recent
acquisitions, continued global expansion, and higher-than-expected systems
consulting costs have increased the total projected expense from $300 million to
approximately $375 million. Based on information currently available, the
remaining costs are estimated at $200 million and will cover hardware and
software upgrades, systems consulting, and computer maintenance. These
expenditures are not expected to have a material adverse impact on Merrill
Lynch's financial position, results of operations, or cash flows in future
periods. However, the failure of securities exchanges, clearing organizations,
vendors, clients, or regulators to resolve their own processing issues in a
timely manner could result in a material financial risk to the company. Merrill
Lynch is devoting necessary resources, including contacting vendors, to address
all Year 2000 issues in a timely manner.
As of January 1, 1999, the "euro" is expected to be adopted as the national
currency of participating member states of the EMU. Since participating member
states' local currencies will continue to be legal tender until July 2002,
conversion issues between the euro and the existing local currencies must be
addressed. Remaining costs to assess the strategic implications of the EMU and
to ensure EMU systems capability are estimated at approximately $65 million.
Merrill Lynch expects to be EMU-capable during the 1998 fourth quarter.
24
<PAGE>
================================================================================
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 second quarter 1998.
For the first six months of 1998, average total assets were $380 billion, up 27%
from $299 billion for the 1997 fourth quarter. Average total liabilities rose
27% to $369 billion from $290 billion for the 1997 fourth quarter. The major
components in the growth of average total assets and liabilities for the first
half of 1998 are summarized as follows:
- --------------------------------------------------------------------------------
(in millions) INCREASE GROWTH
- --------------------------------------------------------------------------------
AVERAGE ASSETS:
Trading assets $34,923 31%
Securities pledged as collateral 19,255 N/M
Receivables under
resale agreements and securities
borrowed transactions 17,348 15
Goodwill 4,872 N/M
- --------------------------------------------------------------------------------
AVERAGE LIABILITIES:
Obligation to return securities
received as collateral $39,097 N/M
Payables under repurchase
agreements and securities
loaned transactions 18,744 19%
Trading liabilities 12,398 20
Long-term borrowings 5,511 13
- --------------------------------------------------------------------------------
N/M -- Not meaningful.
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 $20 billion and $19 billion, respectively. The offset to
the growth in average assets was a $39 billion increase in the obligation to
return securities received as collateral (for more information on SFAS No. 127,
see "New Accounting Pronouncements" section in Notes to the Consolidated
Financial Statements - Unaudited).
In addition, during the first half 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
increased as a result of expanded matched-book activity, primarily involving
non-U.S. governments and agencies. 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.
25
<PAGE>
================================================================================
Non-Investment Grade Holdings and Highly Leveraged Transactions
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
- --------------------------------------------------------------------------------
Non-Investment Grade Holdings
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
trading inventories have continued to increase to satisfy growing client demand
for higher-yielding investments, including emerging market and other non-U.S.
securities. Non-investment grade holdings 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.
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.
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $13,236 $12,993
Derivatives(1) 3,499 3,079
Trading liabilities - cash instruments 2,462 2,962
Marketable investment securities 610 648
Insurance subsidiaries' investments 225 192
- --------------------------------------------------------------------------------
(1) Collateral of $774 and $599 was obtained at June 26, 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 June 26,
1998, the carrying value of such debt and equity securities totaled $51
million, of which 35% 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 $209 million and $432 million at June 26, 1998
and December 26, 1997, respectively.
Derivatives may also expose Merrill Lynch to credit risk related to the
underlying security where a derivative contract can either synthesize ownership
of the underlying security (e.g., long total return swap) or potentially force
ownership of the underlying security (e.g., short put option). In addition,
derivatives may subject Merrill Lynch to credit spread risk, in that changes in
credit quality of the underlying securities may offset the derivatives' fair
values.
26
<PAGE>
A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Derivative fair values:
Trading assets(1) $ 33 $ 62
Trading liabilities 413 62
Derivative notionals (off-balance-sheet)(2) 3,519 3,257
- --------------------------------------------------------------------------------
(1) The preceding table includes $15 and $42 at June 26, 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 hedging strategies to reduce its exposure associated
with non-investment grade positions by purchasing an option to sell the related
security or by entering into other offsetting derivative contracts. Merrill
Lynch also uses non-investment grade trading inventories, principally non-U.S.
governments and agencies securities, to hedge the exposure arising from
structured derivative transactions.
A summary of derivatives used to hedge the credit risk of non-investment grade
positions follows:
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Derivative notionals (off-balance-sheet)(1) $6,264 $5,548
- --------------------------------------------------------------------------------
(1) Represents amount subject to strike or reference price.
At June 26, 1998, the largest non-investment grade concentration consisted of
various sovereign and corporate issues of a South American country totaling $1.1
billion.
- --------------------------------------------------------------------------------
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.
27
<PAGE>
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
A summary of loans, investments, and commitments related to highly leveraged
transactions follows:
- --------------------------------------------------------------------------------
JUNE 26, DECEMBER 26,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Loans (net of allowance for loan losses)(1) $ 896 $467
Equity investments(2) 181 170
Partnership interests 494 82
Bridge loans 95 -
Additional commitments to invest in partnerships 63 60
Unutilized revolving lines of credit and other
lending commitments(3) 786 485
- --------------------------------------------------------------------------------
(1) Represented outstanding loans to 73 and 48 companies at June 26, 1998 and
December 26, 1997, respectively.
(2) Invested in 56 and 72 enterprises at June 26, 1998 and December 26, 1997,
respectively.
(3) Subsequent to quarter end Merrill Lynch entered into a $350 million bridge
loan commitment to a counterparty in connection with a proposed acquisition
transaction. If extended, Merrill Lynch intends to syndicate a significant
portion of the loan.
At June 26, 1998, the largest industry exposure was to the financial services
sector which accounted for 32% of total non-investment grade positions and
highly leveraged transactions.
28
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Statistical Data
- ---------------------------------------------------------------------------------------------------
2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR.
1997 1997 1997 1998 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLIENT ACCOUNTS (in billions):
U.S. Client Assets $ 886 $ 960 $ 979 $ 1,086 $ 1,110
Non-U.S. Client Assets 54 58 225 242 242
-------- -------- -------- -------- --------
Total Assets in Client Accounts or
Under Management $ 940 $ 1,018 $ 1,204 $ 1,328 $ 1,352
======== ======== ======== ======== ========
Assets Under Management:
MLAM(a):
Money Market $ 98 $ 105 $ 107 $ 117 $ 118
Equity 68 73 72 80 77
Fixed-Income 45 46 48 53 54
Private Portfolio 43 45 49 55 58
Insurance 3 3 3 3 3
-------- -------- -------- -------- --------
Total $ 257 $ 272 $ 279 $ 308 $ 310
Mercury - - 167 180 179
-------- -------- -------- -------- --------
Total Assets Under Management $ 257 $ 272 $ 446 $ 488 $ 489
======== ======== ======== ======== ========
ML Consults (Registered Trademark) $ 24 $ 26 $ 27 $ 31 $ 33
Mutual Fund Advisor (Service Mark) and
Asset Power (Registered Trademark) $ 12 $ 14 $ 15 $ 18 $ 19
401(k) Assets $ 51 $ 71 $ 74 $ 80 $ 82
- ---------------------------------------------------------------------------------------------------
UNDERWRITING(b):
Global Debt and Equity:
Volume (in billions) $ 62 $ 68 $ 64 $ 92 $ 105
Market Share 13.9% 14.0% 15.4% 14.2% 15.4%
U.S. Debt and Equity:
Volume (in billions) $ 50 $ 59 $ 56 $ 78 $ 92
Market Share 16.5% 16.1% 17.2% 16.5% 18.5%
- ---------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 43,500 45,000 45,800 46,100 47,100
Non-U.S. 8,900 9,200 10,800 11,100 13,200
-------- -------- -------- -------- --------
Total 52,400 54,200 56,600 57,200 60,300
======== ======== ======== ======== ========
Financial Consultants and
Account Executives Worldwide 14,800 15,200 15,300 15,300 16,300
Support Personnel to
Producer Ratio(c) 1.54 1.53 1.57 1.58 1.58
- ---------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (in millions) $ 481 $ 493 $ 466 $ 518 $ 545
Annualized Return on Average
Common Stockholders' Equity 28.5% 27.3% 23.9% 24.8% 23.9%
Earnings per Common Share:
Basic $ 1.43 $ 1.46 $ 1.37 $ 1.49 $ 1.55
Diluted $ 1.25 $ 1.25 $ 1.17 $ 1.30 $ 1.33
- ---------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $268,036 $288,430 $292,819 $353,424 $365,451
Total Stockholders' Equity $ 7,268 $ 7,797 $ 8,329 $ 9,001 $ 9,691
- ---------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted Average Shares Outstanding:
Basic 329,901 330,958 333,853 340,571 346,299
Diluted 378,901 387,643 390,822 390,936 401,972
Common Shares Outstanding 329,048 332,352 335,082 344,731 347,244
Shares Repurchased(d) 5,588 240 - - -
- ---------------------------------------------------------------------------------------------------
</TABLE>
(a) Merrill Lynch Asset Management.
(b) Full credit to book manager. Market share data derived from Securities Data
Co.
(c) Support personnel includes sales assistants.
(d) 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.
29
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Since the filing of ML & Co.'s 1997 Form 10-K (the "1997 Form 10-K") and ML &
Co.'s Quarterly Report on Form 10-Q for the quarter ended March 27, 1998 (the
"First Quarter 1998 Form 10-Q"), the following events have taken place with
respect to several of the actions reported therein. Capitalized terms used
herein without definition have the meanings set forth in the 1997 Form 10-K.
Orange County Litigation. As reported in ML & Co.'s Current Report on Form 8-K
dated June 2, 1998, ML & Co. reached a settlement to end its litigation with
Orange County, California, John M.W. Moorlach in his official capacity as Orange
County Treasurer-Tax Collector, and the Litigation Representative appointed
pursuant to the terms of the Modified Second Amended Plan of Adjustment for the
County of Orange approved by order of the United States Bankruptcy Court on June
12, 1996 (collectively, the "County"). Under the terms of the settlement, ML &
Co. will pay $400 million to the County. ML & Co. also will return to the County
approximately $20 million of excess collateral that it has been holding. In
addition, ML & Co. reached an agreement to settle a lawsuit brought by the
Irvine Ranch Water District for $17.1 million.
On June 18, 1998, the Supreme Court of the State of New York, Appellate
Division, First Department, affirmed the dismissal of the complaint in the
Wilson Action.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 14, 1998, ML & Co. held its Annual Meeting of Stockholders. Further
details concerning matters submitted for vote of security holders can be found
in the First Quarter 1998 Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML & Co.
hereby undertakes to furnish to the Securities and Exchange
Commission (the "Commission"), upon request, copies of the
instruments defining the rights of holders of long-term debt
securities of 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.
(10)(i) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation
Plan, as amended on July 27, 1998.
30
<PAGE>
(ii) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation
Plan for Managers and Producers, as amended on July 27, 1998.
(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
Commission during the quarterly period covered by this Report:
(i) Current Report dated April 13, 1998 for the purpose of filing
the Preliminary Unaudited Earnings Summary of ML & Co. for the
three-month period ended March 27, 1998.
(ii) Current Report dated April 29, 1998 for the purpose of filing
the Preliminary Unaudited Consolidated Balance Sheet of ML &
Co. as of March 27, 1998.
(iii) Current Report dated May 19, 1998 for the purpose of filing
the Telebras Indexed Callable Protected Growth (Service Mark)
Securities due May 19, 2005 of ML & Co.
(iv) Current Report dated June 2, 1998 for the purpose of reporting
on the settlement of certain litigation arising out of ML &
Co.'s business dealings with Orange County, California.
(v) Current Report dated June 3, 1998 for the purpose of filing ML
& Co.'s 6 3/4% Notes due June 1, 2028.
(vi) Current Report dated June 15, 1998 for the purpose of filing
the Independent Auditors' Consent of Deloitte & Touche L.L.P.
in connection with Registration Statements on Form S-3 (File
Nos. 333-42859 and 333-44173) filed by ML & Co.
(vii) Current Report dated June 24, 1998 for the purpose of filing
ML & Co.'s Floating Rate Notes due June 24, 2003.
(viii) Current Report dated June 26, 1998 for the purpose of filing
ML & Co.'s S&P 500 Market Index Target-Term Securities
(Service Mark) due July 1, 2005.
31
<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: August 7, 1998 By: /s/ E. Stanley O'Neal
-------------------------
E. Stanley O'Neal
Executive Vice President and
Chief Financial Officer
32
<PAGE>
INDEX TO EXHIBITS
Exhibits
10(i) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan, as
amended on July 27, 1998.
10(ii) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan for
Managers and Producers, as amended on July 27, 1998.
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
Exhibit 10(i)
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - GENERAL ...........................................................1
Section 1.1 Purpose.....................................................1
Section 1.2 Definitions.................................................1
(a) "Board of Directors" or "Board".........................1
(b) "Code"..................................................1
(c) "Company"..............................................1
(d) "Committee"............................................1
(e) "Common Stock".........................................1
(f) "Disability"...........................................2
(g) "Fair Market Value"....................................2
(h) "Junior Preferred Stock"...............................2
(i) "Other ML & Co. Security"..............................2
(j) "Participant"..........................................2
(k) "Performance Period"...................................2
(l) "Performance Share"....................................3
(m) "Performance Unit".....................................3
(n) "Restricted Period"....................................3
(o) "Restricted Share".....................................3
(p) "Restricted Unit"......................................3
(q) "Retirement"...........................................3
(r) "Rights"...............................................3
(s) "Rights Agreement".....................................3
(t) "Stock Appreciation Right".............................3
(u) "Stock Option".........................................4
(v) "Vesting Period".......................................4
Section 1.3 Administration..............................................4
Section 1.4 Shares Subject to the Plan..................................4
Section 1.5 Eligibility and Participation...............................5
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES
AND PERFORMANCE UNITS.............................................5
Section 2.1 Performance Periods and Restricted Periods..................5
Section 2.2 Performance Objectives......................................5
Section 2.3 Grants of Performance Shares and Performance Units..........6
i
<PAGE>
Section 2.4 Rights and Benefits During Performance Period...............6
Section 2.5 Adjustment with respect to Performance Shares and
Performance Units...........................................7
Section 2.6 Payment of Performance Shares and Performance Units.........7
(a) Performance Shares.....................................7
(i) If a Restricted Period has been established......7
(ii) If a Restricted Period has not been established..8
(b) Performance Units......................................8
Section 2.7 Termination of Employment...................................8
(a) Prior to the end of a Performance Period...............8
(i) Death............................................8
(ii) Disability or Retirement.........................8
(iii) Other Terminations...............................9
(b) After the end of a Performance Period but prior to
the end of a Restricted Period.........................9
(i) Death, Disability, or Retirement.................9
(ii) OtherTerminations................................9
Section 2.8 Deferral of Payment........................................10
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES
AND RESTRICTED UNITS............................................10
Section 3.1 Vesting Periods and Restricted Periods.....................10
Section 3.2 Grants of Restricted Shares and Restricted Units...........10
Section 3.3 Rights and Restrictions Governing Restricted Shares........11
Section 3.4 Rights Governing Restricted Units..........................11
Section 3.5 Adjustment with respect to Restricted Shares and
Restricted Units...........................................11
Section 3.6 Payment of Restricted Shares and Restricted Units..........12
ii
<PAGE>
(a) Restricted Shares.....................................12
(b) Restricted Units......................................12
Section 3.7 Termination of Employment..................................12
(a) Prior to the end of a Vesting Period..................12
(i) Death...........................................12
(ii) Disability or Retirement........................12
(iii) Other Terminations..............................13
(b) After the end of a Vesting Period but prior
to the end of a Restricted Period.....................13
(i) Death, Disability, or Retirement................13
(ii) Other Terminations..............................13
Section 3.8 Extension of Vesting; Deferral of Payment..................13
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS...........................14
Section 4.1 Grants of Stock Options....................................14
Section 4.2 Option Documentation.......................................14
Section 4.3 Exercise Price.............................................14
Section 4.4 Exercise of Stock Options..................................14
(a) Exercisability........................................14
(b) Option Period.........................................15
(c) Exercise in the Event of Termination of Employment....15
(i) Death...........................................15
(ii) Disability or Retirement........................15
(iii) Other Terminations..............................15
(d) Limitations on Transferability........................16
Section 4.5 Payment of Purchase Price and Tax Liability Upon
Exercise; Delivery of Shares...............................16
(a) Payment of Purchase Price.............................16
(b) Payment of Taxes......................................16
(c) Delivery of Shares....................................17
iii
<PAGE>
Section 4.6 Limitation on Shares of Common Stock Received upon
Exercise of Stock Options..................................17
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION
RIGHTS ...........................................................17
Section 5.1 Grants of Stock Appreciation Rights........................17
Section 5.2 Stock Appreciation Rights Granted in Connection
with Incentive Stock Options...............................18
Section 5.3 Payment Upon Exercise of Stock Appreciation Rights.........19
Section 5.4 Termination of Employment..................................19
(a) Death.................................................19
(b) Disability............................................19
(c) Retirement............................................19
(d) Other Terminations....................................19
ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO.
SECURITIES.......................................................20
Section 6.1 Grants of Other ML & Co. Securities........................20
Section 6.2 Terms and Conditions of Conversion or Exchange.............20
ARTICLE VII - CHANGES IN CAPITALIZATION.......................................20
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT
AFTER A CHANGE IN CONTROL......................................21
Section 8.1 Value of Payments Upon Termination After a Change
in Control.................................................21
(a) Performance Shares and Performance Units..............22
(b) Restricted Shares and Restricted Units................22
(c) Stock Options and Stock Appreciation Rights...........22
(d) Other ML & Co. Securities.............................23
Section 8.2 A Change in Control........................................24
Section 8.3 Effect of Agreement Resulting in Change in Control.........24
Section 8.4 Termination for Cause......................................25
Section 8.5 Good Reason................................................25
iv
<PAGE>
(a) Inconsistent Duties...................................25
(b) Reduced Salary or Bonus Opportunity...................25
(c) Relocation............................................26
(d) Compensation Plans....................................26
(e) Benefits and Perquisites..............................26
(f) No Assumption by Successor............................27
Section 8.6 Effect on Plan Provisions..................................27
ARTICLE IX - MISCELLANEOUS ...................................................27
Section 9.1 Designation of Beneficiary.................................27
Section 9.2 Employment Rights..........................................28
Section 9.3 Nontransferability.........................................28
Section 9.4 Withholding................................................28
Section 9.5 Relationship to Other Benefits.............................28
Section 9.6 No Trust or Fund Created...................................28
Section 9.7 Expenses...................................................29
Section 9.8 Indemnification............................................29
Section 9.9 Tax Litigation.............................................29
ARTICLE X - AMENDMENT AND TERMINATION.........................................29
ARTICLE XI - INTERPRETATION ..................................................29
Section 11.1 Governmental and Other Regulations.........................29
Section 11.2 Governing Law..............................................30
ARTICLE XII - EFFECTIVE DATE AND STOCKHOLDER APPROVAL.........................30
v
<PAGE>
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
ARTICLE I - GENERAL
Section 1.1 Purpose.
The purposes of the Long-Term Incentive Compensation Plan (the "Plan")
are: (a) to enhance the growth and profitability of Merrill Lynch & Co., Inc., a
Delaware corporation ("ML & Co."), and its subsidiaries by providing the
incentive of long-term rewards to key employees who are capable of having a
significant impact on the performance of ML & Co. and its subsidiaries; (b) to
attract and retain employees of outstanding competence and ability; (c) to
encourage long-term stock ownership by employees; and (d) to further the
identity of interests of such employees with those of stockholders of ML & Co.
Section 1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated:
(a) "Board of Directors" or "Board" shall mean the Board of Directors of
ML & Co.
(b) "Code" shall mean the Internal Revenue Code of l986, as amended,
including any successor law thereto.
(c) "Company" shall mean ML & Co. and any corporation, partnership, or
other organization of which ML & Co. owns or controls, directly or indirectly,
not less than 50% of the total combined voting power of all classes of stock or
other equity interests. For purposes of this Plan, the terms "ML & Co." and
"Company" shall include any successor thereto.
(d) "Committee" shall mean the Management Development and Compensation
Committee of the Board of Directors, or its functional successor or any other
Board committee that has been designated by the Board of Directors to administer
the Plan, or the Board of Directors. The Committee shall be constituted so that
at all relevant times it meets the then applicable requirements of Rule 16b-3
(or its successor) promulgated under the Securities Exchange Act of 1934, as
amended.
(e) "Common Stock" shall mean the Common Stock, par value $1.33 1/3 per
share, of ML & Co. and a "share of Common Stock" shall mean one share of
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Common Stock together with, for so long as Rights are outstanding, one Right
(whether trading with the Common Stock or separately).
(f) "Disability," unless otherwise provided herein, shall mean any
physical or mental condition that, in the opinion of the Director of Human
Resources of Merrill Lynch & Co., Inc. (or his functional successor), renders an
employee incapable of engaging in any employment or occupation for which he is
suited by reason of education or training.
(g) "Fair Market Value" of shares of Common Stock on any given date(s)
shall be: (a) the mean of the high and low sales prices on the New York Stock
Exchange--Composite Tape of such shares on the date(s) in question, or, if the
shares of Common Stock shall not have been traded on any such date(s), the mean
of the high and low sales prices on the New York Stock Exchange--Composite Tape
on the first day prior thereto on which the shares of Common Stock were so
traded; or (b) if the shares of Common Stock are not traded on the New York
Stock Exchange, such other amount as may be determined by the Committee by any
fair and reasonable means.
"Fair Market Value" of any Other ML & Co. Security on any given
date(s) shall be: (a) the mean of the high and low sales prices of such Other ML
& Co. Security on the principal securities exchange on which such Security is
traded on the date(s) in question or, if such Other ML & Co. Security shall not
have been traded on any such exchange on such date(s), the mean of the high and
low sales prices on such exchange on the first day prior thereto on which such
Other ML & Co. Security was so traded; or (b) if the Other ML & Co. Security is
not publicly traded on a securities exchange, such other amount as may be
determined by the Committee by any fair and reasonable means.
(h) "Junior Preferred Stock" shall mean ML & Co.'s Series A Junior
Preferred Stock, par value $1.00 per share.
(i) "Other ML & Co. Security" shall mean a financial instrument issued
pursuant to Article VI.
(j) "Participant" shall mean any employee who has met the eligibility
requirements set forth in Section 1.5 hereof and to whom a grant has been made
and is outstanding under the Plan.
(k) "Performance Period" shall mean, in relation to Performance Shares or
Performance Units, any period, for which performance objectives have been
established, of not less than one nor more than ten consecutive ML & Co. fiscal
years, commencing with the first day of the fiscal year in which such
Performance Shares or Performance Units were granted.
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(l) "Performance Share" shall mean a right, granted to a Participant
pursuant to Article II, that will be paid out as a share of Common Stock.
(m) "Performance Unit" shall mean a right, granted to a Participant
pursuant to Article II, to receive an amount equal to the Fair Market Value of
one share of Common Stock in cash.
(n) "Restricted Period" shall mean, (i) in relation to shares of Common
Stock receivable in payment for Performance Shares, the period beginning at the
end of the applicable Performance Period during which restrictions on the
transferability of such shares of Common Stock are in effect; and (ii) in
relation to Restricted Shares or, if the Committee shall so determine,
Restricted Units, the period beginning with the first day of the month in which
Restricted Shares or Restricted Units are granted, during which restrictions on
the transferability of such Restricted Shares or Restricted Units are in effect,
which shall not be of shorter duration than the Vesting Period applicable to the
same Restricted Shares or Restricted Units.
(o) "Restricted Share" shall mean a share of Common Stock, granted to a
Participant pursuant to Article III, subject to the restrictions set forth in
Section 3.3 hereof.
(p) "Restricted Unit" shall mean the right, granted to a Participant
pursuant to Article III, as provided by the Committee at the time of grant to
receive (i) either: (A) an amount equal to the Fair Market Value of one share of
Common Stock in cash, or (B) one share of Common Stock, or, (ii) if the
Committee so determines, the holder of the Restricted Unit may elect whether to
receive cash or Common Stock.
(q) "Retirement" shall mean the cessation of employment by the Company (1)
after reaching age 55 and having completed at least 5 years of service; (2)
after reaching age 50 and having completed at least 10 years of service; (3)
after reaching age 45 and having completed at least 15 years of service; or (4)
having completed at least 20 years of service (in each case including approved
leaves of absence of one year or less).
(r) "Rights" means the Rights to Purchase Units of Junior Preferred Stock
issued pursuant to the Rights Agreement.
(s) "Rights Agreement" means the Rights Agreement dated as of December 16,
1987 between ML & Co. and Manufacturers Hanover Trust Company, Rights Agent, as
amended from time to time.
(t) "Stock Appreciation Right" shall mean a right, granted to a
Participant pursuant to Article V, to receive, in cash or shares of Common
Stock, an amount equal to the increase in Fair Market Value, over a specified
period of time, of a specified number of shares of Common Stock.
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(u) "Stock Option" shall mean a right, granted to a Participant pursuant
to Article IV, to purchase, before a specified date and at a specified price, a
specified number of shares of Common Stock. Stock Options may be "Incentive
Stock Options," which meet the definition of such in Section 422A of the Code,
or "Nonqualified Stock Options," which do not meet such definition.
(v) "Vesting Period" shall mean, in relation to Restricted Shares or
Restricted Units, any period of not less than 12 months beginning with the first
day of the month in which the grant of the applicable Restricted Shares or
Restricted Units is effective, during which such Restricted Shares or Restricted
Units may be forfeited if the Participant terminates employment.
Section 1.3 Administration.
(a) The Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to:
(i) subject to Section 1.5 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the number of
Performance Shares, Performance Units, Restricted Shares, Restricted Units,
Stock Appreciation Rights, or Other ML & Co. Securities subject to each grant;
(iii) determine the number of shares of Common Stock subject to each Stock
Option grant; (iv) determine the time or times when grants are to be made or are
to be effective; (v) determine the terms and conditions subject to which grants
may be made; (vi) extend the term of any Stock Option; (vii) provide at the time
of grant that all or any portion of any Stock Option shall be canceled upon the
Participant's exercise of any Stock Appreciation Rights; (viii) prescribe the
form or forms of the instruments evidencing any grants made hereunder, provided
that such forms are consistent with the Plan; (ix) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (x) construe and interpret the Plan and all rules,
regulations, and instruments utilized thereunder; and (xi) make all
determinations deemed advisable or necessary for the administration of the Plan.
All determinations by the Committee shall be final and binding.
(b) The Committee shall act in accordance with the procedures established
for a Committee under ML & Co.'s Certificate of Incorporation and By-Laws or
under any resolution of the Board.
Section 1.4 Shares Subject to the Plan.
The total number of shares of Common Stock that may be distributed under
the Plan shall be 80,000,000 (whether granted as Restricted Shares or reserved
for distribution upon grant of Performance Shares, Stock Options, Stock
Appreciation Rights (to the extent they may be paid out in Common Stock), or
Other ML & Co. Securities), subject to adjustment as provided in Article VII
hereof. Shares of Common
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Stock distributed under the Plan may be treasury shares or authorized but
unissued shares. To the extent that awards of Other ML & Co. Securities are
convertible into Common Stock or are otherwise equity securities (or convertible
into equity securities) of ML & Co., they shall be subject to the limitation
expressed above on the number of shares of Common Stock that can be awarded
under the Plan. Any shares of Common Stock that have been granted as Restricted
Shares or that have been reserved for distribution in payment for Performance
Shares but are later forfeited or for any other reason are not payable under the
Plan may again be made the subject of grants under the Plan. If any Stock
Option, Stock Appreciation Right, or Other ML & Co. Security granted under the
Plan expires or terminates, or any Stock Appreciation Right is paid out in cash,
the underlying shares of Common Stock may again be made the subject of grants
under the Plan. Units payable in cash that are later forfeited or for any reason
are not payable under the Plan may again be the subject of grants under the
Plan.
Section 1.5 Eligibility and Participation.
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried, key employees of the
Company.
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES AND PERFORMANCE UNITS.
Section 2.1 Performance Periods and Restricted Periods.
The Committee shall establish Performance Periods applicable to
Performance Shares and Performance Units and may establish Restricted Periods
applicable to Performance Shares, at its discretion. Each such Performance
Period shall commence with the beginning of a fiscal year in which the
Performance Shares and Performance Units are granted and have a duration of not
less than one nor more than ten consecutive fiscal years. Each such Restricted
Period shall commence with the end of the Performance Period established for
such Performance Shares and shall end on such date as may be determined by the
Committee at the time of grant. There shall be no limitation on the number of
Performance Periods or Restricted Periods established by the Committee, and more
than one Performance Period may encompass the same fiscal year.
Section 2.2 Performance Objectives.
At any time before or during a Performance Period, the Committee shall
establish one or more performance objectives for such Performance Period,
provided that such performance objectives shall be established prior to the
grant of any Performance Shares or Performance Units with respect to such
Period. Performance objectives shall be based on one or more measures such as
return on stockholders' equity, earnings, or any other standard deemed relevant
by the Committee, measured internally or relative to other organizations and
before or after extraordinary items, as
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may be determined by the Committee; provided, however, that any such measure
shall include all accruals for grants made under the Plan and for all other
employee benefit plans of the Company. The Committee may, in its discretion,
establish performance objectives for the Company as a whole or for only that
part of the Company in which a given Participant is involved, or a combination
thereof. In establishing the performance objective or objectives for a
Performance Period, the Committee shall determine both a minimum performance
level, below which no Performance Shares or Performance Units shall be payable,
and a full performance level, at or above which 100% of the Performance Shares
or Performance Units shall be payable. In addition, the Committee may, in its
discretion, establish intermediate levels at which given proportions of the
Performance Shares or Performance Units shall be payable. Such performance
objectives shall not thereafter be changed except as set forth in Sections 2.5
and 2.6 and Article VII hereof.
Section 2.3 Grants of Performance Shares and Performance Units.
The Committee may select employees to become Participants subject to the
provisions of Section 1.5 hereof and grant Performance Shares or Performance
Units to such Participants at any time prior to or during the first fiscal year
of a Performance Period. Grants shall be deemed to have been made as of the
beginning of the first fiscal year of the Performance Period. Before making
grants, the Committee must receive the recommendations of the management of the
Company, which will take into account such factors as level of responsibility,
current and past performance, and performance potential. Subject to the
provisions of Section 2.7 hereof, a grant of Performance Shares or Performance
Units shall be effective for the entire applicable Performance Period and may
not be revoked. Each grant to a Participant shall be evidenced by a written
instrument stating the number of Performance Shares or Performance Units
granted, the Performance Period, the performance objective or objectives, the
proportion of payments for performance between the minimum and full performance
levels, if any, the Restricted Periods and restrictions applicable to shares of
Common Stock receivable in payment for Performance Shares, and any other terms,
conditions, and rights with respect to such grant. At the time of any grant of
Performance Shares, there shall be reserved out of the number of shares of
Common Stock authorized for distribution under the Plan a number of shares equal
to the number of Performance Shares so granted.
Section 2.4 Rights and Benefits During Performance Period.
The Committee may provide that, during a Performance Period, a Participant
shall be paid cash amounts, with respect to each Performance Share or
Performance Unit held by such Participant, in the same manner, at the same time,
and in the same amount paid, as a dividend on a share of Common Stock.
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Section 2.5 Adjustment with respect to Performance Shares and Performance
Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time adjust performance objectives (up or down) and minimum
or full performance levels (and any intermediate levels and proportion of
payments related thereto), adjust the way performance objectives are measured,
or shorten any Performance Period or Restricted Period, if it determines that
conditions, including but not limited to, changes in the economy, changes in
competitive conditions, changes in laws or governmental regulations, changes in
generally accepted accounting principles, changes in the Company's accounting
policies, acquisitions or dispositions, or the occurrence of other unusual,
unforeseen, or extraordinary events, so warrant.
Section 2.6 Payment of Performance Shares and Performance Units.
Within 90 days after the end of any Performance Period, the Company shall
determine the extent to which performance objectives established by the
Committee pursuant to Section 2.2 hereof for such Performance Period have been
met during such Performance Period and the resultant extent to which Performance
Shares or Performance Units granted for such Performance Period are payable.
Payment for Performance Shares and Performance Units shall be as follows:
(a) Performance Shares:
(i) If a Restricted Period has been established in relation to the
Performance Shares:
(A) At the end of the applicable Performance Period, one or
more certificates representing the number of shares of Common Stock equal to the
number of Performance Shares payable shall be registered in the name of the
Participant but shall be held by the Company for the account of the employee.
Such shares will be nonforfeitable but restricted as to transferability during
the applicable Restricted Period. During the Restricted Period, the Participant
shall have all rights of a holder as to such shares of Common Stock, including
the right to receive dividends, to exercise Rights, and to vote such Common
Stock and any securities issued upon exercise of Rights, subject to the
following restrictions: (1) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; and (2) none of such
shares of Common Stock or Rights may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restricted Period. Any shares of
Common Stock or other securities or property received with respect to such
shares shall be subject to the same restrictions as such shares; provided,
however, that the Company shall not be required to register any fractional
shares of Common Stock payable to any
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Participant, but will pay the value of such fractional shares, measured as set
forth in Section 2.6(b) below, to the Participant.
(B) At the end of the applicable Restricted Period, all
restrictions applicable to the shares of Common Stock, and other securities or
property received with respect to such shares, held by the Company for the
accounts of recipients of Performance Shares granted in relation to such
Restricted Period shall lapse, and one or more stock certificates for such
shares of Common Stock and securities, free of the restrictions, shall be
delivered to the Participant, or such shares and securities shall be credited to
a brokerage account if the Participant so directs.
(ii) If a Restricted Period has not been established in relation to
the Performance Shares, at the end of the applicable Performance Period, one or
more stock certificates representing the number of shares of Common Stock equal
to the number of Performance Shares payable, free of restrictions, shall be
registered in the name of the Participant and delivered to the Participant, or
such shares shall be credited to a brokerage account if the Participant so
directs.
(b) Performance Units: At the end of the applicable Performance Period, a
Participant shall be paid a cash amount equal to the number of Performance Units
payable, times the mean of the Fair Market Value of Common Stock during the
second calendar month following the end of the Performance Period, unless some
other date or period is established by the Committee at the time of grant.
Section 2.7 Termination of Employment.
(a) Prior to the end of a Performance Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Performance Period by reason of death, any outstanding
Performance Shares or Performance Units with respect to such Participant shall
become payable and be paid to such Participant's beneficiary or estate, as the
case may be, as soon as practicable in the manner set forth in Sections
2.6(a)(ii) and 2.6(b) hereof, respectively. In determining the extent to which
performance objectives established for such Performance Period have been met and
the resultant extent to which Performance Shares or Performance Units are
payable, the Performance Period shall be deemed to end as of the end of the
fiscal year in which the Participant's death occurred.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article II, and such Participant shall not forfeit any Performance Shares
or Performance Units held by him, provided that following Disability or
Retirement such Participant does not engage in or assist any business that the
Committee, in its sole discretion, determines to be in competition with business
engaged in by the Company during the remainder of
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the applicable Performance Period. A Participant who does engage in or assist
any business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company shall be deemed to have
terminated employment.
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Performance Period for any reason other than death, the
Participant shall immediately forfeit all Performance Shares and Performance
Units previously granted under the Plan and all right to receive any payment for
such Performance Shares and Performance Units. The Committee may, however,
direct payment in accordance with the provisions of Section 2.6 hereof for a
number of Performance Shares or Performance Units, as it may determine, granted
under the Plan to a Participant whose employment has so terminated (but not
exceeding the number of Performance Shares or Performance Units that could have
been payable had the Participant remained an employee) if it finds that the
circumstances in the particular case so warrant. For purposes of the preceding
sentence, the Performance Period over which performance objectives shall be
measured shall be deemed to end as of the end of the fiscal year in which
termination occurred.
(b) After the end of a Performance Period but prior to the end of a
Restricted Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death or in the case of the Disability
or Retirement of a Participant, the Restricted Period shall be deemed to have
ended and shares held by the Company shall be paid as soon as practicable in the
manner set forth in Section 2.6(a)(i)(B).
(ii) Other Terminations: Terminations of employment for any reason
other than death after the end of a Performance Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless the
Committee, in its sole discretion, finds that the circumstances so warrant and
determines that the Restricted Period shall end on an earlier date as determined
by the Committee and that shares held by the Company shall be paid as soon as
practicable following such earlier date in the manner set forth in Section
2.6(a)(i)(B).
(c) Except as otherwise provided in this Section 2.7, termination of
employment after the end of a Performance Period but before the payment of
Performance Shares or Performance Units relating to such Performance Period
shall not affect the amount, if any, to be paid pursuant to Section 2.6 hereof.
Approved leaves of absence of one year or less shall not be deemed to be
terminations of employment under this Section 2.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
2.7, unless the Committee determines otherwise.
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Section 2.8 Deferral of Payment.
The Committee may, in its sole discretion, offer a Participant the right,
by execution of a written agreement, to defer the receipt of all or any portion
of the payment, if any, for Performance Shares or Performance Units. If such an
election to defer is made, the Common Stock receivable in payment for
Performance Shares shall be deferred as stock units equal in number to and
exchangeable, at the end of the deferral period, for the number of shares of
Common Stock that would have been paid to the Participant. Such stock units
shall represent only a contractual right and shall not give the Participant any
interest, right, or title to any Common Stock during the deferral period. The
cash receivable in payment for Performance Units or fractional shares receivable
for Performance Shares shall be deferred as cash units. Deferred stock units and
cash units may be credited annually with the appreciation factor contained in
the deferred compensation agreement, which may include dividend equivalents. All
other terms and conditions of deferred payments shall be as contained in the
written agreement.
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES AND RESTRICTED UNITS.
Section 3.1 Vesting Periods and Restricted Periods.
The Committee shall establish one or more Vesting Periods applicable to
Restricted Shares and Restricted Units and one or more Restricted Periods
applicable to Restricted Shares, at its discretion. Each such Vesting Period
shall have a duration of not less than 12 months, measured from the first day of
the month in which the grant of the applicable Restricted Shares or Restricted
Units is effective. Each such Restricted Period shall have a duration of 12 or
more consecutive months, measured from the first day of the month in which the
grant of the applicable Restricted Shares is effective, but in no event shall
any Restricted Period applicable to a Restricted Share be of shorter duration
than the Vesting Period applicable to such Restricted Share.
Section 3.2 Grants of Restricted Shares and Restricted Units.
The Committee may select employees to become Participants (subject to the
provisions of Section 1.5 hereof) and grant Restricted Shares or Restricted
Units to such Participants at any time. Before making grants, the Committee must
receive the recommendations of the management of the Company, which will take
into account such factors as level of responsibility, current and past
performance, and performance potential.
Subject to the provisions of Section 3.7 hereof, a grant of Restricted
Shares or Restricted Units shall be effective for the entire applicable Vesting
and Restricted Periods and may not be revoked. Each grant to a Participant shall
be evidenced by a written instrument stating the number of Restricted Shares
granted, the Vesting Period,
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the Restricted Period, the restrictions applicable to such Restricted Shares,
the nature and terms of payment of consideration, if any, and the consequences
of forfeiture that will apply to such Restricted Shares, and any other terms,
conditions, and rights with respect to such grant. Each grant to a Participant
of Restricted Units shall be evidenced by a written instrument stating the
number of Restricted Units granted, the Vesting Period, and all other terms,
conditions and rights with respect to such grant.
Section 3.3 Rights and Restrictions Governing Restricted Shares.
At the time of grant of Restricted Shares, subject to the receipt by the
Company of any applicable consideration for such Restricted Shares, one or more
certificates representing the appropriate number of shares of Common Stock
granted to a Participant shall be registered either in his name or for his
benefit either individually or collectively with others, but shall be held by
the Company for the account of the Participant. The Participant shall have all
rights of a holder as to such shares of Common Stock, including the right to
receive dividends, to exercise Rights, and to vote such Common Stock and any
securities issued upon exercise of Rights, subject to the following
restrictions: (a) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; (b) none of the
Restricted Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted Period; and (c) all of the
Restricted Shares shall be forfeited and all rights of the Participant to such
Restricted Shares shall terminate without further obligation on the part of the
Company unless the Participant remains in the continuous employment of the
Company for the entire Vesting Period in relation to which such Restricted
Shares were granted, except as otherwise allowed by Section 3.7 hereof. Any
shares of Common Stock or other securities or property received with respect to
such shares shall be subject to the same restrictions as such Restricted Shares.
Section 3.4 Rights Governing Restricted Units.
During the Vesting Period, or, if longer, the Restricted Period, for
Restricted Units, a Participant shall be paid, with respect to each such
Restricted Unit, cash amounts in the same manner, at the same time, and in the
same amount paid, as a dividend on a share of Common Stock.
Section 3.5 Adjustment with respect to Restricted Shares and Restricted
Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time shorten any Vesting Period or Restricted Period, if it
determines that conditions, including but not limited to, changes in the
economy, changes in competitive conditions, changes in laws or governmental
regulations, changes in generally accepted accounting principles, changes in the
Company's accounting
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policies, acquisitions or dispositions, or the occurrence of other unusual,
unforeseen, or extraordinary events, so warrant.
Section 3.6 Payment of Restricted Shares and Restricted Units.
(a) Restricted Shares: At the end of the Restricted Period, all
restrictions contained in the Restricted Share Agreement and in the Plan shall
lapse as to Restricted Shares granted in relation to such Restricted Period, and
one or more stock certificates for the appropriate number of shares of Common
Stock, free of restrictions, shall be delivered to the Participant or such
shares shall be credited to a brokerage account if the Participant so directs.
(b) Restricted Units: At the end of the Vesting Period (or, if longer, the
Restricted Period) applicable to a Participant's Restricted Units, there shall
be paid to the Participant, or his beneficiary or estate, as the case may be:
(1), a cash amount equivalent in value to the Fair Market Value of one share of
Common Stock on the last day of the Vesting Period (or, if longer, the
Restricted Period), or, (2) if so determined by the Committee at the time of
grant, at the election of the Participant, one share of Common Stock for each
Restricted Unit, provided, however, that, if the grant of Restricted Units is
payable either in cash or Common Stock at the election of the Participant, at
least six months prior to the end of the applicable period, a Participant may
elect to: (A) extend the Restricted Period of a Restricted Unit for an
additional period determined by the Participant at the time of such election or
(B) if a Participant is eligible for a deferred compensation program offered by
the Corporation, defer the receipt of cash proceeds of a Participant's
applicable Restricted Units in accordance with the terms of such program.
Section 3.7 Termination of Employment.
(a) Prior to the end of a Vesting Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Vesting Period by reason of death, all Restricted Shares
and Restricted Units granted to such Participant are immediately payable as set
forth in Section 3.6.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article III and such Participant shall not forfeit any Restricted Shares or
Restricted Units held by him, provided that, during the remainder of the
applicable Vesting Period, such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee, in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
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(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Vesting Period for any reason other than death, the
Participant shall immediately forfeit all Restricted Shares and Restricted Units
previously granted with respect to such Vesting Period in accordance with the
provisions of Section 3.2 hereof, unless the Committee, in its sole discretion,
finds that the circumstances in the particular case so warrant and allows a
Participant whose employment has so terminated to retain any or all of the
Restricted Shares or Restricted Units granted to such Participant.
(b) After the end of a Vesting Period but prior to the end of a Restricted
Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death, or in the case of the Disability
or Retirement of a Participant, prior to the end of a Restricted Period, all
Restricted Shares granted to such Participant are immediately payable in the
manner set forth in Section 3.6.
(ii) Other Terminations: : Terminations of employment for any reason
other than death after the end of a Vesting Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless (A)
the Restricted Period relates to Restricted Units that have been further
deferred in which case the Restricted Units shall be paid to the Participant, or
(B) the Committee, in its sole discretion, finds that the circumstances so
warrant and determines that the Restricted Period shall end on an earlier date
as determined by the Committee and, in each case, the applicable Restricted
Shares or Restricted Units shall be paid as soon as practicable in the manner
set forth in Section 3.6.
(c) Approved leaves of absence of one year or less shall not be deemed to
be terminations of employment under this Section 3.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
3.7, unless the Committee determines otherwise.
Section 3.8 Extension of Vesting; Deferral of Payment.
The Committee may, in its sole discretion, offer any Participant the
right, by execution of a written agreement with ML & Co. containing such terms
and conditions as the Committee shall in its sole discretion provide for, to
extend the Vesting Period applicable to all or any portion of such Participant's
Restricted Shares or Restricted Units, to convert all or any portion of such
Participant's Restricted Shares into Restricted Units or to defer the receipt of
all or any portion of the payment, if any, for such Participant's Restricted
Units (including any Restricted Shares converted into Restricted Units). In the
event that any Vesting Period with respect to Restricted Shares is extended
pursuant to this Section 3.8, the Restricted Period with respect to
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such Restricted Shares shall be extended to the same date. The provisions of any
written agreement with a Participant pursuant to this Section 3.8 may provide
for the payment or crediting of interest, an appreciation factor or index or
dividend equivalents, as appropriate.
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS.
Section 4.1 Grants of Stock Options.
The Committee may select employees to become Participants (subject to
Section 1.5 hereof) and grant Stock Options to such Participants at any time;
provided, however, that Incentive Stock Options shall be granted within 10 years
of the earlier of the date the Plan is adopted by the Board or approved by the
stockholders. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. Subject to the provisions of the Plan, the Committee
shall also determine the number of shares of Common Stock to be covered by each
Stock Option. The Committee shall have the authority, in its discretion, to
grant "Incentive Stock Options" or "Nonqualified Stock Options," or to grant
both types of Stock Options. Furthermore, the Committee may grant a Stock
Appreciation Right in connection with a Stock Option, as provided in Article V.
Section 4.2 Option Documentation.
Each Stock Option granted under the Plan shall be evidenced by written
documentation containing such terms and conditions as the Committee may deem
appropriate and are not inconsistent with the provisions of the Plan.
Section 4.3 Exercise Price.
The Committee shall establish the exercise price at the time any Stock
Option is granted at such amount as the Committee shall determine, except that
such exercise price shall not be less than 50% of the Fair Market Value of the
underlying shares of Common Stock on the day a Stock Option is granted and that,
with respect to an Incentive Stock Option, such exercise price shall not be less
than 100% of the Fair Market Value of the underlying shares of Common Stock on
the day such Incentive Stock Option is granted. The exercise price will be
subject to adjustment in accordance with the provisions of Article VII of the
Plan.
Section 4.4 Exercise of Stock Options.
(a) Exercisability: Stock Options shall become exercisable at such times
and in such installments as the Committee may provide at the time of grant. The
Committee may, however, in its sole discretion accelerate the time at which a
Stock Option or installment may be exercised. A Stock Option may be exercised at
any time
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from the time first set by the Committee until the close of business on the
expiration date of the Stock Option. Notwithstanding the foregoing, in no event
may a Participant, or a Participant's transferee pursuant to Section 4.4(d),
exercise a Stock Option during the 12-month period following a hardship
withdrawal by the Participant of Elective 401(k) Deferrals as defined under the
Merrill Lynch & Co., Inc. 401(k) Savings & Investment Plan.
(b) Option Period: For each Stock Option granted, the Committee shall
specify the period during which the Stock Option may be exercised, provided that
no Stock Option shall be exercisable after the expiration of 10 years from the
date of grant of such Stock Option.
(c) Exercise in the Event of Termination of Employment:
(i) Death: If a Participant ceases to be an employee of the Company
by reason of death prior to the exercise or expiration of Stock Options granted
to him and outstanding on the date of death, such Stock Options may be exercised
to the full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant or under the terms of Section 4.4(a)
hereof, by his estate or beneficiaries, as the case may be, if such Stock
Options are outstanding in his name, or by his transferee pursuant to Section
4.4(d) or such transferee's estate or beneficiaries, if such Stock Options are
outstanding in the name of such transferee, at any time and from time to time,
but in no event after the expiration date of such Stock Option.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article IV, provided that following Disability or Retirement such
Participant does not engage in or assist any business that the Committee, in its
sole discretion, determines to be in competition with business engaged in by the
Company. A Participant who does engage in or assist any business that the
Committee, in its sole discretion, determines to be competition with business
engaged in by the Company shall be deemed to have terminated employment. In the
case of Incentive Stock Options, Disability shall be as defined in Code Section
22(e)(3).
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the exercise or expiration of a Stock Option for any reason other than
death, all outstanding Stock Options granted to such Participant, whether
outstanding in his name or in the name of another person as a result of a
transfer in accordance with Section 4.4(d), shall expire on the date of such
termination of employment, unless the Committee, in its sole discretion, finds
that the circumstances in the particular case so warrant and determines that the
Participant, his transferee pursuant to Section 4.4(d) or such transferee's
estate or beneficiaries, may exercise any such outstanding Stock Option (to the
extent that any such outstanding Stock Option could have been exercised at the
date of such termination of employment) at any time and from time to
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time within up to 5 years after such termination of employment but in no event
after the expiration date of such Stock Option (the "Extended Period"). If a
Participant dies during the Extended Period and prior to the exercise or
expiration of a Stock Option, his estate or beneficiaries, as the case may be,
if such Stock Option is outstanding in his name, or his transferee pursuant to
Section 4.4(d) or such transferee's estate or beneficiaries, if such Stock
Option is outstanding in the name of such transferee, may exercise such Stock
Option (to the extent such Stock Option could have been exercised at the date of
termination of employment) at any time and from time to time, but in no event
after the end of the Extended Period.
(d) Limitations on Transferability: Stock Options are not transferable by
a Participant except by will or the laws of descent and distribution and are
exercisable during his lifetime only by him; provided, however, that the
Committee shall have the authority, in its discretion, to grant (or to sanction
by way of amendment of an existing grant) Stock Options which may be transferred
by the Participant during his lifetime to any member of his immediate family or
to a trust, limited liability corporation, family limited partnership or other
equivalent vehicle, established for the exclusive benefit of one or more members
of his immediate family, in which case the written documentation containing the
terms and conditions of such Stock Options shall so state. A transfer of a Stock
Option pursuant to this subparagraph may only be effected by the Corporation at
the written request of a Participant and shall become effective only when
recorded in the Corporation's record of outstanding Stock Options. In the event
a Stock Option is transferred as contemplated in this subparagraph, such Stock
Option may not be subsequently transferred by the transferee except by will or
the laws of descent and distribution. In the event a Stock Option is transferred
as contemplated in this subparagraph, such Stock Option shall continue to be
governed by and subject to the terms and limitations of the Plan and the
relevant grant, and the transferee shall be entitled to the same rights as the
Participant under Articles VII, VIII and X hereof, as if no transfer had taken
place. As used in this subparagraph, "immediate family" shall mean, with respect
to any person, any child, stepchild or grandchild, and shall include
relationships arising from legal adoption.
Section 4.5 Payment of Purchase Price and Tax Liability Upon Exercise;
Delivery of Shares.
(a) Payment of Purchase Price: The purchase price of the shares as to
which a Stock Option is exercised shall be paid to the Company at the time of
exercise (i) in cash, (ii) by delivering freely transferable shares of Common
Stock already owned by the person exercising the Stock Option having a total
Fair Market Value on the date of exercise equal to the purchase price, (iii) a
combination of cash and shares of Common Stock equal in value to the exercise
price, or (iv) by such other means as the Committee, in its sole discretion, may
determine.
(b) Payment of Taxes: Upon exercise, a Participant may elect to satisfy
any federal, state or local taxes required by law to be withheld that arise as a
result of the
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exercise of a Stock Option by directing the Company to withhold from the shares
of Common Stock otherwise deliverable upon the exercise of such Stock Option,
such number of shares as shall have a total Fair Market Value, on the date of
exercise, at least equal to the amount of tax to be withheld.
(c) Delivery of Shares: Upon receipt by the Company of the purchase price,
stock certificate(s) for the shares of Common Stock as to which a Stock Option
is exercised (net of any shares withheld pursuant to Section 4.5(b) above) shall
be delivered to the person in whose name the Stock Option is outstanding or such
person's estate or beneficiaries, as the case may be, or such shares shall be
credited to a brokerage account or otherwise delivered, in such manner as such
person or such person's estate or beneficiaries, as the case may be, may direct.
Section 4.6 Limitations on Shares of Common Stock Received upon Exercise
of Stock Options.
The aggregate Fair Market Value (determined at the time an Incentive Stock
Option is granted) of the shares of Common Stock with respect to which an
Incentive Stock Option is exercisable for the first time by a Participant during
any calendar year (under all plans of the Company) shall not exceed $100,000 or
such other limit as may be established from time to time under the Code.
The maximum aggregate number of shares of Common Stock underlying stock
options to be granted in any one fiscal year to any individual executive
officer, as such term is defined in the regulations promulgated under Section
162(m) of the Internal Revenue Code, shall be 1,000,000 (one million), which
number shall be adjusted automatically to give effect to mergers,
consolidations, reorganizations, stock dividends, stock splits or combinations,
reclassifications, recapitalizations, or distributions to holders of Common
Stock (other than cash dividends) including, without limitation, a merger or
other reorganization event in which the Common Stock ceases to exist.*
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION RIGHTS.
Section 5.1 Grants of Stock Appreciation Rights.
The Committee may select employees to become Participants (subject to the
provisions of Section 1.5 hereof) and grant Stock Appreciation Rights to such
Participants at any time. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. The Committee shall have the authority to grant Stock
Appreciation Rights in connection with a Stock Option or independently. The
Committee may grant Stock
* This paragraph is subject to approval by ML & Co.'s stockholder at its 1997
Annual Meeting of Stockholders
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Appreciation Rights in connection with a Stock Option, either at the time of
grant or by amendment, in which case each such right shall be subject to the
same terms and conditions as the related Stock Option and shall be exercisable
only at such times and to such extent as the related Stock Option is
exercisable. A Stock Appreciation Right granted in connection with a Stock
Option shall entitle the holder to surrender to the Company the related Stock
Option unexercised, or any portion thereof, and receive from the Company in
exchange therefor an amount equal to the excess of the Fair Market Value of one
share of the Common Stock on the day preceding the surrender of such Stock
Option over the Stock Option exercise price times the number of shares
underlying the Stock Option, or portion thereof, that is surrendered. A Stock
Appreciation Right granted independently of a Stock Option shall entitle the
holder to receive upon exercise an amount equal to the excess of the Fair Market
Value of one share of Common Stock on the day preceding the exercise of the
Stock Appreciation Right over the Fair Market Value of one share of Common Stock
on the date such Stock Appreciation Right was granted, or such other price
determined by the Committee at the time of grant, which shall in no event be
less than 50% of the Fair Market Value of one share of Common Stock on the date
such Stock Appreciation Right was granted. Stock Appreciation Rights are not
transferable by a Participant except by will or the laws of descent and
distribution and are exercisable during his lifetime only by him.
Section 5.2 Stock Appreciation Rights Granted in Connection with Incentive
Stock Options.
(a) Stock Appreciation Rights granted in connection with Incentive Stock
Options must expire no later than the last date the underlying Incentive Stock
Option can be exercised.
(b) Such Stock Appreciation Rights may be granted for no more than 100% of
the difference between the exercise price of the underlying Incentive Stock
Option and the Fair Market Value of the Common Stock subject to the underlying
Incentive Stock Option at the time the Stock Appreciation Right is exercised.
(c) Such Stock Appreciation Rights are transferable only to the extent and
at the same time and under the same conditions as the underlying Incentive Stock
Options.
(d) Such Stock Appreciation Rights may be exercised only when the
underlying Incentive Stock Options may be exercised.
(e) Such Stock Appreciation Rights may be exercised only when the Fair
Market Value of the shares of Common Stock subject to the Incentive Stock
Options exceeds the exercise price of the Incentive Stock Options.
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Section 5.3 Payment Upon Exercise of Stock Appreciation Rights.
The Company's obligation to any Participant exercising a Stock
Appreciation Right may be paid in cash or shares of Common Stock, or partly in
cash and partly in shares, at the sole discretion of the Committee.
Section 5.4 Termination of Employment.
(a) Death: If a Participant ceases to be an employee of the Company prior
to the exercise or expiration of a Stock Appreciation Right outstanding in his
name on the date of death, such Stock Appreciation Right may be exercised to the
full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant, by his estate or beneficiaries, as the
case may be, at any time and from time to time within l2 months after the date
of death but in no event after the expiration date of such Stock Appreciation
Right.
(b) Disability: The Disability of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following the Disability such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee, in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
(c) Retirement: The Retirement of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following Retirement such Participant does not engage in or assist any business
that the Committee, in its sole discretion, determines to be in competition with
business engaged in by the Company, and such Participant may exercise any Stock
Appreciation Right outstanding in his name at any time and from time to time
within 5 years after the date his Retirement commenced but in no event after the
expiration date of such Stock Appreciation Right. A Participant who does engage
in or assist any business that the Committee, in its sole discretion, determines
to be in competition with business engaged in by the Company shall be deemed to
have terminated employment.
(d) Other Terminations: If a Participant ceases to be an employee prior to
the exercise or expiration of a Stock Appreciation Right for any reason other
than death, all outstanding Stock Appreciation Rights granted to such
Participant shall expire on the date of such termination of employment, unless
the Committee, in its sole discretion, determines that he may exercise any such
outstanding Stock Appreciation Right (to the extent that he was entitled to do
so at the date of such termination of such employment) at any time and from time
to time within up to 5 years after such termination of employment but in no
event after the expiration date of such Stock Appreciation Right.
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ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO. SECURITIES.
Section 6.1 Grants of Other ML & Co. Securities.
Subject to the provisions of the Plan and any necessary action by the
Board of Directors, the Committee may select employees to become Participants
(subject to the provisions of Section 1.5 hereof) and grant to Participants
Other ML & Co. Securities or the right or option to purchase Other ML & Co.
Securities on such terms and conditions as the Committee shall determine,
including, without limitation, the period such rights or options may be
exercised, the nature and terms of payment of consideration for such Other ML &
Co. Securities, whether such Other ML & Co. Securities shall be subject to any
or all of the provisions of Article III of the Plan applicable to Restricted
Shares and/or Restricted Units, the consequences of termination of employment,
and the terms and conditions, if any, upon which such Other ML & Co. Securities
may or must be repurchased by the Company. Before making grants, the Committee
must receive the recommendations of the management of the Company, which will
take into account such factors as level of responsibility, current and past
performance, and performance potential. Each such Other ML & Co. Security shall
be issued at a price that will not exceed the Fair Market Value thereof on the
date the corresponding right or option is granted. Other ML & Co. Securities may
bear interest or pay dividends from such date and at a rate or rates or pursuant
to a formula or formulas fixed by the Committee or any necessary action of the
Board. Any applicable conversion or exchange rate with respect to Other ML & Co.
Securities shall be fixed by, or pursuant to a formula determined by, the
Committee or any necessary action of the Board at each date of grant and may be
predicated upon the attainment of financial or other performance goals.
Section 6.2 Terms and Conditions of Conversion or Exchange.
Each Other ML & Co. Security may be convertible or exchangeable on such
date and within such period of time as the Committee, or the Board if necessary,
determines at the time of grant. Other ML & Co. Securities may be convertible
into or exchangeable for (i) shares of Preferred Stock of ML & Co. or (ii) other
securities of ML & Co. or any present or future subsidiary of ML & Co., whether
or not convertible into shares of Common Stock, as the Committee, or the Board
if necessary, determines at the time of grant (or at any time prior to the
conversion or exchange date).
ARTICLE VII - CHANGES IN CAPITALIZATION.
Any other provision of the Plan to the contrary notwithstanding, if any
change shall occur in or affect shares of Common Stock or Performance Units,
Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML & Co.
Securities on account of a merger, consolidation, reorganization, stock
dividend, stock split or combination, reclassification, recapitalization, or
distribution to holders of shares of
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Common Stock (other than cash dividends) including, without limitation, a merger
or other reorganization event in which the shares of Common Stock cease to
exist, or, if in the opinion of the Committee, after consultation with the
Company's independent public accountants, changes in the Company's accounting
policies, acquisitions, divestitures, distributions, or other unusual or
extraordinary items have disproportionately and materially affected the value of
shares of Common Stock or Performance Units, Restricted Units, Stock Options,
Stock Appreciation Rights, or Other ML & Co. Securities, the Committee shall
make such adjustments, if any, that it may deem necessary or equitable in (a)
the maximum number of shares of Common Stock available for distribution under
the Plan; (b) the number of shares subject to or reserved for issuance under
outstanding Performance Share, Restricted Share, and Stock Option grants; (c)
the performance objectives for the Performance Periods not yet completed,
including the minimum, intermediate, and full performance levels and portion of
payments related thereto; and (d) any other terms or provisions of any
outstanding grants of Performance Shares, Performance Units, Restricted Shares,
Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML & Co.
Securities, in order to preserve the full benefits of such grants for the
Participants, taking into account inflation, interest rates, and any other
factors that the Committee, in its sole discretion, considers relevant. In the
event of a change in the presently authorized shares of Common Stock that is
limited to a change in the designation thereof or a change of authorized shares
with par value into the same number of shares with a different par value or into
the same number of shares without par value, the shares resulting from any such
change shall be deemed to be shares of Common Stock within the meaning of the
Plan. In the event of any other change affecting the shares of Common Stock,
Performance Units, Restricted Units, Stock Options, Stock Appreciation Rights,
or Other ML & Co. Securities, such adjustment shall be made as may be deemed
equitable by the Committee to give proper effect to such event.
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT AFTER A CHANGE IN
CONTROL.
Section 8.1 Value of Payments Upon Termination After a Change in Control.
Any other provision of the Plan to the contrary notwithstanding and
notwithstanding any election to the contrary previously made by the Participant,
in the event a Change in Control shall occur and thereafter the Company shall
terminate the Participant's employment without Cause or the Participant shall
terminate his employment with the Company for Good Reason, the Participant shall
be paid the value of his Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, and Other ML
& Co. Securities in a lump sum in cash, promptly after termination of his
employment but, without limiting the foregoing, in no event later than 30 days
thereafter. Payments shall be calculated as set forth below:
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(a) Performance Shares and Performance Units.
Any payment for Performance Shares and Performance Units pursuant to this
Section 8.1(a) shall be calculated by applying performance objectives for any
outstanding Performance Shares and Performance Units as if the applicable
Performance Period and any applicable Restricted Period had ended on the first
day of the month in which the Participant's employment is terminated. The amount
of any payment to a Participant pursuant to this Section 8.1(a) shall be reduced
by the amount of any payment previously made to the Participant with respect to
the Performance Shares and Performance Units, exclusive of ordinary dividend
payments, resulting by operation of law from the Change in Control, including,
without limitation, payments resulting from a merger pursuant to state law. The
value of the Performance Shares and Performance Units payable pursuant to this
Section 8.1(a) shall be the amount equal to the number of Performance Shares and
Performance Units payable in accordance with the preceding sentence multiplied
by the Fair Market Value of a share of Common Stock on the day the Participant's
employment is terminated or, if higher, the highest Fair Market Value of a share
of the Common Stock on any day during the 90-day period ending on the date of
the Change in Control (the "Pre-CIC Value").
(b) Restricted Shares and Restricted Units.
Any payment under this Section 8.1(b) shall be calculated as if all the
relevant Vesting and Restricted Periods had been fully completed immediately
prior to the date on which the Participant's employment is terminated. The
amount of any payment to a Participant pursuant to this Section 8.1(b) shall be
reduced by the amount of any payment previously made to the Participant with
respect to the Restricted Shares and Restricted Units, exclusive of ordinary
dividend payments, resulting by operation of law from the Change in Control,
including, without limitation, payments resulting from a merger pursuant to
state law. The value of the Participant's Restricted Shares and Restricted Units
payable pursuant to this Section 8.1(b) shall be the amount equal to the number
of the Restricted Shares and Restricted Units outstanding in a Participant's
name multiplied by the Fair Market Value of a share of Common Stock on the day
the Participant's employment is terminated or, if higher, the Pre-CIC Value.
(c) Stock Options and Stock Appreciation Rights.
Any payment for Stock Options and Stock Appreciation Rights pursuant to
this Section 8.1(c) shall be calculated as if all such Stock Options and Stock
Appreciation Rights, regardless of whether or not then fully exercisable under
the terms of the grant, became exercisable immediately prior to the date on
which the Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(c) shall be reduced by the amount of
any payment previously made to a Participant with respect to the Stock Options
and Stock Appreciation Rights, exclusive of any ordinary dividend payments,
resulting by operation of law from the Change in
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Control, including, without limitation, payments resulting from a merger
pursuant to state law. The value of the Participant's Stock Options and Stock
Appreciation Rights payable pursuant to this Section 8.1(c) shall be
(i) in the case of a Stock Option, for each underlying share
of Common Stock, the excess of the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the per share exercise price
for such Stock Option;
(ii) in the case of a Stock Appreciation Right granted in
tandem with a Stock Option, the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the Stock Option exercise
price; and
(iii) in the case of a Stock Appreciation Right granted
independently of a Stock Option, the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the Fair Market Value of one
share of Common Stock on the date such Stock Appreciation Right was
granted, or such other price determined by the Committee at the time
of grant.
(d) Other ML & Co. Securities.
Any payment for Other ML & Co. Securities under this Section 8.1(d) shall
be calculated as if any relevant Vesting or Restricted Periods or other
applicable conditions dependent on the passage of time and relating to the
exercisability of any right or option to purchase Other ML & Co. Securities, or
relating to the full and unconditional ownership of such Other ML & Co.
Securities themselves, had been met on the first day of the month in which the
Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(d) shall be reduced by the amount of
any payment previously made to the Participant with respect to the Other ML &
Co. Securities, exclusive of ordinary dividend payments, resulting by operation
of law from the Change in Control, including, without limitation, payments
resulting from a merger pursuant to state law. The value of the Participant's
Other ML & Co. Securities payable pursuant to this Section 8.1(d) shall be
(i) in the case of an option or right to purchase such Other
ML & Co. Security, for each underlying Other ML & Co. Security, the
excess of the Fair Market Value of such Other ML & Co. Security on
the day the Participant's employment is terminated, or, if higher,
the Pre-CIC Value, over the exercise price of such option or right;
and
(ii) in the case of the Other ML & Co. Security itself (where
there is no outstanding option or right relating to such Other ML &
Co.
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Security), the Fair Market Value of the Other ML & Co. Security on
the day the Participant's employment is terminated, or, if higher,
the Pre-CIC Value.
Section 8.2 A Change in Control.
A "Change in Control" shall mean a change in control of ML & Co. of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided, however, that, without
limitation, a Change in Control shall be deemed to have occurred if:
(a) any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity, or any syndicate or group deemed to
be a person under Section 14(d)(2) of the Exchange Act, other than the Company's
employee stock ownership plan, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 of the General Rules and Regulations under the Exchange Act),
directly or indirectly, of securities of ML & Co. representing 30% or more of
the combined voting power of ML & Co.'s then outstanding securities entitled to
vote in the election of directors of ML & Co.;
(b) during any period of two consecutive years (not including any period
prior to the Effective Date of this Plan) individuals who at the beginning of
such period constituted the Board of Directors and any new directors, whose
election by the Board of Directors or nomination for election by the
stockholders of ML & Co. was approved by a vote of at least three quarters of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(c) all or substantially all of the assets of ML & Co. are liquidated or
distributed.
Section 8.3 Effect of Agreement Resulting in Change in Control.
If ML & Co. executes an agreement, the consummation of which would result
in the occurrence of a Change in Control as described in Section 8.2, then, with
respect to a termination of employment without Cause or for Good Reason
occurring after the execution of such agreement (and, if such agreement expires
or is terminated prior to consummation, prior to such expiration or termination
of such agreement), a Change in Control shall be deemed to have occurred as of
the date of the execution of such agreement.
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Section 8.4 Termination for Cause.
Termination of the Participant's employment by the Company for "Cause"
shall mean termination upon:
(a) the willful and continued failure by the Participant substantially to
perform his duties with the Company (other than any such failure resulting from
the Participant's incapacity due to physical or mental illness or from the
Participant's Retirement or any such actual or anticipated failure resulting
from termination by the Participant for Good Reason) after a written demand for
substantial performance is delivered to him by the Board of Directors, which
demand specifically identifies the manner in which the Board of Directors
believes that he has not substantially performed his duties; or
(b) the willful engaging by the Participant in conduct that is
demonstrably and materially injurious to the Company, monetarily or otherwise.
No act or failure to act by the Participant shall be deemed "willful"
unless done, or omitted to be done, by the Participant not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Company.
Notwithstanding the foregoing, the Participant shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three quarters of the entire membership of the Board of Directors at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Participant and an opportunity for him, together with counsel, to be heard
before the Board of Directors), finding that, in the good faith opinion of the
Board of Directors, the Participant was guilty of conduct set forth above in
clause (a) or (b) of the first sentence of this Section 8.4 and specifying the
particulars thereof in detail.
Section 8.5 Good Reason.
"Good Reason" shall mean the Participant's termination of his employment
with the Company if, without the Participant's written consent, any of the
following circumstances shall occur:
(a) Inconsistent Duties. A meaningful and detrimental alteration in the
Participant's position or in the nature or status of his responsibilities
(including those as a director of ML & Co., if any) from those in effect
immediately prior to the Change in Control;
(b) Reduced Salary or Bonus Opportunity. A reduction by the Company in the
Participant's annual base salary as in effect immediately prior to the Change in
Control; a failure by the Company to increase the Participant's salary at a rate
25
<PAGE>
commensurate with that of other key executives of the Company; or a reduction in
the Participant's annual cash bonus below the greater of (i) the annual cash
bonus that he received, or to which he was entitled, immediately prior to the
Change in Control, or (ii) the average annual cash bonus paid to the Participant
by the Company for the three years preceding the year in which the Change in
Control occurs;
(c) Relocation. The relocation of the office of the Company where the
Participant is employed at the time of the Change in Control (the "CIC
Location") to a location that in his good faith assessment is an area not
generally considered conducive to maintaining the executive offices of a company
such as ML & Co. because of hazardous or undesirable conditions including
without limitation a high crime rate or inadequate facilities, or to a location
that is more than twenty-five (25) miles away from the CIC Location or the
Company's requiring the Participant to be based more than twenty-five (25) miles
away from the CIC Location (except for required travel on the Company's business
to an extent substantially consistent with his customary business travel
obligations in the ordinary course of business prior to the Change in Control);
(d) Compensation Plans. The failure by the Company to continue in effect
any compensation plan in which the Participant participates, including but not
limited to this Plan, the Company's retirement program, Employee Stock Purchase
Plan, 1978 Incentive Equity Purchase Plan, Equity Capital Accumulation Plan,
Canadian Capital Accumulation Plan, Management Capital Accumulation Plan,
limited partnership offerings, cash incentive compensation or any other plans
adopted prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan in connection with the Change in Control, or the failure by
the Company to continue the Participant's participation therein on at least as
favorable a basis, both in terms of the amount of benefits provided and the
level of his participation relative to other Participants, as existed
immediately prior to the Change in Control;
(e) Benefits and Perquisites. The failure of the Company to continue to
provide the Participant with benefits at least as favorable as those enjoyed by
the Participant under any of the Company's retirement, life insurance, medical,
health and accident, disability, deferred compensation or savings plans in which
the Participant was participating immediately prior to the Change in Control;
the taking of any action by the Company that would directly or indirectly
materially reduce any of such benefits or deprive the Participant of any
material fringe benefit enjoyed by him immediately prior to the Change in
Control, including, without limitation, the use of a car, secretary, office
space, telephones, expense reimbursement, and club dues; or the failure by the
Company to provide the Participant with the number of paid vacation days to
which the Participant is entitled on the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect
immediately prior to the Change in Control;
26
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(f) No Assumption by Successor. The failure of ML & Co. to obtain a
satisfactory agreement from any successor to assume and agree to perform a
Participant's employment agreement as contemplated thereunder or, if the
business of the Company for which his services are principally performed is sold
at any time after a Change in Control, the purchaser of such business shall fail
to agree to provide the Participant with the same or a comparable position,
duties, compensation, and benefits as provided to him by the Company immediately
prior to the Change in Control.
Section 8.6 Effect on Plan Provisions.
In the event of a Change in Control, no changes in the Plan, or in any
documents evidencing grants of Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML
& Co. Securities and no adjustments, determinations or other exercises of
discretion by the Committee or the Board of Directors, that were made subsequent
to the Change in Control and that would have the effect of diminishing a
Participant's rights or his payments under the Plan or this Article shall be
effective, including, but not limited to, any changes, determinations or other
exercises of discretion made to or pursuant to the Plan. Once a Participant has
received a payment pursuant to this Article VIII, shares of Common Stock that
were reserved for issuance in connection with any Performance Shares, Restricted
Shares, Stock Options, or Other ML & Co. Securities for which payment is made
shall no longer be reserved and shares of Common Stock that are Restricted
Shares or that are restricted and held by the Company pursuant to Section
2.6(a)(i), for which payment has been made, shall no longer be registered in the
name of the Participant and shall again be available for grants under the Plan.
If the Participant's employment is terminated without Cause or for Good Reason
after a Change in Control, any election to defer payment for Performance Shares
or Performance Units pursuant to Section 2.8 hereof or Restricted Shares or
Restricted Units pursuant to Section 3.8 hereof shall be null and void.
ARTICLE IX - MISCELLANEOUS.
Section 9.1 Designation of Beneficiary.
A Participant, or the transferee of a Stock Option pursuant to Section
4.4(d), may designate, in a writing delivered to ML & Co. before his death, a
person or persons to receive, in the event of his death, any rights to which he
would be entitled under the Plan. A Participant or Stock Option transferee, may
also designate an alternate beneficiary to receive payments if the primary
beneficiary does not survive the Participant or Stock Option transferee. A
Participant or Stock Option transferee may designate more than one person as his
beneficiary or alternate beneficiary, in which case such persons would receive
payments as joint tenants with a right of survivorship. A beneficiary
designation may be changed or revoked by a Participant or Stock Option
transferee at any time by filing a written statement of such change or
27
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revocation with the Company. If a Participant or Stock Option transferee fails
to designate a beneficiary, then his estate shall be deemed to be his
beneficiary.
Section 9.2 Employment Rights.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant, and a
grant under the Plan shall not be construed as giving any Participant any right
to be retained in the employ of the Company.
Section 9.3 Nontransferability.
Except as provided in Section 4.4(d), a Participant's rights under the
Plan, including the right to any amounts or shares payable, may not be assigned,
pledged, or otherwise transferred except, in the event of a Participant's death,
to his designated beneficiary or, in the absence of such a designation, by will
or the laws of descent and distribution.
Section 9.4 Withholding.
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to any
brokerage account, to deduct or withhold from any payment under the Plan any
Federal, state, local or other taxes, including transfer taxes, required by law
to be withheld or to require the Participant or his beneficiary or estate, as
the case may be, to pay any amount, or the balance of any amount, required to be
withheld.
Section 9.5 Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining any
benefits under any retirement, group insurance, or other employee benefit plan
of the Company. The Plan shall not preclude the stockholders of ML & Co., the
Board of Directors or any committee thereof, or the Company from authorizing or
approving other employee benefit plans or forms of incentive compensation, nor
shall it limit or prevent the continued operation of other incentive
compensation plans or other employee benefit plans of the Company or the
participation in any such plans by Participants in the Plan.
Section 9.6 No Trust or Fund Created.
Neither the Plan nor any grant made hereunder shall create or be construed
to create a trust or separate fund of any kind or a fiduciary relationship
between the Company and a Participant or any other person. To the extent that
any person acquires a right to receive payments from the Company pursuant to a
grant under the
28
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Plan, such right shall be no greater than the right of any unsecured general
creditor of the Company.
Section 9.7 Expenses.
The expenses of administering the Plan shall be borne by the Company.
Section 9.8 Indemnification.
Service on the Committee shall constitute service as a member of the Board
of Directors so that members of the Committee shall be entitled to
indemnification and reimbursement as directors of ML & Co. pursuant to its
Certificate of Incorporation, By-Laws, or resolutions of its Board of Directors
or stockholders.
Section 9.9 Tax Litigation.
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is related to
the Plan and that the Company believes to be important to Participants in the
Plan and to conduct any such contest or any litigation arising therefrom to a
final decision.
ARTICLE X - AMENDMENT AND TERMINATION.
The Board of Directors or the Committee (but no other committee of the
Board of Directors) may modify, amend or terminate the Plan at any time, except
that, to the extent then required by applicable law, rule or regulation,
approval of the holders of a majority of shares of Common Stock represented in
person or by proxy at a meeting of the stockholders will be required to increase
the maximum number of shares of Common Stock available for distribution under
the Plan (other than increases due to an adjustment in accordance with the
Plan). No modification, amendment or termination of the Plan shall adversely
affect the rights of a Participant under a grant previously made to him without
the consent of such Participant.
ARTICLE XI - INTERPRETATION.
Section 11.1 Governmental and Other Regulations.
The Plan and any grant hereunder shall be subject to all applicable
Federal and state laws, rules, and regulations and to such approvals by any
regulatory or governmental agency that may, in the opinion of the counsel for
the Company, be required.
29
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Section 11.2 Governing Law.
The Plan shall be construed and its provisions enforced and administered
in accordance with the laws of the State of New York applicable to contracts
entered into and performed entirely in such State.
ARTICLE XII - EFFECTIVE DATE AND STOCKHOLDER APPROVAL.
The Plan shall not be effective unless or until approved by a majority of
the votes cast at a duly held stockholders' meeting at which a quorum
representing a majority of all outstanding voting stock is, either in person or
by proxy present and voting on the Plan.
30
Exhibit 10(ii)
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
FOR MANAGERS AND PRODUCERS
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I - GENERAL .......................................................... 1
Section 1.1 Purpose..................................................... 1
Section 1.2 Definitions................................................. 1
(a) "Board of Directors" or "Board"........................ 1
(b) "Code"................................................. 1
(c) "Company".............................................. 1
(d) "Committee"............................................ 1
(e) "Common Stock"......................................... 1
(f) "Disability"........................................... 2
(g) "Fair Market Value".................................... 2
(h) "Junior Preferred Stock"............................... 2
(i) "Other ML & Co. Security".............................. 2
(j) "Participant".......................................... 2
(k) "Performance Period"................................... 2
(l) "Performance Share".................................... 3
(m) "Performance Unit"..................................... 3
(n) "Restricted Period".................................... 3
(o) "Restricted Share"..................................... 3
(p) "Restricted Unit"...................................... 3
(q) "Retirement"........................................... 3
(r) "Rights"............................................... 3
(s) "Rights Agreement"..................................... 3
(t) "Stock Appreciation Right"............................. 3
(u) "Stock Option"......................................... 4
(v) "Vesting Period"....................................... 4
Section 1.3 Administration.............................................. 4
Section 1.4 Shares Subject to the Plan.................................. 4
Section 1.5 Eligibility and Participation............................... 5
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES AND PERFORMANCE
UNITS............................................................ 5
Section 2.1 Performance Periods and Restricted Periods.................. 5
Section 2.2 Performance Objectives...................................... 5
Section 2.3 Grants of Performance Shares and Performance Units.......... 6
i
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Section 2.4 Rights and Benefits During Performance Period............... 6
Section 2.5 Adjustment with respect to Performance Shares and
Performance Units........................................... 7
Section 2.6 Payment of Performance Shares and Performance Units......... 7
(a) Performance Shares..................................... 7
(i) If a Restricted Period has been established....... 7
(ii) If a Restricted Period has not been established... 8
(b) Performance Units...................................... 8
Section 2.7 Termination of Employment................................... 8
(a) Prior to the end of a Performance Period............... 8
(i) Death............................................ 8
(ii) Disability or Retirement......................... 8
(iii) Other Terminations............................... 9
(b) After the end of a Performance Period but prior to
the end of a Restricted Period......................... 9
(i) Death, Disability, or Retirement.................. 9
(ii) Other Terminations................................ 9
Section 2.8 Deferral of Payment.........................................10
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES
AND RESTRICTED UNITS............................................10
Section 3.1 Vesting Periods and Restricted Periods......................10
Section 3.2 Grants of Restricted Shares and Restricted Units............10
Section 3.3 Rights and Restrictions Governing Restricted Shares.........11
Section 3.4 Rights Governing Restricted Units...........................11
Section 3.5 Adjustment with respect to Restricted Shares and
Restricted Units............................................11
Section 3.6 Payment of Restricted Shares and Restricted Units...........12
ii
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(a) Restricted Shares......................................12
(b) Restricted Units.......................................12
Section 3.7 Termination of Employment...................................12
(a) Prior to the end of a Vesting Period...................12
(i) Death............................................12
(ii) Disability or Retirement.........................12
(iii) Other Terminations...............................13
(b) After the end of a Vesting Period but prior
to the end of a Restricted Period......................13
(i) Death, Disability, or Retirement..................13
(ii) Other Terminations................................13
Section 3.8 Extension of Vesting; Deferral of Payment...................13
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS...........................14
Section 4.1 Grants of Stock Options.....................................14
Section 4.2 Option Documentation........................................14
Section 4.3 Exercise Price..............................................14
Section 4.4 Exercise of Stock Options...................................14
(a) Exercisability.........................................14
(b) Option Period..........................................15
(c) Exercise in the Event of Termination of Employment.....15
(i) Death............................................15
(ii) Disability or Retirement.........................15
(iii) Other Terminations...............................15
(d) Limitations on Transferability.........................16
Section 4.5 Payment of Purchase Price and Tax Liability Upon Exercise;
Delivery of Shares..........................................16
(a) Payment of Purchase Price..............................16
(b) Payment of Taxes.......................................16
(c) Delivery of Shares.....................................17
iii
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Section 4.6 Limitation on Fair Market Value of Shares of Common
Stock Received upon Exercise of Incentive Stock Options.....17
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION
RIGHTS ...........................................................17
Section 5.1 Grants of Stock Appreciation Rights.........................17
Section 5.2 Stock Appreciation Rights Granted in Connection with
Incentive Stock Options.....................................18
Section 5.3 Payment Upon Exercise of Stock Appreciation Rights..........18
Section 5.4 Termination of Employment...................................18
(a) Death..................................................18
(b) Disability.............................................19
(c) Retirement.............................................19
(d) Other Terminations.....................................19
ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO.
SECURITIES.......................................................19
Section 6.1 Grants of Other ML & Co. Securities.........................19
Section 6.2 Terms and Conditions of Conversion or Exchange..............20
ARTICLE VII - CHANGES IN CAPITALIZATION.......................................20
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT
AFTER A CHANGE IN CONTROL......................................21
Section 8.1 Value of Payments Upon Termination After a Change
in Control..................................................21
(a) Performance Shares and Performance Units...............21
(b) Restricted Shares and Restricted Units.................22
(c) Stock Options and Stock Appreciation Rights............22
(d) Other ML & Co. Securities..............................23
Section 8.2 A Change in Control.........................................23
Section 8.3 Effect of Agreement Resulting in Change in Control..........24
Section 8.4 Termination for Cause.......................................24
Section 8.5 Good Reason.................................................25
iv
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(a) Inconsistent Duties....................................25
(b) Reduced Salary or Bonus Opportunity....................25
(c) Relocation.............................................25
(d) Compensation Plans.....................................26
(e) Benefits and Perquisites...............................26
(f) No Assumption by Successor.............................26
Section 8.6 Effect on Plan Provisions...................................26
ARTICLE IX - MISCELLANEOUS ...................................................27
Section 9.1 Designation of Beneficiary..................................27
Section 9.2 Employment Rights...........................................27
Section 9.3 Nontransferability..........................................27
Section 9.4 Withholding.................................................28
Section 9.5 Relationship to Other Benefits..............................28
Section 9.6 No Trust or Fund Created....................................28
Section 9.7 Expenses....................................................28
Section 9.8 Indemnification.............................................28
Section 9.9 Tax Litigation..............................................28
ARTICLE X - AMENDMENT AND TERMINATION.........................................29
ARTICLE XI - INTERPRETATION...................................................29
Section 11.1 Governmental and Other Regulations........................29
Section 11.2 Governing Law.............................................29
ARTICLE XII - EFFECTIVE DATE..................................................29
v
<PAGE>
MERRILL LYNCH & CO., INC.
LONG-TERM INCENTIVE COMPENSATION PLAN
FOR MANAGERS AND PRODUCERS
ARTICLE I - GENERAL
Section 1.1 Purpose.
The purposes of the Long-Term Incentive Compensation Plan (the "Plan") for
Managers and Producers are: (a) to enhance the growth and profitability of
Merrill Lynch & Co., Inc., a Delaware corporation ("ML & Co."), and its
subsidiaries by providing the incentive of long-term rewards to key employees
who are capable of having a significant impact on the performance of ML & Co.
and its subsidiaries; (b) to attract and retain employees of outstanding
competence and ability; (c) to encourage long-term stock ownership by employees;
and (d) to further the identity of interests of such employees with those of
stockholders of ML & Co.
Section 1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated:
(a) "Board of Directors" or "Board" shall mean the Board of Directors of
ML & Co.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended,
including any successor law thereto.
(c) "Company" shall mean ML & Co. and any corporation, partnership, or
other organization of which ML & Co. owns or controls, directly or indirectly,
not less than 50% of the total combined voting power of all classes of stock or
other equity interests. For purposes of this Plan, the terms "ML & Co." and
"Company" shall include any successor thereto.
(d) "Committee" shall mean the Management Development and Compensation
Committee of the Board of Directors, or its functional successor or any other
Board committee that has been designated by the Board of Directors to administer
the Plan, or the Board of Directors.
(e) "Common Stock" shall mean the Common Stock, par value $1.33 1/3 per
share, of ML & Co. and a "share of Common Stock" shall mean one share of
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Common Stock together with, for so long as Rights are outstanding, one Right
(whether trading with the Common Stock or separately).
(f) "Disability," unless otherwise provided herein, shall mean any
physical or mental condition that, in the opinion of the Director of Human
Resources of Merrill Lynch & Co., Inc. (or his or her functional successor),
renders an employee incapable of engaging in any employment or occupation for
which he is suited by reason of education or training.
(g) "Fair Market Value" of shares of Common Stock on any given date(s)
shall be: (a) the mean of the high and low sales prices on the New York Stock
Exchange--Composite Tape of such shares on the date(s) in question, or, if the
shares of Common Stock shall not have been traded on any such date(s), the mean
of the high and low sales prices on the New York Stock Exchange--Composite Tape
on the first day prior thereto on which the shares of Common Stock were so
traded; or (b) if the shares of Common Stock are not traded on the New York
Stock Exchange, such other amount as may be determined by the Committee by any
fair and reasonable means.
"Fair Market Value" of any Other ML & Co. Security on any given
date(s) shall be: (a) the mean of the high and low sales prices of such Other ML
& Co. Security on the principal securities exchange on which such Security is
traded on the date(s) in question or, if such Other ML & Co. Security shall not
have been traded on any such exchange on such date(s), the mean of the high and
low sales prices on such exchange on the first day prior thereto on which such
Other ML & Co. Security was so traded; or (b) if the Other ML & Co. Security is
not publicly traded on a securities exchange, such other amount as may be
determined by the Committee by any fair and reasonable means.
(h) "Junior Preferred Stock" shall mean ML & Co.'s Series A Junior
Preferred Stock, par value $1.00 per share.
(i) "Other ML & Co. Security" shall mean a financial instrument issued
pursuant to Article VI.
(j) "Participant" shall mean any employee who has met the eligibility
requirements set forth in Section 1.5 hereof and to whom a grant has been made
and is outstanding under the Plan.
(k) "Performance Period" shall mean, in relation to Performance Shares or
Performance Units, any period, for which performance objectives have been
established, of not less than one nor more than ten consecutive ML & Co. fiscal
years, commencing with the first day of the fiscal year in which such
Performance Shares or Performance Units were granted.
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(l) "Performance Share" shall mean a right, granted to a Participant
pursuant to Article II, that will be paid out as a share of Common Stock.
(m) "Performance Unit" shall mean a right, granted to a Participant
pursuant to Article II, to receive an amount equal to the Fair Market Value of
one share of Common Stock in cash.
(n) "Restricted Period" shall mean, (i) in relation to shares of Common
Stock receivable in payment for Performance Shares, the period beginning at the
end of the applicable Performance Period during which restrictions on the
transferability of such shares of Common Stock are in effect; and (ii) in
relation to Restricted Shares or, if the Committee shall so determine,
Restricted Units, the period beginning with the first day of the month in which
Restricted Shares or Restricted Units are granted, during which restrictions on
the transferability of such Restricted Shares or Restricted Units are in effect,
which shall not be of shorter duration than the Vesting Period applicable to the
same Restricted Shares or Restricted Units.
(o) "Restricted Share" shall mean a share of Common Stock, granted to a
Participant pursuant to Article III, subject to the restrictions set forth in
Section 3.3 hereof.
(p) "Restricted Unit" shall mean the right, granted to a Participant
pursuant to Article III, as provided by the Committee at the time of grant to
receive (i) either: (A) an amount equal to the Fair Market Value of one share of
Common Stock in cash, or (B) one share of Common Stock, or, (ii) if the
Committee so determines, the holder of the Restricted Unit may elect whether to
receive cash or Common Stock.
(q) "Retirement" shall mean the cessation of employment by the Company (1)
after reaching age 55 and having completed at least 5 years of service; (2)
after reaching age 50 and having completed at least 10 years of service; (3)
after reaching age 45 and having completed at least 15 years of service; or (4)
having completed at least 20 years of service (in each case including approved
leaves of absence of one year or less).
(r) "Rights" means the Rights to Purchase Units of Junior Preferred Stock
issued pursuant to the Rights Agreement.
(s) "Rights Agreement" means the Rights Agreement dated as of December 16,
1987 between ML & Co. and Manufacturers Hanover Trust Company, Rights Agent, as
amended from time to time.
(t) "Stock Appreciation Right" shall mean a right, granted to a
Participant pursuant to Article V, to receive, in cash or shares of Common
Stock, an amount equal to the increase in Fair Market Value, over a specified
period of time, of a specified number of shares of Common Stock.
3
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(u) "Stock Option" shall mean a right, granted to a Participant pursuant
to Article IV, to purchase, before a specified date and at a specified price, a
specified number of shares of Common Stock. Stock Options may be "Incentive
Stock Options," which meet the definition of such in Section 422A of the Code,
or "Nonqualified Stock Options," which do not meet such definition.
(v) "Vesting Period" shall mean, in relation to Restricted Shares or
Restricted Units, any period of not less than 12 months beginning with the first
day of the month in which the grant of the applicable Restricted Shares or
Restricted Units is effective, during which such Restricted Shares or Restricted
Units may be forfeited if the Participant terminates employment.
Section 1.3 Administration.
(a) The Plan shall be administered by the Committee. Subject to the
provisions of the Plan, the Committee shall have sole and complete authority to:
(i) subject to Section 1.5 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the number of
Performance Shares, Performance Units, Restricted Shares, Restricted Units,
Stock Appreciation Rights, or Other ML & Co. Securities subject to each grant;
(iii) determine the number of shares of Common Stock subject to each Stock
Option grant; (iv) determine the time or times when grants are to be made or are
to be effective; (v) determine the terms and conditions subject to which grants
may be made; (vi) extend the term of any Stock Option; (vii) provide at the time
of grant that all or any portion of any Stock Option shall be canceled upon the
Participant's exercise of any Stock Appreciation Rights; (viii) prescribe the
form or forms of the instruments evidencing any grants made hereunder, provided
that such forms are consistent with the Plan; (ix) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (x) construe and interpret the Plan and all rules,
regulations, and instruments utilized thereunder; and (xi) make all
determinations deemed advisable or necessary for the administration of the Plan.
All determinations by the Committee shall be final and binding.
(b) The Committee shall act in accordance with the procedures established
for a Committee under ML & Co.'s Certificate of Incorporation and By-Laws or
under any resolution of the Board.
Section 1.4 Shares Subject to the Plan.
The total number of shares of Common Stock that may be distributed under
the Plan shall be 20,000,000 (whether granted as Restricted Shares or reserved
for distribution upon grant of Performance Shares, Stock Options, Stock
Appreciation Rights (to the extent they may be paid out in Common Stock), or
Other ML & Co. Securities), subject to adjustment as provided in Article VII
hereof. Shares of Common
4
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Stock distributed under the Plan may be treasury shares or authorized but
unissued shares. To the extent that awards of Other ML & Co. Securities are
convertible into Common Stock or are otherwise equity securities (or convertible
into equity securities) of ML & Co., they shall be subject to the limitation
expressed above on the number of shares of Common Stock that can be awarded
under the Plan. Any shares of Common Stock that have been granted as Restricted
Shares or that have been reserved for distribution in payment for Performance
Shares but are later forfeited or for any other reason are not payable under the
Plan may again be made the subject of grants under the Plan. If any Stock
Option, Stock Appreciation Right, or Other ML & Co. Security granted under the
Plan expires or terminates, or any Stock Appreciation Right is paid out in cash,
the underlying shares of Common Stock may again be made the subject of grants
under the Plan. Units payable in cash that are later forfeited or for any reason
are not payable under the Plan may again be the subject of grants under the
Plan.
Section 1.5 Eligibility and Participation.
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried, key employees of the
Company.
ARTICLE II - PROVISIONS APPLICABLE TO PERFORMANCE SHARES AND PERFORMANCE
UNITS.
Section 2.1 Performance Periods and Restricted Periods.
The Committee shall establish Performance Periods applicable to
Performance Shares and Performance Units and may establish Restricted Periods
applicable to Performance Shares, at its discretion. Each such Performance
Period shall commence with the beginning of a fiscal year in which the
Performance Shares and Performance Units are granted and have a duration of not
less than one nor more than ten consecutive fiscal years. Each such Restricted
Period shall commence with the end of the Performance Period established for
such Performance Shares and shall end on such date as may be determined by the
Committee at the time of grant. There shall be no limitation on the number of
Performance Periods or Restricted Periods established by the Committee, and more
than one Performance Period may encompass the same fiscal year.
Section 2.2 Performance Objectives.
At any time before or during a Performance Period, the Committee shall
establish one or more performance objectives for such Performance Period,
provided that such performance objectives shall be established prior to the
grant of any Performance Shares or Performance Units with respect to such
Period. Performance objectives shall be based on one or more measures such as
return on stockholders' equity, earnings, or any other standard deemed relevant
by the Committee, measured internally or relative to other organizations and
before or after extraordinary items, as
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may be determined by the Committee; provided, however, that any such measure
shall include all accruals for grants made under the Plan and for all other
employee benefit plans of the Company. The Committee may, in its discretion,
establish performance objectives for the Company as a whole or for only that
part of the Company in which a given Participant is involved, or a combination
thereof. In establishing the performance objective or objectives for a
Performance Period, the Committee shall determine both a minimum performance
level, below which no Performance Shares or Performance Units shall be payable,
and a full performance level, at or above which 100% of the Performance Shares
or Performance Units shall be payable. In addition, the Committee may, in its
discretion, establish intermediate levels at which given proportions of the
Performance Shares or Performance Units shall be payable. Such performance
objectives shall not thereafter be changed except as set forth in Sections 2.5
and 2.6 and Article VII hereof.
Section 2.3 Grants of Performance Shares and Performance Units.
The Committee may select employees to become Participants subject to the
provisions of Section 1.5 hereof and grant Performance Shares or Performance
Units to such Participants at any time prior to or during the first fiscal year
of a Performance Period. Grants shall be deemed to have been made as of the
beginning of the first fiscal year of the Performance Period. Before making
grants, the Committee must receive the recommendations of the management of the
Company, which will take into account such factors as level of responsibility,
current and past performance, and performance potential. Subject to the
provisions of Section 2.7 hereof, a grant of Performance Shares or Performance
Units shall be effective for the entire applicable Performance Period and may
not be revoked. Each grant to a Participant shall be evidenced by a written
instrument stating the number of Performance Shares or Performance Units
granted, the Performance Period, the performance objective or objectives, the
proportion of payments for performance between the minimum and full performance
levels, if any, the Restricted Periods and restrictions applicable to shares of
Common Stock receivable in payment for Performance Shares, and any other terms,
conditions, and rights with respect to such grant. At the time of any grant of
Performance Shares, there shall be reserved out of the number of shares of
Common Stock authorized for distribution under the Plan a number of shares equal
to the number of Performance Shares so granted.
Section 2.4 Rights and Benefits During Performance Period.
The Committee may provide that, during a Performance Period, a Participant
shall be paid cash amounts, with respect to each Performance Share or
Performance Unit held by such Participant, in the same manner, at the same time,
and in the same amount paid, as a dividend on a share of Common Stock.
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Section 2.5 Adjustment with respect to Performance Shares and
Performance Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time adjust performance objectives (up or down) and minimum
or full performance levels (and any intermediate levels and proportion of
payments related thereto), adjust the way performance objectives are measured,
or shorten any Performance Period or Restricted Period, if it determines that
conditions, including but not limited to, changes in the economy, changes in
competitive conditions, changes in laws or governmental regulations, changes in
generally accepted accounting principles, changes in the Company's accounting
policies, acquisitions or dispositions, or the occurrence of other unusual,
unforeseen, or extraordinary events, so warrant.
Section 2.6 Payment of Performance Shares and Performance Units.
Within 90 days after the end of any Performance Period, the Company shall
determine the extent to which performance objectives established by the
Committee pursuant to Section 2.2 hereof for such Performance Period have been
met during such Performance Period and the resultant extent to which Performance
Shares or Performance Units granted for such Performance Period are payable.
Payment for Performance Shares and Performance Units shall be as follows:
(a) Performance Shares:
(i) If a Restricted Period has been established in relation to the
Performance Shares:
(A) At the end of the applicable Performance Period, one or
more certificates representing the number of shares of Common Stock equal to the
number of Performance Shares payable shall be registered in the name of the
Participant but shall be held by the Company for the account of the employee.
Such shares will be nonforfeitable but restricted as to transferability during
the applicable Restricted Period. During the Restricted Period, the Participant
shall have all rights of a holder as to such shares of Common Stock, including
the right to receive dividends, to exercise Rights, and to vote such Common
Stock and any securities issued upon exercise of Rights, subject to the
following restrictions: (1) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; and (2) none of such
shares of Common Stock or Rights may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restricted Period. Any shares of
Common Stock or other securities or property received with respect to such
shares shall be subject to the same restrictions as such shares; provided,
however, that the Company shall not be required to register any fractional
shares of Common Stock payable to any
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Participant, but will pay the value of such fractional shares, measured as set
forth in Section 2.6(b) below, to the Participant.
(B) At the end of the applicable Restricted Period, all
restrictions applicable to the shares of Common Stock, and other securities or
property received with respect to such shares, held by the Company for the
accounts of recipients of Performance Shares granted in relation to such
Restricted Period shall lapse, and one or more stock certificates for such
shares of Common Stock and securities, free of the restrictions, shall be
delivered to the Participant, or such shares and securities shall be credited to
a brokerage account if the Participant so directs.
(ii) If a Restricted Period has not been established in relation to
the Performance Shares, at the end of the applicable Performance Period, one or
more stock certificates representing the number of shares of Common Stock equal
to the number of Performance Shares payable, free of restrictions, shall be
registered in the name of the Participant and delivered to the Participant, or
such shares shall be credited to a brokerage account if the Participant so
directs.
(b) Performance Units: At the end of the applicable Performance Period, a
Participant shall be paid a cash amount equal to the number of Performance Units
payable, times the mean of the Fair Market Value of Common Stock during the
second calendar month following the end of the Performance Period, unless some
other date or period is established by the Committee at the time of grant.
Section 2.7 Termination of Employment.
(a) Prior to the end of a Performance Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Performance Period by reason of death, any outstanding
Performance Shares or Performance Units with respect to such Participant shall
become payable and be paid to such Participant's beneficiary or estate, as the
case may be, as soon as practicable in the manner set forth in Sections
2.6(a)(ii) and 2.6(b) hereof, respectively. In determining the extent to which
performance objectives established for such Performance Period have been met and
the resultant extent to which Performance Shares or Performance Units are
payable, the Performance Period shall be deemed to end as of the end of the
fiscal year in which the Participant's death occurred.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article II, and such Participant shall not forfeit any Performance Shares
or Performance Units held by him, provided that following Disability or
Retirement such Participant does not engage in or assist any business that the
Committee, in its sole discretion, determines to be in competition with business
engaged in by the Company during the remainder of
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the applicable Performance Period. A Participant who does engage in or assist
any business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company shall be deemed to have
terminated employment.
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Performance Period for any reason other than death, the
Participant shall immediately forfeit all Performance Shares and Performance
Units previously granted under the Plan and all right to receive any payment for
such Performance Shares and Performance Units. The Committee may, however,
direct payment in accordance with the provisions of Section 2.6 hereof for a
number of Performance Shares or Performance Units, as it may determine, granted
under the Plan to a Participant whose employment has so terminated (but not
exceeding the number of Performance Shares or Performance Units that could have
been payable had the Participant remained an employee) if it finds that the
circumstances in the particular case so warrant. For purposes of the preceding
sentence, the Performance Period over which performance objectives shall be
measured shall be deemed to end as of the end of the fiscal year in which
termination occurred.
(b) After the end of a Performance Period but prior to the end of a
Restricted Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death or in the case of the Disability
or Retirement of a Participant, the Restricted Period shall be deemed to have
ended and shares held by the Company shall be paid as soon as practicable in the
manner set forth in Section 2.6(a)(i)(B).
(ii) Other Terminations: Terminations of employment for any reason
other than death after the end of a Performance Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless the
Committee, in its sole discretion, finds that the circumstances so warrant and
determines that the Restricted Period shall end on an earlier date as determined
by the Committee and that shares held by the Company shall be paid as soon as
practicable following such earlier date in the manner set forth in Section
2.6(a)(i)(B).
(c) Except as otherwise provided in this Section 2.7, termination of
employment after the end of a Performance Period but before the payment of
Performance Shares or Performance Units relating to such Performance Period
shall not affect the amount, if any, to be paid pursuant to Section 2.6 hereof.
Approved leaves of absence of one year or less shall not be deemed to be
terminations of employment under this Section 2.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
2.7, unless the Committee determines otherwise.
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Section 2.8 Deferral of Payment.
The Committee may, in its sole discretion, offer a Participant the right,
by execution of a written agreement, to defer the receipt of all or any portion
of the payment, if any, for Performance Shares or Performance Units. If such an
election to defer is made, the Common Stock receivable in payment for
Performance Shares shall be deferred as stock units equal in number to and
exchangeable, at the end of the deferral period, for the number of shares of
Common Stock that would have been paid to the Participant. Such stock units
shall represent only a contractual right and shall not give the Participant any
interest, right, or title to any Common Stock during the deferral period. The
cash receivable in payment for Performance Units or fractional shares receivable
for Performance Shares shall be deferred as cash units. Deferred stock units and
cash units may be credited annually with the appreciation factor contained in
the deferred compensation agreement, which may include dividend equivalents. All
other terms and conditions of deferred payments shall be as contained in the
written agreement.
ARTICLE III - PROVISIONS APPLICABLE TO RESTRICTED SHARES AND RESTRICTED UNITS.
Section 3.1 Vesting Periods and Restricted Periods.
The Committee shall establish one or more Vesting Periods applicable to
Restricted Shares and Restricted Units and one or more Restricted Periods
applicable to Restricted Shares, at its discretion. Each such Vesting Period
shall have a duration of not less than 12 months, measured from the first day of
the month in which the grant of the applicable Restricted Shares or Restricted
Units is effective. Each such Restricted Period shall have a duration of 12 or
more consecutive months, measured from the first day of the month in which the
grant of the applicable Restricted Shares is effective, but in no event shall
any Restricted Period applicable to a Restricted Share be of shorter duration
than the Vesting Period applicable to such Restricted Share.
Section 3.2 Grants of Restricted Shares and Restricted Units.
The Committee may select employees to become Participants (subject to the
provisions of Section 1.5 hereof) and grant Restricted Shares or Restricted
Units to such Participants at any time. Before making grants, the Committee must
receive the recommendations of the management of the Company, which will take
into account such factors as level of responsibility, current and past
performance, and performance potential.
Subject to the provisions of Section 3.7 hereof, a grant of Restricted
Shares or Restricted Units shall be effective for the entire applicable Vesting
and Restricted Periods and may not be revoked. Each grant to a Participant shall
be evidenced by a written instrument stating the number of Restricted Shares
granted, the Vesting Period,
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the Restricted Period, the restrictions applicable to such Restricted Shares,
the nature and terms of payment of consideration, if any, and the consequences
of forfeiture that will apply to such Restricted Shares, and any other terms,
conditions, and rights with respect to such grant. Each grant to a Participant
of Restricted Units shall be evidenced by a written instrument stating the
number of Restricted Units granted, the Vesting Period, and all other terms,
conditions and rights with respect to such grant.
Section 3.3 Rights and Restrictions Governing Restricted Shares.
At the time of grant of Restricted Shares, subject to the receipt by the
Company of any applicable consideration for such Restricted Shares, one or more
certificates representing the appropriate number of shares of Common Stock
granted to a Participant shall be registered either in his name or for his
benefit either individually or collectively with others, but shall be held by
the Company for the account of the Participant. The Participant shall have all
rights of a holder as to such shares of Common Stock, including the right to
receive dividends, to exercise Rights, and to vote such Common Stock and any
securities issued upon exercise of Rights, subject to the following
restrictions: (a) the Participant shall not be entitled to delivery of
certificates representing such shares of Common Stock and any other such
securities until the expiration of the Restricted Period; (b) none of the
Restricted Shares may be sold, transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted Period; and (c) all of the
Restricted Shares shall be forfeited and all rights of the Participant to such
Restricted Shares shall terminate without further obligation on the part of the
Company unless the Participant remains in the continuous employment of the
Company for the entire Vesting Period in relation to which such Restricted
Shares were granted, except as otherwise allowed by Section 3.7 hereof. Any
shares of Common Stock or other securities or property received with respect to
such shares shall be subject to the same restrictions as such Restricted Shares.
Section 3.4 Rights Governing Restricted Units.
During the Vesting Period, or, if longer, the Restricted Period, for
Restricted Units, a Participant shall be paid, with respect to each such
Restricted Unit, cash amounts in the same manner, at the same time, and in the
same amount paid, as a dividend on a share of Common Stock.
Section 3.5 Adjustment with respect to Restricted Shares and Restricted
Units.
Any other provision of the Plan to the contrary notwithstanding, the
Committee may at any time shorten any Vesting Period or Restricted Period, if it
determines that conditions, including but not limited to, changes in the
economy, changes in competitive conditions, changes in laws or governmental
regulations, changes in generally accepted accounting principles, changes in the
Company's accounting
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policies, acquisitions or dispositions, or the occurrence of other unusual,
unforeseen, or extraordinary events, so warrant.
Section 3.6 Payment of Restricted Shares and Restricted Units.
(a) Restricted Shares: At the end of the Restricted Period, all
restrictions contained in the Restricted Share Agreement and in the Plan shall
lapse as to Restricted Shares granted in relation to such Restricted Period, and
one or more stock certificates for the appropriate number of shares of Common
Stock, free of restrictions, shall be delivered to the Participant or such
shares shall be credited to a brokerage account if the Participant so directs.
(b) Restricted Units: At the end of the Vesting Period (or, if longer, the
Restricted Period) applicable to a Participant's Restricted Units, there shall
be paid to the Participant, or his beneficiary or estate, as the case may be:
(1), a cash amount equivalent in value to the Fair Market Value of one share of
Common Stock on the last day of the Vesting Period (or, if longer, the
Restricted Period), or, (2) if so determined by the Committee at the time of
grant, at the election of the Participant, one share of Common Stock for each
Restricted Unit, provided, however, that, if the grant of Restricted Units is
payable either in cash or Common Stock at the election of the Participant, at
least six months prior to the end of the applicable period, a Participant may
elect to: (A) extend the Restricted Period of a Restricted Unit for an
additional period determined by the Participant at the time of such election or
(B) if a Participant is eligible for a deferred compensation program offered by
the Corporation, defer the receipt of cash proceeds of a Participant's
applicable Restricted Units in accordance with the terms of such program.
Section 3.7 Termination of Employment.
(a) Prior to the end of a Vesting Period:
(i) Death: If a Participant ceases to be an employee of the Company
prior to the end of a Vesting Period by reason of death, all Restricted Shares
and Restricted Units granted to such Participant are immediately payable as set
forth in Section 3.6.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article III and such Participant shall not forfeit any Restricted Shares or
Restricted Units held by him, provided that, during the remainder of the
applicable Vesting Period, such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
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(iii) Other Terminations: If a Participant ceases to be an employee
prior to the end of a Vesting Period for any reason other than death, the
Participant shall immediately forfeit all Restricted Shares and Restricted Units
previously granted with respect to such Vesting Period in accordance with the
provisions of Section 3.2 hereof, unless the Committee, in its sole discretion,
finds that the circumstances in the particular case so warrant and allows a
Participant whose employment has so terminated to retain any or all of the
Restricted Shares or Restricted Units granted to such Participant.
(b) After the end of a Vesting Period but prior to the end of a Restricted
Period:
(i) Death, Disability, or Retirement: If a Participant ceases to be
an employee of the Company by reason of death, or in the case of the Disability
or Retirement of a Participant, prior to the end of a Restricted Period, all
Restricted Shares granted to such Participant are immediately payable in the
manner set forth in Section 3.6.
(ii) Other Terminations: Terminations of employment for any reason
other than death after the end of a Vesting Period but prior to the end of a
Restricted Period shall not have any effect on the Restricted Period, unless (A)
the Restricted Period relates to Restricted Units that have been further
deferred in which case the Restricted Units shall be paid to the Participant, or
(B) the Committee, in its sole discretion, finds that the circumstances so
warrant and determines that the Restricted Period shall end on an earlier date
as determined by the Committee and, in each case, the applicable Restricted
Shares or Restricted Units shall be paid as soon as practicable in the manner
set forth in Section 3.6.
(c) Approved leaves of absence of one year or less shall not be deemed to
be terminations of employment under this Section 3.7. Leaves of absence of more
than one year will be deemed to be terminations of employment under this Section
3.7, unless the Committee determines otherwise.
Section 3.8 Extension of Vesting; Deferral of Payment.
The Committee may, in its sole discretion, offer any Participant the
right, by execution of a written agreement with ML & Co. containing such terms
and conditions as the Committee shall in its sole discretion provide for, to
extend the Vesting Period applicable to all or any portion of such Participant's
Restricted Shares or Restricted Units, to convert all or any portion of such
Participant's Restricted Shares into Restricted Units or to defer the receipt of
all or any portion of the payment, if any, for such Participant's Restricted
Units (including any Restricted Shares converted into Restricted Units). In the
event that any Vesting Period with respect to Restricted Shares is extended
pursuant to this Section 3.8, the Restricted Period with respect to
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such Restricted Shares shall be extended to the same date. The provisions of any
written agreement with a Participant pursuant to this Section 3.8 may provide
for the payment or crediting of interest, an appreciation factor or index or
dividend equivalents, as appropriate.
ARTICLE IV - PROVISIONS APPLICABLE TO STOCK OPTIONS.
Section 4.1 Grants of Stock Options.
The Committee may select employees to become Participants (subject to
Section 1.5 hereof) and grant Stock Options to such Participants at any time;
provided, however, that Incentive Stock Options shall be granted within 10 years
of the earlier of the date the Plan is adopted by the Board or approved by the
stockholders. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. Subject to the provisions of the Plan, the Committee
shall also determine the number of shares of Common Stock to be covered by each
Stock Option. The Committee shall have the authority, in its discretion, to
grant "Incentive Stock Options" or "Nonqualified Stock Options," or to grant
both types of Stock Options. Furthermore, the Committee may grant a Stock
Appreciation Right in connection with a Stock Option, as provided in Article V.
Section 4.2 Option Documentation.
Each Stock Option granted under the Plan shall be evidenced by written
documentation containing such terms and conditions as the Committee may deem
appropriate and are not inconsistent with the provisions of the Plan.
Section 4.3 Exercise Price.
The Committee shall establish the exercise price at the time any Stock
Option is granted at such amount as the Committee shall determine, except that
such exercise price shall not be less than 50% of the Fair Market Value of the
underlying shares of Common Stock on the day a Stock Option is granted and that,
with respect to an Incentive Stock Option, such exercise price shall not be less
than 100% of the Fair Market Value of the underlying shares of Common Stock on
the day such Incentive Stock Option is granted. The exercise price will be
subject to adjustment in accordance with the provisions of Article VII of the
Plan.
Section 4.4 Exercise of Stock Options.
(a) Exercisability: Stock Options shall become exercisable at such times
and in such installments as the Committee may provide at the time of grant. The
Committee may, however, in its sole discretion accelerate the time at which a
Stock Option or installment may be exercised. A Stock Option may be exercised at
any time
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from the time first set by the Committee until the close of business on the
expiration date of the Stock Option. Notwithstanding the foregoing, in no event
may a Participant, or a Participant's transferee pursuant to Section 4.4(d),
exercise a Stock Option during the 12-month period following a hardship
withdrawal by the Participant of Elective 401(k) Deferrals as defined under the
Merrill Lynch & Co., Inc. 401(k) Savings & Investment Plan.
(b) Option Period: For each Stock Option granted, the Committee shall
specify the period during which the Stock Option may be exercised, provided that
no Stock Option shall be exercisable after the expiration of 10 years (or such
longer period as the Committee shall designate) from the date of grant of such
Stock Option.
(c) Exercise in the Event of Termination of Employment:
(i) Death: If a Participant ceases to be an employee of the Company
by reason of death prior to the exercise or expiration of Stock Options granted
to him and outstanding on the date of death, such Stock Options may be exercised
to the full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant or under the terms of Section 4.4(a)
hereof, by his estate or beneficiaries, as the case may be, if such Stock
Options are outstanding in his name, or by his transferee pursuant to Section
4.4(d) or such transferee's estate or beneficiaries, if such Stock Options are
outstanding in the name of such transferee, at any time and from time to time,
but in no event after the expiration date of such Stock Option.
(ii) Disability or Retirement: The Disability or Retirement of a
Participant shall not constitute a termination of employment for purposes of
this Article IV, provided that following Disability or Retirement such
Participant does not engage in or assist any business that the Committee in its
sole discretion, determines to be in competition with business engaged in by the
Company. A Participant who does engage in or assist any business that the
Committee in its sole discretion, determines to be competition with business
engaged in by the Company shall be deemed to have terminated employment. In the
case of Incentive Stock Options, Disability shall be as defined in Code Section
22(e)(3).
(iii) Other Terminations: If a Participant ceases to be an employee
prior to the exercise or expiration of a Stock Option for any reason other than
death, all outstanding Stock Options granted to such Participant, whether
outstanding in his name or in the name of another person as a result of a
transfer in accordance with Section 4.4(d), shall expire on the date of such
termination of employment, unless the Committee, in its sole discretion, finds
that the circumstances in the particular case so warrant and determines that the
Participant, his transferee pursuant to Section 4.4(d) or such transferee's
estate or beneficiaries, may exercise any such outstanding Stock Option (to the
extent that any such outstanding Stock Option could have been exercised at the
date of such termination of employment) at any time and from time to
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time within up to 5 years after such termination of employment but in no event
after the expiration date of such Stock Option (the "Extended Period"). If a
Participant dies during the Extended Period and prior to the exercise or
expiration of a Stock Option, his estate or beneficiaries, as the case may be,
if such Stock Option is outstanding in his name, or his transferee pursuant to
Section 4.4(d) or such transferee's estate or beneficiaries, if such Stock
Option is outstanding in the name of such transferee, may exercise such Stock
Option (to the extent such Stock Option could have been exercised at the date of
termination of employment) at any time and from time to time, but in no event
after the end of the Extended Period.
(d) Limitations on Transferability: Stock Options are not transferable by
a Participant except by will or the laws of descent and distribution and are
exercisable during his lifetime only by him; provided, however, that the
Committee shall have the authority, in its discretion, to grant (or to sanction
by way of amendment of an existing grant) Stock Options which may be transferred
by the Participant during his lifetime to any member of his immediate family or
to a trust, limited liability corporation, family limited partnership or other
equivalent vehicle, established for the exclusive benefit of one or more members
of his immediate family, in which case the written documentation containing the
terms and conditions of such Stock Options shall so state. A transfer of a Stock
Option pursuant to this subparagraph may only be effected by the Corporation at
the written request of a Participant and shall become effective only when
recorded in the Corporation's record of outstanding Stock Options. In the event
a Stock Option is transferred as contemplated in this subparagraph, such Stock
Option may not be subsequently transferred by the transferee except by will or
the laws of descent and distribution. In the event a Stock Option is transferred
as contemplated in this subparagraph, such Stock Option shall continue to be
governed by and subject to the terms and limitations of the Plan and the
relevant grant, and the transferee shall be entitled to the same rights as the
Participant under Articles VII, VIII and X hereof, as if no transfer had taken
place. As used in this subparagraph, "immediate family" shall mean, with respect
to any person, any child, stepchild or grandchild, and shall include
relationships arising from legal adoption.
Section 4.5 Payment of Purchase Price and Tax Liability Upon Exercise;
Delivery of Shares.
(a) Payment of Purchase Price: The purchase price of the shares as to
which a Stock Option is exercised shall be paid to the Company at the time of
exercise (i) in cash, (ii) by delivering freely transferable shares of Common
Stock already owned by the person exercising the Stock Option having a total
Fair Market Value on the date of exercise equal to the purchase price, (iii) a
combination of cash and shares of Common Stock equal in value to the exercise
price, or (iv) by such other means as the Committee, in its sole discretion, may
determine.
(b) Payment of Taxes: Upon exercise, a Participant may elect to satisfy
any federal, state or local taxes required by law to be withheld that arise as a
result of the
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exercise of a Stock Option by directing the Company to withhold from the shares
of Common Stock otherwise deliverable upon the exercise of such Stock Option,
such number of shares as shall have a total Fair Market Value, on the date of
exercise, at least equal to the amount of tax to be withheld.
(c) Delivery of Shares: Upon receipt by the Company of the purchase price,
stock certificate(s) for the shares of Common Stock as to which a Stock Option
is exercised (net of any shares withheld pursuant to Section 4.5(b) above) shall
be delivered to the person in whose name the Stock Option is outstanding or such
person's estate or beneficiaries, as the case may be, or such shares shall be
credited to a brokerage account or otherwise delivered, in such manner as such
person or such person's estate or beneficiaries, as the case may be, may direct.
Section 4.6 Limitation on Fair Market Value of Shares of Common Stock
Received upon Exercise of Incentive Stock Options.
The aggregate Fair Market Value (determined at the time an Incentive Stock
Option is granted) of the shares of Common Stock with respect to which an
Incentive Stock Option is exercisable for the first time by a Participant during
any calendar year (under all plans of the Company) shall not exceed $100,000 or
such other limit as may be established from time to time under the Code.
ARTICLE V - PROVISIONS APPLICABLE TO STOCK APPRECIATION RIGHTS.
Section 5.1 Grants of Stock Appreciation Rights.
The Committee may select employees to become Participants (subject to the
provisions of Section 1.5 hereof) and grant Stock Appreciation Rights to such
Participants at any time. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. The Committee shall have the authority to grant Stock
Appreciation Rights in connection with a Stock Option or independently. The
Committee may grant Stock Appreciation Rights in connection with a Stock Option,
either at the time of grant or by amendment, in which case each such right shall
be subject to the same terms and conditions as the related Stock Option and
shall be exercisable only at such times and to such extent as the related Stock
Option is exercisable. A Stock Appreciation Right granted in connection with a
Stock Option shall entitle the holder to surrender to the Company the related
Stock Option unexercised, or any portion thereof, and receive from the Company
in exchange therefor an amount equal to the excess of the Fair Market Value of
one share of the Common Stock on the day preceding the surrender of such Stock
Option over the Stock Option exercise price times the number of shares
underlying the Stock Option, or portion thereof, that is surrendered. A Stock
Appreciation Right granted independently of a Stock Option shall entitle the
holder to receive upon exercise an amount equal to the excess of the Fair Market
Value of one share of Common Stock on the day preceding the exercise of the
Stock Appreciation
17
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Right over the Fair Market Value of one share of Common Stock on the date such
Stock Appreciation Right was granted, or such other price determined by the
Committee at the time of grant, which shall in no event be less than 50% of the
Fair Market Value of one share of Common Stock on the date such Stock
Appreciation Right was granted. Stock Appreciation Rights are not transferable
by a Participant except by will or the laws of descent and distribution and are
exercisable during his lifetime only by him.
Section 5.2 Stock Appreciation Rights Granted in Connection with Incentive
Stock Options.
(a) Stock Appreciation Rights granted in connection with Incentive Stock
Options must expire no later than the last date the underlying Incentive Stock
Option can be exercised.
(b) Such Stock Appreciation Rights may be granted for no more than 100% of
the difference between the exercise price of the underlying Incentive Stock
Option and the Fair Market Value of the Common Stock subject to the underlying
Incentive Stock Option at the time the Stock Appreciation Right is exercised.
(c) Such Stock Appreciation Rights are transferable only to the extent and
at the same time and under the same conditions as the underlying Incentive Stock
Options.
(d) Such Stock Appreciation Rights may be exercised only when the
underlying Incentive Stock Options may be exercised.
(e) Such Stock Appreciation Rights may be exercised only when the Fair
Market Value of the shares of Common Stock subject to the Incentive Stock
Options exceeds the exercise price of the Incentive Stock Options.
Section 5.3 Payment Upon Exercise of Stock Appreciation Rights.
The Company's obligation to any Participant exercising a Stock
Appreciation Right may be paid in cash or shares of Common Stock, or partly in
cash and partly in shares, at the sole discretion of the Committee.
Section 5.4 Termination of Employment.
(a) Death: If a Participant ceases to be an employee of the Company prior
to the exercise or expiration of a Stock Appreciation Right outstanding in his
name on the date of death, such Stock Appreciation Right may be exercised to the
full extent not yet exercised, regardless of whether or not then fully
exercisable under the terms of the grant, by his estate or beneficiaries, as the
case may be, at any time and from time to
18
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time within l2 months after the date of death but in no event after the
expiration date of such Stock Appreciation Right.
(b) Disability: The Disability of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following the Disability such Participant does not engage in or assist any
business that the Committee, in its sole discretion, determines to be in
competition with business engaged in by the Company. A Participant who does
engage in or assist any business that the Committee, in its sole discretion,
determines to be in competition with business engaged in by the Company shall be
deemed to have terminated employment.
(c) Retirement: The Retirement of a Participant shall not constitute a
termination of employment for purposes of this Article IV, provided that
following Retirement such Participant does not engage in or assist any business
that the Committee, in its sole discretion, determines to be in competition with
business engaged in by the Company, and such Participant may exercise any Stock
Appreciation Right outstanding in his name at any time and from time to time
within 5 years after the date his Retirement commenced but in no event after the
expiration date of such Stock Appreciation Right. A Participant who does engage
in or assist any business that the Committee, in its sole discretion, determines
to be in competition with business engaged in by the Company shall be deemed to
have terminated employment.
(d) Other Terminations: If a Participant ceases to be an employee prior to
the exercise or expiration of a Stock Appreciation Right for any reason other
than death, all outstanding Stock Appreciation Rights granted to such
Participant shall expire on the date of such termination of employment, unless
the Committee, in its sole discretion, determines that he may exercise any such
outstanding Stock Appreciation Right (to the extent that he was entitled to do
so at the date of such termination of such employment) at any time and from time
to time within up to 5 years after such termination of employment but in no
event after the expiration date of such Stock Appreciation Right.
ARTICLE VI - PROVISIONS APPLICABLE TO OTHER ML & CO. SECURITIES.
Section 6.1 Grants of Other ML & Co. Securities.
Subject to the provisions of the Plan and any necessary action by the
Board of Directors, the Committee may select employees to become Participants
(subject to the provisions of Section 1.5 hereof) and grant to Participants
Other ML & Co. Securities or the right or option to purchase Other ML & Co.
Securities on such terms and conditions as the Committee shall determine,
including, without limitation, the period such rights or options may be
exercised, the nature and terms of payment of consideration for such Other ML &
Co. Securities, whether such Other ML & Co. Securities shall be subject to any
or all of the provisions of Article III of the Plan applicable to Restricted
Shares and/or Restricted Units, the consequences of termination of employment,
and the terms
19
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and conditions, if any, upon which such Other ML & Co. Securities may or must be
repurchased by the Company. Before making grants, the Committee must receive the
recommendations of the management of the Company, which will take into account
such factors as level of responsibility, current and past performance, and
performance potential. Each such Other ML & Co. Security shall be issued at a
price that will not exceed the Fair Market Value thereof on the date the
corresponding right or option is granted. Other ML & Co. Securities may bear
interest or pay dividends from such date and at a rate or rates or pursuant to a
formula or formulas fixed by the Committee or any necessary action of the Board.
Any applicable conversion or exchange rate with respect to Other ML & Co.
Securities shall be fixed by, or pursuant to a formula determined by, the
Committee or any necessary action of the Board at each date of grant and may be
predicated upon the attainment of financial or other performance goals.
Section 6.2 Terms and Conditions of Conversion or Exchange.
Each Other ML & Co. Security may be convertible or exchangeable on such
date and within such period of time as the Committee, or the Board if necessary,
determines at the time of grant. Other ML & Co. Securities may be convertible
into or exchangeable for (i) shares of Preferred Stock of ML & Co. or (ii) other
securities of ML & Co. or any present or future subsidiary of ML & Co., whether
or not convertible into shares of Common Stock, as the Committee, or the Board
if necessary, determines at the time of grant (or at any time prior to the
conversion or exchange date).
ARTICLE VII - CHANGES IN CAPITALIZATION.
Any other provision of the Plan to the contrary notwithstanding, if any
change shall occur in or affect shares of Common Stock or Performance Units,
Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML & Co.
Securities on account of a merger, consolidation, reorganization, stock
dividend, stock split or combination, reclassification, recapitalization, or
distribution to holders of shares of Common Stock (other than cash dividends)
including, without limitation, a merger or other reorganization event in which
the shares of Common Stock cease to exist, or, if in the opinion of the
Committee, after consultation with the Company's independent public accountants,
changes in the Company's accounting policies, acquisitions, divestitures,
distributions, or other unusual or extraordinary items have disproportionately
and materially affected the value of shares of Common Stock or Performance
Units, Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML &
Co. Securities, the Committee shall make such adjustments, if any, that it may
deem necessary or equitable in (a) the maximum number of shares of Common Stock
available for distribution under the Plan; (b) the number of shares subject to
or reserved for issuance under outstanding Performance Share, Restricted Share,
and Stock Option grants; (c) the performance objectives for the Performance
Periods not yet completed, including the minimum, intermediate, and full
performance levels and portion of payments related thereto; and (d) any other
terms or provisions of any
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outstanding grants of Performance Shares, Performance Units, Restricted Shares,
Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML & Co.
Securities, in order to preserve the full benefits of such grants for the
Participants, taking into account inflation, interest rates, and any other
factors that the Committee, in its sole discretion, considers relevant. In the
event of a change in the presently authorized shares of Common Stock that is
limited to a change in the designation thereof or a change of authorized shares
with par value into the same number of shares with a different par value or into
the same number of shares without par value, the shares resulting from any such
change shall be deemed to be shares of Common Stock within the meaning of the
Plan. In the event of any other change affecting the shares of Common Stock,
Performance Units, Restricted Units, Stock Options, Stock Appreciation Rights,
or Other ML & Co. Securities, such adjustment shall be made as may be deemed
equitable by the Committee to give proper effect to such event.
ARTICLE VIII - PAYMENTS UPON TERMINATION OF EMPLOYMENT AFTER A CHANGE IN
CONTROL.
Section 8.1 Value of Payments Upon Termination After a Change in Control.
Any other provision of the Plan to the contrary notwithstanding and
notwithstanding any election to the contrary previously made by the Participant,
in the event a Change in Control shall occur and thereafter the Company shall
terminate the Participant's employment without Cause or the Participant shall
terminate his employment with the Company for Good Reason, the Participant shall
be paid the value of his Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, and Other ML
& Co. Securities in a lump sum in cash, promptly after termination of his
employment but, without limiting the foregoing, in no event later than 30 days
thereafter. Payments shall be calculated as set forth below:
(a) Performance Shares and Performance Units.
Any payment for Performance Shares and Performance Units pursuant to this
Section 8.1(a) shall be calculated by applying performance objectives for any
outstanding Performance Shares and Performance Units as if the applicable
Performance Period and any applicable Restricted Period had ended on the first
day of the month in which the Participant's employment is terminated. The amount
of any payment to a Participant pursuant to this Section 8.1(a) shall be reduced
by the amount of any payment previously made to the Participant with respect to
the Performance Shares and Performance Units, exclusive of ordinary dividend
payments, resulting by operation of law from the Change in Control, including,
without limitation, payments resulting from a merger pursuant to state law. The
value of the Performance Shares and Performance Units payable pursuant to this
Section 8.1(a) shall be the amount equal to the number of Performance Shares and
Performance Units payable in
21
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accordance with the preceding sentence multiplied by the Fair Market Value of a
share of Common Stock on the day the Participant's employment is terminated or,
if higher, the highest Fair Market Value of a share of the Common Stock on any
day during the 90-day period ending on the date of the Change in Control (the
"Pre-CIC Value").
(b) Restricted Shares and Restricted Units.
Any payment under this Section 8.1(b) shall be calculated as if all the
relevant Vesting and Restricted Periods had been fully completed immediately
prior to the date on which the Participant's employment is terminated. The
amount of any payment to a Participant pursuant to this Section 8.1(b) shall be
reduced by the amount of any payment previously made to the Participant with
respect to the Restricted Shares and Restricted Units, exclusive of ordinary
dividend payments, resulting by operation of law from the Change in Control,
including, without limitation, payments resulting from a merger pursuant to
state law. The value of the Participant's Restricted Shares and Restricted Units
payable pursuant to this Section 8.1(b) shall be the amount equal to the number
of the Restricted Shares and Restricted Units outstanding in a Participant's
name multiplied by the Fair Market Value of a share of Common Stock on the day
the Participant's employment is terminated or, if higher, the Pre-CIC Value.
(c) Stock Options and Stock Appreciation Rights.
Any payment for Stock Options and Stock Appreciation Rights pursuant to
this Section 8.1(c) shall be calculated as if all such Stock Options and Stock
Appreciation Rights, regardless of whether or not then fully exercisable under
the terms of the grant, became exercisable immediately prior to the date on
which the Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(c) shall be reduced by the amount of
any payment previously made to a Participant with respect to the Stock Options
and Stock Appreciation Rights, exclusive of any ordinary dividend payments,
resulting by operation of law from the Change in Control, including, without
limitation, payments resulting from a merger pursuant to state law. The value of
the Participant's Stock Options and Stock Appreciation Rights payable pursuant
to this Section 8.1(c) shall be
(i) in the case of a Stock Option, for each underlying share
of Common Stock, the excess of the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the per share exercise price
for such Stock Option;
(ii) in the case of a Stock Appreciation Right granted in
tandem with a Stock Option, the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the Stock Option exercise
price; and
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(iii) in the case of a Stock Appreciation Right granted
independently of a Stock Option, the Fair Market Value of a share of
Common Stock on the day the Participant's employment is terminated,
or, if higher, the Pre-CIC Value, over the Fair Market Value of one
share of Common Stock on the date such Stock Appreciation Right was
granted, or such other price determined by the Committee at the time
of grant.
(d) Other ML & Co. Securities.
Any payment for Other ML & Co. Securities under this Section 8.1(d) shall
be calculated as if any relevant Vesting or Restricted Periods or other
applicable conditions dependent on the passage of time and relating to the
exercisability of any right or option to purchase Other ML & Co. Securities, or
relating to the full and unconditional ownership of such Other ML & Co.
Securities themselves, had been met on the first day of the month in which the
Participant's employment is terminated. The amount of any payment to a
Participant pursuant to this Section 8.1(d) shall be reduced by the amount of
any payment previously made to the Participant with respect to the Other ML &
Co. Securities, exclusive of ordinary dividend payments, resulting by operation
of law from the Change in Control, including, without limitation, payments
resulting from a merger pursuant to state law. The value of the Participant's
Other ML & Co. Securities payable pursuant to this Section 8.1(d) shall be
(i) in the case of an option or right to purchase such Other
ML & Co. Security, for each underlying Other ML & Co. Security, the
excess of the Fair Market Value of such Other ML & Co. Security on
the day the Participant's employment is terminated, or, if higher,
the Pre-CIC Value, over the exercise price of such option or right;
and
(ii) in the case of the Other ML & Co. Security itself (where
there is no outstanding option or right relating to such Other ML &
Co. Security), the Fair Market Value of the Other ML & Co. Security
on the day the Participant's employment is terminated, or, if
higher, the Pre-CIC Value.
Section 8.2 A Change in Control.
A "Change in Control" shall mean a change in control of ML & Co. of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided, however, that, without
limitation, a Change in Control shall be deemed to have occurred if:
(a) any individual, partnership, firm, corporation, association, trust,
unincorporated organization or other entity, or any syndicate or group deemed to
be a
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person under Section 14(d)(2) of the Exchange Act, other than the Company's
employee stock ownership plan, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 of the General Rules and Regulations under the Exchange Act),
directly or indirectly, of securities of ML & Co. representing 30% or more of
the combined voting power of ML & Co.'s then outstanding securities entitled to
vote in the election of directors of ML & Co.;
(b) during any period of two consecutive years (not including any period
prior to the Effective Date of this Plan) individuals who at the beginning of
such period constituted the Board of Directors and any new directors, whose
election by the Board of Directors or nomination for election by the
stockholders of ML & Co. was approved by a vote of at least three quarters of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(c) all or substantially all of the assets of ML & Co. are liquidated or
distributed.
Section 8.3 Effect of Agreement Resulting in Change in Control.
If ML & Co. executes an agreement, the consummation of which would result
in the occurrence of a Change in Control as described in Section 8.2, then, with
respect to a termination of employment without Cause or for Good Reason
occurring after the execution of such agreement (and, if such agreement expires
or is terminated prior to consummation, prior to such expiration or termination
of such agreement), a Change in Control shall be deemed to have occurred as of
the date of the execution of such agreement.
Section 8.4 Termination for Cause.
Termination of the Participant's employment by the Company for "Cause"
shall mean termination upon:
(a) the willful and continued failure by the Participant substantially to
perform his duties with the Company (other than any such failure resulting from
the Participant's incapacity due to physical or mental illness or from the
Participant's Retirement or any such actual or anticipated failure resulting
from termination by the Participant for Good Reason) after a written demand for
substantial performance is delivered to him by the Board of Directors, which
demand specifically identifies the manner in which the Board of Directors
believes that he has not substantially performed his duties; or
(b) the willful engaging by the Participant in conduct that is
demonstrably and materially injurious to the Company, monetarily or otherwise.
24
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No act or failure to act by the Participant shall be deemed "willful"
unless done, or omitted to be done, by the Participant not in good faith and
without reasonable belief that his action or omission was in the best interest
of the Company.
Notwithstanding the foregoing, the Participant shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three quarters of the entire membership of the Board of Directors at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Participant and an opportunity for him, together with counsel, to be heard
before the Board of Directors), finding that, in the good faith opinion of the
Board of Directors, the Participant was guilty of conduct set forth above in
clause (a) or (b) of the first sentence of this Section 8.4 and specifying the
particulars thereof in detail.
Section 8.5 Good Reason.
"Good Reason" shall mean the Participant's termination of his employment
with the Company if, without the Participant's written consent, any of the
following circumstances shall occur:
(a) Inconsistent Duties. A meaningful and detrimental alteration in the
Participant's position or in the nature or status of his responsibilities
(including those as a director of ML & Co., if any) from those in effect
immediately prior to the Change in Control;
(b) Reduced Salary or Bonus Opportunity. A reduction by the Company in the
Participant's annual base salary as in effect immediately prior to the Change in
Control; a failure by the Company to increase the Participant's salary at a rate
commensurate with that of other key executives of the Company; or a reduction in
the Participant's annual cash bonus below the greater of (i) the annual cash
bonus that he received, or to which he was entitled, immediately prior to the
Change in Control, or (ii) the average annual cash bonus paid to the Participant
by the Company for the three years preceding the year in which the Change in
Control occurs;
(c) Relocation. The relocation of the office of the Company where the
Participant is employed at the time of the Change in Control (the "CIC
Location") to a location that in his good faith assessment is an area not
generally considered conducive to maintaining the executive offices of a company
such as ML & Co. because of hazardous or undesirable conditions including
without limitation a high crime rate or inadequate facilities, or to a location
that is more than twenty-five (25) miles away from the CIC Location or the
Company's requiring the Participant to be based more than twenty-five (25) miles
away from the CIC Location (except for required travel on the Company's business
to an extent substantially consistent with his customary business travel
obligations in the ordinary course of business prior to the Change in Control);
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(d) Compensation Plans. The failure by the Company to continue in effect
any compensation plan in which the Participant participates, including but not
limited to this Plan, the Company's retirement program, Employee Stock Purchase
Plan, 1978 Incentive Equity Purchase Plan, Equity Capital Accumulation Plan,
Canadian Capital Accumulation Plan, Management Capital Accumulation Plan,
limited partnership offerings, cash incentive compensation or any other plans
adopted prior to the Change in Control, unless an equitable arrangement
(embodied in an ongoing substitute or alternative plan) has been made with
respect to such plan in connection with the Change in Control, or the failure by
the Company to continue the Participant's participation therein on at least as
favorable a basis, both in terms of the amount of benefits provided and the
level of his participation relative to other Participants, as existed
immediately prior to the Change in Control;
(e) Benefits and Perquisites. The failure of the Company to continue to
provide the Participant with benefits at least as favorable as those enjoyed by
the Participant under any of the Company's retirement, life insurance, medical,
health and accident, disability, deferred compensation or savings plans in which
the Participant was participating immediately prior to the Change in Control;
the taking of any action by the Company that would directly or indirectly
materially reduce any of such benefits or deprive the Participant of any
material fringe benefit enjoyed by him immediately prior to the Change in
Control, including, without limitation, the use of a car, secretary, office
space, telephones, expense reimbursement, and club dues; or the failure by the
Company to provide the Participant with the number of paid vacation days to
which the Participant is entitled on the basis of years of service with the
Company in accordance with the Company's normal vacation policy in effect
immediately prior to the Change in Control;
(f) No Assumption by Successor. The failure of ML & Co. to obtain a
satisfactory agreement from any successor to assume and agree to perform a
Participant's employment agreement as contemplated thereunder or, if the
business of the Company for which his services are principally performed is sold
at any time after a Change in Control, the purchaser of such business shall fail
to agree to provide the Participant with the same or a comparable position,
duties, compensation, and benefits as provided to him by the Company immediately
prior to the Change in Control.
Section 8.6 Effect on Plan Provisions.
In the event of a Change in Control, no changes in the Plan, or in any
documents evidencing grants of Performance Shares, Performance Units, Restricted
Shares, Restricted Units, Stock Options, Stock Appreciation Rights, or Other ML
& Co. Securities and no adjustments, determinations or other exercises of
discretion by the Committee or the Board of Directors, that were made subsequent
to the Change in Control and that would have the effect of diminishing a
Participant's rights or his payments under the Plan or this Article shall be
effective, including, but not limited to,
26
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any changes, determinations or other exercises of discretion made to or pursuant
to the Plan. Once a Participant has received a payment pursuant to this Article
VIII, shares of Common Stock that were reserved for issuance in connection with
any Performance Shares, Restricted Shares, Stock Options, or Other ML & Co.
Securities for which payment is made shall no longer be reserved and shares of
Common Stock that are Restricted Shares or that are restricted and held by the
Company pursuant to Section 2.6(a)(i), for which payment has been made, shall no
longer be registered in the name of the Participant and shall again be available
for grants under the Plan. If the Participant's employment is terminated without
Cause or for Good Reason after a Change in Control, any election to defer
payment for Performance Shares or Performance Units pursuant to Section 2.8
hereof or Restricted Shares or Restricted Units pursuant to Section 3.8 hereof
shall be null and void.
ARTICLE IX - MISCELLANEOUS.
Section 9.1 Designation of Beneficiary.
A Participant, or the transferee of a Stock Option pursuant to Section
4.4(d), may designate, in a writing delivered to ML & Co. before his death, a
person or persons to receive, in the event of his death, any rights to which he
would be entitled under the Plan. A Participant or Stock Option transferee, may
also designate an alternate beneficiary to receive payments if the primary
beneficiary does not survive the Participant or Stock Option transferee. A
Participant or Stock Option transferee may designate more than one person as his
beneficiary or alternate beneficiary, in which case such persons would receive
payments as joint tenants with a right of survivorship. A beneficiary
designation may be changed or revoked by a Participant or Stock Option
transferee at any time by filing a written statement of such change or
revocation with the Company. If a Participant or Stock Option transferee fails
to designate a beneficiary, then his estate shall be deemed to be his
beneficiary.
Section 9.2 Employment Rights.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant, and a
grant under the Plan shall not be construed as giving any Participant any right
to be retained in the employ of the Company.
Section 9.3 Nontransferability.
Except as provided in Section 4.4(d), a Participant's rights under the
Plan, including the right to any amounts or shares payable, may not be assigned,
pledged, or otherwise transferred except, in the event of a Participant's death,
to his designated beneficiary or, in the absence of such a designation, by will
or the laws of descent and distribution.
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Section 9.4 Withholding.
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to any
brokerage account, to deduct or withhold from any payment under the Plan any
Federal, state, local or other taxes, including transfer taxes, required by law
to be withheld or to require the Participant or his beneficiary or estate, as
the case may be, to pay any amount, or the balance of any amount, required to be
withheld.
Section 9.5 Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining any
benefits under any retirement, group insurance, or other employee benefit plan
of the Company. The Plan shall not preclude the stockholders of ML & Co., the
Board of Directors or any committee thereof, or the Company from authorizing or
approving other employee benefit plans or forms of incentive compensation, nor
shall it limit or prevent the continued operation of other incentive
compensation plans or other employee benefit plans of the Company or the
participation in any such plans by Participants in the Plan.
Section 9.6 No Trust or Fund Created.
Neither the Plan nor any grant made hereunder shall create or be construed
to create a trust or separate fund of any kind or a fiduciary relationship
between the Company and a Participant or any other person. To the extent that
any person acquires a right to receive payments from the Company pursuant to a
grant under the Plan, such right shall be no greater than the right of any
unsecured general creditor of the Company.
Section 9.7 Expenses.
The expenses of administering the Plan shall be borne by the Company.
Section 9.8 Indemnification.
Service on the Committee shall constitute service as a member of the Board
of Directors so that members of the Committee shall be entitled to
indemnification and reimbursement as directors of ML & Co. pursuant to its
Certificate of Incorporation, By-Laws, or resolutions of its Board of Directors
or stockholders.
Section 9.9 Tax Litigation.
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is related to
the Plan and that the
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Company believes to be important to Participants in the Plan and to conduct any
such contest or any litigation arising therefrom to a final decision.
ARTICLE X - AMENDMENT AND TERMINATION.
The Board of Directors or the Committee (but no other committee of the
Board of Directors) may modify, amend or terminate the Plan at any time. No
modification, amendment or termination of the Plan shall adversely affect the
rights of a Participant under a grant previously made to him without the consent
of such Participant.
ARTICLE XI - INTERPRETATION.
Section 11.1 Governmental and Other Regulations.
The Plan and any grant hereunder shall be subject to all applicable
Federal and state laws, rules, and regulations and to such approvals by any
regulatory or governmental agency that may, in the opinion of the counsel for
the Company, be required.
Section 11.2 Governing Law.
The Plan shall be construed and its provisions enforced and administered
in accordance with the laws of the State of New York applicable to contracts
entered into and performed entirely in such State.
ARTICLE XII - EFFECTIVE DATE.
The Plan shall not be effective unless it is approved by the Board of
Directors of the Corporation.
29
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 Six Months
Ended Ended
---------------------- --------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS
Net earnings $ 545 $ 481 $1,063 $ 947
Preferred stock dividends (10) (9) (19) (20)
----- ----- ----- -----
Net earnings applicable to
common stockholders $ 535 $ 472 $1,044 $ 927
===== ===== ===== =====
WEIGHTED-AVERAGE SHARES OUTSTANDING 346.3 329.9 343.4 330.5
----- ----- ----- -----
EFFECT OF DILUTIVE INSTRUMENTS
Employee stock options 33.3 25.5 31.1 28.2
FCCAAP shares 17.1 19.0 17.0 20.6
Restricted units 5.3 4.5 4.9 4.9
ESPP shares - - .1 .1
----- ----- ----- -----
DILUTIVE POTENTIAL COMMON SHARES 55.7 49.0 53.1 53.8
----- ----- ----- -----
TOTAL WEIGHTED-AVERAGE DILUTED SHARES 402.0 378.9 396.5 384.3
===== ===== ===== =====
BASIC EARNINGS PER SHARE $1.55 $1.43 $3.04 $2.80
===== ===== ===== =====
DILUTED EARNINGS PER SHARE $1.33 $1.25 $2.63 $2.41
===== ===== ===== =====
</TABLE>
Basic and diluted earnings per share are based on actual numbers before
rounding.
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 Six Months
Ended Ended
---------------------- --------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pretax earnings from
continuing operations $ 907 $ 784 $ 1,781 $1,551
Add: Fixed charges 4,756 4,101 9,398 7,772
------ ------ ------- ------
Pretax earnings before fixed charges $5,663 $4,885 $11,179 $9,323
====== ====== ======= ======
Fixed charges:
Interest $4,664 $4,038 $ 9,223 $7,646
Other(A) 92 63 175 126
------ ------ ------- ------
Total fixed charges $4,756 $4,101 $ 9,398 $7,772
====== ====== ======= ======
Preferred stock dividend
requirements $ 16 $ 15 $ 31 $ 32
------ ------ ------- ------
Total combined fixed charges and
preferred stock dividends $4,772 $4,116 $ 9,429 $7,804
====== ====== ======= ======
Ratio of earnings to fixed charges 1.19 1.19 1.19 1.20
Ratio of earnings to combined
fixed charges and preferred
stock dividends 1.19 1.19 1.19 1.19
</TABLE>
(A) Other fixed charges consist of the interest factor in rentals,
amortization of debt expense, and preferred stock dividend requirements of
majority-owned subsidiaries.
Exhibit 15
August 7, 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 consolidated
financial information of Merrill Lynch & Co., Inc. and subsidiaries as of June
26, 1998 and for the three- and six-month periods ended June 26, 1998 and June
27, 1997 as indicated in our report dated August 7, 1998; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 26, 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)
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan for
a Select Group of Eligible Employees)
<PAGE>
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan for
a Select Group of Eligible Employees)
Registration Statement No. 333-09779 (1997 Deferred Compensation Plan for
a Select Group of Eligible Employees)
Registration Statement No. 333-32209 (1998 Deferred Compensation Plan for
a Select Group of Eligible Employees)
Registration Statement No. 333-00863 (401(k) Savings & 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 & 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 & Producers)
Registration Statement No. 333-60211 (1999 Deferred Compensation Plan for
a Select Group of Eligible Employees)
Filed on Form S-3:
Debt Securities:
Registration Statement No. 33-54218
Registration Statement No. 2-78338
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
<PAGE>
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
Registration Statement No. 33-16165
Registration Statement No. 33-19820
Registration Statement No. 33-23605
<PAGE>
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 (LTIC and LTICPMP)
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>
<ARTICLE> BD
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> JUN-26-1998
<CASH> 6,281
<RECEIVABLES> 46,427
<SECURITIES-RESALE> 77,828
<SECURITIES-BORROWED> 42,876
<INSTRUMENTS-OWNED> 170,647<F1>
<PP&E> 2,295
<TOTAL-ASSETS> 365,451
<SHORT-TERM> 50,891
<PAYABLES> 24,440
<REPOS-SOLD> 88,606
<SECURITIES-LOANED> 11,104
<INSTRUMENTS-SOLD> 101,523<F2>
<LONG-TERM> 52,075
0
425
<COMMON> 630
<OTHER-SE> 8,636
<TOTAL-LIABILITY-AND-EQUITY> 365,451<F3>
<TRADING-REVENUE> 2,123
<INTEREST-DIVIDENDS> 9,690
<COMMISSIONS> 2,763
<INVESTMENT-BANKING-REVENUES> 1,670
<FEE-REVENUE> 1,993
<INTEREST-EXPENSE> 9,236
<COMPENSATION> 4,753
<INCOME-PRETAX> 1,781
<INCOME-PRE-EXTRAORDINARY> 1,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,063
<EPS-PRIMARY> 3.04
<EPS-DILUTED> 2.63
<FN>
<F1> Includes $12,162 of securities received as collateral, net of securities
pledged as collateral, and $15,694 of securities pledged as collateral, recorded
pursuant to the provisions of Statement of Financial Accounting Standards No.
127 ("SFAS No. 127").
<F2> Includes $27,856 of obligation to return securities received as collateral,
recorded pursuant to the provisions of SFAS No. 127.
<F3> Includes $1,777 in Preferred Securities issued by Subsidiaries.
</FN>
</TABLE>
