-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ILk/EKZ+1R3N30MFuC2n6g9yWs+GZd3bErbHyuRQouBcyJHy5+RfyBe7PYkIQBcx S5Rd/X07JRIWC9EcXYWiwA== 0000950123-99-004508.txt : 19990513 0000950123-99-004508.hdr.sgml : 19990513 ACCESSION NUMBER: 0000950123-99-004508 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCK & CO INC CENTRAL INDEX KEY: 0000064978 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 221109110 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03305 FILM NUMBER: 99618390 BUSINESS ADDRESS: STREET 1: ONE MERCK DR STREET 2: P O BOX 100 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 BUSINESS PHONE: 9084234044 MAIL ADDRESS: STREET 1: ONE MERCK DR STREET 2: PO BOX 100 WS3AB-05 CITY: WHITEHOUSE STATION STATE: NJ ZIP: 08889-0100 10-Q 1 MERCK & CO., INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission File No. 1-3305 MERCK & CO., INC. P. O. Box 100 One Merck Drive Whitehouse Station, N.J. 08889-0100 (908) 423-1000 Incorporated in New Jersey I.R.S. Employer Identification No. 22-1109110 The number of shares of common stock outstanding as of the close of business on April 30, 1999:
Class Number of Shares Outstanding ----- ---------------------------- Common Stock 2,360,551,281
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 [ ] 2 Part I - Financial Information MERCK & CO., INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED MARCH 31, 1999 AND 1998 ($ in millions except per share amounts)
Three Months Ended March 31 ------------------------------- 1999 1998 --------- --------- Sales $ 7,536.7 $ 6,058.8 --------- --------- Costs, Expenses and Other Materials and production 4,154.2 3,235.6 Marketing and administrative 1,154.3 995.1 Research and development 441.8 388.5 Equity income from affiliates (174.8) (226.1) Other (income) expense, net 118.4 30.5 --------- --------- 5,693.9 4,423.6 --------- --------- Income Before Taxes 1,842.8 1,635.2 Taxes on Income 543.2 470.8 --------- --------- Net Income $ 1,299.6 $ 1,164.4 ========= ========= Basic Earnings per Common Share $ .55 $ .49 Earnings per Common Share Assuming Dilution $ .54 $ .47 Dividends Declared per Common Share $ .27 $ .22-1/2
The accompanying notes are an integral part of this consolidated financial statement. - 1 - 3 MERCK & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET MARCH 31, 1999 AND DECEMBER 31, 1998 ($ in millions)
March 31 December 31 1999 1998 --------- --------- ASSETS Current Assets Cash and cash equivalents $ 1,792.6 $ 2,606.2 Short-term investments 1,303.7 749.5 Accounts receivable 3,132.5 3,374.1 Inventories 2,485.8 2,623.9 Prepaid expenses and taxes 900.6 874.8 --------- --------- Total current assets 9,615.2 10,228.5 --------- --------- Investments 4,365.2 3,607.7 Property, Plant and Equipment, at cost, net of allowance for depreciation of $4,214.5 in 1999 and $4,042.8 in 1998 8,121.2 7,843.8 Goodwill and Other Intangibles, net of accumulated amortization of $1,218.1 in 1999 and $1,123.9 in 1998 8,193.3 8,287.2 Other Assets 1,994.2 1,886.2 --------- --------- $32,289.1 $31,853.4 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued liabilities $ 3,395.4 $ 3,682.1 Loans payable and current portion of long-term debt 630.5 624.2 Income taxes payable 1,140.9 1,125.1 Dividends payable 638.1 637.4 --------- --------- Total current liabilities 5,804.9 6,068.8 --------- --------- Long-Term Debt 3,217.6 3,220.8 --------- --------- Deferred Income Taxes and Noncurrent Liabilities 6,197.5 6,057.0 --------- --------- Minority Interests 3,726.5 3,705.0 --------- --------- Stockholders' Equity Common stock Authorized - 5,400,000,000 shares Issued - 2,967,933,536 shares -1999 - 2,967,851,980 shares -1998 29.7 29.7 Other paid-in capital 5,681.0 5,614.5 Retained earnings 20,848.2 20,186.7 Accumulated other comprehensive loss (20.0) (21.3) --------- --------- 26,538.9 25,809.6 Less treasury stock, at cost 604,048,432 shares - 1999 607,399,428 shares - 1998 13,196.3 13,007.8 --------- --------- Total stockholders' equity 13,342.6 12,801.8 --------- --------- $32,289.1 $31,853.4 ========= =========
The accompanying notes are an integral part of this consolidated financial statement. - 2 - 4 MERCK & CO., INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 ($ in millions)
Three Months Ended March 31 ------------------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Income before taxes $ 1,842.8 $ 1,635.2 Adjustments to reconcile income before taxes to cash provided from operations before taxes: Depreciation and amortization 284.9 237.1 Other (39.5) 15.6 Net changes in assets and liabilities 102.4 (70.4) --------- --------- CASH PROVIDED BY OPERATING ACTIVITIES BEFORE TAXES 2,190.6 1,817.5 INCOME TAXES PAID (223.0) (292.7) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,967.6 1,524.8 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (476.0) (315.4) Purchase of securities, subsidiaries and other investments (11,022.9) (6,165.9) Proceeds from sale of securities, subsidiaries and other investments 9,661.8 5,926.5 Other (3.9) (14.2) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (1,841.0) (569.0) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in short-term borrowings 3.8 (164.5) Proceeds from issuance of debt .2 499.1 Payments on debt (.5) (85.8) Purchase of treasury stock (361.6) (328.9) Dividends paid to stockholders (637.4) (537.5) Other 128.0 143.7 --------- --------- NET CASH USED BY FINANCING ACTIVITIES (867.5) (473.9) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (72.7) (10.4) --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (813.6) 471.5 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,606.2 1,125.1 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,792.6 $ 1,596.6 ========= =========
The accompanying notes are an integral part of this consolidated financial statement. Notes to Consolidated Financial Statements 1. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and disclosures required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest Annual Report on Form 10-K. Interim statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full year 1999; in the Company's opinion, all adjustments necessary for a fair presentation of these interim statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform with current year presentation. - 3 - 5 Notes to Consolidated Financial Statements (continued) 2. In November 1998, the Board of Directors approved an increase in authorized common shares from 2.7 billion with no par value to 5.4 billion with one cent par value, effective January 1999. Additionally, the Board of Directors approved a two-for-one stock split of the Company's common stock, effective February 1999. All share and per share amounts for current and prior periods presented in these financial statements reflect the stock split. 3. Inventories consisted of:
($ in millions) ----------------------------- March 31 December 31 1999 1998 -------- -------- Finished goods $1,617.4 $1,701.2 Raw materials and work in process 800.3 851.6 Supplies 68.1 71.1 -------- -------- Total (approximates current cost) 2,485.8 2,623.9 Reduction to LIFO cost -- -- -------- -------- $2,485.8 $2,623.9 ======== ========
4. The Company, along with numerous other defendants, is a party in several antitrust actions brought by retail pharmacies and consumers, alleging conspiracies in restraint of trade and challenging pricing and/or purchasing practices, one of which has been certified as a federal class action and a number of which have been certified as state class actions. In 1996, the Company and several other defendants finalized an agreement to settle the federal class action alleging conspiracy, which represents the single largest group of retail pharmacy claims, pursuant to which the Company paid $51.8 million. Since that time, the Company has entered into other settlements on satisfactory terms. The Company has not engaged in any conspiracy, and no admission of wrongdoing was made nor was included in the final agreements. While it is not feasible to predict or determine the final outcome of these proceedings, management does not believe that they should result in a materially adverse effect on the Company's financial position, results of operations or liquidity. 5. Sales consisted of:
($ in millions) ---------------------------- Three Months Ended March 31 ---------------------------- 1999 1998 -------- -------- Elevated cholesterol $1,170.5 $1,049.0 Hypertension/heart failure 1,087.9 999.8 Anti-ulcerants 260.2 321.3 Osteoporosis 231.4 181.8 Antibiotics 189.8 201.5 Vaccines/biologicals 171.5 185.4 Ophthalmologicals 151.5 148.6 Human immunodeficiency virus (HIV) 149.9 151.3 Other Merck products 547.1 164.4 Merck-Medco 3,576.9 2,655.7 -------- -------- $7,536.7 $6,058.8 ======== ========
Other Merck products include sales of other human pharmaceuticals, continuing sales to divested businesses and pharmaceutical and animal health supply sales to the Company's joint ventures and, as of July 1, 1998, supply sales to Astra Pharmaceuticals, L.P. - 4 - 6 Notes to Consolidated Financial Statements (continued) 6. Other (income) expense, net, consisted of:
($ in millions) --------------------------- Three Months Ended March 31 --------------------------- 1999 1998 ------- ------- Interest income $ (79.5) $ (61.7) Interest expense 71.4 39.2 Exchange losses (gains) 9.4 (5.9) Minority interests 49.5 42.5 Amortization of goodwill and other intangibles 83.3 48.3 Other, net (15.7) (31.9) ------- ------- $ 118.4 $ 30.5 ======= =======
Minority interests include third parties' share of exchange gains and losses arising from translation of the financial statements into U.S. dollars. Interest paid for the three-month periods ended March 31, 1999 and 1998 was $46.8 million and $18.5 million, respectively. 7. Income taxes paid for the three-month periods ended March 31, 1999 and 1998 were $223.0 million and $292.7 million, respectively. 8. The net income effect of dilutive securities was not significant to the Company's calculation of Earnings per common share assuming dilution. A reconciliation of weighted average common shares outstanding to weighted average common shares outstanding assuming dilution follows:
Three Months Ended March 31 -------------------------- 1999 1998 ------- ------- Average common shares outstanding 2,361.9 2,390.1 Common shares issuable(1) 63.0 63.9 ------- ------- Average common shares outstanding assuming dilution 2,424.9 2,454.0 ======= ======= (1) Issuable primarily under stock option plans.
9. Comprehensive income for the three months ended March 31, 1999 and 1998, representing all changes in Stockholders' equity during the period other than changes resulting from the Company's stock, was $1,300.9 million and $1,166.1 million, respectively. - 5 - 7 Notes to Consolidated Financial Statements (continued) 10.The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. All Other includes non-reportable human and animal health segments. Revenues and profits for these segments are as follows:
($ in millions) ---------------------------- Three Months Ended March 31 ---------------------------- 1999 1998 -------- -------- Segment revenues: Merck Pharmaceutical $3,278.9 $2,977.9 Merck-Medco 4,294.5 3,326.0 All Other 631.0 382.1 -------- -------- $8,204.4 $6,686.0 ======== ======== Segment profits: Merck Pharmaceutical $1,994.3 $1,839.8 Merck-Medco 123.8 94.4 All Other 560.9 512.4 -------- -------- $2,679.0 $2,446.6 ======== ========
Segment profits are comprised of segment revenues less certain elements of materials and production costs and operating expenses, including components of equity income (loss) from joint ventures and depreciation and amortization expenses. The vast majority of indirect production costs, research and development expenses and general and administrative expenses, all predominantly related to the Merck Pharmaceutical business, as well as the cost of financing these activities, are not included in the marketing segment profits. The vast majority of goodwill and other intangibles amortization, as well as the cost of financing capital employed, are not included in Merck-Medco segment profits. A reconciliation of total segment profits to consolidated income before taxes is as follows:
($ in millions) ----------------------------- Three Months Ended March 31 ----------------------------- 1999 1998 -------- -------- Segment profits $2,679.0 $2,446.6 Other profits 25.6 15.3 Adjustments 39.1 35.6 Unallocated: Interest income 79.5 61.7 Interest expense (71.4) (39.2) Equity income (loss) from affiliates 85.8 (55.8) Depreciation and amortization expenses (224.4) (178.5) Research and development expenses (441.8) (388.5) Other expenses, net (328.6) (262.0) -------- -------- $1,842.8 $1,635.2 ======== ========
Other profits primarily represent operating income related to divested products or businesses. Adjustments represent the elimination of the effect of double counting certain items of income and expense. Equity income (loss) from affiliates includes taxes paid at the joint venture level and a portion of equity income that is not reported in segment profits. Other expenses, net, include expenses from corporate and manufacturing cost centers and other miscellaneous income (expense), net. 11.Legal proceedings to which the Company is a party are discussed in Part 1 Item 3, Legal Proceedings, in the Annual Report on Form 10-K. There were no material developments in the three-month period ended March 31, 1999. - 6 - 8 MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION Earnings per share for the first quarter of 1999 were $0.54, an increase of 15% over the first quarter of 1998. First quarter net income increased 12% to $1,299.6 million. Sales for the quarter were $7.5 billion, up 24% from the same period last year. Sales growth for the quarter was led by the established major products, the newer products including those introduced in 1998, as well as growth from the Merck-Medco Managed Care business and a 5-point benefit attributable to the restructuring of Astra Merck, Inc. (AMI). Solid volume gains in both domestic and international operations contributed to the results. Foreign exchange had essentially no effect on the Company's first quarter sales growth. Excluding exchange and including the effect of the AMI restructuring, sales of Merck human health products increased 18% for the first quarter. Sales of Merck human health products outside the United States accounted for 41% of Merck human health first quarter sales. Income growth for the quarter was driven by solid sales volume gains as well as the effects of ongoing cost controls and productivity improvements in manufacturing and general and administrative expenses. The savings from productivity improvements were partially offset by increases in selling and promotion expenses to support recent and upcoming product launches. Results for the first quarter were paced by sales volume gains of 'Zocor', 'Fosamax', 'Cozaar'*, 'Hyzaar'*, 'Prinivil' and 'Comvax'. Also contributing to the volume growth were 'Singulair', 'Propecia', 'Cosopt', 'Maxalt' and 'Aggrastat', all introduced in 1998. Prescription volume growth in the Merck-Medco Managed Care business also contributed to the sales increase for the quarter. 'Zocor' continues its solid volume growth and is now the world's second most-prescribed medicine. It remains the leading statin medicine worldwide. Last year, the U.S. Food and Drug Administration (FDA) approved a new 80 mg tablet of 'Zocor', which lowers LDL ("bad") cholesterol by as much as 63 percent. During the American College of Cardiology meeting in March, data were presented that showed 'Zocor' not only substantially lowered LDL and triglycerides but also significantly raised HDL ("good") cholesterol, particularly in patients with low baseline HDL levels. In March, the FDA approved a new indication for 'Mevacor' in people with average to slightly elevated total cholesterol, but whose HDL ("good") cholesterol is below average. 'Mevacor' is now indicated in these patients to reduce the risk of heart attack, unstable angina and coronary revascularizations. Together, 'Zocor' and 'Mevacor' hold more than a 40 percent share of the growing worldwide statin market. Even in the U.S. market only about one-third of eligible patients are receiving treatment. 'Fosamax', Merck's medicine to treat and prevent postmenopausal osteoporosis and reduce the risk of fractures due to osteoporosis, continues to be the only medicine proven to reduce the incidence of hip fractures, the most serious kind of fracture. Eight countries, including Mexico and Canada, have cleared 'Fosamax' for the prevention and treatment of steroid-induced osteoporosis. This is a serious condition that can result in multiple fractures in patients treated with steroids for a variety of serious illnesses, such as rheumatoid arthritis and asthma. The U.S. New Drug Application for this use is under review by the FDA. Merck's angiotensin II antagonist (AIIA) 'Cozaar' and its companion agent, 'Hyzaar', are among Merck's fastest-growing products. With its August 1998 introduction in Japan, 'Cozaar' is now available in all key global markets. 'Cozaar' has been introduced in 78 other countries to date and 'Hyzaar' has been introduced in 59, making these medicines the world's most widely prescribed in the AIIA class. AIIAs have now been recommended for the first time as initial and maintenance treatment for hypertension in the recently updated World Health Organization/International Society of Hypertension Guidelines. 'Cozaar' is the only product in its class cleared for the treatment of heart failure in any market. It has been approved for this use in 19 countries to date, including Germany and Spain, and applications for this indication are pending in other countries. Merck has not yet filed an application for heart failure in the United States. *'Cozaar' and 'Hyzaar' are registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE, USA. - 7 - 9 MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued) Merck's angiotensin converting enzyme (ACE) inhibitors, 'Vasotec' and 'Prinivil', continue to be among the world's most widely prescribed branded anti-hypertensives. 'Vasotec' has been prescribed for more than 27 million patients since its launch in 1984. In the United States, 'Vasotec' is the only ACE inhibitor indicated to treat high blood pressure, asymptomatic left ventricular dysfunction and heart failure. 'Vasotec' is also the only ACE inhibitor indicated to reduce deaths due to symptomatic heart failure, regardless of the underlying cause. 'Prinivil', with its convenient, once-daily dosing in hypertension, heart failure and acute myocardial infarction, continues to demonstrate strong growth well above the rate of the overall ACE inhibitor market. 'Singulair', Merck's once-a-day tablet to treat chronic asthma in adults and children ages six and older, has become the most widely prescribed member of the leukotriene-antagonist class in the United States in less than a year on the market. The product has been introduced in 46 other countries, including the United Kingdom, Spain, Germany and Canada. In clinical studies, 'Singulair' has improved asthma control in many patients by significantly decreasing the frequency of asthma attacks, helping to prevent day- and night-time asthma symptoms, and reducing reliance on bronchodilators. It also has allowed many patients to gradually reduce their use of inhaled steroids. 'Propecia', the first and only tablet for the treatment of male pattern hair loss, has been introduced in 20 countries to date, including the United States, Canada, Brazil, France, Germany, Italy and Australia. Launches are pending in 18 countries. Since the product's introduction last year in the United States, more than 590,000 men have started treatment worldwide. In clinical studies, 83 percent of men maintained their current hair count and 66 percent grew visible hair. Sales of 'Cosopt', an eyedrop that lowers intraocular pressure in patients with open-angle glaucoma and ocular hypertension, continue to grow. The FDA approved 'Cosopt' last year and it has been broadly adopted by ophthalmologists in the United States. In addition, it has been cleared for marketing in 18 countries in Europe and Latin America. Merck plans to introduce 'Cosopt' in other major markets throughout the year. In 1998, Merck introduced 'Maxalt' in the United States and 10 other countries. It has become the fastest growing oral migraine medication in the U.S. and other key markets. Early in 1999, Merck introduced 'Maxalt' in Finland and introductions are pending in 15 other countries. 'Maxalt' is the first and only migraine medicine available in both conventional tablets and convenient, rapidly dissolving tablets that disintegrate within seconds on the tongue without liquids. The European Union's Committee on Proprietary Medicinal Products unanimously recommended approval for Merck's "platelet blocker," 'Aggrastat', in March. This is an important step toward making the product available throughout the European Union. Merck introduced 'Aggrastat' in many markets in 1998, including the United States, Switzerland, Germany, Mexico and Argentina. 'Aggrastat' treats patients with acute coronary syndrome. This indication includes patients with unstable angina (chest pain) and non-Q-wave myocardial infarction (often described as a small heart attack). The Arthritis Advisory Committee of the U.S. FDA on April 20 recommended that the FDA approve 'Vioxx', Merck's investigational, anti-inflammatory COX-2 specific inhibitor, for the treatment of the signs and symptoms of osteoarthritis and the relief of acute pain. Merck's first introduction of 'Vioxx' was in Mexico on March 18. On February 23, 1999, the Board of Directors declared a quarterly dividend of 27 cents per share on the Company's common stock which was paid April 1 to stockholders of record at the close of business on March 5. The Company's total dividend paid to date in 1999 is 54 cents per share, a 20 percent increase over the amount paid during the same period in 1998. The amount of dividends reflects the Company's two-for-one stock split effective February 1999. In early April 1999, Astra AB (Astra) merged with Zeneca Group Plc (Zeneca). As a result of this merger, Astra was required to make one-time payments to Merck totaling approximately $1.8 billion for the relinquishment by Merck of certain rights, including option rights to future Astra products with no existing or pending U.S. patents at the time of the merger. On April 21, Astra made payments to the Company totaling approximately $1.7 billion and is disputing its obligation to pay the remainder. Merck intends to enforce its rights under the agreements entered into in connection with the restructuring of Astra Merck Inc. (AMI) with respect to the disputed amount. The Astra-Zeneca merger also triggers a partial redemption in 2008 of Merck's limited partnership interest in Astra Pharmaceuticals, L.P., the U.S. limited partnership formed in July 1998 as part of the restructuring of AMI (renamed KBI). Additionally, Astra's option to buy Merck's interest in the KBI products is now only exercisable in 2010 and the Company has obtained the right to require Astra to purchase such interest at fair market value in 2008. Also as a result of the merger, the $1.4 billion note issued to Astra in July 1998, originally due in 2038, is payable in 2008. - 8 - 10 MANAGEMENT'S ANALYSIS OF INTERIM FINANCIAL INFORMATION (continued) As disclosed in our Annual Report on Form 10-K for the year ended December 31, 1998, the Company initiated a program in 1996 to assess the risks of Year 2000 noncompliance, remediate all noncompliant systems and assess the readiness of key third parties. The risks identified by this program remain the same and the Company's assessment and remediation plans have not changed materially in terms of scope, timing or estimated costs to complete. The inventory and assessment phases are complete for critical internal information technology (IT) systems and the Company is approximately 80% complete with the remediation phase as of March 31, 1999. The inventory and assessment phase for non-IT systems is substantially complete and remediation is underway. Contingency plans (including the substitution of systems, use of manual methods and other means to prevent the failure of critical systems from having a material effect on the Company) are under development, particularly for high risk areas such as those involving supplier and product management. While some of the risks relating to third party readiness are outside of the Company's control, the Company has instituted programs, including internal records review and external questionnaires and supplier audits, to identify key third parties and assess their level of Year 2000 readiness. As of March 31, 1999, key third parties have been identified and the assessment of their readiness is underway. Third party-based contingency plans, including securing alternate suppliers and alternate lines of communication with customers and suppliers, as well as advance ordering and staging of materials, are being developed to address the risks of noncompliance. Additionally, the Company is assessing the need to maintain increased inventory levels to satisfy potential increased customer demand at year-end. All critical aspects of the Company's Year 2000 compliance program are expected to be completed by the end of the third quarter 1999. Total costs to resolve the Year 2000 issue are not expected to be material to the Company's financial position, results of operations or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires adoption by fiscal 2000. The Statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. The timing of adoption of the Statement and effect on the Company's financial position or results of operations have not yet been determined. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS This report and other written reports and oral statements made from time to time by the Company may contain so-called "forward-looking statements," all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as "expects," "plans," "will," "estimates," "forecasts," "projects" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company's growth strategy, financial results, product approvals and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company's forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company's filings with the Securities and Exchange Commission, especially on Forms 10-K, 10-Q and 8-K (if any). In Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, as filed on March 24, 1999, the Company discusses in more detail various important factors that could cause actual results to differ from expected or historic results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. - 9 - 11 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Number Description Method of Filing ------ ----------- ---------------- 3(a) Restated Certificate of Incorporation of Incorporated by reference to Form Merck & Co., Inc. (May 6, 1992) 10-K Annual Report for the fiscal year ended December 31, 1992 3(b) Certificate of Amendment to the Certificate of Incorporated by reference to Form Incorporation of Merck & Co., Inc. (as amended 10-K Annual Report for the fiscal January 14, 1999, effective February 16, 1999) year ended December 31, 1998 3(c) By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to Form effective February 25, 1997) 10-Q Quarterly Report for the period ended March 31, 1997 12 Computation of Ratios of Earnings to Filed with this document Fixed Charges 27 Financial Data Schedule Filed with this document
(b) Reports on Form 8-K During the three-month period ending March 31, 1999, no current reports on Form 8-K were filed. - 10 - 12 Signatures 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 thereunto duly authorized. MERCK & CO., INC. Date: May 12, 1999 /s/ Mary M. McDonald --------------------- MARY M. MCDONALD Senior Vice President and General Counsel Date: May 12, 1999 /s/ Richard C. Henriques ------------------------ RICHARD C. HENRIQUES Vice President, Controller - 11 - 13 EXHIBIT INDEX Exhibits --------
Number Description ------ ----------- 3(a) Restated Certificate of Incorporation of Merck & Co., Inc. (May 6, 1992) - Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1992 3(b) Certificate of Amendment to the Certificate of Incorporation of Merck & Co., Inc. (as amended January 14, 1999, effective February 16, 1999) - Incorporated by reference to Form 10-K Annual Report for the fiscal year ended December 31, 1998 3(c) By-Laws of Merck & Co., Inc. (as amended effective February 25, 1997) - Incorporated by reference to Form 10-Q Quarterly Report for the period ended March 31, 1997 12 Computation of Ratios of Earnings to Fixed Charges 27 Financial Data Schedule
EX-12 2 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 MERCK & CO., INC. AND SUBSIDIARIES Computation Of Ratios Of Earnings To Fixed Charges (In millions except ratio data)
Three Months Ended Years Ended December 31 March 31 ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- Income Before Taxes $1,842.8 $8,133.1 $6,462.3 $5,540.8 $4,797.2 $4,415.2 Add: One-third of rents 14.4 56.0 47.0 41.0 28.1 36.0 Interest expense, net 57.0 150.6 98.2 103.2 60.3 96.0 Preferred stock dividends 29.9 62.1 49.6 70.0 2.1 -- -------- -------- -------- -------- -------- -------- Earnings $1,944.1 $8,401.8 $6,657.1 $5,755.0 $4,887.7 $4,547.2 ======== ======== ======== ======== ======== ======== One-third of rents $ 14.4 $ 56.0 $ 47.0 $ 41.0 $ 28.1 $ 36.0 Interest expense 71.4 205.6 129.5 138.6 98.7 124.4 Preferred stock dividends 29.9 62.1 49.6 70.0 2.1 -- -------- -------- -------- -------- -------- -------- Fixed Charges $ 115.7 $ 323.7 $ 226.1 $ 249.6 $ 128.9 $ 160.4 ======== ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 17 26 29 23 38 28 ======== ======== ======== ======== ======== ========
For purposes of computing these ratios, "earnings" consist of income before taxes, one-third of rents (deemed by the Company to be representative of the interest factor inherent in rents), interest expense, net of amounts capitalized, and dividends on preferred stock of subsidiary companies. "Fixed charges" consist of one-third of rents, interest expense as reported in the Company's consolidated financial statements and dividends on preferred stock of subsidiary companies. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1999 MAR-31-1999 1,793 1,304 3,133 0 2,486 9,615 12,336 (4,215) 32,289 5,805 3,218 0 0 30 13,313 32,289 7,537 7,537 4,154 4,154 442 0 71 1,843 543 1,300 0 0 0 1,300 .55 .54 NOT MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
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