| þ | ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| o | TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Page | ||||||||
| 1 | ||||||||
Financial Statements: |
||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4-10 | ||||||||
Supplemental Schedule*: |
||||||||
| 11 | ||||||||
| 12 | ||||||||
| 13 | ||||||||
Exhibit 23 - Consent of Independent Registered Public Accounting Firm |
14 | |||||||
| EX-23 | ||||||||
| * | Other schedules required by Section 2520.103-10 of the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 are omitted because they are not applicable. |
-1-
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Assets |
||||||||
Investments, at fair value |
||||||||
Investment in the Master Trust |
$ | 2,813,232,649 | $ | 4,257,559,313 | ||||
Participant loans |
36,360,082 | 37,019,803 | ||||||
Total investments |
2,849,592,731 | 4,294,579,116 | ||||||
Receivables |
||||||||
Employer contribution |
89,523 | 123,820 | ||||||
Participant contribution |
201,089 | 288,778 | ||||||
Total receivables |
290,612 | 412,598 | ||||||
Net assets available for benefits |
$ | 2,849,883,343 | $ | 4,294,991,714 | ||||
-2-
| Year Ended | ||||
| December 31, | ||||
| 2008 | ||||
Additions to net assets attributed to |
||||
Investment income (loss) from the Master Trust |
||||
Net depreciation in fair value of investments |
$ | (1,594,603,562 | ) | |
Interest and dividends |
128,489,911 | |||
Net investment loss |
(1,466,113,651 | ) | ||
Contributions to the Plan |
||||
By participants |
246,025,734 | |||
By employer |
97,452,470 | |||
Total contributions |
343,478,204 | |||
Transfers in |
4,285,273 | |||
Total additions |
(1,118,350,174 | ) | ||
Deductions from net assets attributed to |
||||
Benefits paid to participants |
(301,245,494 | ) | ||
Transfers out |
(2,553,344 | ) | ||
Transfers out due to Danville Sale |
(22,959,359 | ) | ||
Total deductions |
(326,758,197 | ) | ||
Net decrease |
(1,445,108,371 | ) | ||
Net assets available for benefits |
||||
Beginning of year |
4,294,991,714 | |||
End of year |
$ | 2,849,883,343 | ||
-3-
| 1. | Description of Plan | |
| The following description of the Merck & Co., Inc. Employee Savings and Security Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions. | ||
| General | ||
| The Plan was designed to provide an easy, economical way for employees to become stockholders of Merck & Co., Inc. (the “Company” or “Merck”) as well as a systematic means of saving and investing for the future. Regular full-time, part-time, and temporary employees of the Company and of certain wholly-owned subsidiaries as defined by the Plan document who are not covered by a collective bargaining agreement are eligible to enroll in the Plan on or after the first day of the month following their date of hire. | ||
| Participants direct the investment of their contributions into any fund investment option available under the Plan, including Merck common stock. During 2008, the Plan offered 17 registered investment companies (mutual funds), a common/collective trust, and two separately managed accounts. | ||
| The Plan is administered by management committees appointed by the Company’s Chief Executive Officer or the Compensation and Benefits Committee of the Board of Directors of Merck. | ||
| The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”). | ||
| Master Trust | ||
| The assets of the Plan are maintained, for investment purposes only, on a commingled basis with the assets of the Merck & Co., Inc. Employee Stock Purchase & Savings Plan (the “Master Trust”). The Plans do not own specific Master Trust assets but rather maintain individual beneficial interests in such assets. The portion of fund assets allocable to each Plan is based upon the participants’ account balance within each Plan. Investment income for each fund is allocated to each Plan based on the relationship of each Plan’s beneficial interest in the fund to the total beneficial interest of all Plans in the fund. | ||
| Contributions | ||
| Participants may contribute from 2% up to 25% of their base pay. However, pre-tax contributions cannot exceed the statutory limit for pre-tax deferrals ($15,500 in 2008). In addition, the Company matches 75% of an employee’s contributions up to a maximum of 6% of such employee’s base pay per pay period. Company matching contributions are invested according to a participant’s elections. | ||
| Age 50 and above — In addition, the Plan permits unmatched pre-tax “catch-up contributions” of up to $5,000 for 2008 by participants who are at least age 50 by year-end. |
-4-
| Participant Accounts | ||
| Each participant’s account is credited with the participant’s contribution, the Company’s matching contribution and an allocation of Plan earnings. The allocation is based on participants’ account balances, as defined in the Plan document. | ||
| Vesting | ||
| Participants are immediately vested in their contributions, all Company matching contributions, plus actual earnings thereon. | ||
| Participant Loans | ||
| Participants may borrow from their account balances with interest charged at the prime rate plus 1%. Loan terms range from one to five years for a short term loan or up to thirty years for the purchase of a primary residence. The minimum loan is $500 and the maximum loan is the lesser of (i) $50,000 less the highest outstanding loan balance(s) during the one year period prior to the new loan application date, or (ii) 50% of the participant’s account balance less any current outstanding loan balance and defaulted loan amounts. Principal and interest is paid ratably through monthly payroll deductions. | ||
| Payment of Benefits | ||
| Salaried and hourly employees with status codes of terminated (which includes retired), long term disability or death, are eligible for a full distribution of their vested account balances. Employees or beneficiaries may elect to receive one lump sum payment or from one to ten annual installments. In-service distributions and hardship withdrawals are made throughout the year in accordance with applicable Plan provisions. | ||
| Other Matters | ||
| Transfers in and out during 2008 primarily relate to transfers between the Plan, and the Merck & Co., Inc. Employee Stock Purchase and Savings Plan and the Merck Puerto Rico Employee Savings and Security Plan for employees who changed their status during the year. | ||
| 2. | Summary of Accounting Policies | |
| Basis of Accounting | ||
| The accompanying financial statements are prepared on the accrual basis of accounting. Certain amounts in the prior year financial statements have been reclassified to conform to the current presentation. | ||
| Use of Estimates | ||
| The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and |
-5-
| disclosure of contingent assets and liabilities at the date of the financial statements. Management believes that these estimates are adequate. Actual results could differ from those estimates. | ||
| Investment Valuation and Income Recognition | ||
| Valuation of investments of the Plan represents the Plan’s allocable portion of the Master Trust. All investments are recorded at fair value in the accompanying financial statements. In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“FAS 157”). FAS 157 clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. The Plan’s adoption of FAS 157, which was effective on January 1, 2008, did not have a material impact on the Plan’s Statement of Net Assets Available for Benefits or Statement of Changes in Net Assets Available for Benefits. For information related to the Plan’s valuation methodologies under FAS 157, see Note 7 of the financial statements. | ||
| Purchases and sales of securities are recorded on a trade-date basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded as earned. | ||
| Contributions | ||
| Employee and Company matching contributions are recorded in the period in which the Company makes the payroll deductions from the participants’ earnings. | ||
| Payment of Benefits | ||
| Benefits are recorded when paid. | ||
| Expenses | ||
| The Plan’s administrative expenses are paid by the Company. | ||
| Risks and Uncertainties | ||
| The Plan provides for various investment options in investment securities. Investment securities, in general, are exposed to various risks and may decline in value for a number of reasons, including changes in prevailing interest rates and credit availability, increases in defaults, increases in voluntary prepayments for investments that are subject to prepayment risk under normal market conditions, widening of credit spreads and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statement of Net Assets Available for Benefits. | ||
| 3. | Related-Party Transactions | |
| Certain Plan investments are shares of registered investment companies (mutual funds) managed by Fidelity Management Trust Company (“Fidelity”). Fidelity is the trustee as defined by the |
-6-
| Plan and, therefore, these transactions qualify as party-in-interest transactions. The total market value of investments in the registered investment companies (mutual funds) managed by Fidelity was $784,536,240 and $988,973,088 at December 31, 2008, and December 31, 2007, respectively. |
| Merck also is a party-in-interest to the Plan under the definition provided in Section 3(14) of ERISA. Therefore, Plan transactions of Merck common stock qualify as party-in-interest transactions. The market value of investments in Merck common stock was $539,702,412 and $1,027,046,176 at December 31, 2008, and December 31, 2007, respectively. | ||
| 4. | Plan Termination | |
| Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. Upon termination of the Plan, each participant thereby affected would receive the entire value of his or her account as though he or she had retired as of the date of such termination. | ||
| 5. | Tax Status | |
| The Plan obtained a tax determination letter from the Internal Revenue Service dated August 20, 2003, indicating that it had been designed in accordance with applicable sections of the Internal Revenue Code (“IRC”). However, the Plan has been amended since the receipt of the determination letter. The Plan sponsor believes that the Plan is designed and currently operates in compliance with the IRC. Therefore, no provision for income taxes has been made. | ||
| 6. | Master Trust | |
| The Plan had an approximate 93% and 92% interest in the Master Trust at December 31, 2008, and December 31, 2007, respectively. The net assets of the Master Trust are as follows: |
| December 31, | ||||||||
| 2008 | 2007 | |||||||
Registered investment companies (mutual funds) |
$ | 1,945,878,114 | $ | 2,670,080,384 | ||||
Common/collective trusts |
357,859,860 | 582,215,491 | ||||||
Merck common stock |
612,223,047 | 1,174,224,522 | ||||||
Other common stocks |
103,802,463 | 182,175,014 | ||||||
Accrued interest and dividends |
7,768,831 | 7,725,092 | ||||||
| $ | 3,027,532,315 | $ | 4,616,420,503 | |||||
-7-
| Total investment loss of the Master Trust for the year ended December 31, 2008, is as follows: |
| Year Ended | ||||
| December 31, | ||||
| 2008 | ||||
Investment income, net |
||||
Interest and dividends |
$ | 139,125,576 | ||
Net depreciation in Registered investment companies (mutual funds) |
(880,547,348 | ) | ||
Net depreciation in Common/collective trusts |
(211,781,422 | ) | ||
Net depreciation in Merck common stock |
(562,366,744 | ) | ||
Net depreciation in Other common stocks |
(71,144,852 | ) | ||
Total investment loss |
$ | (1,586,714,790 | ) | |
| 7. | Fair Value Measurements | |
| On January 1, 2008, the Company adopted FAS 157. In October 2008, the FASB issued FSP 157-3, which clarifies the application of FAS 157 in a market that is not active. FAS 157 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FAS 157 describes three levels of inputs that may be used to measure fair value: |
| Level 1 – Quoted prices in active markets for identical assets or liabilities. The Plan’s Level 1 assets primarily include registered investment companies (mutual funds) and common stocks. | ||
| Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Plan’s Level 2 assets primarily include investments in common/collective trusts. | ||
| Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation. The Plan’s Level 3 assets include participant loans. |
| If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. |
| Within the Master Trust, investments are recorded at fair value, as follows: |
-8-
| Registered Investment Companies (Mutual Funds) | ||
| Registered investment companies (mutual funds) are valued at their respective net asset values. The net asset values are typically determined by the fund at the close of regular trading on the New York Stock Exchange. | ||
| Common/Collective Trusts | ||
| The common/collective trusts are valued at their respective net asset values. The fair value of investments in the common/collective trusts are determined by their trustee. |
| Common Stocks |
| Common stocks, for which market quotations are readily available, are generally valued at the last reported sale price on their principal exchange on valuation date, or official close price for certain markets. If no sales are reported for that day, investments are valued at the more recent of (i) the last published sale price or (ii) the mean between the last reported bid and asked prices for long positions, or at fair value as determined in good faith by the trustee and the Company. | ||
| Participant Loans | ||
| Participant loans are valued at amortized cost, which approximates fair value. | ||
| Investments Measured at Fair Value | ||
| Investments measured at fair value are summarized below: |
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2008 | 2007 | |||||||||||||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||||||||||||||
| In Active | Other | Significant | ||||||||||||||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||||||||||||||
| Carrying | Identical Assets | Inputs | Inputs | Carrying | Fair | |||||||||||||||||||||||
| Value | (Level 1) | (Level 2) | (Level 3) | Total | Value | Value | ||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||
Investments in the
Master Trust |
||||||||||||||||||||||||||||
Registered investment
companies
(mutual funds) |
$ | 1,945,878,114 | $ | 1,945,878,114 | $ | — | $ | — | $ | 1,945,878,114 | $ | 2,670,080,384 | $ | 2,670,080,384 | ||||||||||||||
Common/collective trusts |
357,859,860 | — | 357,859,860 | — | 357,859,860 | 582,215,491 | 582,215,491 | |||||||||||||||||||||
Merck common stock |
612,223,047 | 612,223,047 | — | — | 612,223,047 | 1,174,224,522 | 1,174,224,522 | |||||||||||||||||||||
Other common stocks |
103,802,463 | 103,802,463 | — | — | 103,802,463 | 182,175,014 | 182,175,014 | |||||||||||||||||||||
Total investments in
the Master Trust |
$ | 3,019,763,484 | $ | 2,661,903,624 | $ | 357,859,860 | $ | — | $ | 3,019,763,484 | $ | 4,608,695,411 | $ | 4,608,695,411 | ||||||||||||||
Participant loans |
$ | 36,360,082 | $ | — | $ | — | $ | 36,360,082 | $ | 36,360,082 | $ | 37,019,803 | $ | 37,019,803 | ||||||||||||||
| Level 3 Valuation Techniques: |
| Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial assets also include certain investment securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. The Plan’s Level 3 investment securities at |
-9-
| December 31, 2008 include participant loans. These securities were valued at amortized cost, which approximates fair value. |
| The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value using significant unobservable inputs (Level 3): |
| Year Ended December 31, 2008 | ||||||||||||||||
| Net | Loan withdrawals, | |||||||||||||||
| Beginning | Transfers | Principal repayments, | Ending | |||||||||||||
| Balance | In to (Out of) | Interest, | Balance | |||||||||||||
| January 1 | Level 3 (1) | Net | December 31 | |||||||||||||
Participant loans |
$ | 37,019,803 | $ | — | $ | (659,721 | ) | $ | 36,360,082 | |||||||
Total |
$ | 37,019,803 | $ | — | $ | (659,721 | ) | $ | 36,360,082 | |||||||
| (1) | Transfers in and out of Level 3 are deemed to occur at the beginning of the quarter in which the transaction takes place. |
| 8. | Danville Sale | |
| As a result of the sale of Merck’s Cherokee Plant located in Danville, Pennsylvania, the following transfer out of the Plan was completed. On March 14, 2008, the participants of the Merck & Co., Inc. Employee Savings and Security Plan and net assets in the amount of $22,959,359 (which includes loan balances of $213,171 and residual transfers) were transferred out of the Plan. The net assets transferred out of the Plan due to the sale are included in Deductions from net assets on the Statement of Changes in Net Assets Available for Benefits. |
-10-
| Merck & Co., Inc. | ||
| Employee Savings and Security Plan | ||
| Schedule H | ||
| Line 4i — Schedule of Assets (Held at End of Year) | EIN: 22-1109110 | |
| December 31, 2008 | Plan No.: 001 |
| (a) | (b) Identity of Issuer, Borrower, | (c) Description of Investment Including | (d) Cost | (e) Current | ||||||
| Lessor or Similar Party | Maturity date, Rate of Interest, Collateral, | Value | ||||||||
| Par or Maturity Value | ||||||||||
** |
Master Trust | Investment in Master Trust | — | $2,813,232,649 | ||||||
* |
Participant Loans | Interest rates ranging from 5% to 12.5% and with maturities through 2038 | — | 36,360,082 | ||||||
| Total | $2,849,592,731 | |||||||||
| * | Denotes a party-in-interest to the Plan. | |
| ** | There are certain investments within the Master Trust that are party-in-interest. |
-11-
| Merck & Co., Inc. Employee Savings and Security Plan |
||||
| By: | /s/Mark E. McDonough | |||
| Mark E. McDonough | ||||
| Vice President and Treasurer | ||||
-12-