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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950130-01-500307.txt : 20010326
<SEC-HEADER>0000950130-01-500307.hdr.sgml : 20010326
ACCESSION NUMBER: 0000950130-01-500307
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010323
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-K405
SEC ACT:
SEC FILE NUMBER: 001-03305
FILM NUMBER: 1577942
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d10k405.txt
<DESCRIPTION>FORM 10-K405
<TEXT>
<PAGE>
As filed with the Securities and Exchange Commission on March 23, 2001
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
____________
FORM 10-K
(MARK ONE)
/X/ Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000
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.
One Merck Drive
Whitehouse Station, N. J. 08889-0100
(908) 423-1000
Incorporated in New Jersey I.R.S. Employer
Identification No. 22-1109110
Securities Registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
Common Stock New York and Philadelphia Stock Exchanges
($0.01 par value)
Number of shares of Common Stock ($0.01 par value) outstanding as of
February 28, 2001: 2,303,501,723.
Aggregate market value of Common Stock ($0.01 par value) held by non-
affiliates on December 31, 2000 based on closing price on February 28, 2001:
$184,990,000,000.
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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Documents Incorporated by Reference:
Document Part of Form 10-K
-------- -----------------
Annual Report to stockholders for the fiscal year Parts I and II
ended December 31, 2000
Proxy Statement for the Annual Meeting of Part III
Stockholders to be held April 24, 2001
================================================================================
<PAGE>
PART I
Item 1. Business.
Merck & Co., Inc. (the "Company") is a global research-driven
pharmaceutical company that discovers, develops, manufactures and markets a
broad range of human and animal health products, directly and through its joint
ventures, and provides pharmaceutical benefit services through Merck-Medco
Managed Care, L.L.C. ("Merck-Medco"). The Company's operations are principally
managed on a products and services basis and are comprised of two reportable
segments: Merck Pharmaceutical, which includes products marketed either directly
or through joint ventures, 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.
The following table shows the sales of various categories of the
Company's products and services:
<TABLE>
<CAPTION>
($ in millions) 2000 1999 1998
--------------- ---- ---- ----
<S> <C> <C> <C>
Atherosclerosis.......................... $ 5,805.2 $ 5,093.2 $ 4,694.1
Hypertension/heart failure............... 4,629.1 4,563.8 4,213.5
Anti-inflammatory/analgesics............. 2,251.7 578.5 98.0
Osteoporosis............................. 1,275.3 1,043.1 775.2
Vaccines/biologicals..................... 952.0 860.0 846.7
Respiratory.............................. 862.2 501.8 194.0
Anti-ulcerants........................... 849.4 913.9 1,113.5
Antibiotics.............................. 783.3 772.3 743.3
Ophthalmologicals........................ 656.2 670.0 630.7
Human immunodeficiency virus ("HIV")..... 528.8 664.4 676.3
Other Merck products..................... 1,629.7 1,820.6 1,311.2
Merck-Medco.............................. 20,140.3 15,232.4 11,601.7
--------- --------- ---------
Total............................... $40,363.2 $32,714.0 $26,898.2
========= ========= =========
</TABLE>
Human health products include therapeutic agents within the Merck
Pharmaceutical segment, sold by prescription for the treatment of human
disorders, as well as preventive agents (vaccines/biologicals). Among these are
atherosclerosis products, which include Zocor (simvastatin) and Mevacor
(lovastatin); hypertension/heart failure products which include Vasotec
(enalapril maleate), Cozaar (losartan potassium), Hyzaar (losartan potassium and
hydrochlorothiazide), Prinivil (lisinopril) and Vaseretic (enalapril maleate and
hydrochlorothiazide); anti-inflammatory/analgesics, of which Vioxx (rofecoxib),
an agent that specifically inhibits COX-2, is the largest-selling; an
osteoporosis product, Fosamax (alendronate sodium), for treatment and prevention
of osteoporosis; vaccines/biologicals, of which M-M-R II (measles, mumps and
rubella virus vaccine live), Varivax (varicella virus vaccine live), a live
virus vaccine for the prevention of chickenpox, and Recombivax HB (hepatitis B
vaccine [recombinant]) are the largest-selling; a respiratory product, Singulair
(montelukast sodium), a leukotriene receptor antagonist; anti-ulcerants, of
which Pepcid (famotidine) is the largest-selling; antibiotics, of which Primaxin
(imipenem and cilastatin sodium) and Noroxin (norfloxacin) are the largest-
selling; ophthalmologicals, of which Timoptic (timolol maleate), Timoptic-XE
(timolol maleate ophthalmic gel forming solution), Trusopt (dorzolamide
hydrochloride ophthalmic solution) and Cosopt (dorzolamide hydrochloride and
timolol maleate ophthalmic solution) are the largest selling; and HIV products,
which include Crixivan (indinavir sulfate), a protease inhibitor for the
treatment of human immunodeficiency viral infection in adults.
Other Merck products include sales of Proscar (finasteride), which
provides long-term disease management of symptomatic benign prostate
enlargement, Maxalt (rizatriptan benzoate), an anti-migraine treatment, Propecia
(finasteride), which treats male pattern hair loss and Aggrastat (tirofiban
hydrochloride), a platelet blocker, for treatment of acute coronary syndrome and
other human pharmaceuticals within the Merck Pharmaceutical segment; continuing
sales to divested businesses; pharmaceutical and animal health supply sales to
the Company's joint ventures; and supply sales to AstraZeneca LP. Also included
in this category are rebates and discounts on the Company's pharmaceutical
products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products
and Merck-Medco pharmaceutical benefit services, principally sales of
prescription drugs through managed prescription drug programs as well as
services provided through programs to manage patient health and drug
utilization.
2
<PAGE>
In November 1999, the Company acquired SIBIA Neurosciences, Inc., a
publicly-held California based biotechnology firm, which engages in the
discovery and development of novel small molecule therapeutics for the treatment
of neurodegenerative, neuropsychiatric and neurological disorders.
In June 2000, Merck-Medco acquired ProVantage Health Services, Inc., a
publicly-held Wisconsin based health care benefits management and health
information company that provides pharmacy benefit services to approximately
five million people.
In June 2000, Merck-Medco commenced providing pharmaceutical benefit
management services for the UnitedHealth Group, one of the largest managed care
organizations in the United States.
In July 2000, the Company submitted a New Drug Application ("NDA") to
the U.S. Food and Drug Administration ("FDA") for Cancidas (caspofungin
acetate), the Company's investigational intravenous antifungal medicine. On
January 10, 2001, the Antiviral Advisory Committee of the FDA recommended that
the FDA clear Cancidas for marketing. On January 26, 2001, the FDA cleared
Cancidas for marketing in the United States for the treatment of invasive
aspergillosis in patients who do not respond to or are intolerant of other
antifungal therapies. In September 2000, the FDA approved Fosamax 10 mg once-
daily for marketing in the United States for treatment to increase bone mass in
men with osteoporosis. In October 2000, the FDA approved the use of a once-
weekly formulation of Fosamax for the prevention and treatment of postmenopausal
osteoporosis in women and in February 2001, the once-weekly formulation of
Fosamax was approved for treatment to increase bone mass in men with
osteoporosis. In March 2000, the FDA approved the use of Singulair 4 mg tablets
to help control asthma in children aged two to five.
In November 2000, Merck-Medco launched Generics First, an innovative
program providing physicians with additional tools and information to help
patients gain experience with generic medicines.
In November 2000, the Company formed a new subsidiary, Merck Capital
Ventures, LLC, to invest up to $100 million in capital in private Internet and
other emerging businesses which focus on areas related to the commercialization,
distribution and delivery of pharmaceuticals and related health care services.
Divestitures -- In July 1998, the Company sold its one-half interest in
The DuPont Merck Pharmaceutical Company, its joint venture with E.I. du Pont de
Nemours and Company ("DuPont"), to DuPont for $2.6 billion in cash.
In December 1999, the Company transferred all of its interest in Chugai
MSD Co., Ltd. to Chugai Pharmaceutical Co., Ltd.
These businesses were not significant to the Company's financial
position, liquidity or results of operations.
Joint Ventures -- In 1982, the Company entered into an agreement with
Astra AB ("Astra") to develop and market Astra products in the United States. In
1993, the Company's total sales of Astra products reached a level that triggered
the first step in the establishment of a joint venture business carried on by
Astra Merck Inc. ("AMI"), in which the Company and Astra each owned a 50% share.
The joint venture, formed in November 1994, developed and marketed most of
Astra's new prescription medicines in the United States. Joint venture sales
consisted primarily of Prilosec (omeprazole), the first of a class of
medications known as proton pump inhibitors which slows the production of acid
from the cells of the stomach lining. In December 1996, the FDA cleared Prilosec
for use as initial therapy in the treatment of heartburn and other symptoms
associated with gastroesophageal reflux disease.
On July 1, 1998, the Company and Astra completed the restructuring of
the ownership and operations of the joint venture whereby the Company acquired
Astra's interest in AMI, renamed KBI Inc. ("KBI"), for consideration totaling
$3.1 billion. KBI's operating assets, excluding certain product rights, were
then combined with the assets of Astra's wholly owned subsidiary, Astra USA,
Inc., to form a new U.S. limited partnership named Astra Pharmaceuticals, L.P.
("the Partnership") in which the Company maintains a limited partner interest.
For a franchise fee payment of $230.0 million, the Partnership became the
exclusive distributor of the products for which KBI retained rights. The Company
earns certain Partnership returns as well as ongoing revenue based on sales of
current and future KBI products. The Partnership returns reflect the Company's
share of the Partnership's earnings in conformity with accounting principles
generally accepted in the United States (GAAP earnings) and include a
preferential return, a priority return and certain variable returns which are
based, in part, upon sales of certain former
3
<PAGE>
Astra USA, Inc. products. The preferential return represents the Company's share
of the undistributed Partnership GAAP earnings. For a payment of $443.0 million,
Astra purchased an option to buy the Company's interest in the KBI products in
2008, 2012 or 2016, excluding the Company's interest in the gastrointestinal
medicines Prilosec and Nexium.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca
AB (AstraZeneca). As a result of the merger, Astra was required to make two one-
time payments to the Company totaling approximately $1.8 billion for the
relinquishment of certain rights, including rights to future Astra products with
no existing or pending U.S. patents at the time of the merger. This merger also
triggers a partial redemption of the Company's limited partner interest in 2008.
Furthermore, as a result of the merger, AstraZeneca's option to buy the
Company's interest in the KBI products is now exercisable only in 2010 and the
Company has obtained the right to require AstraZeneca to purchase such interest
in 2008.
In 1989, the Company formed a joint venture with Johnson & Johnson to
develop, market and manufacture consumer health care products in the United
States. In April 1995, the joint venture obtained FDA clearance in the United
States for marketing Pepcid AC (famotidine), an over-the-counter form of the
Company's ulcer medication Pepcid. This 50% owned joint venture was expanded
into Europe in 1993, and Canada in 1996. The European extension currently
markets and sells over-the-counter pharmaceutical products in France, Germany,
Italy, Spain and the United Kingdom.
In 1991, the Company and DuPont entered into a joint venture to form a
worldwide pharmaceutical company for the research, marketing, manufacturing and
sale of pharmaceutical and imaging agent products. In January 1995, the joint
venture began co-promotion of the Company's prescription medicines, Prinivil and
Prinzide (lisinopril and hydrochlorothiazide), in the United States. As
discussed above under "Divestitures," in July 1998, the Company sold its
one-half interest in the joint venture to DuPont for $2.6 billion in cash.
Effective April 1992, the Company, through the Merck Vaccine Division,
and Connaught Laboratories, Inc. (now Aventis Pasteur), an affiliate of Aventis
A.G., agreed to collaborate on the development and marketing of combination
pediatric vaccines and to promote selected vaccines in the United States. The
research and marketing collaboration enables the companies to pool their
resources to expedite the development of vaccines combining several different
antigens to protect children against a variety of diseases, including
Haemophilus influenzae type b, hepatitis B, diphtheria, tetanus, pertussis and
- ----------- ----------
poliomyelitis.
In 1994, the Company, through the Merck Vaccine Division, and Pasteur
Merieux Connaught (now Aventis Pasteur) formed a joint venture to market human
vaccines in Europe and to collaborate in the development of combination vaccines
for distribution in the European Union ("EU") and the European Free Trade
Association. The Company and Aventis Pasteur contributed, among other things,
their European vaccine businesses for equal shares in the joint venture, known
as Pasteur Merieux MSD, S.N.C. (now Aventis Pasteur MSD, S.N.C.). The joint
venture is subject to monitoring by the EU, to which the partners made certain
undertakings in return for an exemption from European Competition Law, effective
until December 2006. The joint venture is active through affiliates in Belgium,
Denmark, Italy, Germany, Spain and the United Kingdom, and through distributors
throughout the rest of Europe.
In August 1997, the Company and Rhone-Poulenc S.A. combined their
respective animal health and poultry genetics businesses to form Merial, a
fully-integrated, stand-alone joint venture, equally owned by the Company and
Rhone-Poulenc S.A. Merial is the world's largest company dedicated to the
discovery, manufacture and marketing of veterinary pharmaceuticals and vaccines.
The Company contributed developmental research personnel, sales and marketing
activities, and animal health products, as well as its poultry genetics
business. Rhone-Poulenc S.A. contributed research and development,
manufacturing, sales and marketing activities, and animal health products, as
well as its poultry genetics business. In December 1999, Rhone-Poulenc S.A.'s
interest in Merial was acquired by Aventis S.A., a corporation formed by the
merger of Rhone-Poulenc S.A. and Hoechst A.G.
In October 1999, Merck-Medco formed a long-term strategic alliance with
CVS Corporation to collaborate on enhanced Internet, retail and specialty
pharmacy services for Merck-Medco's health plan members.
In April 2000, Merck-Medco partnered with Reader's Digest to introduce a
new service, YOUR\\x\\PLAN, an easy-to-use prescription savings plan for people
who do not currently have prescription drug coverage.
4
<PAGE>
In May 2000, the Company and Schering-Plough Corporation ("Schering-
Plough") entered into agreements to create separate partnerships to develop and
market in the United States new prescription medicines in the cholesterol-
management and respiratory therapeutic areas. These partnerships will pursue the
development and marketing of Zocor as a once-daily fixed-combination tablet with
ezetimibe, Schering-Plough's investigational cholesterol absorption inhibitor;
ezetimibe as a once-daily monotherapy and in co-administration with statins; and
a once-daily fixed-combination tablet of Singulair and Claritin, Schering-
Plough's nonsedating antihistamine, for the treatment of allergic rhinitis and
asthma.
In February 2001, Merck-Medco, Advance PCS and Express Scripts, Inc.
announced the signing of an agreement to form a new venture that will develop an
electronic exchange enabling physicians to link with participating pharmacies,
prescription benefit managers and health plans.
Competition -- The markets in which the Company's pharmaceutical
business is conducted are highly competitive and, in many cases, highly
regulated. Such competition involves an intensive search for technological
innovations and the ability to market these innovations effectively. With its
long-standing emphasis on research and development, the Company is well prepared
to compete in the search for technological innovations. Additional resources to
meet competition include quality control, flexibility to meet exact customer
specifications, an efficient distribution system and a strong technical
information service. The Company is active in acquiring and marketing products
through joint ventures and licenses and has been expanding its sales and
marketing efforts to further address changing industry conditions. However, the
introduction of new products and processes by competitors may result in price
reductions and product replacements, even for products protected by patents. For
example, the number of compounds available to treat diseases typically increases
over time and has resulted in slowing the growth in sales of certain of the
Company's products.
In addition, particularly in the area of human pharmaceutical products,
legislation enacted in all states allows, encourages or, in a few instances, in
the absence of specific instructions from the prescribing physician, mandates
the use of "generic" products (those containing the same active chemical as an
innovator's product) rather than "brand-name" products. Governmental and other
pressures toward the dispensing of generic products have significantly reduced
the sales of certain of the Company's products no longer protected by patents,
such as Moduretic (amiloride HCl and hydrochlorothiazide), Clinoril (sulindac)
and Aldomet (methyldopa), and slowed the growth of certain other products.
Merck-Medco's pharmacy benefit management business is highly
competitive. Merck-Medco competes with other pharmacy benefit managers,
insurance companies and other providers of health care and/or administrators of
health care programs. Merck-Medco competes primarily on the basis of its ability
to design and administer innovative programs that help plan sponsors provide
high-quality, affordable prescription drug care and health management services
to health plan members. Merck-Medco dispenses prescription drugs from its
national network of mail service pharmacies, manages prescriptions dispensed
through a national network of participating retail pharmacies and implements
health management programs to help its clients provide better care for patients
with high-cost, high-risk conditions.
Distribution -- The Company sells its human health products primarily to
drug wholesalers and retailers, hospitals, clinics, government agencies and
managed health care providers such as health maintenance organizations and other
institutions. The Company's professional representatives communicate the
effectiveness, safety and value of the Company's products to health care
professionals in private practice, group practices and managed care
organizations. Merck-Medco sells its pharmaceutical benefit management services
to corporations, labor unions, insurance companies, Blue Cross/Blue Shield
organizations, government agencies, federal and state employee plans, health
maintenance and other similar organizations.
Raw Materials -- Raw materials and supplies are normally available in
quantities adequate to meet the needs of the Company's business.
Government Regulation and Investigation -- The pharmaceutical industry
is subject to global regulation by regional, country, state and local agencies.
Of particular importance is the FDA in the United States, which administers
requirements covering the testing, approval, safety, effectiveness,
manufacturing, labeling and marketing of prescription pharmaceuticals. In many
cases, the FDA requirements have increased the amount of time and money
necessary to develop new products and bring them to market in the United States.
In 1997, the Food and
5
<PAGE>
Drug Administration Modernization Act was passed and was the culmination of a
comprehensive legislative reform effort designed to streamline regulatory
procedures within the FDA and to improve the regulation of drugs, medical
devices and food. The legislation was principally designed to ensure the timely
availability of safe and effective drugs and biologics by expediting the
premarket review process for new products. A key provision of the legislation is
the re-authorization of the Prescription Drug User Fee Act of 1992, which
permits the continued collection of user fees from prescription drug
manufacturers to augment FDA resources earmarked for the review of human drug
applications. This helps provide the resources necessary to ensure the prompt
approval of safe and effective new drugs.
In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that would
effect major changes in the health care system, either nationally or at the
state level. Such legislative initiatives include prescription drug benefit
proposals for Medicare beneficiaries introduced in Congress. Although a reform
bill has not been enacted at the federal level, some states have passed reform
legislation and further federal and state developments are expected. Although
the Company is well positioned to respond to evolving market forces, it cannot
predict the outcome or effect of legislation resulting from these reform
efforts.
For many years, the pharmaceutical industry and the pharmacy benefits
management business have been under federal and state oversight with the new
drug approval system, drug safety, advertising and promotion, drug purchasing
and reimbursement programs and formularies variously under review. The Company
believes that it will continue to be able to conduct its operations, including
the introduction of new drugs to the market, in this regulatory environment. One
type of federal initiative to contain federal health care spending is the
prospective or "capitated" payment system, first implemented to reduce the rate
of growth in Medicare reimbursement to hospitals. Such a system establishes in
advance a flat rate for reimbursement for health care for those patients for
whom the payer is fiscally responsible. This type of payment system and other
cost containment systems are now widely used by public and private payers and
have caused hospitals, health maintenance organizations and other customers of
the Company to be more cost-conscious in their treatment decisions, including
decisions regarding the medicines to be made available to their patients. The
Company continues to work with private and federal employers to slow increases
in health care costs. Further, the Company's efforts to demonstrate that its
medicines can help save costs in other areas, and pricing flexibility across its
product portfolio, have encouraged the use of the Company's medicines and have
helped offset the effects of increasing cost pressures.
Also, federal and state governments have pursued methods to directly
reduce the cost of drugs for which they pay. For example, federal legislation
enacted in 1990 requires the Company to pay a specified rebate for medicines
reimbursed by Medicaid. Federal legislation enacted in 1992 mandates the payment
of rebates similar to the Medicaid rebate for outpatient medicines purchased by
certain Public Health Service entities and "disproportionate share" hospitals
(hospitals meeting certain criteria). That same law mandates minimum discounts
of 24% off of a defined "non-federal average manufacturer price" for the
Veterans' Administration, Federal Supply Schedule and certain other federal
sector purchasers of medicines.
The Omnibus Budget Reconciliation Act of 1993 established a new Federal
Vaccines for Children entitlement program, under which the U.S. Centers for
Disease Control and Prevention ("CDC") funds and purchases recommended pediatric
vaccines at a public sector price for the immunization of Medicaid-eligible,
uninsured, native American and certain underinsured children. The Company was
awarded CDC contracts in 2000 for the supply of six pediatric vaccines for this
program.
The Company encounters similar regulatory and legislative issues in most
of the foreign countries where it does business. There, too, the primary thrust
of governmental inquiry and action is toward determining drug safety and
effectiveness, often with mechanisms for controlling the prices of prescription
drugs and the profits of prescription drug companies. The EU has adopted
directives concerning the classification, labeling, advertising, wholesale
distribution and approval for marketing of medicinal products for human use. The
Company's policies and procedures are already consistent with the substance of
these directives; consequently, it is believed that they will not have any
material effect on the Company's business.
In addition, countries within the EU, recognizing the economic
importance of the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry and the European
Commission on proposals for market deregulation.
6
<PAGE>
The Company is subject to the jurisdiction of various regulatory
agencies and is, therefore, subject to potential administrative actions. Such
actions may include seizures of products and other civil and criminal sanctions.
Under certain circumstances, the Company on its own may deem it advisable to
initiate product recalls. Although it is difficult to predict the ultimate
effect of these activities and legislative, administrative and regulatory
requirements and proposals, the Company believes that its development of new and
improved products should enable it to compete effectively within this
environment.
There are extensive federal and state regulations applicable to the
practice of pharmacy and the administration of managed health care programs.
Each state in which Merck-Medco operates a pharmacy has laws and regulations
governing its operation and the licensing of and standards of professional
practice by its pharmacists. These regulations are issued by an administrative
body in each state (typically, a pharmacy board), which is empowered to impose
sanctions for noncompliance. The policies and procedures of the Company comply
with these regulations.
Patents, Trademarks and Licenses -- Patent protection is considered, in
the aggregate, to be of material importance in the Company's marketing of human
health products in the United States and in most major foreign markets. Patents
may cover products per se, pharmaceutical formulations, processes for or
intermediates useful in the manufacture of products or the uses of products.
Protection for individual products extends for varying periods in accordance
with the date of grant and the legal life of patents in the various countries.
The protection afforded, which may also vary from country to country, depends
upon the type of patent and its scope of coverage.
Patent portfolios developed for products introduced by the Company
normally provide market exclusivity. Patents are in effect for the following
major products in the United States: Aggrastat, Cosopt, Chibroxin (norfloxacin),
Cozaar, Crixivan, Fosamax, Hyzaar, Maxalt, Mevacor, PedvaxHIB (Haemophilus b
-----------
conjugate vaccine), Primaxin, Prinivil, Prinzide, Propecia, Proscar, Recombivax
HB, Sinemet CR (carbidopa and levodopa), Singulair, Timoptic-XE, Trusopt,
Vaseretic, Vioxx, Zocor and Prilosec (which was developed jointly by the Company
and Astra and is supplied exclusively to AstraZeneca LP). The lisinopril
products (which include Prinivil/Prinzide) and Sinemet CR are subject to
agreements with third parties and are not marketed exclusively by the Company.
Several products face expiration of product patents in the United States
and other countries in the near term, including Mevacor (U.S. - 2001),
Prinivil/Prinzide (U.S. - 2001) and Vaseretic (U.S. - 2001). In addition,
Prilosec will face expiration of a product patent in 2001. U.S. product patents
expired in 2000 for Vasotec and Pepcid. In the aggregate, domestic sales of
these products represent 19% of the Company's aggregate human health sales for
2000. The Company expects a significant decline in the sales of these products
in the years 2001 and 2002 upon the loss of market exclusivity. With the
exception of Prilosec, for which the Company has U.S. rights only, a decline is
also expected in the Company's European sales for these products in the years
2001 through 2005 upon the loss of market exclusivity in European countries
throughout this period. European sales of these products represent 3% of the
Company's human health sales for 2000.
In August 2000, the Company filed a supplemental new drug application
with the FDA for Pepcid, in accordance with the provisions of the FDA
Modernization Act of 1997 (the "Modernization Act") (See also page 8). Pursuant
to the Modernization Act, the FDA granted an additional six months of market
exclusivity, commencing October 2000, in the United States to Pepcid for all its
uses, based upon pediatric studies performed by the Company. The market
exclusivity in the United States for Vasotec, which was granted in February
2000, pursuant to the Modernization Act, expired in August 2000.
In the period 1995 through 2000, product patent protection in the United
States expired for the following human and animal pharmaceutical products:
Ivomec (ivermectin), certain ivermectin-containing animal health products,
Mefoxin (cefoxitin sodium), Pepcid, Timoptic, Timolide (timolol maleate and
hydrochlorothiazide) and Vasotec.
While the expiration of a product patent normally results in a loss of
market exclusivity for the covered product, commercial benefits may continue to
be derived from: (i) later-granted patents on processes and intermediates
related to the most economical method of manufacture of the active ingredient of
such product; (ii) patents relating to the use of such product; (iii) patents
relating to novel compositions and formulations; and (iv) in the United States,
market exclusivity that may be available under federal law. The effect of
product patent expiration
7
<PAGE>
also depends upon many other factors such as the nature of the market and the
position of the product in it, the growth of the market, the complexities and
economics of the process for manufacture of the active ingredient of the product
and the requirements of new drug provisions of the Federal Food, Drug and
Cosmetic Act or similar laws and regulations in other countries.
The Modernization Act, which was passed in 1997, includes a Pediatric
Exclusivity Provision that may provide an additional six months of market
exclusivity in the United States for indications of new or currently marketed
drugs, if certain agreed upon pediatric studies are completed by the applicant.
The Company is considering seeking exclusivity based on pediatric studies for
certain of the Company's products.
Additions to market exclusivity are sought in the United States and
other countries through all relevant laws, including laws increasing patent
life. Some of the benefits of increases in patent life have been partially
offset by a general increase in the number of, incentives for and use of generic
products. Additionally, improvements in intellectual property laws are sought in
the United States and other countries through reform of patent and other
relevant laws and implementation of international treaties.
Worldwide, all of the Company's important products are sold under
trademarks that are considered in the aggregate to be of material importance.
Trademark protection continues in some countries as long as used; in other
countries, as long as registered. Registration is for fixed terms and can be
renewed indefinitely.
Royalties received during 2000 on patent and know-how licenses and other
rights amounted to $152.8 million. The Company also paid royalties amounting to
$360.9 million in 2000 under patent and know-how licenses it holds.
Research and Development
The Company's business is characterized by the introduction of new
products or new uses for existing products through a strong research and
development program. Approximately 10,400 people are employed in the Company's
research activities. Expenditures for the Company's research and development
programs were $2.3 billion in 2000, $2.1 billion in 1999 and $1.8 billion in
1998 and will be approximately $2.8 billion in 2001. The Company maintains its
ongoing commitment to research over a broad range of therapeutic areas and
clinical development in support of new products. Total expenditures for the
period 1991 through 2000 exceeded $15.0 billion with a compound annual growth
rate of 11%.
The Company maintains a number of long-term exploratory and fundamental
research programs in biology and chemistry as well as research programs directed
toward product development. Projects related to human and animal health are
being carried on in various fields such as bacterial and viral infections,
cardiovascular functions, cancer, diabetes, pain and inflammation, ulcer
therapy, kidney function, obesity, mental health, the nervous system, ophthalmic
research, prostate therapy, the respiratory system, fungal diseases, bone
diseases, endoparasitic and ectoparasitic diseases, companion animal diseases
and production improvement.
In the development of human and animal health products, industry
practice and government regulations in the United States and most foreign
countries provide for the determination of effectiveness and safety of new
chemical compounds through preclinical tests and controlled clinical evaluation.
Before a new drug may be marketed in the United States, recorded data on
preclinical and clinical experience are included in the New Drug Application,
New Animal Drug Application or the biological Product License Application to the
FDA for the required approval. The development of certain other products is also
subject to government regulations covering safety and efficacy in the United
States and many foreign countries. There can be no assurance that a compound
that is the result of any particular program will obtain the regulatory
approvals necessary for it to be marketed.
New product candidates resulting from this research and development
program include an injectable antibiotic; an oral compound potentially useful
for treatment of chemotherapy-induced emesis; an oral compound potentially
useful for the treatment of depression and other neuropsychiatric diseases; a
second COX-2 specific inhibitor potentially useful for the treatment of
osteoarthritis, rheumatoid arthritis and pain; and certain new vaccines.
All product or service marks appearing in type form different from that
of the surrounding text are trademarks or service marks owned by or licensed to
Merck & Co., Inc., its subsidiaries or affiliates. Cozaar and Hyzaar are
registered trademarks of E.I. du Pont de Nemours and Company, Wilmington, DE.
8
<PAGE>
Employees
At the end of 2000, the Company had 69,300 employees worldwide, with
42,000 employed in the United States, including Puerto Rico. Approximately 30%
of worldwide employees of the Merck Pharmaceutical and Merck-Medco segments are
represented by various collective bargaining groups.
Environmental Matters
The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations. In 2000, the Company
incurred capital expenditures of approximately $162.5 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $670.0 million for the years 2001 through 2005. In addition, the
Company's operating and maintenance expenditures for environmental protection
facilities were approximately $81.7 million in 2000. Expenditures for this
purpose for the years 2001 through 2005 are forecasted to exceed $490.0 million.
The Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites. Expenditures for remediation and
environmental liabilities were $30.7 million in 2000, and are estimated at
$153.0 million for the years 2001 through 2005. These amounts do not consider
potential recoveries from insurers or other parties. The Company has taken an
active role in identifying and providing for these costs, and in management's
opinion, the liabilities for all environmental matters which are probable and
reasonably estimable have been accrued. Although it is not possible to predict
with certainty the outcome of these environmental matters, or the ultimate costs
of remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of those provided should result in a
materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources.
Cautionary Factors that May Affect Future Results
(Cautionary Statements Under the Private Securities Litigation Reform Act of
1995)
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. Although it is not possible to predict or identify all such
factors, they may include the following:
. Generic competition as several products face expiration of product patents
in the United States and other countries in the near term, including
Mevacor (U.S. - 2001), Prinivil/Prinzide (U.S. - 2001) and Vaseretic (U.S.-
2001). In addition, Prilosec, which is supplied exclusively to AstraZeneca
LP, will face expiration of a product patent in 2001. U.S. product patents
expired in 2000 for Vasotec and Pepcid.
. Increased "brand" competition in therapeutic areas important to the
Company's long-term business performance.
. The difficulties and uncertainties inherent in new product development. The
outcome of the lengthy and complex process of new product development is
inherently uncertain. A candidate can fail at any stage of the process and
one or more late-stage product candidates could fail to receive regulatory
approval. New product candidates may appear promising in development but
fail to reach the market because of efficacy or safety concerns, the
inability to obtain necessary regulatory approvals, the difficulty or
excessive cost to manufacture and/or the infringement of patents or
intellectual property rights of others. Furthermore, the sales of new
products may prove to be disappointing and fail to reach anticipated
levels.
. Pricing pressures, both in the United States and abroad, including rules
and practices of managed care groups, judicial decisions and governmental
laws and regulations related to Medicare, Medicaid and health care reform,
pharmaceutical reimbursement and pricing in general.
9
<PAGE>
. Changes in government laws and regulations and the enforcement thereof
affecting the Company's pharmaceutical, vaccine and/or pharmaceutical
benefits management businesses.
. Efficacy or safety concerns with respect to marketed products, whether or
not scientifically justified, leading to product recalls, withdrawals or
declining sales.
. Legal factors, including product liability claims, antitrust litigation and
governmental investigations, environmental concerns and patent disputes
with competitors, any of which could preclude commercialization of products
or negatively affect the profitability of existing products.
. Lost market opportunity resulting from delays and uncertainties in the
approval process of the FDA and foreign regulatory authorities.
. Increased focus on privacy issues in countries around the world, including
the United States and the EU. In the United States, federal and state
governments have pursued legislative and regulatory initiatives regarding
patient privacy, including recently issued federal privacy regulations
concerning health information, which could affect the Company's operations,
particularly at Merck-Medco.
. Changes in tax laws including changes related to the taxation of foreign
earnings, as well as the impact of legislation capping and ultimately
repealing Section 936 of the Internal Revenue Code (relating to earnings
from the Company's Puerto Rican operations).
. Changes in accounting standards promulgated by the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board or
the Securities and Exchange Commission that are adverse to the Company.
. Economic factors over which the Company has no control, including changes
in inflation, interest rates and foreign currency exchange rates.
This list should not be considered an exhaustive statement of all
potential risks and uncertainties.
Geographic Area and Segment Information
The Company's operations outside the United States are conducted
primarily through subsidiaries. Sales of the Company's human health products by
subsidiaries outside the United States were 36% of the Company's human health
sales in 2000, and 40% and 43% in 1999 and 1998, respectively.
The Company's worldwide business is subject to risks of currency
fluctuations, governmental actions and other governmental proceedings abroad.
The Company does not regard these risks as a deterrent to further expansion of
its operations abroad. However, the Company closely reviews its methods of
operations and adopts strategies responsive to changing economic and political
conditions.
In recent years, the Company has been expanding its operations in
countries located in Latin America, the Middle East, Africa, Eastern Europe and
Asia Pacific where changes in government policies and economic conditions are
making it possible for the Company to earn fair returns. Business in these
developing areas, while sometimes less stable, offers important opportunities
for growth over time.
Financial information about geographic areas and operating segments of
the Company's business is incorporated by reference to page 45 of the Company's
2000 Annual Report to stockholders.
Item 2. Properties.
The Company's corporate headquarters is located in Whitehouse Station,
New Jersey. The Company's pharmaceutical business is conducted through
divisional headquarters located in Rahway, New Jersey and West Point,
Pennsylvania. Principal research facilities for human and animal health products
are located in Rahway and West Point. The Company also has production facilities
for human and animal health products at nine locations in the United States and
Puerto Rico. Branch warehouses provide services throughout the country. Outside
the United States, through subsidiaries, the Company owns or has an interest in
manufacturing plants or other properties in Australia, Canada, countries in
Western Europe, Central and South America, Africa and Asia. Merck-Medco
10
<PAGE>
operates its primary businesses through its headquarters located in Franklin
Lakes, New Jersey, and through owned or leased facilities in various locations
throughout the United States.
Capital expenditures for 2000 were $2,727.8 million compared with
$2,560.5 million for 1999. In the United States, these amounted to $2,139.6
million for 2000 and $1,954.7 million for 1999. Abroad, such expenditures
amounted to $588.2 million for 2000 and $605.8 million for 1999.
The Company and its subsidiaries own their principal facilities and
manufacturing plants under titles which they consider to be satisfactory. The
Company considers that its properties are in good operating condition and that
its machinery and equipment have been well maintained. Plants for the
manufacture of products are suitable for their intended purposes and have
capacities and projected capacities adequate for current and projected needs for
existing Company products. Some capacity of the plants is being converted, with
any needed modification, to the requirements of newly introduced and future
products.
Item 3. Legal Proceedings.
The Company, including Merck-Medco, is party to a number of antitrust
suits, certain of which have been certified as class actions, instituted by most
of the nation's retail pharmacies and consumers in several states, alleging
conspiracies in restraint of trade and challenging the pricing and/or purchasing
practices of the Company and Merck-Medco, respectively. A significant number of
other pharmaceutical companies and wholesalers have also been sued in the same
or similar litigation. These actions, except for several actions pending in
state courts, have been consolidated for pre-trial purposes in the United States
District Court for the Northern District of Illinois. 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. 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 the final outcome of these proceedings, in the
opinion of the Company, such proceedings should not ultimately result in any
liability which would have a materially adverse effect on the financial
position, liquidity or results of operations of the Company.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund. These proceedings seek to require the operators of hazardous
waste disposal facilities, transporters of waste to the sites and generators of
hazardous waste disposed of at the sites to clean up the sites or to reimburse
the government for cleanup costs. The Company has been made a party to these
proceedings as an alleged generator of waste disposed of at the sites. In each
case, the government alleges that the defendants are jointly and severally
liable for the cleanup costs. Although joint and several liability is alleged,
these proceedings are frequently resolved so that the allocation of cleanup
costs among the parties more nearly reflects the relative contributions of the
parties to the site situation. The Company's potential liability varies greatly
from site to site. For some sites the potential liability is de minimis and for
others the costs of cleanup have not yet been determined. While it is not
feasible to predict the outcome of many of these proceedings brought by federal
or state agencies or private litigants, in the opinion of the Company, such
proceedings should not ultimately result in any liability which would have a
materially adverse effect on the financial position, results of operations,
liquidity or capital resources of the Company. The Company has taken an active
role in identifying and providing for these costs and such amounts do not
include any reduction for anticipated recoveries of cleanup costs from insurers,
former site owners or operators or other recalcitrant potentially responsible
parties.
In March 1996, the Company, along with other pharmaceutical
manufacturers, received a notice from the Federal Trade Commission ("FTC") that
the FTC was conducting an investigation into pricing practices. The Company has
cooperated fully with the FTC in this investigation, and believes that it is
currently operating in all material respects in accordance with applicable
standards. Accordingly, although the Company cannot predict the outcome of this
investigation, it does not believe it will have a materially adverse effect on
the financial position, liquidity or results of operations of the Company.
There are various other legal proceedings, principally product liability
and intellectual property suits involving the Company, which are pending. While
it is not feasible to predict the outcome of these proceedings, in the opinion
of the Company, all such proceedings are either adequately covered by insurance
or, if not so covered,
11
<PAGE>
should not ultimately result in any liability which would have a materially
adverse effect on the financial position, liquidity or results of operations of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
_________________
12
<PAGE>
Executive Officers of the Registrant (as of March 15, 2001)
RAYMOND V. GILMARTIN -- Age 60
June, 1994 -- Chairman of the Board (since November, 1994), President and
Chief Executive Officer
DAVID W. ANSTICE -- Age 52
March, 2001 -- President, The Americas and U.S. Human Health -- responsible
for one of the two prescription drug divisions comprising U.S. Human
Health, as well as the Company's prescription drug business in Canada and
Latin America, and the Company's joint venture relationship with Schering-
Plough
January, 1997 -- President, Human Health-The Americas -- responsible for
the Company's human health business in the United States, Canada and
Latin America
September, 1994 -- President, Human Health-U.S./Canada -- responsible for
the Company's prescription drug business in the United States and Canada,
and worldwide human health marketing
PAUL R. BELL -- Age 55
April, 1997 -- President, Human Health-Asia Pacific -- responsible for the
Company's prescription drug business in the Far East, Australia, New
Zealand and Japan
March, 1994 -- Vice President, Merck Sharp & Dohme Australia and New
Zealand
RICHARD T. CLARK -- Age 55
January, 2000 -- President, Merck-Medco Managed Care, L.L.C. (Merck-Medco),
a wholly-owned subsidiary of the Company
June, 1997 -- Executive Vice President/Chief Operating Officer, Merck-Medco
April, 1997 -- Senior Vice President, Quality Commercial Affairs, Merck
Manufacturing Division (MMD)
May, 1996 -- Senior Vice President, North American Operations, MMD
October, 1994 -- Vice President, North American Operations, MMD
CELIA A. COLBERT -- Age 44
January, 1997 -- Vice President, Secretary and Assistant General Counsel
November, 1993 -- Secretary (since September, 1993) and Assistant General
Counsel
CAROLINE DORSA -- Age 41
September, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions and for providing financial support
for the Asia Pacific Division
February, 1999 -- Vice President and Treasurer -- responsible for the
Company's treasury and tax functions
January, 1997 -- Vice President and Treasurer
January, 1994 -- Treasurer
13
<PAGE>
KENNETH C. FRAZIER -- Age 46
December, 1999 -- Senior Vice President and General Counsel -- responsible
for legal and public affairs functions and The Merck Company Foundation (a
not-for-profit charitable organization affiliated with the Company)
January, 1999 -- Vice President and Deputy General Counsel
January, 1997 -- Vice President, Public Affairs and Assistant General
Counsel -- responsible for public affairs, corporate legal activities and
The Merck Company Foundation
April, 1994 -- Vice President, Public Affairs
DOUGLAS A. GREENE -- Age 56
May, 2000 -- Executive Vice President, Clinical Sciences and Product
Development, Merck Research Laboratories
Prior to May, 2000, Dr. Greene served as Chief, Division of Endocrinology &
Metabolism at the University of Michigan School of Medicine since 1991 and
as Director, Center for Clinical Investigation and Therapeutics since 1998
RICHARD C. HENRIQUES JR. -- Age 45
November, 2000 -- Vice President, Controller -- responsible for the
Corporate Controller's Group and providing financial support for U.S.
Human Health, Canada and Latin America (The Americas) and the Merck
Vaccine Division
February, 1999 -- Vice President, Controller -- responsible for the
Corporate Controller's Group and providing financial support for The
Americas
January, 1998 -- Vice President & Controller, The Americas
January, 1997 -- Controller, The Americas
January, 1994 -- Controller, North America Pharmaceutical Care
BERNARD J. KELLEY -- Age 59
December, 1993 -- President, Merck Manufacturing Division
PETER S. KIM -- Age 42
February, 2001 -- Executive Vice President, Research & Development, Merck
Research Laboratories
Prior to February, 2001, Dr. Kim served as Member of the Whitehead
Institute (1985 - 2001), Professor of Biology at the Massachusetts
Institute of Technology (1988 - 2001), and Investigator of the Howard
Hughes Medical Institute (1990 - 2001)
14
<PAGE>
JUDY C. LEWENT -- Age 52
February, 2001 -- Executive Vice President and Chief Financial Officer --
responsible for financial and corporate development functions, internal
auditing, corporate licensing, the Company's joint venture relationships,
and Merck Capital Ventures, LLC, a wholly-owned subsidiary of the Company
November, 2000 -- Senior Vice President and Chief Financial Officer --
responsible for financial and corporate development functions, internal
auditing, corporate licensing, the Company's joint venture relationships,
and Merck Capital Ventures, LLC
January, 1997 -- Senior Vice President and Chief Financial Officer --
responsible for financial and corporate development functions, internal
auditing and the Company's joint venture relationships
September, 1994 -- Senior Vice President and Chief Financial Officer (since
January, 1993) -- responsible for financial and public affairs functions,
The Merck Company Foundation (a not-for-profit charitable organization
affiliated with the Company) (since December, 1993), internal auditing and
the Company's joint venture relationships
ADEL MAHMOUD -- Age 59
May, 1999 -- President, Merck Vaccines
November, 1998 -- Executive Vice President, Merck Vaccines
Prior to November, 1998, Dr. Mahmoud was the John H. Hord Professor and
Chairman, Department of Medicine and Physician-in-Chief, Case Western
Reserve University and University Hospitals of Cleveland (1987-1998)
EDWARD M. SCOLNICK -- Age 60
December, 1999 -- Executive Vice President, Science and Technology and
President, Merck Research Laboratories (MRL) -- responsible for worldwide
research function, computer resources and corporate licensing
September, 1994 -- Executive Vice President (since January, 1993), Science
and Technology and President, MRL (since May, 1985) -- responsible for
worldwide research function and activities of Merck Manufacturing Division
(since December, 1993), computer resources (since January, 1993) and
corporate licensing
BRADLEY T. SHEARES -- Age 44
March, 2001 -- President, U.S. Human Health -- responsible for one of the
two prescription drug divisions comprising U.S. Human Health (USHH)
July, 1998 -- Vice President, Hospital Marketing and Sales, USHH
May, 1996 -- Vice President, Anti-Infectives Therapeutic Business Group,
USHH
January, 1995 -- Executive Director, Anti-Infectives Business Group, USHH
JOAN E. WAINWRIGHT -- Age 40
January, 2001 -- Vice President, Public Affairs
June, 2000 -- Vice President, Corporate Communications, Public Affairs
Prior to June, 2000, Ms. Wainwright was Deputy Commissioner for
Communications at the U.S. Social Security Administration (1994 - 2000)
15
<PAGE>
PER WOLD-OLSEN -- Age 53
January, 1997 -- President, Human Health-Europe, Middle East & Africa --
responsible for the Company's prescription drug business in Europe, the
Middle East and Africa and worldwide human health marketing
September, 1994 -- President, Human Health-Europe -- responsible for the
Company's European prescription drug business
WENDY L. YARNO -- Age 46
December, 1999 -- Senior Vice President, Human Resources
June, 1999 -- Vice President, Human Resources
January, 1999 -- Vice President, Worldwide Human Health Marketing
November, 1997 to January, 1999, Ms. Yarno was Vice President, Women's
Health Care, Johnson & Johnson, Ortho-McNeil Pharmaceutical (manufacturer
of pharmaceuticals)
January, 1995 to November, 1997 -- Vice President, Hypertension and Heart
Failure Therapeutic Business Group, U.S. Human Health
All officers listed above serve at the pleasure of the Board of Directors.
None of these officers was elected pursuant to any arrangement or understanding
between the officer and the Board. There are no family relationships among the
officers listed above.
16
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required for this item is incorporated by reference
to pages 31 and 48 of the Company's 2000 Annual Report to stockholders.
Item 6. Selected Financial Data.
The information required for this item is incorporated by reference
to the data for the last five fiscal years of the Company included under Results
for Year and Year-End Position in the Selected Financial Data table on page 48
of the Company's 2000 Annual Report to stockholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required for this item is incorporated by reference
to pages 21 through 31 of the Company's 2000 Annual Report to stockholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required for this item is incorporated by reference
to pages 29 (under the caption "Analysis of Liquidity and Capital Resources")
through 30 of the Company's 2000 Annual Report to stockholders.
Item 8. Financial Statements and Supplementary Data.
(a) Financial Statements
The consolidated balance sheet of Merck & Co., Inc. and subsidiaries
as of December 31, 2000 and 1999, and the related consolidated statements of
income, retained earnings, comprehensive income and cash flows for each of the
three years in the period ended December 31, 2000 and the report dated January
23, 2001 of Arthur Andersen LLP, independent public accountants, are
incorporated by reference to pages 32 through 45 and page 46 of the Company's
2000 Annual Report to stockholders.
(b) Supplementary Data
Selected quarterly financial data for 2000 and 1999 are incorporated
by reference to the data contained in the Condensed Interim Financial Data table
on page 31 of the Company's 2000 Annual Report to stockholders.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The required information on directors and nominees is incorporated by
reference to pages 6 (beginning with the caption "Election of Directors") to 9
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held April 24, 2001. Information on executive officers is set forth in Part I of
this document on pages 13 to 16. The required information on compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to page 31 (under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance") of the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held April 24, 2001.
Item 11. Executive Compensation.
The information required for this item is incorporated by reference
to page 11 (under the caption "Compensation of Directors"), and 13 (beginning
with the caption "Compensation and Benefits Committee Report on Executive
Compensation") through 21 of the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held April 24, 2001.
17
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required for this item is incorporated by reference
to pages 12 (under the caption "Security Ownership of Directors and Executive
Officers") to 13 of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held April 24, 2001.
Item 13. Certain Relationships and Related Transactions.
The information required for this item is incorporated by reference
to page 11 (under the caption "Relationships with Outside Firms") and page 21
(under the caption "Indebtedness of Management") of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held April 24, 2001.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents filed as part of this Form 10-K
1. Financial Statements
The following consolidated financial statements and report of
independent public accountants are incorporated herein by
reference to the Company's 2000 Annual Report to stockholders, as
noted on page 17 of this document:
Consolidated statement of income for the years ended December 31,
2000, 1999 and 1998
Consolidated statement of retained earnings for the years ended
December 31, 2000, 1999 and 1998
Consolidated statement of comprehensive income for the years
ended December 31, 2000, 1999 and 1998
Consolidated balance sheet as of December 31, 2000 and 1999
Consolidated statement of cash flows for the years ended December
31, 2000, 1999 and 1998
Notes to consolidated financial statements
Report of independent public accountants
2. Financial Statement Schedules
Schedules are omitted because they are either not required or
not applicable.
The registrant is primarily an operating company and all of the
subsidiaries included in the consolidated financial statements filed are wholly
owned except for minority interests in four consolidated subsidiaries.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of ***
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report
for the period ended
September 30, 2000
3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) Form 10-Q Quarterly Report
for the period ended
March 31, 1997
10(a) -- Executive Incentive Plan (as amended **
effective February 27, 1996)
10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1991 Incentive Stock Plan (as amended *
effective February 23, 1994)
10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(e) -- 2001 Incentive Stock Plan Incorporated by reference to
(effective January 1, 2001) Form 10-Q Quarterly Report
for the period ended June 30, 2000
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(h) -- Supplemental Retirement Plan (as amended *
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended
June 30, 1996
10(j) -- Plan for Deferred Payment of Directors' Filed with this document
Compensation (amended and restated as of
November 1, 2000)
10(k) -- Form of Stock Option Agreement ****
dated October 14, 1992 between Merck-Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(l) -- Employment Agreement between Per G.H. Incorporated by reference to
Lofberg and Merck-Medco dated April 1, 1993 Form 10-K Annual Report of
Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(m) -- Amendment dated July 27, 1993 to **
Employment Agreement between Per G.H.
Lofberg and Merck-Medco dated April 1, 1993
10(n) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to
respect to the Employment Agreement Form 10-Q Quarterly Report
between Per G.H. Lofberg and Merck-Medco for the period ended
dated April 1, 1993 and amended July 27, 1993 June 30, 1996
10(o) -- Limited Liability Company Agreement of Filed with this document
Merck Capital Ventures, LLC (Dated as of
November 27, 2000)
10(p) -- Employment Agreement between Filed with this document
Merck-Medco Managed Care, L.L.C.
and Per G.H. Lofberg dated November 27, 2000
10(q) -- Amended and Restated License and Option ***
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(r) -- KBI Shares Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(s) -- KBI-E Asset Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
10(t) -- KBI Supply Agreement dated as of ***
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(u) -- Second Amended and Restated Manufacturing ***
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(v) -- Limited Partnership Agreement dated as of ***
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(w) -- Distribution Agreement dated as of July 1, 1998 ***
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(x) -- Agreement to Incorporate Defined Terms dated ***
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 2000 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
23 -- Consent of Independent Public Accountants Contained on page 23 of
this Report
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
</TABLE>
_______________
* Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1994
** Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1995
*** Incorporated by reference to Form 10-Q Quarterly Report for the
period ended June 30, 1998
**** Incorporated by reference to Post Effective Amendment No. 1 to
Registration Statement on Form S-8 to Form S-4 Registration Statement
(No. 33-50667)
None of the instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries (Exhibit Number 4) are being filed
since the total amount of securities authorized under any of such instruments
taken individually does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company agrees to furnish a copy
of such instruments to the Commission upon request.
Copies of the exhibits may be obtained by stockholders upon written
request directed to the Stockholder Services Department, Merck & Co., Inc., P.O.
Box 100--WS 3AB-40, Whitehouse Station, New Jersey 08889-0100 accompanied by
check in the amount of $5.00 payable to Merck & Co., Inc. to cover processing
and mailing costs.
(b) Reports on Form 8-K
During the three-month period ended December 31, 2000, the Company
filed:
1. one Current Report on Form 8-K under Item 5 -- Other Events:
(a) Report dated October 20, 2000 and filed October 20, 2000,
regarding earnings for third quarter and certain supplemental
information; and
2. three Current Reports on Form 8-K under Item 9 -- Regulation FD
Disclosure:
(a) Report dated November 15, 2000 and filed November 15, 2000,
regarding earnings guidance for fourth quarter and Remarks given
by Raymond V. Gilmartin, Chairman, President and Chief Executive
Officer of the Registrant, at The Credit Suisse First Boston
Annual Healthcare Conference.
(b) Report dated December 12, 2000 and filed December 12, 2000,
regarding the Company's business briefing to analysts.
(c) Report dated December 12, 2000 and filed December 12, 2000,
regarding the Company's Annual Business Briefing Opening and
Closing Remarks given by Raymond V. Gilmartin, Chairman, President
and Chief Executive Officer of the Registrant and Annual Business
Briefing Presentations given by certain senior executive officers
of the Registrant.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 23, 2001
By RAYMOND V. GILMARTIN
(Chairman of the Board,
President and Chief Executive Officer)
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
RAYMOND V. GILMARTIN Chairman of the Board, March 23, 2001
President and Chief Executive
Officer; Principal Executive
Officer; Director
JUDY C. LEWENT Senior Vice President and Chief March 23, 2001
Financial Officer; Principal
Financial Officer
RICHARD C. HENRIQUES JR. Vice President, Controller; March 23, 2001
Principal Accounting Officer
H. BREWSTER ATWATER JR. Director March 23, 2001
LAWRENCE A. BOSSIDY Director March 23, 2001
WILLIAM G. BOWEN Director March 23, 2001
JOHNNETTA B. COLE Director March 23, 2001
LLOYD C. ELAM Director March 23, 2001
WILLIAM N. KELLEY Director March 23, 2001
HEIDI G. MILLER Director March 23, 2001
EDWARD M. SCOLNICK Director March 23, 2001
ANNE M. TATLOCK Director March 23, 2001
SAMUEL O. THIER Director March 23, 2001
DENNIS WEATHERSTONE Director March 23, 2001
</TABLE>
Celia A. Colbert, by signing her name hereto, does hereby sign this
document pursuant to powers of attorney duly executed by the persons named,
filed with the Securities and Exchange Commission as an exhibit to this
document, on behalf of such persons, all in the capacities and on the date
stated, such persons including a majority of the directors of the Company.
By CELIA A. COLBERT
Celia A. Colbert
(Attorney-in-Fact)
22
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form 10-K of our report dated January 23,
2001 included in the Company's Annual Report to stockholders for the fiscal year
ended December 31, 2000, into the Company's previously filed Registration
Statements on Form S-8 (Nos. 33-21087, 33-21088, 33-36101, 33-40177, 33-51235,
33-53463, 33-64273, 33-64665, 333-23293, 333-23295, 333-91769, 333-30526, 333-
31762, 333-40282, 333-52264, 333-53246 and 333-56696), on Form S-4 (No. 33-
50667) and on Form S-3 (Nos. 33-39349, 33-60322, 33-51785, 33-57421, 333-17045,
333-36383 and 333-77569). It should be noted that we have not audited any
financial statements of the Company subsequent to December 31, 2000 or performed
any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
New York, New York
March 23, 2001
23
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
2.1 -- Master Restructuring Agreement dated as of ***
June 19, 1998 between Astra AB, Merck & Co.,
Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises, Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P. (Portions of this Exhibit
are subject to a request for confidential
treatment filed with the Commission)
3(a) -- Restated Certificate of Incorporation of Incorporated by reference to
Merck & Co., Inc. (September 1, 2000) Form 10-Q Quarterly Report
for the period ended
September 30, 2000
3(b) -- By-Laws of Merck & Co., Inc. (as amended Incorporated by reference to
effective February 25, 1997) Form 10-Q Quarterly Report
for the period ended
March 31, 1997
10(a) -- Executive Incentive Plan (as amended **
effective February 27, 1996)
10(b) -- Base Salary Deferral Plan (as adopted on Incorporated by reference to
October 22, 1996, effective January 1, Form 10-K Annual Report
1997) for the fiscal year ended
December 31, 1996
10(c) -- 1991 Incentive Stock Plan (as amended *
effective February 23, 1994)
10(d) -- 1996 Incentive Stock Plan (as amended Incorporated by reference to
November 24, 1998) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(e) -- 2001 Incentive Stock Plan Incorporated by reference to
(effective January 1, 2001) Form 10-Q Quarterly Report
for the period ended June 30, 2000
10(f) -- Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended and restated February 24, 1998) Form 10-K Annual Report
for the fiscal year ended
December 31, 1997
10(g) -- 1996 Non-Employee Directors Stock Option Plan Incorporated by reference to
(as amended April 27, 1999) Form 10-Q Quarterly Report
for the period ended
June 30, 1999
10(h) -- Supplemental Retirement Plan (as amended *
effective January 1, 1995)
10(i) -- Retirement Plan for the Directors of Incorporated by reference to
Merck & Co., Inc. (amended and Form 10-Q Quarterly Report
restated June 21, 1996) for the period ended
June 30, 1996
10(j) -- Plan for Deferred Payment of Directors' Filed with this document
Compensation (amended and restated as of
November 1, 2000)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
10(k) -- Form of Stock Option Agreement ****
dated October 14, 1992 between Merck-Medco
and Per G.H. Lofberg (together with a list
showing the number of options held)
10(l) -- Employment Agreement between Per G.H. Incorporated by reference to
Lofberg and Merck-Medco dated April 1, 1993 Form 10-K Annual Report of
Medco Containment Services,
Inc. for the fiscal year ended
June 30, 1993
10(m) -- Amendment dated July 27, 1993 to **
Employment Agreement between Per G.H.
Lofberg and Merck-Medco dated April 1, 1993
10(n) -- Letter Agreement dated May 24, 1996 with Incorporated by reference to
respect to the Employment Agreement Form 10-Q Quarterly Report
between Per G.H. Lofberg and Merck-Medco for the period ended
dated April 1, 1993 and amended July 27, 1993 June 30, 1996
10(o) -- Limited Liability Company Agreement of Filed with this document
Merck Capital Ventures, LLC (Dated as of
November 27, 2000)
10(p) -- Employment Agreement between Filed with this document
Merck-Medco Managed Care, L.L.C.
and Per G.H. Lofberg dated November 27, 2000
10(q) -- Amended and Restated License and Option ***
Agreement dated as of July 1, 1998 between
Astra AB and Astra Merck Inc.
10(r) -- KBI Shares Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc. and Merck Holdings, Inc.
10(s) -- KBI-E Asset Option Agreement dated as of ***
July 1, 1998 by and among Astra AB,
Merck & Co., Inc., Astra Merck Inc. and
Astra Merck Enterprises Inc.
10(t) -- KBI Supply Agreement dated as of ***
July 1, 1998 between Astra Merck Inc. and
Astra Pharmaceuticals, L.P. (Portions of this
Exhibit are subject to a request for confidential
treatment filed with the Commission)
10(u) -- Second Amended and Restated Manufacturing ***
Agreement dated as of July 1, 1998 among
Merck & Co., Inc., Astra AB, Astra Merck Inc.
and Astra USA, Inc.
10(v) -- Limited Partnership Agreement dated as of ***
July 1, 1998 between KB USA, L.P. and
KBI Sub Inc.
10(w) -- Distribution Agreement dated as of July 1, 1998 ***
between Astra Merck Enterprises Inc. and
Astra Pharmaceuticals, L.P.
10(x) -- Agreement to Incorporate Defined Terms dated ***
as of June 19, 1998 between Astra AB, Merck
& Co., Inc., Astra Merck Inc., Astra USA, Inc.,
KB USA, L.P., Astra Merck Enterprises Inc.,
KBI Sub Inc., Merck Holdings, Inc. and Astra
Pharmaceuticals, L.P.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
------ ----------- ----------------
<S> <C> <C>
12 -- Computation of Ratios of Earnings to Fixed Filed with this document
Charges
13 -- 2000 Annual Report to stockholders (only Filed with this document
those portions incorporated by reference in
this document are deemed "filed")
21 -- List of subsidiaries Filed with this document
23 -- Consent of Independent Public Accountants Contained on page 23 of
this Report
24 -- Power of Attorney and Certified Resolution Filed with this document
of Board of Directors
</TABLE>
_____________
* Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1994
** Incorporated by reference to Form 10-K Annual Report for the fiscal
year ended December 31, 1995
*** Incorporated by reference to Form 10-Q Quarterly Report for the period
ended June 30, 1998
**** Incorporated by reference to Post Effective Amendment No. 1 to
Registration Statement on Form S-8 to Form S-4 Registration Statement
(No. 33-50667)
None of the instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries (Exhibit Number 4) are being filed
since the total amount of securities authorized under any of such instruments
taken individually does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company agrees to furnish a copy
of such instruments to the Commission upon request.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(J)
<SEQUENCE>2
<FILENAME>dex10j.txt
<DESCRIPTION>PLAN FOR DEFERRED PAYMENT OF DIRECTORS' COMPENSATION
<TEXT>
<PAGE>
Exhibit 10(j)
================================================================================
MERCK & CO., INC.
Plan for Deferred Payment of
Directors' Compensation
(Amended and Restated as of November 1, 2000)
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Article I Purpose 1
Article II Election of Deferral, Measurement Methods and Distribution Schedule 1
Article III Valuation of Deferred Amounts 2
Article IV Redesignation Within a Deferral Account 3
Article V Redesignation of Deferred Amounts Measured by 4
Certain Measurement Methods on February 1, 2000
Article VI Payment of Deferred Amounts 4
Article VII Designation of Beneficiary 6
Article VIII Plan Amendment or Termination 6
Schedule A Measurement Methods 7
</TABLE>
(i)
<PAGE>
MERCK & CO., INC.
PLAN FOR DEFERRED PAYMENT OF
DIRECTORS' COMPENSATION
I. PURPOSE
To provide an arrangement under which directors of Merck & Co., Inc. other
than current employees may (i) elect to voluntarily defer payment of the
annual retainer and meeting and committee fees until after termination of
their service as a director, and (ii) value compensation mandatorily
deferred on their behalf.
II. ELECTION OF DEFERRAL, MEASUREMENT METHODS AND DISTRIBUTION SCHEDULE
A. Election of Voluntary Deferral Amount
-------------------------------------
1. Prior to December 28 of each year, each director is entitled to make
an irrevocable election to defer until termination of service as a
director receipt of payment of (a) 50% or 100% of the retainer for the
12 months beginning April 1 of the next calendar year, (b) 50% or 100%
of the Committee Chairperson retainer beginning April 1 of the next
calendar year, and (c) 50% or 100% of the meeting and committee fees
for the 12 months beginning April 1 of the next calendar year.
2. Prior to commencement of duties as a director, a director newly
elected or appointed to the Board during a calendar year must make the
election under this paragraph for the portion of the Voluntary
Deferral Amount applicable to such director's first year of service
(or part thereof).
3. The Voluntary Deferral Amount shall be credited as follows: (1)
Meeting and committee fees that are deferred are credited as of the
day the director's services are rendered; (2) if the Board retainer
and/or Committee Chairperson retainer is deferred, a pro-rata share of
the deferred retainer is credited on the last business day of each
calendar quarter. The dates the Voluntary Deferral Amount, or parts
thereof, are credited to the director's deferred account are
hereinafter referred to as the Voluntary Deferral Dates.
B. Mandatory Deferral Amount
-------------------------
1. On the Friday following the Company's Annual Meeting of Stockholders
(such Friday hereinafter referred to as the "Mandatory Deferral
Date"), each director will be credited with an amount equivalent to
one-third of the annual cash retainer for the 12 month period
beginning on the April 1 preceding the Annual Meeting (the "Mandatory
Deferral Amount"). The Mandatory Deferral Amount will be measured by
the Merck Common Stock account.
2. A director newly elected or appointed to the Board after the Mandatory
Deferral Date will be credited with a pro rata portion of the
Mandatory Deferral Amount applicable to such director's first year of
service (or part thereof). Such pro rata portion shall be credited to
the director's account on the first day of such director's service.
1
<PAGE>
C. Election of Measurement Method
------------------------------
Each such annual election referred to in Section A shall include an
election as to the measurement method or methods by which the value of
amounts deferred will be measured in accordance with Article III,
below. The available measurement methods are set forth on Schedule A
hereto.
D. Election of Distribution Schedule
---------------------------------
Each annual election referred to in Section A above shall also include
an election to receive payment following termination of service as a
director of all Voluntary Deferral Amounts and Mandatory Deferral
Amounts in a lump sum either immediately or one year after such
termination, or in quarterly or annual installments over five, ten or
fifteen years.
III. VALUATION OF DEFERRED AMOUNTS
A. Common Stock
------------
1. Initial Crediting. The annual Mandatory Deferral Amount shall be used
to determine the number of full and partial shares of Merck Common
Stock which such amount would purchase at the closing price of the
Common Stock on the New York Stock Exchange on the Mandatory Deferral
Date.
That portion of the Voluntary Deferral Amount allocated to Merck
Common Stock shall be used to determine the number of full and partial
shares of Merck Common Stock which such amount would purchase at the
closing price of the Common Stock on the New York Stock Exchange on
the applicable Voluntary Deferral Date.
However, should it be determined by the Committee on Directors of the
Board of Directors that a measurement of Merck Common Stock on any
Mandatory or Voluntary Deferral Date would not constitute fair market
value, then the Committee shall decide on which date fair market value
shall be determined using the valuation method set forth in this
Article III, Section A.1.
At no time during the deferral period will any shares of Merck Common
Stock be purchased or earmarked for such deferred amounts nor will any
rights of a shareholder exist with respect to such amounts.
2. Dividends. Each director's account will be credited with the
additional number of full and partial shares of Merck Common Stock
which would have been purchasable with the dividends on shares
previously credited to the account at the closing price of the Common
Stock on the New York Stock Exchange on the date each dividend was
paid.
3. Distributions. Distribution from the Merck Common Stock account will
be valued at the closing price of Merck Common Stock on the New York
Stock Exchange on the distribution date.
2
<PAGE>
B. Mutual Funds
------------
1. Initial Crediting. The amount allocated to each Mutual Fund shall be
used to determine the full and partial Mutual Fund shares which such
amount would purchase at the closing net asset value of the Mutual
Fund shares on the Mandatory or Voluntary Deferral Date, whichever is
applicable. The director's account will be credited with the number of
full and partial Mutual Fund shares so determined.
At no time during the deferral period will any Mutual Fund shares be
purchased or earmarked for such deferred amounts nor will any rights
of a shareholder exist with respect to such amounts.
2. Dividends. Each director's account will be credited with the
additional number of full and partial Mutual Fund shares which would
have been purchasable, at the closing net asset value of the Mutual
Fund shares as of the date each dividend is paid on the Mutual Fund
shares, with the dividends which would have been paid on the number of
shares previously credited to such account (including pro rata
dividends on any partial shares).
3. Distributions. Mutual Fund distributions will be valued based on the
closing net asset value of the Mutual Fund shares on the distribution
date.
C. Adjustments
-----------
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, rights
offering or any other change in the corporate structure or shares of
the Company or a Mutual Fund, the number and kind of shares or units
of such investment measurement method available under this Plan and
credited to each director's account shall be adjusted accordingly.
IV. REDESIGNATION WITHIN A DEFERRAL ACCOUNT
A. General
-------
A director may request a change in the measurement methods used to
value all or a portion of his/her account other than Merck Common
Stock. Amounts deferred using the Merck Common Stock method and any
earnings attributable to such deferrals may not be redesignated. The
change will be effective on (i) the day when the redesignation
request is received pursuant to administrative guidelines established
by the Human Resources Financial Services area of the Treasury
department, provided the request is received prior to the close of the
New York Stock Exchange on such day or (ii) the next following
business day if the request is received when the New York Stock
Exchange is closed.
B. When Redesignation May Occur
----------------------------
1. During Active Service. There is no limit on the number of times a
director may redesignate the portion of his/her deferred account
permitted to be redesignated. Each such request shall be irrevocable
and can be designated in whole percentages or as a dollar amount.
3
<PAGE>
2. After Death. Following the death of a director, the legal
representative or beneficiary of such director may redesignate subject
to the same rules as for active directors set forth in Article IV,
Section B.1.
C. Valuation of Amounts to be Redesignated
----------------------------------------
The portion of the director's account to be redesignated will be
valued at its cash equivalent and such cash equivalent will be
converted into shares or units of the other measurement method(s). For
purposes of such redesignations, the cash equivalent of the value of
the Mutual Fund shares shall be the closing net asset value of such
Mutual Fund on (i) the day when the redesignation request is received
pursuant to administrative guidelines established by the Human
Resources Financial Services area of the Treasury department, provided
the request is received prior to the close of the New York Stock
Exchange on such day or (ii) the next following business day if the
request is received when the New York Stock Exchange is closed.
V. REDESIGNATION OF DEFERRED AMOUNTS MEASURED BY CERTAIN MEASUREMENT METHODS
ON FEBRUARY 1, 2001
Prior to February 1, 2001, each director who has any part of his/her
deferred account measured by the ten investment funds listed in the chart
below may elect the investments by which such part of the deferred account
will be measured as of February 1, 2001.
If a director fails to make an election regarding amounts measured by those
ten funds before February 1, 2001, then the amount in each such fund shall
automatically be redesignated as of February 1, 2001, to the investments
specified in the chart below as the replacement investments. The value to
be redesignated will be the closing value on January 31, 2001 as determined
in accordance with Article III.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Investment Fund to Be Replaced Replacement Investment Fund
<S> <C>
- -------------------------------------------------------------------------------------------------------
PIMCO Global Bond Institutional PIMCO Foreign Bond Institutional
- -------------------------------------------------------------------------------------------------------
Vanguard Wellington Fund Vanguard Asset Allocation
- -------------------------------------------------------------------------------------------------------
Fidelity Magellan Fund T. Rowe Price Blue Chip Growth Fund
- -------------------------------------------------------------------------------------------------------
Sequoia Fund Fidelity Destiny I
- -------------------------------------------------------------------------------------------------------
Scudder Growth & Income Fidelity Destiny I
- -------------------------------------------------------------------------------------------------------
T. Rowe Price Small-Cap Value Fund Fidelity Low-Priced Stock Fund
- -------------------------------------------------------------------------------------------------------
T. Rowe Price International Stock Fund Putnam International Voyager A
- -------------------------------------------------------------------------------------------------------
Templeton Growth Fund, Inc. Putnam Global Equity A
- -------------------------------------------------------------------------------------------------------
Templeton Developing Markets A American Century Emerging Markets Fund
- -------------------------------------------------------------------------------------------------------
Fidelity Retirement Government Money Market Fidelity Retirement Money Market
- -------------------------------------------------------------------------------------------------------
</TABLE>
VI. PAYMENT OF DEFERRED AMOUNTS
A. Payment
-------
All payments to directors of amounts deferred will be in cash in
accordance with the distribution schedule elected by the director
pursuant to Article II, Section D. Distributions shall be pro rata
by measurement method. Distributions shall be valued on the
fifteenth day of the distribution month (or, if such day is not a
business day, the next business day) and paid as soon thereafter
as possible.
4
<PAGE>
B. Changes to Distribution Schedule Prior to Termination
-----------------------------------------------------
Upon the request of a director made at any time during the
calendar year immediately preceding the calendar year in which
service as a director is expected to terminate, the Committee on
Directors of the Board of Directors ("Committee on Directors"), in
its sole discretion, may authorize: (a) an extension of a payment
period beyond that originally elected by the director not to
exceed that otherwise allowable under Article II, Section D,
and/or (b) a payment frequency different from that originally
elected by the director. Such request may not be made with regard
to amounts deferred after December 31, 1990 using the Merck Common
Stock method and to any earnings attributable to such deferrals.
Deferrals into Merck Common Stock made after December 31, 1990 and
any earnings thereon may only be distributed in accordance with
the schedule elected by the director under Article II, Section D
or determined by the Committee on Directors under Article VII.
C. Post-Termination Changes to Distribution Schedule
-------------------------------------------------
Following termination of service as a director, each director may
make one request for a further extension of the period for
distribution of his/her deferred compensation. Such request must
be received by the Committee on Directors prior to the first
distribution to the participant under his/her previously elected
distribution schedule. Any revised distribution schedule may not
exceed the deferral period otherwise allowable under Article II,
Section C. This request may be granted and a new payment schedule
determined in the sole discretion of the Committee on Directors.
Such request may not be made with regard to amounts deferred after
December 31, 1990 using the Merck Common Stock Method and to any
earnings attributable to such deferrals. Any retired director who
is not subject to U.S. income tax may petition the Committee on
Directors to change payment frequency, including a lump sum
distribution, and the Committee on Directors may grant such
petition if, in its discretion, it considers there to be
reasonable justification therefor. Deferrals into Merck Common
Stock made after December 30, 1990 and any earnings thereon may
only be distributed in accordance with the schedule elected by the
director under Article II, Section D or determined by the
Committee on Directors under Article VII.
D. Forfeitures
-----------
A director's deferred amount attributable to the Mandatory
Deferral Amount and earnings thereon shall be forfeited upon his
or her removal as a director or upon a determination by the
Committee on Directors in its sole discretion, that a director
has:
(i) joined the Board of, managed, operated, participated in a
material way in, entered employment with, performed
consulting (or any other) services for, or otherwise been
connected in any material manner with a company,
corporation, enterprise, firm, limited partnership,
partnership, person, sole proprietorship or any other
business entity determined by the Committee on Directors in
its sole discretion to be competitive with the business of
the Company, its subsidiaries or its affiliates (a
"Competitor");
(ii) directly or indirectly acquired an equity interest of five
(5) percent or greater in a Competitor; or
5
<PAGE>
(iii) disclosed any material trade secrets or other material
confidential information, including customer lists, relating
to the Company or to the business of the Company to others,
including a Competitor.
VII. DESIGNATION OF BENEFICIARY
In the event of the death of a director, the deferred amount at the date
of death shall be paid to the last named beneficiary or beneficiaries
designated by the director, or, if no beneficiary has been designated, to
the director's legal representative, in one or more installments as the
Committee on Directors in its sole discretion may determine.
VIII. PLAN AMENDMENT OR TERMINATION
The Committee on Directors shall have the right to amend or terminate
this Plan at any time for any reason.
6
<PAGE>
SCHEDULE A
MEASUREMENT METHODS
(Effective July 1, 1999 - January 31, 2001)
Merck Common Stock
Mutual Funds
Acorn Fund
Fidelity Destiny I
Fidelity Equity Income Fund
Fidelity Magellan Fund
Fidelity Retirement Government Money Market
Fidelity Spartan Government Income
Fidelity Spartan U.S. Equity Index Fund
PIMCO Long Term US Government Institutional
PIMCO Total Return Institutional
PIMCO Global Bond Institutional
Scudder Growth & Income Fund
Sequoia Fund
T. Rowe Price Small-Cap Value Fund
T. Rowe Price International Stock Fund
Templeton Developing Markets A
Templeton Growth Fund, Inc. I
Vanguard Wellington Fund
7
<PAGE>
SCHEDULE A
MEASUREMENT METHODS
(February 1, 2001)
Merck Common Stock
Mutual Funds
Acorn Fund
American Century Emerging Markets Fund
Europacific Growth Fund
Fidelity Destiny I
Fidelity Dividend Growth
Fidelity Equity Income Fund
Fidelity Low-Priced Stock Fund
Fidelity Retirement Money Market
Fidelity Spartan Government Income
Fidelity Spartan U.S. Equity Index
Franklin Small Cap Growth A
Janus Enterprise
Janus Growth & Income
PIMCO Foreign Bond Institutional
PIMCO Long Term US Government Institutional
PIMCO Total Return Institutional
Putnam Global Equity A
Putnam International Voyager A
Putnam Vista A
T. Rowe Price Blue Chip Growth Fund
Vanguard Asset Allocation
Vanguard U.S. Growth Portfolio
8
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(O)
<SEQUENCE>3
<FILENAME>dex10o.txt
<DESCRIPTION>LIMITED LIABILITY COMPANY AGREEMENT - MERCK CAPITAL
<TEXT>
<PAGE>
Exhibit 10(o)
Execution Copy
LIMITED LIABILITY COMPANY AGREEMENT
OF
MERCK CAPITAL VENTURES, LLC
Dated as of November 27, 2000
-----------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1 DEFINITIONS................................................................1
-----------
ARTICLE 2 FORMATION; TERM; FISCAL YEAR...............................................1
----------------------------
2.1. Formation.........................................................1
2.2. Term..............................................................2
2.3. Fiscal Year.......................................................2
ARTICLE 3 NAME AND PLACE OF BUSINESS.................................................2
--------------------------
3.1. Name..............................................................2
3.2. Principal Place of Business.......................................2
ARTICLE 4 PURPOSE AND POWERS.........................................................2
------------------
4.1. Purpose...........................................................2
4.2. Powers............................................................2
ARTICLE 5 CAPITAL CONTRIBUTIONS; MEMBERSHIP INTERESTS................................3
-------------------------------------------
5.1. Capital Contributions.............................................3
5.2. Notice and Funding of Capital Contributions.......................4
5.4. No Return of Capital Contributions................................5
5.5. Designated Additional Carry Members...............................5
ARTICLE 6 BOARD OF MANAGERS AND OFFICERS OF THE COMPANY..............................6
- --------- ---------------------------------------------
6.1. Designation of Board of Managers..................................6
6.2. Election; Resignation; Removal....................................7
6.3. Board Action......................................................7
6.4. Meetings..........................................................7
6.5. Quorum............................................................8
6.6. Action By Consent.................................................8
6.7. Telephonic Meetings...............................................8
6.8. Managers as Agents................................................8
6.9. Powers of the Board...............................................8
6.10. Reimbursement.....................................................8
6.11. Non-Exclusive Engagement..........................................9
6.12. Officers..........................................................9
6.13. Certain Actions..................................................10
6.14. Reliance by Third Parties........................................12
6.15. No Right to Manage...............................................12
ARTICLE 7 RIGHTS AND OBLIGATIONS OF LOFBERG.........................................12
---------------------------------
7.1. Powers...........................................................12
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
7.2. Consultation with Investment Committee...........................13
ARTICLE 8 OTHER AGREEMENTS..........................................................13
----------------
8.1. The Investment Committee and the Executive Committee.............13
8.2. Other Investments................................................14
8.3. Certain Other Fees...............................................16
8.4. MCV Budget.......................................................17
8.5. Administrative Staff.............................................18
8.6. Fees and Expenses; Carry Member Costs............................18
ARTICLE 9 ACCOUNTS AND ALLOCATIONS..................................................18
------------------------
9.1. Capital Accounts.................................................18
9.2. Allocations......................................................19
9.3. Tax Allocations..................................................20
ARTICLE 10 DISTRIBUTIONS.............................................................21
-------------
10.1. Distributions....................................................21
10.2. Certain Other Distributions......................................22
10.3 Distributions in Kind............................................24
10.4. Withholding Requirements.........................................25
10.5. Valuations.......................................................25
ARTICLE 11 TRANSFER OF MEMBERSHIP INTERESTS..........................................26
--------------------------------
11.1. Transfers........................................................26
11.2. Ownership of Membership Interests................................27
ARTICLE 12 WITHDRAWAL; DISSOLUTION AND LIQUIDATION...................................27
---------------------------------------
12.1. Withdrawal of Members............................................27
12.3. Liquidation......................................................27
12.4. Return of Excess Distributions to Investor Members...............28
ARTICLE 13 TAX MATTERS; CERTAIN REPRESENTATIONS OF MEMBERS...........................29
-----------------------------------------------
13.1. Designation of Tax Matters Member................................29
13.2. Tax Returns......................................................29
13.3. Taxable Year.....................................................29
13.4. Tax Elections....................................................29
13.5. Certain Representations of Members...............................29
ARTICLE 14 BOOKS OF ACCOUNT; REPORTS.................................................31
-------------------------
14.1. Books of Account.................................................31
14.2. Reports to Members...............................................31
14.3. Final Accounting.................................................31
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 15 LIMITATION ON LIABILITY; INDEMNIFICATION..................................32
----------------------------------------
15.1. Limitation on Members' Liability.................................32
15.2. Limitation on Protected Parties' Liability.......................32
15.3. Indemnification of the Protected Parties.........................32
15.4. No Liability for Acts of Agents..................................32
15.5. General..........................................................33
15.6. Survival.........................................................33
ARTICLE 16 MISCELLANEOUS.............................................................33
-------------
16.1. Special Power of Attorney........................................33
16.2. Amendments.......................................................33
16.3. Binding Effects; Benefits........................................34
16.4. Headings.........................................................34
16.5. Counterparts.....................................................34
16.6. Grammatical Construction.........................................34
16.7. Separability.....................................................34
16.8. Waiver...........................................................34
16.9. Entire Agreement.................................................35
16.10. Notices...........................................................35
16.11. Insurance........................................................35
16.12. Disclosure of Investment.........................................36
16.13. Arbitration......................................................36
16.14. Appointment of Executive Agent....................................37
16.15. Payments on Business Days........................................37
16.16. Governing Law.....................................................38
</TABLE>
APPENDIX A Definitions
<PAGE>
LIMITED LIABILITY COMPANY AGREEMENT
OF
MERCK CAPITAL VENTURES, LLC
LIMITED LIABILITY COMPANY AGREEMENT of Merck Capital Ventures, LLC (the
"Company"), dated as of November 27, 2000, by and among Merck-Medco Managed
------
Care, L.L.C. ("Merck"), the individuals listed on Part A of Schedule A hereto
----- --------------------
(the "Other Investor Members" and together with Merck, the "Investor Members")
---------------------- ----------------
and the individuals listed on Part B of Schedule A hereto (the "Carry Members"
-------------------- -------------
and together with the Investor Members, the "Members").
-------
WHEREAS, the Company was formed by the filing of a Certificate of
Formation with the Secretary of State of the State of Delaware; and
WHEREAS, the Members desire to enter into this Limited Liability Company
Agreement (the "Agreement") in accordance with the provisions of the Delaware
---------
Limited Liability Company Act (the "LLC Act") in order to set forth the rights
-------
and obligations of the Members.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
-----------
Certain capitalized terms used herein are defined in Appendix A attached
----------
hereto and made a part hereof.
ARTICLE 2
FORMATION; TERM; FISCAL YEAR
----------------------------
2.1. Formation. The Members hereby acknowledge the formation of the
---------
Company as a limited liability company pursuant to the LLC Act by virtue of the
filing of a Certificate of Formation with the Secretary of State of the State of
Delaware, and confirm and agree to their status as Members of the Company. The
Members hereby execute this Agreement for the purpose of establishing the
rights, duties and relationship of the Members.
2.2. Term. This Agreement shall continue until the Company is dissolved
----
and liquidated in accordance with the provisions of Article 12 hereof.
-1-
<PAGE>
2.3. Fiscal Year. Unless the Board of Managers at any time shall otherwise
-----------
determine or with respect to the last fiscal year of the Company, the fiscal
year of the Company (the "Fiscal Year") shall end on December 31. The initial
-----------
Fiscal Year shall commence on the date hereof and end on December 31, 2000.
ARTICLE 3
NAME AND PLACE OF BUSINESS
--------------------------
3.1. Name. The name of the Company shall be, and the business of the
----
Company shall be conducted under the name, "Merck Capital Ventures, LLC";
---------------------------
provided that such name shall be subject to change, from time to time, by the
Board of Managers.
3.2. Principal Place of Business. The principal place of business of the
---------------------------
Company shall be at such place as the Board of Managers shall determine from
time to time. The Board of Managers shall notify the Members of any change of
the principal place of business of the Company. The Company may maintain such
office or offices for the transaction of business at such other locations as the
Board of Managers may deem advisable.
ARTICLE 4
PURPOSE AND POWERS
------------------
4.1. Purpose. The purpose of the Company is to purchase, invest or
-------
otherwise acquire or engage in investments of no more than 20% (unless otherwise
approved by the Board of Managers) in the equity of (a) Clinical Development
Entities and (b) private internet and other private emerging businesses engaged
in the businesses of (i) improving the quality and/or reducing the cost of
commercialization, distribution and delivery of pharmaceuticals and healthcare
services related thereto, or (ii) exploiting data derived therefrom (together
with Clinical Development Entities, "E-Healthcare Companies") and such other
----------------------
investments in private companies as may be approved by the Board of Managers or
are made in accordance with Section 7.1(a) and to engage in any and all
activities that are reasonably related thereto, provided, however, that the
-------- -------
Company may not invest in entities engaged in research based pharmaceutical,
vaccine or biotech businesses.
4.2. Powers. The Company shall have and may exercise all the powers and
------
privileges to the fullest extent permitted by law as are necessary, appropriate
or incidental to the conduct, promotion or attainment of the purpose of the
Company, including, without limitation:
(a) to purchase, sell, possess, transfer, or otherwise deal in, and to
exercise all rights, powers, privileges and other incidents of ownership or
possession with
-2-
<PAGE>
respect to, the equity, assets and businesses of E-Healthcare Companies and
other investments or of any of their respective successors or assigns;
(b) to have and maintain one or more offices and, in connection therewith,
to rent or acquire office space and furnishings, engage personnel and do such
other acts and things as may be necessary or advisable in connection with the
maintenance of such office or offices;
(c) to open, maintain and close bank accounts and to draw checks or other
orders for the payment of moneys;
(d) to enter into, perform and carry out contracts and agreements of every
kind necessary or incidental to the accomplishment of the Company's purpose, and
to take or omit to take such other or further action in connection with the
Company's business as may be necessary or desirable in the opinion of the Board
of Managers to further the purpose of the Company;
(e) to invest such funds as are temporarily not required for Company
purposes in short-term high-grade investments selected by the Board of Managers,
including money market accounts, short-term investment funds, government
securities, certificates of deposit of commercial banks (domestic or foreign),
commercial paper, bankers' acceptances and other money market instruments; and
(f) to carry on any other activities necessary to, in connection with, or
incidental to any of the foregoing.
ARTICLE 5
CAPITAL CONTRIBUTIONS; MEMBERSHIP INTERESTS
-------------------------------------------
5.1. Capital Contributions. (a) Merck agrees to contribute to the Company
---------------------
up to $100 million for investments in Portfolio Investments (the "Merck Base
----------
Commitment") as and when called by the Company in accordance with the terms of
- ----------
this Agreement, and to contribute additional amounts to pay certain Fees and
Expenses of the Company as set forth in Section 5.1(b), and each Other Investor
Member agrees to contribute to the Company in respect of each Portfolio
Investment in which Merck invests the Merck Base Commitment (including without
limitation any follow on Portfolio Investments in a Portfolio Company), an
amount calculated by multiplying the Ratable Contribution Percentage of such
Investor Member expressed as a decimal multiplied by the lesser of (i) 10% of
the Acquisition Cost of such Portfolio Investment (or follow on Portfolio
Investment as the case may be) or (ii) $1,000,000 (the "Other Investor Members
----------------------
Base Commitment"), in accordance with the terms of this Agreement (collectively
- ---------------
with the Merck contributions, the "Capital Contributions"). Except as specified
---------------------
by this Agreement or as required by applicable law, (i) no Member shall at any
time be required
-3-
<PAGE>
to make any additional contribution to the capital of the Company or any loans
to the Company, (ii) no Investor Member (other than Merck) shall be obligated to
make a Capital Contribution in respect of a Portfolio Investment made or
committed to be made before the Start Date of such Investor Member or after the
End Date of such Investor Member, and (iii) the Aggregate Capital Contributions
of the Other Investor Members shall not exceed $10 million.
(b) Capital Contributions shall be called and used (i) during the
Investment Period, to fund Portfolio Investments (including follow on
investments) and (ii) during the Expenses Period (including both during and
after the Investment Period), to pay all reasonable Fees and Expenses of the
Company.
(c) Notwithstanding the provisions of Sections 5.1(a) and (b), (i) each
Investor Member's obligation to fund its Capital Contributions (other than the
Capital Contributions set out in Section 5.1(b)(ii)) will expire at the end of
the Investment Period and (ii) Merck's obligation to fund Capital Contributions
in accordance with Section 5.1(b)(ii) will expire at the end of the Expenses
Period.
5.2. Notice and Funding of Capital Contributions. (a) On each occasion
-------------------------------------------
that the Company proposes to make an investment in a Portfolio Company in which
a Capital Contribution is required, the Company shall give to each Investor
Member who is eligible to participate in such Capital Contribution a written
notice at least 10 days prior to the date such Capital Contribution is required
(a "Funding Notice") which shall include (i) a brief description of the
--------------
transaction (including a reasonable description of the form and structure
thereof) or purpose for which such Capital Contributions are required, (ii) the
aggregate amount of Capital Contributions required and the respective Investor
Member's share thereof, (iii) the date by which such Capital Contributions are
required to be funded, and (iv) if applicable, the account of the Portfolio
Company to which such Capital Contributions shall be made.
(b) During the Expenses Period, Merck will contribute to the Company
as a Capital Contribution from time to time as may be reasonably required
amounts sufficient to pay all anticipated Fees and Expenses as provided in the
MCV Budget. In addition, from time to time during the Expenses Period, Merck
will contribute to the Company as a Capital Contribution an amount equal to any
Break-Up Expenses or other Fees and Expenses required to be contributed by Merck
to the Company in accordance with this Agreement.
(c) Each Investor Member shall deposit its required Capital
Contributions, in immediately available funds, in the account of the Company or
of the Portfolio Company, as the case requires, within the time period specified
in the Funding Notice. If an Investor Member deposits its required Capital
Contribution later than the last day specified in the Funding Notice, and the
Company incurs any costs or expenses
-4-
<PAGE>
(including, without limitation, interest expenses) as a result of such late
deposit, then such Investor Member shall pay to the Company an additional amount
equal to the amount of such costs and expenses (and such additional amount shall
not be considered Capital Contributions). If an Investor Member shall Default in
all or any portion of their contribution obligations as set forth in the Funding
Notice, the Company shall give to the other Investor Members ("Non-Defaulting
--------------
Investor Members") a further written notice, which shall include the amount of
- ----------------
the deficiency in the required Capital Contributions. The majority of the
Non-Defaulting Investor Members may either, (i) agree to pay the full amount of
the deficiency in the required Capital Contribution (in such proportion as is
agreed by such Non-Defaulting Investor Members) or (ii) agree that the Company
not proceed with the Portfolio Investment the subject of the Funding Notice in
which case, the Company will refund to the Investor Members the full amount of
all Capital Contributions made by the Investor Members in respect of such
Portfolio Investment.
5.3. Voting Rights. (a) The Investor Members shall have Membership
-------------
Interests in the Company in the amounts representing their respective Capital
Contributions. All such Membership Interests shall be of a single class for
purposes of the LLC Act's voting requirements.
(b) The Carry Members shall be Members entitled to distributions in
accordance with this Agreement. However, except as provided in Sections 5.5(b)
and 16.2, the Membership Interests of the Carry Members shall not entitle them
to vote on any matter as a Member.
5.4. No Return of Capital Contributions. Except as provided in Section
----------------------------------
12.4 hereof, no Member is entitled to a withdrawal or return of its Capital
Contributions to the Company, but each shall look solely to distributions from
the Company for such purpose.
5.5. Designated Additional Carry Members. (a) At any time and from time to
-----------------------------------
time, Merck or, for so long as Lofberg is Chief Executive Officer of the
Company, Lofberg may propose to the Board of Managers, and the Board of Managers
may designate in accordance with and subject to the provisions of Sections
5.5(c) and 6.13, an additional Person as a "Designated Additional Carry Member".
----------------------------------
Upon designation of a Designated Additional Carry Member, the Board of Managers
will in accordance with the provisions of Section 6.13 specify the Applicable
Carried Interest applicable to such Designated Additional Carry Member and such
Designated Additional Carry Member shall be admitted to the Company as a Carry
Member; provided, however, that the sum of the Maximum Amount of all Carry
-------- -------
Members shall not exceed 20%. Each Designated Additional Carry Member shall be
deemed a Carry Member for the purposes of this Agreement, and his or her
interest in the LLC and right to distribution shall be subject to all
restrictions imposed upon a Carry Member hereunder.
-5-
<PAGE>
(b) Upon the designation of a Designated Additional Carry Member as a
Carry Member in accordance with Section 5.5(a), the Other Investor Members
shall, with the prior written consent of Merck, reallocate the Ratable
Contribution Percentages of each of the Other Investor Members, provided,
--------
however, that (i) for so long as Lofberg is the Chief Executive Officer of the
- -------
Company, the aggregate of all Ratable Contribution Percentages will be 100%, and
(ii) if Lofberg ceases to be the Chief Executive Officer, the aggregate of all
Ratable Contribution Percentages shall not be less than the aggregate of the
Ratable Contribution Percentages of all of the Carry Members other than Lofberg
existing immediately prior to the time Lofberg ceases to be the Chief Executive
Officer. Upon the allocation of a Ratable Contribution Percentage in accordance
with and subject to the provisions of this Section 5.5(b) and Section 5.5(c) to
a Designated Additional Carry Member, such Designated Additional Carry Member
shall be admitted to the Company as an Investor Member.
(c) Notwithstanding anything in this Agreement to the contrary, no
amendment of this Agreement or allocation or reallocation of Membership
Interests shall reduce the Carry Interest of any Carry Member or change the
Ratable Contribution Percentage of any Other Investor Member without the prior
written consent of the affected Member.
ARTICLE 6
---------
BOARD OF MANAGERS AND OFFICERS OF THE COMPANY
---------------------------------------------
6.1. Designation of Board of Managers.
--------------------------------
(a) Except as otherwise provided in Section 7.1, the management of the
Company's business shall be vested in a Board of Managers (the "Board of
--------
Managers" or the "Board"). The Board shall consist of a number of Managers (the
- -------- -----
"Managers") determined in accordance with this Section 6.1. A Manager need not
--------
be a Member.
(b) The Board shall consist of up to five Managers as determined by Merck,
the appointment of which shall be determined as follows:
(i) so long as Lofberg is the Chief Executive Officer of the
Company, Lofberg shall be a Manager; and
(ii) all other Managers shall be designated by Merck from time to
time. The initial Managers designated by Merck shall be Judy Lewent, Ken
Frazier, Richard Clark and David Anstice.
(c) The Managers serving on the Board shall not be entitled to receive
fees for serving on the Board.
-6-
<PAGE>
(d) The Board shall elect one of the Managers to act as Chairman (the
"Chairman". The Initial Chairman of the Board of Managers shall be Judy Lewent.
--------
6.2. Election; Resignation; Removal.
------------------------------
(a) Each Manager shall serve from the effective date of his or her
designation until the effective date of his or her resignation or removal.
Except as provided in Section 6.2(c) hereof, in the event any Manager ceases to
be a Manager of the Company, whether by resignation or removal as provided in
this Agreement or otherwise, a successor Manager shall be designated by the
parties that were entitled, pursuant to Section 6.1(b), to designate the former
Manager.
(b) A Manager may resign from his or her position as a Manager at any time
upon not less than 10 days' prior written notice to each of the other Managers
and Merck.
(c) A Manager may be removed only by the parties that designated such
Manager provided, however that Lofberg shall (unless otherwise determined by the
--------
Board of Managers) be removed as a Manager immediately upon his ceasing to be
the Chief Executive Officer of the Company. The parties requiring the removal of
a Manager may specify an effective date for such removal; otherwise, all such
removals shall be effective immediately.
6.3. Board Action. Unless otherwise specified in this Agreement, the Board
------------
shall act by majority vote of those Managers present at the meeting, with each
Manager on the Board having one vote.
6.4. Meetings. The Board may hold regular meetings and in any event
--------
quarterly without call or notice at such places and at such times as the Board
may from time to time determine, provided that reasonable notice of the first
regular meeting following any such determination is given to Managers absent at
the meeting fixing regular meetings. When called by the Chairman, Chief
Executive Officer or Managers holding a majority of the votes on the Board, the
Board may hold special meetings at such places and times as are designated in
the notice of such special meeting, upon at least seven days' notice given by
the Secretary or an Assistant Secretary, or by the Officer or Manager calling
the special meeting.
6.5. Quorum. At any meeting of the Board, the presence of three Managers
------
including the Chief Executive Officer shall constitute a quorum. Any meeting may
be adjourned from time to time by a majority of votes, whether or not a quorum
is present, and the meeting may be held as adjourned upon reasonable notice.
6.6. Action By Consent. Any action of the Board may be taken without a
-----------------
meeting if (i) all of the Managers unanimously consent to the action in writing,
and (ii)
-7-
<PAGE>
the written consent is filed with the records of the meetings of the Board.
Such actions by consent shall be treated for all purposes as actions taken at a
meeting.
6.7. Telephonic Meetings. Managers may participate in a meeting of the
-------------------
Board by means of a conference telephone or similar communications equipment,
provided that all Managers participating in the meeting can hear each other at
the same time. Participation by such means shall constitute presence in person
at a meeting.
6.8. Managers as Agents. The Managers, to the extent of the powers set
------------------
forth herein, are agents of the Company for the purpose of the Company's
business, and the actions of the Managers taken in accordance with such powers
shall bind the Company.
6.9. Powers of the Board.
-------------------
(a) The Board's powers on behalf and in respect of the Company,
subject to the provisions of this Agreement requiring the approval of the
Members and those powers delegated to Lofberg in accordance with Section 7 of
this Agreement, shall be all powers and privileges permitted to be exercised by
managers of a limited liability company under the LLC Act, including, without
limitation, (i) Section 18-402 of the LLC Act, (ii) the revocation or
suspension, at any time, of the powers granted to Lofberg or any other Officer
pursuant this Agreement or otherwise and (iii) the approval of the MCV Budget;
provided, however, that nothing herein shall supersede, limit or otherwise
- -------- -------
invalidate any action, authorization or resolution of the Members set forth in
this Agreement.
(b) The Board may delegate any of its powers to the Executive
Committee or, except as otherwise required by Section 6.13, the Investment
Committee. Any powers not delegated by the Board shall remain with the Board.
6.10. Reimbursement. The Company shall reimburse each Manager and Officer
-------------
for all reasonable and necessary out-of-pocket expenses incurred by such Manager
or Officer on behalf of the Company according to such terms, as shall be
approved by the Board. Such reimbursement shall be treated as an expense of the
Company that shall be deducted in computing Net Profits and shall not be deemed
to constitute a distributive share of Net Profits or a distribution or return of
capital to any Manager or Officer that is also a Member.
6.11. Non-Exclusive Engagement. Subject to Section 7, the services of the
------------------------
Managers to the Company hereunder are not to be deemed exclusive and the
Managers shall be free to render similar or other services to others, so long as
such Managers' services hereunder are not impaired thereby, and to retain for
their own use and benefit fees or other moneys payable thereby. The Managers
shall not be deemed to be affected with notice of or to be under any duty to
disclose to the Company any fact or thing which
-8-
<PAGE>
may come to the notice of the Managers in the course of the Managers rendering
similar services to others, or in the course of its business in any other
capacity, or in any manner whatsoever other than in the course of carrying out
its duties hereunder; provided, however, that the Managers shall give notice to
-------- -------
each of the Members of any matter that comes to their attention that would
reasonably be expected to have a material adverse effect on the Company or the
ability of the Board of Managers to perform its duties under this Agreement.
6.12. Officers.
--------
(a) General. The Board may appoint agents and employees of the
-------
Company who are designated as Officers of the Company. The Officers of the
Company shall include a President, one or more Vice Presidents, a Treasurer and
a Secretary with the duties and authority described below and such officers,
with such titles, duties and authority as may be approved by the Board from time
to time. The same person may hold any number of offices. Each of the Officers
shall be agents of the Company. The appointment of Officers shall not limit in
any respect the power and authority of the Managers to take any action on behalf
of the Company as provided in this Agreement.
(b) Resignation; Removal. Each Officer shall hold office until his or
--------------------
her successor shall have been duly elected and shall have qualified, or until
his or her death, or until he or she shall have resigned or have been removed,
as hereinafter provided. The Board may remove any Officer so appointed at any
time, with or without Cause, in its absolute discretion.
(c) President. The President shall be the chief executive officer of
---------
the Company, and shall be responsible for the general and active management of
the business of the Company and shall see that all orders and resolutions of the
Board are carried into effect. Except to the extent otherwise provided in this
Agreement or in a resolution of the Board of Managers, the President shall have
such other duties and have such other powers as are similar to those of a
president and chief executive officer of a business corporation organized under
the LLC Act. Lofberg will be the initial President of the Company.
(d) Vice President. Each Vice President shall perform all such duties
--------------
as from time to time may be assigned to him by the Board or the President.
(e) Treasurer. The Treasurer shall have the care and custody of the
---------
funds and valuable documents of the Company and shall have oversight and
administrative responsibility for raising and borrowing funds and establishing
banking and similar relationships and, in general, perform all duties incident
to the office of Treasurer and such other duties as from time to time may be
assigned to him or her by the Board. In the event that any Officer other than
the Treasurer shall be designated as the
-9-
<PAGE>
Company's Chief Financial Officer, the Treasurer shall share the foregoing
powers and duties with such Chief Financial Officer, and all references herein
to the Treasurer shall be deemed to include such Chief Financial Officer of the
Company.
(f) Secretary. The Secretary shall: (i) keep or cause to be kept in
---------
one or more books provided for the purpose, the minutes of all meetings and
consents of the Board; (ii) see that all notices are duly given in accordance
with the provisions of this Agreement and as required by law; (iii) be custodian
of the records of the Company; (iv) see that the books, reports, statements,
certificates and other documents and records required by law to be kept and
filed are properly kept and filed; and (v) in general, perform all duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him or her by the Board.
(g) Subordinate Officers. The Board from time to time may delegate to
---------------------
any Officers the power to appoint subordinate officers or agents and to
prescribe their respective rights, terms of office, authorities and duties. Any
such Officer may remove any such subordinate officer or agent appointed by him
or her, for or without Cause.
(h) Fiduciary Duties of Officers. Except as otherwise provided
----------------------------
herein, each Officer shall have fiduciary duties of loyalty and care similar to
those of officers of business corporations organized under the General
Corporation Law of the State of Delaware.
6.13. Certain Actions. Without limiting the generality of Section 6.1(a),
---------------
none of the following actions may be taken by or on behalf of the Company
without prior approval of the Board or the Executive Committee, including, for
so long as Lofberg is the Chief Executive Officer of the Company, the
affirmative vote of Lofberg, in the case of any matter described in clauses (g),
(h) (i) and (j) and any matter described in clause (k) if the annual
compensation of such employee would exceed $150,000:
(a) approval of the MCV Budget and expenditures or capital
commitments other than those authorized under Section 7.1 or otherwise contained
in the MCV Budget;
(b) creating, incurring or assuming any indebtedness (including,
without limitation, any loans by the Members or any of their Affiliates to the
Company) or entering into any guarantees;
(c) mortgaging or creating any liens on any assets;
(d) entering into any employment agreement or amending or waiving any
provision of any employment agreement;
-10-
<PAGE>
(e) selling or disposing of any Portfolio Investment or other
material assets;
(f) commencing or settling any legal actions;
(g) investing in a Portfolio Investment in an amount exceeding $10
million or if all Portfolio Investments in the same Portfolio Company would
exceed $20 million in the aggregate;
(h) investing in a Portfolio Investment of any entity that is a
Clinical Development Entity;
(i) reviewing and approving or disapproving any changes in investment
strategy and scope;
(j) reviewing and approving or disapproving the designation of any
Designated Additional Carry Member and the allocation and reallocation of all
Applicable Carried Interests and Ratable Contribution Percentages;
(k) determining the compensation payable to any employee of the
Company, including without limitation, any Designated Additional Carry Members
and any employees of Merck or its Affiliates selected to provide services to the
Company in accordance with Section 8.5;
(l) terminating the designation of any Carry Member or Designated
Additional Carry Member as a Carry Member of the Company (it being understood
that the employer of such Person retains the absolute authority to terminate
such Person's employment);
(m) permitting the Other Investor Members to contribute, in respect
of an individual Portfolio Investment, an aggregate amount in excess of the
lesser of (A) 10% of the Acquisition Cost or (B) $1,000,000 of a Portfolio
Investment;
(n) reviewing and approving or disapproving any potential conflicts
of interest of the Members;
(o) reviewing and approving or disapproving any transaction involving
the Company and a Portfolio Company in which any Member, a Manager or their
respective Affiliates has or may have a material interest; or
(p) reviewing and approving or disapproving any settlement of any
claim with respect to which any Manager, Officer, Members or any Affiliate of
any of them intends to seek indemnification pursuant to Section 15.
-11-
<PAGE>
Notwithstanding any other provision of the Agreement, so long as
Lofberg is a Member of the Company, if the Company shall take any of the actions
described in clauses (a), (b) or (c) of this Section 6.13 without Lofberg's
prior written consent, distributions to the Carry Members shall be calculated
without giving effect to such actions if the effect of such actions would
otherwise be to reduce a Carry Member's return in respect of any Portfolio
Investment.
6.14. Reliance by Third Parties. Third parties dealing with the Company
-------------------------
may rely conclusively upon any certificate of the Board of Managers or any
Officer to the effect that it is acting on behalf of the Company. The signature
of the Board of Managers or any Officer shall be sufficient to bind the Company
in every manner to any agreement or on any document.
6.15. No Right to Manage. Except as otherwise expressly provided for in
------------------
this Agreement or with the consent of the Board of Managers, the Members shall
not have any right to take part in the management of the business, affairs or
properties of the Company or any right or authority to act for or bind the
Company and shall have only the rights and powers expressly granted to the
Members hereunder.
ARTICLE 7
RIGHTS AND OBLIGATIONS OF LOFBERG
---------------------------------
7.1. Powers. For so long as Lofberg is the Chief Executive Officer of the
------
Company and has not had his investment authority revoked or suspended by the
Board of Managers, Lofberg shall have the authority and power on behalf and in
respect of the Company, without the need for approval from the Board of
Managers, to:
(a) make Portfolio Investments in amounts not exceeding $10 million in
any one Portfolio Investment and, when aggregated with all other Portfolio
Investments in the same Portfolio Company, not exceeding $20 million; provided,
--------
(i) Lofberg shall have consulted with the Board of Managers or the Executive
Committee regarding the timing and accounting implications to Merck of such
investment to the extent feasible and, in all cases, if the investment, together
with all other Portfolio Investments consummated by the Company in a Quarter
would exceed $15 million, (ii) such Portfolio Investment shall not result in the
Company acquiring in excess of 20% of the equity of a Portfolio Company, and
(iii) any Portfolio Investment in a Clinical Development Entity shall require
approval of the Board of Managers or Executive Committee following consultation
with Merck Research Laboratories.
-12-
<PAGE>
(b) incur reasonable Break-Up Expenses and such other Fees and Expenses as
are necessary to manage the Portfolio Investments in accordance with the MCV
Budget or as otherwise authorized by this Agreement.
7.2. Consultation with Investment Committee. In the exercise of the powers
--------------------------------------
conferred on him by Section 7.1, Lofberg will on a regular basis inform the
members of the Investment Committee of Portfolio Investments made and proposed
to be made and provide members of the Investment Committee with such information
within the Company's possession concerning each such Portfolio Investment or
proposed Portfolio Investment, as well as such other information within the
Company's possession as any member of the Investment Committee may request.
ARTICLE 8
OTHER AGREEMENTS
----------------
8.1. The Investment Committee and the Executive Committee. (a) The Board
----------------------------------------------------
of Managers will from time to time appoint an Investment Committee which shall
consist of Lofberg, so long as he is Chief Executive Officer of the Company, and
other members of the Board of Managers, Officers of the Company and other
Persons, as determined by the Board of Managers. The initial members of the
Investment Committee will be Lofberg, Cooper, Jon Filderman, Richard Kender,
Paul Howes and one person designated by Merck. The Board of Managers may remove
any member of the Investment Committee at any time. The Investment Committee
shall meet as necessary. Members of the Investment Committee may participate in
meetings of the Investment Committee in person, by proxy, or by telephonic
conference call in which all participants can hear each other.
(b) The functions of the Investment Committee will be to consult with and
provide investment advice on proposed investments to the Officers, Board of
Managers and the Members, including in regard to any proposed commercial
arrangements with Merck. To assist the Investment Committee, the Officers of the
Company will review all aspects of each proposed investment including
suitability of investment candidates, results of due diligence, terms of
proposed investments, expected synergies and analysis of competitive effects
and, following such review, will present such information and analysis to the
Investment Committee for its review.
(c) Other than as expressly set forth in this Agreement, the
recommendations of the Investment Committee shall be advisory only and shall not
obligate the Members or the Board of Managers to act or refrain from acting in
accordance therewith. Neither the Investment Committee nor any member thereof,
in his or her capacity as such, may act on behalf of or may bind the Company in
any manner. The Company shall be responsible for all reasonable out-of-pocket
expenses incurred by
-13-
<PAGE>
members of the Investment Committee in connection with fulfilling their
responsibilities to the Investment Committee.
(d) The Board of Managers will from time to time appoint an executive
committee of not more than 3 Persons which shall consist of members of the Board
of Managers, Officers of the Company and other Persons, as determined by the
Board of Managers (the "Executive Committee"), provided, however that, for so
------------------- -------- -------
long as Lofberg is Chief Executive Officer of the Company, he will be a member
of the Executive Committee. The initial members of the Executive Committee will
be Lofberg, Judy Lewent and Ken Frazier. Subject to the proviso in the first
sentence of this paragraph (d), the Board of Managers may remove any member of
the Executive Committee at any time. The Executive Committee shall meet as
necessary. Members of the Executive Committee may participate in meetings of the
Executive Committee in person, by proxy, or by telephonic conference call in
which all participants can hear each other.
(e) The Executive Committee shall have the power and authority to take all
actions delegated to it by the Board of Managers.
8.2. Other Investments. (a) Except as provided in Sections 8.2(b) and (c),
-----------------
no Member may make directly or indirectly, and each Member shall cause its
Affiliates and Associates not to make, directly or indirectly, an investment in
any E-Healthcare Company, except through its interest in the Company in
accordance with the terms of this Agreement, unless and until (i) each Member
has contributed its respective Base Commitment to the Company, (ii) the
expiration of the Investment Period or (iii) Lofberg ceases to be the Chief
Executive Officer of the Company.
(b) Notwithstanding anything to the contrary in this Agreement, if
Merck proposes an investment in an E-Healthcare Company to the Company
(including a follow-on investment in a Portfolio Company) and Lofberg rejects
such proposal or does not approve such proposal within 21 days of its submission
to the Investment Committee in the case of an initial investment and 10 Business
Days of its submission to the Investment Committee in the case of a follow-on
investment (such submission to include such information in the possession of
Merck that it reasonably believes is necessary to enable the Investment
Committee to make an informed investment decision), Merck or any of its
Affiliates or Associates (other than the Company) shall be permitted to make an
investment in such E-Healthcare Company on terms no more favorable than those
rejected by Lofberg.
(c) Notwithstanding anything to the contrary in this Agreement, Merck
and any of its Affiliates and Associates may make any investment in an
E-Healthcare Company if such investment together with all previous investments
in such E-Healthcare Company, in the aggregate, would exceed $20 million or if
it would result in Merck, together with its Affiliates and Associates
beneficially owning in excess of 20%
-14-
<PAGE>
of the outstanding equity of such E-Healthcare Company, provided, however, that,
-------- -------
except as provided by paragraph (b), this paragraph shall not permit Merck to
invest in an existing Portfolio Company other than through the Company, unless,
upon consummation of such investment, the Company, Merck and all Affiliates and
Associates of Merck would, in the aggregate, beneficially own equity interests
representing 50% or more of the voting equity interests of such Portfolio
Company.
(d) If Merck or any of its Affiliates or Associates (other than the
Company) enters into a binding agreement to make a Control Acquisition (a
"Control Acquisition Agreement"), Merck shall, on its own behalf or on behalf of
-----------------------------
its Affiliate or Associate that is a party to the Control Acquisition Agreement,
have the absolute right, for a period of 10 Business Days from the date of the
Control Acquisition Agreement (and, if applicable, so long as the majority of
the Other Investors has not previously delivered a Put Notice as defined in
paragraph (e) below), by giving written notice to the Carry Members (a "Call
----
Notice"), to buy all, but not less than all, of the Portfolio Investments in the
- ------
relevant Portfolio Company held by the Company (the "Control Acquisition
-------------------
Interest").
- --------
(e) If Merck or any of its Affiliates or Associates (other than the
Company) makes a Control Acquisition, the majority of the Other Investors shall
have an absolute right, for a period of 10 Business Days from the date of the
Control Acquisition and so long as Merck has not previously delivered a Call
Notice, by giving written notice to Merck (the "Put Notice"), to cause the
----------
Company to sell all, but not less than all, of the Control Acquisition Interest
to Merck or such Affiliate or Associate.
(f) Upon delivery of a Call Notice pursuant to Section 8.2(d) or a
Put Notice pursuant to Section 8.2(e), Merck or its Affiliate or Associate will
be obligated to purchase from the Company, and the Company will be obligated to
sell to Merck or its Affiliate or Associate, all, but not less than all, of the
Control Acquisition Interest in exchange for payment of the Control Acquisition
Price.
(g) The consummation of the purchase of the Control Acquisition
Interest pursuant to this section 8.2 will take place (i) in the case of a
purchase resulting from the delivery of a Call Notice, to the extent reasonably
practicable simultaneously with the closing of the relevant Control Acquisition,
and (ii) in the case of a purchase resulting from the delivery of a Put Notice,
on a date mutually agreeable to the parties but in any event not later than 30
Business Days following the date of the Put Notice (in each case, the "Purchase
--------
Date"). On the Purchase Date, Merck or its Affiliate or Associate shall pay to
- ----
the Company the Control Acquisition Price against delivery to Merck or its
Affiliate or Associate of the Control Acquisition Interest, free and clear of
all encumbrances, but without representation or warranty by the Company other
than as to title. The consummation of the sale and purchase under this Section
8.2(g) will be a Sale of a Portfolio Investment for the purposes of this
Agreement.
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<PAGE>
(h) Merck and its Affiliates or Associates shall be free to make any
and all investments not expressly required by this Agreement to be made in the
Company outside the Company; provided, however, that Merck and its Affiliates
and Associates (other than the Company) shall not, following termination of the
Investment Period, make a follow-on investment in which the Company has an
existing Portfolio Investment unless and until it shall have given each Other
Investor Member, by written notice to such Other Investor Member specifying the
Portfolio Company to which such follow-in investment relates and the terms and
conditions of such follow-on investment (a "Co-Investment Notice"), the right to
co-invest, on the same terms and conditions as Merck or its Affiliate or
Associate, an amount equal to (but not less than) the amount such Other Investor
Member would have been required to contribute to the Company in respect of the
acquisition of such follow-on investment, assuming (1) it were then being made
by the Company, (2) the Investment Period had not ended and (3) the $10 million
limit set forth in clause (iii) of the last sentence of Section 5.1 did not
apply (the "Co-investment Right"). The Co-investment Right of an Other
Investment Member in respect of a follow-up investment shall expire if such
Other Investment Member shall not, within 10 Business Days of the delivery of
the Co-Investment Notice to such Member, deliver to Merck written notice
irrevocably electing to exercise such Co-investment Right. The Other Investor
Members shall not have any Carry Interest in follow-on investments to which the
Co-Investment Right pertains.
8.3 Certain Other Fees. (a) Each Carry Member covenants that if it or any
------------------
of its Affiliates or Associates provides any services to, or enters into any
transaction with, a Portfolio Company (or a Person in which the Company is
considering making a Portfolio Investment if such Person subsequently becomes a
Portfolio Company), in which such Carry Member (a "Benefiting Member") or its
Affiliates or Associates receives securities, transaction fees, financing fees,
director fees, or any other type of fees or any other thing of value
(collectively, "Other Fees"), from such Portfolio Company, all such Other Fees
will be deemed to be the property of the Company, will, except as provided in
paragraph (c), be promptly conveyed to the Company net of any taxes, if any,
assumed to be payable at the Applicable Tax Rate, for which such Benefiting
Member or its Affiliates or Associates are liable and, until so conveyed, will
be held in trust for the benefit of the Company.
(b) Merck covenants that if it or any of its Affiliates or Associates
enters into a commercial arrangement with a Portfolio Company (or a Person in
which the Company is considering making a Portfolio Investment if such Person
subsequently becomes a Portfolio Company), in which Merck or its Affiliates or
Associates receives securities from such Portfolio Company as part of such
commercial arrangement and not for cash (and excluding Warrants Acquired for
Cash and securities acquired upon the cashless exercise of Warrants Acquired for
Cash) ("Other Securities"), all such Other Securities will be deemed to be the
----------------
property of the Company, will, except as provided in paragraph (c), be promptly
conveyed to the Company net of any taxes, if any, assumed
-16-
<PAGE>
to be payable at the Applicable Tax Rate, for which Merck or its Affiliates or
Associates are liable and, until so conveyed, will be held in trust for the
benefit of the Company. The acquisition of Other Securities by Merck shall not
constitute a Control Acquisition for purposes of Section 8.2 even if after
giving effect thereto, the Company, Merck and Merck's Affiliates and Associates
would, in the aggregate, own more than 20% of the outstanding voting equity of a
Portfolio Company.
(c) Each Benefiting Member or Merck, as the case may be, that is required
by this Section 8.3 to transfer Other Fees or Other Securities to the Company
(the "Transferring Member"), shall use commercially reasonable efforts (at the
-------------------
Company's expense) to obtain all necessary consents and approvals that may be
required in connection with the transfer of such Other Fees and Other Securities
to the Company ("Required Consents"). If a Required Consent is denied or if the
-----------------
Transferring Member has not, for any other reason transferred any Other Fees or
Other Securities to the Company as required by this Section 8.3, then the
Benefiting Member or Merck, as applicable, shall pay to the Company in cash
immediately on receipt for distribution in accordance with Article 10 an amount
or amounts equal to all Net Sale Proceeds upon a Sale of such securities by such
Benefiting Member or Merck, as applicable, or their respective Affiliates or
Associates net of any taxes, assumed to be payable at the Applicable Tax Rate,
for which such Benefiting Member or Merck or Affiliates or Associates thereof,
as applicable, are liable.
(d) Notwithstanding anything to the contrary contained in this Agreement,
any contributions made to the Company pursuant to this Section 8.3 will not be
deemed Capital Contributions of the Benefiting Member or increase the
Acquisition Cost or the Benefiting Member's share of the Acquisition Cost of the
related Portfolio Investment. Except as provided in the immediately preceding
sentence, all Other Fees and Other Securities shall be deemed to be part of the
related Portfolio Investments for all purposes of this Agreement and shall be
distributed to the Members to the extent contemplated by and in accordance with
Article 10, except that, until transferred to the Company as required by this
Section 8.3, Other Fees and Other Securities (and their acquisition and
disposition) shall not be subject to the provisions of Section 6.13 or 10.2(a),
(b) or (c).
8.4. MCV Budget. (a) At least 30 days but not more than 90 days prior to
----------
the beginning of each Fiscal Year (other than with respect to the 2001 Fiscal
Year), the Company will prepare and submit to the Board of Managers for its
approval the proposed budget for the following Fiscal Year, showing on a monthly
basis anticipated Fees and Expenses for such Fiscal Year together with any other
information that the Board of Managers shall require) (the budget, as so
approved in accordance with Section 6.13 and this Section 8.4, the "MCV
---
Budget"). The MCV Budget in respect of the 2001 Fiscal Year shall be prepared
- ------
and submitted for approval as soon as reasonably practicable following the date
of this Agreement and in any event no later than December 11, 2000.
-17-
<PAGE>
8.5. Administrative Staff. Merck shall make available to the Company the
--------------------
full-time services of (i) up to two employees of Merck or an Affiliate of Merck,
as necessary, to act as financial analysts for the Company, and (ii) up to two
employees of Merck or an Affiliate of Merck to support the Company as
administrative staff. So long as he is Chief Executive Officer of the Company,
Lofberg shall (i) with the consent of the employee and of the employee's
employer (the "Applicable Employer"), whose consent shall not be unreasonably
-------------------
withheld or delayed, be entitled to select the employees seconded to the Company
pursuant to this Section 8.5, and (ii) be entitled to terminate the secondment
of any such employee. Notwithstanding anything in this Agreement to the
contrary, (a) the Applicable Employer retains the right to terminate for Cause
the employment of any employee seconded to the Company, and (b) any costs and
expenses incurred by the Applicable Employer in connection with the employment
of seconded employees during the period such person's services are used by the
Company shall be deemed to be Carry Member Costs for purposes of this Agreement
unless otherwise excluded from the definition of Carry Member Costs.
8.6. Fees and Expenses; Carry Member Costs. The Company shall be
-------------------------------------
responsible for all Fees and Expenses and Carry Member Costs from the end of the
Expenses Period and will reimburse Merck and its Affiliates for all such Carry
Member Costs incurred by Merck or any of its Affiliates upon receipt of an
invoice from Merck specifying the nature and amount of such Carry Member Costs.
ARTICLE 9
ACCOUNTS AND ALLOCATIONS
------------------------
9.1. Capital Accounts.
----------------
(a) A separate Capital Account shall be established and maintained for
each Member in accordance with Reg. ss.1.704-1(b)(2)(iv). The initial balance of
each Member's Capital Account shall be equal to the amount of cash and the Fair
Market Value of any property (net of any liability secured by such property that
the Company is considered to assume, or take subject to, under Section 752 of
the Code) contributed by such Member as a Capital Contribution to the Company.
(b) The Capital Account of each Member shall be increased by any Net
Profits and gross income items allocated to such Member and any additional
Capital Contributions by such Member.
(c) The Capital Account of each Member shall be reduced by (i) the amount
of any distribution of cash or the Fair Market Value of any property (net of any
liability secured by such property that the Member is considered to assume or
take subject to Section 752 of the Code) distributed to such Member pursuant to
Article 10 in respect of the Member's Capital Account (other than distributions
treated as guaranteed
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<PAGE>
payments within the meaning of Section 707(c) of the Code) when such
distribution is made, and (ii) the Net Losses and items of deduction or expense
allocated to such Member including, without limitation, any "partner nonrecourse
deductions" (as defined in Reg. ss. 1.704-2(i)) and any "nonrecourse deductions"
(as defined in Reg. ss. 1.704-2(b)) allocated to such Member.
(d) Except as otherwise provided in this Agreement, whenever it is
necessary to determine the Capital Account of any Member, the Capital Account of
such Member shall be determined after giving effect to the allocations of Net
Profits, Net Losses and other items realized prior or concurrently to such time
(including, without limitation, any Net Profits and Net Losses attributable to
adjustments to Book Values with respect to any concurrent distribution), and all
contributions and distributions made prior or concurrently to the time as of
which such determination is to be made.
(e) In the event that there is a negative balance in the Capital Account
of any Member, such Member shall not be obligated to make any additional Capital
Contributions or otherwise be liable to restore the negative balance to zero.
9.2. Allocations.
-----------
(a) Allocation of Net Profits and Net Losses.
----------------------------------------
(i) Net Losses. After giving effect to the special allocations
----------
in clauses (b) through (e) hereof, Net Losses (and if necessary, items
thereof) for any Fiscal Year (or period) shall be allocated among the
Members so as to eliminate the differences between their respective
Partially Adjusted Capital Account balances and Target Capital Account
balances for such Fiscal Year (or other period).
(ii) Net Profits. After giving effect to the special
-----------
allocations in clauses (b) through (e) hereof, Net Profits (and if
necessary, items thereof) for any Fiscal Year (or period) shall be
allocated among the Members so as to eliminate the differences between
their respective Target Capital Accounts balances and Partially Adjusted
Capital Account balances for such Fiscal Year (or other period).
(iii) Limitation on Allocations. Notwithstanding anything to the
-------------------------
contrary contained herein, Net Profits, Net Losses and items thereof
arising with respect to a Portfolio Investment shall not be allocated to a
Member who has not made a Capital Contribution with respect to such
Portfolio Investment (unless such Member has a Carry Interest with respect
to such Portfolio Investment).
(iv) Schedule C illustrates the intent of Section 9.2(a) by way
of a
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<PAGE>
hypothetical example.
(b) Notwithstanding any other provision of this Agreement, (i) "partner
nonrecourse deductions" (as defined in Reg. ss. 1.704-2(i)), if any, of the
Company shall be allocated to the Members that bear the economic risk of loss
within the meaning of Reg. ss. 1.704-2(i), and (ii) "nonrecourse deductions" (as
defined in Reg. ss. 1.704-2(b)), if any, of the Company with respect to each
period as it relates to a particular Portfolio Investment shall be allocated
among the Members in proportion to their share of the Net Acquisition Cost of
such Portfolio Investment made by such Members, and to the extent that such
nonrecourse deductions do not relate to any particular Portfolio Investment, to
the Members in accordance with the proportion of aggregate Capital Contributions
made by each Member.
(c) This Agreement shall be deemed to include "qualified income offset,"
"minimum gain chargeback" and "partner nonrecourse debt minimum gain chargeback"
provisions within the meaning of Regulations under Section 704(b) of the Code.
Accordingly, notwithstanding any other provision of this Agreement, items of
income or gain shall be allocated to the Members on a priority basis to the
extent and in the manner required by such provisions.
(d) Subject to Sections 9.2(b), (c) and (e), if any items of income,
expense or deduction are specially allocated pursuant to Section 9.2(b) or (c),
or the allocation of Net Loss or items of deduction or expense is limited by
Section 9.2(e), items of income, gain, deduction and expense, in subsequent
periods, shall be specially allocated so that the net cumulative amount of all
items allocated to each Member (taking into account any minimum gain or partner
nonrecourse debt minimum gain chargeback that would occur if the Company were to
liquidate) shall, to the extent possible, be equal to the amount that would have
been allocated to such Member without regard to Section 9.2(b), (c) or (e).
(e) Notwithstanding any other provisions of this Agreement, no allocation
of Net Loss or items of deduction or expense shall be made to any Member to the
extent that the effect of such allocation would be to cause the Member to have a
negative balance in its Capital Account, after taking into account any
adjustments, allocations or distributions described in Reg. ss. 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), in excess of the maximum amount of such negative
balance such Member would be obligated (or deemed obligated under the
Regulations) to contribute to the Company upon liquidation.
9.3. Tax Allocations. (a) For tax purposes, all items of income, gain,
---------------
loss, or deduction shall be allocated to the Members in the same manner as they
are allocated for purposes of maintaining Capital Accounts; provided, however,
-------- -------
that (i) if the Fair Market Value of any property of the Company differs from
its adjusted basis for tax
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<PAGE>
purposes, then items of income, gain, loss, deduction for tax purposes shall be
allocated among the Members in a manner that takes account of both the amount
and character of the variation between the adjusted basis of the property for
tax purposes and its Fair Market Value in the manner provided for under Section
704(c) of the Code using any method or methods determined by the Board of
Managers after reasonable consultation with Lofberg and (ii) the Board of
Managers may make such adjustments as it deems appropriate, in its discretion
after reasonable consultation with Lofberg, to reflect the economic interests of
the Members in the Company.
(b) Items of credit shall be allocated among the Members in the manner
provided in Reg.ss. 1.704-1(b)(4)(ii).
ARTICLE 10
DISTRIBUTIONS
-------------
10.1. Distributions. (a) Subject to the provisions of this Article 10,
-------------
Available Cash shall be distributed from time to time as the Board of Managers
shall determine but not less often than annually; provided, that Available Cash
--------
arising by reason of the sale by the Company of a Portfolio Investment or by
reason of Section 8.3 shall be distributed within 30 days after receipt thereof
by the Company in accordance with Section 10.1(b). Pending distribution, all
Available Cash shall be invested in Short-Term Investments. Subject to this
Article 10, other Company property, less such amounts as the Board of Managers
deems necessary to meet current or future Company costs or obligations, shall be
distributed at such time or times as the Board of Managers deems appropriate,
subject to the restrictions described herein.
(b) All Available Cash of the Company in respect of a Portfolio
Investment, less, if the Portfolio Investment was Sold, expenses attributable to
such Sale (the "Proceeds" of such Portfolio Investment) shall be distributed as
--------
follows:
(i) first, 100% to Merck until it has received an amount equal
-----
to all Attributable Carry Member Costs and Attributable Fees and Expenses
of all Portfolio Investments that have been Sold;
(ii) second, 100% to the Contributing Members in proportion to
------
their share of the Acquisition Cost of that Portfolio Investment until
they have received an amount equal to the Net Acquisition Cost of the
Portfolio Investment; and
(iii) thereafter, subject to Section 10.1(c), all remaining
----------
Proceeds to the Contributing Members in proportion to their share of the
Acquisition
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Cost of such Portfolio Investment; provided, however, that
-------- -------
Merck's distribution pursuant to this Section 10.1(b)(iii) shall be
reduced by an amount equal to each Carry Member's Applicable Carried
Interest in respect of such Portfolio Investment of Merck's share of the
Proceeds distributable pursuant to this Section 10.1(b)(iii) (before
giving effect to this proviso) less the amount, if any, of such Carry
----
Member's Negative Carry Balance and such amount, if any, will be
distributed to such Carry Member.
(c) Notwithstanding the foregoing, if a distribution in respect of a
Portfolio Investment is made and a Carry Member's Applicable Carried Interest in
respect of that Portfolio Investment later increases in accordance with the
definition of Applicable Carried Interest, the Company shall promptly make an
additional distribution to such Carry Member and/or Merck shall pay over to such
Carry Member an amount (or securities in the case of an in kind distribution)
equal to the difference between the distribution such Carry Member would have
been entitled to receive at the higher Applicable Carried Interest and the
distribution previously made. In connection with any distribution, the Company
shall be entitled to withhold and set aside such reserves as the Board of
Managers may determine may be required to fund such subsequent retroactive
adjustments.
(d) At the time final distributions are made upon the dissolution of the
Company or upon a Carry Member ceasing to be a Carry Member in respect of all
Portfolio Investments, any amounts required to be contributed by such Member to
the Company pursuant to Section 12.4, may be off set by the Company against any
distributions required to be made by the Company to a Member pursuant to Section
10.1(b).
(e) Notwithstanding the foregoing, if the aggregate distributions to a
Member during a Fiscal Year, and the three months following such Fiscal Year,
would not otherwise equal or exceed the Tax Liability Amount, then on or prior
to the Tax Payment Date, the Company shall distribute the amount of such
deficiency to such Member (the "Tax Distribution"). Tax Distributions shall be
----------------
treated as advances on future distributions that would otherwise be made to such
Member, so that future amounts otherwise distributable to a Member shall be
reduced by the amount of any Tax Distribution. At the election of the Board of
Managers, in reasonable consultation with Lofberg, Tax Distributions may be made
in quarterly installments during the Fiscal Year.
(f) Schedule C, illustrates the intent of Section 10.1(b) by way of a
hypothetical example.
10.2. Certain Other Distributions.
---------------------------
(a) If, at a time when Lofberg is Chief Executive Officer of the Company
or, thereafter, if Lofberg's employment with Merck or an Affiliate of Merck to
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act as Chief Executive Officer of the Company is terminated (i) at any time
without Cause or (ii) for any reason after the second anniversary of this
Agreement, a Portfolio Company closes a Qualified IPO and Lofberg recommends to
the Board of Managers no later than 10 Business Days prior to the commencement
of the roadshow for such Qualified IPO selling 100% of the Company's interest in
such Portfolio Company in such Qualified IPO and the Board of Managers rejects
such recommendation, then the Company shall distribute 100% of the Portfolio
Investment in the Portfolio Company to the Members in accordance with Section
10.1(b), as soon as practicable following the date of such Qualified IPO (or if
requested by the underwriters of such Qualified IPO, following the date the
Company is no longer subject to any lock up restrictions), on the assumption
that such Portfolio Investments were sold for the issue price under the
Qualified IPO.
(b) If, at a time when Lofberg is Chief Executive Officer of the Company
or, thereafter, if Lofberg's employment with Merck or an Affiliate of Merck to
act as Chief Executive Officer of the Company is terminated (i) at any time
without Cause or (ii) for any reason after the second anniversary of this
Agreement, Lofberg recommends selling 100% of the Company's Portfolio Investment
at the time when the entirety of such Portfolio Investment constitutes
Marketable Securities (a "Divestment Proposal") and the Board of Managers
---------- --------
rejects such Divestment Proposal, then
(A) if the Portfolio Company is a Qualifying Issuer, the Company
shall distribute the securities of such Portfolio Company to the Members
in accordance with Section 10.1(b) within 10 Business Days following the
determination by the Board of Managers of the Fair Market Value of such
Portfolio Investments as of the Applicable Valuation Date, on the
assumption that such Portfolio Investment was sold for the Fair Market
Value determined by the Board of Managers as of the Applicable Valuation
Date; and
(B) in all other cases, the Company shall promptly distribute to
the Other Investor Members their pro rata share of the securities of such
Portfolio Company (net of securities having a Fair Market Value equal to
their share of Attributable Carry Member Costs and Attributable Fees and
Expenses, assuming 100% of the Portfolio Investment was distributed in
accordance with clause (A) above) and following such distribution the
Other Investor Members shall have no further interest (other than as Carry
Members) in the portion of the Portfolio Investment retained by the
Company.
(c) If, at a time when Lofberg is Chief Executive Officer of the Company,
Lofberg recommends to the Board of Managers approval of a Bona Fide Third Party
Offer setting forth the price and other material terms of such Bona Fide Third
Party
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<PAGE>
Offer and the Board of Managers rejects such Bona Fide Third Party Offer,
then, at the written request of Lofberg delivered to the Board of Managers
within 10 Business Days of such rejection, the Members shall be entitled to
receive distributions in respect of their Interests in accordance with Section
10.1(b), at the election of the Board of Managers, either in cash or by
distribution in kind within 30 Business Days following the demand by Lofberg, on
the assumption that such Portfolio Investment were sold for the price set forth
in the Bona Fide Third Party Offer. Notwithstanding anything to the contrary, if
a distribution is made pursuant to this Section 10.2(c), the Carry Members will
not, except to the extent provided in Section 10.1(c) be entitled to any further
distributions made by the Company pursuant to Section 10.1(b), or otherwise in
respect of such Portfolio Investment (other than as Investor Members) and their
Applicable Carried Interest in respect thereof after the application of this
Section 10.2(c) shall be deemed to be zero.
(d) If a Portfolio Investment has not been liquidated or distributed prior
to the tenth anniversary of this Agreement, the Board of Managers shall either
(i) cause such Portfolio Investment to be liquidated within 90 days or (ii)
valued in accordance with Section 10.5 as of the Applicable Valuation Date. The
Members shall be entitled to receive distributions in respect of their Interests
(A) in accordance with Section 10.1(b) in cash upon the final liquidation of all
Portfolio Investments being liquidated in the case of clause (i), and (B) at the
election of the Board of Managers either in cash or by distribution in kind
within 10 Business Days following delivery by the Third Party Valuation Firm of
its report calculating the Fair Market Value of the remaining Portfolio
Investments, on the assumption in such case that each unliquidated Portfolio
Investment were sold for the Fair Market Value set forth in the valuation report
(the "Valuation Report") in the case of clause (ii). Notwithstanding anything to
----------------
the contrary, if a distribution is made pursuant to this Section 10.2(d), the
Carry Members will not be entitled to any further distributions made by the
Company pursuant to Section 10.1(b) or otherwise in respect of such Portfolio
Investment (other than as Investor Members) and their Applicable Carried
Interest in respect thereof after the application of this Section 10.2(d) shall
be deemed to be zero.
10.3 Distributions in Kind. (a) The Board of Managers shall have
---------------------
authority, but, except as required by Section 10.2, shall not be required to
distribute in kind any non-cash assets held by the Company.
(b) In the event of any distribution in kind, the value of the assets
distributed shall be determined as of the Applicable Valuation Date in
accordance with Section 10.5 hereof. If the Carry Members will be entitled to
receive a distribution in respect of their Applicable Carried Interests pursuant
to Section 10.2(d), the Fair Market Value of the assets to be distributed will
be calculated by a Third Party Valuation Firm in accordance with the methodology
set forth in Section 10.5. A "Third Party Valuation Firm" shall mean any
--------------------------
independent nationally recognized investment banking firm, accounting firm or
appraisal firm selected by the Board of Managers and approved by
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<PAGE>
Lofberg, such approval not to be unreasonably withheld or delayed. The Company
shall bear all of the expenses of the Third Party Valuation Firm retained by the
Company.
(c) Except as required by Section 10.2, no determination by the Board of
Managers to obtain a valuation from a Third Party Valuation Firm in
contemplation of an in-kind distribution shall obligate the Company to make any
such in-kind distribution.
(d) Investments distributed in kind pursuant to this Agreement shall be
distributed, to the extent reasonably practicable, pro rata to the Members
entitled thereto and shall be subject to such conditions and restrictions as are
required by applicable law or any contractual obligation or as were previously
imposed on the Company.
10.4. Withholding Requirements. (a) Notwithstanding any other provision of
------------------------
this Agreement, the Board of Managers is authorized to take any action that it
determines to be necessary or appropriate to cause the Company to comply with
any withholding requirements imposed under Section 1446 or any other provision
of the Code or state, local or foreign law.
(b) If the Code or any state, local or foreign law requires that the
Company remit to the Internal Revenue Service (the "IRS") or any other taxing
---
authority any withholding tax with respect to, or for the account of, any Member
(in its capacity as a Member), the Board of Managers shall provide notice to
such Member of such obligation and such Member shall have the opportunity to
make such payment on its own behalf. If such Member fails, or is not otherwise
able, to make such payment on its own behalf, the Company shall so remit to the
IRS or other taxing authority the full required amount of such withholding tax.
Any amount so remitted shall be credited against any distributions that would
otherwise be made to such Member during such period or thereafter and any excess
of the amount so remitted over amounts so credited against distributions shall
be treated as a recourse demand loan from the Company to the Member. For so long
as the Company is not dissolved and the Member remains a Member, unless
otherwise paid, such loan shall be payable by credit against the first amounts
that would otherwise be distributed to such Member (with any such payment being
allocated first to accrued and unpaid interest through the date of such payment)
but may be prepaid in Cash by the Member, in whole or any part, at any time.
10.5. Valuations. To the extent the assets of the Company, or any portion
----------
thereof, are required to be valued for any purpose, including without limitation
the calculation of distributions in respect of the Applicable Carried Interests,
such valuation shall be made by the Third Party Valuation Firm in the case of
Sections 10.2(d) and 12.3(c) and in all other cases by the Board of Managers in
accordance with the following:
(a) In determining the Fair Market Value on a given date of
publicly-traded securities for which market quotations are readily available (i)
any securities traded on a national securities exchange shall be valued at the
average of the last trade
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<PAGE>
prices for the twenty Business Days prior to the valuation date on which trading
in such securities actually occurred on the exchange where they are primarily
traded or, if the securities are not traded on such valuation date, then for the
twenty Business Days prior to the immediately preceding date on which such
securities were traded on which trading in such securities actually occurred,
and (ii) any securities traded in the over-the-counter market shall be valued at
the average of the closing bid prices last quoted for the twenty Business Day
period prior to the valuation date by NASDAQ or, if not quoted by NASDAQ, at the
average last quote prices for the twenty Business Days prior to such valuation
date on which trading in such securities actually occurred as quoted in a
recognized list for over-the-counter securities or, if the securities are not
quoted on such valuation date (but are actively quoted in such recognized list),
then for the twenty Business Days prior to the immediately preceding date on
which such securities were quoted on which trading in such securities actually
occurred; provided, that in the case of any publicly-traded securities, the
--------
determination of Fair Market Value shall be adjusted downward to the extent that
the Board of Managers or the Third Party Valuation Firm, as the case may be,
reasonably determines trading restrictions, block positions, thin trading or
other similar matters would materially adversely affect the realizable value of
such securities.
(b) The Fair Market Value of all other securities or other assets of the
Company shall be reasonably determined by the Board of Managers or the Third
Party Valuation Firm, as the case may be, acting in good faith based on, among
other things, public market comparables, private market transactions,
independent appraisals and discounted cash flow analyses.
(c) Liabilities shall be determined based upon GAAP by the Board of
Managers or the Third Party Valuation Firm, in consultation with the Board of
Managers and the Carry Members. The Board of Managers or the Third Party
Valuation Firm, in consultation with the Board of Managers, as the case may be,
may in its discretion provide reserves for estimated accrued expenses,
liabilities or contingencies, (including for the purpose specified in Section
10.1(c)) even if such reserves are not required by GAAP. If such reserves are
later reversed, the amounts released shall be distributed to the Member or
Members who would have been entitled to receive distributions of such amounts if
the reversed portion of the reserve had not been established.
ARTICLE 11
TRANSFER OF MEMBERSHIP INTERESTS
--------------------------------
11.1. Transfers. (a) Subject to Section 11.1(b) and (c), no Member may
---------
sell, transfer, assign, pledge, hypothecate or otherwise dispose of ("Transfer")
all or any part of its Membership Interests in the Company (including, without
limitation, its right to
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<PAGE>
receive a share of profits, losses and other allocations and distributions of
the Company). Any purported Transfer of any interest in the Company in violation
of this Article 11 shall be null and void.
(b) Notwithstanding the provisions of Section 11.1(a), Merck shall be
permitted to Transfer its interests in the Company to any direct or indirect
wholly owned subsidiary of Merck & Co., Inc., provided that such transferee has
agreed in writing with the Company to be bound by the provisions of this
Agreement as a Member.
(c) Notwithstanding the provisions of Section 11.1(a), each Other Investor
Member and Carry Member shall be permitted to grant participations in such
Member's Membership Interests to his or her heirs or to a Family Trust for
estate planning purposes, but no such participant shall have any rights as a
Member or any consent rights under this Agreement.
11.2. Ownership of Membership Interests. The Company and the Board of
---------------------------------
Managers shall be entitled to treat the record owner of any Membership Interests
as the absolute owner thereof in all respects until such time as a written
instrument evidencing the Transfer of such Membership Interests has been
received by the Board of Managers and recorded on the books of the Company.
ARTICLE 12
WITHDRAWAL; DISSOLUTION AND LIQUIDATION
---------------------------------------
12.1. Withdrawal of Members. (a) Except as expressly provided for in
---------------------
Article 11, no Member may withdraw from the Company.
(b) A Member shall be deemed to have withdrawn from the Company upon an
Event of Bankruptcy of such Member or any dissolution or liquidation of such
Member.
12.2. Events of Dissolution. The Company shall be dissolved upon the
---------------------
earliest to occur of the following: (a) an Event of Bankruptcy of the Company;
(b) at the election of Merck if Lofberg shall cease to be the Chief Executive
Officer of the Company or (c) the unanimous approval of the Investor Members to
dissolve the Company for any reason, including without limitation following the
disposition of all Portfolio Investments.
12.3. Liquidation. If the Company is dissolved pursuant to Section 12.2,
-----------
the Board of Managers (or any liquidating trustee appointed by the Board of
Managers or, in the event of a dissolution pursuant to Section 12.2(b), a
liquidating trustee appointed by Merck) shall (i) promptly file any notice,
publish any advertisement or take any other
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<PAGE>
action required under applicable law to effect such dissolution, (ii) commence
to wind up the affairs of the Company and liquidate the assets of the Company
and (iii) apply and distribute the proceeds of such liquidation and any
undistributed cash no later than the end of the Fiscal Year following the Fiscal
Year in which such liquidation occurs in accordance with the terms hereof and in
the following order of priority:
(a) First, to pay and discharge, or make provisions or establish reserves
for, the claims of all creditors of the Company and to pay the expenses of
liquidation;
(b) Second, to establish such reserves as the Board of Managers or
liquidating trustee deems reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Company; such reserve may be paid over by the
Board of Managers or liquidating trustee to any attorney-at-law, or other party
acceptable to the Board of Managers or liquidating trustee, as escrow agent to
be held for disbursement in payment of any such liabilities or obligations and,
at the expiration of such period as shall be deemed advisable by the Board of
Managers or liquidating trustee, for distribution of the balance in the manner
hereinafter provided in this Section 12.3; and
(c) Third, to make distributions to the Members in accordance with Section
10.1(b) (including, without limitation, applying the valuation methodology set
out in Section 10.5 in relation to distributions in kind, if any).
12.4. Return of Excess Distributions to Investor Members. If, at the time
--------------------------------------------------
final distributions are made upon the dissolution of the Company or upon a Carry
Member ceasing to have an Applicable Carried Interest in any outstanding
Portfolio Investments, after giving effect to all distributions to that Carry
Member calculated pursuant to Sections 10.1(b), 10.1(c) and 12.3, but before
giving effect to this Section 12.4, such Carry Member will have received an
Excess Carry Amount, such Carry Member shall contribute to the Company, without
interest, for distribution to Merck, an amount that equals the Excess Carry
Amount, reduced by the amount of federal, state, local and foreign tax
obligations borne by such Carry Member with respect to the Excess Carry Amount
as reasonably determined by such Carry Member (it being acknowledged and agreed
that in making such determination such Carry Member shall assume that such
amounts were earned by an individual paying income taxes at the Carry Member's
Applicable Tax Rate), and increased by the actual federal, state, local and
foreign tax benefits realized by such Carry Member or its beneficial owners with
respect to the repayment of any amount pursuant to this Section 12.4 as
reasonably determined by such Carry Member (it being acknowledged and agreed
that in making such determination such Carry Member shall (i) assume that such
amounts were paid by an individual paying income taxes at the Carry Member's
Applicable Tax Rate, (ii) shall include any tax benefits realized by such Carry
Member in connection with receiving a reduced distribution pursuant to Section
10.1(d)) and (iii) shall only be deemed actually used after all other applicable
tax benefits that could have been used by such Carry Member have
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<PAGE>
been deemed to be used; provided, however, that for the purposes of computing
such benefits, (a) any securities received by the Carry Member as a distribution
from the Company and held by such Carry Member shall be marked to market, and
(b) the gain or loss, as the case may be, with respect to such securities, shall
be taken into account in determining the tax benefits realized by such Carry
Member as if such securities had been sold in fully taxable transactions.
ARTICLE 13
TAX MATTERS; CERTAIN REPRESENTATIONS OF MEMBERS
13.1. Designation of Tax Matters Member. Merck is hereby designated as
---------------------------------
the "tax matters partner" (in such capacity, the "Tax Matters Member") under
------------------
Section 6231(a)(7) of the Code to manage, at the cost and expense of the
Company, administrative tax proceedings conducted at the Company level by the
IRS with respect to Company matters. The Members are specifically directed and
authorized to take whatever steps the Tax Matters Member, in its sole discretion
deems necessary or desirable to perfect such designation, including, without
limitation, filing any forms or documents with the IRS and taking such other
action as may from time to time be required under Regulations and cooperating
with the Tax Matters Member in connection with any tax audit, investigation or
litigation.
13.2. Tax Returns. The Tax Matters Member shall cause to be prepared
-----------
and filed, after reasonable consultation with Lofberg and at the cost and
expense of the Company, all necessary Company tax returns, and the Members (and
their Affiliates) shall prepare their tax returns consistently with such Company
tax returns.
13.3. Taxable Year. The taxable year of the Company shall be the
------------
calendar year or such other year as may be reasonably determined by the Board of
Managers.
13.4. Tax Elections. All tax elections required or permitted to be
-------------
made under the Code and any applicable state, local or foreign tax law shall be
made in the discretion of the Tax Matters Member after reasonable consultation
with Lofberg, and any decision with respect to the treatment of Company
transactions on the Company's federal, state, local or foreign tax returns shall
be made in such manner as may be approved by the Tax Matters Member after
reasonable consultation with Lofberg. Each of the Carry Members shall file a
timely election in accordance with the rules set forth in Reg. (S)1.83-2,
with respect to his or her receipt of the Carry Interest.
13.5. Certain Representations of Members. (a) Each Member, severally
----------------------------------
and not jointly, as to itself only, hereby represents, warrants and acknowledges
to the Company and the other Members as follows:
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<PAGE>
(i) Such Member has full power and authority to execute
and deliver this Agreement and to carry out its obligations
hereunder in accordance with the terms and provisions hereof. The
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby have been
duly authorized by all requisite action, corporate or otherwise,
on the part of such Member.
(ii) Such Member is a "United States person" within the
meaning of Section 7701(a)(30) of the Code.
(iii) Such Member is acquiring its Membership Interests
solely for investment, for such Member's own account and not with
a view to, or for resale in connection with, the distribution or
other disposition thereof.
(iv) Such Member has not pledged, hypothecated or
encumbered his or her Membership Interest or entered into any
agreement to do so.
(b) Each Member acknowledges that its Membership Interests may
be construed as "securities" for purposes of federal, state or local securities
laws or regulations. Each Member further acknowledges and represents that it has
been advised that the membership interests of the Company have not been
registered under the Securities Act of 1933, as amended.
(c) Each Member acknowledges and represents that it is
experienced in evaluating companies such as the Company, is able to fend for
itself in the transactions contemplated by this Agreement, has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of its investment, and has the ability to bear the economic
risks of its investment. Each Member further represents that it has had access,
during the course of the transactions and prior to its purchase of Membership
Interests, to all such information as it deemed necessary or appropriate (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) and that it has had, during the course of the
transactions and prior to its purchase of Membership Interests, the opportunity
to ask questions of, and receive answers from, the Company concerning the terms
and conditions of the offering and to obtain additional information (to the
extent the Company possessed such information or could acquire it without
unreasonable effort or expense) necessary to verify the accuracy of any
information furnished to it or to which it had access.
(d) Each Member acknowledges and represents that it understands
that the Membership Interests may not be sold, transferred or otherwise disposed
of without registration under the 1933 Act or an exemption therefrom, and that
in the absence of an effective registration statement covering the Membership
Interests or an available
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<PAGE>
exemption from registration under the 1933 Act, the Membership Interests must be
held indefinitely.
(e) Each Member acknowledges and represents that it understands
that no public market now exists for any of the securities issued by the Company
and that there is no assurance that a public market will ever exist for the
Membership Interests.
ARTICLE 14
BOOKS OF ACCOUNT; REPORTS
-------------------------
14.1. Books of Account. The Board of Managers shall keep, or
----------------
cause to be kept, accurate and complete records and books of account of all
transactions of the Company. The Company books and records shall be maintained
at the principal place of business of the Company and shall be available for
inspection and examination, for a proper purpose and at reasonable times during
usual business hours, by Members or their respective duly authorized
representatives. Except as otherwise expressly provided in this Agreement, such
information shall not be disclosed to third parties and shall be used for
Company purposes only.
14.2. Reports to Members. As promptly as practicable following
------------------
the end of each Fiscal Year, the Board of Managers shall cause to be prepared
and mailed to each Member a report setting forth as of the end of such Fiscal
Year (i) the assets and liabilities of the Company, (ii) the Net Profit and Net
Loss of the Company and (iii) such Member's Capital Account balance and the
manner of calculation thereof. After the end of each Fiscal Year, the Board of
Managers shall cause to be prepared and delivered, as promptly as practicable, a
federal income tax form K-1 for each Member.
14.3. Final Accounting. Following the date on which the Company
----------------
is dissolved and liquidated pursuant to Article 12, an independent accounting
firm selected by the Board of Managers shall commence to take an account of the
affairs and financial transactions of the Company and shall prepare a statement
setting forth the financial position of the Company as of the close of business
on the date the dissolution and liquidation of the Company is completed pursuant
to Article 12 establishing reasonable reserves for contingencies, showing the
amount of each Member's share of the profits or losses of the Company through
such date and stating each Member's Capital Account balance on such date.
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<PAGE>
ARTICLE 15
LIMITATION ON LIABILITY; INDEMNIFICATION
----------------------------------------
15.1. Limitation on Members' Liability. Except as otherwise
--------------------------------
required by the LLC Act, the debts, obligations and liabilities of the Company,
whether arising in contract, tort or otherwise, shall be solely the debts,
obligations and liabilities of the Company, and none of the Members or any
Managers or Officers appointed pursuant to Article 6 hereof (collectively, the
"Protected Parties") shall be obligated personally for any such debt, obligation
-----------------
or liability of the Company solely by reason of being a Member, Manager or
Officer, or by reason of participating in the management of the Company. The
failure of the Company to observe any formalities or requirements relating to
the exercise of its powers or management of its business or affairs under the
LLC Act or this Agreement shall not be grounds for imposing personal liability
on the Members for liabilities of the Company.
15.2. Limitation on Protected Parties' Liability. None of the
------------------------------------------
Protected Parties shall have any liability to the Company or to any other Member
or to any shareholders, members, principals, officers, directors or employees of
any other Member for any Damages claimed by reason of any act or omission to act
on behalf of the Company or otherwise in connection with this Agreement,
provided that this release from liability shall not apply to the extent that
such action or failure to act has been found by a final judgment of a court of
competent jurisdiction to have constituted gross negligence or willful
misconduct.
15.3. Indemnification of the Protected Parties. The Company shall
----------------------------------------
indemnify and hold harmless the Protected Parties for any Damages incurred by
any of them by reason of any act or omission or alleged act or omission arising
out of the activities of the Protected Parties in connection with this
Agreement, any Portfolio Investment, or the Company provided that this
indemnification shall not apply to the extent that such action or failure to act
has been found by a final judgment of a court of competent jurisdiction to have
constituted gross negligence or willful misconduct of the applicable Protected
Parties, or with respect to which indemnification is not obtainable under the
securities laws of the United States or any other law. If the foregoing
indemnity is unavailable to any Protected Party, then the Company shall
contribute to the maximum extent permitted by law to the amount paid or payable
by the Protected Party.
15.4. No Liability for Acts of Agents. None of the Protected
-------------------------------
Parties shall be liable for any act or omission of any third party with respect
to the Company as long as the same is retained by the Board of Managers in good
faith and with reasonable care and diligence.
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15.5. General. (a) The termination of any proceeding by settlement shall
-------
not, of itself, create a presumption that a Protected Party acted in a manner
which constituted gross negligence or willful misconduct. The right of any
Protected Party to the indemnification provided herein shall be cumulative with,
and in addition to, any and all rights to which such Protected Party may
otherwise be entitled by contract or as a matter of law or equity and shall
extend to its successors.
(b) All judgments against the Company and a Protected Party, with respect
to which a Protected Party is entitled to indemnification, shall first be
satisfied from Company assets to the extent available.
(c) To the extent that insurance from third parties has been obtained and
is available in respect of any Damages, the Board of Managers will use its best
efforts to have such Damages paid out of the proceeds of such insurance rather
than having the Company make any payments pursuant to the indemnification
obligations contained herein; provided, however, that if such proceeds are not
-------- -------
readily available, the Board of Managers shall cause the Company to pay such
Damages, in which event the Company will be entitled to reimbursement therefor
out of the proceeds of insurance when and if obtained.
15.6. Survival. The provisions of this Article 15 shall survive the
--------
termination of this Agreement and the dissolution and liquidation of the
Company.
ARTICLE 16
MISCELLANEOUS
-------------
16.1. Special Power of Attorney. Each Member hereby irrevocably makes,
-------------------------
constitutes and appoints the Board of Managers, and such other Person or Persons
as the Board of Managers may designate, with full power of substitution, its
true and lawful representative and attorney-in-fact (acting in such capacity,
the "Attorney-in-Fact"), in the name, place and stead of such Member, with the
----------------
power from time to time to make, execute, sign, acknowledge, swear to, verify,
deliver, record, file and/or publish: (a) all certificates and other instruments
which the Board of Managers may deem appropriate, to form, qualify or continue
the Company as a limited liability company in the State of Delaware, and all
other jurisdictions in which the Company conducts or plans to conduct business
and to change the name of the Company; (b) all conveyances and other instruments
which the Board of Managers may deem appropriate to reflect the dissolution and
termination of the Company pursuant to the terms hereof, including any writing
required by the LLC Act to cancel the Company; and (c) a certificate of assumed
name and such other certificates and instruments as may be necessary under the
fictitious or assumed name statutes from time to time in effect in the State of
Delaware, and all other jurisdictions in which the Company conducts or plans to
conduct business.
-33-
<PAGE>
This power-of-attorney is a special power-of-attorney and is coupled with an
interest in favor of the Attorney-in-Fact and as such (i) shall be irrevocable,
and (ii) may be exercised for such Member by a facsimile signature of the
Attorney-in-Fact.
16.2. Amendments. This Agreement may not be amended without the written
----------
consent of each of the following: (i) Merck, and (ii) the Executive Agent;
provided, however, that no amendment to this Agreement shall (A) reduce the
- -------- -------
distributions to which a Member is entitled under this Agreement or extend the
time for making such distributions or the form or currency in which such
distributions are made or adversely affect the rights of such Member under
Section 5.5(c), 8.3 or 12.4, without the consent of each Member affected
thereby, or (B) adversely affect the rights of Lofberg under Article 7 or
Section 5.5, 6.1(b)(i), 6.4, 6.5, 6.13, 8.1(d), 8.5, 9.3(a), 10.2(a), (b) or
(c), 13.2, 13.4 or this Section 16.2 of the Agreement, without Lofberg's consent
or (C) adversely affect the rights of the Other Investor Members under Section
8.2(d) through (h) without the consent of the majority of the Other Members.
16.3. Binding Effects; Benefits. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Members hereto and their legal representatives and
permitted successors, as applicable. No Person, other than the Members, shall be
entitled to any benefits under this Agreement, except as otherwise expressly
provided herein.
16.4. Headings. The article, section and other headings of this Agreement
--------
are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
16.5. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same agreement.
16.6. Grammatical Construction. Whenever the context may require, any
------------------------
pronouns used herein shall include the corresponding masculine, feminine and/or
neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice versa.
16.7. Separability. Any term or provision of this Agreement which is
------------
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms or provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
16.8. Waiver. No waiver of any breach or condition of this Agreement shall
------
be deemed to be a waiver of any other subsequent breach or condition, whether of
like or different nature.
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<PAGE>
16.9. Entire Agreement. Other than the employment agreements of even date
----------------
herewith between Merck and Lofberg and Merck and Cooper and the Former
Agreements referred to therein, this Agreement constitutes the entire agreement
among the parties hereto and supersedes any prior agreements, understandings and
arrangements, oral or written, among the parties hereto.
16.10. Notices. (a) Any notice or other communication in connection with
-------
this Agreement may be made in writing delivered personally or by courier, or
sent by facsimile transmission (with confirmation slip showing receipt at
correct number) or by certified or registered mail and shall be addressed to the
intended recipient at its address or number initially specified as follows:
if to the Board of Managers:
Merck Capital Ventures, LLC
c/o Merck & Co. Inc.
1 Merck Drive
Whitehouse Station, NJ 08889
Fax No.: (908) 735 1244
Attn: Ken Frazier
if to the Members:
at the addresses set forth in Schedule A.
(b) The addresses specified above may be changed by either party at any
time in writing delivered to the other party in accordance with this Section
16.10. Any such notice is deemed to be given as follows: (i) if in writing and
delivered in person or by courier, on the date when it is delivered; (ii) if by
facsimile, when received at correct number (proof of which shall be an original
facsimile transmission confirmation slip or equivalent); or (iii) if sent by
certified or registered mail (airmail, if overseas) or the equivalent (return
receipt requested), on the date that mail is delivered or its delivery is
attempted, unless the date of that delivery (or attempted delivery) or that
receipt, as applicable, is not a working day in the recipient's city or that
communication is delivered (or attempted) or received, as applicable, after the
close of business on a working day in the recipient's city in which case that
communication shall be deemed given and effective on the first following day
that is a working day in the recipient's city.
16.11. Insurance. The Board of Managers may cause the Company to purchase
---------
and maintain, at the expense of the Company, insurance on behalf of the Company
or its Members or any Officer, Manager or agent of the Company against any
liability asserted against any of them or incurred by any of them in any such
capacity or
-35-
<PAGE>
arising out of their status as such, whether or not the Company would have the
power to indemnify any of them against such liability under the provisions of
this Agreement.
16.12. Disclosure of Investment. The Company and each of the Members
------------------------
agree, and each Member and the Board of Managers will use reasonable best
efforts to procure that any Portfolio Company in which the Company is to make a
Portfolio Investment will agree, that, from the date hereof, no public release
or announcement concerning the transactions contemplated by this Agreement,
including without limitation, the formation of the Company and the consummation
of a Portfolio Investment in a Portfolio Company (or the contemplation thereof),
shall be issued by any party without the prior consent of Merck in its sole
discretion except (i) as such release or announcement may be required by
------
applicable securities law or the rules or regulations of the United States
Securities and Exchange Commission, (ii) if a Portfolio Company reasonably
considers that such a public release or announcement is in the best interests of
the Portfolio Company, in which case the party required or electing to make the
release or announcement shall make its reasonable best efforts to allow Merck
reasonable time to comment on such release or announcement in advance of such
issue or (iii) if such public release or announcement does not include a
reference to Merck or any of its Affiliates or to the Merck name.
16.13. Arbitration. (a) Except for determinations of whether Protected
-----------
Parties are entitled to a release from liability or indemnification in
accordance with Sections 15.2 and 15.3, any controversy, dispute or claim
arising under this Agreement or any breach thereof shall be settled by
arbitration conducted in accordance with this Section 16.13 in the County of New
York, in accordance with the then existing rules of the American Arbitration
Association, and judgment upon any award rendered by the arbitrator may be
entered by any United States federal or state court having jurisdiction thereof,
provided that the foregoing shall not limit the Company's right to seek an
injunction or other equitable relief. Any such arbitration shall be conducted by
a single arbitrator, and, in the case of any dispute with respect to accounting
issues, the arbitrator (the "Arbitrator") shall be a partner of a "Big Five"
----------
accounting firm other than the Company's accountants. If the parties are unable
to agree upon an arbitrator within 5 Business Days of any Member requesting the
appointment thereof, then an arbitrator shall be appointed in accordance with
the rules of the American Arbitration Association. The parties intend that this
agreement to arbitrate be valid, enforceable and irrevocable and that any
determination reach pursuant to the foregoing procedure shall be final and
binding on the parties absent fraud. Each party shall bear their own costs and
expenses of any such arbitration and all of the fees and expenses of the
arbitrator shall be paid as to 50% by Merck and 50% by the other parties to the
Arbitration in proportion to their respective Maximum Amounts.
(b) A party seeking to enforce its rights pursuant to this Section 16.13
shall submit to the Arbitrator, with a copy sent to all other Members to the
dispute, a
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<PAGE>
notice of the existence of the dispute and a brief description of the action
giving rise to the dispute (such submission, a "Dispute Notice").
--------------
(c) No later than the close of business on the second Business Day
following submission of the Dispute Notice to the Arbitrator, representatives of
the relevant Members shall meet in person or by teleconference with the
Arbitrator and at such meeting the Arbitrator shall determine the process by
which the dispute (including scheduling presentations to him) shall be resolved
within 20 Business Days following submission of the Dispute Notice to him
(subject to extension for good cause). The relevant Members shall provide the
Arbitrator with all the information the Arbitrator deems necessary within the
time period specified by the Arbitrator.
(d) The Arbitrator shall deliver a written report to the relevant
Members and a copy to the Company of his determination as to the dispute by the
tenth Business Day following submission of the Dispute Notice to him (subject to
extension for good cause). Such report shall set forth the basis for such
determination and shall constitute an arbitral award that is final, binding and
unappealable under the Federal Arbitration Act, 9 U.S.C. (S)(S) 1 et seq. (the
"FAA").
---
16.14. Appointment of Executive Agent. Until his successor as Executive
------------------------------
Agent shall have been designated in the manner hereafter provided and, in any
event, for so long as he is the Chief Executive Officer of the Company, Lofberg
shall act as the sole agent (the "Executive Agent") for each Carry Member and
each Other Investor Member (collectively, the "Non-Merck Members") and shall,
-----------------
except as provided in Sections 5.5(c), 16.2 and this Section 16.14 be authorized
to exercise all rights of the Non-Merck Members hereunder. Except as provided in
Sections 5.5(c), 16.2 and this Section 16.14, the Executive Agent will have sole
power and authority to take any action on behalf of the Non-Merck Members
pursuant to this Agreement, including delivering any notice or granting any
waiver or consent hereunder, and Merck shall be entitled to rely on any action
taken by the Executive Agent as being taken on behalf of any or all of the Non-
Merck Members as the case requires. Except as provided in Sections 5.5(c), 16.2
and this Section 16.14, the rights of the Non-Merck Members under this Agreement
shall be exercised only by the Executive Agent on behalf of such Non-Merck
Members and no such Non-Merck Member shall be separately authorized to exercise
any such rights. Any notice required to be delivered to any Non-Merck Member
shall be deemed delivered if delivered to the Executive Agent. If Lofberg ceases
to be Chief Executive Officer of the Company, a majority of the Carry Members
may from time to time, by written notice to the Company and Merck, appoint a
replacement Executive Agent, who shall serve as Executive Agent until replaced
as provided in this sentence.
16.15. Payments on Business Days. Any payment required to be made
-------------------------
hereunder on a day which is not a Business Day shall be made on the next
succeeding Business Day.
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<PAGE>
16.16. Governing Law. This Agreement shall be governed by and construed
-------------
both as to validity and enforceability in accordance with the laws of the State
of Delaware, without regard to the conflict of laws provisions thereof.
[Remainder of Page is Intentionally Blank]
-38-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
Merck-Medco Managed Care, L.L.C.
By: ________________________________________
Name:
Title:
----------------------------------------
Per G.H. Lofberg
---------------------------------------
James Cooper
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<PAGE>
APPENDIX A
----------
DEFINITIONS
-----------
-1-
<PAGE>
As used in the foregoing Agreement, the following terms shall have the
meanings set forth below:
"Acquisition Cost" means the amount of Capital Contributions invested
----------------
in a Portfolio Investment, excluding any Fees and Expenses incurred in
connection therewith.
"Affiliate" means, with respect to any Person, any other Person,
---------
directly or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with such Person. The term "control," as
used in the immediately preceding sentence means, with respect to any Person,
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of the controlled Person.
"Agreement" shall have the meaning set forth in the Recitals.
---------
"Applicable Carried Interest" means:
---------------------------
(a) with respect to Lofberg, (i) from the date of this Agreement to
the first anniversary of this Agreement, 0%, (ii) from and after the first
anniversary of this Agreement to the second anniversary of this Agreement, 6%,
and (iii) thereafter, 12%;
(b) with respect to Cooper, (i) from the date of this Agreement to
the first anniversary of this Agreement, 0%, (ii) from and after the first
anniversary of this Agreement to the second anniversary of this Agreement,
1.25%, and (iii) thereafter, 2.5%;
(c) with respect to any other Carry Member, as determined by the
Board of Managers and set forth in a resolution of the Board, provided, however,
that the Applicable Carried Interest of a Carry Member shall be 0% in respect of
any Portfolio Investment:
(1) made or committed to be made by the Company prior to the Start
Date for such Carry Member; or
(2) made by the Company after the End Date for such Carry Member,
and provided further, that:
(A) in the case of a Carry Member whose employment by Merck or any
of its Affiliates is terminated without Cause, or as a result of
such Carry Member's Death or Disability or, in the case of
Lofberg, if Lofberg terminates his employment with the Company
for Good Reason, the Applicable Carried Interest of such Carry
Member in respect of any Portfolio Investment made on or after
the Start Date and on or before the End Date for such Carry
Member, shall be such
-1-
<PAGE>
Carry Member's Maximum Amount; and
(B) in the case of a Carry Member whose employment by Merck or any of
its Affiliates is terminated for any reason other than the
reasons set out in paragraph (A) of this definition, the
Applicable Carried Interest of such Carry Member in respect of
any Portfolio Investment made on or after the Start Date and on
or before the End Date for such Carry Member, shall be the
Applicable Carried Interest in effect at the End Date for such
Carry Member.
"Applicable Employer" shall have the meaning set forth in Section 8.5.
-------------------
"Applicable Portfolio Investment" is defined in the definition of
-------------------------------
Negative Carry Balance.
"Applicable Tax Rate" in respect of a Member, means that Member's
-------------------
marginal tax rate for the applicable Fiscal Year, taking into account, where
applicable, the deductibility of state and local taxes paid for federal tax
purposes, such Member's eligibility for a lower rate on long-term capital gains,
and any preferential rate or exemption to which such Member is actually
entitled.
"Applicable Valuation Date" means:
-------------------------
(a) in the case of Section 10.2(b), the 20/th/ Business Day following
the date the Divestment Proposal is recommended to the Board of Managers by
Lofberg; and
(b) in the case of Section 10.2(d), a date mutually agreed to by the
Members, or if no valuation date is agreed upon, December 31, 2010.
"Associate" has the meaning set forth in Rule 12b-2 under the
---------
Securities Exchange Act of 1934.
"Attorney-in-Fact" shall have the meaning set forth in Section 16.1.
----------------
"Attributable Carry Member Costs" shall mean, with respect to any
-------------------------------
Portfolio Investment, an amount equal to the cumulative previously unrecovered
Carry Member Costs incurred during the Expenses Period multiplied by a fraction,
(x) the numerator of which is the Acquisition Cost of such Portfolio Investment
and (y) the Denominator of which is (i) the aggregate Acquisition Costs of all
Portfolio Investments less (ii) the aggregate Acquisition Costs of Portfolio
Investments that have been Sold other than such Portfolio Investment.
"Attributable Fees and Expenses" shall mean, with respect to any
------------------------------
Portfolio Investment, an amount equal to the cumulative previously unrecovered
Fees and Expenses of the Company incurred during the Expenses Period which were
funded by a
-2-
<PAGE>
Capital Contribution of Merck multiplied by a fraction, (x) the numerator of
which is the Acquisition Cost of such Portfolio Investment and (y) the
Denominator of which is (i) the aggregate Acquisition Costs of all Portfolio
Investments less (ii) the aggregate Acquisition Costs of Portfolio Investments
that have been Sold other than such Portfolio Investment.
"Available Cash" means Cash which is available in the accounts of the
--------------
Company and not reserved to make any payments due and owing by the Company or
otherwise reserved by the Board of Managers, in its reasonable discretion, for
Fees and Expenses, operations, or contingencies of the Company.
"Base Commitment" shall mean, as to Merck, the Merck Base Commitment
---------------
and, as to each Other Investor Member, an amount equal to the Other Investor
Members Base Commitment multiplied by such Other Investor Member's Ratable
Contribution Percentage.
"Benefiting Member" has the meaning set forth in Section 8.3(a).
-----------------
"Board of Managers" and "Board" shall have the meaning set forth in
----------------- -----
Section 6.1.
"Bona Fide Third Party Offer" means a bona fide offer by a third party
---------------------------
that is not an Affiliate or Associate of the Company or any Member to acquire
the Company's entire interest in a Portfolio Company for cash, which offer:
(a) shall not be subject to financing, due diligence or other
contingencies that in the reasonable judgment of the Board of Managers create a
reasonable risk of delay or failure provided, however, that this paragraph (a)
shall not apply in respect of an offer that otherwise satisfies the definition
from an offeror who is bound by a customary confidentiality agreement with a
Portfolio Company if Merck unreasonably prevents such third party from
performing customary due diligence investigations;
(b) shall include evidence reasonably satisfactory to Board of the
offeror's ability to pay the purchase price;
(c) shall not include surviving representations and warranties or
indemnities (other than in respect of title); and
(d) shall not be subject to post-closing purchase price adjustments
or earn-outs.
"Book Value" means:
----------
(a) with respect to any asset, the asset's adjusted basis for federal
-3-
<PAGE>
income tax purposes, except that, in accordance with the rules set forth in
Reg. (S) 1.704-1(b)(iv)(f):
(i) The initial Book Value of the assets of the Company as of the
date of the contribution or deemed contribution shall be their respective
gross Fair Market Values at such time as reasonably determined by the Board
of Managers;
(ii) The Book Value of any asset distributed or deemed distributed by
the Company to any Member shall be adjusted immediately prior to such
distribution to equal its gross Fair Market Value at such time as
reasonably determined by the Board of Managers;
(iii) The Book Values of all Company assets may be adjusted in the
discretion of the Board of Managers to equal their respective gross Fair
Market Values, as reasonably determined by the Board of Managers as of:
(1) The date of the acquisition of an additional interest in the
Company by any new or existing Member in exchange for a
Capital Contribution to the Company; or
(2) Any distribution in liquidation of the Company, or the
distribution by the Company to a retiring or continuing
Member of money or other assets of the Company in reduction
of such Member's Membership Interest in the Company;
(iv) Any adjustments to the adjusted basis of any asset of the
Company pursuant to Sections 734 or 743 of the Code shall be taken into
account in determining such asset's Book Value in a manner consistent with
Reg. (S) 1.704-1(b)(2)(iv)(m); and
(v) If the Book Value of an asset has been determined pursuant to
clauses (i) through (iv) above, to the extent permitted under the Income
Tax Regulations, such Book Value shall thereafter be adjusted in the same
manner as would the asset's adjusted tax basis for federal income tax
purposes, except that depreciation and amortization deductions shall be
computed based on the asset's Book Value as so determined, and not on the
asset's adjusted tax basis in a manner consistent with Reg. (S) 1.704-
1(b)(2)(iv)(g)(3) or 1.704-3(d)(2), as applicable; and
(b) with respect to any liability, at a given time, the amount of such
liability to the extent:
-4-
<PAGE>
(i) reflected in the basis of any asset;
(ii) previously or currently deductible in computing Net
Profit, Net Loss or items of income, deduction or expense for Capital
Account maintenance purposes; or
(iii) otherwise previously taken into account for Capital
Account maintenance purposes.
"Break-Up Expenses" means all expenses incurred by the Company in
-----------------
connection with any Portfolio Investment that is not consummated, provided (a) a
term sheet and letter of intent for such Portfolio Investment has been approved
by the Board of Managers or (b) such Portfolio Investment does not require
approval of the Board of Managers and has been approved by Lofberg.
"Business Day" means any day excluding Saturday, Sunday and any day
------------
which shall be in the City of New York a legal holiday or a day on which banking
institutions are authorized by law or other government action to close.
"Capital Account" means, with respect to any Member, the capital
---------------
account of such Member maintained pursuant to Section 9.1, including all
additions and subtractions thereto, pursuant to this Agreement.
"Capital Contributions" shall have the meaning set forth in Section
---------------------
5.1(a).
"Carry Distributions" shall mean all amounts distributed to the Carry
-------------------
Members pursuant to the proviso in Section 10.1(b)(iii).
"Carry Interest" shall mean the interest of the Carry Members in
--------------
distributions made or to be made by the Company under this Agreement.
"Carry Members" has the meaning set forth in the Preamble and includes
-------------
any person who is designated as a Carry Member pursuant to Section 5.5.
"Carry Member Costs" means all costs and expenses (excluding severance
------------------
costs of terminated employees (other than Carry Members) and the initial costs,
such as headhunter's fees and relocation expenses, of hiring new employees to
replace employees seconded to the Company) incurred by Merck or any of its
Affiliates (other than the Company) in connection with the employment of any
person who is seconded to the Company pursuant to this Agreement or is a Carry
Member or Designated Additional Carry Member, during the period that such person
is employed to provide such services or be such Carry Member or Designated
Additional Carry Member, including, without limitation, any base compensation,
any overtime compensation, any bonus and any compensation related expenses and
the amount of any other employee benefits (including
-5-
<PAGE>
welfare and pension benefits) in the amount (equal to 36% of the base salary
plus overtime of such person) billed by Merck or its Affiliates to the relevant
business division of the entity that employs such employee.
"Cash" when capitalized means money and cash equivalents.
----
"Cause" shall have the meaning set forth in the applicable employment
-----
agreement between the entity employing the Carry Member and the Carry Member or,
if there is no employment agreement, shall mean (i) the continued failure by the
Carry Member to substantially perform the Carry Member's duties with the Company
(other than any such failure resulting from the Carry Member's incapacity due to
physical or mental illness), (ii) the Carry Member's engaging in conduct which
is demonstrably and materially injurious to the Company or any of its
Affiliates, monetarily or otherwise, (iii) the conviction of the Carry Member
for the commission of (A) a felony or (B) any other crime involving moral
turpitude, (iv) the Carry Member's material violation of any employment policies
or applicable codes of conduct of the Company, Merck or an Affiliate of Merck ,
or (v) a material breach by the Carry Member of any employee covenants to which
such an Carry Member is subject.
"Certificate of Formation" means the limited liability certificate of
------------------------
the Company and any amendments thereto.
"Clinical Development Entity" means any private emerging entity
---------------------------
engaged in innovative ways to manage documentation and information processing,
physician and patient recruitment, information analysis, communications and site
management all with the goal of shortening pharmaceutical development time
frames and/or lowering pharmaceutical development costs. Nothing in this
definition shall restrict the Company's power to invest in entities otherwise
satisfying the definition of E-Healthcare Companies under clause (b) of the
definition of such term in Section 4.1.
"Code" means the Internal Revenue Code of 1986, as in effect on the
----
date of this Agreement and as amended thereafter from time to time.
"Company" shall have the meaning set forth in the Preamble.
-------
"Contributing Member" means, in respect of a Distributing Investment,
-------------------
each Investor Member who contributed to the Acquisition Cost of such
Distributing Investment.
"Control Acquisition" means any cash investment prior to termination
-------------------
of the Investment Period (including by way of the cashless exercise of Warrants
Acquired for Cash) by Merck or any of its Affiliates or Associates (other than
the Company) in a Portfolio Company in which the Company has an existing
Portfolio Investment that (i) is rejected or not approved by Lofberg within the
period specified in Section 8.2(b) and
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<PAGE>
(ii) upon the consummation of which, the Company, Merck and Merck's Affiliates
and Associates would, in the aggregate, own more than 20% of the outstanding
voting equity of the Portfolio Company.
"Control Acquisition Interest" shall have the meaning set forth in
----------------------------
Section 8.2(d).
"Control Acquisition Price" of a Control Acquisition Interest means
-------------------------
the same consideration per share (or equity equivalent) paid or to be paid by
Merck or the applicable Affiliate or Associate under the related Control
Acquisition Agreement.
"Cooper" means James Cooper.
------
"Damages" means any and all losses, damages, expenses and liabilities
-------
whether joint or several, including, without limitation, those losses, damages,
expenses and liabilities (including reasonable attorneys' fees) arising under or
connected with the securities laws of the United States, or any other provision
of statutory law, common law, or other applicable law of any jurisdiction.
"Death" shall mean the death of the Carry Member.
-----
"Designated Additional Carry Member" shall have the meaning set forth
----------------------------------
in Section 5.5(a).
"Disability" shall have the meaning set forth in the applicable
----------
employment agreement between the entity employing the Carry Member and the Carry
Member, or if there is no employment agreement, a Carry Member shall be
considered to be disabled after he or she has been unable fully to perform his
or her duties as an employee of the Company (as determined in good faith by the
Board of Managers), with reasonable accommodation as required by law, by reason
of physical or mental illness for 180 days during any 360 day period.
"Distributing Investment" means, in respect of each distribution under
-----------------------
Section 10.1(b), the Portfolio Investment whose Sale gives rise to such
distribution.
"E-Healthcare Companies" shall have the meaning given to it in Section
----------------------
4.1 of the Agreement.
"employee of the Company" or "employees" means any employee of Company
-----------------------
or Merck or an Affiliate of Merck who provides services to the Company under the
terms of this Agreement.
"End Date" means the earlier of (i) the date the applicable Carry
--------
Member's employment with Merck or an Affiliate of Merck is terminated and (ii)
date the applicable Carry Member's designation as a Carry Member is terminated
by the Board of
-7-
<PAGE>
Managers pursuant to Section 6.13(l), in each case for any reason, except that
the End Date shall be the 90/th/ day following such termination date in respect
of a Portfolio Investment initiated prior to such termination date and
consummated on or before such 90th day if the applicable Carry Member's
employment or designation as a Carry Member is terminated without Cause or by
reason of the Carry Member's Death or Disability.
"Event of Bankruptcy" means, with respect to any Person, (i) the
-------------------
filing of a voluntary petition seeking liquidation, reorganization, arrangement
or readjustment, in any form, of its debts under Title 11 of the United States
Code or any other federal or state insolvency law, or the filing of an answer
consenting to or acquiescing in any such petition; (ii) the making of any
general assignment for the benefit of its creditors, or the admission in writing
of its inability to pay debts as they become due; (iii) the expiration of 30
days after the filing of an involuntary petition under Title 11 of the United
States Code, an application for the appointment of a receiver for the assets of
such Person, or an involuntary petition seeking liquidation, reorganization,
arrangement or readjustment of its debts under any other federal, state or
foreign insolvency law, provided that the same shall not have been vacated, set
aside or stayed within such 30-day period; (iv) the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator, or other similar agent
for the Person or for any substantial part of the Person's assets or property;
and (v) the ordering of the winding up or liquidation of the Person's affairs.
"Excess Carry Amount" means, with respect to each Carry Member, an
-------------------
amount, determined on an aggregate basis for all Portfolio Investments in which
such Carry Member has or had a Carry Interest, equal to such amount, if any, by
which its Carry Distributions exceed the product of (i) the highest Applicable
Carried Interest of such Carry Member in respect of any Portfolio Investment,
and (ii) the Net Profit Amount of all Portfolio Investments in which such Carry
Member has or had a Carry Interest.
"Exchange" means (i) a United States national, regional, or local
--------
securities exchange (ii) a foreign securities exchange or (iii) an interdealer
quotation system that regularly disseminates firm buy or sell quotations by
identified brokers or dealers (including, without limitation, NASDAQ).
"Executive Agent" shall have the meaning set forth in section 16.14.
---------------
"Executive Committee" shall have the meaning set forth in Section
-------------------
8.1(d).
"Expenses" shall mean, collectively, the Organizational Expenses and
--------
the Operating Expenses.
"Expenses Period" means the period commencing on the date of this
---------------
Agreement and ending on the third anniversary thereof.
-8-
<PAGE>
"Fair Market Value" shall mean, as to any non-cash property of the
-----------------
Company, the fair market value thereof as determined pursuant to Section 10.5 of
the Agreement.
"Family Trust" in respect of any Person means any trust, partnership,
------------
limited liability company or other entity, the beneficiaries, partners, members
or other equity owners of which (as the case may be), comprise solely members of
that Person's family, by blood or marriage.
"Fees and Expenses" shall mean, collectively, the Break-Up Expenses,
-----------------
the Organizational Expenses and the Operating Expenses.
"Fiscal Year" shall have the meaning set forth in Section 2.3.
-----------
"Funding Notice" shall have the meaning set forth in Section 5.2(a).
--------------
"Good Reason" shall mean the termination by Lofberg of his employment
-----------
as Chief Executive Officer of the Company following the revocation or suspension
of any of the powers granted to Lofberg pursuant to Section 7 of this Agreement
(other than in connection with the termination of Lofberg for Cause).
"GAAP" means the United States generally accepted accounting
----
principles.
"Investment Committee" shall mean a committee appointed by the Board
--------------------
of Managers in accordance with Section 8.1 of the Agreement.
"Investment Period" shall mean the period beginning on the date of
-----------------
this Agreement and ending on the earlier of (i) the date that all of the Merck
Base Commitment has been invested or committed for investment in Portfolio
Investments and Merck has advised the Executive Agent in writing that it does
not intend to make any further investments, (ii) the second anniversary of the
date of this Agreement or (iii) the termination thereof pursuant to Section 12.2
"Investor Members" shall have the meaning set forth in the Preamble
----------------
and includes any person who is designated as an Investor Member pursuant to
Section 5.5.
"LLC Act" shall have the meaning set forth in the Recitals.
-------
"Lofberg" means Per G. H. Lofberg.
-------
"MCV Budget" has the meaning set forth in Section 8.4.
----------
"majority of the Carry Members" means Carry Members holding a
-----------------------------
majority of the Carry Interests in respect of a Portfolio Investment, assuming
such Portfolio
-9-
<PAGE>
Investment were incurred on the date of determination and all unvested Carry
Interests were then vested.
"majority of the Non-Defaulting Investor Members" means Non-Defaulting
-----------------------------------------------
Investor Members providing a majority by monetary value of the Capital
Contributions in respect of a Portfolio Investment.
"majority of the Other Members" means Other Investor Members having a
-----------------------------
majority of the Other Investor Interests in the applicable Portfolio Investment.
"Marketable Securities" means securities that (i) are listed and
---------------------
traded on a national securities exchange or listed for quotation on the National
Association of Securities Dealers, Inc. Automated Quotation System National
Market System, or registered or otherwise transferable under Rule 144 under the
Securities Act of 1933, as amended without any waiting period or volume
restrictions applicable to the Members, (ii) are not subject to any "lock-up" or
other contractual restrictions on transfer and (iii) either (A) are not subject
to any limitations on sale or transfer under the Securities Act of 1933, as
amended or relevant state blue sky or similar foreign laws or (B) are covered by
a registration rights agreement pursuant to which (1) the Company has presently
exercisable registration rights covering 100% of the securities held by the
Company in the applicable Portfolio Investment, (2) Lofberg has recommended in
writing to the Board of Managers that such registration rights be exercised, and
(3) the Board of Managers shall have failed to request registration of such
registrable securities within 30 days of Lofberg's recommendation unless the
failure to request such registration was based upon the Board's determination,
after due inquiry of the Portfolio Company, that there was a reasonable
likelihood the Portfolio Company would exercise deferral or blackout rights if
the Company were to exercise such registration rights.
"Maximum Amount" means the maximum Applicable Carried Interest of a
--------------
Carry Member which is, (a) in respect of Lofberg, 12%, (b) in respect of Cooper,
2.5% and (c) in respect of any other Carry Member, the maximum Applicable
Carried Interest of such Carry Member as specified in the determination of the
Board of Managers and set forth in the applicable resolution of the Board.
"Members" shall have the meaning set forth in the Preamble.
-------
"Membership Interest" means the interests of the Members in the
-------------------
Company.
"Merck Base Commitment" shall have the meaning set forth in Section
---------------------
5.1(a).
"Negative Carry Balance" means, with respect to a Carry Member, such
----------------------
Carry Member's Applicable Carried Interest of the amount, if any (without
duplication of Portfolio Investments sold concurrently for a gain), by which (i)
the sum of Merck's share
-10-
<PAGE>
of the Acquisition Costs of all Portfolio Investments in which the Carry Member
had a Carry Interest and that have been previously Sold, or are being Sold
concurrently with the Sale for which the Negative Carry Balance is to be
calculated, since the last Sale of a Portfolio Investment in which such Carry
Member received a distribution of Carry Interest pursuant to Section
10.1(b)(iii) (the "Applicable Portfolio Investments") exceeds (ii) all amounts
--------------------------------
distributable to Merck pursuant to Section 10.1(b)(ii) or (iii) with respect to
the Applicable Portfolio Investments before reducing such amounts by the amounts
distributed as Carry Distributions to the Carry Members pursuant to Section
10.1(b)(iii). For purposes of this definition, if a Carry Member's Carry
Interest increases in accordance with the definition of Applicable Carried
Interest, the Negative Carry Balance of such Carry Member shall be recomputed
using the new higher percentage.
"Net Acquisition Cost" shall mean, with respect to any Portfolio
--------------------
Investment, the Acquisition Cost of such Portfolio Investment reduced by the
cumulative amount of distributions under Section 10.1(b)(ii) with respect to
such Portfolio Investment.
"Net Profit" and "Net Loss" mean, respectively, for any period the
---------- --------
taxable income and taxable loss of the Company for the period as determined for
federal income tax purposes, provided that for purposes of determining Net
Profit and Net Loss and items of gross income, deductions and expenses and not
for income tax purposes: (i) there shall be taken into account any tax exempt
income of the Company; (ii) any expenditures of the Company which are described
in Section 705(a)(2)(B) of the Code or which are deemed to be described in
Section 705(a)(2)(B) of the Code pursuant to Regulations under Section 704(b) of
the Code shall be treated as deductible expenses; (iii) if any Company asset has
a Book Value which differs from its adjusted tax basis as determined for federal
income tax purposes, income, gain, loss and deduction with respect to such asset
shall be computed based upon the asset's Book Value rather than its adjusted tax
basis in such manner as provided in the Regulations; (iv) items of gross income
or deduction allocated pursuant to Section 9.2(b)-(d) shall be excluded from the
computation of Net Profit and Net Loss; (v) there shall be taken into account
any separately stated items computed under Section 703(a) of the Code; and (vi)
if the Book Value of any Company asset is adjusted pursuant to clauses (ii) -
(iv) of the definition thereof, the amount of such adjustment shall be taken
into account in the taxable year of adjustment as gain or loss from the
disposition of such asset for purposes of computing Net Profit and Net Loss.
"Net Profit Amount" shall mean in respect of a Carry Member an amount
-----------------
equal to the excess of (i) the aggregate amount of all distributions made to
Merck pursuant to Sections 10.1(b)(ii) and (iii) and the Carry Members pursuant
to the proviso in Section 10.1(b)(iii) in respect of all Portfolio Investments
in which such Carry Member has or had a Carry Interest, provided, however, that
-------- -------
in relation to those Portfolio Investments for which a deemed distribution under
Section 10.2(c) has occurred, the price
-11-
<PAGE>
set forth in the Bona Fide Third Party Offer will be deemed to be the amount of
the distribution in respect of that Portfolio Investment for the purposes of
sentence (i) of this definition, over (ii) the aggregate amount of Acquisition
Costs contributed by Merck with respect to such Portfolio Investments.
"Net Sales Proceeds" means Cash payments (including any Cash received
------------------
by way of deferred payment pursuant to, or by amortization of, a note receivable
or otherwise, as and when so received) received upon the Sale of Other Fees or
Other Securities, net of any bona fide direct costs incurred in connection with
such sale, including, without limitation, brokers' fees, legal fees and expenses
and investment banking fees (but excluding any income taxes) reasonably
estimated to be payable as a result of any gain recognized in connection
therewith.
"Non-Merck Members" shall have the meaning set forth in Section 16.14.
-----------------
"Officers" shall have the meaning set forth in Section 6.12.
--------
"Operating Expenses" shall mean all costs and expenses relating to the
------------------
Company's activities, investments and business (to the extent not borne or
reimbursed by a Portfolio Company), including, without limitation, (i) all costs
and expenses attributable to acquiring, holding and disposing of the Company's
investments (including, without limitation, interest on money borrowed by the
Company or on behalf of the Company, legal fees and expenses, travel expenses,
registration expenses and brokerage, finders', custodial and other fees), (ii)
legal, accounting, auditing, consulting and other costs and expenses directly
relating to the ongoing activities of the Company (including, without
limitation, travel expenses, expenses associated with the preparation of
financial statements, valuation reports, tax returns and forms K-1), (iii)
expenses of the Board of Managers and Investment Committee that the Company is
required to pay, (iv) costs, expenses and liabilities of the Company (including,
without limitation, litigation and indemnification costs and expenses, judgments
and settlements), (v) the payment of the salaries of all of the employees of the
Company (if any), (vi) rental and other office expenses of the Company and (vii)
all out-of-pocket fees and expenses incurred by the Company or its members,
officers and employees (without duplication) whether prior to or after the date
hereof directly relating to investment and disposition opportunities for the
Company not consummated (including, without limitation, legal, travel,
accounting, auditing, engineering, consulting and other fees and expenses of
advisors and experts, financing commitment and investment banking fees, and
printing).
"Organizational Expenses" shall mean all costs actually incurred in
-----------------------
organizing the Company, including, without limitation, all fees, costs and
expenses in connection with the planning, negotiation, execution and delivery of
this Agreement and the organization and offering of interests in the Company
(including, without limitation, travel, planning, printing and attorneys' and
accountants' fees and expenses).
-12-
<PAGE>
"Other Fees" shall have the meaning set forth in Section 8.3(a).
----------
"Other Investor Members Base Commitment" shall have the meaning set
--------------------------------------
forth in Section 5.1
"Other Securities" shall have the meaning set forth in Section 8.3(b).
----------------
"Partially Adjusted Capital Account" means, with respect to any Member
----------------------------------
and any Fiscal Year (or period), the Capital Account of such Member at the
beginning of such Fiscal Year (or period), adjusted for all contributions and
distributions during such year (or period) and all special allocations pursuant
to Sections 9.2(b), (c), (d) and (e) with respect to such Fiscal Year (or
period), but before giving effect to any allocations of Net Profit or Net Loss
with respect to such Fiscal Year (or period).
"Person" means any natural person, corporation, membership, trust,
------
partnership, limited liability company, association or other entity.
"Portfolio Company" shall mean any Person that is the issuer of a
-----------------
Portfolio Investment (other than a Short-Term Investment).
"Portfolio Investment" shall mean an investment made by the Company,
--------------------
directly or by or through an entity created for the purpose of making such
investment, in a Portfolio Company, including, without limitation, through the
acquisition of assets, capital stock, partnership interests, equity securities,
equity related securities, joint venture interests, undivided interests, leasing
interests, limited liability company interests or convertible or other
investment interests, or any combination thereof, or securities or interests
convertible into or exchangeable for any of the foregoing, including, without
limitation, any business transaction in which the Company or an entity created
for the purpose of making such investment acquires a Portfolio Company or
interest therein by tender offer, takeover bid, merger, leveraged buyout, open
market purchase, private placement or otherwise and including any of the
foregoing received in exchange for or upon conversion of a Portfolio Investment
in connection with the merger or consolidation or other business combination of
a Portfolio Company with or into another Person.
"Proceeds" shall have the meaning set forth in Section 10.1(b).
--------
"Public Float" means the aggregate Fair Market Value of the common
------------
stock of an issuer held by Persons who are not Affiliates of such issuer.
"Purchase Date" shall have the meaning set forth in Section 8.2(g).
-------------
"Qualified IPO" means a bona fide underwritten public offering,
-------------
pursuant to an effective registration statement under the Securities Act of
1933, of the common stock of a Portfolio Company in which the underwriters
represent in writing that they are
-13-
<PAGE>
prepared to include in such public offering the Company's entire interest in
such Portfolio Company.
"Qualifying Issuer" means any Portfolio Company whose common stock is
-----------------
traded on a national securities exchange or on the Nasdaq Stock Market having
(i) a Public Float of at least $500 million or (ii) an average daily trading
volume for the 20 Business Days prior to the date Lofberg presents a Divestment
Proposal to the Board of Managers of at least 25% of the Company's interest in
such Portfolio Company.
"Quarter" means any consecutive three month period.
-------
"Ratable Contribution Percentage" means the proportion of the total
-------------------------------
obligation of the Other Investor Members to make Capital Contributions
attributable to each Other Investor Member expressed as a percentage which shall
initially be the percentages set out in Schedule B of this Agreement but which
may be amended from time to time in accordance with Section 5.5.
"Reg.(S)" shall mean a section of the Regulations.
-------
"Regulations" shall mean the Treasury regulations from time to time
-----------
issued pursuant to, and in effect under, the Code.
"Required Consents" shall have the meaning set forth in Section
-----------------
8.3(c).
"Sale" or "Sold" means the sale, liquidation or other disposition of a
---- ----
Portfolio Investment for cash or the distribution in kind of a Portfolio
Investment; provided that (i) if a Portfolio Investment is partially sold or
distributed in kind, only the portion so sold or distributed shall be treated as
a "Sold" Portfolio Investment and (ii) if a Portfolio Investment is exchanged
for securities, the Portfolio Investment shall not be treated as a "Sold"
Portfolio Investment.
"Section 705(a)(2)(B) Expenditure" shall mean an expenditure described
--------------------------------
in Section 705(a)(2)(B) of the Code which is neither deductible in computing
taxable income nor properly chargeable to capital accounts and any expenditure
considered to be an expenditure described in Section 705(a)(2)(B) of the Code
pursuant to Regulations under Section 704(b) of the Code.
"Short-Term Investments" shall mean: (i) negotiable instruments or
----------------------
securities (whether certificated or uncertificated) which evidence (A)
obligations of or fully guaranteed by the United States of America, (B) time
deposits in, or bankers' acceptances or certificates of deposit issued by, any
depository institution or trust company organized under the laws of the United
States of America or any state thereof, subject to supervision and examination
by United States or state banking or depository institution authorities and
having, to the knowledge of the Carry Members at the time
-14-
<PAGE>
such investment is made or committed, reported capital and surplus in excess of
$250,000,000, and (c) commercial paper having a maturity of less than 180 days
and having, at the time of the investment or commitment to invest therein, a
rating from Moody's Investors Service, Inc. or Standard & Poor's Corporation of
P-1 or A-1, respectively; and (ii) demand deposits in any depository institution
or trust company referred to in (i)(B) above.
"Start Date" means, in respect of Lofberg and Cooper, the date of this
----------
Agreement, and in respect of any Designated Applicable Carry Member, the date
such Designated Applicable Carry Member is designated pursuant to section 5.5 or
such other date after such designation as may be specified by the Board of
Managers in a resolution of the Board.
"Target Capital Account" means, with respect to any Member and any
----------------------
Fiscal Year (or period), an amount (which may be either a positive or a deficit
balance) equal to the hypothetical distribution such Member would receive
pursuant to clause (i) below, minus the hypothetical contribution such Member
would be required to make pursuant to clause (ii), and minus the Member's share
of the Company's partnership minimum gain, and minus the Member's share of the
Company's partner nonrecourse debt minimum gain, all computed immediately prior
to the hypothetical sale described in clause (i) below.
(i) The hypothetical distribution to a Member at any time is
equal to the amount that would be received by such Member
if all of the Company's assets were sold for an amount of
cash equal to their Book Values, all Company liabilities
were satisfied to the extent required by their terms
(limited, with respect to each nonrecourse liability or
"partner nonrecourse debt" (as defined in Reg.(S) 1.704-
2(b)(4)) to the Book Value of the Company assets securing
each such liability), and the net assets of the Company,
including any amount returned to the Company pursuant to
Section 12.4, were distributed in full to the Members
pursuant to Section 12.3(c) hereof upon liquidation of the
Company.
(ii) The hypothetical contribution by a Member is equal to the
amount that such Member would be obligated to contribute
pursuant to Section 12.4 upon the hypothetical sale
described in clause (i) above in liquidation of the
Company.
"Tax Distribution" shall have the meaning set forth in Section
----------------
10.1(e).
-15-
<PAGE>
"Tax Liability Amount" with respect to a Member for a Fiscal Year,
--------------------
shall equal the product of (i) the Applicable Tax Rate, times (ii) the amount of
the Company's taxable income allocated to such Member with respect to such
Fiscal Year.
"Tax Matters Member" shall have the meaning set forth in Section 13.1.
------------------
"Tax Payment Date" with respect to a Fiscal Year shall mean March 31st
----------------
of the year following such Fiscal Year.
"Transfer" shall have the meaning set forth in Section 11.1(a).
--------
"Transferring Member" shall have the meaning set forth in Section
-------------------
8.3(c).
"Warrants Acquired for Cash" means warrants or options acquired for
--------------------------
cash consideration if such warrants, after giving effect to the cash purchase
price and no other consideration, were not in-the-money at the date of
acquisition. Warrants acquired in connection with a cash investment in other
securities (a "Unit Investment") shall be deemed Warrants Acquired for Cash if
---------------
such Unit Investment is a financing transaction for a cash purchase price made
on arm's length terms.
-16-
<PAGE>
Schedule A
----------
Part A - Investor Members:
1. Merck-Medco Managed Care, L.L.C.
c/o Merck & Co. Inc.
1 Merck Drive
Whitehouse Station, NJ 08889
Fax No.: (908) 735-1244
Attention: Ken Frazier
2. Per G. H. Lofberg
63 East 92/nd/ Street
New York, NY 10128
Fax No.: (212) 423-3034
3. James Cooper
8 Lambert Lane
Upper Saddle River, NJ 07458
Fax No.: (201) 327-2671
Part B - Carry Members:
1. Per G. H. Lofberg
63 East 92/nd/ Street
New York, NY 10128
Fax No.: (212) 423-3043
2. James Cooper
8 Lambert Lane
Upper Saddle River, NJ 07458
Fax No.: (201) 327-2671
-1-
<PAGE>
Schedule B
----------
Contribution Schedule
----------------------------------------------------
Lofberg 82.75%
----------------------------------------------------
Cooper 17.25%
----------------------------------------------------
-1-
<PAGE>
Schedule C
----------
Illustration of Distributions and Allocation of Net Profits and Losses
[See attached Distribution Example]
-2-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.(P)
<SEQUENCE>4
<FILENAME>dex10p.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT - MERCK-MEDCO & PER LOFBERG
<TEXT>
<PAGE>
Exhibit 10(p)
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made as of this 27/th/day of November, 2000, by and between
Merck-Medco Managed Care, L.L.C., a Delaware limited liability company ("Merck-
-----
Medco") and Per G.H. Lofberg (the "Employee").
- ------ ---------
WHEREAS, the Employee has been and is currently employed by Merck-
Medco pursuant to an employment agreement dated April 1, 1993, as amended July
27, 1993 and May 24, 1996 (the "Former Agreement");
----------------
WHEREAS, Merck-Medco, the Employee and certain other members have
entered into a Limited Liability Corporation Agreement, dated as of November 27,
2000 (the "LLC Agreement"), pursuant to which the Employee will become a member
-------------
of Merck Capital Ventures, L.L.C. ("MCV"); and
---
WHEREAS, Merck-Medco desires that the Employee continue his employment
with Merck-Medco by providing services to MCV as the Chief Executive Officer and
President of MCV and the Employee is willing to render such services to MCV on
behalf of Merck-Medco on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Employment Term. Subject to the terms and provisions of this
---------------
Agreement, Merck-Medco hereby agrees to employ the Employee and the Employee
hereby agrees to be employed by Merck-Medco for the period commencing on the
date hereof (the "Commencement Date") and ending on the second anniversary of
------------------
the Commencement Date, unless extended as provided below or terminated sooner as
provided in Section 5 hereof (the "Employment Term"); provided, however, that on
---------------- -------- -------
the second anniversary of the Commencement Date and on each anniversary
thereafter, the Employment Term shall be automatically extended for an
additional one (1) year period so long as neither Merck-Medco nor the Employee
has provided the other party with not less than sixty (60) days prior written
notice that the Employment Term shall not be so extended.
2. Position and Duties. During the Employment Term the Employee
-------------------
shall, on behalf of Merck-Medco, serve as the Chief Executive Officer and
President of MCV with the principal responsibility of assisting MCV in building
a venture capital portfolio primarily in E-healthcare companies and assisting
any such portfolio company (a "Portfolio Company") in achieving business
-----------------
objectives in its dealings with
<PAGE>
Merck & Co. Inc., a New Jersey corporation ("Merck"), Merck-Medco, and other
corporations, and in such regard shall be responsible for (i) developing and
implementing strategy, lead generation, investment decisions and investment
evaluation for MCV, (ii) coordinating with the appropriate business contacts at
Merck-Medco and Merck, (iii) building relationships with entrepreneurs and
relevant individuals within the investment community, (iv) recruiting, and (v)
overseeing MCV's investment portfolio. The Employee shall report solely and
directly to Judy Lewent, or to Chairman of the Board of MCV if Judy Lewent shall
cease to be Chairman of the Board of MCV, and shall perform such other duties,
services and responsibilities as may from time to time be requested by Ms.
Lewent or the Chairman of the Board, including without limitation, serving as an
officer, advisor or board member, where appropriate, for any Portfolio
Companies. During the Employment Term, the Employee's primary business activity
shall be the performance of his duties, services and responsibilities set forth
herein and the Employee will use his best efforts to promote the interests of
Merck-Medco and MCV; provided, however, that during the Employment Term, the
-------- -------
Employee shall not engage in any other business activities on behalf of third
parties which interfere with the performance of Employee's duties hereunder.
Notwithstanding the foregoing, the Employee shall be entitled to (a) serve on
corporate, civic or charitable boards or committees, (b) deliver lectures,
fulfill speaking engagements or teach at educational institutions, and (c)
manage private investments, in the case of each of (a) through (c), so long as
such activities do not materially interfere with the performance of Employee's
duties hereunder or create a conflict of interest.
3. Location. The Employee shall perform his duties hereunder
--------
primarily at Merck-Medco's Paragon building, and shall perform duties at such
other locations as are reasonably designated by the Chairman of the Board.
4. Compensation and Benefits.
-------------------------
4.1 Base Salary. In consideration of the performance of all of
-----------
the Employee's obligations during the Employment Term (including any services as
an officer or director of Merck-Medco or MCV, member of any committee of the
Board of Managers of MCV (the "Board") or board member of any Portfolio Company,
-----
or otherwise), Merck-Medco will during the Employment Term pay the Employee a
base salary (the "Salary") at an annual rate of $150,000, subject to review each
------
year by the Board. The Salary shall be payable in accordance with Merck-Medco's
normal payroll practices. All payments and benefits hereunder shall be subject
to all applicable taxes required to be withheld pursuant to federal, state or
local law.
4.2 Benefits. During the Employment Term, the Employee (and his
--------
dependents, if eligible thereunder) shall continue to be eligible to participate
in all existing employee benefit plans, programs and policies of Merck-Medco in
which he was eligible to participate immediately prior to the Commencement Date
in
2
<PAGE>
accordance with their terms and conditions as they may be amended from time
to time, and such other employee benefit plans, programs and policies of Merck-
Medco which are hereafter established by Merck-Medco and which by their terms
provide for the participation therein by the Employee. Payments received by the
Employee under the terms of the LLC Agreement shall not constitute compensation
for purposes of any employee benefit plan, program or policy of Merck-Medco in
which the Employee is, or becomes, eligible to participate. Options granted to
the Employee to purchase shares of Merck common stock will continue to vest to
the extent provided for in, and in accordance with their terms under, the Former
Agreement but no additional options to purchase Merck common stock will be
granted to the Employee during the Employment Term.
5. Termination. The Employee's employment with Merck-Medco and the
-----------
Employment Term shall terminate upon the expiration of the Employment Term or
upon the earlier occurrence of any of the following events of termination:
(a) By Merck-Medco (other than for Cause) upon prior written
notice.
(b) By the Employee upon sixty (60) days prior written notice.
(c) By Merck-Medco for Cause upon written notice (the "Cause
Notice") to the Employee specifying the conduct constituting Cause. "Cause"
-----
shall mean (i) the continued failure by the Employee to substantially perform
the Employee's duties hereunder (other than any such failure resulting from the
Employee's incapacity due to physical or mental illness), (ii) the Employee's
engaging in conduct which is demonstrably and materially injurious to Merck-
Medco, MCV or any of their affiliates, monetarily or otherwise, (iii) the
conviction of the Employee for the commission of (A) a felony or (B) any other
crime involving moral turpitude, (iv) the Employee's violation of any material
Merck-Medco employment policies or codes of conduct, or (v) a material breach by
the Employee of any provision of this Agreement or the LLC Agreement, including
without limitation, any breach of the employee covenants included in Section 7
hereof. Notwithstanding the foregoing, the Employee shall have a period of 30
days following delivery of the Cause Notice during which he may cure any
condition, act or failure to act specified in the Cause Notice as constituting
Cause, to the extent such condition, act or failure to act is capable of being
cured; provided, however, that if the condition, act or failure to act can not
-------- -------
reasonably be cured in 30 days, it will be deemed cured if the Employee
commences to cure such condition, act or failure to act within the 30-day period
following delivery of the Cause Notice and completes such cure to the reasonable
satisfaction of Merck-Medco within the 60-day period following delivery of the
Cause Notice. If the Employee does not cure each such condition, act or failure
to act and the Employee's employment is terminated for Cause, for all purposes
of this Agreement and the LLC Agreement the effective date of such termination
shall be the date of delivery of the Cause Notice.
3
<PAGE>
(d) By reason of the Disability of the Employee. The Employee
shall be considered to be disabled after he has been unable fully to perform his
duties hereunder (as determined in good faith by the Board), with reasonable
accommodation as required by law, by reason of physical or mental illness for
180 days during any 360 day period ("Disability"). Notwithstanding the
----------
foregoing, whether or not the Employee is eligible for disability benefits under
the benefit plans, programs and policies of Merck-Medco, shall be determined
solely in accordance with the terms and conditions of such plans, programs and
policies, as they may be amended from time to time, and whether or not the
Employee shall be considered disabled for purposes of this Agreement, shall be
determined solely in accordance with the terms and conditions of this Section
5(d).
(e) By reason of the death of the Employee ("Death").
-----
In the event of termination of the Employment Term, for whatever reason, (i) the
Employee shall cooperate with Merck-Medco and MCV and be reasonably available to
Merck-Medco and MCV with respect to continuing and/or future matters arising out
of the Employee's employment or any other relationship with Merck-Medco and MCV,
whether such matters are business-related, legal or otherwise and (ii) the
Employee shall, unless otherwise requested by the Board, resign immediately from
his membership on the Board and the board of any Portfolio Company.
6. Termination Payments. Upon termination of the Employee's
--------------------
employment and the Employment Term for any reason, Merck-Medco shall pay the
Employee (or in the case of his Death, his estate) the Salary hereunder and
unpaid as of the date of termination. The foregoing payments upon termination
of employment shall constitute the exclusive payments due the Employee upon
termination of Employee's employment, but such payments shall have no effect on
(i) any benefits which may be due the Employee under any plan, program or policy
of Merck-Medco in which the Employee is participating on the date of such
termination of employment in accordance with their terms, (ii) the Employee's
entitlement pursuant to the terms of the LLC Agreement, and/or (iii) the
Employee's rights, if any, with respect to any unexercised options to acquire
Merck common stock held by the Employee on the date of such termination of
employment.
7. Employee Covenants.
------------------
7.1 Work made for Hire. (a) The Employee recognizes and
------------------
understands that his duties under this Agreement include or may include the
preparation of works and other written or graphic materials relating directly or
indirectly to the business of Merck-Medco, MCV and their affiliates and that
each such work has been or will be prepared by the Employee as an employee
within the scope of the Employee's employment hereunder, and constitutes a "work
made for hire" as that phrase is used in 17 U.S.C. (S) 101 et seq. The Employee
understands that MCV is considered the author of each "work made for hire" and
exclusively owns all
4
<PAGE>
of the rights to such work. The Employee understands that as owner of each
copyright, MCV has the exclusive rights to use, reproduce, distribute and
publicly display the work. Without limiting the foregoing, to the extent
necessary, the Employee assigns and agrees to assign all intellectual property
rights in all such works and other written or graphic materials, and agrees to
execute all documents necessary to effectuate such assignments.
(b) The Employee will promptly disclose to the Board or to any
persons designated by the Board all inventions, discoveries, improvements, works
of authorship, computer programs, machines, methods of analysis concepts,
formulas, compositions, ideas, designs, processes, techniques, know-how and
data, or other intellectual property reduced to any tangible form, whether or
not patentable (collectively "Inventions") made or conceived or reduced to
----------
practice or developed by the Employee, either alone or jointly with others,
during the Employment Term. The Employee will also disclose to the Board
Inventions conceived, reduced to practice, or developed by him within six months
following the termination of the Employment Term; such disclosures shall be
received by the Board in confidence (to the extent they are not assigned under
this Agreement) and do not extend the assignment made in this Agreement. The
Employee agrees to keep and maintain adequate and current written records of all
Inventions made by the Employee (in the form of notes, sketches, drawings and
other records as may be specified by Merck-Medco and/or MCV), which records
shall be available to and remain the sole property of either Merck-Medco and/or
MCV, as appropriate, at all times.
(c) The Employee agrees to perform, during and after the
Employment Term, all acts deemed necessary or desirable by Merck-Medco to permit
and assist Merck-Medco and/or MCV, at Merck-Medco's sole expense, in evidencing,
perfecting, obtaining, maintaining, defending and enforcing rights of Merck-
Medco and/or MCV and/or the Employee's assignment with respect to such
Inventions in any and all countries.
(d) The Employee understands that any Invention which he
develops entirely on his own time not using any of Merck-Medco's or MCV's
equipment, supplies, facilities, or trade secret information ("Personal
--------
Invention") is excluded from this Agreement provided such Personal Invention (i)
- ---------
does not relate at the time of conception or reduction to practice to Merck-
Medco's or MCV's or their affiliates' businesses, or research or development of
Merck-Medco and/or MCV or their affiliates; and (ii) does not result from any
work performed by the Employee for Merck-Medco and/or MCV. It is understood that
all Personal Inventions made by the Employee prior to his employment by Merck-
Medco are excluded from this Agreement. The Employee agrees to notify Merck-
Medco in writing before making any disclosure or performing work on behalf of
Merck-Medco or MCV or Merck which appears to threaten or conflict with
proprietary rights the Employee claims in
5
<PAGE>
any Personal Invention. In the event of the Employee's failure to give such
notice, the Employee agrees that he will make no claim against Merck-Medco or
MCV with respect to any such Personal Invention.
7.2 Unauthorized Disclosure. The Employee agrees and
-----------------------
understands that in the Employee's position with Merck-Medco during the
Employment Term, the Employee has been and will be exposed to and receive
information relating to the business affairs of Merck-Medco, MCV, their
affiliates and Portfolio Companies, including but not limited to technical
information, business and marketing plans, strategies, customer information,
other information concerning Merck-Medco's, MCV's, their affiliates' and
Portfolio Companies' products, promotions, development, financing, expansion
plans, business policies and practices, and other forms of information
considered by such entities to be confidential and in the nature of trade
secrets. The Employee agrees that during the Employment Term and thereafter,
the Employee will keep such information confidential and not disclose such
information, either directly or indirectly, to any third person or entity
without the prior written consent of Merck-Medco (unless such information is
otherwise in the public domain through no fault of the Employee); provided,
--------
however, that nothing in this Section 7.2 shall prevent the Employee with or
- -------
without Merck-Medco's consent, from disclosing documents or information (i) in
connection with the Employee's performance of his duties and responsibilities
hereunder in the ordinary course of business as an officer of Merck-Medco, or
(ii) in connection with any judicial or administrative investigation, inquiry or
proceeding, provided the Employee is compelled to do so by court order or
subpoena and notifies Merck-Medco as soon as practicable after the receipt of
such court order or subpoena. This confidentiality covenant has no temporal,
geographical or territorial restriction.
7.3 Non-competition. By and in consideration of Merck-Medco's
---------------
entering into this Agreement and the payments and benefits to be provided (i) by
Merck-Medco hereunder and (ii) pursuant to the LLC Agreement, and further in
consideration of the Employee's exposure to the proprietary information of
Merck-Medco and MCV, the Employee agrees that the Employee will not;
(A) during the Employment Term, directly or indirectly,
own, manage, operate, join, control, be employed by, or participate in the
ownership, management, operation or control of, or be connected in any manner,
including but not limited to, holding the position of shareholder (except as a
holder of not more than one percent (1%) of the outstanding shares of a
publicly-held corporation or as a passive investor holding not more than three
percent (3%) of the equity interests in a venture capital fund), director,
officer, consultant, independent contractor, employee, partner, or investor,
with any person, corporation, partnership or other entity engaged in a business
which is in competition, directly or indirectly, (1) with any business of MCV or
any business in which MCV proposes or intends to engage or (2) any significant
6
<PAGE>
business (whether financially, strategically or otherwise significant) (each a
"Significant Business") of any Portfolio Company or any Significant Business in
which any Portfolio Company proposes or intends to engage, and
(B) during the two-year period following the termination of
the Employee's employment hereunder (the "Restriction Period"), directly or
------------------
indirectly, own, manage, operate, join, control, be employed by, or participate
in the ownership, management, operation or control of, or be connected in any
manner, including but not limited to, holding the position of shareholder
(except as a holder of not more than one percent (1%) of the outstanding shares
of a publicly-held corporation or as a passive investor holding not more than
three percent (3%) of the equity interests in a venture capital fund), director,
officer, consultant, independent contractor, employee, partner, or investor,
with any person, corporation, partnership or other entity that directly or
indirectly manages, owns in whole or in part, is a partner with or in, invests
in or otherwise controls any entity engaged in a business which is in
competition, directly or indirectly, with (i) any Significant Business of any
Portfolio Company or any Significant Business in which any Portfolio Company
proposes or intends, as of the date of termination of employment, to engage, or
(ii) any business of any entity which, as of the date of the Employee's
termination of employment, MCV or any Portfolio Company is considering as a
potential Portfolio Company or acquisition, and which within six months
following such termination date, becomes a Portfolio Company or is acquired by a
Portfolio Company. For purposes of this Section 7.3, the term "Portfolio
Company" shall not include any entity from and after the date it shall have
ceased to be a Portfolio Company as defined in the LLC Agreement or, if later,
the date on which Merck-Medco and its Affiliates and Associates shall cease to
beneficially own, directly or indirectly, any equity interest in such entity.
Following termination of the employee's employment, upon request, the Employee
shall notify Merck-Medco of the Employee's then current employment status.
7.4 Non-solicitation and Non-disparagement. (a) The Employee
--------------------------------------
agrees that during the Employment Term and thereafter during the Restriction
Period, he will not intentionally or knowingly, directly or indirectly, (i)
interfere with MCV's or any Portfolio Company's or any of their respective
affiliates' relationship with, or endeavor to entice away from MCV or any
Portfolio Company or any of their respective affiliates, any individual, person,
firm, corporation or other business entity who at any time during the Employment
Term was an employee or customer of MCV or any Portfolio Company or any of their
respective affiliates or otherwise had a material business relationship with MCV
or any Portfolio Company or any of their respective affiliates, (ii) hire any
individual person who at any time during the Employment Term was an employee of
MCV or any Portfolio Company, or (iii) discourage, or attempt to discourage, any
individual, person, firm, corporation or
7
<PAGE>
business entity from doing business with MCV or any Portfolio Company or any of
their respective affiliates. The Employee agrees that during the Employment Term
and thereafter, he will not intentionally or knowingly, directly or indirectly,
make or publish any negative or disparaging statements, comments or remarks
regarding MCV or any Portfolio Company or any of their respective subsidiaries,
affiliated entities, directors, or senior officers.
(b) Merck-Medco agrees that during the Employment Term and
thereafter during the Restriction Period, it will use its best efforts to
prohibit its officers and directors and the officers and directors of MCV from
knowingly discouraging any individual, person, firm, corporation or other
business entity from investing in, or otherwise doing business with, any venture
capital fund for which the Employee is a managing director or chief executive
officer; provided, however, that the officers and directors of the Merck-Medco
-------- -------
and MCV will not be prohibited from disclosing to such third parties, the actual
investment results of MCV. Notwithstanding the foregoing, in the event that
Merck-Medco terminates the employment of the Employee by reason of (i) the
Employee's conviction of a crime involving moral turpitude, or (ii) the
Employee's dishonestly, malfeasance or fraud in connection with the performance
of his duties hereunder or that otherwise is demonstrably and materially
injurious to Merck-Medco, MCV or any of their affiliates, Merck-Medco will not
be required to comply with the provisions of this Section 7.4(b) and this
Section 7.4(b) shall be null and void.
7.5 Remedies. The Employee agrees that any breach of the terms
--------
of this Section 7 would result in irreparable injury and damage to Merck-Medco
for which Merck-Medco would have no adequate remedy at law; the Employee
therefore also agrees that in the event of said breach or any threat of breach,
Merck-Medco shall be entitled to an immediate injunction and restraining order
to prevent such breach and/or threatened breach and/or continued breach by the
Employee and/or any and all persons and/or entities acting for and/or with the
Employee, without having to prove damages, and to all costs and expenses,
including reasonable attorneys' fees and costs, in addition to any other
remedies to which Merck-Medco may be entitled at law or in equity. The terms of
this paragraph shall not prevent Merck-Medco from pursuing any other available
remedies for any breach or threatened breach hereof, including but not limited
to the recovery of damages from the Employee. The Employee and Merck-Medco
further agree that the provisions of this Section 7 are reasonable and Merck-
Medco would not have entered into this Agreement but for their inclusion herein.
Should a court or arbitrator determine that any provision of the covenant not to
compete is unreasonable, either in period of time, geographical area, or
otherwise, the parties hereto agree that the covenant should be interpreted and
enforced to the maximum extent which such court or arbitrator deems reasonable.
8
<PAGE>
The provisions of this Section 7 shall survive any termination of the
Employment Term, and the existence of any claim or cause of action by the
Employee against Merck-Medco, MCV, Merck or any Portfolio Company, whether
predicated on this Agreement or otherwise, shall not constitute a defense to the
enforcement by Merck-Medco of the covenants and agreements of this Section 7.
8. Non-Waiver of Rights. The failure to enforce at any time the
--------------------
provisions of this Agreement or to require at any time performance by the other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement or
any part hereof, or the right of either party to enforce each and every
provision in accordance with its terms.
9. Notices. All notices required or permitted under this Agreement
-------
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown below, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 9.
If to Merck-Medco:
Merck-Medco Managed Care, L.L.C.
c/o Merck & Co. Inc.
1 Merck Drive
Whitehouse Station, NJ 08889
Fax No.: (908) 735 1244
Attn: Ken Frazier
If to the Employee:
Per G. H. Lofberg
63 East 92/nd/ Street
New York, NY 10128
Fax No.: (212) 423-3043
10. Binding Effect/Assignment. This Agreement shall inure to the
-------------------------
benefit of and be binding upon the parties hereto and their respective heirs,
executors, personal representatives, estates, successors (including, without
limitation, by way of merger) and permitted assigns. Notwithstanding the
provisions of the immediately preceding sentence, the Employee shall not assign
all or any portion of this Agreement without the prior written consent of Merck-
Medco.
9
<PAGE>
11. Entire Agreement. Except as otherwise provided in this Section
----------------
11, this Agreement sets forth the entire understanding of the parties hereto
with respect to the subject matter hereof and supersedes all prior agreements
and plans, written or oral between them as to such subject matter.
Notwithstanding the foregoing, the Former Agreement shall continue in full force
and effect during the Employment Term and following the Employee's termination
of employment with Merck-Medco as specified in the Former Agreement; provided,
however, that neither MCV nor any Portfolio Company shall be deemed an affiliate
of Merck-Medco for purposes of the Former Agreement.
12. Severability. If any provision of this Agreement, or any
------------
application thereof to any circumstances, is invalid, in whole or in part, such
provision or application shall to that extent be severable and shall not affect
other provisions or applications of this Agreement.
13. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of New Jersey, without
reference to the principles of conflict of laws.
14. Modifications and Waivers. No provision of this Agreement may be
-------------------------
modified, altered or amended except by an instrument in writing executed by the
parties hereto. No waiver by either party hereto of any breach by the other
party hereto of any provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions at the time
or at any prior or subsequent time.
15. Headings. The headings contained herein are solely for the
--------
purposes of reference, are not part of this Agreement and shall not in any way
affect the meaning or interpretation of this Agreement.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
10
<PAGE>
IN WITNESS WHEREOF, Merck-Medco has caused this Agreement to be
executed by authority of its board of directors, and the Employee has hereunto
set his hand, the day and year first above written.
MERCK-MEDCO MANAGED CARE, L.L.C.
By:_____________________________________________
Name:
Title:
________________________________________________
Per G.H. Lofberg
11
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>5
<FILENAME>dex12.txt
<DESCRIPTION>COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE>
Exhibit 12
MERCK & CO., INC. AND SUBSIDIARIES
Computation Of Ratios Of Earnings To Fixed Charges
--------------------------------------------------
(In millions except ratio data)
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------
2000 1999 1998 1997 1996 1995
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Before Taxes $ 9,824.1 $8,619.5 $8,133.1 $6,462.3 $5,540.8 $4,797.2
Add:
One-third of rents 67.0 66.7 56.0 47.0 41.0 28.1
Interest expense, net 361.9 236.4 150.6 98.2 103.2 60.3
Preferred stock dividends 205.2 120.7 62.1 49.6 70.0 2.1
--------- -------- -------- -------- -------- --------
Earnings $10,458.2 $9,043.3 $8,401.8 $6,657.1 $5,755.0 $4,887.7
========= ======== ======== ======== ======== ========
One-third of rents $ 67.0 $ 66.7 $ 56.0 $ 47.0 $ 41.0 $ 28.1
Interest expense 484.4 316.9 205.6 129.5 138.6 98.7
Preferred stock dividends 205.2 120.7 62.1 49.6 70.0 2.1
--------- -------- -------- -------- -------- --------
Fixed Charges $ 756.6 $ 504.3 $ 323.7 $ 226.1 $ 249.6 $ 128.9
========= ======== ======== ======== ======== ========
Ratio of Earnings
to Fixed Charges 14 18 26 29 23 38
========= ======== ======== ======== ======== ========
</TABLE>
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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>6
<FILENAME>dex13.txt
<DESCRIPTION>2000 ANNUAL REPORT TO STOCKHOLDERS
<TEXT>
<PAGE>
Financial Section
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contents
<S> <C>
Financial Review
Description of Merck's Business ..................... 21
Competition and the Health Care Environment ......... 21
Business Strategies ................................. 22
Joint Ventures ...................................... 22
Foreign Operations .................................. 25
Operating Results ................................... 25
Environmental and Other Matters ..................... 28
Capital Expenditures ................................ 28
Analysis of Liquidity and Capital Resources ......... 29
Recently Issued Accounting Standards ................ 31
Cautionary Factors That May Affect Future Results ... 31
Condensed Interim Financial Data .................... 31
Dividends Paid per Common Share ..................... 31
Common Stock Market Prices .......................... 31
Consolidated Statement of Income ......................... 32
Consolidated Statement of Retained Earnings .............. 32
Consolidated Statement of Comprehensive Income ........... 32
Consolidated Balance Sheet ............................... 33
Consolidated Statement of Cash Flows ..................... 34
Notes to Consolidated Financial Statements ............... 35
Management's Report ...................................... 46
Report of Independent Public Accountants ................. 46
Audit Committee's Report ................................. 47
Compensation and Benefits Committee's Report ............. 47
Selected Financial Data .................................. 48
</TABLE>
Financial Review
- --------------------------------------------------------------------------------
Description of Merck's Business
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco). Through these
complimentary capabilities, Merck works to improve the quality of life and
contain overall health care costs.
Sales
- ----------------------------------------------------------------------------
($ in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
Atherosclerosis ............... $ 5,805.2 $ 5,093.2 $ 4,694.1
Hypertension/heart failure .... 4,629.1 4,563.8 4,213.5
Anti-inflammatory/analgesics .. 2,251.7 578.5 98.0
Osteoporosis .................. 1,275.3 1,043.1 775.2
Vaccines/biologicals .......... 952.0 860.0 846.7
Respiratory ................... 862.2 501.8 194.0
Anti-ulcerants ................ 849.4 913.9 1,113.5
Antibiotics ................... 783.3 772.3 743.3
Ophthalmologicals ............. 656.2 670.0 630.7
Human immunodeficiency
virus (HIV) .................. 528.8 664.4 676.3
Other Merck products .......... 1,629.7 1,820.6 1,311.2
Merck-Medco ................... 20,140.3 15,232.4 11,601.7
- ----------------------------------------------------------------------------
$ 40,363.2 $ 32,714.0 $ 26,898.2
============================================================================
Human health products include therapeutic and preventive agents, generally
sold by prescription, for the treatment of human disorders. Among these are
atherosclerosis products, which include Zocor and Mevacor; hypertension/heart
failure products which include Vasotec, Cozaar, Hyzaar, Prinivil and Vaseretic;
anti-inflammatory/analgesics, of which Vioxx, an agent that specifically
inhibits COX-2, is the largest-selling; an osteoporosis product, Fosamax, for
treatment and prevention of osteoporosis; vaccines/biologicals, of which M-M-R
II, a pediatric vaccine for measles, mumps and rubella, Varivax, a live virus
vaccine for the prevention of chickenpox, and Recombivax HB (hepatitis B vaccine
recombinant), are the largest-selling; a respiratory product, Singulair, a
leukotriene receptor antagonist; anti-ulcerants, of which Pepcid is the
largest-selling; antibiotics, of which Primaxin and Noroxin are the
largest-selling; ophthalmologicals, of which Timoptic, Timoptic-XE, Trusopt and
Cosopt are the largest-selling; and HIV products, which include Crixivan, a
protease inhibitor for the treatment of human immunodeficiency viral infection
in adults.
Other Merck products include sales of other human pharmaceuticals, continuing
sales to divested businesses, pharmaceutical and animal health supply sales to
the Company's joint ventures and, as of July 1, 1998, supply sales to
AstraZeneca LP (AZLP). (See Note 4 to the consolidated financial statements for
further information.) Also included in this category are rebates and discounts
on Merck pharmaceutical products.
Merck-Medco primarily includes Merck-Medco sales of non-Merck products and
Merck-Medco pharmaceutical benefit services, principally sales of prescription
drugs through managed prescription drug programs, as well as services provided
through programs to manage patient health and drug utilization.
Merck sells its human health products primarily to drug wholesalers and
retailers, hospitals, clinics, government agencies and managed health care
providers such as health maintenance organizations and other institutions. The
Company's professional representatives communicate the effectiveness, safety and
value of our products to health care professionals in private practice, group
practices and managed care organizations.
Competition and the Health Care Environment
The markets in which the Company conducts its business are highly competitive
and often highly regulated. Global efforts toward health care cost containment
continue to exert pressure on product pricing and access. In the United States,
the Company has been working with private and government employers to slow the
increase of health care costs. Demonstrating that the Company's medicines can
help save costs in other areas and pricing flexibly across our product portfolio
have encouraged growing use of our medicines and helped offset the effects of
increasing cost pressures. Legislative bodies continue to work to expand health
care access and reduce associated costs. Such initiatives include prescription
drug benefit proposals for Medicare beneficiaries introduced in the U.S.
Congress.
Outside of the United States, in difficult environments encumbered by
government cost containment actions, the Company has worked with payers to help
them allocate scarce resources to optimize health care outcomes, limiting the
potentially detrimental effects of government actions on sales growth. In
addition, countries within the European Union (EU), recognizing the economic
importance of the research-based pharmaceutical industry and the value of
innovative medicines to society, are working with industry and the European
Commission on proposals for market deregulation.
Merck & Co., Inc. 2000 Annual Report Financial Section 21
<PAGE>
There has been an increasing amount of focus on privacy issues in countries
around the world, including the United States and the European Union. In the
United States, federal and state governments have pursued legislative and
regulatory initiatives regarding patient privacy, including recently issued
federal privacy regulations concerning health information, which could affect
the Company's operations, particularly at Merck-Medco.
Although no one can predict the outcome of these and other legislative,
regulatory and advocacy initiatives, we are well positioned to respond to the
evolving health care environment and market forces.
Several products face expiration of product patents in the near term. U.S.
product patents expired in 2000 for Vasotec and Pepcid and will expire in 2001
for Prilosec, which is supplied exclusively to AZLP, Prinivil and Prinzide, for
which co-marketing rights have been licensed to a third party, Mevacor and
Vaseretic. In the aggregate, domestic sales of these products represented 19% of
Merck human health sales for 2000. The Company expects a significant decline in
the sales of these products in the years 2001 and 2002 upon the loss of market
exclusivity. With the exception of Prilosec, for which the Company has U.S.
rights only, a decline is also expected in the Company's European sales for
these products in the years 2001 through 2005 upon the loss of market
exclusivity in European countries throughout this period. European sales of
these products represented 3% of Merck human health sales for 2000. While the
expiration of a product patent normally results in a loss of market exclusivity,
commercial benefits may continue to be derived from other patents, for example,
patents on processes, intermediates, compositions, uses and formulations related
to the product, and, in the United States, additional market exclusivity that
may be available under federal law. The additional six months of U.S. market
exclusivity granted to Vasotec by the U.S. Food and Drug Administration (FDA)
based upon pediatric use studies expired in August 2000. Pepcid was similarly
granted U.S. market exclusivity based on pediatric use studies for six months,
commencing October 2000.
We anticipate that the worldwide trend toward cost-containment will continue
in the new millennium, resulting in ongoing pressures on health care budgets. As
we continue to launch new products successfully, contribute to health care
debates and monitor reforms, our new products, policies and strategies will
enable us to maintain our strong position in the changing economic environment.
Business Strategies
The Company is discovering new innovative products and developing new
indications for existing products - the result of its continuing commitment to
research. The Company is also developing innovative sales, marketing and
education techniques; establishing joint ventures, licensing arrangements and
health care partnerships with large managed care organizations and other payers;
and demonstrating to payers and providers the cost-effectiveness of Merck
products. Additionally, achievement of productivity gains has become a permanent
strategy. Productivity initiatives include, at the manufacturing level,
optimizing plant utilization, implementing lowest-cost processes and improving
technology transfer between research and manufacturing, and throughout the
Company, reducing the cost of purchased materials and services, re-engineering
core and administrative processes and streamlining the organization. At the
manufacturing level, the Company expects that productivity gains will continue
to substantially offset inflation.
To enhance its competitive position in the fast-growing area of managed care,
Merck acquired Medco Containment Services, Inc. in 1993 (renamed Merck-Medco).
Merck-Medco provides pharmaceutical benefit services in the United States.
Merck-Medco manages prescription drug programs through its mail service and
retail pharmacy networks, and offers a series of health management programs to
help payers, providers and patients manage high-risk, high-cost diseases.
Merck-Medco sells its pharmaceutical benefit management services to
corporations, labor unions, insurance companies, Blue Cross/Blue Shield
organizations, government agencies, federal and state employee plans, health
maintenance and other similar organizations.
In support of the Company's continued commitment to provide affordable
medicines to all individuals, Merck-Medco partnered with Reader's Digest in
April 2000 to introduce a new service, YOURxPLAN, an easy-to-use prescription
savings plan for people who do not currently have prescription drug coverage. In
June 2000, Merck-Medco acquired ProVantage Health Services, Inc., a health care
benefits management and health information company that provides pharmacy
benefit services to approximately 5 million people. In July 2000,
merckmedco.com, the world's largest and most successful Internet pharmacy,
partnered with CVS.com to offer consumers one-stop shopping for a wide range of
over-the-counter products. In November 2000, Merck-Medco launched Generics
First, an innovative program providing physicians with additional tools and
information to help patients gain experience with generic medicines. Lastly, in
February 2001, Merck-Medco, AdvancePCS and Express Scripts, Inc. announced the
signing of an agreement to form a new venture that will develop an electronic
exchange enabling physicians to link with participating pharmacies, prescription
benefit managers and health plans.
Joint Ventures
To expand its research base and realize synergies from combining capabilities,
opportunities and assets, the Company has formed a number of joint ventures. In
1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 1993, the Company's
total sales of Astra products reached a level that triggered the first step in
the establishment of a joint venture business carried on by Astra Merck Inc.
(AMI), in which Merck and Astra each owned a 50% share. The joint venture,
formed in November 1994, developed and marketed most of Astra's new prescription
medicines in the United States. Joint venture sales were $1.7 billion for the
first six months of 1998, consisting primarily of Prilosec, the first of a class
of medications known as proton pump inhibitors, which slows the production of
acid from the cells of the stomach lining.
On July 1, 1998, Merck and Astra completed the restructuring of the ownership
and operations of the joint venture whereby the Company acquired Astra's
interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1
billion, including approximately $700.0 million in cash and assumption of a $2.4
billion preferred stock obligation to Astra. The restructuring provided Astra
with the flexibility to develop global operations, pursue strategic alliances
and manage the
22 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
U.S. business, free of the restrictions imposed by the prior AMI joint venture
agreement, while preserving the Company's interests and rights to the U.S. sales
of current and future Astra products. As a result of the acquisition, the
Company fully owned KBI's operating assets and the license rights to make, have
made, import, use and sell the existing and future U.S. pharmaceutical compounds
of Astra. The Company then contributed KBI's operating assets of $644.3 million,
including a $598.0 million step-up in carrying value, to a new U.S. limited
partnership, named Astra Pharmaceuticals L.P. (the Partnership) in exchange for
a 1% limited partner interest. The contributed assets included KBI's workforce,
operating facility, trademarks and information systems. Astra contributed the
net assets of its wholly owned subsidiary, Astra USA, Inc., to the Partnership
in exchange for a 99% general partner interest. For a franchise fee payment of
$230.0 million, the Partnership became the exclusive distributor of the products
for which KBI retained rights. The Partnership was renamed AstraZeneca LP (AZLP)
upon Astra's 1999 merger with Zeneca Group Plc (the AstraZeneca merger),
discussed later.
Merck's acquisition of Astra's interest in KBI for $3.1 billion was accounted
for under the purchase method. In addition to the 50% step-up in carrying value
of KBI's operating assets, purchase price allocations resulted in the
recognition of goodwill totaling $825.9 million which is being amortized on a
straight-line basis over 20 years and other intangibles, principally the
retained U.S. patent rights on in-line products totaling $978.0 million, which
are being amortized on a straight-line basis over 10 years. In connection with
the acquisition of the remaining 50% of the license rights to product candidates
within Astra's research pipeline, the Company recorded a $1.04 billion charge
for acquired research associated with 10 product candidates in Phase II or later
stages of development and U.S. rights to research projects which had not yet
entered Phase II. At the acquisition date, technological feasibility for the
product candidates and the pre-Phase II research projects had not been
established and no alternative future use existed. The product candidates were
in various therapeutic categories, principally gastrointestinal (comprising over
50% of the charge for Phase II or later stages), respiratory and neurological,
with projected FDA approval dates in the years 1999 through 2005. None of these
future products is individually material to the Company. The fair value of the
acquired research was determined based upon the present value of each product's
projected future cash flows, utilizing an income approach reflecting the
appropriate cost of capital. Future cash flows were predominately based on net
income forecasts for each product consistent with historical pricing, margins,
and expense levels for similar products. Revenues were estimated based on
relevant market size and growth factors, expected industry trends, individual
product life cycles, and the life of each product's underlying patent. The
implied risk adjusted discount rates applied to projected cash flows were based
on the Company's weighted average cost of capital, the useful life of each
product, the applicable product's stage of completion, as well as its
probability of technical and marketing success, and averaged 26%, with a range
of 12% to 37%. A cost approach was also utilized to corroborate the values
determined under the income approach. In applying the cost approach,
consideration was given to the level of research and development expenditures
within Astra, the appropriate required rates of return within the market place
and the cost of reproduction for the acquired assets. Both of these approaches
are appropriate under generally accepted valuation methods and yielded similar
results. The research projects considered in the valuation are all subject to
the normal risks and uncertainties associated with demonstrating the safety and
efficacy required to obtain timely FDA approval. While Merck will benefit from
future revenues of successful product candidates, AZLP and Astra will bear all
costs to complete the development of these products, unless AZLP elects not to
pursue a particular product candidate, at which time the Company would bear
further development costs at its discretion. Overall, the incremental revenue
and partnership returns arising from this transaction, net of increased
amortization and dividends on KBI's preferred stock obligation to Astra, are
expected to have a favorable impact on future results of operations and cash
flows.
While maintaining a 1% limited partner interest in AZLP, Merck enjoys consent
and protective rights intended to preserve its business and economic interests,
including restrictions on the power of the general partner to make certain
distributions or dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including powers to direct the
actions of, or remove and replace, the Partnership's chief executive officer and
chief financial officer. Merck earns certain Partnership returns, which are
recorded as Equity income from affiliates, as well as ongoing revenue based on
sales of current and future KBI products. The Partnership returns reflect
Merck's share of AZLP earnings in conformity with accounting principles
generally accepted in the United States (GAAP earnings) and include a
preferential return, a priority return and other variable returns which are
based, in part, upon sales of certain former Astra USA, Inc. products. The
preferential return represents Merck's share of the undistributed AZLP GAAP
earnings which is expected to approximate $275.0 million annually through 2008.
The priority return is an amount provided for in the Partnership agreement that
varies based upon the fiscal year, applicable income tax rates and the
occurrence of a partial redemption of our limited partner interest. We expect
this return to approximate $300.0 million annually, subject to availability of
sufficient Partnership profits. The AstraZeneca merger triggers a partial
redemption of Merck's limited partner interest in 2008, reducing this amount to
approximately $210.0 million annually at that time. Upon the partial redemption
of the Company's limited partner interest, AZLP will distribute to KBI an amount
based primarily on a multiple of Merck's annual revenue derived from sales of
the former Astra USA, Inc. products for the three years prior to the redemption
(the Limited Partner Share of Agreed Value).
For a payment of $443.0 million, Astra purchased an option to buy Merck's
interest in the KBI products, excluding the gastrointestinal medicines Prilosec
and Nexium, in 2008, 2012 or 2016 (the Asset Option) at an exercise price based
primarily on a multiple of Merck's annual revenue derived from the KBI products
for the three years prior to exercise. As a result of the AstraZeneca merger,
the Asset Option is now only exercisable in 2010 at an exercise price equal to
the net present value as of March 31, 2008 of projected future pretax revenue to
be received by the Company from the KBI products (the Appraised Value). Merck
now also has the right to require Astra to purchase such interest in 2008 at the
Appraised Value. The Company also granted Astra an option to buy Merck's common
stock interest in KBI, at an exercise price based
Merck & Co., Inc. 2000 Annual Report 23
<PAGE>
on the net present value of estimated future net sales of Prilosec and Nexium
(the Shares Option). This option is exercisable only after Astra's purchase of
Merck's interest in the KBI products. Generally, the Shares Option was not
exercisable before 2017, but as a result of the AstraZeneca merger, is now
exercisable two years after Astra's purchase of Merck's interest in the KBI
products.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB
(AstraZeneca), which constituted a Trigger Event under the KBI restructuring
agreements. As a result of the merger, Astra was required to make two one-time
payments to Merck totaling approximately $1.8 billion. In exchange for Merck's
relinquishment of rights to future Astra products with no existing or pending
U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance
Payment), which is subject to a true-up calculation in 2008 that may require
repayment of all or a portion of this amount. The amount determined by the
true-up calculation (the True-Up Amount) cannot reasonably be estimated because
it is directly dependent on the fair market value in 2008 of the Astra product
rights retained by the Company which extend to compounds currently in
development as well as compounds that have not yet entered development.
Accordingly, recognition of this contingent income has been deferred until the
realizable amount, if any, is determinable, which is not anticipated prior to
2008.
In connection with the Company's acquisition of Astra's interest in KBI,
Merck agreed to relinquish rights to the pharmaceutical products of any company
that would merge with or acquire Astra. These rights, which protected the value
of KBI's perpetual interest in Astra's pipeline, were relinquished in exchange
for a payment (the Lump Sum Payment) to be made in the event of the merger or
acquisition of Astra. The Company estimated that it was entitled to receive a
Lump Sum Payment of $822.0 million as the result of the AstraZeneca merger. In
the second quarter of 1999, Astra paid $712.5 million of the Lump Sum Payment
and disputed its obligation to pay the remainder. The parties sought arbitration
with respect to the disputed amount. Although Merck retains an interest in
current and future Astra products with an existing or pending U.S. patent, this
merger effectively curtailed the Company's perpetual interest in Astra's
pipeline and, thus, reduced the going concern value acquired in 1998.
Accordingly, one-half of the expected payment was an adjustment to the purchase
price Merck paid for Astra's one-half interest in KBI, reducing goodwill by
$411.0 million, less 50% of a reserve relating to disputed proceeds. The balance
represented compensation to the Company for the reduction of the value of its
original one-half interest in KBI and was recorded in Other (income) expense,
net. Because the reduction in goodwill was not tax-effected and the Lump Sum
Payment was fully taxable, this transaction, net of a reserve relating to
disputed proceeds, yielded an after-tax gain of $74.6 million. In the first
quarter of 2000, the arbitration concluded and the Company received $87.2
million of the disputed proceeds plus interest.
Under the provisions of the KBI restructuring agreements, because a Trigger
Event has occurred, the sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7
billion. Distribution of the Limited Partner Share of Agreed Value and payment
of the True-Up Amount will occur in 2008. AstraZeneca's purchase of Merck's
interest in the KBI products is contingent upon the exercise of either Merck's
option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of nonprescription medicines for U.S. consumers. This 50%
owned joint venture was expanded into Europe in 1993, and into Canada in 1996.
Sales of joint venture products were as follows:
($ in millions) 2000 1999 1998
- --------------------------------------------------------------------------------
Gastrointestinal products........................ $ 345.0 $ 359.3 $ 387.2
Other products................................... 116.1 128.1 127.0
- --------------------------------------------------------------------------------
$ 461.1 $ 487.4 $ 514.2
================================================================================
In 1991, Merck and E.I. du Pont de Nemours and Company (DuPont) formed an
independent, research-driven, worldwide pharmaceutical joint venture, The DuPont
Merck Pharmaceutical Company (DMPC), equally owned by each party. Joint venture
sales were $686.2 million for the first six months of 1998, consisting primarily
of cardiovascular, radiopharmaceutical and central nervous system products. In
July 1998, the Company sold its one-half interest in DMPC to DuPont for $2.6
billion in cash. (See Note 3 to the consolidated financial statements for
further information.)
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established a 50% owned joint venture to market vaccines in Europe and to
collaborate in the development of combination vaccines for distribution in
Europe. Sales of joint venture products were as follows:
($ in millions) 2000 1999 1998
- --------------------------------------------------------------------------------
Hepatitis vaccines................................. $ 134.1 $ 159.6 $ 189.0
Viral vaccines..................................... 48.5 68.6 64.6
Other vaccines..................................... 358.3 338.6 306.8
- --------------------------------------------------------------------------------
$ 540.9 $ 566.8 $ 560.4
================================================================================
In August 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal
health and poultry genetics businesses to form Merial, a fully integrated,
stand-alone joint venture, equally owned by each party. Merial is the world's
largest company dedicated to the discovery, manufacture and marketing of
veterinary pharmaceuticals and vaccines. Merck contributed developmental
research personnel, sales and marketing activities, and animal health products,
as well as its poultry genetics business. Aventis contributed research and
development, manufacturing, sales and marketing activities, and animal health
products, as well as its poultry genetics business. Sales of joint venture
products were as follows:
($ in millions) 2000 1999 1998
- --------------------------------------------------------------------------------
Avermectin products........................ $ 531.7 $ 564.9 $ 616.4
Fipronil products.......................... 345.7 316.0 300.8
Other products............................. 730.4 799.2 842.2
- --------------------------------------------------------------------------------
$ 1,607.8 $ 1,680.1 $ 1,759.4
================================================================================
24 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
In May 2000, the Company and Schering-Plough Corporation (Schering-Plough)
entered into agreements to create separate partnerships to develop and market in
the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These partnerships will pursue the development
and marketing of Zocor as a once-daily fixed-combination tablet with ezetimibe,
Schering-Plough's investigational cholesterol absorption inhibitor; ezetimibe as
a once-daily monotherapy and in co-administration with statins; and a once-daily
fixed-combination tablet of Singulair and Claritin, Schering-Plough's
nonsedating antihistamine, for the treatment of allergic rhinitis and asthma.
The arrangements are not expected to have a significant near-term impact on the
Company's results of operations or financial position.
Foreign Operations
The Company's operations outside the United States are conducted primarily
through subsidiaries. Sales of Merck human health products by subsidiaries
outside the United States were 36% of Merck human health sales in 2000, and 40%
and 43% in 1999 and 1998, respectively.
Distribution of 2000 Foreign
Human Health Sales
[PIE CHART]
Splits
------
Western Europe 45%
Asia/Pacific 29%
Other Foreign 26%
----
Total 100%
The Company's worldwide business is subject to risks of currency fluctuations
and governmental actions. The Company does not regard these risks as a deterrent
to further expansion of its operations abroad. However, the Company closely
reviews its methods of operations and adopts strategies responsive to changing
economic and political conditions.
In recent years, Merck has been expanding its operations in countries located
in Latin America, the Middle East, Africa, Eastern Europe and Asia Pacific where
changes in government policies and economic conditions are making it possible
for Merck to earn fair returns. Businesses in these developing areas, while
sometimes less stable, offer important opportunities for growth over time.
Operating Results
Total sales for 2000 increased 23% in total and 20% on a volume basis from 1999.
Foreign exchange had a one point unfavorable effect on 2000 sales growth. Total
sales for 1999 increased 22% in total and 17% on a volume basis from 1998,
including a two point increase attributable to supply sales to AZLP, as a result
of the 1998 restructuring of AMI. Foreign exchange had less than a one point
unfavorable effect on 1999 sales growth.
Components of
Human Health Sales Growth
[GRAPH]
TOTAL SALES SALES VOLUME NET PRICING FOREIGN
GROWTH GROWTH ACTIONS EXCHANGE RATES
----------- ------------ ----------- --------------
1996 17.7% 19.2% 0.4% -1.9%
1997 15.0 17.6 0.3 -2.9
1998 10.9 14.1 -- -3.2
1999 15.3 16.1 -0.1 -0.7
2000 16.2 18.8 -0.9 -1.7
This chart illustrates the effects of price, volume and exchange on sales of
Merck human health products. Growth for 1999 and 1998 includes a three and five
point increase, respectively, attributable to the 1998 AMI restructuring. The
human health business has grown through sales volume over the last five years.
Price had essentially no effect on sales growth, while the effect of exchange
has varied over the same period.
In 2000, sales of Merck human health products grew 16%. Foreign exchange
rates had a two percentage point unfavorable effect on sales growth, while price
changes had a one point unfavorable effect on growth. In measuring these
effects, changes in the value of foreign currencies are calculated net of price
increases in hyperinflationary countries, principally in Latin America. Domestic
sales growth was 24%, while foreign sales grew 5% including a four percentage
point unfavorable effect from exchange. The unit volume growth from sales of
Merck human health products was driven by five key products: Vioxx, Zocor,
Cozaar/Hyzaar, Fosamax and Singulair. Also contributing to Merck's human health
volume growth were newer products, including Maxalt and Aggrastat.
Vioxx, Merck's newest medicine for the treatment of osteoarthritis and acute
pain, has become the world's fastest growing branded prescription arthritis
medicine and is already Merck's second largest-selling product. In the United
States, Vioxx now accounts for approximately 50% of new prescriptions in the
COX-2 class, despite being second to market. Vioxx is the only COX-2 indicated
in the United States both for osteoarthritis and acute pain. In May 2000, Merck
presented results from an 8,000 patient Vioxx Gastrointestinal Outcomes Research
(VIGOR) study, which was subsequently published in the New England Journal of
Medicine, in which Vioxx reduced the incidence of serious gastrointestinal side
effects, such as ulcers and bleeding, by more than 50% compared to the
nonsteroidal anti-inflammatory drug naproxen. In June 2000, the Company
submitted a supplemental New Drug Application to the FDA to request label
changes to reflect the results of this study. In February 2001, an FDA Arthritis
Advisory Committee recommended that the gastrointestinal
Merck & Co., Inc. 2000 Annual Report 25
<PAGE>
study results, as well as data on certain cardiovascular events, be included in
the labeling; the FDA is not obligated to accept the recommendations of its
advisory committees. In November 2000, another study showed that Vioxx
significantly reduced moderate-to-severe acute pain caused by dental surgery to
a greater degree compared to codeine combined with acetaminophen. Merck
continues to conduct clinical trials with Vioxx to evaluate its efficacy in the
treatment of rheumatoid arthritis and the prevention and treatment of
Alzheimer's disease as well as investigating whether Vioxx can reduce the number
of colon polyps in patients who suffer from them - a broad population at risk of
developing colon cancer.
Zocor, Merck's cholesterol-modifying medicine, continued its strong growth in
2000, based on the product's demonstrated ability to act favorably on all major
lipid parameters. The 1994 landmark Scandinavian Simvastatin Survival Study has
shown that Zocor saves lives by preventing heart attacks and other
cardiovascular events in people with heart disease and high cholesterol. As a
result of Zocor's proven ability to not only lower levels of "bad" (LDL)
cholesterol, but also to increase levels of "good" (HDL) cholesterol, the FDA
approved Zocor as the first "statin" to raise HDL. Low HDL has been identified
as a risk factor for heart disease. Zocor has benefited from an increased
interest in the scientific community about the role that HDL plays in protecting
against cardiovascular events. In the United States, the market for "statin"
medicines is expanding almost 20% a year, primarily from products such as Zocor
that can significantly affect cholesterol levels at the starting dose. Merck
continues its consumer and education awareness efforts in the United States
because more than half of the people who should be taking cholesterol-modifying
medications are still untreated.
Cozaar, and its companion agent, Hyzaar (a combination of Cozaar and the
diuretic hydrochlorothiazide), together are the world's most widely prescribed
medicines in the angiotensin II antagonist class. Strong growth continues as
physicians recognize the excellent tolerability and efficacy of these two
products. Cozaar and Hyzaar have been prescribed for more than 7 million
patients worldwide. Extensive clinical trials are also underway to evaluate the
medicines' effectiveness to improve survival rates and reduce disabilities
associated with heart attacks.
Fosamax, Merck's nonhormonal medicine and the leading product worldwide for
treatment and prevention of postmenopausal osteoporosis in women, continued its
strong growth in 2000. It continues to outperform competition, becoming the only
osteoporosis medicine indicated and consistently proven to reduce the incidence
of fractures of the hip as well as the spine. In September 2000, the Company
received FDA approval, making Fosamax the only drug approved in the United
States for treatment to increase bone mass in men with osteoporosis. According
to the National Osteoporosis Foundation, two million American men have been
diagnosed with the disease, and another three million are at risk. Merck
continues to strengthen the competitive advantage of Fosamax through its recent
introduction of the unique once-weekly formulation which received FDA approvals
for use in postmenopausal women in October 2000 and for treatment to increase
bone mass in men with osteoporosis in February 2001. Regulatory approvals are
being pursued for Fosamax Once Weekly in all parts of the world, including full
European Union approval through the mutual recognition procedure. In countries
where it has been launched, such as the United States and Mexico, sales of the
once-weekly formulation have risen rapidly because of its convenient regimen.
Singulair, Merck's once-a-day tablet for the treatment of chronic asthma in
adults and children age 2 and older, continued its strong growth. It is the No.
1 brand of asthma controller medication prescribed by allergists in the United
States. Studies are currently being conducted to assess whether Singulair, when
taken intravenously, could be a useful hospital emergency room treatment for
individuals suffering acute asthmatic attacks. Other studies are underway to
determine Singulair's effectiveness in combating allergic rhinitis, both as a
monotherapy and in combination treatment.
Maxalt, Merck's treatment for acute migraine headaches in adults, continued
its strong growth in 2000. Maxalt provides fast and effective relief for the
debilitating headache pain and other symptoms such as nausea and sensitivity to
light and noise that often accompany a migraine attack. In 2000, it was the
fastest growing oral migraine medication in the U.S. and European markets.
Maxalt was the first migraine medicine in the United States available in both
conventional tablets and convenient, rapidly dissolving oral wafers, which
disintegrate within seconds on the tongue without liquids.
Aggrastat, a member of a class of drugs known as glycoprotein IIb/IIIa
antagonists, used to treat patients with unstable angina and non-Q-wave
myocardial infarction, otherwise known as a "small" heart attack, also recorded
strong growth in 2000. Aggrastat continues to gain steadily in the IIb/IIIa
antagonist market by targeting hospitals in the United States that treat the
vast majority of patients with acute coronary syndrome.
A group of mature products, including Prinivil and Proscar, continued to
improve in unit volume growth, while others, including Vasotec, Pepcid, Mevacor
and Timoptic, though still contributing to 2000 revenues, declined in unit
volume due to generic and therapeutic competition.
In 1999, sales of Merck human health products grew 15%, including a three
point increase attributable to the 1998 restructuring of AMI. Foreign exchange
rates had a one percentage point unfavorable effect on sales growth, while price
changes had essentially no effect. Domestic sales growth was 21%, including a
six point increase attributable to the restructuring of AMI, while foreign sales
grew 8% including a two percentage point unfavorable effect from exchange. The
unit volume growth from sales of Merck human health products was driven by
established products, including Zocor and Prinivil, as well as newer products,
including Fosamax, Cozaar, Hyzaar, Singulair, Propecia, Maxalt, Aggrastat and
the 1999 launch of Vioxx.
Merck-Medco sales contributed significantly to 2000 and 1999 sales growth. By
continuing to invest in the development of clinical programs, enhanced
information management systems, new technologies, including Internet
initiatives, and growth in the business from the addition of the UnitedHealth
Group contract, with 10 million lives, and the acquisition of ProVantage, with 5
million lives, Merck-Medco strengthened its leadership position in providing
pharmaceutical benefit services. Merckmedco.com continues its success: it now
processes more than 110,000 prescriptions per week and its total prescription
sales exceed those of all of the other major online pharmacies combined. The
number of prescriptions managed
26 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
by Merck-Medco grew to more than 450 million in 2000, up 22% from more than 370
million prescriptions in 1999.
Costs, Expenses and Other
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
($ in millions) 2000 Change 1999 Change 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Materials and production........ $ 22,443.5 +28% $ 17,534.2 +26% $ 13,925.4
Marketing and administrative.... 6,167.7 +19% 5,199.9 +15% 4,511.4
Research and development........ 2,343.8 +13% 2,068.3 +14% 1,821.1
Acquired research............... - * 51.1 -95% 1,039.5
Equity income from affiliates... (764.9) - (762.0) -14% (884.3)
Gains on sales of businesses... - - - * (2,147.7)
Other (income) expense, net..... 349.0 * 3.0 -99% 499.7
- --------------------------------------------------------------------------------------------
$ 30,539.1 +27% $ 24,094.5 +28% $ 18,765.1
============================================================================================
</TABLE>
* 100% or greater
In 2000, materials and production costs increased 28% compared to a 23% sales
growth rate. The higher growth rate in these costs over the sales volume growth
is primarily attributable to the significant growth in Merck-Medco's
historically lower-margin business. Excluding the effect of exchange and
inflation, these costs increased 20%, the same as the unit sales volume growth
in 2000. In 1999, materials and production costs increased 26%, compared to a
22% sales growth rate primarily attributable to growth in the lower-margin
Merck- Medco business. Excluding the effect of exchange and inflation, these
costs increased 17%, the same as the unit sales volume growth in 1999.
Marketing and administrative expenses increased 19% in total and on a volume
basis in 2000, including a 12 point increase attributable to marketing expenses,
primarily in support of the Company's five key product franchises. Marketing and
administrative expenses increased 15% in 1999. Excluding the effect of exchange
and inflation, these expenses increased 13%, including a 10 point increase
attributable to marketing expenses, primarily in support of recent product
launches including the 1999 launch of Vioxx. Marketing and administrative
expenses as a percentage of sales were 15% in 2000, 16% in 1999 and 17% in 1998.
The continuous improvement in the ratios over 1998 primarily reflects the lower
growth of marketing and administrative costs relative to Merck-Medco's sales
growth.
Research and development expenses increased 13% in 2000. Excluding the effect
of exchange and inflation, these expenses increased 11%. Research and
development expenses increased 14% in 1999. Excluding the effects of exchange
and inflation, these expenses increased 10%.
Research and development in the pharmaceutical industry is inherently a
long-term process. The following data show an unbroken trend of year-to-year
increases in research and development spending. For the period 1991 to 2000, the
compounded annual growth rate in research and development was 11%. Research and
development expenses for 2001 are estimated to approximate $2.8 billion.
R&D Expenditures
$ in millions
[GRAPH]
Year Total R&D Expenditures
---- ----------------------
1991 $ 988
1992 1,112
1993 1,173
1994 1,231
1995 1,331
1996 1,487
1997 1,684
1998 1,821
1999 2,068
2000 2,344
In 1999, in connection with the acquisition of SIBIA Neuro-sciences, Inc.
(SIBIA), the Company recorded a pretax and after-tax charge of $51.1 million for
acquired research associated with specific research projects for which, at the
acquisition date, technological feasibility had not been established and no
alternative future use existed. (See Note 3 to the consolidated financial
statements for further information.)
In 1998, in connection with the restructuring of AMI, the Company recorded
a $1.04 billion charge for acquired research associated with 10 product
candidates in Phase II or later stages of development and U.S. rights to future
Astra products which had not yet entered Phase II, and for which, at the
acquisition date, technological feasibility had not been established and no
alternative future use existed. (See Note 4 to the consolidated financial
statements for further information.)
Equity income from affiliates reflects the favorable performance of our
joint ventures and partnership returns from AZLP, which are recorded on a pretax
basis.
In 1998, the Company recorded a pretax gain of $2.15 billion ($1.25 billion
after tax) on the sale of its one-half interest in DMPC. (See Note 3 to the
consolidated financial statements for further information.) This gain was
substantially offset on an after-tax basis by a $1.04 billion pretax and
after-tax charge for acquired research in connection with the restructuring of
AMI and $338.6 million of pretax other charges ($193.1 million after tax). These
other charges, which are included in Other (income) expense, net, were primarily
for environmental remediation costs and asset write-offs, principally deferred
start-up costs which were expensed in accordance with the Company's adoption of
Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities."
The increase in other expense, net, in 2000 primarily reflects the effects
of a number of items recorded in 1999: $411.0 million of income associated with
the Lump Sum Payment from Astra, partially offset by a reserve related to
disputed proceeds, and $77.9 million of income resulting from the reversal of a
1995 restructuring reserve for the anticipated 1999 closure of a manufacturing
facility, partially offset by $110.0 million of charges primarily for endowment
of both The Merck Company Foundation and The Merck Genome Research Institute and
provisions for the settlement of claims. Also contributing to the increase was
higher
Merck & Co., Inc. 2000 Annual Report 27
<PAGE>
net interest expense recorded in 2000 and minority interest expense, reflecting
dividends paid on preferred units of a subsidiary, partially offset by income
recorded from the settlement of disputed proceeds related to the AstraZeneca
merger. In 1999, the decrease in other expense, net, was primarily due to the
aforementioned 1999 items, principally the Lump Sum Payment, partially offset by
higher interest expense and minority interest expense, reflecting a full year of
dividends paid to Astra on preferred stock of a subsidiary, and a full year of
amortization of goodwill and other intangibles resulting from the 1998
restructuring of AMI. Also contributing to the decrease was $338.6 million of
charges recorded in 1998 primarily for environmental remediation costs and asset
write-offs.
<TABLE>
<CAPTION>
Earnings
- -----------------------------------------------------------------------------------
($ in millions except
per share amounts) 2000 Change 1999 Change 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income.................... $6,821.7 +16% $5,890.5 +12% $ 5,248.2
As a % of sales............ 16.9% 18.0% 19.5%
As a % of average
total assets............. 18.1% 17.5% 18.2%
Earnings per
common share
assuming dilution.......... $2.90 +18% $2.45 +14% $2.15
===================================================================================
</TABLE>
Net income was up 16% in 2000 and 12% in 1999. Net income as a percentage of
sales was 16.9% in 2000, compared to 18.0% in 1999 and 19.5% in 1998. The
decline in the ratio from 1999 is principally due to a higher growth rate in
Merck-Medco's historically lower-margin business and the commitment of resources
to support recent product launches, including the 1999 launch of Vioxx. Foreign
currency exchange had a one percentage point unfavorable effect on the growth
rate in 2000 and 1999. The Company's effective income tax rate in 2000 was
30.6%, compared to 31.7% in 1999 and 35.5% in 1998. The higher effective tax
rate in 1999 versus 2000 primarily reflects the nondeductibility of the goodwill
write-off recorded in 1999 resulting from the AstraZeneca merger. The higher
effective tax rate in 1998 versus 1999 primarily reflects the nondeductibility
of the acquired research charge recorded in 1998 in connection with the
restructuring of AMI and the state tax cost of the gain on the 1998 sale of the
Company's one-half interest in DMPC, partially offset by the 1999
nondeductibility of the aforementioned goodwill write-off. Net income as a
percentage of average total assets was 18.1% in 2000, 17.5% in 1999 and 18.2% in
1998. Earnings per common share assuming dilution grew 18% in 2000, compared to
14% in 1999. In 2000 and 1999, earnings per common share assuming dilution
increased at a faster rate than net income as a result of treasury stock
purchases.
Distribution of 2000 Sales
and Equity Income
[PIE CHART]
Splits
------
Raw Materials and Production Costs 55%
Operating Expenses 22%
Taxes and Net Interest 7%
Dividends 7%
Retained Earnings 9%
---
Total 100%
===
Environmental and Other Matters
The Company believes that it is in compliance in all material respects with
applicable environmental laws and regulations. In 2000, the Company incurred
capital expenditures of approximately $162.5 million for environmental
protection facilities. Capital expenditures for this purpose are forecasted to
exceed $670.0 million for the years 2001 through 2005. In addition, the
Company's operating and maintenance expenditures for pollution control were
approximately $81.7 million in 2000. Expenditures for this purpose for the years
2001 through 2005 are forecasted to exceed $490.0 million.
The Company is a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, as well as under other federal and state statutes. The
Company is also remediating environmental contamination resulting from past
industrial activity at certain of its sites and has taken an active role in
identifying and providing for these costs. In management's opinion, the
liabilities for all environmental matters which are probable and reasonably
estimable have been accrued. Expenditures for remediation and environmental
liabilities were $30.7 million in 2000, and are estimated at $153.0 million for
the years 2001 through 2005. These amounts do not consider potential recoveries
from insurers or other parties. Although it is not possible to predict with
certainty the outcome of these environmental matters, or the ultimate costs of
remediation, management does not believe that any reasonably possible
expenditures that may be incurred in excess of those provided should result in a
materially adverse effect on the Company's financial position, results of
operations, liquidity or capital resources for any year. (See Note 9 to the
consolidated financial statements for further information.)
In 1996, the Company, along with other pharmaceutical manufacturers,
received a notice from the Federal Trade Commission (FTC) that it was conducting
an investigation into pricing practices. The Company has cooperated fully with
the FTC in this investigation, and believes that it is currently operating in
all material respects in accordance with applicable standards. While it is not
feasible to predict or determine the outcome of this investigation, management
does not believe that it should result in a materially adverse effect on the
Company's financial position, results of operations or liquidity.
Capital Expenditures
Capital expenditures were $2.7 billion in 2000 and $2.6 billion in 1999.
Expenditures in the United States were $2.1 billion in 2000 and $2.0 billion in
1999. Expenditures during 2000 included $1.0 billion for production facilities,
$645.0 million for research and development facilities, $162.5 million for
environmental projects, and $914.5 million for administrative, safety and
general site projects. Capital expenditures approved but not yet spent at
December 31, 2000 were $2.5 billion. Capital expenditures for 2001 are estimated
to be $2.8 billion.
Depreciation was $905.5 million in 2000 and $771.2 million in 1999, of which
$653.9 million and $552.3 million, respectively, applied to locations in the
United States.
28 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Capital Expenditures
$ in millions
[GRAPH]
YEAR TOTAL CAPITAL EXPENDITURES
---- --------------------------
1991 $1,042
1992 1,067
1993 1,013
1994 1,009
1995 1,005
1996 1,197
1997 1,449
1998 1,973
1999 2,561
2000 2,728
Analysis of Liquidity and Capital Resources
Cash provided by operations continues to be the Company's primary source of
funds to finance operating needs and capital expenditures. In 2000, cash flows
from operations were $7.7 billion, reflecting the continued growth of the
Company's earnings. This cash was used to fund capital expenditures of $2.7
billion, to pay Company dividends of $2.8 billion and to partially fund the
purchase of treasury shares. At December 31, 2000, the total of worldwide cash
and investments was $9.2 billion, including $4.3 billion in cash, cash
equivalents and short-term investments, and $4.9 billion of long-term
investments. The above totals include $1.2 billion in cash and investments held
by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership
interest.
Selected Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
($ in millions) 2000 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital........................... $ 3,643.8 $ 2,500.4 $ 4,159.7
Total debt to total liabilities
and equity.......................... 17.3% 16.8% 12.1%
Cash provided by operations
to total debt....................... 1.1:1 1.0:1 1.4:1
===================================================================================
</TABLE>
Working capital levels are more than adequate to meet the operating
requirements of the Company. Working capital in 1998 reflects proceeds of $2.6
billion from the sale of the Company's one-half interest in DMPC and $1.38
billion from the issuance of a long-term note to Astra. These proceeds were used
to fund a portion of the Company's stock repurchase program and for other
general corporate purposes.
The ratio of total debt to total liabilities and equity was affected by the
net increase of $.9 billion and $2.2 billion in commercial paper borrowings at
December 31, 2000 and 1999, respectively, and the issuances of the $1.38 billion
note to Astra and two $500.0 million debentures in 1998. The ratio of cash
provided by operations to total debt, although impacted by these debt issuances,
reflects the ability of the Company to cover its debt obligations.
In February 2000, the Board of Directors approved purchases of up to $10.0
billion of Merck shares. From 1998 to 2000, the Company purchased $8.3 billion
of treasury shares under previously authorized completed programs, and $2.5
billion under the 2000 program. Total treasury stock purchased in 2000 was $3.5
billion. For the period 1991 to 2000, the Company has purchased 462.4 million
shares at a total cost of $19.5 billion.
In 2000, the Company's $1.0 billion shelf registration filed with the
Securities and Exchange Commission for the issuance of debt securities became
effective, increasing available capacity under such filings to $1.7 billion. In
late 2000, the Company issued $106.0 million of securities under the shelf,
reducing such capacity to $1.6 billion. The Company also has a $1.5 billion Euro
Medium Term Note program, under which no securities have been issued. Proceeds
from the sale of these securities are to be used for general corporate purposes.
In February 2001, the Company issued $500.0 million of notes with annual
interest rate resets and a final maturity of ten years. On an annual basis, the
notes will either be repurchased from the holders at the option of the
remarketing agent and remarketed, or redeemed by the Company. Proceeds from the
sale of these securities will be used to repay short-term borrowings and for
general corporate purposes.
The Company's strong financial position, as evidenced by its triple-A credit
ratings from Moody's and Standard & Poor's on outstanding debt issues, provides
a high degree of flexibility in obtaining funds on competitive terms. The
ability to finance ongoing operations primarily from internally generated funds
is desirable because of the high risks inherent in research and development
required to develop and market innovative new products and the highly
competitive nature of the pharmaceutical industry.
A significant portion of the Company's cash flows are denominated in foreign
currencies. Merck relies on sustained cash flows generated from foreign sources
to support its long-term commitment to U.S. dollar-based research and
development. To the extent the dollar value of cash flows is diminished as a
result of a strengthening dollar, the Company's ability to fund research and
other dollar-based strategic initiatives at a consistent level may be impaired.
To protect against the reduction in value of foreign currency cash flows, Merck
has instituted balance sheet and revenue hedging programs to partially hedge
this risk.
The objective of the balance sheet hedging program is to protect the U.S.
dollar value of foreign currency denominated net monetary assets from the
effects of volatility in foreign exchange that might occur prior to their
conversion to U.S. dollars. To achieve this objective, the Company will hedge
foreign currency risk on monetary assets and liabilities where hedging is cost
beneficial. Merck seeks to fully hedge exposure denominated in developed country
currencies, primarily the euro, Japanese yen and Canadian dollar, and will
either partially hedge or not hedge at all exposure in other currencies,
particularly exposure in developing countries where we consider the cost of
hedging instruments to be uneconomic or such instruments are unavailable at any
cost. The Company will minimize the effect of exchange on unhedged exposure,
principally by managing operating activities and net asset positions at the
Merck & Co., Inc. 2000 Annual Report 29
<PAGE>
local level. Merck manages its net asset exposure principally with forward
exchange contracts. These contracts enable the Company to buy and sell foreign
currencies in the future at fixed exchange rates. For net monetary assets
hedged, forward contracts offset the consequences of changes in foreign exchange
on the amount of U.S. dollar cash flows derived from the net assets. Contracts
used to hedge net monetary asset exposure have average maturities at inception
of less than one year. A sensitivity analysis to changes in the value of the
U.S. dollar on foreign currency denominated derivatives and monetary assets and
liabilities indicated that if the U.S. dollar uniformly weakened by 10% against
all currency exposures of the Company at December 31, 2000 and 1999, Income
before taxes would have declined by $2.5 million in each year. Since Merck is in
a net short position relative to its major foreign currencies after
consideration of forward contracts, a uniform weakening of the U.S. dollar will
yield the largest overall potential net loss in earnings due to exchange. This
measurement assumes that a change in one foreign currency relative to the U.S.
dollar would not affect other foreign currencies relative to the U.S. dollar.
Although not predictive in nature, the Company believes that a 10% threshold
reflects reasonably possible near-term changes in Merck's major foreign currency
exposures relative to the U.S. dollar. The balance sheet hedging program has
significantly reduced the volatility of U.S. dollar cash flows derived from
foreign currency denominated net monetary assets. The cash flows from these
contracts are reported as operating activities in the Consolidated Statement of
Cash Flows.
The objective of the revenue hedging program is to reduce the potential for
longer-term unfavorable changes in foreign exchange to decrease the U.S. dollar
value of future cash flows derived from foreign currency denominated sales,
primarily the euro and Japanese yen. To achieve this objective, the Company will
partially hedge forecasted sales that are expected to occur over its planning
cycle, typically no more than three years into the future. The Company will
layer in hedges over time, increasing the portion of sales hedged as it gets
closer to the expected date of the transaction. The portion of sales hedged is
based on assessments of cost-benefit profiles that consider natural offsetting
exposures, revenue and exchange rate volatilities and correlations, and the cost
of hedging instruments. Merck manages its forecasted transaction exposure
principally with purchased local currency put options. On the forecasted
transactions hedged, these option contracts effectively reduce the potential for
a strengthening U.S. dollar to decrease the future U.S. dollar cash flows
derived from foreign currency denominated sales. Purchased local currency put
options provide the Company with a right, but not an obligation, to sell foreign
currencies in the future at a predetermined price. If the value of the U.S.
dollar weakens relative to other major currencies when the options mature, the
options would expire unexercised, enabling the Company to benefit from favorable
movements in exchange, except to the extent of premiums paid for the contracts.
While a weaker U.S. dollar would result in a net benefit, the market value of
the Company's hedges would have declined by $47.4 million and $86.7 million,
respectively, from a uniform 10% weakening of the U.S. dollar at December 31,
2000 and 1999. The market value was determined using a foreign exchange option
pricing model and holding all factors except exchange rates constant. Since
Merck uses purchased local currency put options, a uniform weakening of the U.S.
dollar will yield the largest overall potential loss in the market value of
these options. The December 31, 2000 measurement reflects reduced notional
amounts compared to the prior year. The December 31, 1999 measurement included
written euro put options with terms identical to deep-in-the-money purchased put
options. The changes in market value of the written options equally offset
market value changes of the purchased options. The sensitivity measurement
assumes that a change in one foreign currency relative to the U.S. dollar would
not affect other foreign currencies relative to the U.S. dollar. Although not
predictive in nature, the Company believes that a 10% threshold reflects
reasonably possible near-term changes in Merck's major foreign currency
exposures relative to the U.S. dollar. Over the last three years, the program
has reduced the volatility of cash flows and mitigated the loss in value of cash
flows during periods of relative strength in the U.S. dollar for the portion of
revenues hedged. The cash flows from these contracts are reported as operating
activities in the Consolidated Statement of Cash Flows.
In addition to the balance sheet and revenue hedging programs, the Company
hedges interest rates on certain variable rate foreign currency denominated
investing transactions. Cross-currency interest rate swap contracts are used,
which, in addition to exchanging cash flows derived from interest rates on the
underlying financial instruments for those derived from interest rates inherent
in the contracts, exchange currencies at both inception and termination of the
contracts. These swap contracts allow the Company to receive variable rate
returns and limit foreign exchange risk. The cash flows from these contracts are
reported as operating activities in the Consolidated Statement of Cash Flows.
The Company's investment portfolio includes cash equivalents and short-term
investments, the market value of which is not significantly impacted by changes
in interest rates. The market value of the Company's medium- to long-term fixed
rate investments is modestly impacted by changes in U.S. interest rates. Changes
in medium- to long-term U.S. interest rates would have a more significant impact
on the market value of the Company's fixed-rate borrowings, which generally have
longer maturities. A sensitivity analysis to measure potential changes in the
market value of the Company's investments and debt from a change in interest
rates indicated that a one percentage point increase in interest rates at
December 31, 2000 and 1999 would have positively impacted the net aggregate
market value of these instruments by $116.0 million and $205.0 million,
respectively. A one percentage point decrease at December 31, 2000 and 1999
would have negatively impacted the net aggregate market value by $135.6 million
and $266.5 million, respectively. The fair value of the Company's debt was
determined using pricing models reflecting one percentage point shifts in the
appropriate yield curves. The fair value of the Company's investments was
determined using a combination of pricing and duration models. Whereas duration
is a linear approximation that works well for modest changes in yields and
generates a symmetrical result, pricing models reflecting the convexity of the
price/yield relationship provide greater precision and reflect the asymmetry of
price movements for interest rate changes in opposite directions. The impact of
convexity is more pronounced in longer-term maturities and low interest rate
environments. The reduced sensitivity of the Company's aggregate investment and
debt portfolio at December 31, 2000 reflects an increase in the size and
weighted average maturity of the Company's investments.
30 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133).
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. In
June 1999, the FASB issued Statement No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which delayed the required adoption of FAS 133 to fiscal
2001. In June 2000, the FASB issued Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FAS 133,
which was effective concurrently with FAS 133. Upon adoption of the Statements
on January 1, 2001, the Company recorded a favorable cumulative effect of
accounting change of $45.5 million after tax in Other comprehensive income
(loss), representing the mark to fair value of purchased local currency put
options. The cumulative effect of accounting change recorded in Net income was
not significant.
Cautionary Factors That May Affect Future Results
This annual 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, 2000, which will be
filed in March 2001, 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. Prior to the filing of the
Form 10-K for the year ended December 31, 2000, reference should be made to Item
1 of the Company's annual report on Form 10-K for the year ended December 31,
1999. 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.
<TABLE>
<CAPTION>
Condensed Interim Financial Data
- ------------------------------------------------------------------------------------------------------
($ in millions except
per share amounts) 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales........................................... $ 11,467.3 $10,567.5 $ 9,477.1 $ 8,851.4
Materials and production costs.................. 6,570.6 5,952.5 5,087.0 4,833.4
Marketing and administrative expenses........... 1,774.1 1,512.8 1,463.6 1,417.2
Research and development expenses............... 662.4 609.8 548.0 523.6
Equity income from affiliates................... (145.5) (219.4) (211.8) (188.3)
Other (income) expense, net..................... 94.6 70.2 113.0 71.5
Income before taxes............................. 2,511.1 2,641.6 2,477.3 2,194.0
Net income...................................... 1,764.4 1,835.9 1,721.7 1,499.6
Basic earnings per common share................. $.77 $.80 $.74 $.65
Earnings per common share assuming dilution..... $.75 $.78 $.73 $.63
- ------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------
Sales........................................... $ 8,963.4 $ 8,195.7 $ 8,018.2 $ 7,536.7
Materials and production costs.................. 4,644.0 4,365.9 4,370.2 4,154.2
Marketing and administrative expenses........... 1,588.6 1,272.7 1,184.4 1,154.3
Research and development expenses............... 627.9 516.0 482.7 441.8
Acquired research............................... - 51.1 - -
Equity income from affiliates................... (180.4) (227.1) (179.6) (174.8)
Other (income) expense, net..................... 71.9 (17.6) (170.1) 118.4
Income before taxes............................. 2,211.4 2,234.7 2,330.6 1,842.8
Net income...................................... 1,573.2 1,539.6 1,478.1 1,299.6
Basic earnings per common share................. $.68 $.65 $.63 $.55
Earnings per common share assuming dilution..... $.66 $.64 $.61 $.54
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Dividends Paid per Common Share
- ------------------------------------------------------------------------------------------------------
Year 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000............................... $1.21 $.34 $.29 $.29 $.29
1999............................... 1.10 .29 .27 .27 .27
======================================================================================================
Common Stock Market Prices
- ------------------------------------------------------------------------------------------------------
2000 4th Q 3rd Q 2nd Q 1st Q
- ------------------------------------------------------------------------------------------------------
High............................................ $ 96.69 $ 77.38 $ 76.63 $ 79.00
Low............................................. 72.88 63.00 61.88 52.00
- ------------------------------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------------------------------
High............................................ $ 81.13 $ 75.94 $ 85.06 $ 87.38
Low............................................. 64.50 60.94 66.00 67.47
======================================================================================================
</TABLE>
The principal market for trading of the common stock is the New York Stock
Exchange under the symbol MRK.
Merck & Co., Inc. 2000 Annual Report 31
<PAGE>
Consolidated Statement of Income
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions except per share amounts) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales..................................................... $40,363.2 $32,714.0 $26,898.2
- -------------------------------------------------------------------------------------------------
Costs, Expenses and Other
Materials and production.................................. 22,443.5 17,534.2 13,925.4
Marketing and administrative.............................. 6,167.7 5,199.9 4,511.4
Research and development.................................. 2,343.8 2,068.3 1,821.1
Acquired research......................................... -- 51.1 1,039.5
Equity income from affiliates............................. (764.9) (762.0) (884.3)
Gains on sales of businesses.............................. -- -- (2,147.7)
Other (income) expense, net............................... 349.0 3.0 499.7
- -------------------------------------------------------------------------------------------------
30,539.1 24,094.5 18,765.1
- -------------------------------------------------------------------------------------------------
Income Before Taxes....................................... 9,824.1 8,619.5 8,133.1
Taxes on Income........................................... 3,002.4 2,729.0 2,884.9
- -------------------------------------------------------------------------------------------------
Net Income................................................ $ 6,821.7 $ 5,890.5 $ 5,248.2
=================================================================================================
Basic Earnings per Common Share........................... $2.96 $2.51 $2.21
=================================================================================================
Earnings per Common Share Assuming Dilution............... $2.90 $2.45 $2.15
=================================================================================================
</TABLE>
Consolidated Statement of Retained Earnings
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1........................................ $23,447.9 $20,186.7 $17,291.5
- -------------------------------------------------------------------------------------------------
Net Income................................................ 6,821.7 5,890.5 5,248.2
Common Stock Dividends Declared........................... (2,905.7) (2,629.3) (2,353.0)
- -------------------------------------------------------------------------------------------------
Balance, December 31...................................... $27,363.9 $23,447.9 $20,186.7
=================================================================================================
</TABLE>
Consolidated Statement of Comprehensive Income
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income................................................ $ 6,821.7 $ 5,890.5 $ 5,248.2
- -------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss)
Net unrealized gain (loss) on investments,
net of tax and net income realization............... 24.3 25.6 (5.6)
Minimum pension liability, net of tax..................... (1.6) 3.8 (24.7)
- -------------------------------------------------------------------------------------------------
22.7 29.4 (30.3)
- -------------------------------------------------------------------------------------------------
Comprehensive Income...................................... $ 6,844.4 $ 5,919.9 $ 5,217.9
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31
($ in millions) 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents...................................................... $ 2,536.8 $ 2,021.9
Short-term investments......................................................... 1,717.8 1,180.5
Accounts receivable............................................................ 5,017.9 4,089.0
Inventories.................................................................... 3,021.5 2,846.9
Prepaid expenses and taxes..................................................... 1,059.4 1,120.9
- ---------------------------------------------------------------------------------------------------------------
Total current assets........................................................... 13,353.4 11,259.2
- ---------------------------------------------------------------------------------------------------------------
Investments.................................................................... 4,947.8 4,761.5
- ---------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment (at cost)
Land........................................................................... 344.7 259.2
Buildings...................................................................... 5,481.1 4,465.8
Machinery, equipment and office furnishings.................................... 8,576.5 7,385.7
Construction in progress....................................................... 2,304.9 2,236.3
- ---------------------------------------------------------------------------------------------------------------
16,707.2 14,347.0
Less allowance for depreciation................................................ 5,225.1 4,670.3
- ---------------------------------------------------------------------------------------------------------------
11,482.1 9,676.7
- ---------------------------------------------------------------------------------------------------------------
Goodwill and Other Intangibles (net of accumulated amortization
of $1,850.7 million in 2000 and $1,488.7 million in 1999).................... 7,374.2 7,584.2
- ---------------------------------------------------------------------------------------------------------------
Other Assets................................................................... 2,752.9 2,353.3
- ---------------------------------------------------------------------------------------------------------------
$ 39,910.4 $ 35,634.9
===============================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities....................................... $ 4,361.3 $ 4,158.7
Loans payable and current portion of long-term debt............................ 3,319.3 2,859.0
Income taxes payable........................................................... 1,244.3 1,064.1
Dividends payable.............................................................. 784.7 677.0
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities...................................................... 9,709.6 8,758.8
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt................................................................. 3,600.7 3,143.9
- ---------------------------------------------------------------------------------------------------------------
Deferred Income Taxes and Noncurrent Liabilities............................... 6,746.7 7,030.1
- ---------------------------------------------------------------------------------------------------------------
Minority Interests............................................................. 5,021.0 3,460.5
- ---------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock, one cent par value
Authorized - 5,400,000,000 shares
Issued - 2,968,355,365 shares - 2000
- 2,968,030,509 shares - 1999......................................... 29.7 29.7
Other paid-in capital.......................................................... 6,265.8 5,920.5
Retained earnings.............................................................. 27,363.9 23,447.9
Accumulated other comprehensive income......................................... 30.8 8.1
- ---------------------------------------------------------------------------------------------------------------
33,690.2 29,406.2
Less treasury stock, at cost
660,756,186 shares - 2000
638,953,059 shares - 1999.................................................... 18,857.8 16,164.6
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity..................................................... 14,832.4 13,241.6
- ---------------------------------------------------------------------------------------------------------------
$ 39,910.4 $ 35,634.9
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
Merck & Co., Inc. 2000 Annual Report 33
<PAGE>
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31
($ in millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Income before taxes......................................................... $ 9,824.1 $ 8,619.5 $ 8,133.1
Adjustments to reconcile income before taxes to cash
provided from operations before taxes:
Acquired research...................................................... -- 51.1 1,039.5
Gains on sales of businesses........................................... -- -- (2,147.7)
Depreciation and amortization.......................................... 1,277.3 1,144.8 1,015.1
Other.................................................................. (222.8) (547.7) 156.6
Net changes in assets and liabilities:
Accounts receivable................................................. (940.1) (752.9) (579.1)
Inventories......................................................... (210.1) (223.0) (409.5)
Accounts payable and accrued liabilities............................ 16.6 404.5 250.1
Noncurrent liabilities.............................................. (94.3) (150.9) (13.0)
Other............................................................... 204.3 69.9 9.8
- ---------------------------------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities Before Taxes.......................... 9,855.0 8,615.3 7,454.9
Income Taxes Paid........................................................... (2,167.7) (2,484.6) (2,126.6)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities................................... 7,687.3 6,130.7 5,328.3
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures........................................................ (2,727.8) (2,560.5) (1,973.4)
Purchase of securities, subsidiaries and other investments.................. (28,637.1) (42,211.2) (29,675.4)
Proceeds from sale of securities, subsidiaries and other investments........ 27,667.5 40,308.7 28,618.9
Proceeds from relinquishment of certain AstraZeneca product rights.......... 92.6 1,679.9 --
Proceeds from sales of businesses........................................... -- -- 2,586.2
Other....................................................................... (36.5) (33.9) 432.3
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities....................................... (3,641.3) (2,817.0) (11.4)
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net change in short-term borrowings......................................... 905.6 2,137.9 (457.2)
Proceeds from issuance of debt.............................................. 442.1 11.6 2,379.5
Payments on debt............................................................ (443.2) (17.5) (340.6)
Proceeds from issuance of preferred units of subsidiary..................... 1,500.0 -- --
Purchase of treasury stock.................................................. (3,545.4) (3,582.1) (3,625.5)
Dividends paid to stockholders.............................................. (2,798.0) (2,589.7) (2,253.1)
Proceeds from exercise of stock options..................................... 640.7 322.9 490.1
Other....................................................................... (149.2) (152.5) (114.1)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities....................................... (3,447.4) (3,869.4) (3,920.9)
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Cash Equivalents................ (83.7) (28.6) 85.1
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents........................ 514.9 (584.3) 1,481.1
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of Year.............................. 2,021.9 2,606.2 1,125.1
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year.................................... $ 2,536.8 $ 2,021.9 $ 2,606.2
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
34 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts)
1. Nature of Operations
Merck is a global research-driven pharmaceutical company that discovers,
develops, manufactures and markets a broad range of human and animal health
products, directly and through its joint ventures, and provides pharmaceutical
benefit services through Merck-Medco Managed Care (Merck-Medco). Human health
products include therapeutic and preventive agents, generally sold by
prescription, for the treatment of human disorders. Pharmaceutical benefit
services primarily include sales of prescription drugs through managed
prescription drug programs as well as services provided through programs to
manage patient health and drug utilization. Through these complimentary
capabilities, Merck works to improve the quality of life and contain overall
health care costs.
Merck sells its human health products and provides pharmaceutical benefit
services primarily to drug wholesalers and retailers, hospitals, clinics,
government agencies, corporations, labor unions, retirement systems, insurance
carriers, managed health care providers such as health maintenance organizations
and other institutions.
2. Summary of Accounting Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and all of its subsidiaries in which a controlling
interest is maintained. For those consolidated subsidiaries where Merck
ownership is less than 100%, the outside stockholders' interests are shown as
Minority interests. Investments in affiliates over which the Company has
significant influence but not a controlling interest are carried on the equity
basis.
Foreign Currency Translation - The U.S. dollar is the functional currency for
the Company's foreign subsidiaries.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with original maturities of less than three months.
Inventories - The majority of domestic inventories are valued at the lower of
last-in, first-out (LIFO) cost or market. Remaining inventories are valued at
the lower of first-in, first-out (FIFO) cost or market.
Revenue Recognition - Revenues from sales of Merck human health products are
recognized upon shipment of product. Revenues generated by Merck-Medco's
pharmaceutical benefit services, comprised principally of sales of prescription
drugs, are recognized, net of certain rebates, upon dispensing of product.
Specifically, revenues from plan member orders dispensed at Merck-Medco's mail
service pharmacies are recognized when the product is shipped, while revenues
from orders dispensed by retail network pharmacies are recognized when the
prescription is filled. For the majority of the retail business, Merck-Medco
assumes financial risk through having independent contractual arrangements to
bill plan sponsors and pay the retail network pharmacy providers. In such cases,
revenues are recognized for the amount billed to the plan sponsor. When
Merck-Medco acts solely as a liaison to reimburse retail pharmacies on the plan
sponsor's behalf, no financial risk has been assumed, and therefore, revenues
are recognized only for the amount of the administrative fee received from the
plan sponsor.
Merck-Medco has contracts with multiple pharmaceutical manufacturers that
offer rebates on drugs included on Merck-Medco formularies. These rebates are
recognized as a credit to cost of sales in the period earned based upon the
dispensed volume of specific drugs stipulated in the contracts.
Depreciation - Depreciation is provided over the estimated useful lives of the
assets, principally using the straight-line method. For tax purposes,
accelerated methods are used. The estimated useful lives primarily range from 10
to 50 years for Buildings, and from 3 to 15 years for Machinery, equipment and
office furnishings.
Goodwill and Other Intangibles - Goodwill of $3.8 billion in 2000 and 1999 (net
of accumulated amortization) represents the excess of acquisition costs over the
fair value of net assets of businesses purchased and is amortized on a
straight-line basis over periods up to 40 years. Other acquired intangibles
principally include customer relationships of $2.5 billion in 2000 and $2.6
billion in 1999 (net of accumulated amortization) that arose in connection with
the acquisition of Medco Containment Services, Inc. (renamed Merck-Medco) and
patent rights approximating $.7 billion in 2000 and $.8 billion in 1999 (net of
accumulated amortization) acquired as part of the restructuring of Astra Merck
Inc. (AMI). (See Note 4.) These acquired intangibles are recorded at cost and
are amortized on a straight-line basis over their estimated useful lives of up
to 40 years. The weighted average amortization period for Goodwill and Other
Intangibles was 33 years at December 31, 2000 and 1999. The Company reviews
goodwill and other intangibles to assess recoverability from future operations
using undiscounted cash flows derived from the lowest appropriate asset
groupings, generally the subsidiary level. Impairment of enterprise goodwill is
typically evaluated at the acquired entity level. Impairments are recognized in
operating results to the extent that carrying value exceeds fair value, which is
determined based on the net present value of estimated future cash flows.
Stock-Based Compensation - Stock-based compensation is recognized using the
intrinsic value method. For disclosure purposes, pro forma net income and
earnings per share impacts are provided as if the fair value method had been
applied.
Use of Estimates - The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
(GAAP) and, accordingly, include amounts that are based on management's best
estimates and judgments.
Reclassifications - Certain reclassifications have been made to prior year
amounts to conform with current year presentation.
Merck & Co., Inc. 2000 Annual Report 35
<PAGE>
3. Acquisitions and Divestitures
In 1999, the Company acquired the outstanding common stock of SIBIA
Neurosciences, Inc. (SIBIA) for approximately $97.4 million. The purchase price
allocation resulted in a charge for acquired research of $51.1 million
associated with research projects for which, at the acquisition date,
technological feasibility had not been established and no alternative future use
existed. SIBIA is engaged in the discovery and development of novel molecule
therapeutics for the treatment of neurodegenerative, neuropsychiatric and
neurological disorders. The acquisition was accounted for by the purchase method
and, accordingly, SIBIA's results of operations have been included with the
Company's since the acquisition date. Pro forma information is not provided as
the impact of the transaction does not have a material effect on the Company's
results of operations for 1999 or 1998.
In July 1998, the Company sold its one-half interest in The DuPont Merck
Pharmaceutical Company (DMPC), its joint venture with E.I. du Pont de Nemours
and Company (DuPont), to DuPont for $2.6 billion in cash, resulting in a pretax
gain of $2.15 billion ($1.25 billion after tax). The joint venture was not
significant to the Company's financial position or results of operations. This
gain was substantially offset on an after-tax basis by a $1.04 billion pretax
and after-tax charge for acquired research (see Note 4) and $338.6 million of
pretax other charges ($193.1 million after tax) included in Other (income)
expense, net. (See Note 14.)
4. Joint Ventures
In 1982, Merck entered into an agreement with Astra AB (Astra) to develop and
market Astra's products under a royalty-bearing license. In 1993, the Company's
total sales of Astra products reached a level that triggered the first step in
the establishment of a joint venture business carried on by AMI, in which Merck
and Astra each owned a 50% share. This joint venture, formed in 1994, developed
and marketed most of Astra's new prescription medicines in the United States.
Joint venture sales were $1.7 billion for the first six months of 1998,
consisting primarily of Prilosec, the first of a class of medications known as
proton pump inhibitors, which slows the production of acid from the cells of the
stomach lining.
On July 1, 1998, Merck and Astra completed the restructuring of the ownership
and operations of the joint venture whereby the Company acquired Astra's
interest in AMI, renamed KBI Inc. (KBI), for consideration totaling $3.1
billion, including approximately $700.0 million in cash and assumption of a $2.4
billion preferred stock obligation to Astra, which is included in Minority
interests in the consolidated financial statements. (See Note 10 for further
information.) As a result of the acquisition, the Company fully owned KBI's
operating assets and the license rights to make, have made, import, use and sell
the existing and future U.S. pharmaceutical compounds of Astra. The Company then
contributed KBI's operating assets of $644.3 million, including a $598.0 million
step-up in carrying value, to a new U.S. limited partnership, named Astra
Pharmaceuticals L.P. (the Partnership) in exchange for a 1% limited partner
interest. The contributed assets included KBI's workforce, operating facility,
trademarks and information systems. Astra contributed the net assets of its
wholly owned subsidiary, Astra USA, Inc., to the Partnership in exchange for a
99% general partner interest. For a franchise fee payment of $230.0 million, the
Partnership became the exclusive distributor of the products for which KBI
retained rights. The Partnership was renamed AstraZeneca LP (AZLP) upon Astra's
1999 merger with Zeneca Group Plc (the AstraZeneca merger), discussed later.
Merck's acquisition of Astra's interest in KBI for $3.1 billion was accounted
for under the purchase method and, accordingly, 100% of KBI's results of
operations have been included with the Company's since July 1, 1998. Pro forma
information is not provided as the impact of the transaction did not have a
material effect on the Company's results of operations for 1998. The purchase
price was allocated based upon the fair values of the portion of assets and
liabilities acquired. In addition to the 50% step-up in carrying value of KBI's
operating assets, purchase price allocations resulted in the recognition of
goodwill totaling $825.9 million which is being amortized on a straight-line
basis over 20 years and other intangibles, principally the retained U.S. patent
rights on in-line products totaling $978.0 million, which are being amortized on
a straight-line basis over 10 years. In connection with the acquisition of the
remaining 50% of the license rights to product candidates within Astra's
research pipeline, the Company recorded a $1.04 billion charge for acquired
research associated with 10 product candidates in Phase II or later stages of
development and U.S. rights to research projects which had not yet entered Phase
II. At the acquisition date, technological feasibility for the product
candidates and the pre-Phase II research projects had not been established and
no alternative future use existed. The product candidates were in various
therapeutic categories, principally gastrointestinal (comprising over 50% of the
charge for Phase II or later stages), respiratory and neurological, with
projected U.S. Food and Drug Administration (FDA) approval dates in the years
1999 through 2005. None of these future products is individually material to the
Company. The fair value of the acquired research was determined based upon the
present value of each product's projected future cash flows, utilizing an income
approach reflecting the appropriate cost of capital. Future cash flows were
predominately based on net income forecasts for each product consistent with
historical pricing, margins, and expense levels for similar products. Revenues
were estimated based on relevant market size and growth factors, expected
industry trends, individual product life cycles, and the life of each product's
underlying patent. The implied risk adjusted discount rates applied to projected
cash flows were based on the Company's weighted average cost of capital, the
useful life of each product, the applicable product's stage of completion, as
well as its probability of technical and marketing success, and averaged 26%,
with a range of 12% to 37%. A cost approach was also utilized to corroborate the
values determined under the income approach. In applying the cost approach,
consideration was given to the level of research and development expenditures
within Astra, the appropriate required rates of return within the market place
and the cost of reproduction for the acquired assets. Both of these approaches
are appropriate under generally accepted valuation methods and yielded similar
results. The research projects considered in the valuation are all subject to
the normal risks and uncertainties associated with
36 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
demonstrating the safety and efficacy required to obtain timely FDA approval.
While Merck will benefit from future revenues of successful product candidates,
AZLP and Astra will bear all costs to complete the development of these products
unless AZLP elects not to pursue a particular product candidate, at which time
the Company would bear further development costs at its discretion.
While maintaining a 1% limited partner interest in AZLP, Merck enjoys consent
and protective rights intended to preserve its business and economic interests,
including restrictions on the power of the general partner to make certain
distributions or dispositions. Furthermore, in limited events of default,
additional rights will be granted to the Company, including powers to direct the
actions of, or remove and replace, the Partnership's chief executive officer and
chief financial officer. Merck earns certain Partnership returns, which are
recorded as Equity income from affiliates, as well as ongoing revenue based on
sales of current and future KBI products. The Partnership returns reflect
Merck's share of AZLP GAAP earnings and include a preferential return, a
priority return and other variable returns which are based, in part, upon sales
of certain former Astra USA, Inc. products. The preferential return represents
Merck's share of the undistributed AZLP GAAP earnings which is expected to
approximate $275.0 million annually through 2008. The priority return is an
amount provided for in the Partnership agreement that varies based upon the
fiscal year, applicable income tax rates and the occurrence of a partial
redemption of our limited partner interest. We expect this return to approximate
$300.0 million annually, subject to availability of sufficient Partnership
profits. The AstraZeneca merger triggers a partial redemption of Merck's limited
partnership interest in 2008, reducing this amount to approximately $210.0
million annually at that time. Upon the partial redemption of the Company's
limited partner interest, AZLP will distribute to KBI an amount based primarily
on a multiple of Merck's annual revenue derived from sales of the former Astra
USA, Inc. products for the three years prior to the redemption (the Limited
Partner Share of Agreed Value).
For a payment of $443.0 million, which has been deferred, Astra purchased an
option to buy Merck's interest in the KBI products, excluding the
gastrointestinal medicines Prilosec and Nexium, in 2008, 2012 or 2016 (the Asset
Option), at an exercise price based primarily on a multiple of Merck's annual
revenue derived from the KBI products for the three years prior to exercise. As
a result of the AstraZeneca merger, the Asset Option is now only exercisable in
2010 at an exercise price equal to the net present value as of March 31, 2008 of
projected future pretax revenue to be received by the Company from the KBI
products (the Appraised Value). Merck now also has the right to require Astra to
purchase such interest in 2008 at the Appraised Value. The Company also granted
Astra an option to buy Merck's common stock interest in KBI, at an exercise
price based on the net present value of estimated future net sales of Prilosec
and Nexium (the Shares Option). This option is exercisable only after Astra's
purchase of Merck's interest in the KBI products. Generally, the Shares Option
was not exercisable before 2017, but as a result of the AstraZeneca merger, is
now exercisable two years after Astra's purchase of Merck's interest in the KBI
products.
In April 1999, Astra merged with Zeneca Group Plc, forming AstraZeneca AB
(AstraZeneca), which constituted a Trigger Event under the KBI restructuring
agreements. As a result of the merger, Astra was required to make two one-time
payments to Merck totaling approximately $1.8 billion. In exchange for Merck's
relinquishment of rights to future Astra products with no existing or pending
U.S. patents at the time of the merger, Astra paid $967.4 million (the Advance
Payment), which is subject to a true-up calculation in 2008 that may require
repayment of all or a portion of this amount. The amount determined by the
true-up calculation (the True-Up Amount) cannot reasonably be estimated because
it is directly dependent on the fair market value in 2008 of the Astra product
rights retained by the Company which extend to compounds currently in
development as well as compounds that have not yet entered development.
Accordingly, recognition of this contingent income has been deferred until the
realizable amount, if any, is determinable, which is not anticipated prior to
2008.
In connection with the Company's acquisition of Astra's interest in KBI,
Merck agreed to relinquish rights to the pharmaceutical products of any company
that would merge with or acquire Astra. These rights, which protected the value
of KBI's perpetual interest in Astra's pipeline, were relinquished in exchange
for a payment (the Lump Sum Payment) to be made in the event of the merger or
acquisition of Astra. The Company estimated that it was entitled to receive a
Lump Sum Payment of $822.0 million as the result of the AstraZeneca merger. In
the second quarter of 1999, Astra paid $712.5 million of the Lump Sum Payment
and disputed its obligation to pay the remainder. The parties sought arbitration
with respect to the disputed amount. Although Merck retains an interest in
current and future Astra products with an existing or pending U.S. patent, this
merger effectively curtailed the Company's perpetual interest in Astra's
pipeline and, thus, reduced the going concern value acquired in 1998.
Accordingly, one-half of the expected payment was an adjustment to the purchase
price Merck paid for Astra's one-half interest in KBI, reducing goodwill by
$411.0 million, less 50% of a reserve relating to disputed proceeds. The balance
represented compensation to the Company for the reduction of the value of its
original one-half interest in KBI and was recorded in Other (income) expense,
net. Because the reduction in goodwill was not tax-effected and the Lump Sum
Payment was fully taxable, this transaction, net of a reserve relating to
disputed proceeds, yielded an after-tax gain of $74.6 million. This gain was
largely offset on an after-tax basis by $110.0 million of pretax charges ($66.2
million after tax) also recorded in Other (income) expense, net. (See Note 14.)
In the first quarter of 2000, the arbitration concluded and the Company received
$87.2 million of the disputed proceeds plus interest.
Under the provisions of the KBI restructuring agreements, because a Trigger
Event has occurred, the sum of the Limited Partner Share of Agreed Value, the
Appraised Value and the True-Up Amount is guaranteed to be a minimum of $4.7
billion. Distribution of the Limited Partner Share of Agreed Value and payment
of the True-Up Amount will occur in 2008. AstraZeneca's purchase of Merck's
interest in the KBI products is contingent upon the exercise of either Merck's
option in 2008 or AstraZeneca's option in 2010 and, therefore, payment of the
Appraised Value may or may not occur.
Merck & Co., Inc. 2000 Annual Report 37
<PAGE>
In 1989, Merck formed a joint venture with Johnson & Johnson to develop and
market a broad range of nonprescription medicines for U.S. consumers. This 50%
owned venture was expanded into Europe in 1993, and into Canada in 1996. Sales
of product marketed by the joint venture were $461.1 million for 2000, $487.4
million for 1999 and $514.2 million for 1998.
In 1991, Merck and DuPont formed an independent, research-driven, worldwide
pharmaceutical joint venture, equally owned by each party. Joint venture sales
were $686.2 million for the first six months of 1998, consisting primarily of
cardiovascular, radiopharmaceutical and central nervous system products. In July
1998, the Company sold its one-half interest in the joint venture to DuPont for
$2.6 billion in cash. (See Note 3.)
In 1994, Merck and Pasteur Merieux Connaught (now Aventis Pasteur)
established an equally owned joint venture to market vaccines in Europe and to
collaborate in the development of combination vaccines for distribution in
Europe. Joint venture vaccine sales were $540.9 million for 2000, $566.8 million
for 1999 and $560.4 million for 1998.
In August 1997, Merck and Rhone-Poulenc (now Aventis) combined their animal
health and poultry genetics businesses to form Merial Limited (Merial), a fully
integrated, stand-alone joint venture, equally owned by each party. Merial is
the world's largest company dedicated to the discovery, manufacture and
marketing of veterinary pharmaceuticals and vaccines. Merck contributed
developmental research personnel, sales and marketing activities, and animal
health products, as well as its poultry genetics business. Aventis contributed
research and development, manufacturing, sales and marketing activities, and
animal health products, as well as its poultry genetics business. Merial sales
were $1.6 billion for 2000, $1.7 billion for 1999 and $1.8 billion for 1998.
In May 2000, the Company and Schering-Plough Corporation (Schering-Plough)
entered into agreements to create separate partnerships to develop and market in
the United States new prescription medicines in the cholesterol-management and
respiratory therapeutic areas. These partnerships will pursue the development
and marketing of Zocor as a once-daily fixed-combination tablet with ezetimibe,
Schering-Plough's investigational cholesterol absorption inhibitor; ezetimibe as
a once-daily monotherapy and in co-administration with statins; and a once-daily
fixed-combination tablet of Singulair and Claritin, Schering-Plough's
nonsedating antihistamine, for the treatment of allergic rhinitis and asthma.
The arrangements are not expected to have a significant near-term impact on the
Company's results of operations or financial position.
5. Affiliates Accounted for Using the Equity Method
Investments in affiliates accounted for using the equity method are included in
Other assets and were $1.7 billion at December 31, 2000 and $1.4 billion at
December 31, 1999. Dividends and distributions received from these affiliates
were $475.5 million in 2000, $412.2 million in 1999 and $919.3 million in 1998.
The decrease in 2000 and 1999 primarily relates to the 1998 restructuring of
AMI.
6. Financial Instruments
Foreign Currency Risk Management
The Company has established revenue and balance sheet hedging programs to
protect against reductions in value and volatility of future foreign currency
cash flows caused by changes in foreign exchange rates. The objectives and
strategies of these programs are described in the Analysis of Liquidity and
Capital Resources section of the Financial Review.
The Company partially hedges forecasted revenues denominated in foreign
currencies with purchased local currency put options. When the dollar
strengthens against foreign currencies, the decline in the value of foreign
currency cash flows is partially offset by the recognition of gains in the value
of purchased currency options designated as hedges of the period. Conversely,
when the dollar weakens, the increase in the value of foreign currency cash
flows is reduced only by the recognition of the premium paid to acquire the
options designated as hedges of the period. Market value gains and premiums on
these contracts are recognized in Sales when the hedged transaction is
recognized. The carrying value of purchased currency options is reported in
Prepaid expenses and taxes or Other assets.
The Company continually reviews its portfolio of purchased options. From time
to time, the Company will adjust its portfolio to preserve the value of
deep-in-the-money purchased options. The most cost-effective means of adjusting
the portfolio is to write options with terms identical to the purchased options.
Deferred gains or losses that accumulate on purchased options prior to writing
an offsetting position will remain deferred and are recognized when the hedged
transaction occurs. Subsequent changes in the market value of the written
options and related purchased options are recorded in earnings. Because the
changes in market value of the purchased options equally offset the written
options, there is no net impact on earnings. The carrying value of written
currency options is reported in Accounts payable and accrued liabilities or
Deferred income taxes and noncurrent liabilities.
Deferred gains and losses on purchased currency options used to hedge
forecasted revenues amounted to $88.4 million and $11.5 million at December 31,
2000 and $172.9 million and $37.4 million at December 31, 1999, respectively.
The Company also hedges certain exposures to fluctuations in foreign currency
exchange rates that occur prior to conversion of foreign currency denominated
monetary assets and liabilities into U.S. dollars. Prior to conversion to U.S.
dollars, these assets and liabilities are translated at spot rates in effect on
the balance sheet date. The effects of changes in spot rates are reported in
earnings and included in Other (income) expense, net. The Company hedges its
exposure to changes in foreign exchange principally with forward contracts.
Because monetary assets and liabilities are marked to spot and recorded in
earnings, forward contracts designated as hedges of the monetary assets and
liabilities are also marked to spot with the resulting gains and losses
similarly recognized in earnings. Gains and losses on forward contracts are
included in Other (income) expense, net, and offset losses and gains on the net
monetary assets and liabilities hedged. The carrying values of forward exchange
contracts are reported in Accounts receivable, Other assets, Accounts payable
and accrued liabilities or Deferred income taxes and noncurrent liabilities.
38 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
At December 31, 2000 and 1999, the Company had contracts to exchange foreign
currencies, principally of the euro region and Japan, for U.S. dollars in the
following notional amounts:
2000 1999
- --------------------------------------------------------------------------------
Purchased currency options............................. $ 903.5 $ 3,005.4
Written currency options............................... - 739.5
Forward sale contracts................................. 2,139.9 2,500.0
Forward purchase contracts............................. 870.3 1,265.0
================================================================================
Interest Rate Risk Management
The Company may use interest rate swap contracts on certain investing and
borrowing transactions and, at December 31, 2000, was party to a seven-year
combined interest rate and currency swap contract entered into in 1997 which
converts a variable rate Dutch guilder investment to a variable rate U.S. dollar
investment. In 2000, a portion of this contract was terminated in conjunction
with the sale of a portion of the related asset with an immaterial impact on net
income. The notional amount of the contract was $279.3 million at December 31,
2000 and $353.1 million at December 31, 1999. In 2000, a similar five-year swap
contract with a notional amount of $249.2 million matured and the related asset
was sold with an immaterial impact on net income. The notional amount of this
swap was $239.4 million at December 31, 1999. The market values of these
contracts are reported in Other assets or Deferred income taxes and noncurrent
liabilities with unrealized gains and losses recorded, net of tax, in
Accumulated other comprehensive income. The Company does not use leveraged swaps
and, in general, does not leverage any of its investment activities that would
put principal capital at risk.
Fair Value of Financial Instruments
Summarized below are the carrying values and fair values of the Company's
financial instruments at December 31, 2000 and 1999. Fair values were estimated
based on market prices, where available, or dealer quotes.
2000 1999
-----------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Assets
- --------------------------------------------------------------------------------
Cash and cash
equivalents........................ $2,536.8 $2,536.8 $2,021.9 $2,021.9
Short-term investments............... 1,717.8 1,717.1 1,180.5 1,180.5
Long-term investments................ 4,947.8 4,945.6 4,761.5 4,755.2
Purchased currency
options............................ 43.8 120.7 131.2 266.7
Forward exchange
contracts and
currency swap...................... 99.3 99.3 128.8 128.8
- --------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------
Loans payable and
current portion of
long-term debt..................... $3,319.3 $3,320.4 $2,859.0 $2,857.6
Long-term debt....................... 3,600.7 3,537.3 3,143.9 2,870.0
Written currency
options............................ - - 106.0 106.0
Forward exchange
contracts and
currency swap...................... 42.1 42.1 104.2 104.2
================================================================================
A summary of the carrying values and fair values of the Company's investments
at December 31 is as follows:
2000 1999
----------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------
Available-for-sale
Debt securities..................... $5,476.9 $5,476.9 $4,242.2 $4,242.2
Equity securities................... 773.8 773.8 1,155.0 1,155.0
Held-to-maturity securities........... 414.9 412.0 544.8 538.5
================================================================================
A summary of gross unrealized gains and losses on the Company's investments
at December 31 is as follows:
2000 1999
------------------ ------------------
Gross Unrealized Gross Unrealized
------------------ ------------------
Gains Losses Gains Losses
- --------------------------------------------------------------------------------
Available-for-sale
Debt securities..................... $ 79.0 $ (10.5) $ 76.3 $ (75.2)
Equity securities................... 126.3 (83.4) 202.0 (98.8)
Held-to-maturity securities........... - (2.9) - (6.3)
================================================================================
Gross unrealized gains and losses with respect to available-for-sale
investments are recorded, net of tax and minority interests, in Accumulated
other comprehensive income.
Available-for-sale debt securities and held-to-maturity securities maturing
within one year totaled $1.5 billion and $249.9 million, respectively, at
December 31, 2000. Of the remaining debt securities, $3.1 billion mature within
five years.
At December 31, 2000 and 1999, $575.0 million of held-to-maturity securities
maturing within three years set off $575.0 million of 5.0% non-transferable note
obligations due by 2003 issued by the Company.
Concentrations of Credit Risk
As part of its ongoing control procedures, the Company monitors concentrations
of credit risk associated with financial institutions with which it conducts
business. Credit risk is minimal as credit exposure limits are established to
avoid a concentration with any single financial institution. The Company also
monitors the creditworthiness of its customers to which it grants credit terms
in the normal course of business. Concentrations of credit risk associated with
these trade receivables are considered minimal due to the Company's diverse
customer base. Bad debts have been minimal. The Company does not normally
require collateral or other security to support credit sales.
7. Inventories
Inventories at December 31 consisted of:
2000 1999
- --------------------------------------------------------------------------------
Finished goods....................................... $ 1,762.8 $ 1,895.6
Raw materials and work in process.................... 1,174.9 869.8
Supplies............................................. 83.8 81.5
- --------------------------------------------------------------------------------
Total (approximates current cost).................... 3,021.5 2,846.9
Reduction to LIFO cost............................... - -
- --------------------------------------------------------------------------------
$ 3,021.5 $ 2,846.9
================================================================================
Merck & Co., Inc. 2000 Annual Report 39
<PAGE>
Inventories valued under the LIFO method comprised approximately 42% and 37%
of inventories at December 31, 2000 and 1999, respectively.
8. Loans Payable and Long-Term Debt
Loans payable at December 31, 2000 and 1999 consisted primarily of $3.1 billion
and $2.2 billion, respectively, of commercial paper borrowings. Loans payable
also reflected $120.0 million and $488.5 million of 5.8% notes at December 31,
2000 and 1999, respectively. These notes, due 2037, are subject to repayment at
par at the option of the holders in May of each year. Loans payable at December
31, 1999 also included $66.9 million of tax-exempt floating rate pollution
control and industrial revenue bonds, which the Company redeemed at par in March
2000. The remainder in both years was principally borrowings by foreign
subsidiaries. The weighted average interest rate for these borrowings was 6.6%
and 5.6% at December 31, 2000 and 1999, respectively.
Long-term debt at December 31 consisted of:
2000 1999
- ---------------------------------------------------------------------
6.0% note due 2008.......................... $ 1,380.0 $ 1,380.0
6.8% euronotes due 2005..................... 499.4 499.3
6.4% debentures due 2028.................... 499.0 499.0
6.0% debentures due 2028.................... 496.1 496.0
Variable rate borrowings due 2004........... 300.0 -
6.3% debentures due 2026.................... 247.0 246.9
Other....................................... 179.2 22.7
- ---------------------------------------------------------------------
$ 3,600.7 $ 3,143.9
=====================================================================
The $1.38 billion note issued to Astra, originally due 2038, is now payable
in 2008 as a result of Astra's 1999 merger with Zeneca. (See Note 4 for further
information.)
In 2000, other consisted primarily of $141.9 million of borrowings at
variable rates averaging 5.7% at December 31, 2000. Of this amount, $106.0
million is subject to repayment at the option of the holders beginning in 2010.
In both years, other also consisted of foreign borrowings at varying rates up to
9.0%.
The aggregate maturities of long-term debt for each of the next five years
are as follows: 2001, $10.9 million; 2002, $9.5 million; 2003, $7.7 million;
2004, $307.0 million; 2005, $505.0 million.
9. Contingencies and Environmental Liabilities
The Company is involved in various claims and legal proceedings of a nature
considered normal to its business, principally product liability and
intellectual property cases. Additionally, 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. 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.
The Company is also a party to a number of proceedings brought under the
Comprehensive Environmental Response, Compensation and Liability Act, commonly
known as Superfund, as well as under other federal and state statutes. When a
legitimate claim for contribution is asserted, a liability is initially accrued
based upon the estimated transaction costs to manage the site. Accruals are
adjusted as feasibility studies and related cost assessments of remedial
techniques are completed, and as the extent to which other potentially
responsible parties (PRPs) who may be jointly and severally liable can be
expected to contribute is determined.
The Company is also remediating environmental contamination resulting from
past industrial activity at certain of its sites and takes an active role in
identifying and providing for these costs. A worldwide survey was initially
performed to assess all sites for potential contamination resulting from past
industrial activities. Where assessment indicated that physical investigation
was warranted, such investigation was performed, providing a better evaluation
of the need for remedial action. Where such need was identified, remedial action
was then initiated. Estimates of the extent of contamination at each site were
initially made at the pre-investigation stage and liabilities for the potential
cost of remediation were accrued at that time. As more definitive information
became available during the course of investigations and/or remedial efforts at
each site, estimates were refined and accruals were adjusted accordingly. These
estimates and related accruals continue to be refined annually.
In management's opinion, the liabilities for all environmental matters which
are probable and reasonably estimable have been accrued and totaled $250.0
million and $305.5 million at December 31, 2000 and 1999, respectively. These
liabilities are undiscounted, do not consider potential recoveries from insurers
or other parties and will be paid out over the periods of remediation for the
applicable sites, which are expected to occur primarily over the next 15 years.
Although it is not possible to predict with certainty the outcome of these
matters, or the ultimate costs of remediation, management does not believe that
any reasonably possible expenditures that may be incurred in excess of the
liabilities accrued should exceed $131.0 million in the aggregate. Management
also does not believe that these expenditures should result in a materially
adverse effect on the Company's financial position, results of operations,
liquidity or capital resources for any year.
10. Preferred Stock of Subsidiary Companies
In March 2000, a wholly-owned subsidiary of the Company issued $1.5 billion par
value of variable rate preferred units. The units are redeemable at par value
plus accrued dividends at the option of the issuer at any time. They are also
redeemable at the option of the holders in March 2010, and at the end of each
five-year interval thereafter. Because the preferred securities are held at the
subsidiary level, they are included in Minority interests in the consolidated
financial statements.
In connection with the 1998 restructuring of AMI (see Note 4), the Company
assumed a $2.4 billion par value preferred stock obligation with a dividend rate
of 5% per annum which is carried by KBI and included in Minority interests.
While a small portion of the preferred stock carried by KBI is convertible into
KBI common shares, none of the preferred securities are convertible into the
40 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Company's common shares and, therefore, they are not included as common shares
issuable for purposes of computing Earnings per common share assuming dilution.
(See Note 16.)
11. Stockholders' Equity
In 2000, 1999 and 1998, Other paid-in capital increased by $345.3 million,
$306.0 million and $390.1 million, respectively, primarily as a result of income
tax benefits relating to stock option exercises.
A summary of treasury stock transactions (shares in millions) is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------
Shares Cost Shares Cost Shares Cost
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, Jan. 1......................... 638.9 $ 16,164.6 607.4 $ 13,007.8 580.6 $ 9,959.9
Purchases............................... 52.5 3,545.4 50.0 3,582.1 56.9 3,625.5
Issuances/(1)/.......................... (30.6) (852.2) (18.5) (425.3) (30.1) (577.6)
- ------------------------------------------------------------------------------------------------------------
Balance, Dec. 31........................ 660.8 $ 18,857.8 638.9 $ 16,164.6 607.4 $ 13,007.8
============================================================================================================
</TABLE>
/(1)/ Issued primarily under stock option plans.
At December 31, 2000 and 1999, 10 million shares of preferred stock, without
par value, were authorized; none were issued.
12. Stock Option Plans
The Company has stock option plans under which employees and non-employee
directors and employees of certain of the Company's equity method investees may
be granted options to purchase shares of Company common stock at the fair market
value at the time of the grant. Options generally vest in 5 years and expire in
10 years from the date of grant. The Company's stock option plan for employees
also provides for the granting of performance-based stock awards. In connection
with Merck's 1999 acquisition of SIBIA and Merck-Medco's 2000 acquisition of
ProVantage Health Services, Inc., stock options outstanding on the acquisition
dates were converted into options to purchase shares of Company common stock
with equivalent value.
Summarized information relative to the Company's stock option plans (shares
in thousands) is as follows:
Number Average
of Shares Price/(1)/
- ----------------------------------------------------------------------
Outstanding at December 31, 1997........... 170,911.2 $ 25.27
Granted.................................... 34,802.8 63.43
Exercised.................................. (29,727.4) 16.49
Forfeited.................................. (3,645.9) 39.06
- ----------------------------------------------------------------------
Outstanding at December 31, 1998........... 172,340.7 34.20
Granted.................................... 28,929.5 80.04
Exercised.................................. (18,367.7) 17.59
Forfeited.................................. (4,363.7) 51.08
Equivalent Options Assumed................. 153.8 40.55
- ----------------------------------------------------------------------
Outstanding at December 31, 1999........... 178,692.6 42.92
Granted.................................... 32,947.5 66.97
Exercised.................................. (30,638.4) 20.91
Forfeited.................................. (4,774.7) 61.80
Equivalent Options Assumed................. 149.7 78.94
- ----------------------------------------------------------------------
Outstanding at December 31, 2000........... 176,376.7 $ 50.75
======================================================================
/(1)/ Weighted average exercise price.
The number of shares and average price of options exercisable at December 31,
2000, 1999 and 1998 were 42.5 million shares at $21.56, 51.3 million shares at
$19.14 and 45.3 million shares at $17.75, respectively. At December 31, 2000 and
1999, 28.9 million shares and 57.7 million shares, respectively, were available
for future grants under the terms of these plans.
Effective January 1, 1996, the Company adopted the provisions of Statement
No. 123, Accounting for Stock-Based Compensation. As permitted by the Statement,
the Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, no compensation expense is recognized
for its stock-based compensation plans other than for its employee
performance-based awards and options granted to employees of certain equity
method investees, the total of which is not significant. Had the fair value
method of accounting, which requires recognition of compensation cost ratably
over the vesting period of the underlying equity instruments, been applied to
all of the Company's stock option plans, Net income would have been reduced by
$359.8 million, or $.15 per share in 2000, $288.9 million, or $.12 per share in
1999 and $192.4 million, or $.08 per share in 1998. This pro forma impact only
takes into account the expense related to options granted since January 1, 1995,
which is being amortized ratably over the vesting period. The average fair value
of employee and non-employee director options granted during 2000, 1999 and 1998
was $23.28, $24.75 and $20.13, respectively. This fair value was estimated using
the Black-Scholes option-pricing model based on the weighted average market
price at grant date of $66.81 in 2000, $80.04 in 1999 and $63.43 in 1998 and the
following weighted average assumptions:
Years Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------
Dividend yield........................ 1.8% 1.4% 1.5%
Risk-free interest rate............... 6.5% 5.1% 5.6%
Volatility............................ 28% 24% 25%
Expected life (years)................. 6.6 6.7 6.5
=====================================================================
Summarized information about stock options outstanding and exercisable at
December 31, 2000 (shares in thousands) is as follows:
Outstanding Exercisable
------------------------------------ -----------------------
Exercise
Price Number Average Average Number Average
Range of Shares Life/(1)/ Price/(2)/ of Shares Price/(2)/
- ----------------------------------------------------------------------------
Under $15 4,988.1 6.85 $13.03 4,988.1 $13.03
$15 to 25 33,007.2 3.32 18.98 32,874.2 18.97
$25 to 40 23,216.7 5.09 32.64 1,450.9 29.53
$40 to 50 24,243.9 6.08 48.59 987.5 46.34
$50 to 65 30,574.9 6.87 62.51 1,322.5 55.22
$65 to 80 35,241.3 8.56 67.00 737.5 72.74
Over $80 25,104.6 8.09 81.72 125.7 95.25
- ----------------------------------------------------------------------------
176,376.7 42,486.4
============================================================================
/(1)/ Weighted average contractual life remaining in years.
/(2)/ Weighted average exercise price.
Merck & Co., Inc. 2000 Annual Report 41
<PAGE>
13. Pension and Other Postretirement Benefit Plans
The net cost for the Company's pension plans consisted of the following
components:
<TABLE>
<CAPTION>
Years Ended December 31 2000 1999 1998
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service cost...................... $ 171.2 $ 159.4 $ 134.8
Interest cost..................... 199.7 179.0 158.7
Expected return on plan assets.... (266.6) (229.4) (199.2)
Net amortization.................. 11.5 27.0 15.0
- --------------------------------------------------------------------
Net pension cost.................. $ 115.8 $ 136.0 $ 109.3
====================================================================
</TABLE>
The net pension cost attributable to international plans included in the
above table was $73.3 million in 2000, $66.9 million in 1999 and $58.8 million
in 1998.
The net cost of postretirement benefits other than pensions consisted of the
following components:
<TABLE>
<CAPTION>
Years Ended December 31 2000 1999 1998
- -------------------------------------------------------------------
<S> <C> <C> <C>
Service cost....................... $ 36.5 $ 39.4 $ 33.7
Interest cost...................... 62.0 58.8 53.6
Expected return on plan assets..... (94.5) (73.2) (64.2)
Net amortization................... (29.5) (18.7) (20.0)
- -------------------------------------------------------------------
Net postretirement benefit cost.... $ (25.5) $ 6.3 $ 3.1
===================================================================
</TABLE>
The cost of health care and life insurance benefits for active employees was
$263.0 million in 2000, $212.7 million in 1999 and $183.4 million in 1998.
Summarized information about the changes in plan assets and benefit
obligation is as follows:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
----------------------------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets at January 1.... $ 3,368.9 $ 2,720.9 $ 948.6 $ 735.0
Actual return on plan assets.............. (195.8) 570.1 (80.8) 202.3
Company contributions..................... 169.0 212.8 - 17.6
Benefits paid from plan assets............ (228.3) (172.9) (6.5) (6.3)
Other..................................... 7.5 38.0 - -
- -------------------------------------------------------------------------------------------
Fair value of plan assets at December 31.. $ 3,121.3 $ 3,368.9 $ 861.3 $ 948.6
===========================================================================================
Benefit obligation at January 1........... $ 2,820.9 $ 2,785.9 $ 818.6 $ 866.5
Service cost.............................. 171.2 159.4 36.5 39.4
Interest cost............................. 199.7 179.0 62.0 58.8
Actuarial losses (gains).................. 220.5 (140.5) 36.4 (108.5)
Benefits paid............................. (252.0) (190.8) (43.7) (38.0)
Other..................................... 6.5 27.9 - .4
- -------------------------------------------------------------------------------------------
Benefit obligation at December 31......... $ 3,166.8 $ 2,820.9 $ 909.8 $ 818.6
===========================================================================================
</TABLE>
The fair value of international pension plan assets included in the preceding
table was $959.0 million in 2000 and $933.7 million in 1999. The pension benefit
obligation of international plans included in this table was $1.1 billion in
2000 and 1999.
A reconciliation of the plans' funded status to the net asset (liability)
recognized at December 31 is as follows:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
---------------------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Plan assets (less than) in excess of benefit
obligation............................................ $ (45.5) $ 548.0 $ (48.5) $ 130.0
Unrecognized net loss (gain)........................... 538.3 (125.1) (101.3) (328.9)
Unrecognized plan changes.............................. 72.9 75.0 (102.2) (116.1)
Unrecognized transitional net asset.................... (15.8) (29.0) -- --
- -------------------------------------------------------------------------------------------------
Net asset (liability).................................. $ 549.9 $ 468.9 $ (252.0) (315.0)
- -------------------------------------------------------------------------------------------------
Recognized as:
Other assets........................................ $ 713.1 $ 651.3 $ - $ -
Accounts payable and accrued liabilities............ (2.8) (7.4) (24.8) (24.9)
Deferred income taxes and noncurrent liabilities.... (280.4) (307.8) (227.2) (290.1)
Accumulated other comprehensive loss................ 120.0 132.8 -- --
=================================================================================================
</TABLE>
For pension plans with benefit obligations in excess of plan assets at
December 31, 2000 and 1999, the fair value of plan assets was $721.1 million and
$357.2 million, respectively, and the benefit obligation was $1.2 billion and
$813.7 million, respectively. For those plans with accumulated benefit
obligations in excess of plan assets at December 31, 2000 and 1999, the fair
value of plan assets was $336.2 million and $279.3 million, respectively, and
the accumulated benefit obligation was $537.4 million and $503.9 million,
respectively.
Assumptions used in determining U.S. plan information are as follows:
<TABLE>
<CAPTION>
Pension and Other
Postretirement Benefits
------------------------------
December 31 2000 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate................................ 7.50% 7.75% 6.75%
Expected rate of return on plan assets....... 10.0 10.0 10.0
Salary growth rate........................... 4.5 4.5 4.5
=============================================================================
</TABLE>
For the three years presented, international pension plan assumptions ranged
from 4.0% to 8.0% for the discount rate, 5.5% to 9.0% for the expected rate of
return on plan assets and 2.0% to 5.0% for the salary growth rate.
42 Merck & Co., Inc 2000 Annual Report Financial Section
<PAGE>
The health care cost trend rate for other postretirement benefit plans was
6.5% at December 31, 2000. The rate is expected to decline to 5.0% over a 3-year
period. A one percentage point change in the health care cost trend rate would
have had the following effects:
<TABLE>
<CAPTION>
One Percentage Point
--------------------
Increase Decrease
- ------------------------------------------------------------------------------
<S> <C> <C>
Effect on total service and interest cost components.... $ 18.7 $ (15.6)
Effect on benefit obligation............................ 145.4 (125.3)
==============================================================================
</TABLE>
14. Other (Income) Expense, Net
<TABLE>
<CAPTION>
Years Ended December 31 2000 1999 1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income ................................... $(470.6) $ (364.7) $ (307.7)
Interest expense .................................. 484.4 316.9 205.6
Exchange gains .................................... (34.4) (27.2) (44.7)
Minority interests ................................ 308.7 222.3 162.4
Amortization of goodwill and other intangibles .... 319.1 317.4 264.3
Other, net ........................................ (258.2) (461.7) 219.8
- --------------------------------------------------------------------------------------
$ 349.0 $ 3.0 $ 499.7
======================================================================================
</TABLE>
Minority interests include third parties' share of exchange gains and losses
arising from translation of the financial statements into U.S. dollars. The
increase in minority interests in 2000 primarily reflects dividends paid on
preferred units of a subsidiary issued in March 2000, and in 1999, reflects
dividends paid to Astra on $2.4 billion par value preferred stock of a
subsidiary beginning in July 1998. (See Note 10.)
Increased amortization of goodwill and other intangibles in 1999 primarily
reflects amortization of goodwill and other intangibles associated with the
restructuring of AMI in July 1998. (See Note 4.)
In 1999, other, net, includes $411.0 million of income associated with the
Lump Sum Payment from Astra, partially offset by a reserve relating to disputed
proceeds (see Note 4) and $110.0 million of charges primarily for endowment of
both The Merck Company Foundation and The Merck Genome Research Institute, as
approved by the Board of Directors based on projected future operating
requirements of these organizations, and provisions for the settlement of
claims. Other, net, also includes $77.9 million of income resulting from the
reversal of a restructuring reserve established in 1995 for the anticipated 1999
closure of a manufacturing facility. As a result of favorable incentives agreed
to in July 1999 with local authorities combined with changes in available
production capacity across plant sites, management decided to continue operating
the facility.
In 1998, other, net, includes $338.6 million of charges, primarily for
environmental remediation costs and asset write-offs, principally deferred
start-up costs.
Interest paid was $450.5 million in 2000, $276.8 million in 1999 and $192.3
million in 1998.
15. Taxes on Income
A reconciliation between the Company's effective tax rate and the
U.S. statutory rate is as follows:
<TABLE>
<CAPTION>
Tax Rate
2000 -------------------------
Amount 2000 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. statutory rate applied to pretax income ... $ 3,438.4 35.0% 35.0% 35.0%
Differential arising from:
Foreign earnings ............................ (464.5) (4.7) (3.3) .3
Tax exemption for Puerto Rico operations .... (106.4) (1.1) (1.5) (1.6)
Equity income from affiliates ............... (5.5) - .1 (1.7)
Acquired research ........................... - - .2 4.5
State taxes ................................. 163.0 1.7 1.8 1.7
Other ....................................... (22.6) (.3) (.6) (2.7)
- -------------------------------------------------------------------------------------
$ 3,002.4 30.6% 31.7% 35.5%
=====================================================================================
</TABLE>
The higher effective tax rate in 1999 versus 2000 primarily reflects the
nondeductibility of the goodwill write-off recorded in 1999 resulting from the
AstraZeneca merger. The higher effective tax rate in 1998 versus 1999 primarily
reflects the nondeductibility of the acquired research charge recorded in 1998
in connection with the restructuring of AMI and the state tax cost of the gain
on the 1998 sale of the Company's one-half interest in DMPC, partially offset by
the 1999 nondeductibility of the aforementioned goodwill write-off.
In 1998, the differential arising from equity income from affiliates
reflected the benefit of recording AMI joint venture results in equity income on
an after-tax basis. This benefit was eliminated upon the July 1998 restructuring
of AMI, which resulted in recording partnership returns from AZLP in equity
income on a pretax basis.
Domestic companies contributed approximately 54% in 2000, 65% in 1999 and 74%
in 1998 to consolidated pretax income.
Taxes on income consisted of:
<TABLE>
<CAPTION>
Years Ended December 31 2000 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision
Federal ......................... $ 2,239.0 $ 2,674.9 $ 1,750.5
Foreign ......................... 591.0 439.9 699.5
State ........................... 266.7 297.1 264.7
- -------------------------------------------------------------------------------
3,096.7 3,411.9 2,714.7
- -------------------------------------------------------------------------------
Deferred provision
Federal ......................... (64.4) (718.9) 226.2
Foreign ......................... (34.9) 21.9 (21.0)
State ........................... 5.0 14.1 (35.0)
- -------------------------------------------------------------------------------
(94.3) (682.9) 170.2
- -------------------------------------------------------------------------------
$ 3,002.4 $ 2,729.0 $ 2,884.9
===============================================================================
</TABLE>
Merck & Co., Inc. 2000 Annual Report 43
<PAGE>
Deferred income taxes at December 31 consisted of:
<TABLE>
<CAPTION>
2000 1999
------------------------ -----------------------
Assets Liabilities Assets Liabilities
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other intangibles ........................................ $ 158.1 $ 1,303.7 $ 198.3 $ 1,372.1
Inventory related ........................................ 716.0 209.1 799.1 316.3
Accelerated depreciation ................................. - 700.9 - 642.2
Advance payment .......................................... 338.6 - 338.6 -
Investment related ....................................... - - - 216.1
Equity investments ....................................... 57.8 311.5 57.8 201.6
Pensions and OPEB ........................................ 146.6 221.5 185.5 192.5
Compensation related ..................................... 140.7 - 129.3 -
Environmental related .................................... 97.7 - 115.6 -
Other .................................................... 1,146.8 507.0 968.4 424.3
- ------------------------------------------------------------------------------------------------------------
Subtotal ................................................. 2,802.3 3,253.7 2,792.6 3,365.1
Valuation allowance....................................... (1.3) - (4.1) -
- ------------------------------------------------------------------------------------------------------------
Total deferred taxes ..................................... $ 2,801.0 $ 3,253.7 $ 2,788.5 $ 3,365.1
- ------------------------------------------------------------------------------------------------------------
Net deferred tax liabilities ............................. $ 452.7 $ 576.6
- ------------------------------------------------------------------------------------------------------------
Recognized as:
Prepaid expenses and taxes ............................ $ (812.5) $ (869.2)
Other assets .......................................... (9.8) (50.3)
Income taxes payable .................................. 30.0 151.9
Deferred income taxes and noncurrent liabilities ...... 1,245.0 1,344.2
============================================================================================================
</TABLE>
Income taxes paid in 2000, 1999 and 1998 were $2.2 billion, $2.5 billion and
$2.1 billion, respectively. The higher amount in 1999 primarily reflects taxes
paid on two one-time payments from Astra and a full year of partnership returns
from AZLP, resulting from the 1998 AMI restructuring. Income tax benefits
relating to stock option exercises reduced taxes paid in 2000, 1999 and 1998 by
$537.5 million, $423.1 million and $351.2 million, respectively.
At December 31, 2000, foreign earnings of $9.7 billion and domestic earnings
of $880.9 million have been retained indefinitely by subsidiary companies for
reinvestment. No provision is made for income taxes that would be payable upon
the distribution of such earnings, and it is not practicable to determine the
amount of the related unrecognized deferred income tax liability. These earnings
include income from manufacturing operations in Ireland, which were tax-exempt
through 1990 and are taxed at 10% thereafter. In addition, the Company has
domestic subsidiaries operating in Puerto Rico under a tax incentive grant that
expires in 2008.
The Company's federal income tax returns have been audited through 1992.
16. Earnings per Share
The weighted average common shares used in the computations of basic earnings
per common share and earnings per common share assuming dilution (shares in
millions) are as follows:
Years Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------
Average common shares
outstanding...................... 2,306.9 2,349.0 2,378.8
Common shares issuable/(1)/....... 46.3 55.6 62.3
- ---------------------------------------------------------------------
Average common shares
outstanding assuming dilution.... 2,353.2 2,404.6 2,441.1
=====================================================================
/(1)/ Issuable primarily under stock option plans.
17. Comprehensive Income
The components of Other comprehensive income (loss) are as follows:
After
Pretax/(1)/ Tax Tax
- ------------------------------------------------------------------------
Year Ended December 31, 2000
- ------------------------------------------------------------------------
Net unrealized gain on investments...... $ .7 $ 28.5 $ 29.2
Net income realization.................. (1.4) (3.5) (4.9)
- ------------------------------------------------------------------------
Subtotal................................ (.7) 25.0 24.3
Minimum pension liability............... 5.3 (6.9) (1.6)
- ------------------------------------------------------------------------
$ 4.6 $ 18.1 $ 22.7
- ------------------------------------------------------------------------
Year Ended December 31, 1999
- ------------------------------------------------------------------------
Net unrealized gain on investments...... $ 91.0 $(64.9) $ 26.1
Net income realization.................. (6.7) 6.2 (.5)
- ------------------------------------------------------------------------
Subtotal................................ 84.3 (58.7) 25.6
Minimum pension liability............... 9.7 (5.9) 3.8
- ------------------------------------------------------------------------
$ 94.0 $(64.6) $ 29.4
- ------------------------------------------------------------------------
Year Ended December 31, 1998
- ------------------------------------------------------------------------
Net unrealized gain on investments...... $ 20.6 $ (4.8) $ 15.8
Net income realization.................. (41.9) 20.5 (21.4)
- ------------------------------------------------------------------------
Subtotal................................ (21.3) 15.7 (5.6)
Minimum pension liability............... (47.2) 22.5 (24.7)
- ------------------------------------------------------------------------
$(68.5) $ 38.2 $(30.3)
========================================================================
/(1)/Net of minority interest.
The components of Accumulated other comprehensive income are as follows:
December 31 2000 1999
- ----------------------------------------------------------------
Net unrealized gain on investments......... $ 72.2 $ 47.9
Minimum pension liability.................. (41.4) (39.8)
- ----------------------------------------------------------------
$ 30.8 $ 8.1
================================================================
44 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
18. Segment Reporting
The Company's operations are principally managed on a products and services
basis and are comprised of two reportable segments: Merck Pharmaceutical, which
includes products marketed either directly or through joint ventures, 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:
Merck
Pharm- Merck- All
aceutical Medco Other Total
- -----------------------------------------------------------------------------
Year Ended December 31, 2000
- -----------------------------------------------------------------------------
Segment revenues................. $18,577.3 $23,319.6 $1,211.6 $43,108.5
Segment profits.................. 11,563.6 683.0 924.8 13,171.4
Included in segment profits:
Equity income (loss)
from affiliates.......... 307.1 - 188.4 495.5
Depreciation and
amortization............. (140.1) (107.1) (4.5) (251.7)
- -----------------------------------------------------------------------------
Year Ended December 31, 1999
- -----------------------------------------------------------------------------
Segment revenues................. $15,998.4 $18,109.0 $1,109.9 $35,217.3
Segment profits.................. 10,238.5 578.3 819.8 11,636.6
Included in segment profits:
Equity income (loss)
from affiliates.......... 312.0 - 169.4 481.4
Depreciation and
amortization............. (113.6) (84.8) (4.4) (202.8)
- -----------------------------------------------------------------------------
Year Ended December 31, 1998
- -----------------------------------------------------------------------------
Segment revenues................. $13,694.5 $14,338.0 $1,185.2 $29,217.7
Segment profits.................. 9,055.3 475.8 834.6 10,365.7
Included in segment profits:
Equity income (loss)
from affiliates.......... 701.3 (.4) 161.4 862.3
Depreciation and
amortization............. (103.6) (91.9) (3.8) (199.3)
=============================================================================
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 affiliates and depreciation and amortization expenses.
The Company does not internally allocate 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. Separate divisions
maintain responsibility for monitoring and managing these costs, including
depreciation related to fixed assets utilized by these divisions and, therefore,
they are not included in the marketing segment profits. The vast majority of
goodwill and other intangibles amortization, predominantly related to the
Merck-Medco business, as well as the cost of financing capital employed, also
are not allocated internally and, therefore, are not included in the marketing
segment profits.
A reconciliation of total segment revenues to consolidated sales is as
follows:
Years Ended December 31 2000 1999 1998
- -------------------------------------------------------------------
Segment revenues.............. $ 43,108.5 $35,217.3 $ 29,217.7
Other revenues................ 434.0 373.4 416.8
Adjustments................... (3,179.3) (2,876.7) (2,736.3)
- -------------------------------------------------------------------
$ 40,363.2 $32,714.0 $ 26,898.2
===================================================================
Other revenues are primarily comprised of miscellaneous corporate revenues,
sales related to divested products or businesses and other supply sales.
Adjustments represent the elimination of receipts reported as revenues in the
internal management system which are not reportable as revenues under GAAP.
Consolidated sales included $33.0 billion, $25.7 billion and $20.2 billion of
revenues derived from the United States and $7.4 billion, $7.0 billion and $6.7
billion of revenues derived from foreign operations in 2000, 1999 and 1998,
respectively.
A reconciliation of total segment profits to consolidated income before taxes
is as follows:
Years Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------
Segment profits............... $ 13,171.4 $ 11,636.6 $ 10,365.7
Other profits................. 339.1 218.9 268.4
Adjustments................... 545.5 252.1 180.5
Unallocated:
Gains on sales of
businesses................ - - 2,147.7
Interest income............ 470.6 364.7 307.7
Interest expense........... (484.4) (316.9) (205.6)
Equity income (loss)
from affiliates.......... 269.4 280.6 22.0
Depreciation and
amortization............. (1,025.6) (942.0) (815.8)
Acquired research.......... - (51.1) (1,039.5)
Research and
development.............. (2,343.8) (2,068.3) (1,821.1)
Other expenses, net........ (1,118.1) (755.1) (1,276.9)
- ---------------------------------------------------------------------
$ 9,824.1 $ 8,619.5 $ 8,133.1
=====================================================================
Other profits are primarily comprised of miscellaneous corporate profits as
well as operating profits related to divested products or businesses and other
supply sales. 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.
Net property, plant and equipment included $8.8 billion, $7.4 billion and
$5.9 billion of assets located in the United States and $2.7 billion, $2.3
billion and $1.9 billion of assets located outside the United States in 2000,
1999 and 1998, respectively. The Company does not disaggregate assets on a
products and services basis for internal management reporting and, therefore,
such information is not presented.
Merck & Co., Inc. 2000 Annual Report 45
<PAGE>
Management's Report
- --------------------------------------------------------------------------------
Primary responsibility for the integrity and objectivity of the Company's
financial statements rests with management. The financial statements report on
management's stewardship of Company assets. These statements are prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.
Nonfinancial information included in the Annual Report has also been prepared by
management and is consistent with the financial statements.
To assure that financial information is reliable and assets are safeguarded,
management maintains an effective system of internal controls and procedures,
important elements of which include: careful selection, training and development
of operating and financial managers; an organization that provides appropriate
division of responsibility, and communications aimed at assuring that Company
policies and procedures are understood throughout the organization. In
establishing internal controls, management weighs the costs of such systems
against the benefits it believes such systems will provide. A staff of internal
auditors regularly monitors the adequacy and application of internal controls on
a worldwide basis.
To insure that personnel continue to understand the system of internal
controls and procedures, and policies concerning good and prudent business
practices, the Company periodically conducts the Management's Stewardship
Program for key management and financial personnel. This program reinforces the
importance and understanding of internal controls by reviewing key corporate
policies, procedures and systems. In addition, an ethical business practices
program has been implemented to reinforce the Company's long-standing commitment
to high ethical standards in the conduct of its business.
The independent public accountants have audited the Company's consolidated
financial statements as described in their report. Although their audits were
not designed for the purpose of forming an opinion on internal controls, the
Company's accounting systems, procedures and internal controls were subject to
testing and other auditing procedures sufficient to enable the independent
public accountants to render their opinion on the Company's financial
statements.
The recommendations of the internal auditors and independent public
accountants are reviewed by management. Control procedures have been implemented
or revised as appropriate to respond to these recommendations. No material
control weaknesses have been brought to the attention of management. In
management's opinion, for the year ended December 31, 2000, the internal control
system was strong and accomplished the objectives discussed herein.
/s/ Raymond V. Gilmartin /s/ Judy C. Lewent
Raymond V. Gilmartin Judy C. Lewent
Chairman, President and Senior Vice President and
Executive Officer Chief Financial Officer
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Stockholders and
Board of Directors of Merck & Co., Inc.:
We have audited the accompanying consolidated balance sheet of Merck & Co., Inc.
(a New Jersey corporation) and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of income, retained earnings,
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Merck & Co., Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
New York, New York ARTHUR ANDERSEN LLP
January 23, 2001
46 Merck & Co., Inc. 2000 Annual Report Financial Section
<PAGE>
Audit Committee's Report
- --------------------------------------------------------------------------------
The Audit Committee of the Board of Directors, comprised of four outside
directors, held three meetings during 2000.
The Audit Committee met with the independent public accountants, management
and internal auditors to assure that all were carrying out their respective
responsibilities. The Committee reviewed the performance and fees of the
independent public accountants prior to recommending their appointment, and met
with them to discuss the scope and results of their audit work, including the
adequacy of internal controls and the quality of financial reporting. The
Committee discussed with the independent public accountants their judgments
regarding the quality and acceptability of the Company's accounting principles,
the clarity of its disclosures and the degree of aggressiveness or conservatism
of its accounting principles and underlying estimates. The Committee discussed
with and received a letter from the independent public accountants confirming
their independence. Both the independent public accountants and the internal
auditors had full access to the Committee, including regular meetings without
management present. Additionally, the Committee reviewed and discussed the
audited financial statements with management and recommended to the Board of
Directors that these financial statements be included in the Company's Form 10-K
filing with the Securities and Exchange Commission.
Dennis Weatherstone William B. Harrison, Jr.
Chairman William N. Kelley, M.D.
Samuel O. Thier, M.D.
Compensation and Benefits Committee's Report
- --------------------------------------------------------------------------------
The Compensation and Benefits Committee, comprised of five outside directors,
held three meetings during 2000.
The Compensation and Benefits Committee's major responsibilities include
providing for senior management succession and overseeing the Company's
compensation and benefit programs. The Committee seeks to provide rewards which
are highly leveraged to performance and clearly linked to Company and individual
results. The objective is to ensure that compensation and benefits are at levels
which enable Merck to attract and retain high-quality employees. The Committee
views stock ownership as a vehicle to align the interests of employees with
those of the stockholders. A long-term focus is