-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OPtqt6svP3GW+h0fYpGFKFTJEii+4861KPGaTngdyj8Fq2afdweghhP08B7ZMI/o b8KWPAZZz6PSizLLvB7Stg== 0000950130-01-500307.txt : 20010326 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 10-K405 1 d10k405.txt FORM 10-K405 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: $184,990,000,000. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Documents Incorporated by Reference: Document Part of Form 10-K -------- ----------------- Annual Report to stockholders for the fiscal year Parts I and II ended December 31, 2000 Proxy Statement for the Annual Meeting of Part III Stockholders to be held April 24, 2001 ================================================================================ PART I Item 1. Business. Merck & Co., Inc. (the "Company") is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures, and provides pharmaceutical benefit services through Merck-Medco Managed Care, L.L.C. ("Merck-Medco"). The Company's operations are principally managed on a products and services basis and are comprised of two reportable segments: Merck Pharmaceutical, which includes products marketed either directly or through joint ventures, and Merck-Medco. Merck Pharmaceutical products consist of therapeutic agents, sold by prescription, for the treatment of human disorders. Merck-Medco revenues are derived from the filling and management of prescriptions and health management programs. The following table shows the sales of various categories of the Company's products and services:
($ 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 --------- --------- --------- Total............................... $40,363.2 $32,714.0 $26,898.2 ========= ========= =========
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 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 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 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 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 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 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 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 . 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 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 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 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 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 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 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 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 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
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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)
18
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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
19
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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
20
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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
_______________ * 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 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.
Signatures Title Date ---------- ----- ---- 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
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 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 EXHIBIT INDEX -------------
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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)
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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.
Exhibit Number Description Method of Filing ------ ----------- ---------------- 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
_____________ * 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. EX-10.(J) 2 dex10j.txt PLAN FOR DEFERRED PAYMENT OF DIRECTORS' COMPENSATION Exhibit 10(j) ================================================================================ MERCK & CO., INC. Plan for Deferred Payment of Directors' Compensation (Amended and Restated as of November 1, 2000) ================================================================================ TABLE OF CONTENTS
Page 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
(i) 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 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 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 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.
- ------------------------------------------------------------------------------------------------------- Investment Fund to Be Replaced Replacement Investment Fund - ------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------
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 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 (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 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 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 EX-10.(O) 3 dex10o.txt LIMITED LIABILITY COMPANY AGREEMENT - MERCK CAPITAL Exhibit 10(o) Execution Copy LIMITED LIABILITY COMPANY AGREEMENT OF MERCK CAPITAL VENTURES, LLC Dated as of November 27, 2000 ----------------------------- TABLE OF CONTENTS
Page 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
-i- 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
-ii- 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
APPENDIX A Definitions 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- 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- 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- 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- (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- (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- (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- 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- 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- 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- (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- 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- (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- 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- 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. -15- (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- 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- 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 -18- 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 -19- 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 -20- 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 -21- 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 -22- 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 -23- 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 -24- 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 -25- 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 -26- 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 -27- 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 -28- 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: -29- (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 -30- 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. -31- 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. -32- 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- 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. -34- 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- 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 -36- 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. -37- 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- 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 -39- APPENDIX A ---------- DEFINITIONS ----------- -1- 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- 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- 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- 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- (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- 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 -6- (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- 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- "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- 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- 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- 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- "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- 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- 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- "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- 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- Schedule B ---------- Contribution Schedule ---------------------------------------------------- Lofberg 82.75% ---------------------------------------------------- Cooper 17.25% ---------------------------------------------------- -1- Schedule C ---------- Illustration of Distributions and Allocation of Net Profits and Losses [See attached Distribution Example] -2- EX-10.(P) 4 dex10p.txt EMPLOYMENT AGREEMENT - MERCK-MEDCO & PER LOFBERG 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 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 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 (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 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 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 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 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 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 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 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 EX-12 5 dex12.txt COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES Exhibit 12 MERCK & CO., INC. AND SUBSIDIARIES Computation Of Ratios Of Earnings To Fixed Charges -------------------------------------------------- (In millions except ratio data)
Years Ended December 31 ----------------------------------------------------------- 2000 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- -------- 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 ========= ======== ======== ======== ======== ========
For purposes of computing these ratios, "earnings" consist of income before taxes, one-third of rents (deemed by the Company to be representative of the interest factor inherent in rents), interest expense, net of amounts capitalized, and dividends on preferred stock of subsidiary companies. "Fixed charges" consist of one-third of rents, interest expense as reported in the Company's consolidated financial statements and dividends on preferred stock of subsidiary companies. EX-13 6 dex13.txt 2000 ANNUAL REPORT TO STOCKHOLDERS Financial Section - --------------------------------------------------------------------------------
Contents 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
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 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 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 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 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 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 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
- -------------------------------------------------------------------------------------------- ($ in millions) 2000 Change 1999 Change 1998 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
* 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 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 $338.6 million of charges recorded in 1998 primarily for environmental remediation costs and asset write-offs.
Earnings - ----------------------------------------------------------------------------------- ($ in millions except per share amounts) 2000 Change 1999 Change 1998 - ----------------------------------------------------------------------------------- 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 ===================================================================================
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 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 $1.2 billion in cash and investments held by Banyu Pharmaceutical Co., Ltd., in which the Company has a 50.87% ownership interest. Selected Data
- ------------------------------------------------------------------------------------ ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------ 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 ===================================================================================
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 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 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.
Condensed Interim Financial Data - ------------------------------------------------------------------------------------------------------ ($ in millions except per share amounts) 4th Q 3rd Q 2nd Q 1st Q - ------------------------------------------------------------------------------------------------------ 2000 - ------------------------------------------------------------------------------------------------------ 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 ======================================================================================================
Dividends Paid per Common Share - ------------------------------------------------------------------------------------------------------ Year 4th Q 3rd Q 2nd Q 1st Q - ------------------------------------------------------------------------------------------------------ 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 ======================================================================================================
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 Consolidated Statement of Income - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions except per share amounts) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- 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 $2.15 =================================================================================================
Consolidated Statement of Retained Earnings - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- 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 $20,186.7 =================================================================================================
Consolidated Statement of Comprehensive Income - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- 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 =================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 32 Merck & Co., Inc. 2000 Annual Report Financial Section Consolidated Balance Sheet - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
December 31 ($ in millions) 2000 1999 - --------------------------------------------------------------------------------------------------------------- Assets - --------------------------------------------------------------------------------------------------------------- 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 ===============================================================================================================
The accompanying notes are an integral part of this consolidated financial statement. Merck & Co., Inc. 2000 Annual Report 33 Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
Years Ended December 31 ($ in millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- 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 ===========================================================================================================================
The accompanying notes are an integral part of this consolidated financial statement. 34 Merck & Co., Inc. 2000 Annual Report Financial Section 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 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 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 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 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 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 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:
2000 1999 1998 ------------------------------------------------------------------ Shares Cost Shares Cost Shares Cost - ------------------------------------------------------------------------------------------------------------ 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 ============================================================================================================
/(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 13. Pension and Other Postretirement Benefit Plans The net cost for the Company's pension plans consisted of the following components:
Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------- 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 ====================================================================
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:
Years Ended December 31 2000 1999 1998 - ------------------------------------------------------------------- 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 ===================================================================
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:
Other Postretirement Pension Benefits Benefits ---------------------------------------------- 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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:
Other Postretirement Pension Benefits Benefits --------------------------------------- 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- 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 -- -- =================================================================================================
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:
Pension and Other Postretirement Benefits ------------------------------ December 31 2000 1999 1998 - ----------------------------------------------------------------------------- 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 =============================================================================
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 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:
One Percentage Point -------------------- Increase Decrease - ------------------------------------------------------------------------------ Effect on total service and interest cost components.... $ 18.7 $ (15.6) Effect on benefit obligation............................ 145.4 (125.3) ==============================================================================
14. Other (Income) Expense, Net
Years Ended December 31 2000 1999 1998 - -------------------------------------------------------------------------------------- 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 ======================================================================================
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:
Tax Rate 2000 ------------------------- Amount 2000 1999 1998 - ------------------------------------------------------------------------------------- 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% =====================================================================================
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:
Years Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------- 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 ===============================================================================
Merck & Co., Inc. 2000 Annual Report 43 Deferred income taxes at December 31 consisted of:
2000 1999 ------------------------ ----------------------- Assets Liabilities Assets Liabilities - -------------------------------------------------------------------------------------------------------------- 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 ============================================================================================================
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 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 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 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 essential for success in the pharmaceutical industry and is encouraged by making a high proportion of executive officer compensation dependent on long-term performance and on enhancing stockholder value. H. Brewster Atwater Jr. Lawrence A. Bossidy Chairman William G. Bowen, Ph.D. Johnnetta B. Cole, Ph.D. Lloyd C. Elam, M.D. Merck & Co., Inc. 2000 Annual Report 47 - -------------------------------------------------------------------------------- Selected Financial Data/(1)/ - -------------------------------------------------------------------------------- Merck & Co., Inc. and Subsidiaries
($ in millions except per share amounts) 2000 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Results for Year: Sales..................................... $ 40,363.2 $ 32,714.0 $ 26,898.2 $ 23,636.9 $ 19,828.7 $ 16,681.1 Materials and production costs............ 22,443.5 17,534.2 13,925.4 11,790.3 9,319.2 7,456.3 Marketing and administrative expenses............................ 6,167.7 5,199.9 4,511.4 4,299.2 3,841.3 3,297.8 Research and development expenses............................ 2,343.8 2,068.3 1,821.1 1,683.7 1,487.3 1,331.4 Acquired research......................... -- 51.1 1,039.5 -- -- -- Equity (income) loss from affiliates..................... (764.9) (762.0) (884.3) (727.9) (600.7) (346.3) Gains on sales of businesses.............. -- -- (2,147.7) (213.4) -- (682.9) Restructuring charge...................... -- -- -- -- -- -- Gain on joint venture formation........... -- -- -- -- -- -- Provision for joint venture obligation.......................... -- -- -- -- -- -- Other (income) expense, net............... 349.0 3.0 499.7 342.7 240.8 827.6 Income before taxes....................... 9,824.1 8,619.5 8,133.1 6,462.3 5,540.8 4,797.2 Taxes on income........................... 3,002.4 2,729.0 2,884.9 1,848.2 1,659.5 1,462.0 Net income................................ 6,821.7 5,890.5 5,248.2 4,614.1 3,881.3 3,335.2 Basic earnings per common share........... $2.96 $2.51 $2.21 $1.92 $1.60 $1.35 Earnings per common share assuming dilution................... $2.90 $2.45 $2.15 $1.87 $1.56 $1.32 Dividends declared........................ 2,905.7 2,629.3 2,353.0 2,094.8 1,793.4 1,578.0 Dividends paid per common share........................ $1.21 $1.10 $.95 $.85 $.71 $.62 Capital expenditures...................... 2,727.8 2,560.5 1,973.4 1,448.8 1,196.7 1,005.5 Depreciation.............................. 905.5 771.2 700.0 602.4 521.7 463.3 - ----------------------------------------------------------------------------------------------------------------------------------- Year-End Position: Working capital........................... $ 3,643.8 $ 2,500.4 $ 4,159.7 $ 2,644.4 $ 2,897.4 $ 3,870.2 Property, plant and equipment (net)..................... 11,482.1 9,676.7 7,843.8 6,609.4 5,926.7 5,269.1 Total assets.............................. 39,910.4 35,634.9 31,853.4 25,735.9 24,266.9 23,831.8 Long-term debt............................ 3,600.7 3,143.9 3,220.8 1,346.5 1,155.9 1,372.8 Stockholders' equity...................... 14,832.4 13,241.6 12,801.8 12,594.6 11,964.0 11,735.7 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales............................... 16.9% 18.0% 19.5% 19.5% 19.6% 20.0% Average total assets................ 18.1% 17.5% 18.2% 18.5% 16.1% 14.6% - ----------------------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions).............. 2,306.9 2,349.0 2,378.8 2,409.0 2,427.2 2,472.3 Average common shares outstanding assuming dilution (millions)................. 2,353.2 2,404.6 2,441.1 2,469.5 2,489.6 2,527.3 Number of stockholders of record........................... 265,700 280,500 269,600 263,900 247,300 243,000 Number of employees....................... 69,300 62,300 57,300 53,800 49,100 45,200 =================================================================================================================================== ($ in millions except per share amounts)........................ 1994 1993 1992/(2)/ 1991 1990 - ------------------------------------------------------------------------------------------------------------------- Results for Year: Sales..................................... $14,969.8 $ 10,498.2 $ 9,662.5 $ 8,602.7 $ 7,671.5 Materials and production costs............ 5,962.7 2,497.6 2,096.1 1,934.9 1,778.1 Marketing and administrative expenses............................ 3,177.5 2,913.9 2,963.3 2,570.3 2,388.0 Research and development expenses............................ 1,230.6 1,172.8 1,111.6 987.8 854.0 Acquired research......................... -- -- -- -- -- Equity (income) loss from affiliates..................... (56.6) 26.1 (25.8) 21.1 22.4 Gains on sales of businesses.............. -- -- -- -- -- Restructuring charge...................... -- 775.0 -- -- -- Gain on joint venture formation........... (492.0) -- -- -- -- Provision for joint venture obligation.......................... 499.6 -- -- -- -- Other (income) expense, net............... 232.8 10.1 (46.3) (78.1) (69.8) Income before taxes....................... 4,415.2 3,102.7 3,563.6 3,166.7 2,698.8 Taxes on income........................... 1,418.2 936.5 1,117.0 1,045.0 917.6 Net income................................ 2,997.0 2,166.2 2,446.6 2,121.7 1,781.2 Basic earnings per common share........... $1.19 $.94 $1.06 $.91 $.76 Earnings per common share assuming dilution................... $1.17 $.93 $1.05 $.91 $.75 Dividends declared........................ 1,463.1 1,239.0 1,106.9 920.3 788.1 Dividends paid per common share........... $.57 $.52 $.46 $.39 $.32 Capital expenditures...................... 1,009.3 1,012.7 1,066.6 1,041.5 670.8 Depreciation.............................. 475.6 348.4 290.3 242.7 231.4 - ------------------------------------------------------------------------------------------------------------------- Year-End Position: Working capital........................... $ 2,291.4 $ 541.6 $ 1,241.1 $ 1,496.5 $ 939.2 Property, plant and equipment (net)..................... 5,296.3 4,894.6 4,271.1 3,504.5 2,721.7 Total assets.............................. 21,856.6 19,927.5 11,086.0 9,498.5 8,029.8 Long-term debt............................ 1,145.9 1,120.8 495.7 493.7 124.1 Stockholders' equity...................... 11,139.0 10,021.7 5,002.9 4,916.2 3,834.4 - ------------------------------------------------------------------------------------------------------------------- Financial Ratios: Net income as a % of: Sales............................... 20.0% 20.6% 25.3% 24.7% 23.2% Average total assets................ 14.3% 14.0% 24.1% 24.2% 24.1% - ------------------------------------------------------------------------------------------------------------------- Year-End Statistics: Average common shares outstanding (millions).............. 2,514.3 2,313.0 2,307.0 2,319.8 2,344.1 Average common shares outstanding assuming dilution (millions)................. 2,557.7 2,332.0 2,330.6 2,343.3 2,363.7 Number of stockholders of record........................... 244,700 231,300 161,200 91,100 82,300 Number of employees....................... 47,500 47,100/(3)/ 38,400 37,700 36,900 ===================================================================================================================
/(1)/ Amounts after 1992 include the impact of the Medco acquisition on November 18, 1993. /(2)/ Results of operations for 1992 exclude the cumulative effect of accounting changes. /(3)/ Increase in 1993 is due to the inclusion of 10,300 Merck-Medco employees. 48 Merck & Co., Inc. Annual Report Financial Section EX-21 7 dex21.txt LIST OF SUBSIDIARIES Exhibit 21 MERCK & CO., INC. SUBSIDIARIES as of 12/31/2000 Each of the subsidiaries set forth below does business under the name stated. A subsidiary of a subsidiary is indicated by indentation under the immediate parent. All voting securities of the subsidiaries named are owned directly or indirectly by the Company, except where otherwise indicated.
Country or State Name of Incorporation - ---- ---------------- Chibret A/S Denmark Hangzhou MSD Pharmaceutical Company Limited/1/ China Hawk and Falcon L.L.C. Delaware International Indemnity Ltd. Bermuda Johnson & Johnson - Merck Consumer Pharmaceuticals Company/1/ New Jersey Laboratorios Prosalud S.A. Peru MCM Vaccine Co./1/ Pennsylvania Merck and Company, Incorporated Delaware Merck SH Inc. Delaware Merial Limited/LLC/1/ Great Britain/ Delaware British United Turkeys Limited/1/ Great Britain Turkey Research & Development Limited/1/ Great Britain Merck Capital Investments, Inc. Delaware Merck Capital Resources, Inc. Delaware MSD Technology, L.P. Delaware Merck Finance Co., Inc. Delaware Merck Cardiovascular Health Company Nevada MSP Distribution Services (C) LLC/1/ Nevada MSP Marketing Services (C) LLC/1/ Nevada Merck Enterprises Canada, Ltd. Canada Merck Foreign Sales Corporation Ltd. Bermuda Merck Hamilton, Inc. California
Merck Holdings, Inc. Delaware Chippewa Holdings LLC Delaware Algonquin SarL Luxembourg Frosst Laboratories, Inc. Delaware Frosst Portuguesa - Produtos Farmaceuticos, Lda. Portugal Istituto Gentili S.p.A./Inc. Italy/Delaware KBI Inc. Delaware KBI Sub Inc. Delaware KBI-E Inc. Delaware KBI-P Inc. Delaware Merck Borinquen Holdings, Inc. Delaware Merck Sharp & Dohme Quimica de Puerto Rico, Inc. Delaware Merck-Medco Holdings II Corp. Delaware Cloverleaf International Holdings S.A. Luxembourg Coordinated Patient Care Scandinavia AS Norway Infodoc AS/1/ Norway Infodoc International AS/1/ Norway Medco Holdings S. de R.L. de C.V. Mexico Medco de Mexico Managed Care S. de R.L. de C.V. Mexico Medco Servicios de Mexico, S. de R.L. de C.V. Mexico Coordination Medicale et Pharmaceutique, S.A. France Fontelabor-Produtos Farmaceuticos, Lda. Portugal Merck Frosst Canada & Co. Canada Maple Leaf Holdings SRL Barbados Merck Sharp & Dohme (Australia) Pty. Limited Australia AMRAD Pharmaceuticals Pty. Ltd./1/ Australia Merck Sharp & Dohme Finance Europe Limited Great Britain Merck Sharp & Dohme B.V. Netherlands Abello Farmacia, S.L./1/ Spain Financiere MSD S.A.S. France MSD (Nippon Holdings) BV Netherlands Laboratoires Martin-Johnson & Johnson-MSD S.A.S./1/ France Laboratoires Merck Sharp & Dohme Chibret SNC France Aventis Pasteur MSD Gestion S.A./1/ France Aventis Pasteur MSD S.N.C./1/ France Aventis Pasteur MSD A/S Denmark Aventis Pasteur MSD GmbH Germany Aventis Pasteur MSD Ltd. (UK) Great Britain Aventis Pasteur MSD Ltd. (Ireland) Ireland Aventis Pasteur MSD N.V. Belgium Aventis Pasteur MSD S.A. Spain Aventis Pasteur MSD S.p.A. Italy Aventis Pasteur Vaccins S.A. France Laboratorios Biopat, S.A. Spain Laboratorios Chibret, S.A. Spain
2 Laboratorios Frosst, S.A. Spain Merck Sharp & Dohme GmbH Austria Merck Sharp & Dohme Holdings de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme de Mexico, S.A. de C.V. Mexico Merck Sharp & Dohme (Israel - 1996) Company Ltd. Israel Merck Sharp & Dohme (Italia) S.p.A. Italy Centra Medicamenta/1/ Italy Istituto Di Richerche Di Biologia Molecolare S.p.A./1/ Italy MSD (Proprietary) Limited South Africa MSD Sharp & Dohme GmbH Germany Chibret Pharmazeutische GmbH Germany Dieckmann Arzneimittel GmbH Germany Woelm Pharma GmbH & Co./1/ Germany MSD Chibropharm GmbH Germany MSD Unterstutzungskasse GmbH Germany Varipharm Arzneimittel GmbH Germany Sharp & Dohme, S.A. Spain Merck Sharp & Dohme Chibret A.G. Switzerland Merck Sharp & Dohme de Venezuela S.R.L. Venezuela Merck Sharp & Dohme (Holdings) Limited Great Britain Charles E. Frosst (U.K.) Limited Great Britain Merck Sharp & Dohme Limited Great Britain Johnson & JohnsonoMSD Consumer Pharmaceuticals/1/ Great Britain Propecia Limited Great Britain Thomas Morson & Son Limited Great Britain Merck Sharp & Dohme IDEA, Inc. Switzerland Merck Sharp & Dohme (Sweden) A.B. Sweden Merck Sharp & Dohme Trading & Service Limited Liability Company Hungary MSD Ireland (Holdings) S.A. Luxembourg Fregenal Holdings S.A. Panama Frosst Iberica, S.A. Spain Laboratorios Abello, S.A. Spain Laboratorios Quimico-Farmaceuticos Chibret, Lda. Portugal Merck Sharp & Dohme de Espana, S.A. Spain Merck Sharp & Dohme, Limitada Portugal MSD Finance, B.V. Netherlands MSD Overseas Manufacturing Co. Bermuda Blue Jay Investments C.V. Netherlands Merck Sharp & Dohme (Puerto Rico) Ltd. Bermuda Merck Sharp & Dohme (Singapore) Ltd. Bermuda MSD Ireland (Investment) Ltd. Bermuda MSD Overseas Manufacturing Co. (Ireland) Ireland Crosswinds B.V. Netherlands Merck Sharp & Dohme (Ireland) Ltd. Bermuda MSD Pembroke Ltd. Bermuda Tradewinds Manufacturing SRL Barbados
3 MSD Technology Singapore Pte. Ltd. Singapore MSP Singapore Company, LLC/1/ Delaware MSP Cholesterol LLC/1/ Delaware MSP Respiratory LLC/1/ Delaware Neopharmed S.p.A. Italy Ruskin Limited Bermuda MSD (Norge) A/S Norway MSD Ventures Singapore Pte. Ltd. Singapore Suomen MSD Oy Finland Kiinteisto Oy Viistotie 11 Finland Merck Sharp & Dohme (I.A.) Corp. Delaware Merck Sharp & Dohme (Argentina) Inc. Delaware MSD Korea Ltd. Korea/Delaware Merck Sharp Dohme Ilaclari Limited Sirketi Turkey Merck Sharp & Dohme Farmaceutica Ltda. Brazil Prodome Quimica e Farmaceutica Ltda./1/ Brazil Merck Sharp & Dohme (International) Limited Bermuda Merck Sharp & Dohme (Asia) Limited Hong Kong Merck Sharp & Dohme (China) Limited Hong Kong Merck Sharp & Dohme S.A. France Merck Sharp & Dohme International Services B.V. Netherlands Merck Sharp & Dohme - Lebanon S.A.L. Lebanon Merck Sharp & Dohme L.L.C. Russian Federation Merck Sharp & Dohme (Middle East) Limited Cyprus Merck Sharp & Dohme of Pakistan Limited Pakistan Merck Sharp & Dohme S.A.R.L. Morocco Merck Technology (U.S.) Company, Inc. Nevada MSP Technology (U.S.) Company, LLC/1/ Delaware Merck Ventures, Inc. Delaware MSD Lakemedel (Scandinavia) Aktiebolog Sweden Prosalud Peruana S.A. Peru Readington Holdings, Inc. New Jersey STELLARx, Inc. Nevada TELERx Marketing Inc. Pennsylvania Merck Investment Co., Inc. Delaware Merck Liability Management Company Delaware Merck LMC Cash Management (Bermuda) Ltd. Bermuda Merck LMC Cash Management, Inc. Delaware Merck-Medco Managed Care, L.L.C. Delaware CM Delaware Corporation Delaware DM-MG, L.L.C. Delaware Medco Containment Insurance Company of New Jersey New Jersey Medco Containment Insurance Company of New York New York
4 Medco Containment Life Insurance Company Pennsylvania Merck Capital Ventures, LLC Delaware merckmedco.com, L.L.C. New Jersey Merck-Medco Managed Care of California, Inc. California Merck-Medco Rx Services of Florida No. 2, L.C. Florida Merck-Medco Rx Services of Florida, L.C. Florida Merck-Medco Rx Services of Massachusetts, L.L.C. Massachusetts Merck-Medco Rx Services of Nevada, Inc. Nevada Merck-Medco Rx Services of New Jersey, L.L.C. New Jersey Merck-Medco Rx Services of New York, L.L.C. New York Merck-Medco Rx Services of Ohio, Ltd. Ohio Merck-Medco Rx Services of Ohio No. 2, Ltd. Ohio Merck-Medco Rx Services of Oklahoma, L.L.C. Oklahoma Merck-Medco Rx Services of Pennsylvania, L.L.C. Pennsylvania Merck-Medco Rx Services of Pennsylvania No. 2, L.L.C. Pennsylvania Merck-Medco Rx Services of Texas, L.L.C. Texas Merck-Medco Rx Services of Virginia, L.L.C. Virginia Merck-Medco Rx Services of Washington, Inc. Washington Merck-Medco Rx Services of Willingboro New Jersey, L.L.C. New Jersey Mergerco Delaware No. 10, L.L.C. Delaware MW Holdings, L.L.C. Delaware NJRE, L.L.C. New Jersey National Rx Services, Inc. of Missouri Missouri National Rx Services No. 3, Inc. of Ohio Ohio New York PAID Independent Practice Association, L.L.C. New York Paid Direct, Inc. Delaware PAID Prescriptions, L.L.C. Nevada Replacement Distribution Center, Inc. Ohio The Institute for Effectiveness Research, L.L.C. Delaware Systemed, L.L.C. Delaware Systemed Pharmacy of Iowa, L.L.C. Delaware Systemed Pharmacy of Ohio, Ltd. Ohio Merck Resource Management, Inc. Delaware Merck Respiratory Health Company Nevada MSP Distribution Services (R) LLC/1/ Nevada MSP Marketing Services (R) LLC/1/ Nevada Merck Sharp & Dohme (Europe) Inc. Delaware Merck Sharp & Dohme Industria Quimica e Veterinaria Limitada Brazil Merck Sharp & Dohme (New Zealand) Limited New Zealand
5 Merck Sharp & Dohme Overseas Finance N.V. Neth. Antilles Merck Sharp & Dohme (Panama) S.A. Panama Merck Sharp & Dohme Peru SRL Peru Merck Sharp & Dohme (Philippines) Inc. Philippines MSD International Holdings, Inc. Delaware Banyu Pharmaceutical Company, Ltd./1/ Japan Banyu-A.S.C. Co., Ltd. Japan Nippon Merck-Banyu Co., Ltd. Japan MSD (Japan) Co., Ltd. Japan NRx Federal Corp. Delaware
- ------------ /1/ own less than 100% 6 EX-24 8 dex24.txt POWER OF ATTORNEY AND CERTIFIED RESOLUTION EXHIBIT 24 POWER OF ATTORNEY ----------------- Each of the undersigned does hereby appoint CELIA A. COLBERT and KENNETH C. FRAZIER and each of them, severally, his/her true and lawful attorney or attorneys to execute on behalf of the undersigned (whether on behalf of the Company, or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) the Form 10-K Annual Report of Merck & Co., Inc. for the fiscal year ended December 31, 2000 under the Securities Exchange Act of 1934, including amendments thereto and all exhibits and other documents in connection therewith. IN WITNESS WHEREOF, this instrument has been duly executed as of the 27/th/ day of February, 2001. MERCK & CO., Inc. By /s/ Raymond V. Gilmartin --------------------------------- Raymond V. Gilmartin (Chairman of the Board, President and Chief Executive Officer) /s/ Raymond V. Gilmartin Chairman of the Board, President - ---------------------------- Raymond V. Gilmartin and Chief Executive Officer (Principal Executive Officer; Director) /s/ Judy C. Lewent Senior Vice President and Chief Financial Officer - ---------------------------- Judy C. Lewent (Principal Financial Officer) /s/ Richard C. Henriques, Jr. Vice President, Controller - ------------------------------- Richard C. Henriques, Jr. (Principal Accounting Officer)
DIRECTORS /s/ H. Brewster Atwater, Jr. /s/ William N. Kelley - ------------------------------------- ----------------------------------- H. Brewster Atwater, Jr. William N. Kelley /s/ Lawrence A. Bossidy /s/ Heidi G. Miller - ------------------------------------- ----------------------------------- Lawrence A. Bossidy Heidi G. Miller /s/ William G. Bowen /s/ Edward M. Scolnick - ------------------------------------- ----------------------------------- William G. Bowen Edward M. Scolnick /s/ Johnnetta B. Cole /s/ Anne M. Tatlock - ------------------------------------- ----------------------------------- Johnnetta B. Cole Anne M. Tatlock /s/ Lloyd C. Elam /s/ Samuel O. Thier - ------------------------------------- ----------------------------------- Lloyd C. Elam Samuel O. Thier /s/ Dennis Weatherstone _____________________________________ ----------------------------------- Niall FitzGerald Dennis Weatherstone _____________________________________ William B. Harrison, Jr. EXHIBIT 24 I, Debra A. Bollwage, Assistant Secretary of MERCK & CO., Inc., a Corporation duly organized and existing under the laws of the State of New Jersey, do hereby certify that the following is a true copy of a resolution adopted at a meeting of the Directors of said Corporation held in New York City, New York, on February 27, 2001, duly called in accordance with the provisions of the By-Laws of said Corporation, and at which a quorum of Directors was present: "Special Resolution No. 8 - 2001 ------------------------------- RESOLVED, that the proposed form of Form 10-K Annual Report of the Company for the fiscal year ended December 31, 2000 presented to this meeting is hereby approved with such changes as the proper officers of the Company, with the advice of counsel, deem appropriate; and RESOLVED, that each officer and director who may be required to execute the aforesaid Form 10-K Annual Report or any amendments thereto (whether on behalf of the Company or as an officer or director thereof, or by attesting the seal of the Company, or otherwise) is hereby authorized to execute a power of attorney appointing Celia A. Colbert and Kenneth C. Frazier and each of them, severally, his/her true and lawful attorney or attorneys to execute in his/her name, place and stead (in any such capacity) such Form 10-K Annual Report and any and all amendments thereto and any and all exhibits and other documents necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform in the name and on behalf of each of said officers and directors, or both, as the case may be, every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any such officer or director might or could do in person." IN WITNESS WHEREOF, I have hereunto subscribed my signature and affixed the seal of the Corporation this 14/th/ day of March, 2001. [Corporate Seal] /s/ Debra A. Bollwage --------------------------- Debra A. Bollwage Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----