SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 1996.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number
1-9813
GENENTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
460 Point San Bruno Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(415) 225-1000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.02 par value 76,621,009
Class Outstanding at March 31, 1996
Special Common Stock $.02 par value 43,536,205
Class Outstanding at March 31, 1996
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Income -
for the three months ended March 31, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows -
for the three months ended March 31, 1996 and 1995 4
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6-9
Financial Review 10-16
Independent Accountants' Review Report 17
PART II. OTHER INFORMATION 18
SIGNATURES 19
Page 2
PART I. FINANCIAL INFORMATION
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months
Ended March 31
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Product sales (including amounts from related parties:
1996-$3,955; 1995-$0) $152,337 $162,067
Royalties (including amounts from related parties:
1996-$6,627; 1995-$2,396) 52,893 47,149
Contract and other (including amounts from
related parties: 1996-$18,757; 1995-$5,184) 22,100 16,222
Interest 15,554 13,529
---------- ----------
Total revenues 242,884 238,967
Costs and expenses:
Cost of sales (including amounts from related parties:
1996-$3,463; 1995-$0) 25,879 26,750
Research and development 115,633 94,959
Marketing, general and administrative 52,042 64,323
Interest 1,559 1,871
---------- ----------
Total costs and expenses 195,113 187,903
Income before taxes 47,771 51,064
Income tax provision 9,554 7,660
---------- ----------
Net income $ 38,217 $ 43,404
========== ==========
Net income per share $ .31 $ .36
========== ==========
Weighted average number of shares used
in computing per share amounts 123,360 120,493
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 3
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
<CAPTION>
Three Months
Ended March 31
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,217 $ 43,404
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15,403 14,345
Deferred income taxes (2,400) -
Gain on sales of securities available-for-sale (84) (4,034)
Writedown of a security available-for-sale - 427
Loss on fixed asset dispositions 95 2
Changes in assets and liabilities:
Receivables and other current assets (3,559) (27,272)
Inventories 4,795 8,900
Accounts payable, other current liabilities
and other long-term liabilities (7,212) (16,754)
---------- ----------
Net cash provided by operating activities 45,255 19,018
Cash flows from investing activities:
Purchases of securities held-to-maturity (136,420) (154,860)
Proceeds from maturities of securities held-to-maturity 147,237 316,319
Purchases of securities available-for-sale (62,595) (139,276)
Proceeds from sales of securities available-for-sale 1,424 5,053
Capital expenditures (24,252) (9,558)
Change in other assets 4,303 (27,771)
---------- ----------
Net cash used in investing activities (70,303) (10,093)
Cash flows from financing activities:
Stock issuances 27,115 9,062
Additions to long-term debt and
short-term borrowings - 25,624
Repayment of long-term debt, including
current portion (230) (211)
---------- ----------
Net cash provided by financing activities 26,885 34,475
---------- ----------
Net increase in cash and cash equivalents 1,837 43,400
Cash and cash equivalents at beginning of period 137,043 66,713
---------- ----------
Cash and cash equivalents at end of period $ 138,880 $ 110,113
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 4
<TABLE>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
<CAPTION>
March 31, December 31,
1996 1995
------------ ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 138,880 $ 137,043
Short-term investments 622,269 603,296
Accounts receivable, net (including amounts
from related parties: 1996-$38,290;
1995-$19,281) 174,865 172,160
Inventories 88,853 93,648
Prepaid expenses and other current assets 39,530 39,267
------------ ------------
Total current assets 1,064,397 1,045,414
Long-term marketable securities 386,664 356,475
Property, plant and equipment, less
accumulated depreciation
(1996-$281,554; 1995-$268,751) 514,461 503,654
Other assets 100,146 105,452
------------ ------------
Total assets $ 2,065,668 $ 2,010,995
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts and notes payable $ 33,336 $ 37,459
Other current liabilities (including
amounts due to related parties:
1996-$9,872; 1995-$8,475) 191,041 195,985
------------ ------------
Total current liabilities 224,377 233,444
Long-term debt 150,000 150,000
Other long-term liabilities 25,979 25,504
------------ ------------
Total liabilities 400,356 408,948
Stockholders' equity:
Preferred stock - -
Special common stock 871 853
Common stock 1,532 1,532
Other stockholders' equity 1,662,909 1,599,662
------------ ------------
Total stockholders' equity 1,665,312 1,602,047
------------ ------------
Total liabilities and stockholders' equity $ 2,065,668 $ 2,010,995
============ ============
<FN>
See notes to condensed consolidated financial statements.
</TABLE>
Page 5
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of Genentech, Inc. (the Company), the accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of adjustments of a normal recurring nature)
considered necessary for a fair presentation have been included. Operating
results for the three-month periods ended March 31, 1996 and 1995 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996. The condensed consolidated balance sheet as of
December 31, 1995 has been derived from the audited financial statements as
of that date. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report to
Stockholders for the year ended December 31, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Note 2. New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires the Company to review for impairment long-lived assets, certain
identifiable intangibles, and goodwill related to those assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In certain situations, an impairment loss would be
recognized. The Company adopted FAS 121 in the quarter ended March 31, 1996.
The adoption did not have a material impact on the financial position, results
of operations or cash flows of the Company.
In October 1995, the FASB issued FAS 123 "Accounting for Stock-Based
Compensation" which also is effective for the Company's 1996 fiscal year. FAS
123 allows companies which have stock-based compensation arrangements with
employees to adopt a new fair-value basis of accounting for stock options and
other equity instruments, or to continue to apply the existing accounting
rules under APB Opinion 25 "Accounting for Stock Issued to Employees" but with
additional financial statement disclosure. The Company will continue to
account for stock-based compensation arrangements under APB Opinion 25,
therefore the adoption of FAS 123 did not have a material impact on its
financial position, results of operations, or cash flows.
Note 3. Agreement with Roche Holdings, Inc.
On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc.
(Roche) was approved by Genentech's non-Roche stockholders to extend for four
years Roche's option to cause Genentech to redeem the outstanding callable
putable common stock (special common stock) of the Company at predetermined
prices. In conjunction with the Agreement, F. Hoffmann-La Roche Ltd. (HLR)
Page 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
was granted an option at terms discussed below for ten years for licenses to
use and sell certain of Genentech's products in non-U.S. markets. As a
general matter, such option for a Genentech product must be exercised at, or
prior to if Genentech mutually agrees, the conclusion of phase II clinical
trials for each product. In general, for each product for which HLR exercises
its option (option product), the Company and HLR will share equally all
development expenses, including preclinical, clinical, process development and
related expenses, incurred by the Company through that date and prospectively,
with respect to the development of the option product in the United States.
HLR will pay all non-U.S. development expenses. At the Company's election, and
with HLR's consent, HLR may reimburse Genentech for HLR's share of development
costs incurred prior to HLR's option exercise date, by payment of such costs
at the time of the option exercise, or by making payments prospectively until
HLR's share has been fully reimbursed to Genentech. In general, Genentech will
supply HLR's clinical requirements of option products at cost and its
commercial requirements at cost plus 20%. In general, HLR will pay a royalty
of 12.5% until an option product reaches $100 million in aggregate sales
outside of the United States, at which time the royalty rate increases to 15%.
In addition, HLR has exclusive rights to, and pays the Company 20% royalties
on, Canadian sales of the Company's existing approved products in Canada, and
European sales of Pulmozyme, registered trademark. Consequently, in the
fourth quarter of 1995, the Company transferred to HLR the rights to its
Canadian product sales, and its European sales of Pulmozyme, and commenced
recording royalty revenue from HLR on such sales.
In the first quarter of 1996, HLR exercised its option with respect to the
development of IDEC-C2B8. Accordingly, contract revenue recorded in the
quarter includes $17.1 million for HLR's exercise, representing a one time
option fee of $13.1 million, which includes reimbursement for development
costs incurred by Genentech prior to HLR's exercise date and for certain Asian
marketing rights, and $4.0 million for reimbursement of development costs
incurred by Genentech after the exercise date but before March 31, 1996. HLR
also advised Genentech that it would not exercise its option with respect to
the development of Genentech's anti-HER2 antibody.
Note 4. Legal Proceedings
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase,
registered trademark; a patent infringement and trade secret misappropriation
case involving antibodies to IgE; product liability cases involving Activase
and Protropin, registered trademark; class action lawsuits regarding
Protropin; and employment related cases. In addition, the Company has received
and responded to grand jury document subpoenas from the United States District
Court for the Northern District of California for documents relating to
Genentech's clinical, sales, and marketing activities associated with human
growth hormone.
The Company, its directors, two former directors and Roche are defendants in a
number of suits filed in Delaware, which have been consolidated in a single
action, by certain individual stockholders purporting to represent
stockholders as a class alleging, in general, breach of the defendants'
fiduciary duties to the Company in connection with the then proposed extension
of Roche's option to cause the Company to redeem the outstanding non-Roche
owned redeemable common stock and transactions related thereto. The Company,
Roche and the attorneys representing the plaintiff stockholders have entered
into a memorandum of understanding settling all claims against the defendants
Page 7
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
in these actions. In connection with the settlement, if approved by the
court, Roche would increase the prices at which it could cause Genentech to
redeem the non-Roche owned special common stock by $0.50 per share per
quarter, to a final price of $82.50 in the quarter ending June 30, 1999, and
Genentech would pay the plaintiffs' attorneys up to $3.5 million in attorneys
fees, and in connection with the then proposed merger, Genentech would absorb
the termination costs of up to six Europe-based Genentech employees.
On June 28, 1995 and August 10, 1995, the U.S. District Court for the Southern
District of New York issued preliminary injunctions against Novo Nordisk A/S
and certain of its affiliates (Novo) and Biotechnology General Corporation and
its affiliate (BTG), respectively, which prohibited each of them, pending the
Court's final determination of the action, from importing, making, using and
selling their human growth hormone products in the United States. Each of Novo
and BTG appealed the Court's decision. On February 26, 1996, the U.S. Court of
Appeals for the Federal Circuit overruled the preliminary injunction against
Novo. On April 8, 1996, the same court upheld the preliminary injunction
against BTG. Future court decisions will determine whether Novo's and BTG's
products will be preliminarily or permanently enjoined from the U.S. market.
Based upon the nature of the claims made and the investigations completed to
date by the Company and its counsel, the Company believes the outcome of the
above actions will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. However, were an
unfavorable ruling to occur in any quarterly period, there exists the
possibility of a material impact on the net income of that period.
Note 5. Inventories
Inventories at March 31, 1996 and December 31, 1995 are summarized below:
1996 1995
---------- ----------
(thousands)
Raw materials $ 14,574 $ 12,808
Work in process 64,428 67,239
Finished goods 9,851 13,601
---------- ----------
Total $ 88,853 $ 93,648
========== ==========
Note 6. Quasi-Reorganization
On February 18, 1988, the Company's Board of Directors approved the
elimination of the Company's accumulated deficit through an accounting
reorganization of its stockholders' equity accounts (a quasi-reorganization)
effective October 1, 1987, that did not involve any revaluation of assets or
liabilities. The Company eliminated the accumulated deficit of $329.5 million
by a transfer from additional paid-in capital in an amount equal to the
accumulated deficit.
Page 8
The Company has been reporting in income the recognition of operating loss and
tax credit carryforward items arising prior to the quasi-reorganization due to
the Company's adoption of its quasi-reorganization in the context of the
accounting and quasi-reorganization literature existing at the date the quasi-
reorganization was effected. If the provisions of the subsequently issued
Staff Accounting Bulletin 86 (SAB 86) had been applied, net income for the
quarter ended March 31, 1995, would have been reduced by $10.0 million or $.08
per share, because SAB 86 would require that the tax benefits of prior
operating loss and tax credit carryforwards be reported as a direct addition
to additional paid-in capital rather than being recorded in the income
statement. The Securties and Exchange Commission staff has indicated that it
would not object to the Company's accounting for such tax benefit. As of June
30, 1995, the operating loss and tax credit carryforwards arising prior the
quasi-reorganization had been fully utilized; thus there was no impact for the
quarter ended March 31, 1996.
Note 7. Subsequent Event - Research and Development Collaboration
In April 1996, the Company entered into a collaboration with Xoma Corporation
(Xoma) for the development of Genentech's anti-CD11a monoclonal antibody for
the treatment of psoriasis and organ transplant rejection. In connection with
the collaboration, Genentech purchased 1.5 million shares of Xoma common stock
for $8.8 million. In addition, Genentech loaned Xoma $5.0 million pursuant to
a convertible note. Under the terms of the collaboration, Genentech expects to
make additional loans to Xoma to be used for the product's development. Xoma
is responsible for the development of anti-CD11a through Phase II trials.
After completion of Phase II trials, Genentech will determine the product's
future development strategy. Upon meeting certain milestones, Xoma will have
an option to participate in development through U.S. approval, after which it
will have the right to copromote and share in the profits of the product in
the United States, and to receive royalties from its sales elsewhere.
Page 9
GENENTECH, INC.
FINANCIAL REVIEW
AGREEMENT WITH ROCHE HOLDINGS, INC.
On October 25, 1995, a new agreement (the Agreement) with Roche Holdings, Inc.
(Roche) was approved by Genentech's non-Roche stockholders to extend for four
years Roche's option to cause Genentech (the Company) to redeem the
outstanding callable putable common stock (special common stock) of the
Company at predetermined prices. In conjunction with the Agreement, F.
Hoffman-La Roche Ltd. (HLR) was granted an option at terms discussed below for
ten years for licenses to use and sell certain of Genentech's products in non-
U.S. markets. As a general matter, such option for a Genentech product must
be exercised at, or prior to if Genentech mutually agrees, the conclusion of
phase II clinical trials for each product. In general, for each product for
which HLR exercises its option (option product), the Company and HLR will
share equally all development expenses, including preclinical, clinical,
process development and related expenses, incurred by the Company through that
date and prospectively, with respect to the development of the option product
in the United States. HLR will pay all non-U.S. development expenses. At the
Company's election, and with HLR's consent, HLR may reimburse Genentech for
HLR's share of development costs incurred prior to HLR's option exercise date,
by payment of such costs at the time of the option exercise, or by making
payments prospectively until HLR's share has been fully reimbursed to
Genentech. In general, Genentech will supply HLR's clinical requirements of
option products at cost and its commercial requirements at cost plus 20%. In
general, HLR will pay a royalty of 12.5% until an option product reaches $100
million in aggregate sales outside of the United States, at which time the
royalty rate increases to 15%. In addition, HLR has exclusive rights to, and
pays the Company 20% royalties on, Canadian sales of the Company's existing
approved products in Canada, and European sales of Pulmozyme, registered
trademark. Consequently, in the fourth quarter of 1995, the Company
transferred to HLR the rights to its Canadian product sales, and its European
sales of Pulmozyme, and commenced recording royalty revenue from HLR on such
sales.
In the first quarter of 1996, HLR exercised its option with respect to the
development of IDEC-C2B8. Accordingly, contract revenue recorded in the
quarter includes $17.1 million for HLR's exercise, representing a one time
option fee of $13.1 million, which includes reimbursement for development
costs incurred by Genentech prior to HLR's exercise date and for certain Asian
marketing rights, and $4.0 million for reimbursement of development costs
incurred by Genentech after the exercise date but before March 31, 1996. HLR
also advised Genentech that it would not exercise its option with respect to
the development of Genentech's anti-HER2 antibody.
Page 10
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Three Months Ended March 31
-------------------------------
REVENUES 1996 1995 % Change
- --------- -------- -------- ---------
Revenues $242.9 $239.0 2%
======== ======== =========
PRODUCT SALES
- ----------------------
Activase $ 76.6 $ 78.2 (2)%
Protropin and Nutropin 56.0 54.4 3
Pulmozyme 18.9 28.5 (34)
Actimmune 0.8 1.0 (20)
-------- -------- ---------
Total product sales $152.3 $162.1 (6)%
======== ======== =========
Overall product sales in the first quarter of 1996 decreased 6% from the
comparable period in 1995 primarily due to the Agreement with Roche. Pursuant
to the Agreement, in the fourth quarter of 1995 Genentech stopped recording
customer sales of Pulmozyme in Europe and customer sales of each of its
products in Canada. The Company instead began to provide its products to HLR
at cost plus 20% for HLR's sales to customers in these territories, and began
to receive royalties from HLR on such sales. In the first quarter of 1996,
Genentech's product sales to HLR for Canadian and European sales were $4.0
million; in the comparable period of 1995 Genentech's sales to customers in
these regions were $13.8 million. On a pro forma basis, including sales to HLR
in 1996 and excluding Canadian and European customer sales in 1995, total
product sales in 1996 were $152.3 million, compared to $148.3 million in 1995.
The Agreement also resulted in higher royalties in 1996 and had a slight
impact on cost of sales as a percent of sales; see comments below regarding
these items.
Net sales of Activase, registered trademark, (Alteplase, recombinant)
recombinant tissue plasminogen activator, decreased 2% in the first quarter of
1996 compared to the first quarter of 1995, primarily due to the sale in 1995
of $3.8 million of bulk product to Japanese licensees. $1.0 million of the
decrease is attributable to the Agreement with Roche. On a pro forma basis as
described above, 1996 first quarter sales of Activase were $76.6 million,
compared to $75.9 million in the first quarter of 1995. In March 1996,
Genentech submitted a supplemental Product License Application to the Food and
Drug Administration (FDA) for the use of Activase to treat acute ischemic
stroke.
Net sales of the Company's two growth hormone products - Protropin, registered
trademark, (somatrem for injection) and Nutropin, registered trademark,
(somatropin [rDNA origin] for injection) - increased 3% in first quarter of
1996 over the comparable period in 1995, with an increase in U.S. sales more
than offsetting the decrease resulting from the transfer of Canadian sales of
growth hormone to HLR in late 1995. On a pro forma basis, growth hormone sales
were $56.0 million in 1996 compared to $53.7 million in 1995. In April 1996,
an appeals court upheld the preliminary injunction against one of the
Company's possible competitors, prohibiting the sale of that company's growth
hormone product pending final determination of the action. Also in April,
another company received FDA approval to sell its human growth hormone product
to treat growth inadequacy in children.
Page 11
Net sales of Pulmozyme decreased 34% in the quarter ended March 31, 1996
compared to the first quarter of 1995, primarily due to the Agreement with
Roche. 1995 Pulmozyme sales included $10.7 million of sales to European and
Canadian customers. In 1996, sales in these territories are made by HLR. On a
pro forma basis, Pulmozyme sales were $18.9 million in the first quarter of
1996, compared to $17.8 million in the first quarter of 1995.
Three Months Ended March 31
ROYALTIES, CONTRACT AND ------------------------------
OTHER, AND INTEREST INCOME 1996 1995 % Change
- ----------------------------- -------- -------- --------
Royalties $ 52.9 $47.1 12%
Contract and other 22.1 16.2 36
Interest income 15.6 13.6 15
Royalty income increased 12% in 1996 primarily due to new royalties from HLR
pursuant to the Agreement. Under the Agreement, effective in the fourth
quarter of 1995, Genentech receives royalties from HLR on their sales of
Genentech products in Europe and Canada. The first quarter of 1995 did not
include such royalties because at that time Genentech recorded sales to
customers in those territories. Royalties in 1996 also included income from
other new royalty arrangements and higher royalties from existing licensees
due to increased licensee sales.
Contract and other income increased in the first quarter of 1996 over the
first quarter of 1995 due to $17.1 million of contract revenue from HLR for
HLR's exercise of its option regarding IDEC-C2B8, as discussed previously.
This increase was partially offset by two factors - the inclusion in other
income in 1995 of $4.0 million of gains on sales on biotechnology equity
securities; and a decrease in other contract revenue in 1996 resulting from
normal quarterly variations in the timing of contract benchmark achievements
and payments.
Interest income increased in 1996 compared to 1995 due to a larger investment
portfolio and a higher average portfolio yield. The total investment
portfolio, consisting of cash and cash equivalents, and short- and long-term
marketable securities, increased to $1,147.8 million as of March 31, 1996 from
$942.3 million as of March 31, 1995, and from $1,096.8 million as of December
31, 1995.
Three Months Ended March 31
------------------------------
COSTS AND EXPENSES 1996 1995 % Change
- -------------------------- -------- -------- --------
Cost of sales $ 25.9 $ 26.8 (3)%
Research and development 115.6 94.9 22
Marketing, general and
administrative 52.0 64.3 (19)
Interest expense 1.6 1.9 (16)
-------- -------- --------
Total costs and expenses $195.1 $187.9 4%
======== ======== ========
Cost of sales as a percent of product sales increased slightly in the first
quarter of 1996 over the first quarter of 1995 primarily due to the impact of
lower margin sales to HLR in 1996, pursuant to the Agreement as discussed
above, partially offset by lower inventory reserves provided ($0.6 million in
1996 versus $1.7 million in 1995). The 1996 reserve of $0.6 million was
Page 12
provided for expected obsolescence of certain Activase inventories in
connection with the discontinuance of the 20 milligram vial configuration of
the product. In 1995, a reserve of $1.7 million was provided for expected
product expiration of certain Activase inventories.
R&D expenses increased 22% in the first quarter of 1996 over the comparable
period in 1995 due to increased expenditures for scale-up, other process
improvements and clinical material production for products in Phase II and III
clinical trials, and other expenses related to Phase III clinical trials,
primarily for the anti-HER2 antibody for breast cancer. There was also an
increased number of projects in early stage development in 1996. Included in
R&D expense in 1996 is a $5.0 million payment to Washington University for a
license for worldwide rights to human neurturin, a neurotrophic factor that
promotes nerve cell growth and may be useful for the treatment of
neurodegenerative disorders. R&D as a percent of revenue was approximately
48% in the first quarter of 1996.
Marketing, general and administrative expenses decreased in the quarter ended
March 31, 1996 versus the comparable period in 1995 primarily due to the
closure of the Company's European and Canadian offices pursuant to the
Agreement with Roche, and, to a lesser extent, due to lower U.S. sales and
marketing expenses stemming from the timing of various promotional activities.
Interest expense primarily relates to the Company's 5% convertible
subordinated debentures.
Three Months Ended March 31
------------------------------
INCOME TAXES 1996 1995 % Change
- ------------- -------- -------- ---------
Income taxes $ 9.6 $ 7.7 25%
The increase in income tax expense was attributable to an increase in the
estimated effective income tax rate, from 15% in 1995 to 20% in 1996. The
rate increased due to the recognition of a greater amount of tax credit
carryforwards in 1995 than in 1996.
Three Months Ended March 31
------------------------------
NET INCOME 1996 1995 % Change
- ------------------- -------- -------- --------
Net income $38.2 $43.4 (12)%
Earnings per share $ .31 $ .36
Net income decreased in 1996 due to an increase in research and development
expenses and a higher effective tax rate, which more than offset higher
revenues from royalties and contract income.
LIQUIDITY AND CAPITAL
RESOURCES March 31, 1996 December 31, 1995
- -------------------------- ---------------- -------------------
Cash, cash equivalents,
short-term investments
and long-term marketable
securities $1,147.8 $1,096.8
Working capital 840.0 812.0
Page 13
Cash generated from operations, maturities of investments and stock issuances
was used to make investments in marketable securities and capital additions.
Cash and cash equivalents at March 31, 1996 remained essentially flat compared
to December 31, 1995. Working capital increased $28.0 million.
Capital expenditures totaled $24.3 million in the first three months of 1996
compared to $9.6 million in the same period in 1995. The increase was
primarily due to improvements to existing manufacturing and administrative
facilities in 1996.
FORWARD-LOOKING STATEMENTS
The following statements are forward-looking and are based on the Company's
current expectations. The Company's actual results could differ materially
from these forward-looking statements.
Total Product Sales - The Company anticipates that a year over year decrease
in total reported quarterly product sales may continue throughout 1996.
Factors affecting the Company's total product sales include, but are not
limited to, the amount and timing of Genentech's sales to HLR, the amount of
sales to customers in the United States and the timing and amount of bulk
shipments to Japanese licensees.
Activase Sales - The Company faces the possibility of potential new
competition in the thrombolytic market. Genentech is aware that one company is
seeking FDA approval to market its product for the treatment of acute
myocardial infarction (AMI) in the United States, and recently an advisory
committee of the FDA recommended that the product be approved for such
treatment. Depending on the extent and type of new competition, the Company's
total Activase sales could be materially affected. Other factors affecting
the Company's Activase sales include, but are not limited to, the timing of
FDA approval, if any, of new competitive products, pricing decisions made by
the Company, and the outcome of any patent disputes which may arise in
connection with the Company's patents for Activase and related processes.
Growth Hormone Sales - The Company continues to face the possibility of new
competition in the growth hormone market. Three companies received FDA
approval in 1995 to market their growth hormone products for treatment of
growth hormone inadequacy in children. A fourth company received notice from
the FDA in April 1996 that such approval is imminent, and additionally is
seeking approval to sell its human growth hormone to treat AIDS wasting.
Genentech expects such competition to have an adverse effect on its sales of
Protropin and Nutropin which, depending on the extent and type of the
competition, could be material. Other factors affecting the Company's growth
hormone sales include, but are not limited to, the timing of FDA approval, if
any, of new competitive products, the outcome of litigation involving the
Company's patents for growth hormone and related processes, pricing decisions
made by the Company, and the availability of third party reimbursement for the
cost of growth hormone therapy.
Royalty and Contract Revenues - The Company's 1996 royalty and contract
revenues could continue to vary significantly from the prior year, both on a
quarterly and annual basis, and future royalties and contract revenues could
vary significantly from 1996 levels. Major factors affecting these items
include, but are not limited to, HLR's decisions to exercise or not exercise
its options to develop and sell the Company's future products, and variations
in HLR's sales of Genentech products.
R&D Expenses - The Company intends to continue its commitment to aggressive
investment in R&D. The Company has announced its intention for R&D spending to
remain at approximately half of total revenues for the short-term. Over the
long-term, however, R&D as a percent of revenues should decrease, although in
Page 14
dollar terms R&D spending is expected to rise as revenues rise. Factors
affecting the Company's R&D expenses include, but are not limited to, the
outcome of clinical trials currently being conducted; the number of products
entering into development from preclinical research; future levels of the
Company's product sales, royalty revenues and contract revenues; the
possibility of competition with respect to products or technologies under
development; and decisions by HLR to exercise or not exercise its options to
develop and sell potential products of the Company in non-U.S. markets and the
timing of such decisions.
Liquidity - The Company believes that its cash, cash equivalents, and short-
term and long-term investments, together with funds provided by operations and
leasing arrangements, will be sufficient to meet its foreseeable cash
requirements. Factors affecting the Company's cash position include, but are
not limited to, future levels of the Company's product sales, royalty revenues
and contract revenues.
The above statements are forward-looking and involve a number of risks and
uncertainties. Among other factors that could cause the Company's actual
results, including its product sales, royalties, expenses and net income, to
differ materially from these statements or any other forward-looking
statements made by, or on behalf of the Company, are the following:
Acceptance of Pulmozyme as a treatment for cystic fibrosis - Factors that
may influence the future sales of Pulmozyme include physician perception of
the number and kinds of patients who will benefit from such therapy, the
availability of third party reimbursement for the costs of therapy, the timing
of the development of alternative therapies for the treatment and care of
cystic fibrosis, whether and when additional indications are approved for
Pulmozyme, and the cost of Pulmozyme therapy.
Variation of royalty, contract and other revenues - These revenues will
continue to fluctuate due to the timing of non-U.S. approvals, if any, for
products licensed to HLR; whether and when contract benchmarks are achieved;
the initiation of new contractual arrangements, including the exercise of
product options by HLR, and the timing and amount of related development cost
reimbursement, if any; and the conclusion of existing arrangements with other
companies and HLR.
Successful development of products - The Company intends to continue to
develop new products. Successful pharmaceutical product development is highly
uncertain and is dependent on numerous factors, many of which are beyond the
Company's control. Products that appear promising in the early phases of
development may fail to reach the market for numerous reasons. They may be
found to be ineffective or to have harmful side effects in preclinical or
clinical testing, may fail to receive necessary regulatory approvals, may turn
out to be uneconomical because of manufacturing costs or other factors, or
they may be precluded from commercialization by the proprietary rights of
others or by competing products or technologies for the same indication.
Success in preclinical and early clinical trials does not ensure that large
scale clinical trials will be successful. Clinical results are frequently
susceptible to varying interpretations which may delay, limit or prevent
regulatory approvals. The length of time necessary to complete clinical trials
and from submission of an application for marketing approval to a final
decision by a regulatory authority varies significantly and may be difficult
to predict.
Uncertainties surrounding proprietary rights - The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and involve
complex legal and factual questions. Accordingly, the breadth of claims
allowed in such company's patents cannot be predicted. Patent disputes are
frequent and can preclude commercialization of products. The Company, as in
Page 15
the past, may be involved in future material patent litigation. Such
litigation is costly in its own right and could subject the Company to
significant liabilities to third parties and, if decided adversely, the
Company may need to obtain third party licenses or cease using the technology
or product in dispute. As discussed above, the presence of patents or other
proprietary rights belonging to other parties may lead to the termination of
research and development of a particular product.
Page 16
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 1996, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March
31, 1996 and 1995. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December
31, 1995, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 17, 1996, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1995, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
April 9, 1996
Page 17
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 26, 1996, the U.S. Court of Appeals for the Federal Circuit
overruled the preliminary injunction against Novo Nordisk A/S and certain of
its affiliates (Novo). On April 8, 1996, the same court upheld the preliminary
injunction against Biotechnology General Corporation and its affiliate (BTG).
Future court decisions will determine whether Novo's and BTG's growth hormone
products will be preliminarily or permanently enjoined from the U.S. market.
See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.20 Employment Agreement, dated January 1, 1996, between
the Company and Edmon R. Jennings
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
In a report filed on Form 8-K dated February 23, 1996, in connection with the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company made a cautionary statement identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward looking statements made by, or on behalf of, the Company.
Page 18
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 1996 GENENTECH, INC.
/S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR.
------------------------------------- ----------------------------
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr.
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
/S/BRADFORD S. GOODWIN
----------------------------
Bradford S. Goodwin
Vice President and Controller
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 138,880
<SECURITIES> 1,008,933
<RECEIVABLES> 174,865<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 88,853
<CURRENT-ASSETS> 1,064,397
<PP&E> 796,015
<DEPRECIATION> 281,554
<TOTAL-ASSETS> 2,065,668
<CURRENT-LIABILITIES> 224,377
<BONDS> 150,000
0
0
<COMMON> 2,403
<OTHER-SE> 1,662,909
<TOTAL-LIABILITY-AND-EQUITY> 2,065,668
<SALES> 152,337
<TOTAL-REVENUES> 242,884
<CGS> 25,879
<TOTAL-COSTS> 25,879
<OTHER-EXPENSES> 115,633
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 1,559
<INCOME-PRETAX> 47,771
<INCOME-TAX> 9,554
<INCOME-CONTINUING> 38,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,217
<EPS-PRIMARY> .31
<EPS-DILUTED> 0
<FN>
<F1>ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN
THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL
ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS.
</FN>
</TABLE>
Exhibit 15.1
May 14, 1996
Securities and Exchange Commission
Washington, DC 20549
We are aware of the incorporation by reference in the Registration
Statements pertaining to the 1991 Employee Stock Plan, the 1994 Stock
Option Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive
Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares
issuable to certain warrant holders, the shares issuable to certain
convertible subordinated debenture holders, the Genentech, Inc. Tax
Reduction Investment Plan and in the related prospectuses, as applicable,
contained in such Registration Statements of our report dated April 9, 1996
relating to the unaudited condensed consolidated interim financial
statements of Genentech, Inc. which are included in its Form 10-Q for the
quarter ended March 31, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of the registration statement prepared or certified by accountants
within the meaning of Section 7 or 11 of the Securities Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT effective as of this 1st day of January 1996
("Effective Date"), by and between Genentech, Inc., a Delaware corporation,
hereinafter called the "Company" and Edmon R. ("Ed") Jennings, an individual,
hereinafter called the "Employee."
WITNESSETH:
WHEREAS, the Company believes, and has heretofore acknowledged, that the
Employee has made a tremendous contribution to the Company and is a highly
valued employee, and accordingly the Company wishes to formalize its long-
standing relationship with the Employee by documenting its desire to continue
to employ the Employee as its Vice President; and
WHEREAS, Employee is desirous of providing services to the Company in the
aforementioned capacity:
NOW, THEREFORE, in consideration of the mutual promises contained below,
the Company and the Employee hereby agree as follows:
1. Employment. The Company hereby employs the Employee and the Employee
hereby accepts employment upon the terms and conditions set forth herein.
2. Term. Subject to the provisions for early termination of the
Employee's employment as hereinafter provided, the term of this Employment
Agreement shall commence as of the Effective Date and shall continue for a
period of three (3) years thereafter (the "Term").
3. Duties. During the Term, Employee shall be employed as a Vice
President of the Company and shall carry out the duties of said position in
accordance with the reasonable directions and assignments of his superiors.
The Employee agrees to exercise his best efforts to advance the interests of
the Company, to diligently carry out the duties assigned to him by the Company
and to devote his full-time attention and energies to the business of the
Company. The Employee will not, during the Term, engage in any other business
activity inconsistent with his duties to the Company.
4. Salary. For all services rendered by the Employee hereunder, the
Company agrees to pay annually to the Employee a base salary of one hundred
ninety nine thousand eight hundred dollars ($199,800) (inclusive of the
Employee's car allowance), payable in equal semi-monthly installments ("Base
Salary"), which amount shall be reviewed on an annual basis and may be subject
to upward adjustment on the basis of performance consistent with upward
adjustments for the salaries of Vice Presidents of the Company generally as
well as those whose scope of duties and responsibilities are similar to
Employee's. The Employee will next be eligible for a salary review in
December, 1996. During the period of his employment, the Employee shall also
receive the benefits referred to in Paragraph 6 (b), without the exclusion
resulting from consultant status.
5. Bonuses. In addition to the salary set forth in Paragraph 4, the
Employee is eligible to receive cash bonuses each year during the Term hereof,
consistent with the Company's bonus plan for that year as approved by the
Company's Board of Directors and similar in amount to bonuses paid other Vice
Presidents of the Company whose scope of duties and responsibilities are
similar to Employee's.
6. Termination.
(a) The employment of the Employee hereunder may be terminated at any
time, for any reason, by either party upon two weeks' notice of termination to
the other party.
(b) In the event of such termination by either party (except for
termination by the Company for cause, as described in Paragraph 6(c) below),
Employee shall continue as a consultant to the Company for the remainder of
the Term, and the Company shall pay to Employee as a consultant on a monthly
basis, within 15 days of the end of each month, during each month of the
remaining Term, an amount equal to the amount of salary paid during his last
month as an employee plus 1/12th of the amount of bonus he received for the
preceding year. The foregoing amounts shall be subject to any appropriate
withholding for federal or state income tax or similar tax purposes. In
addition, in the event of such termination, Employee shall continue to
receive, while he is receiving any payment under this paragraph, benefits
similar to those that are then available to employees of the Company at the
Vice President level, including, without limitation, medical, dental, vision
and insurance benefits and any other benefits but specifically excluding the
Company's stock purchase plan, its 401(k) plan and any other plan the Company
may adopt in which participation is specifically conditioned on status as an
employee. In addition, in the event of such termination, Employee as a
consultant shall continue during the remaining Term to vest any unvested stock
options he has under any of the Company's stock option plans at the same rate
such options are vesting as of the Effective Date and such stock options shall
remain exercisable until March 30, 2000, unless earlier terminated by lapse of
time pursuant to the provisions of the plan or plans under which the stock
options were granted. If Roche exercises its option to cause the Company to
redeem all of the outstanding common stock not then owned by Roche, vesting of
Employee's unvested options shall accelerate to the extent provided under the
stock option plans and the individual grant agreements pursuant to which the
options were granted, and the unvested options shall otherwise be treated in a
manner identical to that of the unvested options (from the same stock option
plans) of the Company's other employees at that time. In the event of a
termination as described in Paragraph 6(a), Employee and the Company shall
enter into a consulting agreement which contains the material terms described
herein and any other standard terms the Company imposes on its other
consultants at the time of such agreement.
(c) The Company shall have the right to terminate this Agreement for
cause only under the following circumstances:
(i) the Employee's willful and continuing gross neglect of his
duties or his willful and continuing failure to perform his
duties, which continues for more than thirty (30) days
following the Employee's receipt of written notice from the
Company that describes such gross neglect or failure,
(ii) the Employee's breach of his confidentiality obligations
to the Company, as described in the Proprietary Rights and
Inventions Agreement between the parties; or
(iii) the Employee's embezzlement from or fraud against the Company.
In the event of a termination for cause by the Company, and only in such
event, the Employee shall only be paid his salary due as of his last day of
employment and shall receive no benefits provided in Paragraph 6(b) hereof or
any other compensation or remuneration hereunder. Nothing in Paragraph
6(c)(i) shall be construed as prohibiting the Employee from voluntarily
resigning his position during the 30-day notice period provided in paragraph
6(c)(i) or at any time prior to the Employee's receipt of such notice. In
such case, the Employee shall receive the benefits described in Paragraph 6(b)
hereof.
7. Waiver and Release. (a) Subject to the provisions of Paragraph 7(b)
below, in exchange for the benefits provided to the Employee in this
Agreement, the Employee waives and releases and promises never to assert any
and all claims that the Employee has or might have against the Company and its
predecessors, subsidiaries, related entities, officers, directors,
shareholders, agents, attorneys, employees, successors or assigns arising out
of any acts, omissions or events occurring prior to the Effective Date, and
other than claims arising under this Agreement. These claims include, but are
not limited to, claims for discrimination arising under federal, state and
local statutory or common law such as the Age Discrimination in Employment
Act, Title VII of the Civil Rights Act of 1964, the California Fair Employment
and Housing Act, the Americans with Disabilities Act, and the law of contract
and tort. The Employee also waives and releases and promises never to assert
any such claims, even if the Employee does not believe that he has such
claims. The Employee therefore waives his rights under section 1542 of the
Civil Code of California, which states as follows:
A general release does not extend to claims which
the creditor does not know or suspect to exist in his
favor at the time of executing the release, which if
known by him must have materially affected his
settlement with the debtor.
(b) Notwithstanding the provisions of Paragraph 7(a) above:
(i) if the Employee shall hereafter be made a defendant in any
civil or criminal proceeding or proceedings relating to the
Employee's activities as an employee of, or otherwise on behalf
of, the Company, and whether or not such activities have
heretofore been or may hereafter be the subject of governmental
or other investigation, inquiry or other action, and/or
(ii) if the Employee shall otherwise be subjected to expense or
other liability in connection with any such activities,
investigation, inquiry or other action,
then (A) the Waiver and Release provided for in Paragraph 7(a) shall not apply
to claims of the Employee against the Company for indemnification which arise
out of any of the matters referred to in (b)(i) or (b)(ii) above ("Potential
Matters"), and (B) the Company agrees to indemnify the Employee fully with
respect to any and all Potential Matters in accordance with the Company's
Certificate of Incorporation and the Delaware (or other relevant) corporate
law, including but not limited to the same provisions with respect to
indemnification and advancement of such legal fees which the Employee may
incur in connection with any such Potential Matter as are contained in the May
31, 1994 agreement between the Employee and the Company.
8. Choice of Law; Arbitration. This Employment Agreement shall be
interpreted and enforced in accordance with the laws of the State of
California. Any dispute under this Agreement shall be resolved by
arbitration, which shall be held in San Francisco, California, in accordance
with the Rules of the American Arbitration Association, within thirty (30)
days after the parties shall have been unable to resolve any such dispute.
Judgment upon an arbitration award may be entered in any court of competent
jurisdiction. The prevailing party shall be entitled to reasonable attorney's
fees in addition to any other relief to which such party may be entitled.
9. Notices. Any notice required or permitted to be given under this
Employment Agreement shall be sufficient if in writing, and if sent by first
class mail to his residence in the case of the Employee, or to its principal
office in the case of the Company and addressed to Corporate Secretary. Any
such notice shall be effective upon delivery if it is hand-delivered, upon
receipt if it is transmitted by wire or telegram, or three (3) days after
deposit in the United States mail, if it is mailed.
10. Waiver of Breach. The waiver by either party of a breach of any
provision of this Employment Agreement by the other party shall not operate or
be construed as a waiver of any subsequent breach by such other party.
11. Assignment. The rights and obligations of the Company under this
Employment Agreement shall inure to the benefit of and shall be binding upon
the successors and assigns of the Company. The Company may assign this
Agreement to any purchaser of substantially all of its assets, to the
surviving entity in a merger with the Company, or to any entity controlled by,
under common control with, or controlling the Company. Employee shall have no
right or power to assign this Agreement in whole or in part to any third
party, provided, however, that:
(a) if the Employee shall be prevented during the term of this Agreement
from properly performing services hereunder by reason of illness or
other physical or mental incapacity, the Company shall continue to
pay the Employee his then current salary hereunder during the period
of his disability (but not to exceed the Term) and shall continue to
provide all of the employee benefits to which the Employee was
entitled prior to the commencement of such disability;
(b) the provisions of this Paragraph 11 shall not affect the
entitlements of the Employee's spouse, heirs, executors,
administrators, legatees, beneficiaries or assigns under the
Company's Stock Purchase or Stock Option Plan, or any other employee
benefit plan of the Company.
12. Entire Agreement. This Employment Agreement contains the entire
agreement of the parties respecting the subject matter hereof, but does not
abrogate or otherwise affect the May 31, 1994 agreement between the Company
and the Employee concerning indemnification of the Employee. This Employment
Agreement may not be changed orally but only by an agreement in writing
executed by both of the parties.
IN WITNESS WHEREOF, parties have executed this Employment Agreement
effective as of the Effective Date.
COMPANY:
By: /S/John P. McLaughlin
Title: Executive Vice President
EMPLOYEE: /S/Edmon R. Jennings
