UNITED STATES
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, 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.
A Delaware Corporation 94-2347624
(I.R.S. employer identification number)
460 Point San Bruno Boulevard
South San Francisco, California 94080-4990
(415) 225-1000
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock $.02 par value New York Stock Exchange
Callable Putable Common Stock Pacific Stock Exchange
$.02 par value
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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. [ ]
The approximate aggregate market value of voting stock held by nonaffiliates
of the registrant is $2,124,378,536 as of March 7, 1997. (A)
Number of shares of Common Stock outstanding as of March 7, 1997:
76,621,009
Number of shares of Callable Putable Common Stock outstanding as of
March 7, 1997: 45,537,468
Documents incorporated by reference:
PARTS INCORPORATED
DOCUMENT BY REFERENCE
(1) Annual Report to stockholders for the year ended II
December 31, 1996 (specified portions)
(2) Definitive Proxy Statement with respect to the 1997 III
Annual Meeting of Stockholders filed by Genentech, Inc.
(SEC file No. 1-9813) with the Securities and Exchange
Commission (hereinafter referred to as "Proxy Statement")
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(A) Excludes 92,659,682 shares of Common Stock and Callable Putable Common
Stock held by Directors, Officers and stockholders whose ownership exceeds
five percent of either the Common Stock or Callable Putable Common Stock
outstanding at March 7, 1997 (the holdings of one stockholder, FMR Corp.,
were calculated based on its holdings as of December 31, 1996). Exclusion of
shares held by any person should not be construed to indicate that such
person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or that such
person is controlled by or under common control with the registrant.
PART I
ITEM 1. BUSINESS
Genentech, Inc. (the Company) is a biotechnology company that discovers,
develops, manufactures and markets human pharmaceuticals produced by
recombinant DNA technology for significant unmet medical needs. The Company
manufactures and markets six products directly in the United States (U.S.) and
sells these products to F. Hoffmann-La Roche Ltd (HLR) for HLR to sell outside
of the United States. Of these six products, HLR has the right to sell five
in Canada and one in a number of countries. In addition, the Company receives
royalties from HLR's sales of these products and receives royalties from HLR
and other licensees from sales of five other products which originated from
the Company's technology.
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered into
a new agreement (the Agreement). Each share of the Company's common stock not
held by Roche or its affiliates on that date automatically converted to one
share of callable putable common stock (special common stock). The Agreement
extends until June 30, 1999, Roche's option to cause the Company to redeem
(call) the outstanding special common stock of the Company at predetermined
prices. Should the call be exercised, Roche will concurrently purchase from
the Company a like number of common shares, for a price equal to the Company's
cost to redeem the special common stock. During the quarter beginning January
1, 1997, the call price is $69.25 per share; it increases by $1.25 in the
following quarter, then increases by $1.50 per share each quarter through the
end of the option period on June 30, 1999, on which date the price is $82.50
per share. If Roche does not cause the redemption as of June 30, 1999, the
Company's stockholders will have the option (the put) to cause the Company to
redeem none, some, or all of their shares of special common stock at $60.00
per share (and Roche will concurrently provide the necessary redemption funds
to the Company by purchasing a like number of shares of common stock at $60.00
per share) within thirty business days commencing July 1, 1999. Roche Holding
Ltd, a Swiss corporation, has guaranteed Roche's obligation under the put.
In conjunction with the Agreement, HLR was granted an option for ten years for
licenses to use and sell certain of the Company'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, the Company and HLR will share equally all development expenses
incurred by the Company through the option exercise date and prospectively with
respect to the development of the 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 the Company for HLR's share of development costs
incurred prior to HLR's option exercise date, either 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 the Company.
In general, HLR pays a royalty of 12.5% until a product reaches $100 million
in aggregate sales outside of the U.S., 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 products
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 European sales of Pulmozyme, and commenced
recording royalty revenue from HLR on such sales. The Company supplies its
products to HLR, and has agreed to supply products for which HLR has exercised
its option, for sales outside of the U.S. at cost plus 20%.
Under the Agreement, independent of its right to cause the Company to redeem
the special common stock, Roche may increase its ownership of the Company up
to 79.9% by making purchases on the open market. Roche held approximately
66.0% of the outstanding common equity of the Company as of December 31, 1996.
In January and February 1997, Roche purchased additional shares of the
Company's common equity, thereby increasing Roche's holdings to approximately
68.0%.
Roche and the Company have developed "Guiding Principles" regarding the nature
of their relationship should the call rights be exercised by Roche or the put
rights be exercised by the Company's stockholders. These Guiding Principles
are not binding on either of the companies and are not intended to modify or
alter in any manner any of the agreements between Roche and the Company or to
waive any rights that either Roche or the Company may have under such
agreements. These Guiding Principles reflect certain of the current practices
of the Company or how the Company and Roche will interact in certain business
areas if the put rights or call rights are exercised.
Products
Genentech has developed and currently manufactures and markets six products in
the U.S.: Activase, registered trademark, (Alteplase, recombinant) recombinant
tissue plasminogen activator; Protropin, registered trademark, (somatrem for
injection) recombinant growth hormone; Nutropin, registered trademark,
[somatropin (rDNA origin) for injection] human growth hormone; Nutropin AQ,
trademark, [somatropin (rDNA origin) injection] liquid formulation human
growth hormone; Pulmozyme, (dornase alfa) inhalation solution; and Actimmune,
registered trademark, (Interferon gamma-1b) recombinant interferon gamma.
Activase: Tissue plasminogen activator (t-PA) is an enzyme that is produced
naturally by the body to dissolve blood clots. However, when a blood clot
obstructs blood flow in the coronary artery and causes a heart attack, the
body is unable to produce enough t-PA to dissolve the clot rapidly enough to
prevent damage to the heart. Through recombinant DNA technology, Genentech
produces Activase, a recombinant form of t-PA, in sufficient quantity for
therapeutic use. The United States Food and Drug Administration (FDA)
approved Activase for marketing in the U.S. in 1987 for the treatment of acute
myocardial infarction (AMI or heart attack); in 1990 for use in the treatment
of acute pulmonary embolism (blood clots in the lungs); and in June 1996 for
the treatment of acute ischemic stroke or brain attack within three hours of
symptom onset. The Company is currently conducting Phase III studies to
expand the treatment window to five hours from symptom onset in patients with
acute ischemic stroke. In addition, Phase II studies are being performed to
evaluate a second generation of t-PA.
In exchange for royalty payments, the Company has licensed marketing rights to
recombinant t-PA in Japan to Kyowa Hakko Kogyo, Ltd. (Kyowa) and Mitsubishi
Kasei Corporation (Mitsubishi). Kyowa and Mitsubishi are marketing forms of
recombinant t-PA under the trademarks Activacin, registered trademark, and
GRTPA, registered trademark, respectively. In a number of countries outside
of the U.S., Canada and Japan, the Company has licensed t-PA marketing and
manufacturing rights to Boehringer Ingelheim International GmbH (Boehringer).
The Company has also licensed certain rights to Boehringer regarding future
sales of the second generation of t-PA, which is currently under development.
Boehringer markets recombinant t-PA under the trademark Actilyse, registered
trademark. Prior to February 1995, t-PA was marketed in Canada by the Company
under the Activase trademark and by Boehringer under the trademark Lysatec.
In February 1995, the Company purchased all t-PA Canadian marketing rights
from Boehringer. Pursuant to the Agreement with Roche, the Company
subsequently granted exclusive rights to HLR, which began selling Activase in
Canada on December 1, 1995, and the Company began receiving a royalty on such
sales.
Protropin: Human growth hormone is a naturally occurring human protein
produced in the pituitary gland that regulates metabolism and is responsible
for growth in children. A recombinant growth hormone product developed by the
Company, Protropin, was approved by the FDA in 1985 for marketing in the U.S.
for the treatment of growth hormone inadequacy in children.
In exchange for royalty payments, the Company licensed rights to recombinant
growth hormone outside the U.S. and Canada to Pharmacia & Upjohn, which
manufactures and markets recombinant growth hormone under the trademarks
Somatonorm, registered trademark, and Genotropin, registered trademark. Under
the terms of the agreement with Pharmacia & Upjohn, and effective in late
1995, the Company now has the right to sell growth hormone in certain European
countries and Pharmacia & Upjohn has the right to sell their own growth
hormone in the U.S. and Canada. In conjunction with the Agreement with Roche,
Genentech granted exclusive rights to sell Protropin in Canada to HLR, which
began selling Protropin in Canada on December 1, 1995, and Genentech began
receiving a royalty on such sales.
Nutropin: Nutropin is a human growth hormone similar to Protropin; however,
it does not have the additional amino acid, methionine, found in the Protropin
chemical structure. It was approved by the FDA in March 1994 for marketing for
the treatment of growth hormone inadequacy in children. Nutropin was approved
in November 1993 and launched in January 1994 for marketing in the U.S. for
the treatment of growth hormone inadequacy in children due to chronic renal
insufficiency (CRI). CRI causes irreversible damage to the kidneys and a
variety of other medical problems, including growth hormone inadequacy. The
condition affects an estimated 3,000 children in the United States. Nutropin
has been designated an Orphan Drug for treatment of growth hormone inadequacy
in children with CRI in the United States. In December 1996, the FDA approved
Nutropin for the treatment of short stature associated with Turner syndrome.
The Company has also applied for regulatory approval of Nutropin for growth
hormone inadequacy in adults. In conjunction with the Agreement with Roche,
the Company granted the right to sell Nutropin in Canada to HLR, and the
Company will receive a royalty on any such sales.
Nutropin AQ: In December 1995, the Company received regulatory approval to
market Nutropin AQ, a liquid formulation of Nutropin, aimed at providing
improved convenience in administration. Nutropin AQ was approved for the
treatment of growth hormone inadequacy in children, growth hormone inadequacy
in children due to CRI and short stature associated with Turner syndrome. HLR
has the right to sell Nutropin AQ in Canada from which the Company will
receive a royalty on any such sales.
In addition, the Company is working in collaboration with Alkermes, Inc. to
develop a sustained-release formulation of the Company's human growth hormone.
Currently in Phase I/II clinical trials, this formulation is designed to free
patients receiving growth hormone therapy from the need for daily injections.
Pulmozyme: Pulmozyme is marketed in the U.S. for the management of cystic
fibrosis (CF), for which it has U.S. Orphan Drug designation. There are an
estimated 22,000 patients with CF in the U.S., a significant portion of whom
are expected to be candidates for treatment. In December 1996, Pulmozyme was
cleared for marketing by the FDA for the management of CF patients with
advanced disease. Phase III studies are being performed to determine whether
early intervention with Pulmozyme can benefit young patients with preserved
lung function. In conjunction with the Agreement with Roche, and effective
during the fourth quarter of 1995, the Company granted Roche the exclusive
right to sell Pulmozyme in Europe and Canada in return for a royalty on such
sales.
Actimmune: Actimmune is approved in the U.S. for the treatment of chronic
granulomatous disease (CGD), a rare, inherited disorder of the immune system
which affects an estimated 250 to 400 Americans. Actimmune received
designation by the FDA in 1990 as an Orphan Drug for the treatment of CGD in
the United States. The Company receives royalty payments from Boehringer from
the sale of interferon gamma in certain countries outside of the U.S., Canada
and Japan.
Licensed Products:
In addition to the royalties mentioned above, the Company also receives
royalties on the following products:
Product Trademark Company
____________________________ ____________ ______________________________
Recombinant human insulin Humulin Eli Lilly and Company (Lilly)
Human growth hormone Humatrope Lilly
Recombinant interferon alpha Roferon-A HLR
Hepatitis B vaccine Recombivax Merck and Company, Inc.
Hepatitis B vaccine Engerix-B Smith-Kline Beecham
Pharmaceuticals
Factor VIII Kogenate Bayer Corporation
Bovine growth hormone Posilac Monsanto Corporation
Royalty payments from Lilly on Humulin, trademark, sales will expire in August
1998. In December 1994, the Company and Lilly reached an agreement regarding
all patent infringement and contract actions then pending between the two
parties. Under the terms of the settlement, Lilly agreed to pay the Company up
to $145 million ($25 million in 1994, and 16 quarterly payments of $7.5
million thereafter, $30.0 million of which was received and recorded as
revenue by Genentech in each of 1996 and 1995), subject to possible offsets
and contingent upon Humulin continuing to be marketed in the United States.
In return, the Company granted Lilly licenses, options to licenses, or
immunities from suit for certain of the Company's patents. Future payments are
required from Lilly on sales of these products. These future payments from
Lilly will expire at the end of 1998.
Through its January 1997 agreement with Roche Laboratories, Inc., a New Jersey
corporation, the Company now has the exclusive right to market and promote
Roche's Roferon-A, registered trademark, in the U.S. for ten years for its
approved oncology indications, including hairy-cell leukemia, AIDs-related
Kaposi's sarcoma and Ph-positive chronic myelogenous leukemia. During the
term of such agreement, the Company will receive a commission on the net sales
of Roferon-A, and the Company shall not receive any royalty (other than as
part of the commission) under the 1980 Roche agreement regarding such sales.
Products in Development: As part of the Company's program of research and
development (R&D), a number of other products are in various stages of
development. Product development efforts cover a wide range of disorders or
medical conditions, including cancer, respiratory disorders, cardiovascular
diseases, endocrine disorders, inflammatory and immune problems, and
neurological disorders.
In addition to the new indications for existing products discussed above,
below is a summary of products in clinical development:
<TABLE>
<CAPTION>
Product Description
- -------------------------------- ------------------------------------------------
<S> <C>
Phase III
- ---------
Anti-HER2 Humanized Monoclonal A humanized monoclonal antibody targeted against
Antibody a protein receptor, which may be useful in the
treatment of certain types of breast cancer.
Auriculin (registered trademark) A hormone that occurs naturally in the heart
Anaritide which may be useful in treating oliguric
patients with acute renal failure (being
developed under a collaboration between the
Company and Scios Inc.).
IDEC-C2B8 A monoclonal antibody which may be useful
in the treatment of non-Hodgkin's B-cell
lymphomas (being developed under a collaboration
between the Company and IDEC Pharmaceuticals, Inc.,
(IDEC) and under a collaboration between the Company
and Roche). IDEC filed for regulatory approval
in the first quarter of 1997.
IGF-I A protein that is being studied to determine if
it can improve blood glucose control in type I
and II diabetics. The Company is currently
preparing for phase III clinical trials for type
II diabetics. (Roche has exercised its option
for this product outside of the U.S.)
Nerve Growth Factor A protein that may aid the treatment of diabetic
peripheral neuropathy (Roche has exercised its
option for this product outside of the U.S.). The
Company is currently preparing for phase III
clinical trials.
Oral IIb/IIIa antagonist An inhibitor of platelet aggregation that may
be useful in the prevention of unwanted
clotting in certain cardiovascular conditions
(being developed under a collaboration between
the Company and Roche). The Company is
currently preparing for phase III clinical
trials.
Phase II
- --------
Anti-IgE Humanized Monoclonal A humanized IgE monoclonal antibody designed to
Antibody interfere early in the process that leads to
symptoms of allergy such as allergic asthma
and allergic rhinitis (being developed in
collaboration with Tanox Biosystems, Inc. and
Novartis Pharmaceuticals Corporation).
Thrombopoietin (TPO) A protein that is being studied for treatment of
thrombocytopenia, a reduction in clot-inducing
platelets, in cancer patients treated with
chemotherapy.
Phase I
- -------
Anti-CD18 An antibody designed to address problems
related to loss of blood flow, as in
trauma. (This is being developed in
collaboration with Roche.)
Anti-CDIIa An antibody designed to block the immune
cells that are over-active in psoriasis.
Preclinical studies suggest it also may
be useful to curb these same immune cells
after an organ transplant, thus preventing
rejection of the transplant. (This is
being developed in collaboration with Xoma
Corporation.)
Vascular Endothelial Growth A protein that ischemic tissues, tissues
Factor (VEGF) lacking in oxygen, secrete. It binds to
receptors on nearby blood vessels and
causes angiogenesis, the formation of new
blood vessels. The Company is currently
investigating the use of VEGF for the
treatment of coronary ischemia.
Anti-VEGF An antibody developed to treat several
types of cancer. In preclinical studies,
the anti-VEGF antibody resulted in
decreased vascularization and a decline in
growth and metastasis of a variety of
tumors. The Company has filed an
investigational new drug application (IND)
to investigate its anti-VEGF antibody in a
Phase I clinical trial as a potential
therapy against solid tumors.
</TABLE>
In conjunction with the Agreement with Roche, HLR was granted an option for
ten years for licenses to use and sell certain of the Company's products in
non-U.S. markets. In the past, the Company has licensed the foreign rights to
some of its products to major foreign pharmaceutical companies and actively
coordinated development and clinical programs with these partners. In some
cases the Company has retained manufacturing rights to the licensed products.
The Company has retained U.S. marketing rights for its products currently
under development.
The Company entered into a collaboration with IDEC in March 1995, to develop
IDEC's anti-CD20 monoclonal antibody, IDEC-C2B8, for the treatment of non-
Hodgkin's B-cell lymphomas. In the first quarter of 1997, IDEC filed for
regulatory approval of that product. In February 1996, the Company expanded
its collaboration with IDEC to include two radioconjugates, IDEC-Y2B8 and
IDEC-In2B8, for the treatment of more severe forms of B-cell lymphomas. Under
the terms of the collaboration agreement, the Company and IDEC have agreed to
copromote IDEC-C2B8 in the U.S. and Canada, with IDEC receiving a share of the
profits. The Company has commercialization rights throughout the rest of the
world except Japan. In conjunction with the Agreement with Roche, the Company
has granted an option to HLR to use and sell IDEC-C2B8 in all countries,
except the U.S., in which the Company has rights under its agreement with
IDEC. HLR exercised that option. IDEC will receive royalties on sales
outside the U.S. In connection with the collaboration, the Company provided
$9.0 million in preferred equity investments and licensing fees, provided
additional equity funding of $12.5 million in 1996 and $2.5 million in 1995,
and will provide up to $29.0 million in milestone and option payments of which
$4.0 million was paid in 1996. The Company's equity investment in IDEC at
December 31, 1996 had a carrying value of $45.6 million.
The Company has a collaboration with Scios Inc. (Scios) for the development of
Scios's Auriculin for the treatment of acute renal failure in the U.S. and
Canada. The results of the Phase III trial announced in May 1995, were
equivocal in all primary endpoints with the exception of a prospectively
defined endpoint relating to oliguric (low urine output) patients. Scios is
pursuing another Phase III trial for acute renal failure in relation to this
sub-population of oliguric patients. Under terms of the collaboration, the
companies have agreed to copromote Auriculin in the U.S. and Canada, sharing
profits from its commercialization. The Company received exclusive rights to
all markets outside the U.S. and Canada subject to a royalty obligation to
Scios. In connection with the collaboration, the Company purchased Scios non-
voting preferred stock for $20 million, which is convertible into shares of
Scios common stock. A portion of this preferred stock was subsequently sold.
The Company's equity holding in Scios at December 31, 1996, had a carrying
value of $7.8 million. The Company established a line of credit for $30
million that Scios may draw down at Scios's discretion through December 31,
1997 directly from the bank with immediate repayment of the funds due to the
bank by the Company. Amounts drawn by Scios under the bank letter of credit
or directly from the Company are repayable in the form of cash or Scios common
stock (at the market price prevailing on the date of repayment) at Scios's
option any time through December 30, 2002. Interest on amounts borrowed by
Scios accrue to the Company at the prime rate of interest. At December 31,
1996 and 1995, no amounts were drawn. In addition, the Company agreed to pay
$50 million in benchmark payments, conditional on achieving certain
predetermined commercialization goals.
Distribution
The Company has a U.S.-based pharmaceutical marketing, sales and distribution
organization for its human pharmaceuticals. The Company's sales efforts are
focused on specialist physicians based at major medical centers in the United
States. In general, products are sold to distributors or directly to hospital
pharmacies or medical centers. The Company utilizes common pharmaceutical
company marketing techniques, including advertisements, direct mail, and other
methods.
The Company's products are available at no charge to qualified patients under
the Company's uninsured patient programs in the United States. The Company
has established the Genentech Endowment for Cystic Fibrosis so qualified CF
patients in the U.S. who need Pulmozyme can gain assistance in obtaining it,
and the Genentech Endowment for Growth Disorders, so qualified growth hormone
disorder patients in the U.S. who need Nutropin/Protropin can gain assistance
in obtaining it.
During 1996, the Company provided certain marketing programs relating to
Activase. A comprehensive wastage replacement program exists for Activase
which, subject to specific conditions, provides customers the right to return
Activase to the Company for replacement related to both patient related
product wastage and product expiry. The Company maintains the right to renew,
modify or discontinue the above programs.
As discussed in the "Notes to Consolidated Financial Statements" in the
Company's 1996 Annual Report to Stockholders (Part II, Item 8 of the Form
10-K), the Company has three customers, including HLR, who provided over 10%
of total revenues. Also discussed in the note are revenues from foreign
customers in 1996, 1995 and 1994.
Raw Materials
Raw materials and supplies required for the production of the Company's
principal products are generally available in quantities adequate to meet the
Company's needs.
Proprietary Technology - Patents and Trade Secrets
The Company has a policy of seeking patents on inventions arising from its
ongoing R&D activities. Patents issued or applied for cover inventions
ranging from basic recombinant DNA techniques to processes relating to
specific products and to the products themselves. The Company has either been
granted patents or has patent applications pending which relate to a number of
current and potential products including products licensed to others. The
Company considers that in the aggregate its patent applications, patents and
licenses under patents owned by third-parties are of material importance to
its operations. Important legal issues remain to be resolved as to the extent
and scope of available patent protection for biotechnology products and
processes in the U.S. and other important markets outside of the United
States. The Company expects that litigation will likely be necessary to
determine the validity and scope of certain of its proprietary rights. The
Company is currently involved in a number of patent lawsuits, as either a
plaintiff or defendant, and administrative proceedings relating to the scope
of protection of its patents and those of others. These lawsuits and
proceedings may result in a significant commitment of Company resources in the
future. There can be no assurance that the patents the Company obtains or the
unpatented proprietary technology it holds will afford the Company significant
commercial protection.
In general, the Company has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use or sale of its
products. These licenses (both exclusive and non-exclusive) generally require
the Company to pay royalties to the parties on product sales.
The Company's trademarks, ACTIVASE, PROTROPIN, NUTROPIN, NUTROPIN AQ,
PULMOZYME and ACTIMMUNE in the aggregate are considered to be of material
importance and are registered, except Nutropin AQ, in the United States Patent
and Trademark Office and in other countries throughout the world.
Royalty income recognized by the Company during 1996, 1995 and 1994 for patent
licenses, know-how and other related rights amounted to $214.7 million, $190.8
million and $126.0 million, respectively. In 1996, 1995 and 1994 the Company
incurred royalty expenses amounting to $58.9 million, $54.8 million and $50.5
million, respectively, under licenses from others.
Competition
The Company faces competition, and believes significant long-term competition
can be expected, from large pharmaceutical and chemical companies as well as
biotechnology companies. This competition can be expected to become more
intense as commercial applications for biotechnology products increase. Some
competitors, primarily large pharmaceutical companies, have greater clinical,
regulatory and marketing resources and experience than the Company. Many of
these companies have commercial arrangements with other companies in the
biotechnology industry to supplement their own research capabilities.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in price
reductions or product replacements, even for products protected by patents.
However, the Company believes its competitive position is enhanced by its
commitment to research leading to the discovery and development of new
products and manufacturing methods. Other factors which should help the
Company meet competition include ancillary services provided to support its
products, customer service, and dissemination of technical information to
prescribers of its products and to the health care community including payers.
Over the longer term, the Company's (and its partners') ability to
successfully market current products, expand their usage and bring new
products to the marketplace will depend on many factors, including the
effectiveness and safety of the products, FDA and foreign regulatory
agencies' approvals for new indications, the degree of patent protection
afforded to particular products, and the effect of the advent of managed care
as an important purchaser of pharmaceutical products.
Activase: Activase's market share in 1996 increased to approximately 80% in
the U.S. for the treatment of AMI. However, the overall size of the
thrombolytic market at year end 1996 declined from 1995 by approximately 6%.
The decline in the market size was the result of the increasing use of
angioplasty rather than thrombolytic therapy, as well as from patients
receiving therapy through ongoing clinical trials. In April 1995, the FDA
approved for marketing an accelerated dosage of Activase. In June 1996, the
Company received clearance from the FDA to market Activase for the treatment
of acute ischemic stroke or brain attack. Activase is the first therapy to be
indicated for the management of stroke. In addition, the Company is conducting
Phase II clinical trials on a second generation of t-PA.
Genentech is aware of other companies actively pursuing the development for
the U.S. market of nonrecombinant or recombinant t-PA or derivatives of that
substance, and additional companies or combinations of companies pursuing the
development of other types of potentially competitive thrombolytic agents. In
October 1996, Boehringer Mannheim (BM) announced that the FDA licensed its
heart attack drug, reteplase (brand name Retevase, registered trademark). The
Company believes reteplase infringes on its patents and has filed a patent
infringement action against BM.
Protropin and Nutropin: Lilly received FDA approval in 1987 to market
its growth hormone product for treatment of growth hormone inadequacy in
children. Three other companies - BioTechnology General (BTG), Novo
Nordisk A/S (Novo) and Pharmacia & Upjohn - received FDA approval in 1995 to
market their growth hormone products for the treatment of growth hormone
inadequacy in children, although BTG has been preliminarily enjoined
from selling its product. A fifth competitor, Serono Laboratories, Inc.,
received FDA approval in October 1996 to market its growth hormone product.
Novo introduced its product in the U.S. market in February 1997 after the
preliminary injunction against Novo was stayed. Pharmacia & Upjohn has
marketed their product in the U.S. market since late 1995. In December
1995, Genentech received clearance from the FDA to market Nutropin
AQ, the first and only liquid (aqueous) recombinant human growth hormone
product available.
Based on information currently available, Protropin and Nutropin have
approximately a 66% share of the U.S. market for treatment of children with
growth hormone inadequacy.
Pulmozyme: Sales of Pulmozyme for the management of CF in the U.S., Canada
and some countries in Europe began in early 1994. In December 1996, Pulmozyme
was cleared for marketing by the FDA for the management of CF patients with
advanced disease; a condition that affects approximately 500 patients in the
U.S. In accordance with the Agreement with Roche, in the fourth quarter of
1995, HLR obtained exclusive rights to sell Pulmozyme outside of the U.S., and
the Company receives a royalty on such sales.
Actimmune: Actimmune received designation as an Orphan Drug by the FDA in
1990 for the treatment of CGD.
Forward-Looking Statements
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from any forward-looking statements made by or on behalf of
the Company, this section also includes a discussion of important factors that
could affect the Company's actual future results, including its product sales,
royalties, contract revenues, expenses and net income.
Total Product Sales: Product sales will be dependent on the overall
competitive environment. Other factors affecting the Company's total product
sales include, but are not limited to, the amount and timing of the Company's
sales to HLR, the amount of sales to customers in the U.S., increased
competition in the growth hormone and thrombolytic markets, the timing and
amount of bulk shipments to licensees, and the possibility of the introduction
of a new product in late 1997.
Activase Sales: The Company faces new competition in the thrombolytic market.
The Company is aware that one company received FDA approval in October 1996,
to market its product for the treatment of AMI in the U.S. The Company has
brought suit against that company for patent infringement. In addition, there
is an increasing use of angioplasty in the treatment of AMI patients in lieu
of the use of thrombolytic therapy. 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 additional competitive
products, pricing decisions made by the Company, the outcome of litigation
against Boehringer Mannheim GmbH and Boehringer Mannheim Corporation involving
the Company's patents for tissue plasminogen activator and processes related
to its production and formulation, the outcome of the GUSTO III clinical trial
which involved a head-to-head comparison of Activase and Retevase and which
failed to demonstrate that Retavase has a statistically significant lower
mortality rate than Activase, the increasing use of other therapies such as
angioplasty techniques for the treatment of AMI, and the impact of the FDA's
recent clearance for the Company to market Activase for the treatment of acute
ischemic stroke.
Growth Hormone Sales: The Company continues to face the possibility of
increased competition in the growth hormone market. Three companies received
FDA approval in 1995, and a fourth company received FDA approval in October
1996, to market their growth hormone products for treatment of growth hormone
inadequacy in children, although one of those companies has been preliminarily
enjoined from selling its product. Two of the Company's competitors have
received approval to market their existing human growth hormone products for
additional indications. The Company expects such competition to have an
adverse effect on its sales of Protropin, Nutropin and Nutropin AQ which,
depending on the extent and type of 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 other new competitive
products, the outcome of litigation involving the Company's patents for human
growth hormone and related processes, pricing decisions made by the Company,
the availability of third-party reimbursement for the cost of growth hormone
therapy, and the impact of Nutropin as a treatment for short stature
associated with Turner syndrome.
Pulmozyme Sales: Factors that may influence the future sales of Pulmozyme
include, but are not limited to, 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 CF, whether and when
additional indications are approved, and the cost of therapy.
Royalty and Contract Revenues: Royalty and contract revenues in future
periods could vary significantly from 1996 levels. Major factors affecting
these revenues include, but are not limited to: HLR's decisions to exercise
or not to exercise its option to develop and sell the Company's future
products in non-U.S. markets and the timing and amount of related development
cost reimbursement, if any; variations in HLR's sales of Genentech products,
and other licensees' sales of licensed products; the expiration of royalties
from Lilly in 1998; fluctuations in foreign currency exchange rates; the
timing of non-U.S. approvals, if any, for products licensed to HLR; whether
and when contract benchmarks are achieved; the initiation of other new
contractual arrangements; and the conclusion of existing arrangements with
other companies and HLR.
R&D Expenses: The Company intends to continue its commitment to aggressive
investment in R&D. As it continues late-stage clinical testing of products,
the Company anticipates that its R&D expenses will continue at a high
percentage of revenues over the short-term. Over the long-term, however, R&D
as a percent of revenues should decrease, although in dollar terms R&D
spending is generally 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 late-stage research; future levels of the Company's
product sales (including the impact of competition), royalty and contract
revenues; the possibility of competition with respect to products or
technologies under development; and decisions by HLR to exercise or not to
exercise its option to develop and sell potential products of the Company in
non-U.S. markets and the timing of such decisions.
Income Tax Provision: The Company expects that its effective tax rate will
increase from the current rate of 20% to between 25% and 35% in 1997 and for
the next several years, dependent upon several factors. These factors
include, but are not limited to, changes in tax laws and rates, future levels
of R&D spending, the outcome of clinical trials of certain development
products, the Company's success in commercializing such products, and
potential competition regarding the products.
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 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 to submit an application for marketing approval for 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 companies' patents cannot be predicted. Patent disputes are
frequent and can preclude commercialization of products. The Company, as in
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. The presence of patents or other proprietary rights
belonging to other parties may lead to the termination of R&D of a particular
product. The Company believes it has strong patent protection or the potential
for strong patent protection for a number of its products that generate sales
and royalty revenue or that the Company is developing; however, the courts
will determine the ultimate strength of patent protection of the Company's
products and those on which the Company earns royalties.
Liquidity: The Company believes that its cash, cash equivalents, and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. In addition, the Company believes it could access additional
funds from the capital markets. Factors affecting the Company's cash position
include, but are not limited to, future levels of the Company's product sales,
royalty and contract revenues, expenses and capital expenditures.
Market Potential/Risk: Over the longer term, the Company's (and its
partners') ability to successfully market current products, expand their
usage, and bring new products to the marketplace will depend on many factors,
including, but not limited to, the effectiveness and safety of the products,
FDA and foreign regulatory agencies' approvals for new products and new
indications, and the degree of patent protection afforded to particular
products.
Roche Holdings, Inc.: The Company expects to continue to have material
transactions with Roche, including royalty and contract development revenues,
product sales and joint product development.
Foreign Exchange: The Company receives royalty revenues from countries
throughout the world. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in the foreign markets in which the
Company's products are sold. The Company is exposed to changes in exchange
rates in Europe, Asia and Canada. When the U.S. dollar strengthens against
the currencies in these countries, the U.S. dollar value of non-U.S. dollar-
based revenue decreases; when the U.S. dollar weakens, the U.S. dollar value
of the non-U.S. dollar-based revenues increases. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S. dollar, may
adversely affect the Company's royalty revenues as expressed in U.S. dollars.
To mitigate this risk, the Company hedges certain of these anticipated
revenues by purchasing options with expiration dates and amounts of currency
that are based on a portion of probable revenues so that the adverse impact of
movements in currency exchange rates on the non-dollar denominated revenues
will be at least partly offset by an associated increase in the value of the
option. The Company also enters into forward contracts to lock in the dollar
value of a portion of these anticipated revenues.
Interest Rates: The Company's interest income is sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents,
short-term investments and long-term investments. To mitigate the impact of
fluctuations in U.S. interest rates, the Company enters into interest rate
swap transactions which generally involve the receipt of fixed rate interest
and the payment of floating rate interest without the exchange of the
underlying principal. These agreements have the effect of locking in rates
for longer periods of time than the duration of short-term investments.
Equity Securities: As part of its strategic alliance efforts, the Company
invests in equity instruments that are subject to fluctuations from market
value changes in stock prices. To mitigate this risk, certain equity
securities are hedged with costless collars. A costless collar is a purchased
put option and a written call option in which the cost of the purchased put
and the proceeds of the written call offset each other; therefore, there is no
initial cost or cash outflow for these instruments at the time of purchase.
The purchased put protects the Company from a decline in the market value of
the security below a certain minimum level (the put "strike" level); while the
call effectively limits the Company's potential to benefit from an increase in
the market value of the security above a certain maximum level (the call
"strike" level).
Credit Risk of Counterparties: The Company could be exposed to losses related
to the above financial instruments should one of its counterparties default.
This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings
including patent infringement cases and various cases involving product
liability and other matters. See Item 3 "Legal Proceedings" below for further
information.
Government Regulation
The pharmaceutical industry is subject to stringent regulation with respect to
product safety and efficacy by various federal, state and local authorities.
Of particular significance are the FDA's requirements covering research and
development, testing, manufacturing, quality control, labeling and promotion
of drugs for human use. A pharmaceutical product cannot be marketed in the
U.S. until it has been approved by the FDA, and then can only be marketed for
the indications and claims approved by the FDA. As a result of these
requirements, the length of time, the level of expenditures and the laboratory
and clinical information required for approval of an NDA (New Drug
Application), a PLA (Product License Application), a BLA (Biologics License
Application) or an ELA (Establishment License Application) are substantial and
can require a number of years, although recently revised regulations are
designed to reduce somewhat the time for approval of new products.
Although it is difficult to predict the ultimate effect, if any, these matters
or any other pending or future legislation, regulations or government actions
may have on its business, the Company believes that the development of new and
improved products which address unmet medical needs should enable it to
compete effectively within this environment.
Research and Development
A major portion of the Company's operating expenses to date have been related
to the R&D of products either on its own behalf or under contracts. During
1996, 1995 and 1994 the Company's research and development expenses were
$471.1 million, $363.0 million and $314.3 million, respectively. The Company
has sponsored approximately 92%, 95% and 98% of its research and development
for the years 1996, 1995 and 1994, respectively.
The Company's research efforts have been the primary source of the Company's
products. The Company intends to maintain its strong commitment to research
as an essential component of its product development effort. In the future,
licensed technology developed by outside parties could become an additional
source of potential products.
Human Resources
As of December 31, 1996, the Company had 3,071 employees in the United States.
Environment
The Company seeks to comply with all applicable statutory and administrative
requirements concerning environmental quality. The Company has made, and will
continue to make, the necessary expenditures for environmental compliance and
protection. Expenditures for compliance with environmental laws have not had
and are not expected to have a material effect on the Company's capital
expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The Company's major facilities are located in a research and industrial park
in South San Francisco, California in both leased and owned properties. The
Company currently occupies twenty-two buildings for its R&D, manufacturing,
marketing and administrative activities. Fourteen of the buildings are owned
property and eight are leased. The Company has made and continues to make
improvements to these properties to accommodate its growth. In addition, the
Company owns approximately 17 acres adjacent to its current facilities that
may be used for future expansion. In 1995, the Company began development of a
new manufacturing facility of approximately 0.4 million square feet in
Vacaville, California under an operating lease arrangement. Completion of the
project is expected in 1998. The Company also has leases for certain
additional office facilities in several locations in the United States.
The Company believes its facilities are in good operating condition and that
the real property owned or leased, combined with the new Vacaville site, are
adequate for all present and foreseeable future uses. The Company believes
any additional facilities could be obtained or constructed with the Company's
capital resources.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase;
product liability cases; and employment related cases.
In late 1995, the Company received and responded to grand jury document
subpoenas from the United States District Court for the Northern District of
California for documents relating to the Company's clinical, sales, and
marketing activities associated with human growth hormone. In February 1997,
the Company received another grand jury document subpoena from the same court
relating to that subject matter.
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 and certain
of its affiliates and BTG and its affiliate, respectively, which prohibit 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
overturned the preliminary injunction against Novo, and in April 1996, the
Court of Appeals affirmed the preliminary injunction against BTG. BTG's
subsequent petition to the U.S. Supreme Court for review of that decision was
denied. In June 1996, the U.S. District Court for the Southern District of
New York issued a second preliminary injunction against Novo to prohibit it,
pending the Court's final determination of the action, from importing, making,
using, and selling its human growth hormone product in the U.S. Novo appealed
that decision, and in December 1996, the Court of Appeals for the Federal
Circuit stayed the second preliminary injunction against Novo pending further
proceedings. In March 1997, the Court of Appeals invalidated the patent that
was the subject of the preliminary injunction. Future court decisions will
determine whether Novo's and BTG's products will be permanently enjoined from
the U.S. market.
On August 19, 1994 and August 30, 1994, two class action suits were filed in
the U.S. District Court for the District of Minnesota against the Company, one
of its executives, Caremark International, Inc. (Caremark), certain of its
executives and Dr. David R. Brown alleging, in general, causes of action under
the Racketeer Influenced and Corrupt Organizations Act and various state
statutory and common law theories. In addition, the suits alleged that the
defendants made improper payments to Dr. Brown in connection with Dr. Brown's
prescription of Protropin for the plaintiffs rather than a competing product,
and that the plaintiffs were injured by purchasing Protropin at costs
approximately 30% higher than a competing product. These suits were
voluntarily dismissed without prejudice in November 1996. A suit was filed in
the District Court of Hennepin County, Minnesota in July 1996, against the
Company, Dr. Brown and Caremark, alleging the defendants paid kickbacks to Dr.
Brown with an agreement that Dr. Brown would prescribe Protropin to his
patients rather than a competing product. The plaintiffs seek disgorgement of
profits and allege causes of action under various state statutory and common
law theories, including fraud and breach of fiduciary duty. A similar suit
was filed in the U.S. District Court for the District of South Dakota,
Southern Division, on July 13, 1995 against the Company, Caremark and Dr.
Brown, alleging the same causes of action as above, as well as intentional
infliction of emotional distress but not state and common law claims.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
<TABLE>
<CAPTION>
GENENTECH, INC.
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and positions
with the Company are as follows:
<S> <C> <C>
Name Age Position
Arthur D. Levinson, Ph.D. 46 President and Chief Executive Officer
William D. Young 52 Chief Operating Officer
Louis J. Lavigne, Jr. 48 Executive Vice President and Chief Financial
Officer
John P. McLaughlin 45 Executive Vice President and Secretary
Judy Heyboer 47 Senior Vice President, Human Resources
David C. Roche 47 Senior Vice President, Sales and
Marketing
Robert Arathoon, Ph.D. 44 Vice President - Process Sciences
Gregory Baird 46 Vice President - Corporate Communications
Joffre Baker, Ph.D. 49 Vice President - Research Discovery
David W. Beier 48 Vice President - Government Affairs
Robert Garnick, Ph.D. 47 Vice President - Quality
Marty Glick 47 Vice President - Finance - Tax and
Treasury
Bradford S. Goodwin 42 Vice President - Finance and Controller
Susan D. Hellmann, M.D., M.P.H. 39 Vice President - Medical Affairs and
Chief Medical Officer
Dennis J. Henner, Ph.D. 45 Vice President - Research
Paul F. Hohenschuh 53 Vice President - Manufacturing
Paula Jardieu, Ph.D. 46 Vice President - Pharmacological Sciences
Edmon R. Jennings 49 Vice President - Corporate Development
Stephen G. Juelsgaard 48 Vice President, General Counsel and
Assistant Secretary
Cynthia J. Ladd 41 Vice President - Corporate Law
Ted W. Love, M.D. 37 Vice President - Product Development
M. David MacFarlane, Ph.D. 56 Vice President - Regulatory Affairs
Polly Moore, Ph.D. 49 Vice President - Information Resources
James P. Panek 43 Vice President - Engineering and
Facilities
Kim Popovits 38 Vice President - Sales
Nicholas J. Simon 42 Vice President - Business and Corporate
Development
Daniel K. Spiegelman 38 Treasurer
David Stump, M.D. 47 Vice President - Clinical Research and
Genentech Fellow
</TABLE>
All officers are elected annually by the Board of Directors. There is no
family relationship among any of the officers or directors.
Business Experience
Dr. Levinson was appointed President and Chief Executive Officer in July 1995.
He was elected Senior Vice President in December 1992. Dr. Levinson has held
a number of other positions, including Vice President of Research, subsequent
to joining the Company in May 1980 as a Senior Scientist.
Mr. Young was appointed Chief Operating Officer in March 1997. He served as
Executive Vice President from January 1996 to March 1997, as Senior Vice
President of the Company from September 1988 to January 1996 and as Vice
President of Manufacturing and Process Sciences from April 1983 until
September 1988. Mr. Young joined the Company in September 1980 as Director of
Manufacturing from Eli Lilly and Company.
Mr. Lavigne was appointed Executive Vice President in March 1997. He served
as Senior Vice President from July 1994 to March 1997. He was appointed Chief
Financial Officer in August 1988 and had been Vice President since July 1986.
Mr. Lavigne joined the Company in July 1982 from Pennwalt Corporation and
became Controller in May 1983 and an officer of the Company in February 1984.
Mr. McLaughlin was appointed Executive Vice President in December 1995. Since
July 1994, he had served as Senior Vice President and Secretary. Mr.
McLaughlin was appointed Senior Vice President, General Counsel and Secretary
in June 1993 and served as Vice President, General Counsel and Secretary since
February 1989. He joined the Company as Vice President of Government Affairs
in September 1987 from Royer, Shacknai & Mehle, a Washington, D.C. law firm,
where he was a partner. Mr. McLaughlin was Counsel to the House Energy and
Commerce Subcommittee on Health and the Environment and earlier served as
Counsel to the House Subcommittee on Consumer Protection and Finance.
Ms. Heyboer joined the Company as Senior Vice President of Human Resources in
August 1996. Prior to joining Genentech, she was employed at Acuson
Corporation from 1983 to 1996, most recently as a Senior Vice President,
Employee Relations.
Mr. Roche joined Genentech in July 1996 as Senior Vice President of Sales and
Marketing. Prior to joining the Company, Mr. Roche was Vice President of
Sales and Marketing at Janssen Pharmaceutica USA since 1994, and before that
was President of the Prescription Products Division at Marion Merrell Dow USA.
Dr. Arathoon was appointed Vice President of Process Sciences in April 1996.
Since joining the Company in 1983 from Wellcome Foundation, Dr. Arathoon has
held a series of positions of increasing responsibility, most recently Senior
Director of Process Sciences from November 1994 to April 1996.
Mr. Baird joined the Company in February 1992 as Vice President of Corporate
Communications. Prior to joining Genentech, Mr. Baird was employed by G.D.
Searle & Co. for five years as Vice President of Corporate Communications
(Searle is a wholly-owned subsidiary of Monsanto Company).
Dr. Baker was appointed Vice President, Research Discovery in February 1997.
He had served as Senior Director, Research Discovery since March 1993 and
prior to that as Director, Cardiovascular Research from 1990 to 1993. Prior
to joining the Company in 1988 as a Senior Scientist, Dr. Baker was an
associate professor at the University of Kansas.
Mr. Beier joined the Company in March 1989 as Vice President of Government
Affairs. Prior to joining Genentech, Mr. Beier spent 10 years as Counsel to
the Committee on the Judiciary of the United States House of Representatives
where he was responsible for intellectual property and international trade
issues.
Dr. Garnick was elected Vice President of Quality in April 1994. He was
Senior Director of Quality Control from 1990 to 1994 and Director of Quality
Control from 1988 to 1990. Dr. Garnick joined the Company in August 1984 from
Armour Pharmaceutical.
Mr. Glick was appointed Vice President of Finance - Tax and Treasury in
December 1996. He has been a Vice President of the Company since July 1991
and was Treasurer from July 1990 to December 1996. He joined the Company in
June 1987 as Director of Tax. Before joining Genentech, Mr. Glick was
employed by Levi Strauss & Co. for seven years, most recently as Director of
Tax Planning.
Mr. Goodwin was appointed Vice President of Finance in December 1996. He has
been a Vice President of the Company since July 1993 and has served as
Controller since June 1989. Previously he was the Director of Financial
Planning and Analysis, the Assistant Controller and the General Auditor. He
joined Genentech in April 1987.
Dr. Hellmann was appointed Vice President of Medical Affairs in March 1996 and
Chief Medical Officer in December 1996. Prior to joining the Company as
Clinical Scientist in 1995, Dr. Hellmann was Associate Director of Clinical
Cancer Research at Bristol-Myers Squibb Pharmaceutical Research Institute from
1993 to 1995, and from 1992 to 1993 was a medical oncologist with Lexington
Oncology Associates.
Dr. Henner was promoted to Vice President of Research in April 1996. He had
served as Vice President of Research Technology since July 1994, and as Senior
Director of Research Technology from 1990 to 1994. Dr. Henner joined the
Company in 1981 as a Scientist in Research. Prior to joining Genentech, Dr.
Henner was at Scripps Clinic and Research Foundation.
Mr. Hohenschuh was elected Vice President of Manufacturing in September 1989.
He was Vice President of Biochemical Manufacturing from July 1986 until
September 1989 and Senior Director of Biochemical Manufacturing from June 1985
to June 1986. Mr. Hohenschuh joined the Company in October 1982 as Director
of Biochemical Manufacturing.
Dr. Jardieu was appointed Vice President, Pharmacological Sciences in February
1997. She joined the Company in 1986 as a Scientist and subsequently held the
positions of Senior Scientist, Staff Scientist and Senior Director of
Pharmacological Sciences. Prior to joining the Company, Dr. Jardieu was at
John Hopkins University School of Medicine where she held a faculty position.
Mr. Jennings was appointed Vice President of Corporate Development in December
1995. He served as Vice President of Sales and Marketing from January 1994 to
December 1995, and had served as Vice President of Sales since January 1991.
He joined the Company in September 1985 as Western Area Sales Manager. Prior
to joining Genentech, Mr. Jennings was Western Region Sales Manager of
Bristol-Myers' Oncology Division. Mr. Jennings held various sales and
management positions during his twelve-year career with Bristol-Myers.
Mr. Juelsgaard was appointed Vice President, General Counsel and Assistant
Secretary in July 1994. He was appointed Vice President of Corporate Law in
February 1993. He joined the Company in 1985 as Corporate Counsel and
subsequently held the positions of Senior Corporate Counsel and Chief
Corporate Counsel.
Ms. Ladd was appointed Vice President of Corporate Law in February 1996. She
joined the Company in 1989 as Corporate Counsel and subsequently held the
positions of Senior Corporate Counsel and Chief Corporate Counsel.
Dr. Love was appointed Vice President of Product Development in March 1996.
He was Senior Director of Product Development since 1995, and Clinical
Scientist from 1993 to 1995. Prior to joining the Company in 1992 as a
Research Physician, Dr. Love was a member of the Cardiology Division at
Massachusetts General Hospital, Harvard Medical School.
Dr. MacFarlane joined the Company in August 1989 as Vice President of
Regulatory Affairs. Dr. MacFarlane was employed by Glaxo, Inc. from 1978
until he joined Genentech. At Glaxo, Dr. MacFarlane had served as Vice
President of Regulatory Affairs, Director of Regulatory Affairs, and Director
of Research and Professional Services.
Dr. Moore was appointed Vice President of Information Resources in April 1994.
She was Senior Director of Information Resources from July 1992 to April 1994
and Director of Computer Resources from November 1987 to June 1992. Dr. Moore
joined Genentech in August 1982 as a Senior Systems Analyst in Scientific
Computing.
Mr. Panek was appointed Vice President of Engineering and Facilities in July
1993. He joined the Company in 1982 and held a number of positions in the
manufacturing division before becoming Director of Engineering and Facilities
in 1988 and Senior Director of Engineering and Facilities in July 1991. Prior
to joining Genentech, Mr. Panek was employed by Eli Lilly and Company for six
years.
Ms. Popovits was elected Vice President of Sales in October 1994. She was
Director of Field Sales from January 1993 to 1994 and Regional Manager of the
Northeast Region from October 1989 to January 1993. Ms. Popovits was at
American Critical Care, a division of American Hospital Supply Corporation,
for six years prior to joining the Company in November 1987 as Division
Manager in the Southeast region.
Mr. Simon was appointed Vice President of Business and Corporate Development
in December 1995. He has been Vice President of Business Development since
December 1994. He was Senior Director of Business Development from December
1993 to 1994. Mr. Simon joined Genentech as a Director in Business
Development in December 1989 from Xoma Corporation.
Mr. Spiegelman was appointed Treasurer in December 1996. He joined the
Company in July 1991 as Treasury Manager and subsequently held the position of
Assistant Treasurer from July 1992 to December 1996.
Dr. Stump was named a Genentech Fellow in January 1996 in addition to his
responsibilities as Vice President of Clinical Research, a position he has
held since July 1995. He was Senior Director of Clinical Research from 1991
to 1995, and joined the Company as Director of Clinical Research in 1989.
Prior to joining Genentech, Dr. Stump was an Associate Professor of Medicine
and Biochemistry at the University of Vermont.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
The section labeled "11-Year Financial Summary" appearing on pages 76 and 77
of the Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The section labeled "Financial Review" appearing on pages 41 through 49 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements appearing on pages 51 through 74, the Report of Ernst & Young LLP,
Independent Auditors, appearing on page 75 and the section entitled "Quarterly
Financial Data (unaudited)" appearing on page 75 of the Company's 1996 Annual
Report to Stockholders are incorporated herein by reference.
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
(a) The sections labeled "Nominees" and "Section 16 (a) Beneficial Ownership
Reporting Compliance" appearing on pages 4 through 7 and 12 of the Company's
Proxy Statement in connection with the 1997 Annual Meeting of Stockholders are
incorporated herein by reference.
(b) Information concerning the Company's Executive Officers is set forth in
Part I of the Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The sections labeled "Executive Compensation", "Compensation of Directors",
"Compensation of Executive Officers", "Summary of Compensation", "Stock Option
Grants and Exercises", "Loans and Other Compensation" and "Compensation
Committee Interlocks and Insider Participation" appearing on pages 12 through
17 and 20 of the Company's Proxy Statement in connection with the 1997 Annual
Meeting of Stockholders are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections labeled "Merger with Roche Holdings, Inc.", "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management" appearing
on pages 1 through 3 and 11 through 12 of the Company's Proxy Statement in
connection with the 1997 Annual Meeting of Stockholders are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Relationships and Related Transactions" appearing
on pages 20 through 22 of the Company's Proxy Statement in connection with the
1997 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Index to Financial Statements
The following Financial Statements and supplementary data are included in
the Company's 1996 Annual Report to Stockholders and are incorporated herein
by reference pursuant to Item 8 of this Form 10-K.
Page(s) in
1996 Annual
Report to Stockholders
----------------------
Consolidated Statements of Income for each
of the three years in the period ended
December 31, 1996 [51]
Consolidated Statements of Cash Flows for each
of the three years in the period ended
December 31, 1996 [52]
Consolidated Balance Sheets at December 31,
1996 and 1995 [53]
Consolidated Statements of Stockholders' Equity
for each of the three years in the period ended
December 31, 1996 [54]
Notes to Consolidated Financial Statements [55-74]
Report of Ernst & Young LLP, Independent Auditors [75]
Quarterly Financial Data (unaudited) [75]
2. Financial Statement Schedule
The following schedule is filed as part of this Form 10-K:
Schedule II- Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1996.
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation.(1)
3.2 Amended Certificate of Incorporation.(5)
3.3 Restated By-Laws.(3)
4.1 Indenture, dated March 27, 1987 ("Indenture") for U.S. $150,000,000
5% Convertible Subordinated Debentures due 2002.(2)
4.2 First Supplemental to Indenture, dated August 17, 1990.(3)
4.3 Second Supplemental to Indenture, dated October 18, 1995. (7)
10.1 Patent License Agreement with Columbia University dated October 12,
1988.(2)
10.2 Amended and Restated Contract for the Sale and Distribution of
Protropin dated as of March 1, 1991.(4)
10.3 Agreement and Plan of Merger, dated as of May 23, 1995, as amended
and restated, among the Company, Roche Holdings, Inc. and HLR
(U.S.) II, Inc. with exhibits.(5)
10.4 Amended Governance Agreement, dated September 7, 1990, between the
Company and Roche Holdings, Inc.(5)
10.5 Heads of Agreement, dated as of February 11, 1992, between the
Company and F. Hoffmann-LaRoche Ltd.(4)
10.6 Agreement dated June 6, 1991 between the Company and Grandview
Drive Joint Venture.(4)
10.7 Agreement dated March 17, 1992 between the Company and Robert A.
Swanson.(4)
10.8 Agreement between Genentech and F. Hoffman-La Roche Ltd
regarding commercialization of Genentech's products outside the
United States dated as of October 25, 1995.(5)
10.9 Guaranty Agreement between Genentech and Roche Holding, Ltd dated
as of October 25, 1995.(5)
10.10 Amended and Restated Lease Agreement, dated December 8, 1995,
between the Company and BNP Leasing Corporation.(7)
10.11 Amended and Restated Purchase Agreement, dated December 8, 1995,
between the Company and BNP Leasing Corporation.(7)
10.12 Guiding Principles for the Genentech/Roche Relationship.(8)
13.1 1996 Annual Report to Stockholders.(8)
23.1 Consent of Ernst & Young LLP, Independent Auditors.(8)
27.1 Financial Data Schedule.(8)
28.1 Description of the Company's capital stock.(1)
99.1* 1984 Incentive Stock Option Plan, as amended and restated as of
October 16, 1996.(8)
99.2* 1984 Non-Qualified Stock Option Plan, as amended and restated
as of October 16, 1996.(8)
99.3* Restated Relocation Loan Program.(4)
99.4* Restated 401(k) Plan.(7)
99.5* 1991 Employee Stock Plan, as amended and restated as of October
25, 1995.(6)
99.6* 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(8)
99.7* Supplemental Plan.(4)
99.8* 1994 Stock Option Plan, as amended and restated as of October 16,
1996.(8)
99.9* 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996.(8)
99.10* Deferred Compensation Plan.(8)
* As required by Item 14(a)(3) of Form 10-K, the Company identifies this
Exhibit as a management contract or compensatory plan or arrangement of the
Company.
- --------------------
(1) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.
(2) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1987 and incorporated herein by reference.
(3) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(4) Filed as an exhibit to Annual Report on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(5) Filed as an exhibit to Form S-4 dated October 25, 1995 (registration
statement no. 33-59949) and incorporated herein by reference.
(6) Filed as an exhibit to Form S-8 dated October 25, 1995 (registration
statement no. 33-59949-01) and incorporated herein by reference.
(7) Filed as an exhibit to Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(8) Filed with this document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended December 31,
1996.
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.
GENENTECH, INC.
Registrant
Date: March 26, 1997
By: /S/BRADFORD S. GOODWIN
----------------------------------
Bradford S. Goodwin
Vice President - Finance and
Controller
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Louis J. Lavigne, Jr., Executive Vice President
and Chief Financial Officer, and Bradford S. Goodwin, Vice President and
Controller, his attorney-in-fact, with the full power of substitution, for him
in any and all capacities, to sign any amendments to this report, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
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:
Signature Title Date
--------- ----- ----
Principal Executive Officer:
/S/ARTHUR D. LEVINSON President, Chief Executive March 26, 1997
- --------------------------- Officer and Director
Arthur D. Levinson
Principal Financial Officer:
/S/LOUIS J. LAVIGNE, JR. Executive Vice President March 26, 1997
- --------------------------- and Chief Financial Officer
Louis J. Lavigne, Jr.
Director:
/S/HERBERT W. BOYER Director March 26, 1997
- ---------------------------
Herbert W. Boyer
/S/JURGEN DREWS Director March 26, 1997
- ---------------------------
Jurgen Drews
/S/FRANZ B. HUMER Director March 26, 1997
- ---------------------------
Franz B. Humer
/S/LINDA F. LEVINSON Director March 26, 1997
- ---------------------------
Linda F. Levinson
/S/J. RICHARD MUNRO Director March 26, 1997
- ---------------------------
J. Richard Munro
/S/DONALD L. MURFIN Director March 26, 1997
- ---------------------------
Donald L. Murfin
/S/JOHN T. POTTS, JR. Director March 26, 1997
- ---------------------------
John T. Potts, Jr.
/S/C. THOMAS SMITH, JR. Director March 26, 1997
- ---------------------------
C. Thomas Smith, Jr.
/S/DAVID S. TAPPAN, JR. Director March 26, 1997
- ---------------------------
David S. Tappan, Jr.
<TABLE>
SCHEDULE II
GENENTECH, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995 and 1994
(in thousands)
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions(1) Period
---------- ---------- ---------- ----------
Allowance for doubtful accounts
and returns:
<S> <C> <C> <C> <C>
Year Ended December 31, 1996: $ 6,672 $ 9,887 $ (8,690) $ 7,869
========== ========== ========== ==========
Year Ended December 31, 1995: $ 4,422 $ 10,972 $ (8,722) $ 6,672
========== ========== ========== ==========
Year Ended December 31, 1994: $ 3,572 $ 5,583 $ (4,733) $ 4,422
========== ========== ========== ==========
Inventory reserves:
Year Ended December 31, 1996: $ 6,909 $ 4,950 $ (2,580) $ 9,279
========== ========== ========== ==========
Year Ended December 31, 1995: $ 13,008 $ 3,690 $ (9,789) $ 6,909
========== ========== ========== ==========
Year Ended December 31, 1994: $ 2,606 $ 11,940 $ (1,538) $ 13,008
========== ========== ========== ==========
Reserve for non-marketable
equity securities:
Year Ended December 31, 1996: $ 5,092 $ - $ (102) $ 4,990
========== ========== ========== ==========
Year Ended December 31, 1995: $ 4,623 $ 469 $ - $ 5,092
========== ========== ========== ==========
Year Ended December 31, 1994: $ 3,875 $ 748 $ - $ 4,623
========== ========== ========== ==========
<FN>
(1) Represents amounts written off or returned against the allowance or reserves.
</TABLE>
<TABLE>
INDEX OF EXHIBITS FILED WITH FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.12 Guiding Principles for the Genentech/Roche Relationship
13.1 1996 Annual Report to Stockholders
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
99.1 1984 Incentive Stock Option Plan, as amended and restated as of
October 16, 1996
99.2 1984 Non-Qualified Stock Option Plan, as amended and restated
as of October 16, 1996
99.6 1990 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996
99.8 1994 Stock Option Plan, as amended and restated as of October
16, 1996
99.9 1996 Stock Option/Stock Incentive Plan, as amended and restated
as of October 16, 1996
99.10 Deferred Compensation Plan
</TABLE>
1
Genentech, Inc.
460 Point San Bruno Blvd.
South San Francisco, CA 94080
USA
Basel, February 19, 1997
PRIVILEGED AND CONFIDENTIAL
Gentlemen,
In connection with the issuance of the attached "Guiding Principles"
by F. Hoffmann-La Roche Ltd ("Roche") and Genentech, Inc. ("Genentech"),
and in order to avoid any misunderstanding, we are writing to confirm
that Roche views the "Guiding Principles" as a statement of the
expectations of Roche and Genentech. Neither Roche nor Genentech
intends the "Guiding Principles" to be a binding agreement and neither
Roche nor Genentech, by agreeing to issue the "Guiding Principles",
makes any promises, express or implied, with respect to the matters
addressed therein. Nothing in the "Guiding Principles" will change or
alter any of the existing agreements between Genentech and Roche.
F.HOFFMANN-LA ROCHE LTD
\S\DR. FRANZ B. HUMER
------------------------
BY: Dr. Franz B. Humer
TITLE: Chief Operating Officer
AGREED AND ACCEPTED:
GENENTECH, INC.
\S\ARTHUR D. LEVINSON
-------------------------
BY: Arthur D. Levinson, Ph.D.
TITLE: President and CEO
GUIDING PRINCIPLES FOR THE
GENENTECH/ROCHE RELATIONSHIP
Corporate Governance
Genentech will continue to be governed by a Board of Directors as
provided in the current Governance Agreement.
The Genentech Board of Directors (or its designated committee) will
approve Genentech's budget, headcount, long range plan, capital
expenditures, compensation programs and key business decisions in
accordance with its fiduciary duties to its shareholders. The members
of the Board will determine the chairmanship of the Board and its
committees as well as the composition of its committees.
The Genentech CEO will report to the Board. All officers will continue
with their current reporting relationships unless changed by the
Genentech CEO or the Board. The Executive Committee, Product
Development Committee, Organization Development Committee and Research
Review Committee (or their successors as established by the Genentech
CEO or Board) will continue in their roles with respect to operations,
product development and research at Genentech unless changed by the
Genentech CEO or the Board.
Corporate Name
The name of Genentech will continue. It is widely recognized within the
scientific community and stands for excellence in innovation and there
is therefore no reason to expect the important value and positioning of
the name to change.
Employment Practices
Genentech will continue its current employment practices unless changed
by the Genentech CEO or the Board. Roche recognizes the value of
Genentech's culture and of maintaining Genentech as an integrated
entity. It is expected that Genentech will be an integrated, multi-
disciplinary company with all necessary functions. The Genentech CEO or
the Board retain the option to manage headcount as is in the best
interests of Genentech, taking into account the overall interest of
Genentech's shareholders.
Genentech will maintain an independent and entrepreneurial compensation
and benefits policy based on reward for success as approved by the
Genentech CEO or the Board. In the event that Genentech's stock is no
longer publicly traded, a replacement incentive program that maintains
the entrepreneurial approach of Genentech will be implemented.
Research
Research direction will be set by Genentech's head of research in
consultation with the Executive Committee and current practices such as
time allocated to independent research, rapid publication of results to
permit recognition in the scientific community, and use of post-docs
will continue. In addition, Research will seek to remain on the cutting
edge of related technologies through internal efforts and in-licensing
of technology, product rights, and collaborations with third parties.
The current level of Research funding will be maintained unless changed
by the Genentech Board of Directors or Genentech CEO. The level of
Research funding in the future could increase modestly for inflation and
in-licensing. Research collaborations between Genentech and Roche will
be evaluated on the basis of scientific merit and mutual benefit.
Genentech and Roche will continue to exchange scientific information and
knowledge to the benefit of both research groups.
Small Molecule Research
Genentech envisions that it will look for partners for most small
molecule projects and that Roche will be the preferred collaborator
assuming Roche has adequate resources and interest in such a
collaboration. Unless Roche owns 100% of Genentech, appropriate
business terms will be negotiated.
Development
Through Phase II, Genentech projects will be managed by Genentech's
Product Development Committee as overseen by the Executive Committee (or
their successors as established by the Genentech CEO or Board), and the
Genentech CEO. At the initiation of Phase I, Roche will review the data
and the proposed clinical plan. Approximately four months prior to
completion of the Phase II trials, or "proof of concept", Genentech will
supply information to Roche about the product, its proposed development
and its commercial potential. Upon successful completion of Phase II,
or earlier demonstration of "proof of concept", Roche will be provided
the results of the trial(s) and related commercial information. The
meeting of the Genentech and Roche joint development and commercial
committee will be scheduled and held. This meeting will be expected to
review and approve one global development and registration strategy and
plan to bring any new product to the market as quickly and as
effectively as possible. The development work will be carried out
utilizing available resources in both companies with development speed,
development cost, and commercial potential as main criteria for success.
If Roche decides not to develop and market a product, Genentech will be
free to develop the product with a partner or out-license it.
Manufacturing
It is anticipated that Genentech will manufacture its large molecules
and Genentech/Roche jointly developed large molecules and that Roche
will make Genentech/Roche jointly developed small molecules. All other
manufacturing and process technology arrangements will be on a space
available basis at commercial terms.
Sales and Marketing
Genentech has a highly focused efficient and productive sales and
marketing organization with in-depth expertise in specialized markets.
Genentech and Roche intend to preserve the strengths/expertise and the
culture of this organization to maximize sales and market performance of
our products.
GENENTECH, INC. F. HOFFMANN-LA ROCHE LTD
3
FINANCIAL REVIEW
(dollars in millions, except per share amounts)
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, Genentech, Inc. (the Company) and Roche Holdings, Inc.
(Roche) entered into a new agreement (the Agreement) to extend until June 30,
1999, Roche's option to cause the Company to redeem (call) the outstanding
callable putable common stock (special common stock) of the Company at
predetermined prices. Should the call be exercised, Roche will concurrently
purchase from the Company a like number of common shares for a price equal to
the Company's cost to redeem the special common stock. If Roche does not cause
the redemption as of June 30, 1999, the Company's stockholders will have the
option to cause the Company to redeem none, some, or all of their shares of
special common stock (and Roche will concurrently provide the necessary
redemption funds to the Company by purchasing a like number of shares of common
stock) within thirty business days commencing July 1, 1999. See the
"Relationship with Roche Holdings, Inc." note in the "Notes to Consolidated
Financial Statements" for further information.
In conjunction with the Agreement, F. Hoffmann-La Roche Ltd (HLR) was granted
an option for ten years for licenses to use and sell certain of the Company's
products in non-United States (U.S.) markets. As a result of the Agreement, in
1996 the Company's total product sales decreased, while contract and royalty
revenue increased. Cost of sales as a percentage of product sales also
increased due to the Agreement. See below for further discussion.
RESULTS OF OPERATIONS
(dollars in millions)
Annual % Change
Revenues 1996 1995 1994 96/95 95/94
- -------------------------------------------------------------------------------
Revenues $ 968.6 $ 917.8 $ 795.4 6 % 15%
The increase in revenues in 1996 resulted primarily from higher contract and
royalty revenue partly offset by lower product sales. The 1995 increase
resulted primarily from higher royalty income and product sales. Product sales
to HLR in conjunction with the Agreement were $13.2 million in 1996 and $1.8
million in 1995.
Annual % Change
Product Sales 1996 1995 1994 96/95 95/94
- ------------------------------------------------------------------------------
Activase $ 284.1 $ 301.0 $ 280.9 (6)% 7%
Protropin and
Nutropin 218.2 219.4 225.4 (1) (3)
Pulmozyme 76.0 111.3 88.3 (32) 26
Actimmune 4.5 3.6 6.4 25 (44)
----------------------------------------------------------
Total product
sales $ 582.8 $ 635.3 $ 601.0 (8)% 6%
% of revenues 60% 69% 76%
Total product sales decreased in 1996 compared to 1995 primarily as a result of
the Agreement with Roche. On a pro forma basis that includes sales to HLR in
1996 and the fourth quarter of 1995, and excludes Canadian and European
customer sales in 1995, sales increased to $582.8 million in 1996 from $578.7
million in 1995.
Activase: Total net sales of Activase, registered trademark, in 1996 decreased
compared to 1995 primarily due to the impact of not having Canadian customer
sales in 1996 as a result of the Agreement with Roche and the increased use of
angioplasty (see below). Activase sales to Canadian customers were $12.7
million in 1995. Sales to U.S. customers decreased slightly in 1996 due to a
decline in the market size. Although Activase's market share grew to
approximately 80% in 1996 from approximately 75% in 1995, the overall size of
the thrombolytic market at year end 1996 declined from 1995 by approximately
6%. The decline in the market size was the result of the increasing use of
angioplasty rather than thrombolytic therapy, as well as from patients
receiving therapy through ongoing clinical trials. On a pro forma basis,
Activase sales were $284.1 million in 1996 versus $288.3 million in 1995, with
the slight decrease due to lower U.S. sales and lower bulk product sales to
Japan licensees. In June 1996, the Company received clearance from the U.S.
Food and Drug Administration (FDA) to market Activase for the treatment of
acute ischemic stroke or brain attack. Activase is the first therapy to be
indicated for the management of stroke. The increase in Activase sales in 1995
over 1994 was attributable to growth in market share and an increase in the
number of patients receiving thrombolytic therapy in the United States.
Protropin and Nutropin: Net sales of Protropin, registered trademark, and
Nutropin, registered trademark, (together, growth hormone) were essentially
flat in 1996 compared to 1995. On a pro forma basis, growth hormone sales in
1996 were $218.2 million compared to $216.7 million in 1995. The Company
continues to face increased competition in the growth hormone market. Three
companies in 1995, and a fourth company in 1996, received FDA approval to
market their growth hormone products for treatment of growth hormone inadequacy
in children, although one of those companies has been preliminarily enjoined
from selling its product. Two competitors have received approval to market
their existing human growth hormone products for additional indications.
Growth hormone sales decreased in 1995 compared to 1994 due to a slight volume
increase in sales being more than offset by the impact of pricing programs for
distribution channels and for the managed care sector. In December 1996, the
Company received clearance from the FDA to market Nutropin for the treatment of
growth failure associated with Turner syndrome.
Pulmozyme: Net sales of Pulmozyme, registered trademark, in 1996 decreased
compared to 1995 primarily in conjunction with the Agreement with Roche.
Pulmozyme sales to customers in Europe and Canada totaled $41.3 million in
1995. In 1996, sales in these territories were made by Roche for the full
year, and the Company received royalties on Roche's sales. On a pro forma
basis, Pulmozyme sales were $76.0 million in 1996 compared to $70.0 million in
1995. Pulmozyme sales in 1995 increased over 1994 due to market launches in
additional European countries and continued adoption of the product by
physicians to treat cystic fibrosis patients. In December 1996, Pulmozyme was
cleared for marketing by the FDA for the management of cystic fibrosis patients
with advanced disease, a condition that affects approximately 500 patients in
the United States.
Royalties, Contract and Other, Annual % Change
and Interest Income 1996 1995 1994 96/95 95/94
- ------------------------------------------------------------------------------
Royalties $ 214.7 $ 190.8 $ 126.0 13% 51%
Contract and other 107.0 31.2 25.6 243 22
Interest income 64.1 60.5 42.8 6 42
The Company receives royalty payments from HLR from its sales of the Company's
products outside of the U.S. under the Agreement, and receives royalties from
other licensees and HLR from the sales of various other health care products.
Total royalties in 1996 increased over 1995 primarily due to new royalties from
HLR in conjunction with the Agreement, as well as higher income from existing
licensees due to increased licensee sales. Royalty revenue under the Agreement
was $17.0 million in 1996 and $1.9 million in 1995. All other royalty revenue
from HLR in 1996, 1995 and 1994, totaled $9.2 million, $10.6 million and $7.9
million, respectively. The increase in 1995 compared to 1994 was attributable
to increases in product sales by various licensees and new royalty
arrangements. In 1995, the largest dollar increase was attributable to the
receipt and recognition of $30.0 million of royalty revenue relating to the
December 1994 settlement with Eli Lilly and Company (Lilly) regarding certain
of the Company's patents. Under the December 1994 settlement agreement with
Lilly, royalties of $30.0 million per year are payable, subject to possible
offsets and contingent upon Humulin, registered trademark, continuing to be
marketed in the U.S., to the Company through 1998, at which time such royalty
obligations expire. Under a prior license agreement with Lilly, the Company
receives royalties from Lilly's sales of its human insulin product. These
royalty obligations expire in August of 1998. Cash flows from royalty income
include non-dollar denominated revenues. The Company currently purchases
simple foreign currency put option contracts (options) and enters into foreign
currency forward exchange contracts (forward contracts) to hedge these cash
flows. All options expire within the next four years. The Company has forward
contracts of various durations that will expire by the end of 1997.
Contract and other revenues increased in 1996 due to contract revenue from HLR
for the exercises of their options under the Agreement with respect to the
development of three projects - IDEC-C2B8, insulin-like growth factor (IGF-1)
and nerve growth factor (NGF). The Company recorded non-recurring contract
revenues of $58.2 million relating to these option exercises in 1996. All
other contract revenue from HLR, including reimbursement for ongoing
development expenses after the option exercise date, totaled $37.1 million in
1996, $13.4 million in 1995 and $17.1 million in 1994. The increase in 1995
compared to 1994 was attributable to $6.4 million of gains recorded from sales
of biotechnology equity securities. Contract and other revenues will continue
to fluctuate due to variations in the timing of contract benchmark
achievements; the initiation of new contractual arrangements, including the
potential exercise of product options by HLR; and the conclusion of existing
arrangements.
Interest income increased in 1996 compared to 1995 due to a larger investment
portfolio. The increase in 1995 compared to 1994 was attributable to a larger
investment portfolio and a higher average portfolio yield. The Company enters
into interest rate swaps as part of its overall strategy of managing the
duration of its investment portfolio. See the "Financial Instruments" note in
the "Notes to Consolidated Financial Statements" for further information.
Annual % Change
Costs and Expenses 1996 1995 1994 96/95 95/94
- -------------------------------------------------------------------------------
Cost of sales $104.5 $ 97.9 $ 95.8 7% 2%
Research and
development 471.1 363.0 314.3 30 15
Marketing, general and
administrative 240.1 251.7 248.6 (5) 1
Special charge - 25.0 - - -
Interest expense 5.0 8.0 7.1 (38) 13
----------------------------------------------------------
Total costs
and expenses $820.7 $ 745.6 $ 665.8 10% 12%
% of revenues 85% 81% 84%
Cost of sales as % of
product sales 18% 15% 16%
R&D as % of revenues 49 40 40
MG&A as % of revenues 25 27 31
Cost of Sales: The cost of sales as a percentage of product sales increased
in 1996 compared to 1995 primarily due to the impact of lower margin sales to
HLR in 1996. The economic benefits from sales to HLR are also reflected in
royalties as discussed above. In 1996, 1995 and 1994, reserves of $3.6
million, $3.7 million and $11.9 million, respectively, were provided for
expected expirations of certain inventories.
Research and Development: Research and development (R&D) expense increased 30%
in 1996 compared to 1995 due to continued late-stage clinical testing of
products and new development projects. The increase in 1995 over 1994 resulted
from a higher level of activity and associated costs of products in the later
stages of clinical trials and the manufacture of products for clinical trials.
To gain additional access to potential new products and technologies and to
utilize other companies to help develop the Company's potential new products,
the Company has established strategic alliances with, including acquiring the
equity and convertible debt of, companies developing technologies that fall
outside the Company's research focus and with companies having the potential to
generate new products through technology exchanges and investments. The
Company has also entered into product-specific collaborations to acquire
development and marketing rights for products.
Marketing, General and Administrative: Marketing, general and administrative
expenses (MG&A) in 1996 decreased from 1995 primarily due to the closure of the
Company's European and Canadian operations in conjunction with the Agreement.
MG&A expenses in 1995 were comparable to the 1994 level of expenses.
Special Charge: The Company recorded a special charge of $25.0 million in
1995, which included $21.0 million related to the Agreement with Roche and $4.0
million associated with the resignation of the Company's former President and
Chief Executive Officer. The merger expenses included investment banking fees,
legal expenses, filing fees and other costs related to the Agreement, as well
as charges associated with the settlement of stockholder lawsuits filed after
the transaction was announced.
Interest Expense: Interest expense in 1996, 1995 and 1994, net of amounts
capitalized, relates primarily to interest on the Company's 5% convertible
subordinated debentures. In 1995, it also included interest on a $25.0 million
borrowing arrangement which commenced in February 1995 and was paid in December
of that year.
Income Before Taxes and Income Taxes 1996 1995 1994
- -----------------------------------------------------------------------------
Income before taxes $ 147.9 $ 172.2 $ 129.6
Income tax provision 29.6 25.8 5.2
Effective tax rate 20% 15% 4%
The increase in the effective tax rate to 20% in 1996 from 15% in 1995 is due
to the recognition of a greater amount of tax credit carryforwards in 1995 than
in 1996. The net increase in the rate from 1994 to 1995 was primarily related
to limitations on the utilization of existing carryforwards related to the U.S.
alternative minimum tax.
Annual % Change
Net Income 1996 1995 1994 96/95 95/94
- -------------------------------------------------------------------------------
Net income $ 118.3 $ 146.4 $124.4 (19)% 18%
Net income per share $ 0.96 $ 1.21 $ 1.04
Net income in 1996 decreased compared to 1995 primarily due to higher R&D
expenses and lower product sales, partly offset by increased contract and
royalty revenue. Net income in 1995 increased over 1994 due to higher revenue
from all sources, partly offset by higher expenses, primarily R&D and special
charges.
LIQUIDITY AND CAPITAL RESOURCES 1996 1995 1994
- ------------------------------------------------------------------------------
Cash, cash equivalents, short-term investments
and long-term marketable debt and equity
securities $1,159.1 $1,096.8 $ 920.9
Working capital 705.1 812.0 776.6
Cash provided by (used in):
Operating activities 139.7 133.9 200.4
Investing activities (141.7) (117.7) (322.3)
Financing activities 72.2 54.1 71.2
Capital expenditures
(included in investing activities above) (141.8) (70.2) (82.8)
Current ratio 3.8:1 4.5:1 4.5:1
Cash generated from operations, the maturity of investments and stock issuances
were used to purchase marketable securities and make capital additions in 1996.
Capital expenditures in 1996 primarily include building and land purchases and
improvements to existing manufacturing and office facilities. In 1995, the
Company entered into an arrangement with a lessor for a new manufacturing
facility which qualifies as an operating lease and is expected to become
operational in 1998.
FORWARD-LOOKING STATEMENTS
The following section contains forward-looking statements that are based on
the Company's current expectations. Because the Company's actual results may
differ materially from any forward-looking statements made by or on behalf of
the Company, this section also includes a discussion of important factors that
could affect the Company's actual future results, including its product sales,
royalties, contract revenues, expenses and net income.
Total Product Sales: The Company anticipates that total reported quarterly
product sales in 1997 will be comparable to 1996; however, product sales will
be dependent on the overall competitive environment. Other factors affecting
the Company's total product sales include, but are not limited to, the amount
and timing of the Company's sales to HLR, the amount of sales to customers in
the U.S., increased competition in the growth hormone and thrombolytic
markets, the timing and amount of bulk shipments to licensees, and the
possibility of the introduction of a new product in late 1997.
Activase Sales: The Company faces new competition in the thrombolytic market.
The Company is aware that one company received FDA approval in October 1996 to
market its product for the treatment of acute myocardial infarction (AMI) in
the U.S. The Company has brought suit against that company for patent
infringement. In addition, there is an increasing use of angioplasty in the
treatment of AMI patients in lieu of the use of thrombolytic therapy.
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 additional competitive products, pricing decisions made
by the Company, the outcome of litigation against Boehringer Mannheim GmbH and
Boehringer Mannheim Corporation involving the Company's patents for tissue
plasminogen activator and processes related to its production and formulation,
the increasing use of other therapies such as angioplasty techniques for the
treatment of AMI, and the impact of the FDA's recent clearance for the Company
to market Activase for the treatment of acute ischemic stroke.
Growth Hormone Sales: The Company continues to face the possibility of
increased competition in the growth hormone market. Three companies received
FDA approval in 1995, and a fourth company received FDA approval in October
1996, to market their growth hormone products for treatment of growth hormone
inadequacy in children, although one of those companies has been preliminarily
enjoined from selling its product. Two of the Company's competitors have
received approval to market their existing human growth hormone products for
additional indications. The Company expects such competition to have an
adverse effect on its sales of Protropin and Nutropin which, depending on the
extent and type of 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 other new competitive products, the outcome of
litigation involving the Company's patents for human growth hormone and
related processes, pricing decisions made by the Company, the availability of
third- party reimbursement for the cost of growth hormone therapy, and the
impact of Nutropin as a treatment for growth failure associated with Turner
syndrome.
Pulmozyme Sales: Factors that may influence the future sales of Pulmozyme
include, but are not limited to, 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, and the cost of therapy.
Royalty and Contract Revenues: Royalty and contract revenues in future
periods could vary significantly from 1996 levels. Major factors affecting
these revenues include, but are not limited to: HLR's decisions to exercise
or not to exercise its option to develop and sell the Company's future
products in non-U.S. markets and the timing and amount of related development
cost reimbursement, if any; variations in HLR's sales of Genentech products,
and other licensees' sales of licensed products; the expiration of royalties
from Lilly in 1998; fluctuations in foreign currency exchange rates; the
timing of non-U.S. approvals, if any, for products licensed to HLR; whether
and when contract benchmarks are achieved; the initiation of other new
contractual arrangements; and the conclusion of existing arrangements with
other companies and HLR.
R&D Expenses: The Company intends to continue its commitment to aggressive
investment in R&D. As it continues late-stage clinical testing of products,
the Company anticipates that its R&D expenses will continue at a high
percentage of revenues over the short-term. Over the long-term, however, R&D
as a percent of revenues should decrease, although in dollar terms R&D
spending is generally 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 late-stage research; future levels of the Company's
product sales (including the impact of competition), royalty and contract
revenues; the possibility of competition with respect to products or
technologies under development; and decisions by HLR to exercise or not to
exercise its option to develop and sell potential products of the Company in
non-U.S. markets and the timing of such decisions.
Income Tax Provision: The Company expects that its effective tax rate will
increase from the current rate of 20% to approximately 35% in 1997, and
continue at or near 35% for the next several years dependent upon several
factors. These factors include, but are not limited to, changes in tax laws
and rates, future levels of R&D spending, the outcome of clinical trials of
certain development products, the Company's success in commercializing such
products, and potential competition regarding the products.
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 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 to submit an application for marketing approval for 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 companies' patents cannot be predicted. Patent disputes are
frequent and can preclude commercialization of products. The Company, as in
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. 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. The Company believes it has strong patent
protection or the potential for strong patent protection for a number of its
products that generate sales and royalty revenue or that the Company is
developing; however, the courts will determine the ultimate strength of patent
protection of the Company's products and those on which the Company earns
royalties.
Liquidity: The Company believes that its cash, cash equivalents, and short-
term investments, together with funds provided by operations and leasing
arrangements, will be sufficient to meet its foreseeable operating cash
requirements. Factors affecting the Company's cash position include, but are
not limited to, future levels of the Company's product sales, royalty and
contract revenues, expenses and capital expenditures.
Market Potential/Risk: Over the longer term, the Company's (and its
partners') ability to successfully market current products, expand their
usage, and bring new products to the marketplace will depend on many factors,
including, but not limited to, the effectiveness and safety of the products,
FDA and foreign regulatory agencies' approvals for new products and new
indications, and the degree of patent protection afforded to particular
products.
Roche Holdings, Inc.: At December 31, 1996, Roche held approximately 66.0% of
the Company's outstanding common equity. In January and February 1997, Roche
purchased additional shares of the Company's common equity increasing Roche's
holdings to 68.0%. The Company expects to continue to have material
transactions with Roche, including royalty and contract development revenues,
product sales and joint product development.
Foreign Exchange: The Company receives royalty revenues from countries
throughout the world. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in the foreign markets in which the
Company's products are sold. The Company is exposed to changes in exchange
rates in Europe, Asia and Canada. When the U.S. dollar strengthens against
the currencies in these countries, the U.S. dollar value of non-U.S. dollar-
based revenue decreases; when the U.S. dollar weakens, the U.S. dollar value
of the non-U.S. dollar-based revenues increases. Accordingly, changes in
exchange rates, and in particular a strengthening of the U.S. dollar, may
adversely affect the Company's royalty revenues as expressed in U.S. dollars.
To mitigate this risk, the Company hedges certain of these anticipated
revenues by purchasing options with expiration dates and amounts of currency
that are based on a portion of probable revenues so that the adverse impact of
movements in currency exchange rates on the non-dollar denominated revenues
will be at least partly offset by an associated increase in the value of the
option. The Company also enters into forward contracts to lock in the dollar
value of a portion of these anticipated revenues.
Interest Rates: The Company's interest income is sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents,
short-term investments and long-term investments. To mitigate the impact of
fluctuations in U.S. interest rates, the Company enters into interest rate
swap transactions which generally involve the receipt of fixed rate interest
and the payment of floating rate interest without the exchange of the
underlying principal. These agreements have the effect of locking in rates
for longer periods of time than the duration of short-term investments.
Equity Securities: As part of its strategic alliance efforts, the Company
invests in equity instruments that are subject to fluctuations from market
value changes in stock prices. To mitigate this risk, certain equity
securities are hedged with costless collars. A costless collar is a purchased
put option and a written call option in which the cost of the purchased put
and the proceeds of the written call offset each other; therefore, there is no
initial cost or cash outflow for these instruments at the time of purchase.
The purchased put protects the Company from a decline in the market value of
the security below a certain minimum level (the put "strike" level); while the
call effectively limits the Company's potential to benefit from an increase in
the market value of the security above a certain maximum level (the call
"strike" level).
Credit Risk of Counterparties: The Company could be exposed to losses related
to the above financial instruments should one of its counterparties default.
This risk is mitigated through credit monitoring procedures.
Legal Proceedings: The Company is a party to various legal proceedings
including patent infringement cases and various cases involving product
liability and other matters. See the "Leases, Commitments and Contingencies"
note in the "Notes to Consolidated Financial Statements" for further
information.
REPORT OF MANAGEMENT
Genentech, Inc. is responsible for the preparation, integrity and fair
presentation of its published financial statements. The Company has prepared
the financial statements, presented on pages 51 to 74, in accordance with
generally accepted accounting principles. As such, the statements include
amounts based on judgments and estimates made by management. The Company also
prepared the other information included in the annual report and is
responsible for its accuracy and consistency with the financial statements.
The financial statements have been audited by the independent auditing firm,
Ernst & Young LLP, which was given unrestricted access to all financial
records and related data, including minutes of all meetings of stockholders,
the Board of Directors and committees of the Board. The Company believes that
all representations made to the independent auditors during their audit were
valid and appropriate. Ernst & Young LLP's audit report appears on page 75.
Systems of internal accounting controls, applied by operating and financial
management, are designed to provide reasonable assurance as to the integrity
and reliability of the financial statements and reasonable, but not absolute,
assurance that assets are safeguarded from unauthorized use or disposition,
and that transactions are recorded according to management's policies and
procedures. The Company continually reviews and modifies these systems, where
appropriate, to maintain such assurance. Through the Company's general audit
activities, the adequacy and effectiveness of the systems and controls are
reviewed and the resultant findings are communicated to management and the
Audit Committee of the Board of Directors.
The selection of Ernst & Young LLP as the Company's independent auditors has
been approved by the Company's Board of Directors and ratified by the
stockholders. An Audit Committee of the Board of Directors, composed of four
non-management directors, meets regularly with, and reviews the activities of,
corporate financial management, the general audit function and the independent
auditors to ascertain that each is properly discharging its responsibilities.
The independent auditors and general auditor meet with the Audit Committee,
with and without management present, to discuss the results of their work, the
adequacy of internal accounting controls and the quality of financial
reporting.
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. Bradford S. Goodwin
President and Senior Vice President and Vice President - Finance
Chief Executive Officer Chief Financial Officer and Controller
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------
Revenues
Product sales (including amounts from
related parties: 1996-$13,216;
1995-$1,776; 1994-$0) $ 582,829 $ 635,263 $ 601,064
Royalties (including amounts
from related parties: 1996-$26,240;
1995-$12,492; 1994-$8,454) 214,702 190,811 126,022
Contract and other (including amounts
from related parties: 1996-$95,299;
1995-$13,448; 1994-$17,106) 107,037 31,209 25,556
Interest 64,110 60,562 42,748
-----------------------------------
Total revenues 968,678 917,845 795,390
Costs and expenses
Cost of sales (including amounts from
related parties: 1996-$10,900;
1995-$6,963; 1994-$0) 104,527 97,930 95,829
Research and development (including
contract related: 1996-$37,051;
1995-$17,124; 1994-$7,584) 471,143 363,049 314,322
Marketing, general and administrative 240,063 251,653 248,604
Special charge (primarily merger related) -- 25,000 --
Interest 5,010 7,940 7,058
------------------------------------
Total costs and expenses 820,743 745,572 665,813
Income before taxes 147,935 172,273 129,577
Income tax provision 29,587 25,841 5,183
------------------------------------
Net income $ 118,348 $ 146,432 $ 124,394
====================================
Net income per share $ 0.96 $ 1.21 $ 1.04
====================================
Weighted average number of shares used
in computing per share amounts 123,695 121,220 119,465
====================================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Increase (Decrease) in Cash and
Cash Equivalents
YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 118,348 $ 146,432 $ 124,394
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 62,124 58,421 53,452
Writedown of securities available-for-sale - 6,609 12,590
Gain on sales of securities available-for-sale (347) (7,432) -
Deferred income taxes (34,021) (22,655) (34,193)
Loss on fixed asset dispositions
(including merger-related in 1995) 5,309 1,032 5,510
Other - (234) 748
Changes in assets and liabilities:
Net cash flow from trading securities (8,184) (50,014) (4,634)
Receivables and other current assets (30,416) (28,446) (11,937)
Inventories 1,705 9,552 (18,475)
Accounts payable, other current
liabilities and other long-term
liabilities 25,153 20,682 72,901
----------------------------------
Net cash provided by operating activities 139,671 133,947 200,356
Cash flows from investing activities:
Purchases of securities held-to-maturity (634,124) (682,396) (1,088,737)
Proceeds from maturities of securities
held-to-maturity 772,922 924,345 877,139
Purchases of securities available-for-sale (304,806) (353,118) (22,644)
Proceeds from sales of securities available-
for-sale 182,564 101,591 -
Purchases of non-marketable equity securities (9,323) - (4,000)
Capital expenditures (141,837) (70,166) (82,837)
Change in other assets (7,046) (37,948) (1,198)
------------------------------------
Net cash used in investing activities (141,650) (117,692) (322,277)
Cash flows from financing activities:
Stock issuances 72,558 54,946 71,955
Reduction in long-term debt,
including current portion (358) (871) (794)
------------------------------------
Net cash provided by financing activities 72,200 54,075 71,161
------------------------------------
Increase (decrease) in cash and cash equivalents 70,221 70,330 (50,760)
Cash and cash equivalents at beginning of year 137,043 66,713 117,473
------------------------------------
Cash and cash equivalents at end of year $ 207,264 $ 137,043 $ 66,713
====================================
Supplemental cash flow data:
Cash paid during the year for:
Interest, net of portion capitalized $ 5,010 $ 7,917 $ 7,058
Income taxes 52,243 44,699 4,099
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 207,264 $ 137,043
Short-term investments 415,900 603,296
Accounts receivable - trade (net of
allowances of: 1996-$4,110; 1995-$4,579) 77,785 87,694
Accounts receivable - other (net of
allowances of: 1996-$3,759; 1995-$2,093) 86,450 65,185
Accounts receivable - related party 33,377 19,281
Inventories 91,943 93,648
Prepaid expenses and other current assets 42,365 39,267
-----------------------------
Total current assets 955,084 1,045,414
Long-term marketable securities 535,916 356,475
Property, plant and equipment, net 586,167 503,654
Other assets 149,205 105,452
-----------------------------
Total assets $ 2,226,372 $ 2,010,995
=============================
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable $ 45,501 $ 37,101
Accrued liabilities - related party 9,908 8,745
Other accrued liabilities 194,542 187,598
-----------------------------
Total current liabilities 249,951 233,444
Long-term debt 150,000 150,000
Other long-term liabilities 25,362 25,504
-----------------------------
Total liabilities 425,313 408,948
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.02 par value; authorized:
100,000,000 shares; none issued - -
Special common stock, $.02 par value;
authorized: 100,000,000 shares; outstanding:
1996-44,805,755; 1995-42,646,958 896 853
Common stock, $.02 par value;
authorized: 200,000,000 shares;
outstanding: 1996 and 1995-76,621,009 1,532 1,532
Additional paid-in capital 1,362,585 1,281,640
Retained earnings (since October 1, 1987
quasi-reorganization) 382,097 263,749
Net unrealized gain on securities
available-for-sale 53,949 54,273
-------------------------------
Total stockholders' equity 1,801,059 1,602,047
-------------------------------
Total liabilities and stockholders' equity $ 2,226,372 $ 2,010,995
===============================
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(thousands)
1996 1995 1994
Year ended December 31 ------------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Special common stock
Beginning balance 42,647 $ 853 - - - -
Issuance of stock upon exercise
of options and warrants 2,159 43 298 $ 6 - -
Conversion of common stock
to special common stock - - 42,349 847 - -
---------------------------------------------------------------
Ending balance 44,806 896 42,647 853 - -
---------------------------------------------------------------
Redeemable common stock
Beginning balance - - 50,106 1,002 47,690 $ 954
Issuance of stock upon exercise
of options and warrants - - 679 14 1,905 38
Issuance of stock under
employee stock plan - - 322 6 511 10
Conversion of redeemable
common stock to common stock - - (51,107) (1,022) - -
---------------------------------------------------------------
Ending balance - - - - 50,106 1,002
---------------------------------------------------------------
Common stock
Beginning balance 76,621 1,532 67,133 1,343 67,133 1,343
Issuance of stock upon exercise
of options and warrants - - 512 10 - -
Issuance of stock under
employee stock plan - - 218 4 - -
Conversion of redeemable
common stock to common stock - - 51,107 1,022 - -
Conversion of common stock
to special common stock - - (42,349) (847) - -
---------------------------------------------------------------
Ending balance 76,621 1,532 76,621 1,532 67,133 1,343
---------------------------------------------------------------
Additional paid-in capital
Beginning balance 1,281,640 1,207,720 1,070,121
Issuance of stock upon exercise
of options and warrants 55,103 37,087 56,133
Issuance of stock under
employee stock plan 17,412 17,819 15,774
Income tax benefits
realized from employee
stock option exercises 8,430 7,204 26,038
Tax benefits arising prior
to quasi-reorganization - 11,810 39,654
---------- ---------- -----------
Ending balance 1,362,585 1,281,640 1,207,720
---------- ----------- -----------
Retained earnings
Beginning balance 263,749 129,127 44,387
Net income 118,348 146,432 124,394
Tax benefits arising prior
to quasi-reorganization - (11,810) (39,654)
---------- ---------- -----------
Ending balance 382,097 263,749 129,127
---------- ---------- -----------
Net unrealized gain on securities
Beginning balance 54,273 9,592 -
Net unrealized (loss) gain on
securities available-for-sale (324) 44,681 9,592
---------- ---------- ----------
Ending balance 53,949 54,273 9,592
---------- ---------- ----------
Total stockholders' equity $1,801,059 $1,602,047 $1,348,784
========== ========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</TABLE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Genentech, Inc. (the Company) is a biotechnology
company that discovers, develops, manufactures and markets human
pharmaceuticals produced by recombinant DNA technology for significant unmet
medical needs. The Company manufactures and markets six products directly in
the United States (U.S.) and sells these products to F. Hoffmann-La Roche Ltd
(HLR) for HLR to sell outside of the United States. Of these six products,
HLR has the right to sell five in Canada and one in a number of countries. In
addition, the Company receives royalties from HLR's sales of these products,
and receives royalties from HLR and other licensees from sales of five other
products which originated from the Company's technology.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all significant subsidiaries and collaborations.
Material intercompany balances and transactions are eliminated.
Use of Estimates: 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.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Short-term Investments and Long-term Marketable Securities: The Company
invests its excess cash balances in short-term and long-term marketable
securities, primarily corporate notes, certificates of deposit and treasury
notes. As part of its strategic alliance efforts, the Company also invests in
equity securities and convertible debt of other biotechnology companies.
Investment securities are classified into one of three categories: held-to-
maturity, available-for-sale, or trading. Securities are considered held-to-
maturity when the Company has the positive intent and ability to hold the
securities to maturity. These securities are recorded as either short-term
investments or long-term marketable securities on the balance sheet depending
upon their contractual maturity dates. Held-to-maturity securities are stated
at amortized cost, including adjustment for amortization of premiums and
accretion of discounts. Securities are considered trading when bought
principally for the purpose of selling in the near term. These securities are
recorded as short-term investments and are carried at market value.
Unrealized holding gains and losses on trading securities are included in
interest income. Securities not classified as held-to-maturity or as trading
are considered available-for-sale. These securities are recorded as either
short-term investments or long-term marketable securities and are carried at
market value with unrealized gains and losses included in stockholders'
equity. If a decline in fair value below cost is considered other than
temporary, such securities are written down to estimated fair value with a
charge to marketing, general and administrative expenses. The cost of all
securities sold is based on the specific identification method.
Property, Plant and Equipment: The costs of buildings and equipment are
depreciated using the straight-line method over the following estimated useful
lives of the assets: buildings - 25 years; certain manufacturing equipment -
15 years; other equipment - 4 or 8 years; leasehold improvements - length of
applicable lease. The costs of repairs and maintenance are expensed as
incurred. Repairs and maintenance expenses for the years ended December 31,
1996, 1995 and 1994, were $28.8 million, $22.1 million and $19.2 million,
respectively. Interest on construction-in-progress of $2.5 million in 1996,
$1.5 million in 1995 and $0.6 million in 1994 has been capitalized and is
included in property, plant and equipment.
Property, plant and equipment balances at December 31 are summarized below
(thousands):
1996 1995
---------------------------------------------------------------------
At cost:
Land $ 67,619 $ 57,313
Buildings 297,888 258,717
Equipment 428,738 383,387
Leasehold improvements 12,314 12,508
Construction in progress 99,708 60,480
-----------------------------
906,267 772,405
Less: accumulated depreciation 320,100 268,751
-----------------------------
Net property, plant and equipment $ 586,167 $ 503,654
=============================
Patents and Other Intangible Assets: As a result of its research and
development (R&D) programs, the Company owns or is in the process of applying
for patents in the U.S. and other countries which relate to products and
processes of significant importance to the Company. Costs of patents and
patent applications are capitalized and amortized on a straight-line basis
over their estimated useful lives of approximately 12 years. Intangible
assets are generally amortized on a straight-line basis over their estimated
useful lives.
Contract Revenue: Contract revenue for R&D is recorded as earned based on the
performance requirements of the contract. In return for contract payments,
contract partners may receive certain marketing and manufacturing rights,
products for clinical use and testing, or R&D services.
Royalty Expenses: Royalty expenses directly related to product sales are
classified in cost of sales. Other royalty expenses, relating to royalty
revenue, totaled $36.0 million, $30.2 million and $26.5 million in 1996, 1995
and 1994, respectively, and are classified in marketing, general and
administrative expenses.
Advertising Expenses: The Company expenses the costs of advertising as
incurred. Advertising expenses for the years ended December 31, 1996, 1995
and 1994, were $28.0 million, $29.2 million and $44.2 million, respectively.
Income Taxes: The Company accounts for income taxes by the asset and
liability approach for financial accounting and reporting of income taxes.
The Company's method of accounting for operating loss and tax credit
carryforwards arising prior to the date of the Company's quasi-reorganization
in 1987 is described in the "Quasi-Reorganization" note.
Net Income Per Share: Net income per share is computed based on the weighted
average number of shares of the Company's special common stock, common stock
and common stock equivalents, if dilutive.
Financial Instruments: The Company purchases simple foreign currency put
options (options) with expiration dates and amounts of currency that are based
on a portion of probable non-dollar revenues so that the potential adverse
impact of movements in currency exchange rates on the non-dollar denominated
revenues will be at least partially offset by an associated increase in the
value of the options. See the "Financial Instruments" note for further
discussion. At the time the options are purchased they have little or no
intrinsic value. Realized and unrealized gains related to the options are
deferred until the designated hedged revenues are recorded. The associated
costs, which are deferred and classified as other current assets, are
amortized over the term of the options and recorded as a reduction of the
hedged revenues. Realized gains and losses are recorded in the income
statement with the related hedged revenues. The Company also enters into
foreign currency forward contracts (forward contracts) as hedging instruments.
Forward contracts are recorded at fair value, and any gains and losses from
these forward contracts are recorded in the income statement with the related
hedged revenues. Financial instruments, such as forward contracts, not
qualifying as hedges under generally accepted accounting principles are marked
to market with gains or losses recorded in income as they occur.
Interest rate swaps have been used and may be used in the future to adjust the
duration of the investment portfolio in order to meet duration targets.
Interest rate swaps are contracts in which two parties agree to swap future
streams of payments over a specified period. See the "Financial Instruments"
note for further discussion. Net payments made or received on swaps are
included in interest income as adjustments to the interest received on invested
cash. Amounts deferred on terminated swaps are classified as other assets and
are amortized to interest income over the original contractual term of the
swaps by a method that approximates the level-yield method.
The Company's marketable equity portfolio consists primarily of biotechnology
companies whose risk of market fluctuations is greater than the stock market
in general. To manage this risk, the Company enters into certain costless
collar instruments to hedge certain equity securities against changes in
market value. See the "Financial Instruments" note for further discussion.
Gains and losses on these instruments are recorded as an adjustment to
unrealized gains and losses on marketable securities with a corresponding
receivable or payable recorded in long-term other assets or long-term
liabilities.
401(k) Plan: The Company's 401(k) plan (Plan) covers substantially all of its
U.S. employees. Under the Plan, eligible employees may contribute up to 15% of
their eligible compensation, subject to certain Internal Revenue Service
restrictions. The Company matches a portion of employee contributions, up to a
maximum of 4% of each employee's eligible compensation. The match is effective
December 31 of each year and is fully vested when made. During 1996, 1995 and
1994, the Company provided $6.1 million, $5.6 million and $5.2 million,
respectively, for the Company match under the Plan.
New Accounting Standards: On January 1, 1996, the Company adopted 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 of 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 adoption of FAS 121 did not have a material impact on the
financial position, results of operations or cash flows of the Company.
In 1996, the Company also implemented the disclosure requirements of FAS 123
"Accounting for Stock-Based Compensation" (FAS 123). Under FAS 123, the
Company will continue to account for stock-based employee compensation
arrangements under the intrinsic value method prescribed by Accounting
Principles Board Opinion 25 "Accounting for Stock Issued to Employees" (APB
25), and will provide pro forma disclosures of net income and earnings per
share as if the fair value basis method prescribed by FAS 123 had been applied
in measuring employee compensation expense. See the "Capital Stock" note for
such disclosure.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined using a weighted-average approach which approximates the first-in,
first-out method. Inventories at December 31, 1996 and 1995 are summarized
below (thousands):
1996 1995
------------------------------------------------------------------
Raw materials and supplies $ 17,971 $ 12,808
Work in process 61,368 67,239
Finished goods 12,604 13,601
----------------------
Total $ 91,943 $ 93,648
======================
Reclassifications: Certain reclassifications of prior year amounts have been
made to conform with the current year presentation.
SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
HLR contributed approximately 14% of the Company's total revenues in 1996, and
contributed less than 10% in 1995 and 1994. See the "Related Party
Transactions" note below for further information. Two major customers,
Caremark, Inc. and Bergen Brunswig, contributed 10% or more of the Company's
total revenues. Caremark, Inc., which accounted for 15%, 18% and 21% of total
revenues in 1996, 1995 and 1994, respectively, distributes Protropin,
Nutropin, Pulmozyme and Actimmune through its extensive branch network and is
then reimbursed through a variety of sources. Bergen Brunswig, a wholesale
distributor of all of the Company's products, contributed 10% of revenues in
1996 and 11% in each of the years 1995 and 1994.
Approximate foreign sources of revenues were as follows (millions):
1996 1995 1994
- -----------------------------------------------------
Europe $146.4 $112.0 $81.8
Asia 17.8 23.6 19.5
Canada 11.1 25.0 9.7
The Company currently sells primarily to distributors and hospitals throughout
the U.S., performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral. In 1996, 1995 and 1994, the
Company did not record any material additions to, or losses against, its
provision for doubtful accounts.
RESEARCH AND DEVELOPMENT ARRANGEMENTS
To gain access to potential new products and technologies and to utilize other
companies to help develop the Company's potential new products, the Company has
established strategic alliances with, including the acquisition of both
marketable and non-marketable equity investments and convertible debt in,
companies developing technologies that fall outside the Company's research
focus and with companies having the potential to generate new products through
technology exchanges and investments. Potential future payments may be due to
certain collaborative partners if the partners achieve certain benchmarks as
defined in the collaborative agreements. The Company has also entered into
product-specific collaborations to acquire development and marketing rights
for products.
SPECIAL CHARGE
The $25.0 million special charge in 1995 includes $21.0 million related to the
merger agreement (the Agreement) with Roche Holdings, Inc. (Roche), discussed
in the note "Relationship with Roche Holdings, Inc.," and $4.0 million of
charges associated with the resignation of the Company's former President and
Chief Executive Officer. The merger expenses include legal expenses,
investment banking fees, filing fees and other costs related to the Agreement
with Roche, as well as charges associated with the settlement of stockholder
lawsuits filed after the transaction was announced.
INCOME TAXES
The income tax provision consists of the following amounts (thousands):
1996 1995 1994
- ----------------------------------------------------------------
Current:
Federal $ 61,502 $ 43,997 $ 38,331
State 2,104 4,467 1,016
Foreign 2 32 29
------------------------------------
Total current 63,608 48,496 39,376
------------------------------------
Deferred:
Federal (34,021) (12,319) (34,193)
State - (10,336) -
------------------------------------
Total deferred (34,021) (22,655) (34,193)
------------------------------------
Total income tax provision $ 29,587 $ 25,841 $ 5,183
====================================
Actual current tax liabilities are lower than reflected above by $8.4 million,
$7.2 million and $26.0 million in 1996, 1995 and 1994, respectively, due to
employee stock option related tax benefits which were credited to
stockholders' equity.
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate follows:
</TABLE>
<TABLE>
<CAPTION>
1996 Amount Tax Rate
(thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax at U.S. statutory rate $ 51,777 35.0% 35.0% 35.0%
Operating losses utilized - - - (45.6)
Research and development
credits realized (4,500) (3.0) (15.9) -
Alternative minimum tax liability - - - 24.6
Adjustment of deferred tax assets
valuation allowance (22,566) (15.3) (13.1) (26.4)
Foreign losses (benefited) not benefited (5,050) (3.4) 2.8 15.0
State taxes 3,368 2.3 2.6 0.8
Other 6,558 4.4 3.6 0.6
-------------------------------------------
Income tax provision $ 29,587 20.0% 15.0% 4.0%
===========================================
</TABLE>
The components of deferred taxes consist of the following at December 31
(thousands):
1996 1995
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 58,842 $ 50,010
Unrealized gain on sale of securities
available-for-sale 21,017 21,204
Other 10,543 3,109
--------------------------
Total deferred tax liabilities 90,402 74,323
Deferred tax assets:
Capitalized research and development costs 34,280 -
Federal credit carryforwards 111,400 107,350
Expenses not currently deductible 38,368 39,433
State credit carryforwards 26,710 32,147
Other 6,340 5,058
--------------------------
Total deferred tax assets 217,098 183,988
Valuation allowance (35,827) (52,817)
--------------------------
Total net deferred tax assets 181,271 131,171
--------------------------
Total net deferred taxes $ 90,869 $ 56,848
==========================
Total tax credit carryforwards of $138.1 million expire in the years 1997
through 2012, except for $43.0 million of alternative minimum tax credits which
have no expiration date. The valuation allowance at December 31, 1996,
reflected above relates to the tax benefits of stock option deductions which
will be credited to additional paid-in capital when realized.
The valuation allowance decreased by $17.0 million in 1996, $31.6 million in
1995 and $38.5 million in 1994.. Realization of net deferred taxes depends on
future earnings from existing and new products and new indications for existing
products. The timing and amount of future earnings will depend on continued
success in marketing and sales of the Company's current products, as well as
the scientific success, results of clinical trials and regulatory approval of
products under development.
INVESTMENT SECURITIES
Securities classified as trading, available-for-sale and held-to-maturity at
December 31, 1996 and 1995 are summarized below. Estimated fair value is based
on quoted market prices for these or similar investments.
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ------------------------------------------------------------------------------
(thousands)
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $ 144,460 $ 1,932 $ (2,897) $ 143,495
==============================================
SECURITIES AVAILABLE-FOR-SALE
(carried at estimated
fair value):
Equity securities $ 42,773 $ 56,347 $ (1,376) $ 97,744
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing within:
1 year 51,179 - (71) 51,108
1-5 years 103,057 1,299 (209) 104,147
5-10 years 113,176 1,001 (2,114) 112,063
Other debt securities
maturing within:
1 year 46,583 27 - 46,610
1-5 years 43,954 185 (94) 44,045
----------------------------------------------
TOTAL AVAILABLE-FOR-SALE $ 400,722 $ 58,859 $ (3,864) $ 455,717
==============================================
SECURITIES HELD-TO-MATURITY*
(carried at amortized cost):
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing within:
1 year $ 76,718 $ 31 - $ 76,749
5-10 years 30,155 - $ (777) 29,378
Other debt securities
maturing within:
1 year 91,664 4 (35) 91,633
1-5 years 141,553 576 (27) 142,102
----------------------------------------------
TOTAL HELD-TO-MATURITY $ 340,090 $ 611 $ (839) $ 339,862
==============================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
- ------------------------------------------------------------------------------
(thousands)
TOTAL TRADING SECURITIES
(carried at estimated
fair value) $135,325 $ 1,314 $ (1,328) $135,311
==============================================
SECURITIES AVAILABLE-FOR-SALE
(carried at estimated
fair value):
Equity securities $ 22,423 $ 45,894 $ (350) $ 67,967
U.S. Treasury securities
and obligations of other
U.S. government agencies
maturing within:
1 year 7,503 17 - 7,520
1-5 years 162,322 7,103 - 169,425
5-10 years 83,188 437 - 83,625
Other debt securities
maturing within
1-5 years 29,868 1,172 - 31,040
----------------------------------------------
TOTAL AVAILABLE-FOR-SALE $305,304 $ 54,623 $ (350) $359,577
==============================================
SECURITIES HELD-TO-MATURITY*
(carried at amortized cost)
maturing within 1 year:
U.S. Treasury securities
and obligations of other
U.S. government agencies $219,267 $ 318 $ (53) $219,532
Other debt securities 236,870 95 (297) 236,668
----------------------------------------------
TOTAL HELD-TO-MATURITY $456,137 $ 413 $ (350) $456,200
==============================================
* Interest rate swap arrangements are used to modify the duration of certain
held-to-maturity securities. The average effective maturity of the
portfolio was 2.5 years and 2.7 years at December 31, 1996 and 1995,
respectively. See "Financial Instruments" note for further information.
The carrying value of all investment securities held at December 31, 1996 and
1995 is summarized below (thousands):
Security 1996 1995
- ------------------------------------------------------------------------------
Trading securities $143,495 $135,311
Securities available-for-sale maturing within one year 97,718 7,520
Securities held-to-maturity maturing within one year 168,382 456,137
Accrued interest 6,305 4,328
-------- --------
Total short-term investments $415,900 $603,296
======== ========
Securities available-for-sale maturing within 1-10 years,
including equity securities $357,999 $352,057
Securities held-to-maturity maturing within 1-10 years 171,708 -
Accrued interest 6,209 4,418
-------- --------
Total long-term marketable securities $535,916 $356,475
======== ========
In 1996, proceeds from sales of available-for-sale securities totaled $182.6
million; gross realized gains totaled $1.0 million and gross realized losses
totaled $0.7 million. In 1995, proceeds from sales of available-for-sale
securities totaled $101.6 million; gross realized gains totaled $7.6 million
and gross realized losses totaled $0.2 million. During 1994, no available-for-
sale securities were sold. The Company recorded charges in 1995 and 1994 of
$6.6 million and $12.6 million, respectively, to write down certain available-
for-sale biotechnology equity securities for which the decline in fair value
below cost was other than temporary.
During the year ended December 31, 1996, net unrealized holding losses on
trading securities included in net income totaled $1.0 million. In 1995 and
1994, such losses were not material.
Marketable debt securities held by the Company are issued by a diversified
selection of corporate and financial institutions with strong credit ratings.
The Company's investment policy limits the amount of credit exposure with any
one institution. These debt securities are generally not collateralized. The
Company has not experienced any material losses due to credit impairment on
its investments in marketable debt securities in the years 1996, 1995 and
1994.
FINANCIAL INSTRUMENTS
Foreign Currency Instruments: Certain of the Company's revenues are earned
outside of the United States. Moreover, the Company's foreign currency
denominated revenues exceed its foreign currency denominated expenses;
therefore, risk exists that net income may be impacted by changes in the
exchange rates between the U.S. dollar and foreign currencies. To hedge
anticipated non-dollar denominated net revenues, the Company currently
purchases options and enters into forward contracts. At December 31, 1996,
the Company had hedged approximately 90% of probable net foreign revenues
anticipated within 12 months and between 20% and 45% of its probable net
foreign revenues through 2000. At December 31, 1996 and 1995, the notional
amount of the options totaled $100.3 million and $72.8 million, respectively,
and consisted of the following currencies: Australian dollars, Canadian
dollars, German marks, Spanish pesetas, French francs, British pounds, Italian
lire, Japanese yen, and Swedish krona. All option contracts mature within the
next four years. The fair value of the options, which is based on exchange
rates and market conditions at December 31, 1996 and 1995, totaled $7.3
million and $6.3 million, respectively. At December 31, 1996 and 1995, the
U.S. dollar equivalent of the notional amount of the forward sell contracts
was $34.3 million and $6.0 million, respectively, and the forward buy
contracts totaled $0.4 million and $6.2 million, respectively.
Credit exposure is limited to the unrealized gains on these contracts. All
agreements are with a diversified selection of institutions with strong credit
ratings which minimizes risk of loss due to nonpayment from the counterparty.
The Company has not experienced any losses due to credit impairment of its
foreign currency instruments.
Interest Rate Swaps: Interest income is subject to fluctuations as U.S.
interest rates change. To manage this risk, the Company periodically
establishes duration targets for its investment portfolio that reflect its
anticipated use of cash and fluctuations in market rates of interest. The
Company enters into interest rate swaps (swaps) as part of its overall
strategy of managing the duration of its cash portfolio. For each swap, the
Company receives interest based on fixed rates and pays interest to
counterparties based on floating rates (three- or six- month London Inter-Bank
Offered Rate (LIBOR)) on a notional principal amount. By designating a swap
with a pool of short-term securities equal in size to the notional amount of
the swap, an instrument with an effective interest rate and maturity equal to
the term of the swap is created. Increases (decreases) in swap variable
payments caused by rising (falling) interest rates will be essentially offset
by increased (reduced) interest income on the related short-term investments,
while the fixed rate payments received from the swap counterparty establish
the Company's interest income. LIBOR payments received on swaps are highly
correlated to interest collections on short-term investments. The use of
swaps in this manner generates net interest income on the swap and the
associated pool of short-term securities equivalent to interest income that
would be earned from a high-grade corporate security of the same maturity as
the swap, while reducing credit risk (there is no principal invested in a
swap). The Company's credit exposure on swaps is limited to the value of the
interest rate swaps that have become favorable to the Company and any net
interest earned but not yet received. The Company's swap counterparties have
strong credit ratings which minimize the risk of non-performance on the swaps.
The Company has not experienced any material losses due to credit impairment.
The Company's credit exposure on swaps as of December 31, 1996 and 1995, was
$6.8 million and $24.1 million, respectively. The net carrying amount of the
swaps, which reflects the net interest accrued for such swaps, totaled $2.1
million and $7.2 million at December 31, 1996 and 1995, respectively, and is
included in accounts receivable.
The Company targets the average maturity of its investment portfolio
(including cash, cash equivalents, short-term and long-term investments,
swaps, and excluding equity securities) based on its anticipated use of cash
and fluctuations in the market rates of interest. The maturity of the
investment portfolio (including swaps) ranges from overnight funds used for
near-term working capital purposes to investments maturing within the next one
to ten years for future working capital, capital expenditures, strategic
investments and debt repayment.
The notional amount of each swap is equal to the amount of designated high-
quality short-term investments which are expected to be invested in during the
life of the swap. The anticipated investments include U.S. Treasury
securities, U.S. government agency securities, commercial paper and corporate
debt obligations. Swaps are used to extend the maturity of the investment
portfolio.
For the years ended December 31, 1996 and 1995, the weighted average rate
received on swaps was 6.71% and 7.29%, respectively, and the weighted average
rate paid on swaps was 5.68% and 6.56%, respectively. Net interest income
(loss) from swaps, including amortization of net losses on terminated swaps,
totaled $2.5 million in 1996 and ($0.7) million in 1995.
During 1995, to reduce the average effective maturity of its portfolio, the
Company terminated certain swap agreements prior to maturity and is amortizing
the realized gains and losses over the original contractual term of the swaps
as a reduction to interest income. At December 31, 1996, net losses of $0.7
million remained unamortized; $0.5 million will be recognized in 1997 and $0.2
million will be recognized in 1998.
Equity Collar Instruments: To hedge against fluctuations in the market value
of a portion of the marketable equity portfolio, the Company has entered into
costless collar instruments, a form of equity collar instrument, that expire
in 1998 and 1999 and will require settlement in equity securities or cash. A
costless collar instrument is a purchased put option and a written call option
on a specific equity security such that the cost of the purchased put and the
proceeds of the written call offset each other; therefore, there is no initial
cost or cash outflow for these instruments. The fair value of the purchased
puts and the written calls were determined based on quoted market prices at
year end. At December 31, 1996, the notional amount of the put and call
options were $17.2 million and $27.5 million, respectively.
The tables below outline specific information for the swaps outstanding at
December 31, 1996 and 1995. The fair value is based on market prices of similar
agreements. Dollars are in millions.
<TABLE>
<CAPTION>
Interest Rate Swaps Short-term Investments
--------------------------- --------------------------------
Fixed Average
Rates Variable Effective
Notional To Be Rates To Carrying Average Interest
December 31, 1996: Amounts Received Be Paid* Value Maturity** Rate
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Swaps matched
to investments
to meet maturity
target comparable
to outstanding debt 3- or 6-
[Maturing on: 7.68%- month
1/2/02] $150 7.71% LIBOR $150 13 days 5.66%
Swaps matched to
other investments
to meet specific
maturity targets 3- or 6-
[Ending dates: 4.97%- month
10/27/97-9/20/99] 60 7.20% LIBOR 60 32 days 5.47%
Other short-term
investments - 206
-------- --------
Total $210 $416
======== ========
December 31, 1995:
- ------------------
Swaps matched
to investments
to meet maturity
target comparable
to outstanding debt 3- or 6-
[Maturing on: 7.68%- month
1/2/02] $150 7.71% LIBOR $150 118 days 5.52%
Swaps matched to
other investments
to meet specific
maturity targets 3- or 6-
[Ending dates: 6.09%- month
8/12/97 - 9/20/99] 80 7.20% LIBOR 80 93 days 5.85%
Other short-term
investments - 373
-------- --------
Total $230 $603
======== ========
<FN>
* 3- and 6-month LIBOR rates are reset every 3 or 6 months. At December 31,
1996, the 3-month LIBOR rate and the 6-month LIBOR rate were 5.6%. At December
31, 1995, the 3-month LIBOR rate was 5.6% and the 6-month LIBOR rate was 5.5%.
** Average maturity reflects either the maturity date or, for a floating
investment, the next reset date.
</TABLE>
Financial Instruments Held for Trading Purposes: As part of its overall
investment strategy, the Company has contracted with two external money
managers to manage part of its investment portfolio. One portfolio, which had
a carrying value of $37.2 million at December 31, 1996, and $34.9 million at
December 31, 1995, consisted of primarily non-dollar denominated investments.
To hedge the non-dollar denominated investments, the money manager enters into
forward contracts. The fair value at December 31, 1996 and 1995, of the
forward contracts totaled $0.8 million and $0.1 million, respectively. The
average fair value during 1996 and 1995 totaled $0.3 million and $0.1 million,
respectively. Net realized and unrealized trading gains on the portfolio
totaled approximately $2.4 million in 1996 and $3.8 million in 1995, and are
included in interest income. Counterparties have strong credit ratings which
minimize the risk of non-performance from the counterparties.
Summary of Fair Values: The table below summarizes the carrying value and fair
value at December 31, 1996 and 1995, of the Company's financial instruments.
The fair value of the long-term debt was estimated based on the quoted market
price at year end.
1996 1995
------------------ ---------------------
Carrying Fair Carrying Fair
Financial Instrument Value Value Value Value
- ------------------------------------------------------------------------------
(thousands)
Assets:
Investment securities
(including accrued interest
and traded forward contracts) $ 951,816 $ 951,588 $959,771 $959,834
Purchased foreign exchange put
options 4,616 7,273 2,345 6,300
Outstanding interest rate swaps (net) 2,122 11,555 7,194 23,940
Liabilities:
Short-term and long-term debt 150,000 139,500 150,358 147,750
Equity collars 1,222 4,892 - -
Foreign exchange forward contracts 138 138 237 237
OTHER ACCRUED LIABILITIES
Other accrued liabilities at December 31 are as follows (thousands):
1996 1995
- ------------------------------------------------------------------------------
Accrued compensation $ 42,716 $ 36,945
Accrued clinical and other studies 39,981 27,290
Accrued royalties 25,098 23,159
Accrued marketing and promotion costs 11,889 18,863
Income taxes payable 18,530 14,329
Other 56,328 67,012
-----------------------------
Total other accrued liabilities $194,542 $187,598
=============================
LONG-TERM DEBT
The Company's long-term debt as of December 31, 1996 and 1995 consisted of
$150.0 million of convertible subordinated debentures, with interest payable
at 5%, due in 2002. The debentures are convertible at the option of the
holder into shares of the Company's special common stock. Upon conversion,
the holder receives, for each $74 in principal amount of debenture converted,
one-half share of the Company's special common stock and $18 in cash. The $18
in cash is reimbursed by Roche to the Company. Generally, the Company may
redeem the debentures until maturity.
LEASES, COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under operating leases at December 31, 1996 are
as follows (thousands):
1997 1998 1999 2000 2001 Thereafter Total
- ------------------------------------------------------------------------------
$7,563 3,942 5,400 5,121 4,791 9,155 $35,972
The Company leases various real property under operating leases that generally
require the Company to pay taxes, insurance and maintenance. Rent expense was
approximately $11.7 million, $9.5 million and $6.5 million for the years 1996,
1995 and 1994, respectively. Sublease income was not material in any of the
three years presented.
Under three of the lease agreements, the Company has an option to purchase the
properties at an amount that does not constitute a bargain. Alternatively,
the Company can cause the property to be sold to a third party. The Company
is contingently liable, under residual value guarantees, for approximately
$166.0 million. The Company also is required to maintain certain financial
ratios and is limited to the amount of additional debt it can assume.
Pursuant to its research and development collaboration agreement entered into
with Scios Inc. (Scios) in 1995, the Company established a line of credit for
$30 million that Scios may draw down at Scios' discretion through 2002. This
commitment is supported through December 31, 1997, by a bank letter of credit
under which Scios may draw up to $30 million directly from the bank, with
immediate repayment of the funds due to the bank by the Company. Amounts drawn
by Scios under the bank letter of credit or directly from the Company are
repayable in the form of cash or Scios common stock (at the average market
price over the thirty day period before the date of repayment) at Scios'
option any time through December 30, 2002. Interest on amounts borrowed by
Scios accrue to the Company at the prime rate of interest. At December 31,
1996 and 1995, no amounts were drawn.
In addition, the Company has entered into research collaborations with
companies whereby potential future payments may be due to selective
collaborative partners if the partners achieve certain benchmarks as defined
in the collaborative agreements. The Company may also, from time to time,
lend additional funds to these companies, subject to approval.
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase;
product liability cases involving Activase and growth hormone products; and
class action lawsuits regarding Protropin. In addition, in 1995 the Company
received and responded to grand jury document subpoenas from the United States
District Court for the Northern District of California for documents relating
to the Company's clinical, sales and marketing activities associated with
human growth hormone. In February 1997, the Company received another grand
jury document subpoena from the same court related to the same subject matter.
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 these
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.
RELATIONSHIP WITH ROCHE HOLDINGS, INC.
On October 25, 1995, the Company and Roche entered into a new agreement (the
Agreement). Each share of the Company's common stock not held by Roche or its
affiliates on that date automatically converted to one share of callable
putable common stock (special common stock). The Agreement extends until June
30, 1999, Roche's option to cause the Company to redeem (call) the outstanding
special common stock of the Company at predetermined prices. Should the call
be exercised, Roche will concurrently purchase from the Company a like number
of common shares for a price equal to the Company's cost to redeem the special
common stock. During the quarter beginning January 1, 1997, the call price is
$69.25 per share; it increases by $1.25 in the following quarter, then
increases by $1.50 per share each quarter through the end of the option period
on June 30, 1999, on which date the price is $82.50 per share. If Roche does
not cause the redemption as of June 30, 1999, the Company's stockholders will
have the option (the put) to cause the Company to redeem none, some, or all of
their shares of special common stock at $60.00 per share (and Roche will
concurrently provide the necessary redemption funds to the Company by
purchasing a like number of shares of common stock at $60.00 per share) within
thirty business days commencing July 1, 1999. Roche Holding Ltd, a Swiss
corporation, has guaranteed Roche's obligation under the put.
In conjunction with the Agreement, HLR was granted an option for ten years for
licenses to use and sell certain of the Company'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 the Company mutually agrees, the conclusion of
phase II clinical trials for each product. In general, for each product for
which HLR exercises its option, the Company and HLR will share equally all
development expenses incurred by the Company through the option exercise date
and prospectively with respect to the development of the 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 the Company for HLR's
share of development costs incurred prior to HLR's option exercise date,
either 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
the Company.
In general, HLR pays a royalty of 12.5% until a product reaches $100 million
in aggregate sales outside of the U.S., 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 products
and European sales of Pulmozyme. Consequently, in the fourth quarter of 1995,
the Company transferred to HLR the rights to its Canadian product sales and
European sales of Pulmozyme, and commenced recording royalty revenue from HLR
on such sales. The Company supplies its products to HLR, and has agreed to
supply products for which HLR has exercised its option, for sales outside of
the U.S. at cost plus 20%.
Under the Agreement, independent of its right to cause the Company to redeem
the special common stock, Roche may increase its ownership of the Company up
to 79.9% by making purchases on the open market. Roche holds approximately
66.0% of the outstanding common equity of the Company as of December 31, 1996.
In January and February 1997, Roche purchased additional shares of the
Company's common equity increasing Roche's holdings to 68.0%.
RELATED PARTY TRANSACTIONS
The Company has transactions with Roche, HLR (a wholly owned subsidiary of
Roche, with two officers on the Company's Board of Directors), and its
affiliates in the ordinary course of business. In 1996, HLR exercised its
option under the Agreement with respect to the development of three projects -
IDEC-C2B8, insulin-like growth factor (IGF-1) and nerve growth factor (NGF).
The Company recorded non-recurring contract revenues of $58.2 million relating
to the option exercises. Other contract revenue from HLR, including
reimbursement for ongoing development expenses after the option exercise date
for the three projects, totaled $37.1 million in 1996, $13.4 million in 1995
and $17.1 million in 1994. All other revenue from Roche, HLR and their
affiliates, principally royalties under previous product licensing agreements,
and royalties and product sales under the Agreement, totaled $39.5 million in
1996, $14.3 million in 1995 and $8.5 million in 1994. During the three years,
the Company has collaborated with HLR on other projects.
CAPITAL STOCK
Common Stock, Special Common Stock and Redeemable Common Stock
After the close of business on June 30, 1995, each share of the Company's
redeemable common stock automatically converted to one share of Genentech
common stock, in accordance with the terms of the redeemable common stock put
in place at the time of its issuance in 1990 and as described in Genentech's
Certificate of Incorporation. On October 25, 1995, pursuant to the Agreement
with Roche, each share of the Company's common stock not held by Roche or its
affiliates automatically converted to one share of callable putable common
stock (special common stock). See the "Relationship with Roche Holdings,
Inc." note above for a discussion of these transactions.
Stock Award Plans
The Company has stock option plans adopted in 1996, 1994, 1990 and 1984, which
variously allow for the granting of non-qualified stock options, incentive
stock options and stock appreciation rights to employees, and the granting of
non-qualified stock options to directors and consultants of the Company.
Generally, non-qualified options have a maximum term of 20 years and incentive
options have a maximum term of 10 years. In general, options vest in
increments over four years from the date of grant, although the Company may
grant options with different vesting terms from time to time. No stock
appreciation rights have been granted to date.
The Company adopted the 1991 Employee Stock Plan (1991 Plan) on December 4,
1990, and amended it during 1993 and 1995. All full-time employees of the
Company are eligible to participate in the 1991 Plan. Of the 3,800,000 shares
of special common stock reserved for issuance under the 1991 Plan, 2,865,196
shares have been issued as of December 31, 1996. During 1996, 2,487 of the
eligible employees participated in the 1991 Plan.
The Company has elected to continue to follow APB 25 for accounting for its
employee stock options because the alternative fair value method of accounting
prescribed by FAS 123 requires the use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.
Pro forma information regarding net income and earnings per share in 1996 and
1995 has been determined as if the Company had accounted for its employee
stock options and employee stock plan under the fair value method prescribed
by FAS 123. The resulting effect on pro forma net income and earnings per
share disclosed for 1996 and 1995 is not likely to be representative of the
effects on net income and earnings per share on a pro forma basis in future
years, because 1995 and 1996 pro forma results include the impact of only one
and two years, respectively, of grants and related vesting, while subsequent
years will include additional years of grants and vesting. The fair value of
options was estimated at the date of grant using a Black-Scholes option
valuation model with the following weighted average assumptions: risk-free
interest rates of 5.8% for 1996 and 6.0% for 1995; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock
of 6.2%; and a weighted-average expected life of the option of 5.0 years.
Grants under the employee stock plan terminate with each quarterly stock
purchase.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to pro forma expense over the options' vesting period. Pro forma
information for the years ending December 31 follows (in thousands, except per
share amounts):
1996 1995
---- ----
Net income - as reported $ 118,348 $ 146,432
Net income - pro forma 104,358 142,370
Earnings per share - as reported 0.96 1.21
Earnings per share - pro forma 0.84 1.18
A summary of the Company's stock option activity and related information were
as follows:
Shares Weighted Average
Price
----------- ----------------
Options outstanding at December 31, 1993 12,439,727 $ 27.38
Grants 5,137,055 50.19
Exercises (1,400,223) 23.53
Cancellations (195,752) 36.89
Options outstanding at December 31, 1994 15,980,807 34.93
Grants 1,303,800 48.52
Exercises (1,472,759) 24.60
Cancellations (602,774) 42.59
------------
Options outstanding at December 31, 1995 15,209,074 36.80
Grants 6,761,545 53.99
Exercises (1,624,541) 29.39
Cancellations (743,569) 48.93
------------
Options outstanding at December 31, 1996 19,602,509 42.89
============
The following table summarizes information concerning currently outstanding and
exercisable options:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- -------- ----------- ---------
$14.080 - $20.625 1,278,761 2.83 $17.01 1,278,361 $17.01
$21.375 - $31.000 4,181,212 12.77 26.37 4,114,332 26.37
$32.125 - $48.125 2,964,663 16.74 41.68 2,126,573 39.33
$48.250 - $54.250 11,177,873 13.42 52.45 952,284 50.45
----------- -----------
19,602,509 13.09 42.93 8,471,550 30.91
=========== ===========
Using the Black-Scholes option valuation model, the weighted average fair value
of options granted in 1996 and 1995 was $13.36 and $12.27, respectively.
Shares of special common stock available for future grants under all stock
option plans were 4,469,574 at December 31, 1996.
Warrants
All previously outstanding warrants to purchase the Company's special common
stock were exercised or expired as of July 31, 1996. As of December 31, 1995,
121,445 shares subject to exercisable warrants were outstanding, with a price
range of $27.57 to $28.26. 113,093 shares were exercised through July 31,
1996, at a price range of $27.57 to $28.26, and 8,352 shares expired
unexercised.
QUASI-REORGANIZATION
On October 1, 1987, the Company eliminated its accumulated deficit through an
accounting reorganization of its stockholders' equity accounts (a quasi-
reorganization) that did not involve any revaluation of assets or liabilities.
An accumulated deficit of $329.5 million was eliminated by a transfer from
additional paid-in capital in an amount equal to the accumulated deficit.
The Company has been recording, 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 in
1995 would have been reduced by $11.8 million or $.10 per share, and 1994 net
income would have been reduced by $39.7 million or $.33 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 Securities and
Exchange Commission staff has indicated that it would not object to the
Company's accounting for such tax benefits. As of June 30, 1995, the
operating loss and tax credit carryforwards arising prior to the quasi-
reorganization had been fully utilized, therefore there was no impact on
earnings in 1996.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Genentech, Inc.
We have audited the accompanying consolidated balance sheets of Genentech,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. 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 generally accepted auditing
standards. 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 consolidated financial position of Genentech, Inc.
at December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
January 17, 1997
QUARTERLY FINANCIAL DATA (UNAUDITED)
(thousands, except per share amounts)
1996 Quarter Ended
-----------------------------------------------
December 31 September 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $230,325 $251,707 $243,762 $242,884
Product sales 139,724 142,463 148,305 152,337
Gross margin from product sales 113,065 117,627 121,152 126,458
Net income 7,470 50,942 21,719 38,217
Net income per share .06 .41 .18 .31
1995 Quarter Ended
-----------------------------------------------
December 31 September 30 June 30 March 31
- ------------------------------------------------------------------------------
Total revenues $221,914 $223,911 $233,053 $238,967
Product sales 153,482 158,478 161,236 162,067
Gross margin from product sales 130,983 134,109 136,924 135,317
Net income 25,636 40,229 37,163 43,404
Net income per share .21 .33 .31 .36
Total revenues were higher in the first three quarters of 1996 compared to the
fourth quarter due primarily to contract revenue from HLR for the exercises of
its options under the Agreement (see the "Related Party Transactions" note in
the "Notes to Consolidated Financial Statements" for more information) in each
of the first three quarters. Net income was lower in the fourth quarter due
to lower revenues and higher expenses, primarily research and development.
<TABLE>
<CAPTION>
11-YEAR FINANCIAL SUMMARY (UNAUDITED)
(millions, except per share and employee data)
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 968.6 $ 917.8 $ 795.4 $ 649.7 $ 544.3
Product sales 582.8 635.3 601.0 457.4 391.0
Royalties 214.7 190.8 126.0 112.9 91.7
Contract & other 107.0 31.2 25.6 37.9 16.7
Interest 64.1 60.5 42.8 41.5 44.9
----------------------------------------------
Total costs and expenses $ 820.7 $ 745.6 $ 665.8 $ 590.8 $ 522.3
Cost of sales 104.5 97.9 95.8 70.5 66.8
Research & development 471.1 363.0 314.3 299.4 278.6
Marketing, general & administrative 240.1 251.7 248.6 214.4 172.5
Special charge - 25.0(1) - - -
Interest 5.0 8.0 7.1 6.5 4.4
----------------------------------------------
Income data
Income (loss) before taxes $ 147.9 $ 172.2 $ 129.6 $ 58.9 $ 21.9
Income tax provision 29.6 25.8 5.2 - 1.1
Net income (loss) 118.3 146.4 124.4 58.9 20.8
Net income (loss) per share 0.96 1.21 1.04 0.50 0.18
----------------------------------------------
Selected balance sheet data
Cash, short-term investments
& marketable securities $1,159.1 $1,096.8 $ 920.9 $ 719.8 $ 646.9
Accounts receivable 197.6 172.2 146.3 130.5 93.9
Inventories 91.9 93.6 103.2 84.7 65.3
Property, plant & equipment, net 586.2 503.7 485.3 456.7 432.5
Other long-term assets 149.2 105.5 61.0 64.1 37.1
Total assets 2,226.4 2,011.0 1,745.1 1,468.8 1,305.1
Total current liabilities 250.0 233.4 220.5 190.7 133.5
Long-term debt 150.0 150.0 150.4 151.2 152.0
Total liabilities 425.3 408.9 396.3 352.0 297.8
Total stockholders' equity 1,801.1 1,602.0 1,348.8 1,116.8 1,007.3
----------------------------------------------
Other data
Depreciation and amortization expense $ 62.1 $ 58.4 $ 53.5 $ 44.0 $ 52.2
Capital expenditures 141.8 70.2 82.8 87.5 126.0
----------------------------------------------
Share information
Shares used to compute EPS 123.7 121.2 119.5 117.1 114.0
Actual year-end 121.4 119.3 117.2 114.8 112.9
----------------------------------------------
Per share data
Market price: High $ 55.38 $ 53.00* $ 53.50 $ 50.50 $ 39.50
Low $ 51.38 $ 44.50* $ 41.75 $ 31.25 $ 25.88
Book value $ 14.84 $ 13.43 $ 11.50 $ 9.73 $ 8.92
----------------------------------------------
Number of employees 3,071 2,842 2,738 2,510 2,331
----------------------------------------------
<FN>
The Company has paid no dividends.
The Financial Summary above reflects adoption of FAS 121 in 1996, FAS 115 in 1994, FAS
109 in 1992 and FAS 96 in 1988.
All share and per share amounts reflect a two-for-one split in 1986 and a two-for-one
split in 1987.
*Special common stock began trading October 26, 1995. On October 25, 1995, pursuant to
the new Agreement with Roche, each share of the Company's common stock not held by
Roche or its affiliates automatically converted to one share of special common stock.
**Redeemable common stock began trading September 10, 1990; prior to that date
all shares were common stock. Pursuant to the merger agreement with Roche, all
shareholders as of effective date September 7, 1990, received for each common
share owned, $18 in cash from Roche and one-half share of newly issued
redeemable common stock from the Company.
(1) Charges related to 1995 merger and new Agreement with Roche ($21 million) and
resignation of the Company's former CEO ($4 million).
(2) Charges primarily related to 1990 Roche merger.
(3) Primarily inventory-related charge.
(4) Charge for purchase of in-process R&D.
</TABLE>
1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------
$ 515.9 $ 476.1 $ 400.5 $ 334.8 $ 230.5 $ 134.0
383.3 367.2 319.1 262.5 141.4 43.6
63.4 47.6 36.7 26.7 20.1 12.9
20.4 31.9 27.5 33.5 57.1 70.9
48.8 29.4 17.2 12.1 11.9 6.6
- --------------------------------------------------------------------
$ 469.8 $ 572.7 $ 352.9 $ 311.7 $ 186.6 $ 484.6
68.4 68.3 60.6 46.9 23.8 10.8
221.3 173.1 156.9 132.7 96.5 79.8
175.3 158.1 127.9 101.9 59.5 27.3
- 167.7(2) - 23.3(3) - 366.7(4)
4.8 5.5 7.5 6.9 6.8 -
- --------------------------------------------------------------------
$ 46.1 $ (96.6) $ 47.6 $ 23.1 $ 43.9 $ (350.6)
1.8 1.5 3.6 2.5 1.7 2.4
44.3 (98.0) 44.0 20.6 42.2 (353.0)
0.39 (1.05) 0.51 0.24 0.50 (5.10)
- --------------------------------------------------------------------
$ 711.4 $ 691.3 $ 205.0 $ 152.5 $ 158.3 $ 84.3
69.0 58.8 66.8 63.9 92.2 24.5
56.2 39.6 49.3 63.4 58.0 14.7
342.5 300.2 299.1 289.4 195.7 133.1
42.7 61.7 85.0 89.7 108.7 114.9
1,231.4 1,157.7 711.2 662.9 619.0 376.0
118.6 101.4 75.9 95.4 82.8 37.8
152.9 153.5 154.4 155.3 168.1 31.6
281.7 264.5 242.2 263.6 263.6 83.3
949.7 893.2 469.0 399.3 355.4 292.6
- --------------------------------------------------------------------
$ 46.9 $ 47.6 $ 44.6 $ 38.3 $ 23.5 $ 8.1
71.3 36.0 37.2 110.9 65.3 46.3
- --------------------------------------------------------------------
112.5 93.0 86.0 84.5 84.4 69.3
111.3 110.6 84.3 82.9 78.7 67.0
- --------------------------------------------------------------------
$ 36.25 $ 30.88 $ 23.38 $ 47.50 $ 64.75 $ 49.38
$ 27.50**
$ 20.75 $ 20.13 $ 16.00 $ 14.38 $ 28.00 $ 16.44
$ 21.75**
$ 8.53 $ 8.08 $ 5.56 $ 4.82 $ 4.52 $ 4.37
- --------------------------------------------------------------------
2,202 1,923 1,790 1,744 1,465 1,168
- --------------------------------------------------------------------
COMMON STOCK, SPECIAL COMMON STOCK AND REDEEMABLE COMMON STOCK INFORMATION
Stock Trading Symbol GNE
Stock Exchange Listings
The Company's callable putable common stock (special common stock) has traded
on the New York Stock Exchange and the Pacific Stock Exchange under the symbol
GNE since October 26, 1995. On October 25, 1995, the Company's non-Roche
stockholders approved a new agreement (the Agreement) with Roche Holdings,
Inc. (Roche). Pursuant to the Agreement, each share of the Company's common
stock not held by Roche or its affiliates automatically converted to one share
of special common stock. From July 3, 1995 through October 25, 1995, the
Company's common stock was traded under the symbol GNE. After the close of
business on June 30, 1995, each share of the Company's redeemable common stock
automatically converted to one share of the Company's common stock. The
conversion was in accordance with the terms of the redeemable common stock put
in place at the time of its issuance on September 7, 1990, when the Company's
merger with a wholly owned subsidiary of Roche was consummated. The
redeemable common stock of the Company traded under the symbol GNE from
September 10, 1990 to June 30, 1995. The Company's common stock was traded on
the New York Stock Exchange under the symbol GNE from March 2, 1988, until
September 7, 1990, and on the Pacific Stock Exchange under the symbol GNE from
April 12, 1988, until September 7, 1990. The Company's common stock was
previously traded in the NASDAQ National Market System under the symbol GENE.
No dividends have been paid on the common stock, special common stock or
redeemable common stock. The Company currently intends to retain all future
income for use in the operation of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. See the
"Relationship with Roche Holdings, Inc." note in the "Notes to Consolidated
Financial Statements" for a further description of the Agreement with Roche.
Special Common Stockholders
As of December 31, 1996, there were approximately 16,748 stockholders of
record of the Company's special common stock.
Stock Prices Special Common/Redeemable Common/Common Stock
1996 1995
- --------------------------------------------------------------------------
High Low High Low
-------------------------------------------------
4th Quarter $ 54 3/8 $ 52 3/4 $ 53 $ 47 7/8
3rd Quarter 53 1/4 51 3/8 49 1/4 46 5/8
2nd Quarter 53 3/8 51 7/8 52 46 3/8
1st Quarter 55 3/8 52 1/2 51 44 1/2
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Genentech, Inc. of our report dated January 17, 1997, included in the 1996
Annual Report to Stockholders of Genentech, Inc.
Our audits also included the financial statement schedule of Genentech, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements pertaining to the 1991 Employee Stock Plan, the 1996 Stock
Option/Stock Incentive 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 convertible
subordinated debenture holders, the Genentech, Inc. Tax Reduction Investment
Plan and in the related Prospectuses of our report dated January 17, 1997,
with respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
Ernst & Young LLP
San Jose, California
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF INCOME AND CONSOLIDATED
STATEMENTS OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 207,264
<SECURITIES> 951,816
<RECEIVABLES> 205,481
<ALLOWANCES> 7,869
<INVENTORY> 91,943
<CURRENT-ASSETS> 955,084
<PP&E> 906,267
<DEPRECIATION> 320,100
<TOTAL-ASSETS> 2,226,372
<CURRENT-LIABILITIES> 249,951
<BONDS> 150,000
0
0
<COMMON> 2,428
<OTHER-SE> 1,798,631
<TOTAL-LIABILITY-AND-EQUITY> 2,226,372
<SALES> 582,829
<TOTAL-REVENUES> 968,678
<CGS> 104,527
<TOTAL-COSTS> 104,527
<OTHER-EXPENSES> 471,143
<LOSS-PROVISION> 9,887
<INTEREST-EXPENSE> 5,010
<INCOME-PRETAX> 147,935
<INCOME-TAX> 29,587
<INCOME-CONTINUING> 118,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,348
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0
</TABLE>
GENENTECH, INC.
1984 INCENTIVE STOCK OPTION PLAN, AS AMENDED AND RESTATED
(Effective October 16, 1996)
1. PURPOSE
(a) The purpose of the Plan is to provide a means by which selected key
employees of GENENTECH, INC. (the "Company") and its affiliates, as defined in
subparagraph 1(b), may be given an opportunity to purchase stock of the
Company.
(b) The word "affiliate" as used in the Plan means any parent corporation or
subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now holding key positions, to secure and retain the services of
persons capable of filling such positions, and to provide incentives for such
persons to exert maximum efforts for the success of the Company.
(d) The Company intends that the options issued under the Plan be incentive
stock options as that term is used in Section 422 of the Code.
2. ADMINISTRATION
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board relegates administration to a
committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine
all questions of policy and expediency that may arise in the administration of
the Plan.
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible under the
Plan shall be granted options; when and how the option shall be granted; the
provisions of each option granted (which need not be identical), including the
time or times during the term of each option within which all or portions of
such option may be exercised; and the number of shares for which an option
shall be granted to each person.
(2) To construe and interpret the Plan and options granted under it, and to
establish, amend and revoke rules and regulations for its administration. The
Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any option agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
(3) To amend the Plan as provided in paragraph 10.
(4) Generally, to exercise such powers and to perform such acts as the Board
deems necessary or expedient to promote the best interests of the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than three (3) members of the Board. If administration
is delegated to a committee, the committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the committee at any time and revest in the Board the administration
of the Plan.
3. SHARES SUBJECT TO THE PLAN
(a) Subject to the provisions of paragraph 9 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
this Plan shall not exceed in the aggregate Fifteen Million Ninety Four
Thousand Three Hundred and Ninety Seven (15,094,397) shares of the Company's
common stock; provided, however, that such aggregate number of shares shall be
reduced to reflect the number of shares of the Company's common stock which
has been sold under, or may be sold pursuant to outstanding options granted
under, the Company's 1984 Non-Qualified Stock Option Plan (the "Non-Qualified
Plan") to the same extent as if such sales had been made or options had been
granted pursuant to this Plan. As used in this Plan, the "Company's common
stock" includes all series of common stock authorized by the Company's charter
documents, including the Common Stock and Earnings Convertible Restricted
Stock now authorized and any other series that may in the future be
authorized. If any option granted under this Plan or the Non-Qualified Plan
shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such option shall again
become available for this Plan and the Non-Qualified Plan.
(b) For options granted after December 31, 1986, an option may be granted to
an eligible person under the Plan only if the aggregate fair market value
(determined at the time the option is granted) of the stock with respect to
which incentive stock options are exercisable for the first time by such
optionee during any calendar year under all such plans of the Company and its
affiliates does not exceed one hundred thousand dollars ($100,000). Should it
be determined that any option granted under the Plan exceeds such maximum,
such option shall be considered a nonstatutory stock option to the extent, but
only to the extent, of such excess.
(c) Subject to the limitations contained elsewhere herein and to the
provisions of paragraph 9 relating to adjustments upon changes in stock, the
aggregate number of shares of stock that may be subject to options granted to
all persons who are directors of the Company at the time such Options are
granted shall not exceed four hundred thousand (400,000) shares of the
Company's common stock, and no single director of the Company may be granted
options to purchase more than two hundred thousand (200,000) shares of the
Company's common stock.
4. ELIGIBILITY
(a) Options may be granted only to key employees (including officers) of the
Company or its affiliates. A director of the Company shall not be eligible to
be granted an option under the Plan unless such director is also a key
employee (including an officer) of the Company or an affiliate of the Company.
(b) A director shall in no event be eligible to be granted an option under
the Plan unless and until such director is expressly declared eligible to
participate in the Plan by action of the Board or the committee.
(c) No person shall be eligible for the grant of an option under the Plan
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock assessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any
of its affiliates unless the options price is at least one hundred ten percent
(110%) of the fair market value of such stock at the date of grant and the
term of the option does not exceed five (5) years from the date of grant.
5. OPTION PROVISIONS
Each option shall be in such form and shall contain such terms and
conditions as the Board or the committee shall deem appropriate. The
provisions of separate options need not be identical, but each option shall
include (through incorporation of provisions hereof by reference in the option
or otherwise) the substance of each of the following provisions:
(a) The term of any option shall not be greater than ten (10) years from the
date it was granted.
(b) The exercise price of each option shall be not less than one hundred
percent (100%) of the fair market value of the stock subject to the option on
the date the option is granted.
(c) The purchase price of stock acquired pursuant to an option shall be
paid, as specified in the option, either (i) in cash at the time the option is
exercised, or (ii) at the discretion of the Board or the committee, (A) by
delivery to the Company of other shares of the Company's common stock, (B)
according to a deferred payment or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other common
stock of the Company) with the person to whom the option is granted or to whom
the option is transferred pursuant to subparagraph 5(d), or (C) in any other
form of legal consideration that may be acceptable to the Board or the
committee in their discretion, either at the time of grant or exercise of the
option.
In the case of any deferred payment arrangement specified at the time of
grant, an interest rate shall be stated which is not less than the rate then
specified which will prevent any imputation of higher interest under Section
483 of the Code.
(d) An option shall not be transferable except by will or by the laws of
descent and distribution, and shall be exercisable during the lifetime of the
person to whom the option is granted only by such person.
(e) The total number of shares of stock subject to an option may, but need
not, be allotted in periodic installments (which may, but need not, be equal).
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period
as to which the option was not fully exercised. During the remainder of the
term of the option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the option. The provisions of this
subparagraph 5(e) are subject to any option provisions governing the minimum
number of shares as to which an option may be exercised.
(f) [RESERVED]
(g) The Company may require any optionee, or any person to whom an option is
transferred under subparagraph 5(d), as a condition of exercising any such
option to make such representations, warranties and agreements as the Company
may deem appropriate to assure that issuance of the Company's common stock
upon exercise of such option is in compliance with then applicable federal and
state securities laws.
(h) An option shall terminate three (3) months after termination of the
optionee's employment with the Company or an affiliate, unless (i) the
termination of employment of the optionee is due to such person's permanent
and total disability, within the meaning of Section 422(c)(6) of the Code, in
which case the option may, but need not, provide that it may be exercised at
any time within one (1) year following such termination of employment; or (ii)
the optionee dies while in the employ of the Company or an affiliate, or
within not more than three (3) months after termination of such employment, in
which case the option may, but need not, provide that it may be exercised at
any time within eighteen (18) months following the death of the optionee by
the person or persons to whom the optionee's rights under such option pass by
will or by the laws of descent and distribution; or (iii) the option by its
terms specifies either (a) that it shall terminate sooner than three (3)
months after termination of the optionee's employment, or (b) that it may be
exercised more than three (3) months after termination of the optionee's
employment with the Company or an affiliate. This subparagraph 5(h) shall not
be construed to extend the term of any option or to permit anyone to exercise
the option after expiration of its term, nor shall it be construed to increase
the number of shares as to which any option is exercisable from the amount
exercisable on the date of termination of the optionee's employment.
(i) The option may, but need not, include a provision whereby the optionee
may elect any time during the term of his or her employment with the Company
or any affiliate to exercise the option as to any part or all of the shares
subject to the option prior to the stated vesting data of the option or of any
installment or installments specified in the option. Any shares so purchased
from any unvested installment or option may be subject to a repurchase right
in favor of the Company or to any other restriction the Board or the committee
determines to be appropriate.
(j) Options may be granted to directors of the Company only during the first
month of each calendar quarter. Any option held by a director of the Company
may only be exercised during any period of ten business days beginning on the
third business day after a quarterly or annual summary statement of the
Company's revenues and earnings appears on a wire service or in a newspaper of
general circulation, or is otherwise made generally available to the public.
6. COVENANTS OF THE COMPANY
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company
to register under the Securities Act of 1933, as amended, either the Plan, any
option granted under the Plan or any stock issued or issuable pursuant to any
such option. If the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems
necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell
stock upon exercise of such options unless and until such authority is
obtained.
7. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
8. MISCELLANEOUS
(a) The Board or the committee shall have the power to accelerate the time
during which an option may be exercised or the time during which the option or
any part thereof will vest pursuant to subparagraph 5(e), notwithstanding the
provisions in the option stating the time during which it may be exercised or
the time during which it will vest.
(b) Neither an optionee nor any person to whom an option is transferred
under subparagraph 5(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option
unless and until such person has satisfied all requirements for exercise of
the option pursuant to its terms.
9. ADJUSTMENTS UPON CHANGES IN STOCK
(a) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or otherwise), the Board shall make
appropriate adjustments in the maximum number of shares subject to the Plan
and the number of shares and price per share of stock subject to outstanding
options.
(b) In the event of a Change of Control (as defined in subparagraph 9(c)),
then as to options which are not then exercisable, the time during which such
options may be exercised shall be accelerated to the 60-day period from and
after a Change of Control, unless, in the opinion of the Board, it is clearly
in the best interests of the optionholders and the shareholders taken together
that the Company or a surviving corporation (if the Change of Control results
in the Company not surviving) assume any outstanding options or substitute
similar options for those outstanding under the Plan, in which case the Board
may take appropriate action to effect an assumption or substitution.
(c) "Change of Control" shall mean any of the following events:
(1) the acquisition by any person (including a group, within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended), other than the Company or any of its subsidiaries, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended) of 50% or more of the combined voting power
of the Company's then outstanding voting securities; or
(2) approval by stockholders of the Company of a merger, consolidation,
liquidation or dissolution of the Company or of the sale of all or
substantially all of the Company's assets.
(d) Notwithstanding any provision to the contrary set forth herein, the
consummation of the merger contemplated by the Agreement and Plan of Merger
dated as of May 23, 1995, among the Company, Roche Holdings, Inc. and HLR
(U.S.) II, Inc. shall not be deemed to be a Change of Control under the Plan.
(e) From and after October 25, 1995, all references herein to "shares",
"stock", or "the Company's common stock" shall be deemed to be references to
shares of Callable Putable Common Stock, par value $0.02 per share, of the
Company ("Special Common Stock"), except for the references to the shares of
Common Stock of the Company contained in subparagraph 9(g).
(f) Notwithstanding any provision to the contrary set forth herein, in the
event that the Special Common Stock is redeemed in accordance with Article
THIRD, Section (c)(ii) of the Company's Certificate of Incorporation, any
options granted under the Plan that are exercisable for Special Common Stock
and that are outstanding on the date of redemption (whether or not such
options are exercisable on such date) shall become exercisable for
consideration of the same type and amount as the holders thereof would have
received had they exercised such options prior to such date of redemption.
(g) Notwithstanding any provision to the contrary set forth herein, in the
event that the shares of Special Common Stock are converted into shares of
Common Stock, par value $0.02 per share, of the Company ("Common Stock")
pursuant to Article THIRD, Section (c)(vi) of the Company's Certificate of
Incorporation, each option granted under the Plan which is outstanding on the
Conversion Date as such term is defined in Article THIRD, Section (c)(vi) of
the Company's Certificate of Incorporation) shall automatically be canceled,
and the holder thereof shall receive, in exchange therefor, a substitute
option to purchase, at a per share exercise price equal to the per share
exercise price of such canceled option, the number of shares of Common Stock
equal to the number of shares of Special Common Stock subject to such canceled
option. Such substitute option shall be subject to the same terms and
conditions as the option for which it is exchanged, including with respect to
vesting (such that such substitute option vests at the same time as the option
for which it is exchanged would have vested) and the conditions relating to
the exercise of the option. From and after the Conversion Date, all references
herein to "shares", "stock", or the "Company's Common Stock" which in
accordance with subparagraph 9(e) are deemed to be references to shares of
Special Common Stock, shall be deemed to be references to shares of Common
Stock.
10. AMENDMENT OF THE PLAN
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 9 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by a
majority of the outstanding shares of the Company entitled to vote within
twelve (12) months before or after the adoption of the amendment, where the
amendment will:
(i) Increase the number of shares reserved for options under the Plan;
(ii) Materially modify the requirements as to eligibility for participation
in the Plan; or
(iii) Materially increase the benefits accruing to participants under the
Plan.
It to expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide optionees with the
maximum benefits provided or to be provided under the provisions of the Code
and the regulations promulgated thereunder relating to employee incentive
stock options and/or to bring the Plan and/or options granted under it into
compliance therewith.
(b) Rights and obligations under any option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom the option was granted.
11. TERMINATION OR SUSPENSION OF THE PLAN
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate within ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No options may be granted under the Plan while the Plan
is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the option was granted.
12. EFFECTIVE DATE OF PLAN
The Plan shall become effective as determined by the Board, but no options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the holders of a majority of the outstanding shares of the Company
entitled to vote, and, if required, an appropriate permit has been issued by
the Commissioner of Corporations of the State of California.
GENENTECH, INC.
1984 NON-QUALIFIED STOCK OPTION PLAN, AS AMENDED AND RESTATED
(Effective October 16, 1996)
1. PURPOSE
(a) The purpose of the Plan is to provide a means by which selected key
employees and directors (if declared eligible under paragraph 4) of and
consultants to GENENTECH, INC. (the "Company") and its affiliates, as defined
in subparagraph 1(b), may be given an opportunity to purchase stock of the
Company.
(b) The word "affiliate" as used in the Plan means any Parent corporation or
subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now holding key positions to secure and retain the services of persons
capable of filling such positions, and to provide incentives for such persons
to exert maximum efforts for the success of the Company.
(d) The Company intends that the options issued under the Plan not be
incentive stock options as that term is used in Section 422 of the Code.
(e) For purposes of the Plan, the following definitions shall apply:
CLOSING SELLING PRICE: The Closing Selling Price per share of Common Stock
on any relevant date under the Plan shall be the closing selling price per
share of Common Stock, if such Common Stock is reported on a national
securities exchange or reported on the NASDAQ National Market System (or any
successor system), for the trading day immediately preceding the date in
question, as such price is published in the Wall Street Journal (or if such
publication is not available, a comparable publication selected by the
Committee).
EMPLOYEE: An individual shall be considered to be an Employee for so long
as such individual remains in the employ of the Company or one or more of its
parent or subsidiary corporations.
SERVICE: An individual shall be deemed to be in the Service of the Company
for so long as such individual (i) renders service on a periodic basis to the
Company or one or more of its parent or subsidiary corporations as an Employee
or Consultant or (ii) is a member of the Company's Board of Directors (the
"Board").
2. ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee (the
"Committee"). The Committee shall be comprised of not less than three (3)
Board members, none of whom shall be eligible to participate in this Plan or
any other stock option, stock appreciation, stock bonus or other stock plan of
the Company or its parent or subsidiary corporations (except to the extent
such member becomes entitled to the special option grant to be made pursuant
to automatic grant provisions of Section VII of Article Two or to option
grants made pursuant to the automatic grant provisions of Article Three of the
1990 Stock Option/ Stock Incentive Plan). The Board may from time to time
appoint members to the Committee in substitution for (or in addition to)
members previously appointed, and the Board shall have the authority to fill
any and all vacancies on a Committee, however caused.
(b) The Committee shall at all times have the authority to make
discretionary option grants under the Plan to eligible Employees who are not
members of the Board.
(c) Subject to the express provisions of the Plan, the Committee shall have
plenary authority:
(i) To determine from time to time which of the persons eligible under the
Plan shall be granted options; when and how the option shall be granted; the
provisions of each option granted (which need not be identical), including the
time or times during the term of each option within which all or portions of
such option may be exercised; and the number of shares for which an option
shall be granted to each such person.
(ii) To construe and interpret the Plan and options granted under it, and
to establish, amend and revoke rules and regulations for its administration.
The Committee, in the exercise of this power, may correct any defeat, omission
or inconsistency in the Plan or in any option agreement, in a manner and to
the extent it shall deem necessary or expedient to make the Plan fully
effective.
(iii) Generally, to exercise such powers and to perform such acts as the
Committee deems necessary or expedient to promote the best interests of the
Company.
(d) Determinations of the Committee on all matters relating to the Plan and
any discretionary option grants or stock issuances made hereunder shall be
final, binding and conclusive on all persons having any interest in the Plan
or any options granted or shares issued under the Plan.
3. SHARES SUBJECT TO THE PLAN
(a) Subject to the provisions of paragraph 9 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
this Plan shall not exceed in the aggregate Fifteen Million Ninety Four
Thousand Three Hundred and Ninety Seven (15,094,397) shares of the Company's
common stock; provided, however, that such aggregate number of shares shall be
reduced to reflect the number of shares of the Company's common stock which
have been sold under, or may be sold pursuant to outstanding options granted
under, the Company's 1984 Incentive Stock Option Plan (the "ISO Plan") to the
same extent as if such sales had been made or options had been granted
pursuant to this Plan. As used in this Plan, the "Company's common stock"
includes all series of common stock authorized by the Company's charter
documents, including the Common Stock and Earnings Convertible Restricted
Stock now authorized and any other series that may in the future be
authorized. If any option granted under this Plan or the ISO Plan shall for
any reason expire or otherwise terminate without having been exercised in
full, the stock not purchased under such option shall again become available
for this Plan and the ISO Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
(c) There is no maximum limit on the aggregate fair market value (determined
as of the times the respective options are granted) of the stock for which any
eligible person may be granted options under the Plan in any calendar year.
(d) Subject to the limitations contained elsewhere herein and to the
provisions of paragraph 9 relating to adjustments upon changes in stock, the
aggregate number of shares of stock that may be subject to options granted to
all persons who are directors of the Company at the time such options are
granted shall not exceed one million two hundred thousand (1,200,000) shares
of the Company's common stock, and no single director of the Company who is
not an employee of the Company or an affiliate thereof may be granted options
to purchase more than forty thousand (40,000) shares of the Company's common
stock; and no one director of the Company who is an employee of the Company or
an affiliate thereof may be granted options to purchase more than six hundred
thousand (600,000) shares of the Company's common stock.
4. ELIGIBILITY
(a) Options may be granted only to key employees (including officers) or
directors of or consultants to the company or its affiliates.
(b) A director shall in no event be eligible to be granted an option under
the Plan unless and until such director is expressly declared eligible to
participate in the Plan by action of the Committee.
(c) Notwithstanding the above or any provision to the contrary set forth
herein, no options shall be granted to any non-Employee director under this
Plan after April 30, 1992.
5. OPTION PROVISIONS
Each option shall be in such form and shall contain such terms and
conditions as the Committee shall deem appropriate. The provisions of separate
options need not be identical, but each option shall include (through
incorporation of provisions hereof by reference in the option or otherwise)
the substance of each of the following provisions:
(a) The term of any option shall not be greater than twenty (20) years from
the date it was granted.
(b) The exercise price of each option shall be not less than eighty-five
percent (85%) of the fair market value of the stock subject to the option on
the date the option is granted.
(c) The purchase price of stock acquired pursuant to an option shall be
paid, as specified in the option, either (i) in cash at the time the option is
exercised, or (ii) at the discretion of the Committee, (A) by delivery to the
Company of other shares of the Company's common stock, (B) according to a
deferred payment or other arrangement (which may include, without limiting the
generality of the foregoing, the use of other common stock of the Company)
with the person to whom the option is granted or to whom the option is
transferred pursuant to subparagraph 5(f), or (C) in any other form of legal
consideration that may be acceptable to the Committee in their discretion,
either at the time of grant or exercise of the option.
In the case of any deferred payment arrangement specified at the time of
grant, an interest rate shall be stated which is not less than the rate then
specified which will prevent any imputation of higher interest under Section
483 of the Code.
(d) The total number of shares of stock subject to an option may, but need
not, be allotted in periodic installments (which may, but need not, be equal).
From time to time during each of such installment periods, the option may be
exercised with respect to some or all of the shares allotted to that period,
and/or with respect to some or all of the shares allotted to any prior period
as to which the option was not fully exercised. During the remainder of the
term of the option (if its term extends beyond the end of the installment
periods), the option may be exercised from time to time with respect to any
shares then remaining subject to the option. The provisions of this
subparagraph 5(d) are subject to any option provisions governing the minimum
number of shares as to which an option may be exercised.
(e) The Company may require any optionee, or any person to whom an option is
transferred under subparagraph 5(f), as a condition of exercising any such
option to make such representations, warranties and agreements as the Company
may deem appropriate to assure that issuance of the Company's common stock
upon exercise of such option is in compliance with then applicable federal and
state securities laws.
(f) (1) Should an Optionee cease to continue in Service for any reason
(other than termination due to death or permanent disability) while the holder
of one or more outstanding options under this Plan, then such options shall
not be exercisable at any time after the earlier of (i) the specified
expiration date of the option term or (ii) the expiration of three (3) months
after the Optionee's cessation of Service. Each such option shall, during the
applicable period following cessation of Service, be exercisable only to the
extent of the number of shares (if any) in which the Optionee is vested on the
date of such cessation of Service; provided, however, that the Committee shall
have the discretion to specify, either at the time the option is granted or at
the time that the Optionee ceases Service, that vesting of such option may be
accelerated and that the applicable period set forth in subclause (ii) may be
increased, as provided in paragraph 8(a).
(2) An option may be exercisable by the Optionee or, in the event the
Optionee is permanently disabled (as such term is defined in Section 22(e)(3)
of the Code), by his or her spouse or designee. Options shall not be
assignable or transferrable by the Optionee otherwise than by will or by the
laws of descent and distribution.
(3) Should an Optionee cease to continue in Service due to death or
permanent disability while the holder of one or more outstanding options under
this Plan, then such options shall not be exercisable at any time after the
earlier of (i) the specified expiration date of the option term or (ii) the
expiration of three (3) months after the Optionee's cessation of Service. Each
such option shall, during the applicable period following cessation of
Service, be exercisable only to the extent of the number of shares (if any) in
which the Optionee in vested on the date of such cessation of Service;
provided, however, that the Committee shall have the discretion to specify,
either at the time the option is granted or at the time that the Optionee
ceases Service, that the vesting of such option may be accelerated or extended
from the date of cessation of Service and that the period of exercisability
can be increased up to the expiration date of the option term.
(4) Any option granted to an Optionee under this Plan and outstanding in
whole or in part on the date of the Optionee's death may be subsequently
exercised by the Personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution in the case of
the Optionee's death, and any option granted to an Optionee under this Plan
which is outstanding in whole or in part on the date of the Optionee's
cessation of Service due to permanent disability may be exercised by the
Optionee's spouse or designee. Any such exercise must be in accordance with
clause (3).
(g) The option may, but need not, include a provision whereby the optionee
may elect at any time during the term of his or her employment with the
Company or any affiliate to exercise the option as to any part or all of the
shares subject to the option prior to the stated vesting date of the option or
of any installment or installments specified in the option. Any shares so
purchased from any unvested installment or option may be subject to a
repurchase right in favor of the Company or to any other restriction the
Committee determines to be appropriate.
(h) Options may be granted to directors of the Company only during the first
month of each calendar quarter. Any option held by a director of the Company
may only be exercised during any period of ten business days beginning on the
third business day after a quarterly or annual summary statement of the
Company's revenues and earnings appears on a wire service or in a newspaper of
general circulation, or is otherwise made generally available to the public.
6. COVENANTS OF THE COMPANY
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company
to register under the Securities Act of 1933, as amended, either the Plan, any
option granted under the Plan or any stock issued or issuable pursuant to any
such option. If the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems
necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell
stock upon exercise of such options unless and until such authority is
obtained.
7. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
8. MISCELLANEOUS
(a) The Committee shall have the power to accelerate or increase the time
during which an option any be exercised or the time during which the option or
any part thereof will vest pursuant to subparagraph 5(d), notwithstanding the
provisions in the option stating the time during which it may be exercised or
the time during which it will vest.
(b) Neither an optionee nor any person to whom an option is transferred
under subparagraph 5(f) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option
unless and until such person has satisfied all requirements for exercise of
the option pursuant to its terms.
9. ADJUSTMENTS UPON CHANGES IN STOCK
(a) If any change is made in the stock subject to the Plan, or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange
of shares, change in corporate structure or otherwise), the Committee shall
make appropriate adjustments in the maximum number of shares subject to the
Plan and the number of shares and price per share of stock subject to
outstanding options.
(b) In the event of a Change of Control (as defined in subparagraph 9(c)),
then as to options which are not then exercisable, the time during which such
options may be exercised shall be accelerated to the 60-day period from and
after a Change of Control, unless, in the opinion of the Committee, it in
clearly in the best interests of the optionholders and the shareholders taken
together that the Company or a surviving corporation (if the Change of Control
result as in the Company not surviving) assume any outstanding options or
substitute similar options for those outstanding under the Plan, in which case
the Committee may take appropriate action to effect an assumption or
substitution.
(c) "Change of Control" shall mean any of the following events:
(1) the acquisition by any person (including a group, within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended), other than the Company or any of its subsidiaries, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) as amended) of 50% or more of the combined voting power
of the Company's then outstanding voting securities; or
(2) approval by stockholders of the Company of a merger, consolidation,
liquidation or dissolution of the Company or of the sale of all or
substantially all of the Company's assets.
(d) Notwithstanding any provision to the contrary set forth herein, the
consummation of the merger contemplated by the Agreement and Plan of Merger
dated as of May 23, 1995, among the Company, Roche Holdings, Inc. and HLR
(U.S.) II, Inc. shall not be deemed to be a Change of Control under the Plan.
(e) From and after October 25, 1995, all references herein to "shares",
"stock", or "the Company's common stock" shall be deemed to be references to
shares of Callable Putable Common Stock, par value $0.02 per share, of the
Company ("Special Common Stock"), except for the references to the shares of
Common Stock of the Company contained in subparagraph 9(g).
(f) Notwithstanding any provision to the contrary set forth herein, in the
event that the Special Common Stock is redeemed in accordance with Article
THIRD, Section (c)(ii) of the Company's Certificate of Incorporation, any
options granted under the Plan that are exercisable for Redeemable Common
Stock and that are outstanding on the date of redemption (whether or not such
options are exercisable on such date) shall become exercisable for
consideration of the same type and amount as the holders thereof would have
received had they exercised such options prior to such date of redemption.
(g) Notwithstanding any provision to the contrary set forth herein, in the
event that the shares of Special Common Stock are converted into shares of
Common Stock, par value $0.02 per share, of the Company ("Common Stock")
pursuant to Article THIRD, Section (c)(vi) of the Company's Certificate of
Incorporation, each option granted under the Plan which is outstanding on the
Conversion Date (as such term is defined in Article THIRD, Section (c)(vi) of
the Company's Certificate of Incorporation) shall automatically be canceled,
and the holder thereof shall receive, in exchange therefor, a substitute
option to purchase, at a per share exercise price equal to the per share
exercise price of such canceled option, the number of shares of Common Stock
equal to the number of shares of Redeemable Common Stock subject to such
canceled option. Such substitute option shall be subject to the same terms and
conditions as the option for which it is exchanged, including with respect to
vesting (such that such substitute option vests at the same time as the option
for which it is exchanged would have vested) and the conditions relating to
the exercise of the option. From and after the Conversion Date, all references
herein to "shares", "stock", or the "Company's Common Stock" which in
accordance with subparagraph 9(e) are deemed to be references to shares of
Special Common Stock, shall be deemed to be references to shares of Common
Stock.
10. AMENDMENT OF THE PLAN
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 9 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by a
majority of the outstanding shares of the Company entitled to vote within
twelve (12) months before or after the adoption of the amendment, where the
amendment will:
(i) Increase the number of shares reserved for options under the Plan;
(ii) Materially modify the requirements as to eligibility for
participation in the Plan; or
(iii) Materially increase the benefits accruing to participants under the
Plan.
(b) Rights and obligations under any option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom the option was granted.
11. TERMINATION OR SUSPENSION OF THE PLAN
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate within ten (10) years from the date the
Plan is adopted by the Board or approved by the shareholders of the Company,
whichever is earlier. No options may be granted under the Plan while the Plan
is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the option was granted.
12. EFFECTIVE DATE OF PLAN
The Plan shall become effective as determined by the Board, but no options
granted under the Plan shall be exercised unless and until the Plan has been
approved by a majority of the outstanding shares of the Company entitled to
vote, and, if required, an appropriate permit has been issued by the
Commissioner of Corporations of the State of California.
1990 STOCK OPTION/STOCK INCENTIVE PLAN
(as amended effective October 16, 1996)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
A. This 1990 Stock Option/Stock Incentive Plan (the "Plan") is intended to
promote the interests of Genentech, Inc., a Delaware corporation (the
"Company"), by providing a method whereby the Company may retain the services
of persons now employed by or serving as consultants to it, secure and retain
the services of persons capable of filling such positions and provide
incentives for such persons to exert maximum efforts for the success of the
Company or its parent or subsidiary corporations.
B. For purposes of the Plan, the following definitions shall be in effect:
CHANGE IN CONTROL: "Change in Control" shall have the meaning set forth
in Article Two, III.C. hereof.
CHANGE IN CONTROL PRICE: "Change in Control Price" shall have the meaning
set forth in Article Two, II.C.4.b. hereof.
CLOSING SELLING PRICE: The Closing Selling Price per share of Common
Stock on any relevant date under the Plan shall be the closing selling price
per share of Common Stock, if such Common Stock is reported on a national
securities exchange or reported on the NASDAQ National Market System (or any
successor system), for the trading day immediately preceding the date in
question, as such price is published in the Wall Street Journal (or if such
publication is not available, a comparable publication selected by the
Committee).
COMMON STOCK: The Common Stock issuable under the Plan shall be shares of
the Company's common stock, par value $0.02 per share. From and after October
25, 1995, all references to "shares", "stock", or "common stock" shall be
deemed to be references to shares of Callable Putable Common Stock, par value
$0.02 per share (the "Special Common Stock"), of the Company.
CONSULTANT: An individual shall be considered to be a Consultant for so
long as such individual continues to render personal services to the Company
or one or more of its parent or subsidiary corporations as an independent
contractor.
CORPORATE TRANSACTION: "Corporate Transaction" shall have the meaning set
forth in Article Two, III.A. hereof.
EMPLOYEE: An individual shall be considered to be an Employee for so long
as such individual remains in the employ of the Company or one or more of its
parent or subsidiary corporations.
PARENT: A corporation shall be deemed to be a parent of the Company if it
is a corporation (other than the Company) in an unbroken chain of corporations
ending with the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
SECTION 16(b) INSIDER: An individual shall be considered to be a Section
16(b) Insider on any relevant date under the Plan if such individual (A) is at
the time an officer or director of the Company subject to the short-swing
profit restrictions of the regulations promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended (the "1934 Act") or (B) unless
Section 16 or regulations promulgated thereunder, are amended to provide
otherwise, was such an officer or director at any time during the six month
period immediately preceding the date in question and made any purchase or
sale of Common Stock during such six-month period.
SERVICE: An individual shall be deemed to be in the Service of the
Company for so long as such individual (i) renders service on a periodic basis
to the Company or one or more of its parent or subsidiary corporations as an
Employee or Consultant or (ii) is a member of the Company's Board of Directors
(the "Board").
SUBSIDIARY: A corporation shall be deemed to be a subsidiary of the
Company if it is one of the corporations (other than the Company) in an
unbroken chain of corporations beginning with the Company, provided each such
corporation (other than the last corporation in the unbroken chain) owns, at
the time of determination, stock possessing 50 percent or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain. For purposes of nonstatutory option grants under Article Two
and stock incentive grants under Article Three and all Corporate Transaction
provisions of the Plan, the term "subsidiary" shall also include any
partnership, joint venture or other business entity of which the Company owns,
directly or indirectly through another subsidiary corporation, more than a
fifty percent (50%) interest in voting power, capital or profits.
C. Neither stock option grants nor stock bonus issuances made to any
individual under the Plan shall in any way affect, limit or restrict such
individuals eligibility to participate in any other stock plan or other
compensation or benefit plan, arrangement or practice now or hereafter
maintained by the Company or any parent or subsidiary corporation.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Compensation Committee (the
"Committee"). The Committee shall be comprised of not less than three (3)
Board members. The Board may from time to time appoint members to the
Committee in substitution for (or in addition to) members previously
appointed, and the Board shall have the authority to fill any and all
vacancies on the Committee, however caused.
B. The Committee shall at all times have the authority to make
discretionary option grants under the Plan to eligible Employees who are not
members of the Board.
C. Subject to the express provisions of the Plan, the committee shall have
plenary authority:
(i) to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations deemed
necessary or advisable in administering the Plan; and
(ii) to change the terms and conditions of any outstanding discretionary
option grant or unvested stock issuance, provided such action does not,
without the consent of the holder, adversely affect the rights and obligations
such individual may have under the Plan or the outstanding grant or stock
issuance.
D. Determinations of the Committee on all matters relating to the Plan and
any discretionary option grants or stock issuances made hereunder shall be
final, binding and conclusive on all persons having any interest in the Plan
or any options granted or shares issued under the Plan.
III. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate components: the Regular
Option Grant Program specified in Article Two, the Automatic Grant Program
specified in Article Three and the Stock Incentive Program specified in
Article Four. Under the Regular Option Grant Program, eligible Employees, non-
Employee Board members and Consultants may be granted options to purchase
shares of Common Stock at an exercise price equal to not less than 50% of the
Closing Selling Price per share on the grant date, and a special option grant
is to be made in accordance with Section VII of Article Two. Under the
Automatic Grant Program, non-Employee Board members shall automatically be
granted options to purchase shares of Common Stock at an exercise price of
100% of the Closing Selling Price per share of Common Stock on the date of
grant, provided, however, that options granted under the Automatic Grant
Program in 1990 shall have an exercise price per share equal to the Closing
Selling Price on the date thirty (30) days after (i) the effective date of the
Merger (defined in Article Six) or (ii) the termination date of the Merger
Agreement (defined in Article Six), as applicable.
B. Under the Stock Incentive Program, eligible Employees, non-Employee
Board members and Consultants may be awarded shares of Common Stock as a
reward for past services or as an incentive to the performance of future
services. Such shares may be issued as fully-vested shares or as shares
vesting over time.
C. The provisions of Articles One, Five and Six of the Plan shall apply to
the Regular Option Grant Program, the Automatic Option Grant Program and the
Stock Incentive Program and shall accordingly govern the interests of all
individuals in the Plan.
IV. ELIGIBILITY FOR OPTION GRANTS AND STOCK ISSUANCES
The individuals eligible to receive option grants ("Optionees") and/or stock
incentives ("Recipients") pursuant to the Plan shall be limited to (i) those
Employees, non-Employee Board members and Consultants selected by the
Committee and (ii) those non-Employee Board members who are entitled to option
grants pursuant to the Automatic Option Grant Program of Article Three.
V. STOCK SUBJECT TO THE PLAN
A. The Common Stock issuable under the Plan shall be made available either
from authorized but unissued shares of Common Stock or from shares of Common
Stock reacquired by the Company on the open market. The aggregate number of
shares of Common Stock issuable over the term of this Plan, whether through
exercised options or direct stock issuances shall not exceed 11,500,000 shares
(subject to adjustment from time to time in accordance with paragraphs C. and
D. below).
B. Should an option granted under this Plan expire or terminate for any
reason prior to exercise or surrender in full (including options canceled in
accordance with the cancellation-regrant provisions of the Regular Option
Grant Program), the shares subject to the portion of the option not so
exercised or surrendered shall be available for subsequent option grants under
this Plan. Shares subject to stock appreciation rights exercised in accordance
with the Stock Appreciation Right provisions of Article Two and shares
repurchased by the Company pursuant to its repurchase rights under the Plan
shall not be available for subsequent issuance, whether through option grants,
stock appreciation rights or direct issuances, under this Plan.
C. In the event any change is made to the Common Stock issuable under the
Plan by reason of any stock dividend, stock split, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without receipt of consideration, then appropriate adjustments shall be
made by the Committee to (i) the aggregate number and/or class of shares
issuable under this Plan, the maximum number and/or class of shares
purchasable per Employee-director pursuant to the applicable limitation of
Section II.B of this Article One and the number and/or class of shares for
which the special option grant is to be made pursuant to the automatic grant
provisions of Section VII of Article Two and for which the automatic option
grants are to be made pursuant to the provisions of Article Three, to reflect
the effect of such change upon the Company's capital structure, (ii) the
number and/or class of shares and the exercise price per share of the stock
subject to each outstanding option in order to preclude the dilution or
enlargement of benefits thereunder and (iii) the number and/or class of shares
and the exercise price per share in effect under each outstanding stock
appreciation right in order to preclude the dilution or enlargement of
benefits thereunder. All adjustments made by the Committee pursuant to this
paragraph C. shall be final, binding and conclusive.
D. Subject to the special priority provisions of Article Six of the Plan,
in the event that (i) the Company is the surviving entity in any Corporate
Transaction that does not result in the termination of outstanding options
pursuant to the Corporate Transaction provisions of the Plan or (ii) the
outstanding options under the Plan are to be assumed in connection with such
Corporate Transaction, then each such continuing or assumed option shall,
immediately after such Corporate Transaction, be appropriately adjusted to
apply and pertain to the number and class of securities which would be
issuable, in consummation of such Corporate Transaction, to an actual holder
of the same number of shares of Common Stock as are subject to such option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the exercise price payable per share subject to each option,
provided the aggregate exercise price of such option shall remain the same. In
addition, the aggregate number and/or class of shares issuable under this Plan
shall be appropriately adjusted to reflect the effect of such Corporate
Transaction upon the Company's capital structure.
ARTICLE TWO
REGULAR OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
A. Except for the special option grant to be made pursuant to Section VII
of this Article Two, the Committee shall have plenary authority (subject to
the express provisions of the Plan and Section 144 of the Delaware General
Corporation Law) to determine which Employees, non-Employee Board members and
Consultants are to be granted options under this Regular Option Grant Program,
the number of shares to be covered by each such option, the status of the
granted option as either an incentive stock option ("Incentive Option") which
meets the requirements of Section 422A of the Internal Revenue Code of 1986,
as amended from time to time (the "Code"), or a non-statutory option not
intended to meet such requirements, the time or times at which such option is
to become exercisable, the time or times at which such option (or the Shares
subject to such option) becomes vested (referred to herein as the "vesting
schedule") and the term for which the option is to remain outstanding, up to a
maximum term of twenty (20) years.
B. The granted options shall be evidenced by instruments in such form as
the Committee shall from time to time approve; provided, however, that each
such instrument (other than the instrument evidencing the special grant to be
made under Section VII of this Article Two) shall comply with and incorporate
the terms and conditions specified below, except as such terms and conditions
must be modified for Incentive Options as set forth below in Section IV of
this Article Two.
1. Exercise Price.
a. The exercise price per share shall be fixed by the Committee, but in no
event shall the exercise price per share be less than fifty percent (50%) of
the Closing Selling Price per share of Common Stock on the date of the option
grant.
b. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the loan provisions of this Article Two, be
payable in one of the alternative forms specified below:
(A) full payment in cash or check made payable to the Company's order; or
(B) full payment in shares of Common Stock held by the Optionee for the
requisite period necessary to avoid a charge to the Company's reported
earnings and valued at the Closing Selling Price on the Exercise Date (as such
term is defined below); or
(C) full payment in a combination of shares of Common Stock held by the
Optionee for the requisite period necessary to avoid a charge to the Company's
reported earnings and valued at the Closing Selling Price on the Exercise Date
and cash or check.
c. For purposes of subparagraph b. above, the Exercise Date shall be the
first date on which there is delivered to the Company both (I) written notice
of the exercise of the option and (II) payment of the exercise price for the
purchased shares.
2. Term and Exercise of Options.
a. Each option granted under this Regular Option Grant Program shall be
exercisable in one or more installments over the Optionee's period of Service
as shall be determined by the Committee and set forth in the instrument
evidencing such option; provided, however, that no such option granted to a
Section 16(b) Insider shall become exercisable in whole or in part within the
first six (6) months after the grant date, except in the event of the
Optionee's death or disability.
b. An option may be exercisable by the Optionee or, in the event the
Optionee is permanently disabled (as such term is defined in Section 22(e) of
the Code), by his or her spouse, and such option may be transferred by the
Optionee to a trust for such Optionee's benefit or the benefit of an immediate
family member or by will or the laws of descent or distribution.
c. The Committee may, at its discretion, accelerate the vesting schedule of
any outstanding option at any time.
3. Termination of Service.
a. Should an Optionee cease to continue in Service for any reason (other
than termination due to death, permanent disability or retirement from
employment by the Company after reaching age sixty-five (65)) while the holder
of one or more outstanding options under this Regular Option Grant Program,
then such options shall not be exercisable at any time after the earlier of
(i) the specified expiration date of the option term or (ii) the expiration of
three (3) months after the Optionee's cessation of Service. Each such option
shall, during the applicable period following cessation of Service, be
exercisable only to the extent of the number of shares (if any) in which the
Optionee is vested on the date of such cessation of Service; provided,
however, that the Committee shall have the discretion to specify, either at
the time the option is granted or at the time that the Optionee ceases
Service, that vesting of such option may be extended for a period not to
exceed three (3) years from the date of cessation of Service and that the
applicable period set forth in clause (ii) may be increased to a period of up
to five (5) years.
b. Should an Optionee cease to continue in Service due to permanent
disability while the holder of one or more outstanding options under this
Regular Option Grant Program, then such options shall not be exercisable at
any time after the earlier of (i) the specified expiration date of the option
term or (ii) the expiration of three (3) months after the Optionee's cessation
of Service. Each such option shall, during the applicable period following
cessation of Service, be exercisable only to the extent of the number of
shares (if any) in which the Optionee is vested on the date of such cessation
of Service; provided, however, that the Committee shall have the discretion to
specify, either at the time the option is granted or at the time that the
Optionee ceases Service, that the vesting of such option may be accelerated or
extended from the date of cessation of Service and that the period of
exercisability can be increased up to the expiration date of the option term.
Should an Optionee cease to continue in Service due to death or retirement
from employment by the Company after reaching age sixty-five (65), while the
holder of one or more outstanding options under this Regular Option Grant
Program, then all unvested options on such date shall automatically become
vested and the expiration date of the option shall automatically be extended
to the expiration date of the option term.
c. Any option granted to an Optionee under this Regular Option Grant
Program and outstanding in whole or in part on the date of the Optionee's
death may be subsequently exercised by the personal representative of the
Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution in the case of the Optionee's death, and any option
granted to an Optionee under this Regular Option Grant Program which is
outstanding in whole or in part on the date of the Optionee's cessation of
Service due to permanent disability may be exercised by the Optionee's spouse
or designee. Any such exercise must be in accordance with subparagraph b.
d. The Committee shall have complete discretion, exercisable either at the
time the option is granted or at the time the Optionee ceases Service, to
establish as a provision applicable to the exercise of one or more options
granted under this Regular Option Grant Program that during the limited period
of exercisability following cessation of Service due to retirement, "plant
closing" or "mass layoff" (as such terms are defined at 29 U.S.C. Section
2101) that is subject to the notice requirements of 29 U.S.C. Section 2102,
the option will continue to vest according to the vesting schedule that would
have applied had the optionee continued in Service.
4. Repurchase Rights.
a. The shares of Common Stock acquired upon the exercise of one or more
options granted under this Regular Option Grant Program may be subject to
repurchase by the Company, at the exercise price paid per share, upon the
Optionee's cessation of Service prior to vesting in such shares.
b. Any such repurchase right shall be exercisable by the Company upon such
terms and conditions (including the establishment of the appropriate vesting
schedule and other provision for the expiration of such right in one or more
installments over the optionee's period of Service) as the Committee may
specify in the instrument evidencing such right, which instrument shall
include appropriate terms with respect to the legending of stock certificates
and the placing of unvested shares into escrow.
c. All of the Company's outstanding repurchase rights shall automatically
terminate, and all shares purchased under this Regular Option Grant Program
shall immediately vest in full, upon the occurrence of any Corporate
Transaction or Change in Control; provided, however, that no such termination
of repurchase rights or immediate vesting of the purchased shares shall occur
if (and to the extent that): (i) the Company's outstanding repurchase rights
are to be assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination of
repurchase rights and acceleration of vesting are precluded by other
limitations imposed by the Committee either at the time the option is granted
or at the time the option shares are purchased.
5. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by the option until such individual shall have exercised
the option, paid the option price and satisfied all other conditions precedent
to the issuance of certificates for the purchased shares.
II. STOCK APPRECIATION RIGHTS
A. The Committee shall have full power and authority, exercisable in its
sole discretion, to grant stock appreciation rights to one or more Employees,
non-Employee Board members or Consultants eligible for option grants under
this Regular Option Grant Program. Each such right shall entitle the holder to
a distribution based on the appreciation in the value per share of a
designated amount of Common Stock.
B. Three types of stock appreciation rights shall be authorized for
issuance under the Plan:
1. Tandem Stock Appreciation Rights. These rights require the holder to
elect between the exercise of the underlying option for shares of Common Stock
and the surrender of such option for an appreciation distribution equal to the
excess of (I) the Closing Selling Price (on the date of option surrender) of
the vested shares of Common Stock purchasable under the surrendered option
over (II) the aggregate option price payable for such shares.
2. Concurrent Stock Appreciation Rights. Concurrent rights may apply to all
or any portion of the shares of Common Stock subject to the underlying option
and will be exercised automatically at the same time the option is exercised
for those shares. The appreciation distribution to which the holder of such
concurrent right shall be entitled upon exercise of the underlying option
shall be in an amount equal to the excess of (I) the aggregate Closing Selling
Price (at date of exercise) of the vested shares purchased under the
underlying option with such concurrent rights over (II) the aggregate option
price paid for those shares.
3. Limited Stock Appreciation Rights. These rights will entitle the holder
to surrender outstanding options in connection with certain Changes in Control
(as defined below) for an appreciation distribution equal in amount to the
excess of (I) the Change in Control Price (as defined below) of the number of
shares in which the Optionee is at the time vested under the surrendered
option over (II) the aggregate option price payable for such vested shares.
C. The terms and conditions applicable to each Tandem Stock Appreciation
Right ("Tandem Right"), Concurrent Stock Appreciation Right ("Concurrent
Right") and Limited Stock Appreciation Right ("Limited Right") shall be as
follows:
1. Tandem Rights.
a. Tandem Rights may be tied to either Incentive Options or non-statutory
options. Each such right shall, except as specifically set forth below, be
subject to the same terms and conditions applicable to the particular stock
option grant to which it pertains.
b. The Appreciation Distribution payable on the exercised Tandem Right
shall be in an amount equal to the excess of (I) the Closing Selling Price (on
the date of the option surrender) of the number of shares of Common Stock in
which the Optionee is vested under the surrendered option over (II) the
aggregate option price payable for such vested shares.
c. The Appreciation Distribution may, in the Committee's discretion, be
made in cash, in shares of Common Stock or in a combination of cash and Common
Stock. Any shares of Common Stock so distributed shall be valued at the
Closing Selling Price on the date the option is surrendered, and the shares of
Common Stock subject to the surrendered option shall not be available for
subsequent issuance under this Plan.
2. Concurrent Rights.
a. Concurrent Rights may be tied to any or all of the shares of Common
Stock subject to any Incentive Option or non-statutory option grant made under
this Regular Option Grant Program. The Concurrent Right shall, except as
specifically set forth below, be subject to the same terms and conditions
applicable to the particular stock option grant to which it pertains.
b. The Concurrent Right shall be automatically exercised at the same time
the underlying option is exercised for the particular shares of Common Stock
to which the Concurrent Right pertains.
c. The Appreciation Distribution payable on the exercised Concurrent Right
shall be equal to the excess of (I) the aggregate Closing Selling Price (on
the Exercise Date) of the vested shares of Common Stock purchased under the
underlying option which have Concurrent Rights appurtenant to them over (II)
the aggregate option price paid for such shares.
d. The Appreciation Distribution may, in the Committee's discretion, be
paid in cash, in shares of Common Stock or in a combination of cash and Common
Stock. Any shares of Common Stock so distributed shall be valued at the
Closing Selling Price on the date the Concurrent Right is exercised and shall
reduce on a one-for-one basis the number of shares of Common Stock thereafter
issuable under this Plan.
3. Terms Applicable to Both Tandem Rights and Concurrent Rights.
a. To exercise any outstanding Tandem or Concurrent Right, the holder must
provide written notice of exercise to the Company in compliance with the
provisions of the instrument evidencing such right.
b. If a Tandem or Concurrent Right is granted to an individual who is at
the time a Section 16(b) Insider, then the instrument of grant shall
incorporate all the terms and conditions at the time necessary to assure that
the subsequent exercise of such right shall qualify for the safe-harbor
exemption from short-swing profit liability provided by SEC Rule 16b-3 (or any
successor rule or regulation).
c. No limitation shall exist on the aggregate amount of cash payments the
Company may make under this Article Two Program in connection with the
exercise of Tandem or Concurrent Rights.
4. Limited Rights.
a. Each Section 16(b) Insider shall have the Limited Right, exercisable in
the event there should occur a Change in Control (as such term is defined
below), to surrender any or all of the options (whether incentive stock
options or non-statutory options) held by such individual under this Article
Two Program, to the extent such options (I) have been outstanding for at least
six (6) months and (II) are at the time exercisable for vested shares.
b. In exchange for each option surrendered in accordance with subparagraph
a. above, the Section 16(b) Insider shall receive an Appreciation Distribution
in an amount equal to the excess of (I) the Change in Control Price
(determined as of the date of surrender) of the number of shares in which the
Section 16(b) Insider is at the time vested under the surrendered option over
(II) the aggregate option price payable for such vested shares. For purposes
of such Appreciation Distribution, the Change in Control Price per share of
the vested Common Stock subject to the surrendered option shall be deemed to
be equal to the greater of (a) the Closing Selling Price per share on the date
of surrender or (b) the highest reported price per share paid in effecting the
Change in Control. However, if the option is an Incentive Option, then the
Change in Control Price of the vested shares subject to the surrendered option
shall not exceed the value per share determined under clause (a) above.
c. The Appreciation Distribution shall be made entirely in cash, and the
shares of Common Stock subject to each surrendered option shall not be
available for subsequent issuance under this Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any of the following transactions (a "Corporate
Transaction"):
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially all of
the assets of the Company to any entity other than a Subsidiary of the
Company, or
(iii) any reverse merger in which the Company is the surviving entity but
in which fifty percent (50%) or more of the Company's outstanding voting stock
held by persons who are not "Subject Persons" as defined in Article Eleventh
of the Company's Certificate of Incorporation (as in effect on the effective
date of the Merger) including persons included in such definition by
subparagraph (b) thereof is transferred to holders different from those who
held the stock immediately prior to such merger, then the exercisability of
each option outstanding under this Regular Option Grant Program shall be
automatically accelerated so that each such option shall, immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of shares of Common Stock
purchasable under such option and may be exercised for all or any portion of
such shares. However, an outstanding option under this Regular Option Grant
Program shall not be so accelerated if and to the extent: (i) such option is,
in connection with the Corporate Transaction, either to be assumed by the
successor corporation or parent thereof or be replaced with a comparable
option to purchase shares of the capital stock of the successor corporation or
parent thereof, or (ii) such option is to be replaced by a comparable cash
incentive program of the successor corporation based on the value of the
option at the time of the Corporate Transaction, or (iii) the acceleration of
such option is subject to other applicable limitations imposed by the
Committee at the time of grant. The determination of comparability under
clause (i) or (ii) above shall be made by the Committee, and its determination
shall be final, binding and conclusive.
B. Upon the consummation of the Corporate Transaction, all outstanding
options under this Regular Option Grant Program shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be outstanding.
C. In the event of any of the following transactions (a "Change in
Control"):
(i) the acquisition by a person or group of related persons, other than the
Company or any person controlling, controlled by or under common control with
the Company, of beneficial ownership (as determined pursuant to the provisions
of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding securities pursuant to
a transaction or series of related transactions which the Board does not
approve; or
(ii) the first date within any period of thirty-six (36) consecutive months
or less on which there is effected any change in the composition of the Board
such that the majority of the Board (determined by rounding up to the next
whole number) ceases to be comprised of individuals who either (I) have been
members of the Board continuously since the beginning of such period or (II)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (I) who
were still in office at the time such election or nomination was approved by
the Board; then the exercisability of each option outstanding under this
Regular Option Grant Program shall be automatically accelerated so that each
such option shall become exercisable, immediately prior to such Change in
Control, for the full number of shares purchasable under such option and may
be exercised for all or any portion of such shares. However, an outstanding
option under this Regular Option Grant Program shall not be so accelerated if
and to the extent one or more limitations imposed by the Committee at the time
of grant preclude such acceleration upon a Change in Control.
D. The grant of options under this Regular Option Grant Program shall in no
way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. INCENTIVE OPTIONS
A. The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Regular Option Grant Program. Options
which are specifically designated as "nonstatutory" options when issued under
this Regular Option Grant Program shall not be subject to such terms and
conditions.
1. Option Price.
The option price per share of the Common Stock subject to an Incentive
Option shall in no event be less than one hundred percent (100%) of the
Closing Selling Price per share of Common Stock on the grant date.
2. 10% Stockholder.
If any individual to whom an Incentive Option is to be granted pursuant to
the provisions of this Regular Option Grant Program is on the grant date the
owner of stock (as determined under Section 424(d) of the Internal Revenue
Code) possessing 10% or more of the total combined voting power of all classes
of stock of the Company or any one of its parent or subsidiary corporations
(such person to be herein referred to as a 10% Stockholder), then (i) the
option price per share shall not be less than one hundred and ten percent
(110%) of the Closing Selling Price per share of Common Stock on the grant
date and (ii) the maximum term of the option shall not exceed five (5) years
from the grant date.
3. Dollar Limitation.
The aggregate fair market value (determined on the basis of the Closing
Selling Price in effect on the respective date or dates of grant) of the
Common Stock for which one or more options granted to any Employee under this
Plan (or any other option plan of the Company or its parent or subsidiary
corporations) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
thereof as incentive stock options under the Federal tax laws shall be applied
on the basis of the order in which such options are granted.
4. Term and Exercise of Options.
a. No Incentive Option shall have a term in excess of ten (10) years from
the grant date.
b. An Incentive Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime
of the Optionee only by the Optionee.
5. Termination of Service.
A. An Incentive Option must be exercised within the three (3)-month period
commencing with the date of cessation of Employee status for any reason other
than death, except that in the event the Optionee's cessation of Employee
status is due to permanent disability, such period shall be one (1) year from
the date of such cessation of Employee status. Incentive Options not exercised
within the applicable period shall be treated as non-statutory options.
B. Except as modified by the preceding provisions of this Incentive Options
section, all the provisions of this Regular Option Grant Program shall be
applicable to the Incentive Options granted hereunder.
V. CANCELLATION AND RE-GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected option holders, the cancellation of
any or all outstanding options under this Regular Option Grant Program (other
than the special grant to be made pursuant to Section VII of this Article Two)
and to grant in substitution therefor new options under this Plan covering the
same or different numbers of shares of Common Stock but having an option price
per share not less than fifty percent (50%) of the Closing Selling Price (one
hundred percent (100%) of the Closing Selling Price in the case of an
Incentive Option or, in the case of a 10% Stockholder, not less than one
hundred and ten percent (110%) of the Closing Selling Price) per share of
Common Stock on the new grant date.
VI. LOANS OR GUARANTEE OF LOANS
The Committee may assist any Employee (including any officer or director) in
the exercise of one or more options under this Regular Option Grant Program
(other than the special grant to be made pursuant to Section VII of this
Article Two) by (a) authorizing the extension of a loan to such Employee from
the Company, (b) permitting the Employee to pay the option price for the
purchased Common Stock in installments over a period of years or (c)
authorizing a guarantee by the Company of a third-party loan to the Employee.
The terms of any loan, installment method of payment or guarantee (including
the interest rate and terms of repayment) shall be established by the
Committee in its sole discretion. Loans, installment payments and guarantees
may be granted without security or collateral, but the maximum credit
available to the Optionee shall not exceed the sum of (i) the aggregate
exercise price (less the par value) of the purchased shares plus (ii) any
Federal and State income and employment tax liability incurred by the Employee
in connection with the exercise of the option.
VII. SPECIAL OPTION GRANT
[RESERVED]
ARTICLE THREE
AUTOMATIC GRANT PROGRAM
I. AUTOMATIC GRANTS
On July 18, 1990, each individual who is a non-Employee member of the Board
on such date shall automatically be granted a nonstatutory option under this
Article Three to purchase 15,000 shares of Common Stock. On April 30, 1992,
each individual who is a non-Employee member of the Board on such date shall
automatically be granted a non-statutory option under this Article Three to
purchase 15,000 shares of Common Stock. Each non-Employee who is first elected
a member of the Board after such date shall automatically be granted, on the
date of such individual's election to the Board, a non-statutory option under
this Article Three to purchase 15,000 shares of Common Stock. Each Employee
director who is first elected a member of the Board and who subsequently
becomes a non-Employee director after January 1, 1992 shall automatically be
granted, on the date of such individual's change from Employee to non-
Employee, a non- statutory option under this Article Three to purchase 15,000
shares of Common Stock. This provision shall terminate on April 30, 1995.
II. TERMS AND CONDITIONS OF GRANT
Each option granted in accordance with the provisions of this Article Three
shall be evidenced by an instrument in such form as the Committee approves
from time to time for grants made under Article Two; provided, however, that
each such automatic grant shall be subject to the following terms and
conditions:
A. Exercise Price.
The exercise price per share shall be one hundred percent (100%) of the
Closing Selling Price per share of Common Stock on the grant date; provided,
however, that options granted under this Article Three in 1990 shall have an
exercise price per share equal to the Closing Selling Price on the date thirty
(30) days after (i) the effective date of the Merger (defined in Article Six)
or (ii) the termination date of the Merger Agreement (defined in Article Six),
as applicable.
B. Term and Vesting of Options.
1. Except as otherwise specified below, each option shall vest in
increments of 5,000 shares on the first, second and third anniversaries of the
grant date and shall thereafter remain exercisable until the expiration or
earlier termination of the option term.
2. Each granted option shall have a term of ten (10) years measured from
the grant date.
C. Exercise of Option.
Upon exercise of the option, the option exercise price for the purchased
shares shall become immediately due and payable in full in one of the
alternative forms specified below:
(i) cash or check payable to the Company's order;
(ii) shares of Common Stock held by the optionee for the requisite period
necessary to avoid a charge to the Company's reported earnings and valued at
the Closing Selling Price on the date of exercise; or
(iii) any combination of the foregoing so long as the total payment equals
the aggregate exercise price for the purchased shares.
D. Effect of Termination of Board Membership.
1. Should an optionee cease to be a member of the Board for any reason
(other than death) prior to the expiration date of one or more automatic
grants held by the optionee under this Article Three, then each such grant
shall remain exercisable, for any shares of Common Stock for which the option
is exercisable at the time of such cessation of Board membership, for a period
not to exceed the earlier of (i) the expiration of the three (3)-month period
following the date of such cessation of Board membership or (ii) the specified
expiration date of the option term.
2. Should the optionee's membership on the Board cease by reason of death,
then each outstanding grant held by the optionee under this Article Three may
be subsequently exercised, for any shares of Common Stock for which the option
is exercisable at the time of the optionee's cessation of Board membership, by
the personal representative of the optionee's estate or by the person or
persons to whom the option is transferred pursuant to the optionee's will or
in accordance with the laws of descent and distribution. Any such exercise
must, however, occur prior to the earlier of (i) the expiration of the twelve
(12)-month period following the date of the optionee's death or (ii) the
specified expiration date of the option term.
E. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by an option granted under this Article Three until such
individual shall have exercised the option, paid the option exercise price in
full and satisfied all other conditions precedent to the issuance of
certificates for the purchased shares.
III. CORPORATE TRANSACTION
A. In the event of one or more of the following transactions (a "Corporate
Transaction"):
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State of the Company's incorporation;
(ii) the sale, transfer or other disposition of all or substantially all of
the assets of the Company to any entity other than a Subsidiary of the
Company; or
(iii) any reverse merger in which the Company is the surviving entity but
in which fifty percent (50%) or more of the Company's outstanding voting stock
held by persons who are not "Subject Persons" as defined in Article Eleventh
of the Company's Certificate of Incorporation (as in effect on the effective
date of the Merger) including persons included in such definition by
subparagraph (b) thereof is transferred to holders different from those who
held the stock immediately prior to such merger; then each option grant under
this Article Three outstanding at the time and not otherwise at the time fully
exercisable shall automatically accelerate and become exercisable for any or
all of the shares subject to the option immediately prior to the specified
effective date for the Corporate Transaction. Upon the consummation of such
Corporate Transaction, all outstanding options granted under this Article
Three shall, to the extent not previously exercised by the optionee or assumed
by the successor corporation or its parent company, terminate and cease to be
outstanding.
B. The Automatic Grant Program in effect under this Article Three shall in
no way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. CHANGE IN CONTROL
A. In the event of one or more of the following transactions (a "Change in
Control"):
(i) the acquisition by a person or group of related persons, other than the
Company or any person controlling, controlled by or under common control with
the Company, of beneficial ownership (as determined pursuant to the provisions
of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of
securities of the Company representing thirty percent (30%) or more of the
combined voting power of the Company's then outstanding securities pursuant to
a transaction or series of related transactions which the Board does not
approve; or
(ii) the first date within any period of thirty-six (36) consecutive months
or less on which there is effected any change in the composition of the Board
such that the majority of the Board (determined by rounding up to the next
whole number) ceases to be comprised of individuals who either (I) have been
members of the Board continuously since the beginning of such period or (II)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (I) who
were still in office at the time such election or nomination was approved by
the Board; then all outstanding options granted under this Article Three and
not otherwise at the time fully exercisable shall automatically accelerate
upon the Change in Control and thereby become exercisable for any or all
option shares. In addition, each option grant under this Article Three which
has been outstanding for at least six (6) months may be surrendered, on the
tenth (10th) business day following the Change in Control, in exchange for a
cash payment from the Company in an amount equal to the excess of (i) the Fair
Market Value (on the date of such surrender) of the shares of Common Stock
subject to the surrendered option over (ii) the aggregate option price payable
for such shares.
B. For purposes of subparagraph A above, the Fair Market Value per share of
Common Stock subject to the surrendered option shall be deemed to be equal to
the greater of (a) the Closing Selling Price per share on the date of such
surrender, as determined in accordance with the normal valuation provisions of
the Plan, or if applicable, (b) the highest reported price per share paid in
acquiring ownership of the fifty percent (50%) or greater interest in the
Company's outstanding voting securities.
ARTICLE FOUR
STOCK INCENTIVE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
A. Shares may be issued under this Stock Incentive Program as a reward for
past services rendered the Company or one or more of its parent or subsidiary
corporations or as an incentive for future service with such entities. Any
unvested shares so issued shall be evidenced by a Restricted Stock Issuance
Agreement ("Issuance Agreement") which complies with the terms and conditions
of this Stock Incentive Program and shall include appropriate terms with
respect to legending of certificates and escrow of unvested shares.
1. Vesting Schedule.
a. The Recipient's interest in the issued shares of Common Stock may, in
the absolute discretion of the Committee, be fully and immediately vested upon
issuance or may vest in one or more installments.
b. The elements of the vesting schedule applicable to any unvested shares
issued under this Stock Incentive Program, namely the number of installments
in which the shares are to vest, the interval or intervals (if any) which are
to lapse between installments and the effect which death, disability or other
event designated by the Committee is to have upon the vesting schedule, shall
be determined by the Committee and set forth in the Issuance Agreement
executed by the Company and the Recipient at the time of the incentive grant.
c. Except as may otherwise be provided in the Issuance Agreement, the
Recipient may not transfer unvested shares of Common Stock. The Recipient,
however, shall have all the rights of a stockholder with respect to such
unvested shares, including without limitation the right to vote such shares
and to receive all dividends paid on such shares.
2. Cancellation of Shares.
a. In the event the Recipient should, while his/her interest in the issued
Common Stock remains unvested, cease to continue in Service for any reason
whatsoever, then the Company shall have the right to cancel all such unvested
shares, and the Recipient shall thereafter have no further stockholder rights
with respect to such shares.
b. The Committee may in its discretion waive such cancellation of unvested
shares in whole or in part and thereby effect the immediate vesting of the
Recipient's interest in the shares of Common Stock (or other assets) as to
which the waiver applies.
3. Corporate Transaction/Change in Control.
All unvested shares under the Stock Incentive Program shall immediately vest
in full immediately prior to the occurrence of any Corporate Transaction or
Change in Control, except to the extent:
(i) the Company's outstanding cancellation rights are to be assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction, or
(ii) one or more limitations imposed by the Committee at the time of stock
issuance preclude such accelerated vesting.
ARTICLE FIVE
MISCELLANEOUS
I. TAX WITHHOLDING
A. The Company's obligation to deliver shares upon the exercise or
surrender of stock options or stock appreciation rights granted under Article
Two or Article Three or upon the issuance or vesting of shares under Article
Four shall be subject to the satisfaction of all applicable Federal, State and
local income and employment tax withholding requirements.
B. The Committee may, in its discretion and upon such terms and conditions
as it may deem appropriate (including the applicable safe-harbor provisions of
SEC Rule 16b-3 or any successor rule or regulation) provide any or all
Optionees or Recipients with the election to have the Company withhold, from
the shares of Common Stock purchased or issued under the Plan, one or more of
such shares with an aggregate Closing Selling Price equal to the designated
percentage (up to 100% specified by the Optionee or Recipient) of the Federal
and State income taxes ("Taxes") incurred in connection with the acquisition
of such shares. In lieu of such direct withholding, one or more Optionees or
Recipients may also be granted the right to deliver shares of Common Stock to
the Company in satisfaction of such Taxes. The withheld or delivered shares
shall be valued at the Closing Selling Price on the applicable determination
date for such Taxes.
II. AMENDMENT OF THE PLAN
A. The Board shall have the complete and exclusive authority to amend or
modify the Plan in any or all respects whatsoever; provided, however, that no
such amendment or modification shall, without the consent of the holders,
adversely affect rights and obligations with respect to any stock options,
stock appreciation rights or unvested Common Stock at the time outstanding
under the Plan. In addition, with a view to making available the benefits
provided by Section 422A of the Code and/or SEC Rule 16b-3 as in effect from
time to time under the 1934 Act, the Board shall, at the time of each such
amendment, determine whether or not to submit such amendment of the Plan to
the Company's stockholders for approval.
B. No material amendments shall be made to the provisions of the Article
Three Program without the approval of the Company's stockholders.
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no stock
option or stock appreciation right granted under the Plan shall become
exercisable, and no shares shall be issued, unless and until the Plan shall
have been approved by the Company's stockholders. If such stockholder approval
is not obtained within twelve (12) months after the date of the Board's
adoption of the Plan, then all stock options and stock appreciation rights
previously granted under the Plan shall terminate and no further stock options
or stock appreciation rights shall be granted. Subject to such limitation, the
Committee may grant stock options and stock appreciation rights under the Plan
at any time after the effective date and before the date fixed herein for
termination of the Plan.
B. The Plan shall in all events terminate on the date determined by the
Board. Upon such termination, any stock options, stock appreciation rights and
unvested shares at the time outstanding under the Plan shall continue to have
force and effect in accordance with the provisions of the instruments
evidencing such grants or issuances.
C. Options may be granted under this Plan to purchase shares of Common
Stock in excess of the number of shares then available for issuance under the
Plan, provided (i) an amendment to increase the maximum number of shares
issuable under the Plan is adopted by the Board prior to the initial grant of
any such option and within one year thereafter such amendment is approved by
the Company's stockholders, if such stockholder approval is deemed necessary
by the Board, and (ii) each option granted is not to become exercisable, in
whole or in part, at any time prior to the obtaining of such stockholder
approval, and provided further that at any time that the Amended and Restated
Governance Agreement dated as of October 25, 1995 between the Company and
Roche Holdings, Inc. (the "Amended Governance Agreement") remains in effect,
any action by the Board pursuant to the foregoing shall require the approval
of a majority of the Independent Directors (as such term is defined in Article
Eleventh of the Certificate of Incorporation of the Company).
IV. MISCELLANEOUS PROVISIONS
A. Any cash proceeds received by the Company from the issuance of shares
hereunder shall be used for general corporate purposes.
B. The implementation of the Plan, the granting of any stock option or
stock appreciation right hereunder, and the issuance of Common Stock under the
Regular Option Grant, the Automatic Option Grant or Stock Incentive Programs
shall be subject to the Company's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
stock options and stock appreciation rights granted under it and the Common
Stock issued pursuant to it.
C. Neither the action of the Company in establishing the Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of the
Plan itself shall be construed so as to grant any individual the right to
remain in the employ or service of the Company or any of its parent or
subsidiary corporations for any period of specific duration, and the Company
(or any parent or subsidiary retaining the services of such individual) may
terminate such individual's employment or service at any time and for any
reason, with or without cause.
D. Nothing contained in the Plan shall be construed to limit the authority
of the Company to exercise its corporate rights and powers, including (without
limitation) the right of the Company (a) to grant options for proper corporate
purposes otherwise than under this Plan to any Employee or other person, firm
or company or association or (b) to grant options to, or assume the option of,
any person in connection with the acquisition (by purchase, lease, merger,
consolidation or otherwise) of the business and assets (in whole or in part)
of any person, firm, company or association.
ARTICLE SIX
SPECIAL MERGER PROVISIONS
I. PRIORITY
The provisions of this Article Six shall govern any and all options under
this Plan which have been granted prior to, or are granted following, the
effective date of the merger of the Company with and into HLR (U.S.) II, Inc.
(the "Merger") pursuant to that certain Agreement and Plan of Merger ("Merger
Agreement") dated May 23, 1995 among the Company, Roche Holdings, Inc., and
HLR (U.S.) II, Inc. To the extent there is a conflict between any of the
provisions of this Article Six and any other provision of the Plan, the
specific provisions of this Article Six shall be controlling and shall govern
the disposition of all such options outstanding at the time of the Merger.
II. OPTION ADJUSTMENTS
A. None of the options granted under this Plan prior to the effective date
of the Merger shall be accelerated in whole or in part in connection with the
Merger.
B. None of the options granted under this Plan prior to the effective date
of the Merger shall be cashed out, or otherwise entitle the option holders to
any cash payments, in connection with the consummation of the Merger.
C. Each option granted under this Plan prior to the effective date of the
Merger shall remain in effect after the Merger upon the same terms and
conditions (including, without limitation, the exercise price per share and
the number of shares) in effect for such option immediately prior to the
Merger, except that the shares purchasable under each such continuing option
shall be shares of Special Common Stock. Each such continuing option will
become exercisable, and the shares purchasable thereunder shall vest, in
accordance with the same installment dates such option would have become
exercisable, and such shares would have vested, under the vesting schedule
specified for that option at the time of grant.
III. PLAN ADJUSTMENTS
A. After the effective date of the Merger, all references in the Plan to
Common Stock shall automatically become references to Special Common Stock.
B. If the Special Common Stock shall be redeemed at any time as provided in
Section (c)(ii) of Article Third of the Certificate of Incorporation of the
Company, then all outstanding options and stock appreciation rights granted
hereunder shall automatically accelerate and become fully exercisable and
vested immediately prior to the date fixed for redemption, and upon such
redemption the holder of such option or stock appreciation right shall
promptly be paid for each such option or right an amount equal to the product
of (i) the excess of the redemption price per share fixed in Section (c)(ii)
of Article Third (without reduction for the payment of any cash dividends as
provided in the fourth sentence of Section (c)(ii)(C) of Article Third) over
the exercise price per share, times (ii) the number of shares covered by such
option or right. Upon such redemption, any of the redemption price to be paid
pursuant to Section (c)(ii) of Article Third of the Certificate of
Incorporation of the Company received by a holder of shares issued under the
Stock Incentive Program in respect of unvested shares shall be placed in
escrow and released to such holder in accordance with the vesting schedule
that would have applied to such shares had such redemption not taken place.
C. Neither the consummation of the Merger nor the exercise by Roche
Holdings, Inc. or its affiliates of its right to designate nominees to the
Board of Directors pursuant to Sections 3.01 and 3.02 of the Amended
Governance Agreement, nor any change in the composition of the Board of
Directors resulting therefrom, shall constitute a Change in Control.
D. Upon the conversion of the Special Common Stock into Common Stock, all
references in the Plan to Special Common Stock (as provided in Article Five,
III. A.) shall automatically become references to Common Stock. Each option
granted under this Plan prior to such conversion shall remain in effect after
such conversion upon the same terms and conditions (including, without
limitation, the exercise price per share and the number of shares) in effect
for such option immediately prior to such conversion, except that the shares
purchasable under each such continuing option shall be shares of Common Stock.
Each such continuing option will become exercisable, and the shares
purchasable thereunder shall vest, in accordance with the same installment
dates such option would have become exercisable, and such shares would have
vested, under the vesting schedule specified for that option at the time of
grant.
1994 STOCK OPTION PLAN
(as amended effective October 16, 1996)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
A. This 1994 Stock Option Plan (the "Plan") is intended to promote the
interests of Genentech, Inc., a Delaware corporation (the "Company"), by
providing a method whereby the Company may retain the services of persons now
employed by or serving as consultants or directors to it, secure and retain
the services of persons capable of filling such positions and provide
incentives for such persons to exert maximum efforts for the success of the
Company or its parent or subsidiary corporations.
B. For purposes of the Plan, the following definitions shall be in effect:
CHANGE IN CONTROL: "Change in Control" shall have the meaning set forth in
Article Two, II.C. hereof.
CLOSING SELLING PRICE: The Closing Selling Price per share of Special Common
Stock on any relevant date under the Plan shall be the closing selling price
per share of Special Common Stock, if such Special Common Stock is reported on
a national securities exchange or reported on the NASDAQ National Market
System (or any successor system), for the trading day immediately preceding
the date in question, as such price is published in the Wall Street Journal
(or if such publication is not available, a comparable publication selected by
the Committee).
CONSULTANT: An individual shall be considered to be a Consultant for so long
as such individual continues to render personal services to the Company or one
or more of its parent or subsidiary corporations as an independent contractor.
CORPORATE TRANSACTION: "Corporate Transaction" shall have the meaning set
forth in Article Two, II. A. hereof.
EMPLOYEE: An individual shall be considered to be an Employee for so long as
such individual remains in the employ of the Company or one or more of its
Parent or Subsidiary.
PARENT: A corporation shall be deemed to be a parent of the Company if it is
a corporation (other than the Company) in an unbroken chain of corporations
ending with the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
SECTION 16(b) INSIDER: An individual shall be considered to be a Section
16(b) Insider on any relevant date under the Plan if such individual (A) is at
the time an officer or director of the Company subject to the short-swing
profit restrictions of the regulations promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended (the "1934 Act") or (B) unless
Section 16 or regulations promulgated thereunder are amended to provide
otherwise, was such an officer or director at any time during the six month
period immediately preceding the date in question and made any purchase or
sale of Special Common Stock during such six-month period.
SERVICE: An individual shall be deemed to be in the Service of the Company
for so long as such individual renders service on a periodic basis to the
Company or one or more of its Parent or Subsidiaries as an Employee or
Consultant.
SPECIAL COMMON STOCK: The Special Common Stock issuable under the Plan shall
be shares of the Company's Callable Putable Common Stock, par value $0.02 per
share.
SUBSIDIARY: A corporation shall be deemed to be a subsidiary of the Company
if it is one of the corporations (other than the Company) in an unbroken chain
of corporations beginning with the Company, provided each such corporation
(other than the last corporation in the unbroken chain) owns, at the time of
determination, stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain. For purposes of nonstatutory option grants under Article Two and all
Corporate Transaction provisions of the Plan, the term "subsidiary" shall also
include any partnership, joint venture or other business entity of which the
Company owns, directly or indirectly through another subsidiary corporation,
more than a fifty percent (50%) interest in voting power, capital or profits.
C. Stock option grants made to any individual under the Plan shall not in
any way affect, limit or restrict such individual's eligibility to participate
in any other stock plan or other compensation or benefit plan, arrangement or
practice now or hereafter maintained by the Company or any Parent or
Subsidiary.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Compensation Committee (the
"Committee"). The Committee shall be comprised of not less than two (2) Board
members. The Board may from time to time appoint members to the Committee in
substitution for (or in addition to) members previously appointed, and the
Board shall have the authority to fill any and all vacancies on the Committee,
however caused.
B. Subject to limitations contained elsewhere herein and to the provisions
of Section IV., C. and D. of this Article I relating to adjustments upon
changes in stock, the aggregate number of shares of stock that may be subject
to options granted to any Employee in a calendar year shall not exceed two
hundred fifty thousand (250,000) shares of the Company's Special Common Stock.
C. Subject to the express provisions of the Plan, the Committee shall have
plenary authority:
(i) to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations deemed
necessary or advisable in administering the Plan; and
(ii) to change the terms and conditions of any outstanding discretionary
option grant or unvested stock issuance, provided such action does not,
without the consent of the holder, adversely affect the rights and
obligations such individual may have under the Plan or an outstanding grant.
D. Determinations of the Committee on all matters relating to the Plan and
any discretionary option grants made hereunder shall be final, binding and
conclusive on all persons having any interest in the Plan or any options
granted issued under the Plan.
III. STRUCTURE OF THE PLAN
A. The Plan shall be divided into two separate components: the Option Grant
Program specified in Article Two and the Automatic Grant Program specified in
Article Three. Under the Option Grant Program, eligible Employees, non-
Employee Board members and Consultants may be granted options to purchase
shares of Special Common Stock at an exercise price equal to not less than 50%
of the Closing Selling Price per share on the grant date. Under the Automatic
Grant Program, non-Employee Board members shall automatically be granted
options to purchase shares of Special Common Stock on the dates and in the
amounts specified in Article Three below at an exercise price of 100% of the
Closing Selling Price per share of Special Common Stock on the date of grant.
B. The provisions of Articles One, Four and Five of the Plan shall apply
to the the Option Grant Program and the Automatic Option Grant Program and
shall accordingly govern the interests of all individuals in the Plan.
IV. ELIGILBILITY FOR OPTION GRANTS
The individuals eligible to receive option grants ("Optionees") pursuant to
the Plan shall be limited to (i) those Employees, non-Employee Board members
and Consultants selected by the Committee; and (ii) those non-Employee Board
members who are entitled to option grants pursuant to the Automatic Option
Grant Program of Article Three.
V. STOCK SUBJECT TO THE PLAN
A. The Special Common Stock issuable under the Plan shall be made available
either from authorized but unissued shares of Special Common Stock or from
shares of Special Common Stock reacquired by the Company on the open market.
The aggregate number of shares of Special Common Stock issuable over the term
of this Plan, whether through exercised options or direct stock issuances,
shall not exceed 4,500,000 shares (subject to adjustment from time to time in
accordance with subparagraphs C. and D. below).
B. Should an option granted under this Plan expire or terminate for any
reason prior to exercise or surrender in full (including options canceled in
accordance with the cancellation-regrant provisions of the Option Grant
Program), the shares subject to the portion of the option not so exercised or
surrendered shall be available for subsequent option grants under this Plan.
Shares repurchased by the Company pursuant to its repurchase rights under the
Plan shall not be available for subsequent issuance.
C. In the event any change is made to the Special Common Stock issuable
under the Plan by reason of any stock dividend, stock split, combination of
shares, exchange of shares or other change affecting the outstanding Special
Common Stock as a class without receipt of consideration, then appropriate
adjustments shall be made by the Committee to (i) the aggregate number and/or
class of shares issuable under this Plan and the maximum number and/or class
of shares purchasable per Employee pursuant to the applicable limitation of
Section II.B of this Article One and the number and/or class of shares for
which the automatic option grants are to be made pursuant to the provisions of
Article Three, to reflect the effect of such change upon the Company's capital
structure, and (ii) the number and/or class of shares and the exercise price
per share of the stock subject to each outstanding option in order to preclude
the dilution or enlargement of benefits thereunder. All adjustments made by
the Committee pursuant to this subparagraph C. shall be final, binding and
conclusive.
D. Subject to the special priority provisions of Article Five of the Plan,
in the event that (i) the Company is the surviving entity in any Corporate
Transaction that does not result in the termination of outstanding options
pursuant to the Corporate Transaction provisions of the Plan or (ii) the
outstanding options under the Plan are to be assumed in connection with such
Corporate Transaction, then each such continuing or assumed option shall,
immediately after such Corporate Transaction, be appropriately adjusted to
apply and pertain to the number and class of securities which would be
issuable, in consummation of such Corporate Transaction, to an actual holder
of the same number of shares of Special Common Stock as are subject to such
option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share subject
to each option, provided that the aggregate exercise price of such option
shall remain the same. In addition, the aggregate number and/or class of
shares issuable under this Plan shall be appropriately adjusted to reflect the
effect of such Corporate Transaction upon the Company's capital structure.
ARTICLE TWO
OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
A. The Committee shall have plenary authority (subject to the express
provisions of the Plan and Section 144 of the Delaware General Corporation
Law) to determine which Employees, non-Employee Board members and Consultants
are to be granted options under this Option Grant Program, the number of
shares to be covered by each such option, the status of the granted option as
either an incentive stock option ("Incentive Option") which meets the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
from time to time (the "Code"), or a non-statutory option not intended to meet
such requirements, the time or times at which such option is to become
exercisable, the time or times at which such option (or the Shares subject to
such option) becomes vested (referred to herein as the "vesting schedule") and
the term for which the option is to remain outstanding, up to a maximum term
of twenty (20) years.
B. The granted options shall be evidenced by instruments in such form as the
Committee shall from time to time approve; provided, however, that each such
instrument shall comply with and incorporate the terms and conditions
specified below, except as such terms and conditions must be modified for
Incentive Options as set forth below in Section III of this Article Two.
1. Exercise Price.
a. The exercise price per share shall be fixed by the Committee, but in no
event shall the exercise price per share be less than fifty percent (50%) of
the Closing Selling Price per share of Special Common Stock on the date of the
option grant.
b. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the loan provisions of this Article Two, be
payable in one of the alternative forms specified below:
(A) full payment in cash or check made payable to the Company's order; or
(B) full payment in shares of Special Common Stock held by the Optionee
for the requisite period necessary to avoid a charge to the Company's reported
earnings and valued at the Closing Selling Price on the Exercise Date (as such
term is defined below); or
(C) full payment in a combination of shares of Special Common Stock held
by the Optionee for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at the Closing Selling Price on the
Exercise Date and cash or check.
c. For purposes of subparagraph b. above, the Exercise Date shall be the
first date on which there is delivered to the Company both (i) written notice
of the exercise of the option and (ii) payment of the exercise price for the
purchased shares.
2. Term and Exercise of Options.
a. Each option granted under this Option Grant Program shall be exercisable
in one or more installments over the Optionee's period of Service as shall be
determined by the Committee and set forth in the instrument evidencing such
option; provided, however, that no such option granted to a Section 16(b)
Insider shall become exercisable in whole or in part within the first six (6)
months after the grant date, except in the event of the Optionee's death or
disability.
b. An option may be exercisable by the Optionee or, in the event the
Optionee is permanently disabled (as such term is defined in Section 22(e) of
the Code), by his or her spouse, and such option may be transferred by the
Optionee to a trust for such Optionee's benefit or the benefit of an immediate
family member or by will or the laws of descent or distribution.
c. The Committee may, at its discretion, accelerate the vesting schedule of
any outstanding option at any time.
3. Termination of Service.
a. Should an Optionee cease to continue in Service for any reason (other
than termination due to death, permanent disability or retirement from
employment by the Company after reaching age sixty-five (65)) while the holder
of one or more outstanding options under this Option Grant Program, then such
options shall not be exercisable at any time after the earlier of (i) the
specified expiration date of the option term or (ii) the expiration of three
(3) months after the Optionee's cessation of Service. Each such option shall,
during the applicable period following cessation of Service, be exercisable
only to the extent of the number of shares (if any) in which the Optionee is
vested on the date of such cessation of Service; provided, however, that the
Committee shall have the discretion to specify, either at the time the option
is granted or at the time that the Optionee ceases Service, that vesting of
such option may be extended for a period not to exceed three (3) years from
the date of cessation of Service and that the applicable expiration period set
forth in clause (ii) may be increased to a period of up to five (5) years.
b. Should an Optionee cease to continue in Service due to permanent
disability while the holder of one or more outstanding options under this
Option Grant Program, then such options shall not be exercisable at any time
after the earlier of (i) the specified expiration date of the option term or
(ii) the expiration of three (3) months after the Optionee's cessation of
Service. Each such option shall, during the applicable period following
cessation of Service, be exercisable only to the extent of the number of
shares (if any) in which the Optionee is vested on the date of such cessation
of Service; provided, however, that the Committee shall have the discretion to
specify, either at the time the option is granted or at the time that the
Optionee ceases Service, that the vesting of such option may be accelerated or
extended from the date of cessation of Service and that the period of
exercisability can be increased up to the expiration date of the option term.
Should an Optionee cease to continue in Service due to death or retirement
from employment by the Company after reaching age sixty-five (65), while the
holder of one or more outstanding options under this Regular Option Grant
Program, then all unvested options on such date shall automatically become
vested and the expiration date of the option shall automatically be extended
to the expiration date of the option term.
c. Any option granted to an Optionee under this Option Grant Program and
outstanding in whole or in part on the date of the Optionee's death may be
subsequently exercised by the personal representative of the Optionee's estate
or by the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution in
the case of the Optionee's death, and any option granted to an Optionee under
this Option Grant Program which is outstanding in whole or in part on the date
of the Optionee's cessation of Service due to permanent disability may be
exercised by the Optionee's spouse or designee. Any such exercise must be in
accordance with subparagraph b.
d. The Committee shall have complete discretion, exercisable either at the
time the option is granted or at the time the Optionee ceases Service, to
establish as a provision applicable to the exercise of one or more options
granted under this Option Grant Program that during the limited period of
exercisability following cessation of Service due to retirement, "plant
closing" or "mass layoff" (as such terms are defined at 29 U.S.C. Section
2101) that is subject to the notice requirements of 29 U.S.C. Section 2102,
the option will continue to vest according to the vesting schedule that would
have applied had the Optionee continued in Service.
4. Repurchase Rights.
a. Options may provide that notwithstanding any vesting schedule pursuant to
subparagraph 2.a. above, they may be exercised prior to such vesting schedule
so long as the Optionee enters into a repurchase agreement satisfactory to the
Company. The shares of Special Common Stock acquired upon the exercise of one
or more options granted under this Option Grant Program may be subject to
repurchase by the Company, at the exercise price paid per share, upon the
Optionee's cessation of Service prior to vesting in such shares.
b. Any such repurchase right shall be exercisable by the Company upon such
terms and conditions (including the establishment of the appropriate vesting
schedule and other provision for the expiration of such right in one or more
installments over the Optionee's period of Service) as the Committee may
specify in the instrument evidencing such right, which instrument shall
include appropriate terms with respect to the legending of stock certificates
and the placing of unvested shares into escrow.
c. All of the Company's outstanding repurchase rights shall automatically
terminate, and all shares purchased under this Option Grant Program shall
immediately vest in full, upon the occurrence of any Corporate Transaction or
Change in Control; provided, however, that no such termination of repurchase
rights or immediate vesting of the purchased shares shall occur if (and to the
extent that): (i) the Company's outstanding repurchase rights are to be
assigned to the successor corporation (or parent thereof) in connection with
the Corporate Transaction or (ii) such termination of repurchase rights and
acceleration of vesting are precluded by other limitations imposed by the
Committee either at the time the option is granted or at the time the option
shares are purchased.
5. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by the option until such individual shall have exercised
the option, paid the option price and satisfied all other conditions precedent
to the issuance of certificates for the purchased shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any of the following transactions (a "Corporate
Transaction"):
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially all of
the assets of the Company to any entity other than a Subsidiary of the
Company, or
(iii) any reverse merger in which the Company is the surviving entity but in
which fifty percent (50%) or more of the Company's outstanding voting stock
held by persons who are not "Subject Persons" as defined in Article Eleventh
of the Company's Certificate of Incorporation (as in effect on September 7,
1990) including persons included in such definition by subparagraph (b)
thereof is transferred to holders different from those who held the stock
immediately prior to such merger, then the exercisability of each option
outstanding under this Option Grant Program shall be automatically accelerated
so that each such option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable with respect to
the total number of shares of Special Common Stock purchasable under such
option and may be exercised for all or any portion of such shares. However, an
outstanding option under this Option Grant Program shall not be so accelerated
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent
thereof or be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation or parent thereof, or (ii) such
option is to be replaced by a comparable cash incentive program of the
successor corporation based on the value of the option at the time of the
Corporate Transaction, or (iii) the acceleration of such option is subject to
other applicable limitations imposed by the Committee at the time of grant.
The determination of comparability under clause (i) or (ii) above shall be
made by the Committee, and its determination shall be final, binding and
conclusive.
B. Upon the consummation of the Corporate Transaction, all outstanding
options under this Option Grant Program shall, to the extent not previously
exercised or assumed by the successor corporation or its parent company,
terminate and cease to be outstanding.
C. In the event of any of the following transactions (a "Change in
Control"):
(i) the acquisition by a person or group of related persons, other than the
Company or any person controlling, controlled by or under common control with
the Company, of beneficial ownership (as determined pursuant to the provisions
of Rule 13d-3 under the 1934 Act) of securities of the Company representing
thirty percent (30%) or more of the combined voting power of the Company's
then outstanding securities pursuant to a transaction or series of related
transactions which the Board does not approve; or
(ii) the first date within any period of thirty-six (36) consecutive months
or less on which there is effected any change in the composition of the Board
such that the majority of the Board (determined by rounding up to the next
whole number) ceases to be comprised of individuals who either (I) have been
members of the Board continuously since the beginning of such period or (II)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (I) who
were still in office at the time such election or nomination was approved by
the Board; then the exercisability of each option outstanding under this
Option Grant Program shall be automatically accelerated so that each such
option shall become exercisable, immediately prior to such Change in Control,
for the full number of shares purchasable under such option and may be
exercised for all or any portion of such shares. However, an outstanding
option under this Option Grant Program shall not be so accelerated if and to
the extent one or more limitations imposed by the Committee at the time of
grant preclude such acceleration upon a Change in Control.
D. The grant of options under this Option Grant Program shall in no way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
III. INCENTIVE OPTIONS
A. The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Option Grant Program. Options which are
specifically designated as "non-statutory" options when issued under this
Option Grant Program shall not be subject to such terms and conditions.
1. Option Price.
The option price per share of the Special Common Stock subject to an
Incentive Option shall in no event be less than one hundred percent (100%) of
the Closing Selling Price per share of Special Common Stock on the grant date.
2. 10% Stockholder.
If any individual to whom an Incentive Option is to be granted pursuant to
the provisions of this Option Grant Program is on the grant date the owner of
stock (as determined under Section 424(d) of the Internal Revenue Code)
possessing 10% or more of the total combined voting power of all classes of
stock of the Company or any one of its Parent or Subsidiaries (such person to
be herein referred to as a 10% Stockholder), then (i) the option price per
share shall not be less than one hundred and ten percent (110%) of the Closing
Selling Price per share of Special Common Stock on the grant date and (ii) the
maximum term of the option shall not exceed five (5) years from the grant
date.
3. Dollar Limitation.
The aggregate fair market value (determined on the basis of the Closing
Selling Price in effect on the respective date or dates of grant) of the
Special Common Stock for which one or more options granted to any Employee
under this Plan (or any other option plan of the Company or its Parent or
Subsidiaries) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
thereof as incentive stock options under the Federal tax laws shall be applied
on the basis of the order in which such options are granted.
4. Term and Exercise of Options.
a. No Incentive Option shall have a term in excess of ten (10) years from
the grant date.
b. An Incentive Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime
of the Optionee only by the Optionee.
5. Termination of Service.
Notwithstanding any term in the Plan to the contrary, an Incentive Option
must be exercised within the three (3) month period commencing with the date
of cessation of Employee status for any reason, except that in the event the
Optionee's cessation of Employee status is due to permanent disability, such
period shall be one (1) year from the date of such cessation of Employee
status. Incentive Options not exercised within the applicable period shall be
treated as non-statutory options.
B. Except as modified by the preceding provisions of this Incentive Options
section, all the provisions of this Option Grant Program shall be applicable
to the Incentive Options granted hereunder. If any option originally granted
as an Incentive Stock Option is modified so as not to qualify under the Code
as an Incentive Stock Option, such modified Incentive Stock Option shall be a
non-statutory option.
IV. CANCELLATION AND RE-GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected option holders, the cancellation of
any or all outstanding options under this Option Grant Program and to grant in
substitution therefor new options under this Plan covering the same or
different numbers of shares of Special Common Stock but having an option price
per share not less than fifty percent (50%) of the Closing Selling Price (one
hundred percent (100%) of the Closing Selling Price in the case of an
Incentive Option or, in the case of a 10% Stockholder, not less than one
hundred and ten percent (110%) of the Closing Selling Price) per share of
Special Common Stock on the new grant date.
V. LOANS OR GUARANTEE OF LOANS
The Committee may assist any Employee (including any officer or director) in
the exercise of one or more options under this Option Grant Program by (a)
authorizing the extension of a loan to such Employee from the Company, (b)
permitting the Employee to pay the option price for the purchased Special
Common Stock in installments over a period of years or (c) authorizing a
guarantee by the Company of a third-party loan to the Employee. The terms of
any loan, installment method of payment or guarantee (including the interest
rate and terms of repayment) shall be established by the Committee in its sole
discretion. Loans, installment payments and guarantees may be granted without
security or collateral, but the maximum credit available to the Optionee shall
not exceed the sum of (i) the aggregate exercise price (less the par value) of
the purchased shares plus (ii) any Federal and State income and employment tax
liability incurred by the Employee in connection with the exercise of the
option.
ARTICLE THREE
AUTOMATIC GRANT PROGRAM
I. AUTOMATIC GRANTS
On April 30, 1995, each individual who is a non-Employee member of the Board
on such date shall automatically be granted a non-statutory option under this
Article Three to purchase 15,000 shares of Special Common Stock. Each non-
Employee who is first appointed or elected a member of the Board after April
30, 1995 shall automatically be granted, on the date of such individual's
election to the Board, a non-statutory option under this Article Three to
purchase 15,000 shares of Special Common Stock. Each Employee director who is
first elected a member of the Board and who subsequently becomes a non-
Employee director after April 30, 1995 shall automatically be granted, on the
date of such individual's change from Employee to non-Employee director, a
non-statutory option under this Article Three to purchase 15,000 shares of
Special Common Stock. This provision shall terminate on April 30, 1996.
II. TERMS AND CONDITIONS OF GRANT
Each option granted in accordance with the provisions of this Article Three
shall be evidenced by an instrument in such form as the Committee approves
from time to time for grants made under Article Two; provided, however, that
each such automatic grant shall be subject to the following terms and
conditions:
A. Exercise Price.
The exercise price per share shall be one hundred percent (100%) of the
Closing Selling Price per share of Special Common Stock on the grant date.
B. Term and Vesting of Options.
1. Except as otherwise specified below, each option shall vest in
increments of 5,000 shares on the first, second and third anniversaries of the
grant date and shall thereafter remain exercisable until the expiration or
earlier termination of the option term.
2. Each granted option shall have a term of ten (10) years measured from
the grant date.
C. Exercise of Option.
Upon exercise of the option, the option exercise price for the purchased
shares shall become immediately due and payable in full in one of the
alternative forms specified below:
(i) cash or check payable to the Company's order;
(ii) shares of Special Common Stock held by the optionee for the
requisite period necessary to avoid a charge to the Company's reported
earnings and valued at the Closing Selling Price on the date of exercise; or
(iii) any combination of the foregoing so long as the total payment
equals the aggregate exercise price for the purchased shares.
D. Effect of Termination of Board Membership.
1. Should an Optionee cease to be a member of the Board for any reason
(other than death) prior to the expiration date of the automatic grant held by
the optionee under this Article Three, then such grant shall remain
exercisable, for any shares of Special Common Stock for which the option is
exercisable at the time of such cessation of Board membership, for a period
not to exceed the earlier of (i) the expiration of the three (3) month period
following the date of such cessation of Board membership or (ii) the specified
expiration date of the option term.
2. Should the Optionee's membership on the Board cease by reason of death,
then each outstanding grant held by the optionee under this Article Three may
be subsequently exercised, for any shares of Special Common Stock for which
the option is exercisable at the time of the Optionee's cessation of Board
membership, by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the optionee's
will or in accordance with the laws of descent and distribution. Any such
exercise must, however, occur prior to the earlier of (i) the expiration of
the twelve (12) month period following the date of the Optionee's death or
(ii) the specified expiration date of the option term.
E. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by an option granted under this Article Three until such
individual shall have exercised the option, paid the option exercise price in
full and satisfied all other conditions precedent to the issuance of
certificates for the purchased shares.
III. CORPORATE TRANSACTION
A. In the event of a Corporate Transaction, options granted under the
Automatic Grant Program shall be treated as described in Section II of Article
Two, except the provisions of clause (iii) of the penultimate sentence of
Section II A(iii) of Article Two shall not apply.
IV. CHANGE IN CONTROL
A. In the event of a Change in Control, options granted under the Automatic
Grant Program shall be treated as described in Section II of Article Two,
except the last sentence of Section II C.(ii) of Article Two shall not apply.
ARTICLE FOUR
MISCELLANEOUS
I. TAX WITHHOLDING
A. The Company's obligation to deliver shares upon the exercise or surrender
of stock options granted under Article Two shall be subject to the
satisfaction of all applicable Federal, State and local income and employment
tax withholding requirements.
B. The Committee may, in its discretion and upon such terms and conditions
as it may deem appropriate (including the applicable safe-harbor provisions of
SEC Rule 16b-3 or any successor rule or regulation) provide any or all
Optionees or Recipients with the election to have the Company withhold, from
the shares of Special Common Stock purchased or issued under the Plan, one or
more of such shares with an aggregate Closing Selling Price equal to the
designated percentage (up to 100% specified by the Optionee or Recipient) of
the Federal and State income taxes ("Taxes") incurred in connection with the
acquisition of such shares. In lieu of such direct withholding, one or more
Optionees or Recipients may also be granted the right to deliver unrestricted
shares of Special Common Stock to the Company in satisfaction of such Taxes.
The withheld or delivered shares shall be valued at the Closing Selling Price
on the applicable determination date for such Taxes.
II. AMENDMENT OF THE PLAN
A. The Board shall have the complete and exclusive authority to amend or
modify the Plan in any or all respects whatsoever; provided, however, that no
such amendment or modification shall, without the consent of the holders,
adversely affect rights and obligations with respect to any stock options then
outstanding under the Plan. In addition, with a view to making available the
benefits provided by Section 422 of the Code and/or SEC Rule 16b-3 as in
effect from time to time under the 1934 Act, the Board shall, at the time of
each such amendment, determine whether or not to submit such amendment of the
Plan to the Company's stockholders for approval.
B. No material amendments shall be made to the provisions of the Automatic
Grant Program without the approval of the Company's stockholders.
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no stock
option granted under the Plan shall become exercisable, and no shares shall be
issued, unless and until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve (12)
months after the date of the Board's adoption of the Plan, then all stock
options previously granted under the Plan shall terminate and no further stock
options shall be granted. Subject to such limitation, the Committee may grant
stock options under the Plan at any time after the effective date and before
the date fixed herein for termination of the Plan.
B. The Plan shall in all events terminate on the date determined by the
Board, but in no event shall the Plan terminate later than February 22, 2004.
Upon such termination, any stock options at the time outstanding under the
Plan shall continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants.
C. Options may be granted under this Plan to purchase shares of Special
Common Stock in excess of the number of shares then available for issuance
under the Plan, provided (i) an amendment to increase the maximum number of
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such option and within one year thereafter such amendment is
approved by the Company's stockholders, if such stockholder approval is deemed
necessary by the Board, and (ii) each option granted is not to become
exercisable, in whole or in part, at any time prior to the obtaining of such
stockholder approval, and provided further that at any time that the Amended
and Restated Governance Agreement dated as of October 25, 1995 between the
Company and Roche Holdings, Inc. (the "Amended Governance Agreement") remains
in effect, any action by the Board pursuant to the foregoing shall require the
approval of a majority of the Independent Directors (as such term is defined
in Article Eleventh of the Certificate of Incorporation of the Company).
IV. MISCELLANEOUS PROVISIONS
A. Any cash proceeds received by the Company from the issuance of shares
hereunder shall be used for general corporate purposes.
B. The implementation of the Plan, the granting of any stock option
hereunder, and the issuance of Special Common Stock under the Option Grant
Program or the Automatic Grant Program, shall be subject to the Company's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the stock options granted under it and the
Special Common Stock issued pursuant to it.
C. Neither the action of the Company in establishing the Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of the
Plan itself shall be construed so as to grant any individual the right to
remain in the employ or service of the Company or any of its Parent or
Subsidiaries for any period of specific duration, and the Company (or any
parent or subsidiary retaining the services of such individual) may terminate
such individual's employment or service at any time and for any reason, with
or without cause.
D. Nothing contained in the Plan shall be construed to limit the authority
of the Company to exercise its corporate rights and powers, including (without
limitation) the right of the Company (a) to grant options for proper corporate
purposes otherwise than under this Plan to any Employee or other person, firm
or company or association or (b) to grant options to, or assume the option of,
any person in connection with the acquisition (by purchase, lease, merger,
consolidation or otherwise) of the business and assets (in whole or in part)
of any person, firm, company or association.
ARTICLE FIVE
SPECIAL REDEMPTION PROVISIONS
I. PRIORITY
To the extent there is a conflict between any of the provisions of this
Article Five and any other provision of the Plan, the specific provisions of
this Article Five shall be controlling and shall govern the disposition of all
such options outstanding at the time the Redemption (as defined below) occurs
or no longer can occur.
II. EFFECT OF REDEMPTION ON VESTED OPTIONS
A. If the Special Common Stock shall be redeemed at any time as provided in
Section (c)(ii) of Article Third of the Certificate of Incorporation of the
Company (the "Redemption"), then holders of all outstanding options granted
hereunder, to the extent vested immediately prior to the date fixed for the
Redemption ("Vested Options"), shall promptly be paid for each such Vested
Option or right an amount equal to the product of (i) the excess of the
redemption price per share fixed in Section (c)(ii) of Article Third (without
reduction for the payment of any cash dividends as provided in the fourth
sentence of Section (c)(ii)(C) of Article Third) over the exercise price per
share, times (ii) the number of shares covered by such Vested Option or right.
III. EFFECT OF REDEMPTION ON UNVESTED OPTIONS
A. Upon the Redemption, each option granted under this Plan, to the extent
not vested immediately prior to the date fixed for the Redemption, shall be
replaced by a comparable incentive program. Each such continuing option will
become exercisable, and the shares purchasable thereunder shall vest, in
accordance with the same installment dates such option would have become
exercisable, and such shares would have vested, under the vesting schedule
specified for that option at the time of grant.
IV. EFFECT OF NO REDEMPTION
A. If the Redemption does not occur, upon conversion of the Special Common
Stock into Common Stock, each option granted under this Plan prior to such
conversion shall remain in effect after such conversion upon the same terms
and conditions (including, without limitation, the exercise price per share
and the number of shares) in effect for such option immediately prior to such
conversion, except that the shares purchasable under each such continuing
option shall be shares of Common Stock. Each such continuing option will
become exercisable, and the shares purchasable thereunder shall vest, in
accordance with the same installment dates such option would have become
exercisable, specified for that option at the time of grant.
V. OTHER
A. After the earlier of the Redemption or the Conversion Date (as defined in
Article Third of the Certificate of Incorporation of the Company), all
references in the Plan to Special Common Stock shall automatically become
references to Common Stock.
B. The exercise by Roche Holdings, Inc. or its affiliates of its right to
designate nominees to the Board of Directors pursuant to Sections 3.01 and
3.02 of the Amended Governance Agreement shall not constitute a Change in
Control.
1996 STOCK OPTION/STOCK INCENTIVE PLAN
(as amended effective October 16, 1996)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSES OF THE PLAN
A. This 1996 Stock Option/Stock Incentive Plan (the "Plan") is intended to
promote the interests of Genentech, Inc., a Delaware corporation (the
"Company"), by providing a method whereby the Company may retain the services
of persons now employed by or serving as consultants or directors to it,
secure and retain the services of persons capable of filling such positions
and provide incentives for such persons to exert maximum efforts for the
success of the Company or its parent or subsidiary corporations.
B. For purposes of the Plan, the following definitions shall be in effect:
CHANGE IN CONTROL: "Change in Control" shall have the meaning set forth in
Article Two, III.C. hereof.
CHANGE IN CONTROL PRICE: "Change in Control Price" shall have the meaning
set forth in Article Two, II.C.4.b. hereof.
CLOSING SELLING PRICE: The Closing Selling Price per share of Special Common
Stock on any relevant date under the Plan shall be the closing selling price
per share of Special Common Stock, if such Special Common Stock is reported on
a national securities exchange or reported on the NASDAQ National Market
System (or any successor system), for the trading day immediately preceding
the date in question, as such price is published in the Wall Street Journal
(or if such publication is not available, a comparable publication selected by
the Committee).
CONSULTANT: An individual shall be considered to be a Consultant for so long
as such individual continues to render personal services to the Company or one
or more of its Parent or Subsidiaries as an independent contractor or
continues to have an effective and unexpired consulting agreement with the
Company.
CORPORATE TRANSACTION: "Corporate Transaction" shall have the meaning set
forth in Article Two, III.A. hereof.
EMPLOYEE: An individual shall be considered to be an Employee for so long as
such individual remains in the employ of the Company or one or more of its
Parent or Subsidiaries, irrespective of whether employment services are
actually provided by the individual.
PARENT: A corporation shall be deemed to be a parent of the Company if it is
a corporation (other than the Company) in an unbroken chain of corporations
ending with the Company, provided each such corporation in the unbroken chain
(other than the Company) owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain.
SECTION 16(b) INSIDER: An individual shall be considered to be a Section
16(b) Insider on any relevant date under the Plan if such individual (A) is at
the time an officer or director of the Company subject to the short-swing
profit restrictions of the regulations promulgated under Section 16 of the
Securities Exchange Act of 1934, as amended (the "1934 Act") or (B) unless
Section 16 or regulations promulgated thereunder, are amended to provide
otherwise, was such an officer or director at any time during the six month
period immediately preceding the date in question and made any purchase or
sale of Special Common Stock during such six-month period.
SERVICE: An individual shall be deemed to be in the Service of the Company
for so long as such individual renders service on a periodic basis to the
Company or one or more of its Parent or Subsidiaries as an Employee or
Consultant.
SPECIAL COMMON STOCK: The Special Common Stock issuable under the Plan shall
be shares of the Company's Callable Putable Common Stock, par value $0.02 per
share. All references to "shares" or "stock", shall be deemed to be references
to shares of the Special Common Stock.
SUBSIDIARY: A corporation shall be deemed to be a subsidiary of the Company
if it is one of the corporations (other than the Company) in an unbroken chain
of corporations beginning with the Company, provided each such corporation
(other than the last corporation in the unbroken chain) owns, at the time of
determination, stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain. For purposes of non-statutory option grants under Article Two and stock
incentive grants under Article Four and all Corporate Transaction provisions
of the Plan, the term "subsidiary" shall also include any partnership, joint
venture or other business entity of which the Company owns, directly or
indirectly through another subsidiary corporation, more than a fifty percent
(50%) interest in voting power, capital or profits.
C. Neither stock option grants nor stock bonus issuances made to any
individual under the Plan shall in any way affect, limit or restrict such
individual's eligibility to participate in any other stock plan or other
compensation or benefit plan, arrangement or practice now or hereafter
maintained by the Company or any Parent or Subsidiary.
II. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Compensation Committee (the
"Committee"). The Committee shall be comprised of not less than two (2) Board
members. The Board may from time to time appoint members to the Committee in
substitution for (or in addition to) members previously appointed, and the
Board shall have the authority to fill any and all vacancies on the Committee,
however caused.
B. Subject to limitations contained elsewhere herein and to the provisions of
Section V., C. and D. of this Article I relating to adjustments upon changes
in stock, the aggregate number of shares of stock that may be subject to
options and stock appreciation rights granted hereunder to any Employee in a
calendar year shall not exceed two hundred fifty thousand (250,000) shares of
the Company's Special Common Stock.
C. Subject to the express provisions of the Plan, the Committee shall have
plenary authority:
(i) to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations deemed
necessary or advisable in administering the Plan; and
(ii) to change the terms and conditions of any outstanding discretionary
option grant or unvested stock issuance, provided such action does not,
without the consent of the holder, adversely affect the rights and obligations
such individual may have under the Plan or the outstanding grant or stock
issuance.
D. Determinations of the Committee on all matters relating to the Plan and
any discretionary option grants or stock issuances made hereunder shall be
final, binding and conclusive on all persons having any interest in the Plan
or any options granted or shares issued under the Plan.
III. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate components: the Regular
Option Grant Program specified in Article Two, the Automatic Grant Program
specified in Article Three and the Stock Incentive Program specified in
Article Four. Under the Regular Option Grant Program, eligible Employees,
non-Employee Board members and Consultants may be granted options to purchase
shares of Special Common Stock at an exercise price equal to not less than 50%
of the Closing Selling Price per share on the grant date. Under the Automatic
Grant Program, non-Employee Board members shall automatically be granted
options to purchase shares of Special Common Stock on the dates and in the
amounts specified in Article Three below at an exercise price of 100% of the
Closing Selling Price per share of Special Common Stock on the date of grant.
B. Under the Stock Incentive Program, eligible Employees, non-Employee Board
members and Consultants may be awarded shares of Special Common Stock as a
reward for past services or as an incentive to the performance of future
services. Such shares may be issued as fully-vested shares or as shares
vesting over time.
C. The provisions of Articles One, Five and Six of the Plan shall apply to
the Regular Option Grant Program, the Automatic Option Grant Program and the
Stock Incentive Program and shall accordingly govern the interests of all
individuals in the Plan.
IV. ELIGIBILITY FOR OPTION GRANTS AND STOCK ISSUANCES
A. The individuals eligible to receive option grants ("Optionees") and/or
stock incentives ("Recipients") pursuant to the Plan shall be limited to (i)
those Employees, non-Employee Board members and Consultants selected by the
Committee and (ii) those non-Employee Board members who are entitled to option
grants pursuant to the Automatic Option Grant Program of Article Three.
V. STOCK SUBJECT TO THE PLAN
A. The Special Common Stock issuable under the Plan shall be made available
either from authorized but unissued shares of Special Common Stock or from
shares of Special Common Stock reacquired by the Company on the open market.
The aggregate number of shares of Special Common Stock issuable over the term
of this Plan, whether through exercised options or direct stock issuances
shall not exceed 9,000,000 shares (subject to adjustment from time to time in
accordance with paragraphs C. and D. below).
B. Should an option granted under this Plan expire or terminate for any
reason prior to exercise or surrender in full (including options canceled in
accordance with the cancellation-regrant provisions of the Regular Option
Grant Program), the shares subject to the portion of the option not so
exercised or surrendered shall be available for subsequent option grants under
this Plan. Shares subject to stock appreciation rights exercised in accordance
with the Stock Appreciation Right provisions of Article Two and shares
repurchased by the Company pursuant to its repurchase rights under the Plan
shall not be available for subsequent issuance, whether through option grants,
stock appreciation rights or direct issuances, under this Plan.
C. In the event any change is made to the Special Common Stock issuable under
the Plan by reason of any stock dividend, stock split, combination of shares,
exchange of shares or other change affecting the outstanding Special Common
Stock as a class without receipt of consideration, then appropriate
adjustments shall be made by the Committee to (i) the aggregate number and/or
class of shares issuable under this Plan, the maximum number and/or class of
shares purchasable per Employee pursuant to the applicable limitation of
Section II.B of this Article One and the number and/or class of shares for
which the automatic option grants are to be made pursuant to the provisions of
Article Three, to reflect the effect of such change upon the Company's capital
structure, (ii) the number and/or class of shares and the exercise price per
share of the stock subject to each outstanding option in order to preclude the
dilution or enlargement of benefits thereunder and (iii) the number and/or
class of shares and the exercise price per share in effect under each
outstanding stock appreciation right in order to preclude the dilution or
enlargement of benefits thereunder. All adjustments made by the Committee
pursuant to this paragraph C. shall be final, binding and conclusive.
D. Subject to the special priority provisions of Article Six of the Plan, in
the event that (i) the Company is the surviving entity in any Corporate
Transaction that does not result in the termination of outstanding options
pursuant to the Corporate Transaction provisions of the Plan or (ii) the
outstanding options under the Plan are to be assumed in connection with such
Corporate Transaction, then each such continuing or assumed option shall,
immediately after such Corporate Transaction, be appropriately adjusted to
apply and pertain to the number and class of securities which would be
issuable, in consummation of such Corporate Transaction, to an actual holder
of the same number of shares of Special Common Stock as are subject to such
option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share subject
to each option, provided that the aggregate exercise price of such option
shall remain the same. In addition, the aggregate number and/or class of
shares issuable under this Plan shall be appropriately adjusted to reflect the
effect of such Corporate Transaction upon the Company's capital structure.
ARTICLE TWO
REGULAR OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
A. The Committee shall have plenary authority (subject to the express
provisions of the Plan and Section 144 of the Delaware General Corporation
Law) to determine which Employees, non-Employee Board members and Consultants
are to be granted options under this Regular Option Grant Program, the number
of shares to be covered by each such option, the status of the granted option
as either an incentive stock option ("Incentive Option") which meets the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
from time to time (the "Code"), or a non-statutory option not intended to meet
such requirements, the time or times at which such option is to become
exercisable, the time or times at which such option (or the Shares subject to
such option) becomes vested (referred to herein as the "vesting schedule") and
the term for which the option is to remain outstanding, up to a maximum term
of ten (10) years.
B. The granted options shall be evidenced by instruments in such form as the
Committee shall from time to time approve; provided, however, that each such
instrument shall comply with and incorporate the terms and conditions
specified below, except as such terms and conditions must be modified for
Incentive Options as set forth below in Section IV of this Article Two.
1. Exercise Price.
a. The exercise price per share shall be fixed by the Committee, but in no
event shall the exercise price per share be less than fifty percent (50%) of
the Closing Selling Price per share of Special Common Stock on the date of the
option grant.
b. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the loan provisions of this Article Two, be
payable in one of the alternative forms specified below:
(A) full payment in cash or check made payable to the Company's order; or
(B) full payment in shares of Special Common Stock held by the Optionee
for the requisite period necessary to avoid a charge to the Company's reported
earnings and valued at the Closing Selling Price on the Exercise Date (as such
term is defined below); or
(C) full payment in a combination of shares of Special Common Stock held
by the Optionee for the requisite period necessary to avoid a charge to the
Company's reported earnings and valued at the Closing Selling Price on the
Exercise Date and cash or check.
c. For purposes of subparagraph b. above, the Exercise Date shall be the
first date on which there is delivered to the Company both (i) written notice
of the exercise of the option and (ii) payment of the exercise price for the
purchased shares.
2. Term and Exercise of Options.
a. Each option granted under this Regular Option Grant Program shall be
exercisable in one or more installments over the Optionee's period of Service
as shall be determined by the Committee and set forth in the instrument
evidencing such option; provided, however, that no such option granted to a
Section 16(b) Insider shall become exercisable in whole or in part within the
first six (6) months after the grant date, except in the event of the
Optionee's death or disability.
b. An option may be exercisable by the Optionee or, in the event the
Optionee is permanently disabled (as such term is defined in Section 22(e) of
the Code), by his or her spouse, and such option may be transferred by the
Optionee to a trust for such Optionee's benefit or the benefit of an immediate
family member or by will or the laws of descent or distribution.
c. The Committee may, at its discretion, accelerate the vesting schedule of
any outstanding option at any time.
3. Termination of Service.
a. Should an Optionee cease to continue in Service for any reason (other
than termination due to death, permanent disability or retirement from
employment by the Company after reaching age sixty-five (65)) while the holder
of one or more outstanding options under this Regular Option Grant Program,
then such options shall not be exercisable at any time after the earlier of
(i) the specified expiration date of the option term or (ii) the expiration of
three (3) months after the Optionee's cessation of Service. Each such option
shall, during the applicable period following cessation of Service, be
exercisable only to the extent of the number of shares (if any) in which the
Optionee is vested on the date of such cessation of Service; provided,
however, that the Committee shall have the discretion to specify, either at
the time the option is granted or at the time that the Optionee ceases
Service, that vesting of such option may be extended for a period not to
exceed three (3) years from the date of cessation of Service and that the
applicable expiration period set forth in clause (ii) may be increased to a
period of up to five (5) years.
b. Should an Optionee cease to continue in Service due to permanent
disability while the holder of one or more outstanding options under this
Regular Option Grant Program, then such options shall not be exercisable at
any time after the earlier of (i) the specified expiration date of the option
term or (ii) the expiration of three (3) months after the Optionee's cessation
of Service. Each such option shall, during the applicable period following
cessation of Service, be exercisable only to the extent of the number of
shares (if any) in which the Optionee is vested on the date of such cessation
of Service; provided, however, that the Committee shall have the discretion to
specify, either at the time the option is granted or at the time that the
Optionee ceases Service, that the vesting of such option may be accelerated or
extended from the date of cessation of Service and that the period of
exercisability can be increased up to the expiration date of the option term.
Should an Optionee cease to continue in Service due to death, or retirement
from employment by the Company after reaching age sixty-five (65), while the
holder of one or more outstanding options under this Regular Option Grant
Program, then all unvested options on such date shall automatically become
vested and the expiration date of the option shall automatically be extended
to the expiration date of the option term.
c. Any option granted to an Optionee under this Regular Option Grant
Program and outstanding in whole or in part on the date of the Optionee's
death may be subsequently exercised by the personal representative of the
Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution in the case of the Optionee's death, and any option
granted to an Optionee under this Regular Option Grant Program which is
outstanding in whole or in part on the date of the Optionee's cessation of
Service due to permanent disability may be exercised by the Optionee's spouse
or designee. Any such exercise must be in accordance with subparagraph b.
d. The Committee shall have complete discretion, exercisable either at the
time the option is granted or at the time the Optionee ceases Service, to
establish as a provision applicable to the exercise of one or more options
granted under this Regular Option Grant Program that during the limited period
of exercisability following cessation of Service due to retirement, "plant
closing" or "mass layoff" (as such terms are defined at 29 U.S.C. Section
2101) that is subject to the notice requirements of 29 U.S.C. Section 2102,
the option will continue to vest according to the vesting schedule that would
have applied had the optionee continued in Service.
4. Repurchase Rights.
a. Options may provide that notwithstanding any vesting schedule pursuant
to subparagraph 2. a. above, they may be exercised prior to such vesting
schedule so long as the Optionee enters into a repurchase agreement
satisfactory to the Company. The shares of Special Common Stock acquired upon
the exercise of one or more options granted under this Regular Option Grant
Program may be subject to repurchase by the Company, at the exercise price
paid per share, upon the Optionee's cessation of Service prior to vesting in
such shares.
b. Any such repurchase right shall be exercisable by the Company upon such
terms and conditions (including the establishment of the appropriate vesting
schedule and other provision for the expiration of such right in one or more
installments over the optionee's period of Service) as the Committee may
specify in the instrument evidencing such right, which instrument shall
include appropriate terms with respect to the legending of stock certificates
and the placing of unvested shares into escrow.
c. All of the Company's outstanding repurchase rights shall automatically
terminate, and all shares purchased under this Regular Option Grant Program
shall immediately vest in full, upon the occurrence of any Corporate
Transaction or Change in Control; provided, however, that no such termination
of repurchase rights or immediate vesting of the purchased shares shall occur
if (and to the extent that): (i) the Company's outstanding repurchase rights
are to be assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination of
repurchase rights and acceleration of vesting are precluded by other
limitations imposed by the Committee either at the time the option is granted
or at the time the option shares are purchased.
5. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by the option until such individual shall have exercised
the option, paid the option price and satisfied all other conditions precedent
to the issuance of certificates for the purchased shares.
II. STOCK APPRECIATION RIGHTS
A. The Committee shall have full power and authority, exercisable in its sole
discretion, to grant stock appreciation rights to one or more Employees, non-
Employee Board members or Consultants eligible for option grants under this
Regular Option Grant Program. Each such right shall entitle the holder to a
distribution based on the appreciation in the value per share of a designated
amount of Special Common Stock.
B. Three types of stock appreciation rights shall be authorized for issuance
under the Plan:
1. Tandem Stock Appreciation Rights. These rights require the holder to
elect between the exercise of the underlying option for shares of Special
Common Stock and the surrender of such option for an appreciation distribution
equal to the excess of (i) the Closing Selling Price (on the date of option
surrender) of the vested shares of Special Common Stock purchasable under the
surrendered option over (ii) the aggregate option price payable for such
shares.
2. Concurrent Stock Appreciation Rights. Concurrent rights may apply to
all or any portion of the shares of Special Common Stock subject to the
underlying option and will be exercised automatically at the same time the
option is exercised for those shares. The appreciation distribution to which
the holder of such concurrent right shall be entitled upon exercise of the
underlying option shall be in an amount equal to the excess of (i) the
aggregate Closing Selling Price (at date of exercise) of the vested shares
purchased under the underlying option with such concurrent rights over (ii)
the aggregate option price paid for those shares.
3. Limited Stock Appreciation Rights. These rights will entitle the holder
to surrender outstanding options in connection with certain Changes in Control
(as defined below) for an appreciation distribution equal in amount to the
excess of (i) the Change in Control Price (as defined below) of the number of
shares in which the Optionee is at the time vested under the surrendered
option over (ii) the aggregate option price payable for such vested shares.
C. The terms and conditions applicable to each Tandem Stock Appreciation
Right ("Tandem Right"), Concurrent Stock Appreciation Right ("Concurrent
Right") and Limited Stock Appreciation Right ("Limited Right") shall be as
follows:
1. Tandem Rights.
a. Tandem Rights may be tied to either Incentive Options or non-statutory
options. Each such right shall, except as specifically set forth below, be
subject to the same terms and conditions applicable to the particular stock
option grant to which it pertains.
b. The Appreciation Distribution payable on the exercised Tandem Right
shall be in an amount equal to the excess of (i) the Closing Selling Price (on
the date of the option surrender) of the number of shares of Special Common
Stock in which the Optionee is vested under the surrendered option over (ii)
the aggregate option price payable for such vested shares.
c. The Appreciation Distribution may, in the Committee's discretion, be
made in cash, in shares of Special Common Stock or in a combination of cash
and Special Common Stock. Any shares of Special Common Stock so distributed
shall be valued at the Closing Selling Price on the date the option is
surrendered, and the shares of Special Common Stock subject to the surrendered
option shall not be available for subsequent issuance under this Plan.
2. Concurrent Rights.
a. Concurrent Rights may be tied to any or all of the shares of Special
Common Stock subject to any Incentive Option or non-statutory option grant
made under this Regular Option Grant Program. The Concurrent Right shall,
except as specifically set forth below, be subject to the same terms and
conditions applicable to the particular stock option grant to which it
pertains.
b. The Concurrent Right shall be automatically exercised at the same time
the underlying option is exercised for the particular shares of Special Common
Stock to which the Concurrent Right pertains.
c. The Appreciation Distribution payable on the exercised Concurrent Right
shall be equal to the excess of (i) the aggregate Closing Selling Price (on
the Exercise Date) of the vested shares of Special Common Stock purchased
under the underlying option which have Concurrent Rights appurtenant to them
over (ii) the aggregate option price paid for such shares.
d. The Appreciation Distribution may, in the Committee's discretion, be
paid in cash, in shares of Special Common Stock or in a combination of cash
and Special Common Stock. Any shares of Special Common Stock so distributed
shall be valued at the Closing Selling Price on the date the Concurrent Right
is exercised and shall reduce on a one-for-one basis the number of shares of
Special Common Stock thereafter issuable under this Plan.
3. Terms Applicable to Both Tandem Rights and Concurrent Rights.
a. To exercise any outstanding Tandem or Concurrent Right, the holder must
provide written notice of exercise to the Company in compliance with the
provisions of the instrument evidencing such right.
b. If a Tandem or Concurrent Right is granted to an individual who is at
the time a Section 16(b) Insider, then the instrument of grant shall
incorporate all the terms and conditions at the time necessary to assure that
the subsequent exercise of such right shall qualify for the safe-harbor
exemption from short-swing profit liability provided by SEC Rule 16b-3 (or any
successor rule or regulation).
c. No limitation shall exist on the aggregate amount of cash payments the
Company may make under this Article Two Program in connection with the
exercise of Tandem or Concurrent Rights.
4. Limited Rights.
a. Each Section 16(b) Insider shall have the Limited Right, exercisable in
the event there should occur a Change in Control (as such term is defined
below), to surrender any or all of the options (whether incentive stock
options or non-statutory options) held by such individual under this Article
Two Program, to the extent such options (i) have been outstanding for at least
six (6) months and (ii) are at the time exercisable for vested shares.
b. In exchange for each option surrendered in accordance with subparagraph
a. above, the Section 16(b) Insider shall receive an Appreciation Distribution
in an amount equal to the excess of (i) the Change in Control Price
(determined as of the date of surrender) of the number of shares in which the
Section 16(b) Insider is at the time vested under the surrendered option over
(ii) the aggregate option price payable for such vested shares. For purposes
of such Appreciation Distribution, the Change in Control Price per share of
the vested Special Common Stock subject to the surrendered option shall be
deemed to be equal to the greater of (a) the Closing Selling Price per share
on the date of surrender or (b) the highest reported price per share paid in
effecting the Change in Control. However, if the option is an Incentive
Option, then the Change in Control Price of the vested shares subject to the
surrendered option shall not exceed the value per share determined under
clause (a) above.
c. The Appreciation Distribution shall be made entirely in cash, and the
shares of Special Common Stock subject to each surrendered option shall not be
available for subsequent issuance under this Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any of the following transactions (a "Corporate
Transaction"):
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially all of
the assets of the Company to any entity other than a Subsidiary of the
Company, or
(iii) any reverse merger in which the Company is the surviving entity but in
which fifty percent (50%) or more of the Company's outstanding voting stock
held by persons who are not "Subject Persons" as defined in Article Eleventh
of the Company's Certificate of Incorporation (as in effect on September 7,
1990) including persons included in such definition by subparagraph (b)
thereof is transferred to holders different from those who held the stock
immediately prior to such merger, then the exercisability of each option
outstanding under this Regular Option Grant Program shall be automatically
accelerated so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Special Common Stock purchasable
under such option and may be exercised for all or any portion of such shares.
However, an outstanding option under this Regular Option Grant Program shall
not be so accelerated if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, or (ii) such option is to be replaced by a comparable cash incentive
program of the successor corporation based on the value of the option at the
time of the Corporate Transaction, or (iii) the acceleration of such option is
subject to other applicable limitations imposed by the Committee at the time
of grant. The determination of comparability under clause (i) or (ii) above
shall be made by the Committee, and its determination shall be final, binding
and conclusive.
B. Upon the consummation of the Corporate Transaction, all outstanding
options under this Regular Option Grant Program shall, to the extent not
previously exercised or assumed by the successor corporation or its parent
company, terminate and cease to be outstanding.
C. In the event of any of the following transactions (a "Change in Control"):
(i) the acquisition by a person or group of related persons, other than the
Company or any person controlling, controlled by or under common control with
the Company, of beneficial ownership (as determined pursuant to the provisions
of Rule 13d-3 under the 1934 Act) of securities of the Company representing
thirty percent (30%) or more of the combined voting power of the Company's
then outstanding securities pursuant to a transaction or series of related
transactions which the Board does not approve; or
(ii) the first date within any period of thirty-six (36) consecutive months
or less on which there is effected any change in the composition of the Board
such that the majority of the Board (determined by rounding up to the next
whole number) ceases to be comprised of individuals who either (I) have been
members of the Board continuously since the beginning of such period or (II)
have been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause (I) who
were still in office at the time such election or nomination was approved by
the Board; then the exercisability of each option outstanding under this
Regular Option Grant Program shall be automatically accelerated so that each
such option shall become exercisable, immediately prior to such Change in
Control, for the full number of shares purchasable under such option and may
be exercised for all or any portion of such shares. However, an outstanding
option under this Regular Option Grant Program shall not be so accelerated if
and to the extent one or more limitations imposed by the Committee at the time
of grant preclude such acceleration upon a Change in Control.
D. The grant of options under this Regular Option Grant Program shall in no
way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
IV. INCENTIVE OPTIONS
A. The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Regular Option Grant Program. Options
which are specifically designated as "non-statutory" options when issued under
this Regular Option Grant Program shall not be subject to such terms and
conditions.
1. Option Price.
The option price per share of the Special Common Stock subject to an
Incentive Option shall in no event be less than one hundred percent (100%) of
the Closing Selling Price per share of Special Common Stock on the grant date.
2. 10% Stockholder.
If any individual to whom an Incentive Option is to be granted pursuant to
the provisions of this Regular Option Grant Program is on the grant date the
owner of stock (as determined under Section 424(d) of the Internal Revenue
Code) possessing 10% or more of the total combined voting power of all classes
of stock of the Company or any one of its Parent or Subsidiaries (such person
to be herein referred to as a 10% Stockholder), then (i) the option price per
share shall not be less than one hundred and ten percent (110%) of the Closing
Selling Price per share of Special Common Stock on the grant date and (ii) the
maximum term of the option shall not exceed five (5) years from the grant
date.
3. Dollar Limitation.
The aggregate fair market value (determined on the basis of the Closing
Selling Price in effect on the respective date or dates of grant) of the
Special Common Stock for which one or more options granted to any Employee
under this Plan (or any other option plan of the Company or its Parent or
Subsidiaries) may for the first time become exercisable as incentive stock
options under the Federal tax laws during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
thereof as incentive stock options under the Federal tax laws shall be applied
on the basis of the order in which such options are granted.
4. Term and Exercise of Options.
a. No Incentive Option shall have a term in excess of ten (10) years from
the grant date.
b. An Incentive Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime
of the Optionee only by the Optionee.
5. Termination of Service.
A. Notwithstanding any terms in the Plan to the contrary, an Incentive
Option must be exercised within the three (3) month period commencing with the
date of cessation of Employee status for any reason, except that in the event
the Optionee's cessation of Employee status is due to permanent disability,
such period shall be one (1) year from the date of such cessation of Employee
status. Incentive Options not exercised within the applicable period shall be
treated as non-statutory options.
B. Except as modified by the preceding provisions of this Incentive Options
section, all the provisions of this Regular Option Grant Program shall be
applicable to the Incentive Options granted hereunder. If any option
originally granted as an Incentive Stock Option is modified so as not
to qualify under the Code as an Incentive Stock Option, such modified
Incentive Stock Option shall be a non-statutory option.
V. CANCELLATION AND RE-GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected option holders, the cancellation of
any or all outstanding options under this Regular Option Grant Program and to
grant in substitution therefor new options under this Plan covering the same
or different numbers of shares of Special Common Stock but having an option
price per share not less than fifty percent (50%) of the Closing Selling Price
(one hundred percent (100%) of the Closing Selling Price in the case of an
Incentive Option or, in the case of a 10% Stockholder, not less than one
hundred and ten percent (110%) of the Closing Selling Price) per share of
Special Common Stock on the new grant date.
VI. LOANS OR GUARANTEE OF LOANS
The Committee may assist any Employee (including any officer or director) in
the exercise of one or more options under this Regular Option Grant Program by
(a) authorizing the extension of a loan to such Employee from the Company, (b)
permitting the Employee to pay the option price for the purchased Special
Common Stock in installments over a period of years or (c) authorizing a
guarantee by the Company of a third-party loan to the Employee. The terms of
any loan, installment method of payment or guarantee (including the interest
rate and terms of repayment) shall be established by the Committee in its sole
discretion. Loans, installment payments and guarantees may be granted without
security or collateral, but the maximum credit available to the Optionee shall
not exceed the sum of (i) the aggregate exercise price (less the par value) of
the purchased shares plus (ii) any Federal and State income and employment tax
liability incurred by the Employee in connection with the exercise of the
option.
ARTICLE THREE
AUTOMATIC GRANT PROGRAM
I. AUTOMATIC GRANTS
On April 30, 1996 each individual who is a non-Employee member of the Board
on such date shall automatically be granted a non-statutory option under this
Article Three to purchase 20,000 shares of Special Common Stock. Each non-
Employee who is first appointed or elected a member of the Board after April
30, 1996 shall automatically be granted, on the date of such individual's
election to the Board, a non-statutory option under this Article Three to
purchase 20,000 shares of Special Common Stock. Each Employee director who is
first elected a member of the Board and who subsequently becomes a non-
Employee director after April 30, 1996 shall automatically be granted, on the
date of such individual's change from Employee to non-Employee director, a
non-statutory option under this Article Three to purchase 20,000 shares of
Special Common Stock.
II. TERMS AND CONDITIONS OF GRANT
Each option granted in accordance with the provisions of this Article Three
shall be evidenced by an instrument in such form as the Committee approves
from time to time for grants made under Article Two; provided, however, that
each such automatic grant shall be subject to the following terms and
conditions:
A. Exercise Price.
The exercise price per share shall be one hundred percent (100%) of the
Closing Selling Price per share of Special Common Stock on the grant date.
B. Term and Vesting of Options.
1. Except as otherwise specified below, each option shall vest in
increments of 5,000 shares on the first, second, third and fourth
anniversaries of the grant date and shall thereafter remain exercisable until
the expiration or earlier termination of the option term.
2. Each granted option shall have a term of ten (10) years measured from
the grant date.
C. Exercise of Option.
Upon exercise of the option, the option exercise price for the purchased
shares shall become immediately due and payable in full in one of the
alternative forms specified below:
(i) cash or check payable to the Company's order;
(ii) shares of Special Common Stock held by the optionee for the requisite
period necessary to avoid a charge to the Company's reported earnings and
valued at the Closing Selling Price on the date of exercise; or
(iii) any combination of the foregoing so long as the total payment equals
the aggregate exercise price for the purchased shares.
D. Effect of Termination of Board Membership.
1. Should an optionee cease to be a member of the Board for any reason (other
than death) prior to the expiration date of the automatic grant held by the
optionee under this Article Three, then each such grant shall remain
exercisable, for any shares of Special Common Stock for which the option is
exercisable at the time of such cessation of Board membership, for a period
not to exceed the earlier of (i) the expiration of the three (3) month period
following the date of such cessation of Board membership or (ii) the specified
expiration date of the option term.
2. Should the optionee's membership on the Board cease by reason of death,
then each outstanding grant held by the optionee under this Article Three may
be subsequently exercised, for any shares of Special Common Stock for which
the option is exercisable at the time of the optionee's cessation of Board
membership, by the personal representative of the optionee's estate or by the
person or persons to whom the option is transferred pursuant to the optionee's
will or in accordance with the laws of descent and distribution. Any such
exercise must, however, occur prior to the earlier of (i) the expiration of
the twelve (12) month period following the date of the optionee's death or
(ii) the specified expiration date of the option term.
E. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with respect
to any shares covered by an option granted under this Article Three until such
individual shall have exercised the option, paid the option exercise price in
full and satisfied all other conditions precedent to the issuance of
certificates for the purchased shares.
III. CORPORATE TRANSACTION
In the event of a Corporate Transaction, options granted under the Automatic
Grant Program shall be treated as described in Section III of Article Two,
except the provisions of clause (iii) of the penultimate sentence of Section
III A.(iii) of Article Two shall not apply.
IV. CHANGE IN CONTROL
In the event of a Change in Control, options granted under the Automatic
Grant Program shall be treated as described in Section III of Article Two,
except the last sentence of Section III C.(ii) of Article Two shall not apply.
ARTICLE FOUR
STOCK INCENTIVE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
A. Shares may be issued under this Stock Incentive Program as a reward for
past services rendered the Company or one or more of its Parent or
Subsidiaries or as an incentive for future service with such entities. Any
unvested shares so issued shall be evidenced by a Restricted Stock Issuance
Agreement ("Issuance Agreement") which complies with the terms and conditions
of this Stock Incentive Program and shall include appropriate terms with
respect to legending of certificates and escrow of unvested shares.
1. Vesting Schedule.
a. The Recipient's interest in the issued shares of Special Common Stock
may, in the absolute discretion of the Committee, be fully and immediately
vested upon issuance or may vest in one or more installments.
b. The elements of the vesting schedule applicable to any unvested shares
issued under this Stock Incentive Program, namely the number of installments
in which the shares are to vest, the interval or intervals (if any) which are
to lapse between installments and the effect which death, disability or other
event designated by the Committee is to have upon the vesting schedule, shall
be determined by the Committee and set forth in the Issuance Agreement
executed by the Company and the Recipient at the time of the incentive grant.
c. Except as may otherwise be provided in the Issuance Agreement, the
Recipient may not transfer unvested shares of Special Common Stock. The
Recipient, however, shall have all the rights of a stockholder with respect to
such unvested shares, including without limitation the right to vote such
shares and to receive all dividends paid on such shares.
2. Cancellation of Shares.
a. In the event the Recipient should, while his/her interest in the issued
Special Common Stock remains unvested, cease to continue in Service for any
reason whatsoever, then the Company shall have the right to cancel all such
unvested shares, and the Recipient shall thereafter have no further
stockholder rights with respect to such shares.
b. The Committee may in its discretion waive such cancellation of unvested
shares in whole or in part and thereby effect the immediate vesting of the
Recipient's interest in the shares of Special Common Stock (or other assets)
as to which the waiver applies.
3. Corporate Transaction/Change in Control.
All unvested shares under the Stock Incentive Program shall immediately vest
in full immediately prior to the occurrence of any Corporate Transaction or
Change in Control, except to the extent:
(i) the Company's outstanding cancellation rights are to be assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction, or
(ii) one or more limitations imposed by the Committee at the time of stock
issuance preclude such accelerated vesting.
ARTICLE FIVE
MISCELLANEOUS
I. TAX WITHHOLDING
A. The Company's obligation to deliver shares upon the exercise or surrender
of stock options or stock appreciation rights granted under Article Two or
Article Three or upon the issuance or vesting of shares under Article Four
shall be subject to the satisfaction of all applicable Federal, State and
local income and employment tax withholding requirements.
B. The Committee may, in its discretion and upon such terms and conditions as
it may deem appropriate (including the applicable safe-harbor provisions of
SEC Rule 16b-3 or any successor rule or regulation) provide any or all
Optionees or Recipients with the election to have the Company withhold, from
the shares of Special Common Stock purchased or issued under the Plan, one or
more of such shares with an aggregate Closing Selling Price equal to the
designated percentage (up to 100% specified by the Optionee or Recipient) of
the Federal and State income taxes ("Taxes") incurred in connection with the
acquisition of such shares. In lieu of such direct withholding, one or more
Optionees or Recipients may also be granted the right to deliver unrestricted
shares of Special Common Stock to the Company in satisfaction of such Taxes.
The withheld or delivered shares shall be valued at the Closing Selling Price
on the applicable determination date for such Taxes.
II. AMENDMENT OF THE PLAN
A. The Board shall have the complete and exclusive authority to amend or
modify the Plan in any or all respects whatsoever; provided, however, that no
such amendment or modification shall, without the consent of the holders,
adversely affect rights and obligations with respect to any stock options,
stock appreciation rights or unvested Special Common Stock at the time
outstanding under the Plan. In addition, with a view to making available the
benefits provided by Section 422 of the Code and/or SEC Rule 16b-3 as in
effect from time to time under the 1934 Act, the Board shall, at the time of
each such amendment, determine whether or not to submit such amendment of the
Plan to the Company's stockholders for approval.
B. No material amendments shall be made to the provisions of the Automatic
Grant Program without the approval of the Company's stockholders.
III. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan shall become effective when adopted by the Board, but no stock
option or stock appreciation right granted under the Plan shall become
exercisable, and no shares shall be issued, unless and until the Plan shall
have been approved by the Company's stockholders. If such stockholder approval
is not obtained within twelve (12) months after the date of the Board's
adoption of the Plan, then all stock options and stock appreciation rights
previously granted under the Plan shall terminate and no further stock options
or stock appreciation rights shall be granted. Subject to such limitation, the
Committee may grant stock options and stock appreciation rights under the Plan
at any time after the effective date and before the date fixed herein for
termination of the Plan.
B. The Plan shall in all events terminate on the date determined by the Board
but in no event shall the Plan terminate later than February 6, 2006. Upon
such termination, any stock options, stock appreciation rights and unvested
shares at the time outstanding under the Plan shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
grants or issuances.
C. Options may be granted under this Plan to purchase shares of Special
Common Stock in excess of the number of shares then available for issuance
under the Plan, provided (i) an amendment to increase the maximum number of
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such option and within one year thereafter such amendment is
approved by the Company's stockholders, if such stockholder approval is deemed
necessary by the Board, and (ii) each option granted is not to become
exercisable, in whole or in part, at any time prior to the obtaining of such
stockholder approval, and provided further that at any time that the Amended
and Restated Governance Agreement dated as of October 25, 1995 between the
Company and Roche Holdings, Inc. (the "Amended Governance Agreement") remains
in effect, any action by the Board pursuant to the foregoing shall require the
approval of a majority of the Independent Directors (as such term is defined
in Article Eleventh of the Certificate of Incorporation of the Company).
IV. MISCELLANEOUS PROVISIONS
A. Any cash proceeds received by the Company from the issuance of shares
hereunder shall be used for general corporate purposes.
B. The implementation of the Plan, the granting of any stock option or stock
appreciation right hereunder, and the issuance of Special Common Stock under
the Regular Option Grant, the Automatic Grant Program or Stock Incentive
Program shall be subject to the Company's procurement of all approvals and
permits required by regulatory authorities having jurisdiction over the Plan,
the stock options and stock appreciation rights granted under it and the
Special Common Stock issued pursuant to it.
C. Neither the action of the Company in establishing the Plan, nor any action
taken by the Board or the Committee hereunder, nor any provision of the Plan
itself shall be construed so as to grant any individual the right to remain in
the employ or service of the Company or any of its Parent or Subsidiaries for
any period of specific duration, and the Company (or any parent or subsidiary
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
D. Nothing contained in the Plan shall be construed to limit the authority of
the Company to exercise its corporate rights and powers, including (without
limitation) the right of the Company (a) to grant options for proper corporate
purposes otherwise than under this Plan to any Employee or other person, firm
or company or association or (b) to grant options to, or assume the option of,
any person in connection with the acquisition (by purchase, lease, merger,
consolidation or otherwise) of the business and assets (in whole or in part)
of any person, firm, company or association.
ARTICLE SIX
SPECIAL REDEMPTION AND PUT PROVISIONS
I. PRIORITY
To the extent there is a conflict between any of the provisions of this
Article Six and any other provision of the Plan, the specific provisions of
this Article Six shall be controlling and shall govern the disposition of all
such options outstanding at the time of the Redemption (as defined below),
upon the exercise of the Put Rights (as defined below), or when both events
may no longer occur. Any rights under Section 1.04 of the Governance
Agreement dated as of September 7, 1990 between the Company and Roche
Holdings, Inc., ("Roche") and Section 1.04 of the Amended Governance Agreement
which a holder of an option, stock appreciation right, or stock issued under
the Stock Incentive Program may have are superseded in their entirety by this
Article Six.
II. EFFECT OF REDEMPTION ON VESTED OPTIONS AND VESTED STOCK APPRECIATION
RIGHTS AND VESTED SHARES ISSUED UNDER THE STOCK INCENTIVE PROGRAM
A. If the Special Common Stock shall be redeemed by the Company (the
"Redemption") at any time as provided in Section (c)(ii) of Article Third of
the Certificate of Incorporation of the Company as in effect on October 25,
1995 (the "Certificate") or the put rights are exercisable by the stockholders
of the Company (the "Put Rights") at any time as provided in Section (c)(iii)
of Article Third of the Certificate, then holders of all outstanding options
and stock appreciation rights granted hereunder, to the extent vested
immediately prior to the date fixed for the Redemption or to the extent to
which the Put Rights were properly exercised by such holder for their
outstanding vested options and stock appreciation rights granted hereunder
("Vested Securities"), shall promptly be paid for such Vested Securities an
amount equal to the product of (i) the excess of the redemption price or put
price per share fixed in Section (c)(ii) or (iii) of Article Third of the
Certificate, as applicable (without reduction for the payment of any cash
dividends as provided in the fourth sentence of Section (c)(ii)(C) of Article
Third of the Certificate), over the exercise price per share, times (ii) the
number of shares covered by such Vested Security. If either the Redemption or
exercise of the Put Rights occurs as described in the preceding sentence, then
holders of all outstanding shares issued under the Stock Incentive Program, to
the extent vested immediately prior to the date fixed for the Redemption or to
the extent to which the Put Rights were properly exercised by such holder for
their outstanding vested shares issued under the Stock Incentive Program
("Vested Shares"), shall promptly be paid for such Vested Shares an amount
equal to the product of (i) the redemption price or put price per share fixed
in Section (c)(ii) or (iii) of Article Third of the Certificate, as applicable
(without reduction for the payment of any cash dividends as provided in the
fourth sentence of Section (c)(ii)(C) of Article Third of the Certificate),
times (ii) the number of Vested Shares. All payments hereunder shall be
reduced by any appropriate tax withholding.
III. EFFECT OF REDEMPTION ON UNVESTED OPTIONS AND STOCK APPRECIATION RIGHTS,
AND UNVESTED SHARES ISSUED UNDER THE STOCK INCENTIVE PROGRAM
A. Upon the Redemption each option and stock appreciation right granted under
this Plan, to the extent not vested immediately prior to the date fixed for
the Redemption shall be canceled. Upon the Redemption, all unvested shares
issued under the Stock Incentive Program shall be canceled.
IV. EFFECT OF NO REDEMPTION
A. If the Redemption does not occur, each option and stock appreciation right
granted and each share awarded under the Stock Incentive Program under this
Plan which is outstanding on July 1, 1999 shall remain outstanding on the same
terms and conditions (including, without limitation, the exercise price per
share (in the case of options and stock appreciation rights), and the number
of shares for options, stock appreciation rights and shares issued under the
Stock Incentive Program) in effect for such option, stock appreciation right
or share issued under the Stock Incentive Program immediately prior to July 1,
1999, except that the shares purchasable under each such option, stock
appreciation right or shares issued under the Stock Incentive Program shall
continue to be shares of Special Common Stock prior to the Conversion Date (as
defined in Section (c)(vi) of Article Third of the Certificate) and shares of
Common Stock on and after the Conversion Date. Each such continuing option,
stock appreciation right and share issued under the Stock Incentive Program
will become exercisable, and shall vest in accordance with the same
installment dates such option, stock appreciation right or share issued under
the Stock Incentive Program would have become exercisable at the time of
grant. Notwithstanding any provision in this Article Six, Section IV, to the
contrary, if at any time following July 1, 1999 the shares of Genentech's
capital stock are no longer listed for trading on the New York Stock Exchange,
the Nasdaq National Market, or any other national exchange for any reason, any
unvested options, stock appreciation rights and shares issued under the Stock
Incentive Program shall automatically be cancelled as of such date.
V. EXAMPLE
A. For purposes of this example assume that it is July 1, 1999, the
Redemption has not occurred, the Put Rights are exercisable, an individual
holds an option for 100 shares of Special Common Stock with an exercise price
of $50 per share, 75 of such shares are vested and 25 shares are unvested, the
Special Common Stock is trading on the New York Stock Exchange at $62 per
share, and the Put Price (as defined in the Certificate) is $60 per share.
During the Put Period (as defined in the Certificate) the holder may properly
exercise the holder's Put Rights with respect to none, some or all of the 75
vested shares. If, for example, the holder exercised Put Rights for 40 of the
75 shares, that holder would receive (40 shares) x (60 - 50 dollars per share)
= $400, reduced by appropriate tax withholding. So long as the Special Common
Stock (during the Put Period) or the Common Stock (following the Put Period)
are listed for trading on the New York Stock Exchange, the Nasdaq National
Market, or any other national exchange, (i) the 35 remaining vested shares for
which Put Rights were not exercised shall remain exercisable to acquire shares
of Special Common Stock or Common Stock, as appropriate, and (ii) the 25
unvested shares would continue to vest and, to the extent vested, be
exercisable to acquire shares of Special Common Stock or Common Stock, as
appropriate. If the Special Common Stock or the Common Stock is no longer
listed for trading on the New York Stock Exchange, the Nasdaq National Market,
or any other national exchange for any reason, any of the 25 shares that are
unvested on such date shall automatically be cancelled.
VI. OTHER
A. On the Conversion Date, all references in the Plan to Special Common Stock
shall automatically become references to Common Stock.
B. The exercise by Roche Holdings, Inc. or its affiliates of its right to
designate nominees to the Board of Directors pursuant to Sections 3.01 and
3.02 of the Amended Governance Agreement shall not constitute a Change in
Control.
GENENTECH, INC.
DEFERRED COMPENSATION PLAN
GENENTECH, INC., a Delaware corporation, hereby adopts the
Genentech, Inc. Deferred Compensation Plan. The Plan will become effective
upon the occurrence of a Redemption or Delisting, whichever shall first occur.
SECTION 1
DEFINITIONS
The following words and phrases shall have the following meanings
unless a different meaning is plainly required by the context:
1.1 "Account" or "Account(s)" means as to any Participant the
separate account(s) maintained on the books of the Company in order to reflect
his or her interest under the Plan.
1.2 "Affiliate" means any Parent or Subsidiary of the Company,
but only for the period during which such other entity actually qualifies as a
Parent or Subsidiary.
1.3 "Beneficiary" means the person or persons entitled (under
Section 5.4) to receive any vested balance credited to a Participant's Account
upon the death of the Participant.
1.4 "Board of Directors" means the Board of Directors of the
Company, as constituted from time to time.
1.5 "Committee" shall have the same meaning as assigned from time
to time to the identical term under the Stock Option Plan.
1.6 "Company" means Genentech, Inc., a Delaware corporation.
1.7 "Consultant" means a Consultant (as defined from time to time
under the Stock Option Plan) who, on the Effective Date, possesses one or more
unvested, in-the-money Options which, on the Effective Date, will be cancelled
under Article Six of the Stock Option Plan due to the occurrence of a
Redemption or Delisting.
1.8 "Delisting" means the failure of the Special Common Stock to
be listed for trading on at least one of: (a) the New York Stock Exchange, (b)
the Nasdaq National Market, or (c) any other national exchange.
1.9 "Delisting Value" means the greater of (a) the arithmetic
mean of the Closing Selling Prices (as defined in the Stock Option Plan) of
the Special Common Stock on the twenty trading days immediately preceding the
date on which Delisting occurs, or (b) $60 per share of Special Common Stock
(adjusted for any reorganizations, consolidations, recapitalizations, stock
dividends, split-ups, or other changes in the corporate structure of the
Company which affect the Special Common Stock).
1.10 "Disability" or "Disabled" means permanent and total
disability as defined in section 22(e)(3) of the Internal Revenue Code of
1986, as amended, including any valid regulation promulgated thereunder, and
any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.
1.11 "Effective Date" means the date on which the Plan becomes
effective. The Plan shall become effective on the first to occur of a
Redemption or Delisting. The Plan shall not be effective prior to the
occurrence of either such event.
1.12 "Employee" means an employee of an Employer who, on the
Effective Date, possesses one or more unvested, in-the-money Options which, on
the Effective Date, will be cancelled under Article Six of the Stock Option
Plan due to the occurrence of a Redemption or Delisting, irrespective of
whether employment services are actually provided by the individual.
1.13 "Employer" means the Company and each of its Affiliates that
adopts the Plan as a participating Employer. With respect to an individual
Participant, Employer means the Company or the Affiliate that has adopted the
Plan and that directly employs the Participant.
1.14 "Employer Contributions" means the amounts credited to
Participants' Accounts under the Plan pursuant to Section 3.
1.15 "Nonemployee Director" means any individual who is a member
of the Board of Directors of the Company (but who is an employee of neither
the Company nor of any Affiliate) who, on the Effective Date, possesses one or
more unvested, in-the-money Options which, on the Effective Date, will be
cancelled under Article Six of the Stock Option Plan due to the occurrence of
a Redemption or Delisting.
1.16 "Option" means a stock option granted pursuant to the Stock
Option Plan.
1.17 "Parent" shall have the same meaning as assigned from time to
time to the identical term under the Stock Option Plan.
1.18 "Participant" means a Consultant, Employee or Nonemployee
Director who (a) has become a Participant in the Plan pursuant to Section 2.1
and (b) has not ceased to be a Participant pursuant to Section 2.2.
1.19 "Plan" means the Genentech, Inc. Deferred Compensation Plan,
as set forth in this instrument and as hereafter amended from time to time.
1.20 "Redemption" means the redemption of the Special Common Stock
as provided in Section (c)(ii) of Article Third of the Certificate of
Incorporation of the Company.
1.21 "Redemption Value" means the value specified for redemption
of the Special Common Stock as set forth in Section (c)(ii)(A) of Article
Third of the Certificate of Incorporation of the Company (and as adjusted
pursuant to Section (c)(ii)(C) of Article Third of the Certificate of
Incorporation).
1.22 "Retirement" means the Participant's termination of
employment with the Company and all of its Affiliates on account of his or her
retirement at or after age 65.
1.23 "Special Common Stock" shall have the same meaning as
assigned from time to time to the identical term under the Stock Option Plan.
1.24 "Stock Option Plan" means the Genentech, Inc. 1996 Stock
Option/Stock Incentive Plan, as hereafter amended from time to time.
1.25 "Subsidiary" shall have the same meaning as assigned from
time to time to the identical term under the Stock Option Plan.
SECTION 2
PARTICIPATION
2.1 Participation. Each individual who is a Consultant, Employee
or Nonemployee Director on the Effective Date automatically shall become a
Participant in the Plan on such date.
2.2 Termination of Participation. An individual who has become a
Participant shall remain a Participant until his or her entire vested Account
balance is distributed.
SECTION 3
EMPLOYER CONTRIBUTIONS
3.1 Employer Contributions. On the Effective Date, each
Participant shall have Employer Contributions credited to his or her
Account(s) in an amount determined in the manner prescribed in this Section
3.1. If the Effective Date occurs due to a Delisting, such amount shall be
determined in accordance with Section 3.1.1. If the Effective Date occurs due
to a Redemption, such amount shall be determined in accordance with Section
3.1.2. For each Participant, the calculation under Section 3.1.1 or Section
3.1.2 (as the case may be) shall be performed for each of the Participant's
unvested, in-the-money Options which are cancelled on the Effective Date due
to the Delisting or Redemption. Options which are not in-the-money (i.e.,
which have exercise prices greater than the Delisting Value or Redemption
Value, whichever is applicable) shall not be considered for purposes of
determining Employer Contributions.
3.1.1 Delisting. With respect to any Option, the amount
credited to a Participant's Account shall equal the product of:
(a) The amount by which the Delisting Value of a share exceeds
the exercise price of the Option, times
(b) The number of shares covered by the Option.
3.1.2 Redemption. With respect to any Option, the amount
credited to a Participant's Account shall equal the product of:
(a) The amount by which the Redemption Value of a share exceeds
the exercise price of the Option, times
(b) The number of shares covered by the Option.
3.2 Crediting of Employer Contributions. The Employer
Contributions on any Option shall be credited to a separate Account created
for each such Option. All Employer Contributions shall be credited as of the
Effective Date (but may or may not become vested, as provided in Section 6).
The exact dollar amount to be credited shall be determined by the Committee
under such formulas (consistent with the Plan) as the Committee shall adopt.
3.3 Deemed Interest on Accounts. Each Account shall be credited
with deemed interest as of the end of each calendar quarter. The annual rate
for crediting deemed interest during any quarter (which rate shall be adjusted
quarterly) shall be the rate paid by two-year U.S. Treasury notes (at
issuance) which are last issued during such quarter. Deemed interest under
this Section 3.3 shall be calculated using a 360-day year and shall be
compounded on a quarterly basis.
3.4 Form and Timing of Payment. On or prior to the Effective
Date, each Participant shall elect the form and timing of payment for the
vested portion (if any) of his or her Account(s). A Participant may elect (a)
payment as of each March 31, June 30, September 30 and December 31 (of all
amounts which are then vested), (b) payment as of each June 30 and December 31
(of all amounts which are then vested) or (c) payment of all vested amounts as
soon as administratively practicable after the Participant's last scheduled
vesting date. A Participant later may change his or her election as to the
form and timing of payment with respect to amounts which are scheduled to vest
in any future calendar year. However, any election under the preceding
sentence will be effective only if (1) the election is received by the
Committee (or its delegate) no later than last day of the calendar year prior
to the year in which the amounts with respect to which the election is being
made become vested, and (2) the Participant acknowledges in writing (in a form
acceptable to the Committee) that any income tax consequences from the
Participant's election will be solely the responsibility of the Participant.
A Participant may not change his or her election with respect to already
vested amounts. Each election under this Section 3.4 shall be made in such
manner as the Committee may specify.
SECTION 4
ACCOUNTING
4.1 Participants' Accounts. At the direction of the Committee,
there shall be established and maintained on the books of the Company, a
separate Account or Accounts for each Participant to which shall be credited
Employer Contributions made on behalf of the Participant, and the deemed
interest on such Employer Contributions. A separate Account shall be
established for the crediting of Employer Contributions (and deemed interest
thereon) on each of the Participant's unvested, in-the-money Options which are
cancelled on the Effective Date due to the Delisting or Redemption.
4.2 Participants Remain Unsecured Creditors. All amounts
credited to a Participant's Account under the Plan shall continue for all
purposes to be a part of the general assets of the Company. Each
Participant's interest in the Plan shall make him or her only a general,
unsecured creditor of the Company.
4.3 Accounting Methods. The accounting methods or formulas to be
used under the Plan for the purpose of maintaining the Participants' Accounts,
including the calculation and crediting of any deemed interest shall be
determined by the Committee in its sole discretion. The accounting methods or
formulas selected by the Committee may be revised from time to time.
4.4 Reports. Each Participant shall be furnished with periodic
statements of his or her Account, reflecting the status of his or her interest
in the Plan, at least annually.
SECTION 5
DISTRIBUTIONS
5.1 Normal Distribution Timing and Rules. Subject to Sections
5.2 and 5.3, distribution of the vested balance credited to a Participant's
Account(s) shall be made as soon as administratively practicable after the
date or dates elected by the Participant under Section 3.4. Subject to the
provisions of this Section 5, payment shall be made to the Participant, or in
the event of the Participant's death, to the Participant's Beneficiary (or
estate, as provided in Section 5.4). A Participant (or Beneficiary) shall be
paid all vested amounts credited to his or her Account(s) (if any) no later
than the last scheduled vesting date for the applicable Option.
5.2 Special Rule for Death or Disability. If a Participant dies,
the vested balance then credited to his or her Account (including any amounts
vested pursuant to Section 6.2.2) shall be immediately distributed to the
Participant's Beneficiary as soon as administratively practicable after the
date of death. If a Participant becomes Disabled, the vested balance credited
to the Participant's Account (including any amounts vested pursuant to Section
6.2.2) shall be distributed to the Participant at the time and in the form
elected by the Participant pursuant to Section 3.4; provided, however, that
the Committee, in its sole discretion, may elect to distribute the vested
balance of the Participant's Account in a lump sum as of any date after the
date of Disability.
5.3 Special Rule for Termination of Employment. If a Participant
terminates his or her employment with the Company and all of its Affiliates
for a reason other than death or Disability, the vested balance then credited
to his or her Account shall be distributed to him or her in a lump sum as soon
as administratively practicable after such termination.
5.4 Beneficiary Designations. Each Participant may, pursuant to
such procedures as the Committee may specify, designate one or more
Beneficiaries.
5.4.1 Spousal Consent. If a Participant does not designate
his or her spouse as sole primary Beneficiary, the beneficiary designation
shall be ineffective unless such spouse consents to the designation. Any
spousal consent required under this Section 5.4 shall be ineffective unless it
is set forth in writing and signed by the spouse. Notwithstanding the
preceding, if the Participant establishes to the satisfaction of the Company
that written spousal consent may not be obtained because the spouse cannot be
located, his or her designation shall be effective without a spousal consent.
Any spousal consent required under this Section 5.4 shall be valid only with
respect to the spouse who signs the consent.
5.4.2 Changes and Failed Designations. A Participant may
change or revoke Beneficiary designations by delivering a new designation (or
revocation) in the manner described in Section 5.4.1. Any designation or
revocation shall be effective only if it is received by the Company. However,
when so received, the designation or revocation shall be effective as of the
date the notice is executed (whether or not the Participant still is living),
but without prejudice to the Company on account of any payment made before the
change is recorded. The last effective designation received by the Company
shall supersede all prior designations. If a Participant dies without having
effectively designated a Beneficiary, or if no Beneficiary survives the
Participant, the vested portion (if any) of the Participant's Account shall be
payable (a) to his or her surviving spouse (if any), or (b) if the Participant
is not survived by a spouse, to the Participant's estate.
5.5 Financial Hardship. In the event that a Participant incurs a
"financial hardship", the Committee, in its sole discretion and
notwithstanding any contrary provision of the Plan, may determine that all or
part of the vested portion of the Participant's Account(s) shall be paid to
him or her immediately; provided, however, that the amount paid to the
Participant pursuant to this Section 5.5 shall be limited to the amount
reasonably necessary to alleviate the Participant's hardship. For purposes of
this Section 5.5, a "financial hardship" shall mean a severe financial
emergency which is caused by a sudden and unexpected accident, illness or
other event beyond the control of the Participant which, without an acceler-
ated distribution from the Plan, would result in severe financial burden to
the Participant or a member of his or her immediate family. A financial
hardship does not exist to the extent that the hardship may be relieved by
(a) reimbursement or compensation by insurance, (b) liquidation of the
Participant's other assets (to the extent such liquidation would not itself
cause severe financial hardship), or (c) any loan available to the Participant
(to the extent the payments on such loan would not themselves cause severe
financial hardship).
5.6 Payments to Incompetents. If any individual to whom a
benefit is payable under the Plan is a minor or legally incompetent, the
Committee shall determine whether payment shall be made directly to the
individual, any person acting as his or her custodian or legal guardian under
the California Uniform Transfers to Minors Act, his or her legal
representative or a near relative, or directly for his or her support,
maintenance or education.
5.7 Undistributable Accounts. Each Participant (and in the event
of the Participant's death, his or her Beneficiary) shall keep the Committee
advised of his or her current address. If the Committee is unable to locate
the Participant or Beneficiary to whom a Participant's Account is payable
under this Section 5, the Participant's Account shall be frozen and no further
deemed interest under Section 3.3 shall be credited to the Account. Accounts
that, in accordance with the preceding sentence, have been undistributable for
a period of 35 months shall be forfeited as of the end of the 35th month. If
a Participant whose Account was forfeited under this Section 5.7 (or his or
her Beneficiary) files a claim for distribution of the Account after the date
that it was forfeited, and if the Committee determines that such claim is
valid, then the forfeited balance shall be paid in a lump sum cash payment as
soon as administratively practicable thereafter (without any deemed interest
for the period during which the account was frozen or forfeited).
5.8 Payment in Cash or Its Equivalent. All payments from the
Plan shall be made in cash or its equivalent.
5.9 Tax Withholding. The Company shall withhold all applicable
taxes from any payment, including but not limited to, any federal, FICA,
state, and local income and employment taxes.
5.10 Committee Discretion. Within the specific time periods
described in this Section 5, the Committee shall have sole discretion to
determine the specific timing of the payment of any Account balance under the
Plan.
SECTION 6
PARTICIPANT'S INTEREST IN ACCOUNT
6.1 Vesting in Accounts. A Participant's vested interest (if
any) in his or her Account(s) shall be determined in accordance with Section
6.2. The vested portion of a Participant's Account(s) (if any) shall be
distributed to the Participant in the manner and at the time set forth in
Section 5, and any unvested portion shall be permanently forfeited as provided
in Section 6.2.
6.2 Vesting Rules. With respect to each Account of a
Participant, his or her interest in the Account shall be vested in accordance
with the same schedule, and on the same terms and conditions, as the Option
(or applicable portion thereof) with respect to which the Employer
Contributions in the Account were calculated. For example, suppose that
Employer Contributions of $4,000 are credited to a Participant's Account on
January 10, 1998, based on an Option covering 200 shares of Special Common
Stock. If the Option had been scheduled to vest as to 100 shares on June 30,
1998, and as to the remaining 100 shares on June 30, 1999, the Participant
would be scheduled to vest in $2,000 of Employer Contributions (and deemed
interest thereon) on June 30, 1998, and as to an additional $2,000 of Employer
Contributions (and deemed interest thereon) on June 30, 1999. On any
scheduled vesting date, vesting actually will occur only if the terms and
conditions set forth in the applicable Option agreement are satisfied (for
example, with respect to continuous employment with the Company and
Affiliates). Consistent with the Plan, the specific vesting schedule for any
Account shall be determined by the Committee in its discretion.
6.2.1 Termination. Upon termination of the Participant's
employment with all Employers and Affiliates for any reason at any time, the
vested portion of his or her Account(s) shall be distributable to him or her
in the manner and at the times set forth in Section 5, and the unvested
portion of such Account shall be permanently forfeited.
6.2.2 Full Vesting. Notwithstanding any contrary provision
of Section 6.2.1, a Participant's interest in his or her entire Account may
become 100% vested and nonforfeitable in accordance with the rules of this
Section 6.2.2. A Participant's interest in his or her entire Account shall
become 100% vested and nonforfeitable upon the date of his or her death or
Retirement. If a Participant becomes Disabled, the Committee, in its sole
discretion, may provide that all or part of the Participant's Account shall
become vested upon the date of his or her Disability.
6.3 Transfers of Employment. The transfer of a Participant
from employment with an Employer to employment with another Affiliate shall
not constitute a termination of employment under the Plan. Upon termination
of his or her employment with such other Affiliate (other than for transfer to
employment with another Affiliate), the Participant's employment shall be
deemed then to have terminated.
SECTION 7
ADMINISTRATION OF THE PLAN
7.1 Committee. The Plan shall be administered by the Committee.
The Committee shall have the authority to control and manage the operation and
administration of the Plan.
7.2 Actions by Committee. Each decision of a majority of the
members of the Committee then in office shall constitute the final and binding
act of the Committee. The Committee may act with or without a meeting being
called or held and shall keep minutes of all meetings held and a record of all
actions taken by written consent.
7.3 Powers of Committee. The Committee shall have all powers and
discretion necessary or appropriate to supervise the administration of the
Plan and to control its operation in accordance with its terms, including, but
not by way of limitation, the following powers:
(a) To interpret and determine the meaning and validity of the
provisions of the Plan and to determine any question arising under, or
in connection with, the administration, operation or validity of the
Plan or any amendment thereto;
(b) To determine any and all considerations affecting the
eligibility of any employee to become a Participant or remain a
Participant in the Plan;
(c) To cause one or more separate Accounts to be maintained for
each Participant;
(d) To cause Employer Contributions and deemed interest to be
credited to Participants' Accounts;
(e) To establish and revise an accounting method or formula for
the Plan, as provided in Section 4.3;
(f) To determine the status and rights of Participants and
their spouses, Beneficiaries or estates;
(g) To employ such counsel, agents and advisers, and to obtain
such legal, clerical and other services, as it may deem necessary or
appropriate in carrying out the provisions of the Plan;
(h) To establish, from time to time, rules for the performance
of its powers and duties and for the administration of the Plan;
(i) To arrange for annual distribution to each Participant of a
statement of benefits accrued under the Plan;
(j) To publish a claims and appeal procedure pursuant to which
individuals or estates may claim Plan benefits and appeal denials of
such claims;
(k) To delegate to any one or more of its members or to any
other person, severally or jointly, the authority to perform for and on
behalf of the Committee one or more of the functions of the Committee
under the Plan; and
(l) To decide all issues and questions regarding Account
balances, and the time, form, manner, and amount of distributions to
Participants.
7.4 Decisions of Committee. All actions, interpretations, and
decisions of the Committee shall be conclusive and binding on all persons, and
shall be given the maximum deference permitted by law.
7.5 Administrative Expenses. All expenses incurred in the
administration of the Plan by the Committee, or otherwise, including legal
fees and expenses, shall be paid and borne by the Employers.
7.6 Eligibility to Participate. No member of the Committee who
also is a Participant shall be excluded from participating in the Plan, but as
a member of the Committee, he or she shall not be entitled to act or pass upon
any matters pertaining specifically to his or her own Account.
7.7 Indemnification. Each of the Employers shall, and hereby
does, indemnify and hold harmless the members of the Committee, from and
against any and all losses, claims, damages or liabilities (including
attorneys' fees and amounts paid, with the approval of the Board of Directors,
in settlement of any claim) arising out of or resulting from the
implementation of a duty, act or decision with respect to the Plan, so long as
such duty, act or decision does not involve gross negligence or willful
misconduct on the part of any such individual.
SECTION 8
FUNDING
8.1 Unfunded Plan. All amounts credited to a Participant's
Account under the Plan shall continue for all purposes to be a part of the
general assets of the Company. The interest of the Participant in his or her
Account, including his or her right to distribution thereof, shall be an
unsecured claim against the general assets of the Company. Nothing contained
in the Plan shall give any Participant or Beneficiary any interest in or claim
against any specific assets of the Company.
SECTION 9
MODIFICATION OR TERMINATION OF PLAN
9.1 Employers' Obligation is Limited. The Employers intend to
continue the Plan indefinitely, and to maintain each Participant's Account
until it is scheduled to be paid to him or her in accordance with the
provisions of the Plan. However, the Plan is voluntary on the part of the
Employers, and the Employers do not guarantee to continue the Plan. The
Company at any time may amend the Plan, with or without cause.
9.2 Right to Amend or Terminate. The Board of Directors reserves
the right to alter, amend or terminate the Plan, or any part thereof, at any
time and for any reason provided that (a) no amendment or termination of the
Plan shall, without the consent of the Participant, reduce the vested balance
then credited to the Participant's Account, and (b) the Plan shall not be
terminated until all vested amounts (and amounts which possibly still may
vest) have been distributed to the Participants (or Beneficiaries).
SECTION 10
GENERAL PROVISIONS
10.1 Inalienability. In no event may either a Participant, a
former Participant or his or her Beneficiary, spouse or estate sell, transfer,
anticipate, assign, hypothecate, or otherwise dispose of any right or interest
under the Plan; and such rights and interests shall not at any time be subject
to the claims of creditors nor be liable to attachment, execution or other
legal process. Accordingly, for example, a Participant's interest in the Plan
is not transferable pursuant to a domestic relations order.
10.2 Participation by Affiliates. One or more Affiliates of the
Company may become participating Employers by adopting the Plan. By adopting
the Plan, an Affiliate is deemed to agree to all of its terms, including (but
not limited to) the provisions granting exclusive authority to the Board of
Directors to amend the Plan and the provisions granting exclusive authority to
the Committee to administer and interpret the Plan. Any Affiliate may
terminate its participation in the Plan at any time by resolution of its board
of directors. The liabilities incurred under the Plan to the Participants
shall be solely the liabilities of the Company, and no other Employer shall be
liable for benefits accrued under the Plan. An Affiliate's participation in
the Plan shall be deemed terminated if it ceases to be an Affiliate.
10.3 Rights and Duties. Neither the Employers nor the Committee
shall be subject to any liability or duty under the Plan except as expressly
provided in the Plan, or for any action taken, omitted or suffered in good
faith.
10.4 Apportionment of Costs and Duties. All acts required of the
Employers under the Plan may be performed by the Company for itself and its
Affiliates, and the costs of the Plan may be equitably apportioned by the
Committee among the Company and the other Employers.
10.5 No Effect on Employment. Neither the establishment or
maintenance of the Plan, the making of any Employer Contributions nor any
action of any Employer or the Committee, shall be held or construed to confer
upon any individual any right to be continued as an employee, or upon
dismissal, any right or interest in any specific assets of the Employers other
than as provided in the Plan. Each Employer expressly reserves the right to
discharge any employee at any time, with or without cause.
10.6 Employer Contributions Not Counted Under Other Employee
Benefit Plans. Employer Contributions under the Plan will not be considered
for purposes of contributions or benefits under any other employee benefit
plan sponsored by the Employers.
10.7 Compliance with Rule 16b-3. Payments under the Plan are
intended to be exempt from liability under section 16 of the Securities
Exchange Act of 1934, as amended ("section 16"). To the extent deemed
necessary or advisable by the Committee, any payment to an individual who is
subject to section 16(a) with respect to the Special Common Stock may be
delayed in order to ensure that such payment will not result in any liability
under section 16(b) to such individual.
10.8 Applicable Law. The provisions of the Plan shall be
construed, administered and enforced in accordance with the laws of the State
of California (other than its conflict of laws provisions).
10.9 Severability. If any provision of the Plan is held invalid
or unenforceable, its invalidity or unenforceability shall not affect any
other provisions of the Plan, and in lieu of each provision which is held
invalid or unenforceable, there shall be added as part of the Plan a provision
that shall be as similar in terms to such invalid or unenforceable provision
as may be possible and be valid, legal, and enforceable.
10.10 Captions. The captions contained in and the table of
contents prefixed to the Plan are inserted only as a matter of convenience and
for reference and in no way define, limit, enlarge or describe the scope or
intent of the Plan nor in any way shall affect the construction of any
provision of the Plan.
EXECUTION
IN WITNESS WHEREOF, the Company, by its duly authorized officers,
has executed the Plan on the date indicated below.
GENENTECH, INC.
Dated: By:
Title:
GENENTECH, INC.
DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
Page
SECTION 1 DEFINITIONS
1.1 "Account" or "Account(s)" 1
1.2 "Affiliate" 1
1.3 "Beneficiary" 1
1.4 "Board of Directors" 1
1.5 "Committee" 1
1.6 "Company" 1
1.7 "Consultant" 1
1.8 "Delisting" 1
1.9 "Delisting Value" 2
1.10 "Disability" 2
1.11 "Effective Date" 2
1.12 "Employee" 2
1.13 "Employer" 2
1.14 "Employer Contributions" 2
1.15 "Nonemployee Director" 2
1.16 "Option" 2
1.17 "Parent" 2
1.18 "Participant" 3
1.19 "Plan" 3
1.20 "Redemption" 3
1.21 "Redemption Value" 3
1.22 "Retirement" 3
1.23 "Special Common Stock" 3
1.24 "Stock Option Plan" 3
1.25 "Subsidiary" 3
SECTION 2 PARTICIPATION
2.1 Participation 3
2.2 Termination of Participation 3
SECTION 3 EMPLOYER CONTRIBUTIONS
3.1 Employer Contributions 4
3.1.1 Delisting 4
3.1.2 Redemption 4
3.2 Crediting of Employer Contributions 4
3.3 Deemed Interest on Accounts 4
3.4 Form and Timing of Payment 5
SECTION 4 ACCOUNTING
4.1 Participants' Accounts 5
4.2 Participants Remain Unsecured Creditors 5
4.3 Accounting Methods 5
4.4 Reports 6
SECTION 5 DISTRIBUTIONS
5.1 Normal Distribution Timing and Rules 6
5.2 Special Rule for Death or Disability 6
5.3 Special Rule for Termination of Employment 6
5.4 Beneficiary Designations 6
5.4.1 Spousal Consent 6
5.4.2 Changes and Failed Designations 7
5.5 Financial Hardship 7
5.6 Payments to Incompetents 7
5.7 Undistributable Accounts 8
5.8 Payment in Cash or Its Equivalent 8
5.9 Tax Withholding 8
5.10 Committee Discretion 8
SECTION 6 PARTICIPANT'S INTEREST IN ACCOUNT
6.1 Vesting in Accounts 8
6.2 Vesting Rules 8
6.2.1 Termination 9
6.2.2 Full Vesting 9
6.3 Transfers of Employment 9
SECTION 7 ADMINISTRATION OF THE PLAN
7.1 Committee 9
7.2 Actions by Committee 10
7.3 Powers of Committee 10
7.4 Decisions of Committee 11
7.5 Administrative Expenses 11
7.6 Eligibility to Participate 11
7.7 Indemnification 11
SECTION 8 FUNDING
8.1 Unfunded Plan 11
SECTION 9 MODIFICATION OR TERMINATION OF PLAN
9.1 Employers' Obligation is Limited 12
9.2 Right to Amend or Terminate 12
SECTION 10 GENERAL PROVISIONS
10.1 Inalienability 12
10.2 Participation by Affiliates 12
10.3 Rights and Duties 13
10.4 Apportionment of Costs and Duties 13
10.5 No Effect on Employment 13
10.6 Employer Contributions Not Counted Under Other Employee Benefit
Plans 13
10.7 Compliance with Rule 16b-3 13
10.8 Applicable Law 13
10.9 Severability 13
10.10 Captions 13
