UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended March 31, 1997.
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from to .
Commission File Number
1-9813
GENENTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
460 Point San Bruno Boulevard, South San Francisco, California 94080
(Address of principal executive offices and zip code)
(415) 225-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $.02 par value 76,621,009
Class Outstanding at March 31, 1997
Special Common Stock $.02 par value 45,626,330
Class Outstanding at March 31, 1997
GENENTECH, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Condensed Consolidated Statements of Income -
for the three months ended March 31, 1997 and 1996 3
Condensed Consolidated Statements of Cash Flows -
for the three months ended March 31, 1997 and 1996 4
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Financial Review 10-16
Independent Accountants' Review Report 17
PART II. OTHER INFORMATION 18
SIGNATURES 19
Page 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(thousands, except per share amounts)
(unaudited)
Three Months
Ended March 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Product sales (including amounts from related parties:
1997-$4,494; 1996-$3,955) $154,213 $152,337
Royalties (including amounts from related parties:
1997-$6,798; 1996-$6,627) 65,312 52,893
Contract and other (including amounts from
related parties: 1997-$15,706; 1996-$18,757) 21,409 22,100
Interest 16,351 15,554
---------- ----------
Total revenues 257,285 242,884
Costs and expenses:
Cost of sales (including amounts from related parties:
1997-$3,899; 1996-$3,463) 27,685 25,879
Research and development (including contract
related: 1997-$15,706; 1996-$7,616) 122,743 115,633
Marketing, general and administrative 61,981 52,042
Interest 988 1,559
---------- ----------
Total costs and expenses 213,397 195,113
Income before taxes 43,888 47,771
Income tax provision 12,289 9,554
---------- ----------
Net income $ 31,599 $ 38,217
========== ==========
Net income per share $ .25 $ .31
========== ==========
Weighted average number of shares used
in computing per share amounts 125,283 123,360
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 3
<TABLE>
<CAPTION>
GENENTECH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
(unaudited)
Three Months
Ended March 31
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 31,599 $ 38,217
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 16,481 15,403
Deferred income taxes (2,583) (2,400)
Gain on sales of securities available-for-sale (1,992) (84)
Loss on sales of securities available-for-sale 997 -
Loss on fixed asset dispositions 31 95
Changes in assets and liabilities:
Investments in trading securities (97,585) -
Receivables and other current assets (11,850) (3,559)
Inventories (1,724) 4,795
Accounts payable, other current liabilities
and other long-term liabilities 6,170 (7,212)
---------- ----------
Net cash (used in) provided by operating activities (60,456) 45,255
Cash flows from investing activities:
Purchases of securities held-to-maturity (138,090) (136,420)
Proceeds from maturities of securities held-to-maturity 185,096 147,237
Purchases of securities available-for-sale (136,994) (62,595)
Proceeds from sales of securities available-for-sale 114,885 1,424
Capital expenditures (45,711) (24,252)
Change in other assets (3,435) 4,303
---------- ----------
Net cash used in investing activities (24,249) (70,303)
Cash flows from financing activities:
Stock issuances 27,258 27,115
Repayment of long-term debt, including
current portion - (230)
---------- ----------
Net cash provided by financing activities 27,258 26,885
---------- ----------
Net (decrease) increase in cash and cash equivalents (57,447) 1,837
Cash and cash equivalents at beginning of period 207,264 137,043
---------- ----------
Cash and cash equivalents at end of period $ 149,817 $ 138,880
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 4
<TABLE>
<CAPTION>
GENENTECH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(thousands)
(unaudited)
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 149,817 $ 207,264
Short-term investments 510,789 415,900
Accounts receivable, net (including amounts
from related party: 1997-$30,036;
1996-$33,377) 205,561 197,612
Inventories 93,667 91,943
Prepaid expenses and other current assets 45,771 42,365
------------ ------------
Total current assets 1,005,605 955,084
Long-term marketable securities 505,479 535,916
Property, plant and equipment, less accumulated
depreciation (1997-$332,888; 1996-$320,100) 617,895 586,167
Other assets 153,187 149,205
------------ ------------
Total assets $ 2,282,166 $ 2,226,372
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,018 $ 45,501
Accrued liabilities - related party 16,146 9,908
Other accrued liabilities 184,300 194,542
------------ ------------
Total current liabilities 248,464 249,951
Long-term debt 150,000 150,000
Other long-term liabilities 23,887 25,362
------------ ------------
Total liabilities 422,351 425,313
Commitments and contingencies
Stockholders' equity:
Preferred stock - -
Special common stock 915 896
Common stock 1,532 1,532
Additional paid-in capital 1,395,635 1,362,585
Retained earnings (since October 1, 1987
quasi-reorganization) 413,696 382,097
Net unrealized gain on securities
available-for-sale 48,037 53,949
------------ ------------
Total stockholders' equity 1,859,815 1,801,059
------------ ------------
Total liabilities and stockholders' equity $ 2,282,166 $ 2,226,372
============ ============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
Page 5
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Statement of Accounting Presentation
In the opinion of Genentech, Inc. (the Company), the accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting only of adjustments of a normal recurring nature)
considered necessary for a fair presentation have been included. Operating
results for the three-month periods ended March 31, 1997 and 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The condensed consolidated balance sheet as of
December 31, 1996 has been derived from the audited financial statements as
of that date. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report to
Stockholders for the year ended December 31, 1996.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Note 2. New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) 128, "Earnings per Share," and FAS 129,
"Disclosure of Information about Capital Structure," which are required to be
adopted on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share (EPS) and to
restate all prior periods as required by FAS 128. Under the new requirements
for calculating EPS, the dilutive effect of stock options will be excluded
from a new EPS measure, Basic EPS. The impact is expected to result in an
increase in Basic EPS for the first quarter ended March 31, 1997 and March 31,
1996; however, this impact is expected to be immaterial. The impact of FAS
128 on the calculation of the second new EPS measure, Diluted Earnings Per
Share, for these quarters is expected to be immaterial.
FAS 129 consolidates existing guidance relating to disclosure about a
company's capital structure. Since the Company has been in compliance with
existing disclosure requirements of its capital structure, adoption of FAS 129
is not expected to have a material impact on the financial position, results
of operations or cash flows of the Company.
Note 3. 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 April
1, 1997, the call price is $70.50 per share and increases by $1.50 per share
Page 6
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 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 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 (U.S.). 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 holds approximately
68.0% of the outstanding common equity of the Company as of March 31, 1997.
Contract revenue in the quarter ended March 31, 1997, totaled $15.7 million,
of which $12.6 million are reimbursements for ongoing development expenses for
the three development projects - IDEC-C2B8, insulin-like growth factor and
nerve growth factor - that HLR exercised its development option under the
Agreement in 1996.
Note 4. Legal Proceedings
The Company is a party to various legal proceedings including patent
infringement cases involving human growth hormone products and Activase,
registered trademark; product liability cases; and employment related cases.
In late 1995, the Company received and responded to grand jury document
subpoenas from the U.S. District Court for the Northern District of California
for documents relating to the Company's clinical, sales and
Page 7
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
marketing activities associated with human growth hormone. In February 1997,
the Company received another grand jury document subpoena from the same court
relating to the same 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 Nordisk A/S
(Novo) and certain of its affiliates and BioTechnology General (BTG) and its
affiliate, respectively, which prohibited each of them, pending the Court's
final determination of the action, from importing, making, using and selling
their human growth hormone products in the U.S. 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
United States. 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 BTG's product 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, registered trademark, 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
sought disgorgement of profits and alleged causes of action under various
state statutory and common law theories, including fraud and breach of
fiduciary duty. This action was dismissed in March 1997 with prejudice. A
similar suit was filed on July 13, 1995, in the U.S. District Court for the
District of South Dakota, Southern Division 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.
Page 8
GENENTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 5. Commitments
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
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. On March 31, 1997, Scios drew down the
entire $30 million with replacement of funds due to the bank by the Company on
April 1, 1997. In addition, on April 2, 1997, Scios suspended development of
Auriculin, registered trademark, anaritide based upon the results of an
interim analysis of data from the Phase III study in oliguric acute renal
failure. Auriculin was under development in collaboration with the Company.
Note 6. Inventories
Inventories at March 31, 1997 and December 31, 1996 are summarized below:
1997 1996
---------- ----------
(thousands)
Raw materials and supplies $ 17,937 $ 17,971
Work in process 64,089 61,368
Finished goods 11,641 12,604
---------- ----------
Total $ 93,667 $ 91,943
========== ==========
Note 7. Change in Effective Income Tax Rate
The Company's effective income tax rate for the quarter ended March 31, 1997
was 28% compared to 20% in the comparable period of 1996. The rate increase
to 28% in 1997 from 20% in 1996 was primarily due to the recognition of
previously reserved deferred tax assets in 1996. The 1997 effective tax rate
is less than the U.S. statutory rate of 35% primarily due to research and
development tax credits.
Page 9
GENENTECH, INC.
FINANCIAL REVIEW
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 Condensed
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,
contract revenue in the quarter ended March 31, 1997, totaled $15.7 million,
of which $12.6 million are reimbursements for ongoing development expenses for
the three development projects - IDEC-C2B8, insulin-like growth factor (IGF-1)
and nerve growth factor (NGF) - that HLR exercised its development option
under the Agreement in 1996.
RESULTS OF OPERATIONS
(dollars in millions, except per share amounts)
Three Months Ended March 31
-------------------------------
REVENUES 1997 1996 % Change
- --------- -------- -------- ---------
Revenues $ 257.3 $242.9 6%
======== ======== =========
PRODUCT SALES
- ----------------------
Activase $ 75.0 $ 76.6 (2)%
Protropin and Nutropin 55.9 56.0 -
Pulmozyme 22.3 18.9 18
Actimmune 1.0 0.8 25
-------- -------- ---------
Total product sales $ 154.2 $152.3 1%
======== ======== =========
Net sales of Activase, registered trademark, (Alteplase, recombinant), a
tissue plasminogen activator (t-PA), decreased in the first quarter of 1997
compared to the first quarter of 1996, due to lower U.S. sales attributable to
a decrease in thrombolytic market size. Although Activase's market share
remains above 80%, the overall size of the market declined since the first
quarter of 1996 as a result of the increasing use of angioplasty rather than
thrombolytic therapy, as well as from patients receiving therapy through
ongoing clinical trials. In March 1997, results from the GUSTO III clinical
trial which involved a head-to-head comparison of Activase and Boehringer
Mannheim's (BM) Retavase, registered trademark, failed to demonstrate that
Retavase has a statistically significant lower mortality rate than Activase.
Page 10
Net sales of the Company's three growth hormone products - Protropin,
registered trademark, (somatrem for injection), Nutropin, registered
trademark, [somatropin (rDNA origin) for injection] and Nutropin AQ,
trademark, [somatropin (rDNA origin) injection] - remained essentially the
same in the first quarter of 1997 over the comparable period in 1996. In the
first quarter of 1997, Serono Laboratories, Inc. and Novo Nordisk A/S (Novo)
began selling their human growth hormone products. Novo began selling
Norditropin, registered trademark, after the U.S. Court of Appeals stayed the
preliminary injunction against Novo. The Court of Appeals subsequently
invalidated the patent that was the subject of the preliminary injunction.
(See the "Legal Proceedings" note in the Notes to Condensed Consolidated
Financial Statements for more information on the Novo case.)
Net sales of Pulmozyme, registered trademark, increased 18% in the quarter
ended March 31, 1997 from the comparable period in 1996 due to increased
market penetration for its currently approved indications - management of
patients with moderate or advanced cystic fibrosis (CF).
Three Months Ended March 31
ROYALTIES, CONTRACT AND ------------------------------
OTHER, AND INTEREST INCOME 1997 1996 % Change
- ----------------------------- -------- -------- --------
Royalties $65.3 $52.9 23%
Contract and other 21.4 22.1 (3)
Interest income 16.4 15.6 5
Royalty income increased $12.4 million, or 23%, in the first quarter of 1997
due primarily to increased sales of products by licensees. In addition, $2.2
million of the increase was related to reserves against certain royalty
revenues for 1996 which were reversed in the first quarter of 1997 due to the
favorable outcome of certain patent proceedings.
Contract and other revenue decreased in the first quarter of 1997 over the
comparable quarter in 1996 primarily due to $17.1 million of contract revenues
from HLR in the first quarter of 1996 related to HLR's exercise of its option
regarding IDEC-C2B8. This decrease was partially offset by $12.6 million of
contract revenues in the first quarter of 1997 for ongoing development
expenses related to the three projects (IDEC-C2B8, IGF-1 and NGF) for which
HLR exercised its development option in 1996; and an increase in other
contract revenue in the first quarter of 1997 resulting from normal variations
in the timing of contract benchmark achievements and payments.
Interest income increased in the first quarter of 1997 compared to 1996 due
primarily to an increase in the average yield on the portfolio. The total
investment portfolio, consisting of cash and cash equivalents, and short- and
long-term marketable securities, increased to $1,166.1 million as of March 31,
1997 from $1,147.8 million as of March 31, 1996 and from $1,159.1 million as
of December 31, 1996.
Three Months Ended March 31
------------------------------
COSTS AND EXPENSES 1997 1996 % Change
- -------------------------- -------- -------- --------
Cost of sales $ 27.7 $ 25.9 7%
Research and development 122.7 115.6 6
Marketing, general and
administrative 62.0 52.0 19
Interest expense 1.0 1.6 (38)
-------- -------- --------
Total costs and expenses $213.4 $195.1 9%
======== ======== ========
Page 11
Cost of sales as a percent of product sales increased in the first quarter of
1997 to 18% from 17% in the first quarter of 1996 due to a product mix shift.
Research and development (R&D) expenses increased 6% in the first quarter of
1997 over the comparable period in 1996 primarily due to increased expenses
for additional large-scale clinical trials for products in late-stage
development, continued testing of products currently in late-stage clinical
testing and costs to license technology from collaborative partners. These
increases were partially offset by a $5.0 million payment in the first quarter
of 1996 to Washington University for a license for worldwide rights to human
neurturin, a neurotrophic factor that promotes nerve cell growth and may be
useful for the treatment of neurodegenerative disorders, and to other
neurotrophic factors. R&D as a percent of revenue was approximately 48% in
the first quarter of 1997.
Marketing, general and administrative (MG&A) expenses increased in the first
quarter of 1997 over the comparable period in 1996 due to increased sales and
marketing expenses primarily related to promoting Roche's Roferon-A,
registered trademark, in the U.S. for its approved oncology indications,
expenses related to pre-launch activities for IDEC-C2B8 and higher corporate
expenses.
Interest expense declined in the first quarter of 1997 over the comparable
period in 1996 due to an increase in capitalized interest resulting from
higher capital expenditures.
Three Months Ended March 31
------------------------------
INCOME TAXES 1997 1996 % Change
- ------------- -------- -------- ---------
Income taxes $12.3 $ 9.6 28%
The Company's effective income tax rate for the quarter ended March 31, 1997
was 28% compared to 20% in the comparable period of 1996. The rate increase
to 28% in 1997 from 20% in 1996 was primarily due to the recognition of
previously reserved deferred tax assets in 1996. The 1997 effective tax rate
is less than the U.S. statutory rate of 35% primarily due to research and
development tax credits.
Three Months Ended March 31
------------------------------
NET INCOME 1997 1996 % Change
- ------------------- -------- -------- --------
Net income $31.6 $38.2 (17)%
Earnings per share $ .25 $ .31
Net income decreased in the first quarter of 1997 over the first quarter of
1996 due to higher R&D, MG&A and income tax expenses, partially offset by
increased royalty revenue.
LIQUIDITY AND CAPITAL
RESOURCES March 31, 1997 December 31, 1996
- ----------------------------- -------------------- -------------------
Cash and cash equivalents, $ 1,166.1 $ 1,159.1
short-term investments
and long-term marketable
securities
Working capital 757.1 705.1
Page 12
Cash generated from operations, maturities of investments and stock issuances
were used to make investments in marketable securities and capital additions.
Cash and cash equivalents at March 31, 1997, were lower by $57.4 million
compared to December 31, 1996 and working capital increased by $52.0 million
in the first quarter of 1997.
Capital expenditures totaled $45.7 million in the first quarter of 1997
compared to $24.3 million in the same period of 1996. The increase was
related to improvements to existing manufacturing and office facilities in the
first quarter of 1997.
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. 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 volume of bulk
shipments to licensees, and the possibility of the introduction of a new
product in late 1997 and the potential introduction of additional new products
and indications for existing products in 1998 and beyond.
Activase Sales: The Company faces new competition in the thrombolytic market.
BM received U.S. Food and Drug Administration (FDA) approval in October 1996
to market its product, Retavase, for the treatment of acute myocardial
infarction (AMI) in the U.S. The Company has brought suit against BM for
patent infringement. In addition, there is an increasing use of angioplasty
for the treatment of AMI patients in lieu 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 t-PA and processes related to
its production and formulation, physicians' responses to the outcome of the
GUSTO III clinical trial, the increasing use of other therapies such as
angioplasty techniques for the treatment of AMI, and the impact of the FDA's
clearance in June 1996 for the Company to market Activase for the treatment of
acute ischemic stroke.
Growth Hormone Sales: The Company continues to face 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. In the first quarter of 1997, two of those companies began
selling their growth hormone products. 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
Page 13
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 sales of Nutropin as a treatment for short stature
associated with Turner syndrome, and the timing and likelihood of FDA approval
of Nutropin for the treatment of growth hormone inadequacy in adults.
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 Eli Lilly and Company 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, as
revenues increase, 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 its effective tax rate to be
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
Page 14
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
materially 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 foreign currency put option contracts with expiration
dates and amounts of currency that are based on a portion of probable revenues
so 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 foreign
currency forward exchange contracts to lock in the dollar value of a portion
of these anticipated revenues.
Page 15
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 short-term
impact of fluctuations in U.S. interest rates, the Company invests in
securities with durations ranging from overnight to ten years. The purchase
of a combination of both long- and short-term securities minimizes the
quarterly fluctuation in the average yield of the portfolio by locking in some
rates for longer periods of time than can be accomplished with only 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 quality standards and 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 "Legal Proceedings" note in the Notes to
Condensed Consolidated Financial Statements for further information.
Page 16
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Genentech, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Genentech, Inc. as of March 31, 1997, and the related condensed consolidated
statements of income and cash flows for the three-month periods ended March
31, 1997 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data, and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, which will
be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Genentech, Inc. as of December
31, 1996, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated January 17, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
31, 1996, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Jose, California
April 8, 1997
Page 17
GENENTECH, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1997, Genentech, Inc. (the Company), received another grand jury
document subpoena 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 March 1997, the United States Court of Appeals for the Federal Circuit (the
Court of Appeals) invalidated the patent that was the subject of the
preliminary injunction against Novo Nordisk A/S and certain of its affiliates.
Shortly thereafter, the Company filed a combined petition for rehearing and
suggestion for rehearing "in banc" with the Court of Appeals.
See also Note 4 "Legal Proceedings" in Part I "Notes to Condensed Consolidated
Financial Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
15.1 Letter re: Unaudited Interim Financial Information
27.1 Financial Data Schedule
*99.1 1991 Employee Stock Plan, as amended April 10, 1997.
*Indicates management contract or compensatory plan or
arrangement of the Company.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended March 31, 1997.
Page 18
GENENTECH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 12, 1997 GENENTECH, INC.
/S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR.
------------------------------------- ----------------------------
Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr.
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
/S/BRADFORD S. GOODWIN
----------------------------
Bradford S. Goodwin
Vice President, Finance and
Controller
Page 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 149,817
<SECURITIES> 1,016,268
<RECEIVABLES> 205,561<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 93,667
<CURRENT-ASSETS> 1,005,605
<PP&E> 950,783
<DEPRECIATION> 332,888
<TOTAL-ASSETS> 2,282,166
<CURRENT-LIABILITIES> 248,464
<BONDS> 150,000
0
0
<COMMON> 2,447
<OTHER-SE> 1,857,368
<TOTAL-LIABILITY-AND-EQUITY> 2,282,166
<SALES> 154,213
<TOTAL-REVENUES> 257,285
<CGS> 27,685
<TOTAL-COSTS> 27,685
<OTHER-EXPENSES> 122,743
<LOSS-PROVISION> 0<F1>
<INTEREST-EXPENSE> 988
<INCOME-PRETAX> 43,888
<INCOME-TAX> 12,289
<INCOME-CONTINUING> 31,599
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,599
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
<FN>
<F1>ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN
THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL
ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS.
</FN>
</TABLE>
Exhibit 15.1
May 12, 1997
The Board of Directors and Stockholders
Genentech, Inc.
We are aware of 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, as applicable, contained in such Registration
Statements of our report dated April 8, 1997 relating to the
unaudited condensed consolidated interim financial statements of
Genentech, Inc. which are included in its Form 10-Q for the quarter
ended March 31, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is
not a part of the registration statement prepared or certified by
accountants within the meaning of Section 7 or 11 of the Securities
Act of 1933.
Very truly yours,
ERNST & YOUNG LLP
GENENTECH, INC.
1991 Employee Stock Plan
(As amended effective April 10, 1997)
1. Purpose
The purpose of this 1991 Employee Stock Plan (the "Plan") is to
provide employees of Genentech, Inc. (the "Company"), and its U.S.
subsidiaries designated by the Company's Board of Directors, who wish to
become stockholders of the Company an opportunity to purchase (i) shares
of Callable Putable Common Stock of the Company, or (ii) shares of
Common Stock of the Company, to the extent shares of Callable Putable
Common Stock are converted to Common Stock in accordance with the
Company's Certificate of Incorporation (the shares referred to in
clauses (i) and (ii) above being hereinafter referred to collectively as
the "Shares"). The Plan is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code").
2. Eligible Employees
Subject to the provisions of Sections 7, 8 and 9 below, any individual
who is in the full-time employment of the Company on the day on which a
Grant Date (as defined in Section 3 below) occurs is eligible to
participate in an offering of Shares made by the Company hereunder. In
addition, the Board of Directors may at any time designate one or more
of the Company's U.S. subsidiary corporations (as defined in Section
425(f) of the Code) to be included in an offering of Shares under the
Plan. Full-time employment shall mean employment by the Company or its
designated U.S. subsidiary for:
(a) 20 hours or more per week; and
(b) more than five months in the calendar year.
3. Grant Dates
From time to time, the Board of Directors may fix a date (a "Grant
Date") or a series of dates (each of which is a "Grant Date") on which
the Company will grant rights to purchase Shares ("Rights") to employees
eligible to participate.
4. Prices
The purchase price per Share for Shares covered by a grant of Rights
hereunder shall be determined by the Board of Directors, but in no event
shall be less than the lesser of:
(a) eighty-five percent (85%) of the fair market value of a Share
on the Grant Date on which such Right was granted; or
(b) eighty-five percent (85%) of the fair market value of a Share
on the date such Right is exercised as to that Share.
5. Exercise of Rights and Method of Payment
(a) Rights granted under the Plan will be exercisable on specific
dates as determined by the Board of Directors.
(b) The method of payment for Shares purchased upon exercise of
Rights granted hereunder shall be through regular payroll deductions or
by lump sum cash payment, or both, as determined by the Board of
Directors. No interest shall be paid upon payroll deductions or other
payments in exercise of Rights unless specifically provided for by the
Board of Directors.
6. Terms of Rights
Rights granted hereunder shall be exercisable during a twenty-seven
(27) month period or such shorter period as determined by the Board of
Directors. All Rights granted to an employee shall terminate upon
termination of full-time employment of the employee. Any payments
received by the Company from a participating employee with respect to a
Right granted hereunder and not utilized for the purchase of Shares upon
exercise of such Right shall be promptly returned to such employee by
the Company after termination of such Right, except that amounts that
were not so utilized because such amounts were insufficient to purchase
a whole Share may be applied toward the purchase of Shares pursuant to a
Right subsequently granted hereunder, if any.
7. Shares Subject to the Plan
No more than four million five hundred thousand (4,500,000) Shares may
be sold pursuant to Rights granted under the Plan. Appropriate
adjustments in the above figure, in the number of Shares covered by
outstanding Rights granted hereunder, in the exercise price of the
Rights and in the maximum number of Shares which an employee may
purchase (pursuant to Section 9 below) shall be made to give effect to
any mergers, consolidations, reorganizations, recapitalizations, stock
splits, stock dividends or other relevant changes in the capitalization
of the Company occurring after the effective date of the Plan, provided
that no fractional Shares shall be subject to a Right and each Right
shall be adjusted downward to the nearest full Share. Any agreement of
merger or consolidation will include provisions for protection of the
then existing Rights of participating employees under the Plan. Either
authorized and unissued Shares or issued Shares heretofore or hereafter
reacquired by the Company may be made subject to Rights under the Plan.
If for any reason any Right under the Plan terminates in whole or in
part, Shares subject to such terminated Right may again be subject to a
Right under the Plan.
8. Limitations on Grants
Anything to the contrary notwithstanding, pursuant to Section 423 of
the Code:
(a) No employee shall be granted a Right hereunder if such
employee, immediately after the Right is granted, owns stock possessing
five percent (5%) or more of the total combined voting power or value of
all classes of stock of the Company, its parent corporation (as defined
in Section 425(c) of the Code) or any subsidiary corporation, in each
case computed in accordance with Section 423(b)(3) of the Code.
(b) No employee shall be granted a Right which permits his Rights
to purchase Shares under all employee stock purchase plans of the
Company and its subsidiaries to accrue at a rate which exceeds twenty-
five thousand dollars ($25,000) (or such other maximum as may be
prescribed from time to time by the Code) of fair market value of such
Shares (determined at the time such Right is granted) for each calendar
year in which such Right is outstanding at any time, all in accordance
with the provisions of Section 423(b)(8) of the Code.
9. Limits on Participation
(a) Participation shall be limited to eligible employees who enroll
under the Plan.
(b) No Right granted to any participating employee shall cover more
than twelve thousand (12,000) Shares.
(c) No more than One Hundred Eighty Thousand (180,000) Shares may
be purchased during any calendar quarter upon the exercise of Rights
granted under the Plan; provided, however, that for those calendar
quarters in which the Company pays regular annual bonuses to eligible
employees, the maximum aggregate numbers of Shares which may be
purchased upon the exercise of Rights shall be Two Hundred Thousand
(200,000) Shares. If the aggregate purchases of Shares upon exercises of
Rights granted under the Plan would exceed the applicable maximum number
for a particular calendar quarter, the maximum permitted number of
Shares shall be allocated to the exercising participants in proportion
to the number of Shares they would otherwise purchase during such
calendar quarter.
10. Employee's Rights as Stockholder
No participating employee shall have any Rights as a stockholder in
the Shares covered by a Right granted hereunder until such Right has
been exercised, full payment has been made for the corresponding Shares
and the purchase has been entered in the records of the Transfer Agent
for the Shares.
11. Rights Not Transferable
Rights under the Plan are not assignable or transferable by a
participating employee.
12. Amendments or Discontinuance of the Plan
The Board of Directors of the Company shall have the right to amend,
modify or terminate the Plan at any time without notice; provided,
however, that the then existing Rights of all participating employees
shall not be adversely affected thereby, except that in the case of a
participating employee of a foreign branch of the Company or a
designated U.S. subsidiary corporation the Plan may be varied to conform
with local laws, and provided further that, subject to the provisions of
Section 7 above, no such amendment to the Plan shall, without the
approval of the stockholders of the Company:
(a) Increase the total number of Shares which may be offered under
the Plan;
(b) Amend the Plan in any manner which would render Rights granted
hereunder unqualified for special tax treatment under Section 421 of the
Code.
13. Effective Date and Approvals
The Plan shall become effective as of January 1, 1991. The Company's
obligation to offer, sell or deliver its Shares under the Plan is
subject to the approval of the Company's stockholders and any
governmental approval required in connection with the authorized
issuance or sale of such Shares and is further subject to the
determination by the Company that all applicable securities laws have
been complied with.
14. Administration of the Plan
The Board of Directors or any committee or person(s) to whom it
delegates its authority (the "Administrator") shall administer,
interpret and apply all provisions of the Plan. The Administrator may
waive such provisions of the Plan as it deems necessary to meet special
circumstances not anticipated or covered expressly by the Plan. Nothing
contained in this Section shall be deemed to authorize the Administrator
to alter or administer the provisions of the Plan in a manner
inconsistent with the provisions of Section 423 of the Code.
4
