-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Om4rjElOPKDMatNHlGHyKU9SqF3rUWStgKTdxMRUXwZOwbC8LKhSlZDDEX+XMV07 4LKLSHcgIxnniLSEb2Qljg== 0000318771-97-000003.txt : 19970328 0000318771-97-000003.hdr.sgml : 19970328 ACCESSION NUMBER: 0000318771-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENENTECH INC CENTRAL INDEX KEY: 0000318771 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 942347624 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09813 FILM NUMBER: 97564288 BUSINESS ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4152251000 MAIL ADDRESS: STREET 1: 460 POINT SAN BRUNO BLVD STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 10-K 1 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: ============================================================================== Title of Each Class Name of Each Exchange on Which Registered - ------------------------------------------------------------------------------ Common Stock $.02 par value New York Stock Exchange Callable Putable Common Stock Pacific Stock Exchange $.02 par value ============================================================================== 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") - ----------------------------------------------------------------------------- (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:
Product Description - -------------------------------- ------------------------------------------------ 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.
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.
GENENTECH, INC. EXECUTIVE OFFICERS The executive officers of the Company and their respective ages and positions with the Company are as follows: 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
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. SCHEDULE II GENENTECH, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1996, 1995 and 1994 (in thousands)
Additions Balance at Charged to Balance at Beginning of Costs and End of Period Expenses Deductions(1) Period ---------- ---------- ---------- ---------- Allowance for doubtful accounts and returns: 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 ========== ========== ========== ========== (1) Represents amounts written off or returned against the allowance or reserves.
INDEX OF EXHIBITS FILED WITH FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996
Exhibit No. Description - ----------- ----------- 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
1 EX-10 2 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 EX-13 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
CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) 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 ==================================== See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) Increase (Decrease) in Cash and Cash Equivalents YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------- 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 See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS (dollars in thousands) DECEMBER 31 1996 1995 - -------------------------------------------------------------------------------- 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 =============================== See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (thousands) 1996 1995 1994 Year ended December 31 ------------------- ------------------- ------------------- Shares Amount Shares Amount Shares Amount -------- --------- -------- --------- -------- --------- 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 ========== ========== ========== See Notes to Consolidated Financial Statements.
1996 Amount Tax Rate (thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------ 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% ===========================================
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.
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 - ------------------------------------------------------------------------------------- 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 ======== ======== * 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.
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.
11-YEAR FINANCIAL SUMMARY (UNAUDITED) (millions, except per share and employee data) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------- 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 ---------------------------------------------- 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.
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 EX-23 4 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 EX-27 5
5 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. 1,000 YEAR DEC-31-1996 DEC-31-1996 207,264 951,816 205,481 7,869 91,943 955,084 906,267 320,100 2,226,372 249,951 150,000 0 0 2,428 1,798,631 2,226,372 582,829 968,678 104,527 104,527 471,143 9,887 5,010 147,935 29,587 118,348 0 0 0 118,348 0.96 0
EX-99 6 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. EX-99 7 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. EX-99 8 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. EX-99 9 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. EX-99 10 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. EX-99 11 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 -----END PRIVACY-ENHANCED MESSAGE-----