-----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, TBOEnz4Ineyqo8HGbl0cecB2U/bc3SjfYPkVDXYg8mj3yMfLUXqw+aAuEpHmHKzs EmMvDpSIpWiJMU57KM4i6A== 0000318771-98-000005.txt : 19980814 0000318771-98-000005.hdr.sgml : 19980814 ACCESSION NUMBER: 0000318771-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE SROS: PCX 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-Q SEC ACT: SEC FILE NUMBER: 001-09813 FILM NUMBER: 98684449 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) /X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 1998. Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 1-9813 GENENTECH, INC. (Exact name of registrant as specified in its charter) Delaware 94-2347624 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 1 DNA Way, South San Francisco, California 94080 (Address of principal executive offices and zip code) (650) 225-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Number of Shares Outstanding - ----- ---------------------------- Common Stock $.02 par value 76,621,009 (Common Stock) Outstanding at June 30, 1998 Callable Putable Common Stock $.02 par value 49,223,128 (Special Common Stock) Outstanding at June 30, 1998 GENENTECH, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE NO. Condensed Consolidated Statements of Income - for the three months and six months ended June 30, 1998 and 1997 3 Condensed Consolidated Statements of Cash Flows - for the six months ended June 30, 1998 and 1997 4 Condensed Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Independent Accountants' Review Report 10 Financial Review 11-19 PART II. OTHER INFORMATION 20 SIGNATURES 22
Page 2 PART I. FINANCIAL INFORMATION GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (thousands, except per share amounts) (unaudited)
Three Months Six Months Ended June 30, Ended June 30, --------------------- --------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Revenues: Product sales (including amounts from related parties: three months - 1998-$6,566; 1997-$4,504; six months - 1998-$13,173; 1997-$8,998) $ 176,263 $ 145,018 $ 340,982 $ 299,231 Royalties (including amounts from related parties: three months - 1998-$8,752; 1997-$6,225; six months - 1998-$15,881; 1997-$13,023) 57,388 55,379 121,881 120,691 Contract and other (including amounts from related parties: three months - 1998-$7,850; 1997-$10,695; six months - 1998-$15,648; 1997-$26,401) 14,056 16,659 28,921 38,068 Interest 20,305 16,437 40,928 32,788 --------- --------- --------- --------- Total revenues 268,012 233,493 532,712 490,778 Costs and expenses: Cost of sales (including amounts from related parties: three months - 1998-$5,747; 1997-$3,664; six months - 1998-$11,772; 1997-$7,563) 37,150 25,567 70,771 53,252 Research and development (including contract related: three months - 1998-$10,679; 1997-$10,695; six months - 1998-$19,741; 1997-$26,401 92,949 110,890 191,151 233,633 Marketing, general and administrative 80,643 63,073 155,593 125,054 Interest 1,195 916 2,154 1,904 --------- --------- --------- --------- Total costs and expenses 211,937 200,446 419,669 413,843 Income before taxes 56,075 33,047 113,043 76,935 Income tax provision 15,701 9,253 31,652 21,542 --------- --------- --------- --------- Net income $ 40,374 $ 23,794 $ 81,391 $ 55,393 ========= ========= ========= ========= Earnings per share Basic $ 0.32 $ 0.19 $ 0.65 $ 0.45 ========= ========= ========= ========= Diluted $ 0.31 $ 0.19 $ 0.63 $ 0.44 ========= ========= ========= ========= Weighted average shares used to compute diluted earnings per share 129,775 126,425 129,291 125,842 ========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. Page 3 GENENTECH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (thousands) (unaudited)
Six Months Ended June 30, ---------------------- 1998 1997 ---------- ---------- Cash flows from operating activities: Net income $ 81,391 $ 55,393 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 37,246 33,568 Deferred income taxes (8,480) (4,445) Gain on sales of securities available-for-sale (5,835) (5,836) Loss on sales of securities available-for-sale 389 1,217 Write down of securities available-for-sale 7,193 - Loss on fixed asset dispositions - 83 Changes in assets and liabilities: Investments in trading securities (16,263) (101,631) Receivables and other current assets 12,458 (17,618) Inventories (814) (7,724) Accounts payable, other current liabilities and other long-term liabilities (7,281) 6,064 ---------- ---------- Net cash provided by (used in) operating activities 100,004 (40,929) Cash flows from investing activities: Purchases of securities held-to-maturity (177,416) (213,523) Proceeds from maturities of securities held-to-maturity 152,182 281,045 Purchases of securities available-for-sale (302,359) (204,141) Proceeds from sales of securities available-for-sale 162,945 237,383 Purchases of non-marketable equity securities (5,425) - Capital expenditures (43,331) (76,454) Change in other assets (2,568) (34,334) ---------- ---------- Net cash used in investing activities (215,972) (10,024) Cash flows from financing activities: Stock issuances 61,451 51,420 ---------- ---------- Net cash provided by financing activities 61,451 51,420 ---------- ---------- Net (decrease) increase in cash and cash equivalents (54,517) 467 Cash and cash equivalents at beginning of period 244,469 207,264 ---------- ---------- Cash and cash equivalents at end of period $ 189,952 $ 207,731 ========== ==========
See Notes to Condensed Consolidated Financial Statements. Page 4 GENENTECH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (thousands) (unaudited)
June 30, December 31, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 189,952 $ 244,469 Short-term investments 731,361 588,853 Accounts receivable, net (including amounts from related party: 1998-$36,238; 1997-$44,386) 180,086 189,245 Inventories 116,840 116,026 Prepaid expenses and other current assets 53,878 55,325 ------------ ------------ Total current assets 1,272,117 1,193,918 Long-term marketable securities 466,963 453,188 Property, plant and equipment, less accumulated depreciation (1998-$409,351; 1997-$376,091) 693,375 683,304 Other assets 174,240 177,202 ------------ ------------ Total assets $ 2,606,695 $ 2,507,612 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 29,859 $ 48,992 Income taxes payable 57,032 40,293 Accrued liabilities - related party 14,468 15,427 Other accrued liabilities 165,882 184,845 ------------ ------------ Total current liabilities 267,241 289,557 Long-term debt 150,000 150,000 Other long-term liabilities 30,435 36,830 ------------ ------------ Total liabilities 447,676 476,387 Commitments and contingencies Stockholders' equity: Preferred stock - - Special Common Stock 985 952 Common Stock 1,532 1,532 Additional paid-in capital 1,525,186 1,463,768 Retained earnings 592,532 511,141 Net unrealized gain on securities available-for-sale 38,784 53,832 ------------ ------------ Total stockholders' equity 2,159,019 2,031,225 ------------ ------------ Total liabilities and stockholders' equity $ 2,606,695 $ 2,507,612 ============ ============
See Notes to Condensed Consolidated Financial Statements. Page 5 GENENTECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1. Statement of Accounting Presentation In the opinion of Genentech, Inc. (the Company), the accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the three- and six-month periods ended June 30, 1998 and 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The condensed consolidated balance sheet as of December 31, 1997 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report to Stockholders for the year ended December 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2. New Accounting Standards The Company adopted Statement of Financial Accounting Standards (FAS) No. 128, "Earnings Per Share," for the year ended December 31, 1997. All earnings per share (EPS) and share amounts for all periods presented have been restated to comply with FAS 128. The following is a reconciliation of the numerator and denominators of the basic and diluted EPS computations for the three- and six-month periods ended June 30, 1998 and 1997 (in thousands).
Three Months Six Months Ended June 30, Ended June 30, ------------------ ------------------- 1998 1997 1998 1997 -------- -------- -------- --------- Numerator: Net income - numerator for basic and diluted EPS: $ 40,374 $ 23,794 $ 81,391 $ 55,393 -------- -------- -------- -------- Denominator: Denominator for basic EPS-- weighted-average shares 125,601 122,808 125,179 122,389 Effect of dilutive securities: Stock options 4,174 3,617 4,112 3,453 -------- -------- -------- -------- Denominator for diluted EPS --adjusted weighted-average shares and assumed conversions 129,775 126,425 129,291 125,842 ======== ======== ======== ========
Page 6 Options to purchase 1,580,150 shares of Special Common Stock between $68.19 per share and $68.38 per share were outstanding in the six-month period ended June 30, 1998, and options to purchase 147,900 shares of Special Common Stock at $58.38 per share and 182,105 shares of Special Common Stock between $57.38 per share and $58.38 per share were outstanding in the three- and six-month periods ended June 30, 1997, respectively, but were not included in the computations of diluted EPS because the options were anti-dilutive. In the three- and six-month periods ended June 30, 1998 and 1997, the Company had convertible subordinated debentures that were convertible to 1,013,514 shares of Special Common Stock, but were not included in the computations of diluted EPS because they were anti-dilutive. The Financial Accounting Standards Board (the FASB) issued FAS 130, "Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments of an Enterprise and Related Information," in June 1997, which require additional disclosures to be adopted by December 31, 1998. Under FAS 130, the Company is required to display comprehensive income and its components as part of the Company's full set of financial statements. Comprehensive income is comprised of net income and other comprehensive income. The measurement and presentation of net income will not change. Other comprehensive income includes certain changes in equity of the Company that are excluded from net income. Specifically, FAS 130 requires unrealized holding gains and losses on the Company's available-for-sale securities, which are currently reported separately in stockholders' equity, to be included in other comprehensive income. For the three months ended June 30, 1998 and 1997, total comprehensive income was $20.2 million and $20.0 million, respectively. For the six months ended June 30, 1998 and 1997, total comprehensive income was $66.3 million and $45.7 million, respectively. FAS 131 requires that the Company report financial and descriptive information about its reportable operating segments. The Company is evaluating the impact on its disclosures. In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities, " effective beginning in the first quarter of 2000. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting under FAS 133. The Company is currently evaluating the impact of FAS 133 on its financial position and results of operations. Note 3. Relationship with Roche Holdings, Inc. On October 25, 1995, the Company and Roche Holdings, Inc. (Roche) entered into a new agreement (the Agreement) to extend 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 shares of Common Stock for a price equal to the Company's cost to redeem the Special Common Stock. During the quarter beginning July 1, 1998, the call price is $78.00 per share and increases by $1.50 per share each quarter through the end of the option period on June 30, 1999, on which date the price will be $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 Page 7 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 the event that sufficient shares of the Company's Special Common Stock are tendered pursuant to the put to result in Roche owning at least 85% of the total outstanding shares of the Company's outstanding equity, the Company has in place an Incentive Units Program (the Program) that would result in amounts becoming payable to eligible employees if specified performance benchmarks are achieved by the Company during the term of the Program. These amounts would vary depending on which benchmarks are achieved. At June 30, 1998, no such amounts were payable under the Program. In conjunction with the Agreement and revisions agreed upon in principle in the second quarter of 1997, 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-U.S. markets (the License Agreement). Under the License Agreement, HLR may exercise its option to license any such future product of the Company either when the Company determines to move such product into development or at the end of Phase II clinical trials. The License Agreement provides that the Company and HLR will share the U.S. and European development costs regardless of the location or purpose of studies. 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 June 30, 1998. Contract revenue for the reimbursement of ongoing development expenses for nerve growth factor (NGF), for which HLR exercised its development option under the License Agreement in 1996, was $4.2 million and $8.8 million for the three- and six-month periods ended June 30, 1998. Note 4. Legal Proceedings The Company is a party to various legal proceedings, including patent infringement cases involving human growth hormone products and Activase, registered trademark, product liability cases involving Protropin, registered trademark, and other matters. In July 1997, an action was filed in the U.S. District Court for the Northern District of California alleging that the Company's manufacture, use and sale of its Nutropin, registered trademark, human growth hormone products infringed a patent (the Goodman Patent) owned by the Regents of the University of California (UC). This action is substantially the same as a previous action filed in 1990 against the Company by UC alleging that the Company's manufacture, use and sale of its Protropin human growth hormone products infringed the Goodman Patent. The 1997 case has been stayed pending the conclusion of the 1990 case, which is expected to commence trial on February 1, 1999. In 1995, the Company received and responded to grand jury document subpoenas from the U.S. District Court for the Northern District of California for documents relating to the Company's past clinical, sales and marketing activities associated with human growth hormone. In February 1997 and February 1998, the Company received grand jury document subpoenas from the same court related to the same subject matter. The government is actively investigating this matter, and the Company believes that it is a subject of that investigation. Certain employees and Page 8 an ex-employee received letters from the government informing them that they are targets of the investigation. 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. Note 5. Inventories Inventories are summarized below:
June 30, December 31, 1998 1997 ------------ ------------ (thousands) Raw materials and supplies $ 13,152 $ 17,544 Work in process 91,660 84,831 Finished goods 12,028 13,651 --------- --------- Total $ 116,840 $ 116,026 ========= =========
Note 6. Subsequent Events On July 6, 1998, the Company entered into an agreement with HLR to provide HLR exclusive marketing rights outside of the U.S. for Herceptin, registered trademark, (Trastuzumab). Under the agreement, HLR paid a $40.0 million up- front fee and has agreed to pay cash milestones tied to product development activities, to contribute equally with the Company on global development costs and to make royalty payments on product sales. Also in July 1998, the Company and Novo Nordisk A/S (Novo) agreed to settle a lawsuit brought in October 1997 by Novo in the U.S. District Court for the District of New Jersey alleging infringement of a patent held by Novo relating to the Company's manufacture, use and sale of its Nutropin human growth hormone products, and a lawsuit brought by the Company in the U.S. District Court for the Southern District of New York relating to the Company's patents for human growth hormone and insulin. Under the settlement agreement, Novo and the Company will cross-license worldwide certain patents relating to human growth hormone. At the end of August 1998, Novo will receive a worldwide license under the Company patents relating to insulin and the Company will receive certain payments. Page 9 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Stockholders Genentech, Inc. We have reviewed the accompanying condensed consolidated balance sheet of Genentech, Inc. as of June 30, 1998, and the related condensed consolidated statements of income for the three-month and six-month periods ended June 30, 1998 and 1997, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Genentech, Inc. as of December 31, 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 20, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. ERNST & YOUNG LLP San Jose, California July 10, 1998 Page 10 GENENTECH, INC. FINANCIAL REVIEW RELATIONSHIP WITH ROCHE HOLDINGS, INC. On October 25, 1995, Genentech, Inc. (the Company) and Roche Holdings, Inc. (Roche) entered into a new agreement (the Agreement) to extend until June 30, 1999, Roche's option to cause the Company to redeem (call) the outstanding callable putable common stock (Special Common Stock) of the Company at predetermined prices. Should the call be exercised, Roche will concurrently purchase from the Company a like number of shares of the Company's common stock (the Common Stock) 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 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. In conjunction with the Agreement and revisions agreed upon in principle in the second quarter of 1997, 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-U.S. markets (the License Agreement). The License Agreement provides that the Company and HLR will share the U.S. and European development costs regardless of the location or purpose of studies. Under the License Agreement, HLR may exercise its option to license any such future products of the Company either when the Company determines to move such product into development or at the end of Phase II clinical trials. See the Relationship with Roche Holdings, Inc. note in the Notes to Condensed Consolidated Financial Statements for further information. As a result of the License Agreement, contract revenue for the quarter ended June 30, 1998, and on a year-to-date basis totaled $4.2 million and $8.8 million for the reimbursement of ongoing development expenses related to nerve growth factor (NGF), for which HLR exercised its development option under the License Agreement in 1996.
RESULTS OF OPERATIONS (dollars in millions, except per share amounts) Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ REVENUES 1998 1997 % Change 1998 1997 % Change - ---------------------------- ------- ------- -------- ------- ------- -------- Revenues $ 268.0 $ 233.5 15% $ 532.7 $ 490.8 9% ======= ======= ======== ======= ======= ======== PRODUCT SALES - ---------------------------- Activase $ 54.1 $ 68.3 (21)% $ 109.8 $ 143.3 (23)% Protropin, Nutropin and Nutropin AQ 62.3 55.6 12 113.2 111.5 2 Pulmozyme 24.1 20.2 19 43.6 42.5 3 Rituxan 34.8 - - 72.5 - - Actimmune 1.0 0.9 11 1.9 1.9 0 ------- ------- -------- ------- ------- -------- Total product sales $ 176.3 $ 145.0 22% $ 341.0 $ 299.2 14% ======= ======= ======== ======= ======= ========
Page 11 Rituxan, trademark, (Rituximab) was approved by the FDA in November 1997 for the treatment of patients with relapsed or refractory low-grade or follicular, CD20-positive B-cell non-Hodgkin's lymphoma, a cancer of the immune system. Net sales of Rituxan were $34.8 million and $37.7 million in the first and second quarter of 1998, respectively. Although not enough time has passed for these figures to be indicative of the future trend of Rituxan sales, the Company believes that the initial pent-up demand reflected in sales for the fourth quarter of 1997 and the first quarter of 1998 is being replaced by demand from increased use. Rituxan was co-developed by the Company and IDEC Pharmaceuticals Corporation (IDEC), from whom the Company licenses Rituxan. During the first quarter of 1998, the Company received FDA approval for the large-scale (12,000-liter) manufacture of Rituxan. The Rituxan that the Company manufactures will supplement the Rituxan manufactured by IDEC for the Company. During the second quarter, the Company's and IDEC's partner HLR received approval from the European Commission to market Rituxan under the tradename MabThera, trademark, for marketing in the European Union. MabThera was approved for treating non-Hodgkin's lymphoma patients who have had two or more relapses or are resistant to chemotherapy. HLR holds marketing rights for MabThera outside of the U.S. and Japan. HLR has agreed to pay to the Company royalties and a mark-up on MabThera supplied to HLR. Net sales of Activase, registered trademark, (Alteplase, recombinant), a tissue plasminogen activator (t-PA), decreased in the three- and six-month periods ended June 30, 1998 from the comparable periods in 1997. These decreases were primarily due to a decline in market share as a result of competition from Centocor, Inc.'s (Centocor) Retavase, registered trademark. These decreases also resulted, to a lesser extent, from a decline in the size of the thrombolytic market due to increasing use of angioplasty and from a decrease in the available commercial market due to patients receiving therapy through two large ongoing Phase III clinical trials. Even though Activase's market share and the thrombolytic market size declined from the prior year, the market share and size during 1998 have remained constant. In March 1998, the Company received two new patents related to variant forms of t-PA. Based on these patents, the Company filed an infringement action against Centocor in the Northern District of California which alleges that Centocor's sale, offer for sale, use in, and importation into, the U.S. of Retavase (Reteplase, recombinant), a t-PA, infringes these two new patents of the Company. The Company is seeking a permanent injunction and damages. In early July 1998, the Company and partner Boehringer Ingelheim GmbH announced preliminary findings from the European Cooperative Acute Stroke Study II (ECASS II) in stroke patients presenting within 0 to 6 hours of symptom onset. This study failed to show a statistically significant clinical benefit in stroke patients treated with Actilyse, registered trademark, (the European tradename for Alteplase, recombinant) compared to placebo. The Company's Activase (the U.S. tradename for Alteplase, recombinant) is approved for the treatment of acute ischemic stroke within 3 hours of symptom onset. Also in July 1998, the Company announced that the Data Safety Monitoring Board (DSMB) of its U.S. clinical trial ATLANTIS (Alteplase ThromboLysis for Acute Noninterventional Therapy in Ischemic Stroke), recommended termination of the study. ATLANTIS is a placebo-controlled, double-blinded pivotal study observing Activase in acute ischemic stroke patients three to five hours from symptom onset. As a result of the DSMB's recommendation, the Company has decided not to file for a label extension for Activase in acute ischemic stroke beyond the currently approved three-hour window. Page 12 Net sales of the Company's three growth hormone products - Protropin, registered trademark, (somatrem for injection), Nutropin, registered trademark, [somatropin (rDNA origin) for injection] and Nutropin AQ, registered trademark, [somatropin (rDNA origin) injection] - increased in the three- and six-month periods ended June 30, 1998 from the comparable periods in 1997. These increases primarily reflect fluctuations in distributors' ordering patterns and treatment of new adult patients with growth hormone deficiency following regulatory approval of Nutropin and Nutropin AQ for this indication in December 1997. Net sales of Pulmozyme, registered trademark, (dornase alfa) increased in the three- and six-month periods ended June 30, 1998 from the comparable periods in 1997 primarily due to fluctuations in ordering patterns and new patients in all age groups, including very young patients following regulatory approval for this age group. In February 1998, the Company received approval from the U.S. Food and Drug Administration (FDA) for a label extension for Pulmozyme. With this revised labeling, Pulmozyme may now also be used to treat very young children with cystic fibrosis, ages three months to four years, adding to the product's previous approvals for patients five years of age and older. During the quarter ended June 30, 1998, the Company licensed U.S. marketing and development rights to interferon gamma, including Actimmune, registered trademark, (Interferon gamma-1b), to Connetics Corporation. Following a transition period, the Company will no longer sell Actimmune.
Three Months Ended Six Months Ended June 30, June 30, ROYALTIES, CONTRACT AND ------------------ ------------------ OTHER, AND INTEREST INCOME 1998 1997 % Change 1998 1997 % Change - ---------------------------- ------- ------- -------- ------- ------- -------- Royalties $ 57.4 $ 55.4 4% $ 121.9 $ 120.7 1% Contract and other 14.0 16.7 (16) 28.9 38.1 (24) Interest income 20.3 16.4 24 40.9 32.8 25
Royalty revenues increased in the second quarter of 1998 from the second quarter of 1997 due to higher royalties from HLR. On a year-to-date basis, royalty revenues were comparable to last year. Although royalty revenues in 1998 were higher than last year due to higher licensee sales, this increase was offset by the reversal of reserves against certain royalty revenues in the first quarter of 1997. See also above discussion of Rituxan and new Roche royalties related to Rituxan. Contract and other revenues decreased in the second quarter of 1998 from the comparable period in 1997 due to higher gains on the sale of biotechnology equity securities in the second quarter of 1997 partly offset by higher contract revenues from collaborators in 1998. On a year-to-date basis compared to last year, contract and other revenues were lower primarily as a result of fluctuations in contract revenues from HLR. Two projects, Rituxan and IGF-I, for which HLR exercised its development option in 1996, have wound down. Rituxan was commercialized in the fourth quarter of 1997 and IGF-I in Type I and II diabetes mellitus was discontinued in September 1997. Interest income increased in the second quarter of 1998 and on a year-to-date basis from the comparable periods in 1997 primarily due to a higher portfolio balance. The total investment portfolio, consisting of cash and cash Page 13 equivalents, and short- and long-term marketable securities, increased to $1,388.3 million as of June 30, 1998 from $1,156.9 million as of June 30, 1997 and from $1,286.5 million as of December 31, 1997.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ COSTS AND EXPENSES 1998 1997 % Change 1998 1997 % Change - ---------------------------- ------- ------- -------- ------- ------- -------- Cost of sales $ 37.2 $ 25.6 45% $ 70.8 $ 53.3 33% Research and development 92.9 110.9 (16) 191.1 233.6 (18) Marketing, general and administrative 80.6 63.0 28 155.5 125.0 24 Interest expense 1.2 0.9 33 2.2 1.9 16 ------- ------- -------- ------- ------- -------- Total costs and expenses $ 211.9 $ 200.4 6% $ 419.6 $ 413.8 1% ======= ======= ======== ======= ======= ========
Cost of sales increased in the second quarter of 1998 and on a year-to-date basis from the comparable periods in 1997 primarily as a result of a shift in the product mix, including the introduction of Rituxan and higher costs. Research and development expenses decreased in the second quarter of 1998 and on a year-to-date basis from the comparable periods in 1997 primarily due to fewer large late-stage clinical trials in 1998. On a year-to-date basis for 1998, the Company invested approximately 36% of revenues into R&D compared to 48% in the comparable period in 1997. This percentage decrease reflects the Company's goal to decrease R&D spending as a percent of revenues as products progress through late-stage clinical trials and revenues increase. Marketing, general and administrative (MG&A) expenses increased in the second quarter of 1998 and on a year-to-date basis from the comparable periods in 1997. These increases were due to higher marketing and sales (M&S) expenses related to the introduction of Rituxan and the resultant profit sharing with IDEC and as a result of competitive conditions with other marketed products.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ INCOME TAXES 1998 1997 % Change 1998 1997 % Change - --------------------------- ------- ------- -------- ------- ------- -------- Income Taxes $ 15.7 $ 9.3 69% $ 31.7 $ 21.6 47%
The Company's effective income tax rate for the second quarter of 1998 and on a year-to-date basis was 28% which was the same as the comparable periods in 1997. The effective tax rate in each period was less than the U.S. statutory rate of 35% primarily due to research and development tax credits.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ NET INCOME 1998 1997 % Change 1998 1997 % Change - -------------------------- -------- ------- -------- ------- ------- -------- Net income $ 40.4 $ 23.8 70% $ 81.4 $ 55.4 47% Earnings per share: Basic $ 0.32 $ 0.19 $ 0.65 $ 0.45 Diluted $ 0.31 $ 0.19 $ 0.63 $ 0.44
Page 14 The increase in net income in the second quarter of 1998 and on a year-to- date basis from the comparable periods in 1997 was driven primarily by sales of Rituxan and lower R&D; partially offset by a decrease in Activase sales, higher M&S expenses and higher cost of sales.
LIQUIDITY AND CAPITAL RESOURCES June 30, 1998 December 31, 1997 - --------------------------- ------------------- ------------------- Cash and cash equivalents, $ 1,388.3 $ 1,286.5 short-term investments and long-term marketable securities Working capital $ 1,004.9 904.4
Cash generated from operations, maturities of investments and stock issuances were used to make investments in marketable securities and capital additions. Cash and cash equivalents at June 30, 1998, were higher by $101.8 million compared to December 31, 1997, and working capital increased by $100.5 million in the first half of 1998. Capital expenditures totaled $43.3 million in the first half of 1998 compared to $76.5 million in the comparable period of 1997. The decrease in 1998 compared to 1997 was due to the completion of certain construction projects to improve existing manufacturing, laboratory and office facilities. 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 these and any other 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. Product Sales: The Company's product sales may vary from period to period for several reasons including, but not limited to: the overall competitive environment for the Company's products; the amount of sales to customers in the U.S.; the amount and timing of the Company's sales to HLR; the timing and volume of bulk shipments to licensees; the availability of third-party reimbursements for the cost of therapy; the effectiveness and safety of the products; the rate of adoption and use of the Company's products for approved indications and additional indications; and the potential introduction of new products, including Herceptin, registered trademark, (Trastuzumab), which the Company filed during the quarter under Fast Track review for regulatory approval, and additional indications for existing products in 1998 and beyond. Competition: The Company faces growing competition in two of its therapeutic markets. Activase lost market share and could lose additional market share in the thrombolytic market to Centocor's Retavase and the resulting adverse effect on sales could be material. Retavase received FDA approval in October 1996 for the treatment of acute myocardial infarction (AMI). In addition, there is an increasing use of angioplasty in lieu of thrombolytic therapy for the treatment of AMI, which is expected to continue. In the growth hormone Page 15 market, the Company continues to face increased competition from five other companies with growth hormone products. Three of these competitors have also received approval to market their existing human growth hormone products for additional indications. The Company expects that such competition could have an adverse effect on its sales of Protropin, Nutropin and Nutropin AQ and such effect could be material. Other competitive factors affecting the Company's product 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 degree of patent protection afforded to particular products, the outcome of litigation involving the Company's patents and patents of competing companies for products and processes related to production and formulation of those products, the increasing use and development of alternate therapies, and the rate of market penetration by competing products. Royalty and Contract Revenues: Royalty and contract revenues in future periods could vary significantly from 1997 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 reimbursements, if any; variations in HLR's sales and other licensees' sales of licensed products; the expiration of royalties from Lilly beginning in August 1998, which contribute substantially to current royalty revenues; fluctuations in foreign currency exchange rates; the initiation of other new contractual arrangements with other companies; the timing of non-U.S. approvals, if any, for products licensed to HLR; whether and when contract benchmarks are achieved; and the conclusion of existing arrangements with other companies and HLR. R&D: The Company intends to continue to develop new products and is committed to aggressive R&D investment. 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; they may fail to receive necessary regulatory approvals; they may turn out to be uneconomical because of manufacturing costs or other factors; or they may be precluded from commercialization by the proprietary rights of others or by competing products or technologies for the same indication. Success in preclinical and early clinical trials does not ensure that large scale clinical trials will be successful. Clinical results are frequently susceptible to varying interpretations that 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. The Company currently has several products in late-stage clinical testing and anticipates that its R&D expenses will continue at a high percentage of revenues over the short-term though they are expected to decline in 1998 from 1997 levels. Over the long-term, as revenues increase, R&D as a percent of revenues should decrease to the 20% to 25% range. 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, in-licensing activities, including the timing and amount of related development funding or milestone payments, and future levels of revenues. In December 1997, the Company and Alteon Inc. (Alteon) entered into a collaborative agreement to develop and market pimagedine, an advanced Page 16 glycosylation end-product formation inhibitor. Based on the recommendations of an External Safety Monitoring Committee, with which the FDA and the Company concurred, in the first quarter of 1998, Alteon discontinued a Phase III clinical trial of pimagedine in Type II diabetics with progressive kidney disease and is continuing a Phase III trial of pimagedine in Type I diabetics with progressive kidney disease. A third Phase III trial in diabetic patients with end-stage renal disease is ongoing. Income Tax Provision: The Company expects its effective tax rate to be approximately 28% in 1998 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. 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 has in the past been, is currently, and may in the future be involved in 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 at a material cost 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. Year 2000: Some of the Company's older computer software programs were written using two digit fields rather than four digit fields to define the applicable year (i.e., "98" in the computer code refers to the year "1998"). As a result, time-sensitive functions of those software programs may misinterpret dates after January 1, 2000, to refer to the twentieth century rather than the twenty-first century (i.e., "02" could be interpreted as "1902" rather than "2002"). This could cause system failures or miscalculations resulting in inaccuracies in computer output or disruptions of operations, including, among other things, inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products, or engage in similar normal business activities. The Company has developed a strategy to address the potential exposures related to the impact on its computer systems for the Year 2000 and beyond. An inventory of key financial, informational and operational systems has been completed. Detailed plans for implementation and testing of any necessary modifications to these key computer systems to ensure they are Year 2000 compliant have been or are in process of being developed to address computer system problems as required by December 31, 1999. The Company believes that with these detailed plans and completed modifications, the Year 2000 issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely fashion, the Year 2000 issue could have a material impact on the operations of the Company. In addition to risks associated with the Company's own computer systems, the Company has relationships with, and is to varying degrees dependent upon, a Page 17 large number of third parties that provide information, goods and services to the Company. These include financial institutions, suppliers, vendors, research partners and governmental entities. If large numbers of these third parties experience failures in their computer systems due to Year 2000 non- compliance, it could affect the Company's ability to process transactions, manufacture products, or engage in similar normal business activities. While some of these risks are outside the control of the Company, the Company has instituted a program to identify key third parties, update contracts and address any non-compliance issues. The total cost of the Year 2000 systems assessments and conversions is funded through operating cash flows and the Company is expensing these costs. The financial impact of making the required systems changes cannot be known precisely at this time, but is not expected to be material to the Company's financial position, results of operations or cash flows. 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 and debt 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, in-licensing activities, including the timing and amount of related development funding or milestone payments, and capital expenditures. Roche Holdings, Inc.: At June 30, 1998, Roche held approximately 66.0% of the Company's outstanding common equity. The Company expects to continue to have material transactions with Roche, including royalty and contract revenues, product sales and joint product development costs. Market Risk: The Company is exposed to market risk, including changes to interest rates, foreign currency exchange rates and equity investment prices. To reduce the volatility related to these exposures, the Company enters into various derivative transactions pursuant to the Company's investment and risk management policies and procedures in areas such as hedging and counterparty exposure practices. The Company does not use derivatives for speculative purposes. The Company maintains risk management control systems to monitor the risks associated with interest rates, foreign currency exchange rates and equity investment price changes, and its derivative and financial instrument positions. The risk management control systems use analytical techniques, including sensitivity analysis, and market values. Though the Company intends for its risk management control systems to be comprehensive, there are inherent risks which may only be partially offset by the Company's hedging programs should there be unfavorable movements in interest rates, foreign currency exchange rates or equity investment prices. 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, convertible equity loans, preferred stock investments and long-term investments. To mitigate the impact of fluctuations in U.S. interest rates, the Company may enter into swap transactions, which involve the receipt of fixed rate interest and the payment of floating rate interest without the exchange of the underlying principal. By investing the Company's cash in an amount equal to the notional amount of the swap contract, with a Page 18 maturity date equal to the maturity date of the floating rate obligation, the Company hedges itself from any potential earnings impact due to changes in interest rates. Foreign Currency Exchange Rates - The Company receives royalty revenues from licensees selling products in 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 licensed products are sold. The Company is exposed to changes in exchange rates in Europe, Asia and Canada. The Company's exposure to foreign exchange rates primarily exists with the German Mark. 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. In addition, as part of its overall investment strategy, the Company has three portfolios that are managed by external money managers. These portfolios consist primarily of non-dollar denominated investments. As a result, the Company is exposed to changes in the exchanges rates of the countries in which these non-dollar denominated investments are made. To mitigate this risk, the Company hedges certain of its anticipated revenues by purchasing option contracts with expiration dates and amounts of currency that are based on 25% to 90% of probable future revenues so that the potential 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 duration of these options is generally one to four years. The Company may also enter into foreign currency forward contracts (forward contracts) to lock in the dollar value of a portion of these anticipated revenues. The duration of these forward contracts is generally less than one year. Also, to hedge the non-dollar denominated investments in the externally managed portfolios, the external money managers also enter into forward contracts. Equity Investment Securities - As part of its strategic alliance efforts, the Company invests in equity securities of biotechnology companies 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). In addition, as part of its strategic alliance efforts, the Company has made interest bearing loans that are convertible into the equity securities of the debtor. 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 Legal Proceedings note in the Notes to Condensed Consolidated Financial Statements for further information. Page 19 GENENTECH, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Previously reported. See Item 3 of the Company's report on Form 10-K for the period ended December 31, 1997. See also Item 1 of the Company's report on Form 10-Q for the period ended March 31, 1998. See also the Legal Proceedings and Subsequent Events notes in the Notes to Condensed Consolidated Financial Statements of Part I. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders, held on April 30, 1998, two matters were voted upon. A description of each matter and tabulation of votes follows: 1. Election of five directors: Votes ---------------------------- Nominee For Withheld ----------------------- ------------ ----------- Franz B. Humer 111,743,535 4,453,091 Jonathan K.C. Knowles 115,522,912 673,714 Arthur D. Levinson 115,693,449 503,177 Donald L. Murfin 115,757,658 438,968 John T. Potts, Jr. 115,744,089 452,537 There were no abstentions or broker nonvotes. The terms of directors Boyer, Fayne Levinson, Munro, Smith and Tappan continued after the Annual Meeting of Stockholders. 2. Ratification of Ernst & Young, LLP as the Company's Independent Accountants for the year ending December 31, 1998: Votes ---------------------------------------- For Against Abstain ----------- ----------- ----------- 116,039,036 57,247 100,343 There were no broker nonvotes. Page 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 15.1 Letter re: Unaudited Interim Financial Information 27.1 Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk disclosures set forth in the 1997 Annual Report to Stockholders have not changed significantly. Page 21 GENENTECH, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 11, 1998 GENENTECH, INC. /S/ARTHUR D. LEVINSON /S/LOUIS J. LAVIGNE, JR. ------------------------------------- ---------------------------- Arthur D. Levinson, Ph.D. Louis J. Lavigne, Jr. President and Chief Executive Officer Executive Vice President and Chief Financial Officer /S/JOHN M. WHITING ---------------------------- John M. Whiting Controller and Chief Accounting Officer Page 22 EX-15 2 Exhibit 15.1 August 11, 1998 The Board of Directors and Stockholders Genentech, Inc. We are aware of the incorporation by reference in the Registration Statements pertaining to the 1991 Employee Stock Plan, the 1996 Stock Option/Stock Incentive Plan, the 1994 Stock Option Plan, the 1990 Stock Option/Stock Incentive Plan, the 1984 Incentive Stock Option Plan and the 1984 Non-Qualified Stock Option Plan, the shares issuable to certain convertible subordinated debenture holders, the Genentech, Inc. Tax Reduction Investment Plan and in the related prospectuses, as applicable, contained in such Registration Statements of our report dated July 10, 1998 relating to the unaudited condensed consolidated interim financial statements of Genentech, Inc. which are included in its Form 10-Q for the quarter and six-months ended June 30, 1998. Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933. Very truly yours, ERNST & YOUNG LLP EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 6-MOS DEC-31-1998 JUN-30-1998 189,952 1,198,324 180,086 0 116,840 1,272,117 1,102,726 409,351 2,606,695 267,241 150,000 0 0 2,517 2,156,502 2,606,695 340,982 532,712 70,771 70,771 191,151 0 2,154 113,043 31,652 81,391 0 0 0 81,391 0.65 0.63 ACCOUNTS RECEIVABLE ARE PRESENTED NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS IN THE CONDENSED CONSOLIDATED BALANCE SHEET. THE PROVISION FOR LOSSES ON DOUBTFUL ACCOUNTS IS NOT REPORTED AS A SEPARATE LINE IN THE CONDENSED CONSOLIDATED STATEMENT OF INCOME OR STATEMENT OF CASH FLOWS. REPRESENTS BASIC EARNINGS PER SHARE.
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