-----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, FbbwHSxQbvdWdYOzKTg6ixph95goP/mHEtGynstP5czoTgNlzE4ceAmRgaUGXCV4 j3VJK1B6+HX2yiUBQY+p/Q== 0001095811-01-500401.txt : 20010312 0001095811-01-500401.hdr.sgml : 20010312 ACCESSION NUMBER: 0001095811-01-500401 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010510 FILED AS OF DATE: 20010309 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: PRE 14A SEC ACT: SEC FILE NUMBER: 001-09813 FILM NUMBER: 1565398 BUSINESS ADDRESS: STREET 1: 1 DNA WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 650-225-1000 MAIL ADDRESS: STREET 1: 1 DNA WAY STREET 2: . CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 PRE 14A 1 f70173prpre14a.txt PRELIMINARY PROXY MATERIAL 1 SCHEDULE 14A (RULE 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Genentech, Inc. - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) not applicable - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: (2) Aggregate number of securities to which transaction applies: (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): (4) Proposed maximum aggregate value of transaction: (5) Total fee paid: [ ] Fee paid previously with preliminary materials: [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: 2 [GENENTEC LOGO] NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 10, 2001
To the Stockholders of Genentech, Inc.: Notice is hereby given that the 2001 Annual Meeting (the "Annual Meeting") of the stockholders of Genentech, Inc. (the "Company") will be held at the Westin Hotel, 1 Old Bayshore Highway, Millbrae, California, on Thursday, May 10, 2001, at 10:00 a.m., local time, for the following purposes: 1. To elect all of the members of the Company's Board of Directors to serve until the Company's next annual meeting and until such directors' successors are elected and qualified. 2. To consider and vote upon an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the authorized shares of common stock from 600,000,000 to 1,200,000,000. 3. To ratify the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 2001. 4. To transact such other business as may properly come before the Annual Meeting or at any adjournments thereof. A proxy statement describing the matters to be considered at the Annual Meeting is attached to this notice. Only holders of common stock of record at the close of business on March 13, 2001 are entitled to notice of, and to vote at, the Annual Meeting and at any adjournments thereof. By Order of the Board of Directors STEPHEN G. JUELSGAARD, Secretary South San Francisco, California March 27, 2001 PLEASE COMPLETE, SIGN AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. THIS WILL INSURE THAT YOUR SHARES ARE VOTED IN ACCORDANCE WITH YOUR WISHES. 3 GENENTECH, INC. PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 10, 2001 INFORMATION CONCERNING SOLICITATION AND VOTING GENERAL The Board of Directors of Genentech, Inc. ("Genentech," "we," "us" or the "Company") hereby solicits your proxy for use at the Annual Meeting of Stockholders to be held on Thursday, May 10, 2001 (the "Annual Meeting"), or at any adjournment or postponement of the Annual Meeting, for the purposes set forth in the foregoing Notice of Annual Meeting of Stockholders. Copies of solicitation material will be furnished to brokerage houses, fiduciaries and custodians to forward to beneficial owners of common stock of Genentech, par value $0.02 per share, held in their names. The cost of solicitation of proxies, including expenses in connection with preparing and mailing this Proxy Statement, will be borne by Genentech. In addition, we will reimburse brokerage firms and other persons representing beneficial owners of common stock for their expenses in forwarding solicitation material to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram, internet and personal solicitation by directors, officers or other regular employees of Genentech. No additional compensation will be paid to directors, officers or other regular employees for such services. This Proxy Statement and accompanying Proxy Card will be mailed on or about March 27, 2001 to all stockholders entitled to vote at the Annual Meeting. In this Proxy Statement, "common stock" refers to Genentech's common stock, par value $.02 per share, and "special common stock" refers to Genentech's callable putable common stock, par value $.02 per share. In addition, all share and per share data and other information in this prospectus relating to our common stock and our special common stock gives effect to our two-for-one split of our common stock on October 24, 2000. VOTING RIGHTS AND OUTSTANDING SHARES Stockholders of record at the close of business on March 13, 2001 (the "Record Date") will be entitled to notice of and to vote at the Annual Meeting. On the Record Date, Genentech had outstanding shares of common stock, par value $0.02 per share. A quorum for the Annual Meeting consists of a majority of the total number of shares of common stock outstanding on the Record Date. Each holder of record of shares of common stock on the Record Date is entitled to one vote per share on each matter to be considered at the Annual Meeting. The directors are elected by a plurality of the votes of common stock present in person or by proxy and entitled to vote at the Annual Meeting. The affirmative vote of a majority of the shares of common stock issued and outstanding is required for approval of the amendment of the Company's Amended and Restated Certificate of Incorporation. An affirmative vote of a majority of the shares present in person or represented by proxy and entitled to vote is required for approval of all other matters being submitted to the stockholders for their consideration. All votes will be tabulated by the inspector of elections appointed for the Annual Meeting, who will separately tabulate affirmative and negative votes, abstentions and broker nonvotes. Abstentions and broker nonvotes are each included in the number of shares present for purposes of determining the presence of a quorum. However, abstentions will be counted toward the tabulations of votes cast on proposals presented to the stockholders and will have the same effect as negative votes. For the amendment of the Company's Amended and Restated Certificate of Incorporation, a broker nonvote will have the same effect as a negative vote but on all other matters broker nonvotes will not be counted for purposes of determining whether a proposal has been approved or not. Any stockholder giving a proxy has the power to revoke it any time before it is exercised, whether the proxy was given by telephone, via the internet or by returning the Proxy Card. The proxy may be revoked by filing with the Secretary of Genentech, at the principal executive office of Genentech, 1 DNA Way, South San Francisco, California 94080, a notice of revocation or a duly executed Proxy Card bearing a later date, or by making an authorized internet or telephone communication on a later date in accordance with the instructions on the enclosed Proxy Card. It may also be revoked by attendance at the Annual Meeting and voting in person. 1 4 RELATIONSHIP WITH ROCHE HISTORY OF OWNERSHIP On September 7, 1990, a wholly owned subsidiary of Roche Holdings, Inc. ("Roche") was merged with and into Genentech. Pursuant to the 1990 merger agreement, Genentech and Roche entered into a governance agreement that contained terms relating to our corporate governance after the 1990 merger. Pursuant to the 1990 governance agreement, our board of directors elected two nominees of Roche to serve on the Genentech board. On October 25, 1995, a second wholly owned subsidiary of Roche was merged with and into Genentech, and Genentech and Roche amended the 1990 governance agreement. In the 1995 merger, for our stockholders other than Roche, each share of common stock was converted into one share of our special common stock. Roche maintained the same percentage ownership of our equity as prior to the 1995 merger and continued to have the right to nominate only two directors to our board of directors under the amended governance agreement. The purpose of the conversion of the common stock into special common stock was (i) to establish a four-year period during which our publicly traded stock could be redeemed by us at Roche's option at specified prices per share ranging from $15.63 during the quarter ending December 31, 1995 to $20.63 during the quarter ending June 30, 1999 and (ii) to afford the holders of special common stock the right to require the purchase of all or a portion at the option of the holder of their shares of such stock at a price of $15.00 per share exercisable during the 30-business day period following June 30, 1999. REDEMPTION OF THE SPECIAL COMMON STOCK On June 30, 1999, we redeemed all of our special common stock held by stockholders other than Roche at $20.63 per share in cash and retired all of the shares of special common stock including those held by Roche. As a result, Roche's percentage ownership of our outstanding equity increased from approximately 65% to 100% and our then existing governance agreement terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. OFFERINGS OF, AND NOTES EXCHANGEABLE FOR, OUR COMMON STOCK On July 23, 1999, Roche completed a public offering of 88 million shares of our common stock. In connection with that offering, we amended our Certificate of Incorporation and bylaws and entered into an affiliation agreement with Roche, described below. On October 26, 1999, Roche completed a public offering of 80 million shares of our common stock. Upon completion of that offering, Roche's percentage ownership of our outstanding common stock was reduced to 66.4%. On January 19, 2000, Roche completed an offering of zero-coupon notes which are exchangeable for an aggregate of 13,034,618 shares of our common stock held by Roche. On March 29, 2000, Roche completed a public offering of 34.6 million shares of our common stock, reducing its ownership to 58.9% of our outstanding common stock. ARRANGEMENTS BETWEEN GENENTECH AND ROCHE As a result of the redemption of the special common stock, the then existing governance agreement between Genentech and Roche terminated, except for provisions relating to indemnification and stock options, warrants and convertible securities. Subsequently, we entered into an affiliation agreement with Roche that enabled our current management to conduct our business and operations as we had done in the past while at the same time reflecting Roche's ownership in us. The affiliation agreement is for the exclusive benefit of Roche and can be amended at any time by Roche and us. We have amended our bylaws in order to maintain certain proportional representation rights of Roche under the bylaws with respect to membership on our board of directors and board committees to the extent that we do not make repurchases of our common stock as required by the affiliation agreement. We expect that we and Roche will make similar amendments to the affiliation agreement and licensing agreement. Our Amended and Restated Certificate of Incorporation provides that the provisions in our bylaws described below under "-- Composition of Board of Directors," "-- Roche's Right to Proportional Representation," "-- Membership of Committees" and "-- Nomination of Directors" may be repealed or amended 2 5 only by a 60% vote of our stockholders, except for Roche's right to nominate a number of directors proportional to Roche's ownership interest rounded down to the next whole number until Roche's ownership interest is less than 5%, which may be repealed or amended only by a 90% vote of our stockholders. The provisions of the affiliation agreement described below under "-- Roche Approval Required for Certain Actions" and "-- Licensing and Marketing Arrangements" terminate upon Roche owning less than 40% of our stock. For purposes of the following provisions, an independent director is a director who is not: - one of our officers; or - an employee, director, principal stockholder or partner of Roche or any affiliate of Roche or an entity that was dependent upon Roche for more than 10% of its revenues or earnings in its most recent fiscal year. Composition of Board of Directors Our board consists of six members all of whom are nominated by the Nominations Committee of the board: two nominees of Roche, one executive officer of Genentech and up to three independent directors. Directors are elected to serve one year terms or until their successors are elected and qualified. At all times our board will include at least two independent directors and one executive officer of Genentech. Roche's Right to Proportional Representation We have agreed that upon Roche's request Roche will be entitled to representation on our board proportional to its ownership interest in our common stock. Roche will be entitled to have the number of Roche designated directors equal to the percentage of our common stock owned by Roche times the total number of directors, rounded up to the next whole number if Roche's ownership interest is greater than 50% and rounded down if Roche's ownership percentage is less than or equal to 50%. Upon Roche's request, we will immediately take action to cause the size of our board to be increased and to cause our board to fill the vacancies by electing Roche nominees in order to achieve Roche's proportional representation. If Roche's ownership interest of common stock drops below 40%, Roche will cause its directors to resign to the extent its representation is in excess of its proportional ownership interest. The number of directors who are required to resign upon such event shall be rounded up to the next whole number. Roche shall thereafter be entitled to nominate a number of directors which is proportional to Roche's ownership interest rounded down to the next whole number, until Roche's ownership interest is less than 5%. Membership of Committees We have five standing committees of the board: an Audit Committee, a Compensation Committee, a Corporate Governance Committee, an Executive Committee and a Nominations Committee and Roche is entitled upon request to its proportional representation on each committee. Roche's committee members may designate another Roche director to serve as their alternates on any committee. The Nominations Committee shall at all times have three members. At anytime that Roche owns 80% or more of the total voting power of our stock, the nominations committee shall include two nominees of Roche and one of the independent directors. At any time that Roche owns less than 80% of the total voting power of our stock, the nominations committee shall include a number of nominees of Roche that is equal to the percentage owned by Roche of the total voting power of our common stock times three, rounded up to the next whole number if Roche's total voting power is greater than 50% and rounded down to the next whole number if Roche's total voting power is less than or equal to 50%, provided that Roche shall at no time have more than two nominees and, provided further that if the reason for Roche owning less than 80% of the total voting power is as a result of a breach of our obligations relating to tax matters below, the Nominations Committee shall include two nominees of Roche as determined above. 3 6 Nomination of Directors The nomination of any person for director requires the approval of a majority of the members of the Nominations Committee. Roche Approval Required for Certain Actions Without the prior approval of the directors designated by Roche, we have agreed not to approve: - any acquisition that would constitute a substantial portion of our business or assets; - any sale, lease, license, transfer or other disposal of all or a substantial portion of our business or assets other than in the ordinary course of our business; - any issuance of capital stock except (1) issuances of capital stock pursuant to employee incentive plans not exceeding 5% of our voting stock, (2) issuances of capital stock upon the exercise, conversion or exchange of any of our outstanding capital stock, and (3) other issuances of capital stock not exceeding 5% of our voting stock in any 24 month period; and - any repurchase or redemption of our capital stock other than redemption required by the terms of any security and purchases made at fair market value in connection with any of our deferred compensation plans. For purposes of the first and second bullet points in this paragraph, unless a majority of the board of directors have made a contrary determination in good faith, a "substantial portion of our business or assets" shall mean a portion of our business or assets accounting for 10% or more of our and our consolidated subsidiaries' consolidated total assets, contribution to net income or revenues. Following a request by Roche for proportional representation on the board, until the Roche designees take office as directors we may not take any action other than in the ordinary course of business without the consent of Roche. Licensing and Marketing Arrangements In 1995, we entered into a licensing and marketing agreement with F. Hoffmann-La Roche Ltd ("Hoffmann-La Roche") and its affiliates granting it a ten-year option to license to use and sell products in non-U.S. markets. In July 1999, we amended that agreement, the major provisions of which include: - extending Hoffmann-La Roche's option until at least 2015; - Hoffmann-La Roche may exercise its option to license our products upon the occurrence of any of the following: (1) our decision to file an Investigational New Drug exemption application, or IND, for a product, (2) completion of a Phase II trial for a product or (3) if Hoffmann-La Roche previously paid us a fee of $10 million to extend its option on a product, completion of a Phase III trial for that product; - we agreed, in general, to manufacture for and supply to Hoffmann-La Roche its clinical requirements of our products at cost, and its commercial requirements at cost plus a margin of 20%; however, Hoffmann-La Roche will have the right to manufacture our products under certain circumstances; - Hoffmann-La Roche has agreed to pay, for each product for which Hoffmann-La Roche exercises its option upon either a decision to file an IND with the FDA or completion of the Phase II trials, a royalty of 12.5% on the first $100 million on its aggregate sales of that product and thereafter a royalty of 15% on its aggregate sales of that product in excess of $100 million until the later in each country of the expiration of our last relevant patent or 25 years from the first commercial introduction of that product; and - Hoffmann-La Roche will pay, for each product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, a royalty of 15% on its sales of that product until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction 4 7 of that product; however, $5 million of any option extension fee paid by Hoffmann-La Roche will be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of the product exceed $100 million. Registration Rights We have agreed that, upon Roche's request, we will file one or more registration statements under the Securities Act of 1933 in order to permit Roche to offer and sell shares of our common stock. We have agreed to use our best efforts to facilitate the registration and offering of those shares designated for sale by Roche. We have the right to postpone the filing or effectiveness of a registration statement for a period of up to 60 days in any 12-month period if: - in the reasonable good faith judgment of our board, fulfillment of our obligations would require us to make disclosures that would be detrimental to Genentech and premature; or - we have filed a registration statement with respect to securities to be distributed in an underwritten public offering and we have been advised by the lead or managing underwriter that an offering by Roche would materially and adversely affect the distribution of our securities. Generally, all expenses incident to the performance by us of our obligations with respect to the registration of Roche's shares of our common stock will be paid by us except that Roche has agreed to pay certain expenses to be directly incurred by Roche, including underwriting fees, discounts and commissions and counsel fees. In addition, we are only required to pay for two registrations within a 12-month period. We and Roche each have agreed to customary indemnification and contribution provisions with respect to liability incurred in connection with these registrations. Dispositions by Roche If Roche and its affiliates sell their majority ownership of shares of our common stock to a successor, Roche has agreed that it will cause the successor to purchase all shares of our common stock not held by Roche: - if the consideration is composed entirely of either cash or equity traded on a U.S. national securities exchange, with consideration in the same form and amounts per share as received by Roche and its affiliates; and - in any other case, with consideration either in the same form and amounts per share as received by Roche and its affiliates or with consideration that has a value per share not less than the weighted average value per share received by Roche and its affiliates as determined by an investment bank of nationally recognized standing appointed by a committee of independent directors. Roche has agreed to cause the buyer to agree to be bound by the obligations described in the preceding paragraph as well as the obligations described under "-- Business Combinations with Roche" and "-- Compulsory Acquisitions" below. We have agreed that the buyer shall be entitled to succeed to Roche's rights described under "-- Roche's Right to Proportional Representation." Business Combinations with Roche Roche has agreed that as a condition to any merger of Genentech with Roche or its affiliates or the sale of substantially all of our assets to Roche or its affiliates, that either: - the merger or sale must be authorized by the favorable vote at any meeting of a majority of the shares of common stock not owned by Roche, provided that no person or group shall be entitled to cast more than 5% of the votes cast at the meeting; or - in the event such a favorable vote is not obtained, the value of the consideration to be received by the holders of our common stock, other than Roche, shall be equal to or greater than the average of the 5 8 means of the ranges of fair values for the common stock as determined by two investment banks of nationally recognized standing appointed by a committee of independent directors. Roche has agreed that it will not sell any shares of our common stock in the 90 days immediately preceding any proposal by Roche for a merger with us. Roche also agreed that in the event of any merger of Genentech with Roche or its affiliates or sale of substantially all of our assets to Roche or its affiliates, each unvested option then outstanding under our stock option plan will: - be accelerated so that each option shall become exercisable immediately prior to the consummation of the transaction for the full number of shares of common stock covered by the option; - become exchangeable upon the consummation of the transaction for deferred cash compensation, which vests on the same schedule as the shares of the common stock covered by the option, having a value equal to the product of (A) the number of shares covered by the option and (B) the amount which Roche, in its reasonable judgment, considers to be equivalent in value to the consideration per share received by holders of shares of common stock other than Roche in the transaction, minus the exercise price per share under the option; or - be canceled in exchange for a replacement option to purchase stock of the surviving corporation in the transaction with the terms of the option to provide value equivalent, as determined by Roche in its reasonable discretion, to that of the canceled option. Compulsory Acquisitions If Roche owns more than 90% of our common stock for more than two months, Roche has agreed to, as soon as reasonably practicable, effect a merger of Genentech with Roche or an affiliate of Roche. The merger shall be conditioned on the vote or the valuation described under the first two bullets of "-- Business Combinations with Roche" above. ROCHE'S RIGHT TO MAINTAIN ITS PERCENTAGE OWNERSHIP INTEREST IN OUR STOCK The affiliation agreement requires us to, among other things, establish a stock repurchase program designed to maintain Roche's percentage ownership interest in our common stock. We are required to repurchase a sufficient number of shares pursuant to this program to ensure that, with respect to any issuance of common stock by us in the future, the percentage of our common stock owned by Roche immediately after such issuance will be no lower than Roche's lowest percentage ownership of our common stock at any time after the offering of common stock occurring in July 1999 but prior to the time of such issuance, except that we may issue shares up to an amount that would cause Roche's lowest percentage ownership to be no more than 2% below the "Minimum Percentage." The Minimum Percentage equals a fraction (expressed as a percentage) where the numerator is the lowest number of shares of our common stock owned by Roche since the July 1999 offering (to be adjusted in the future for dispositions of shares of our common stock by Roche), and the denominator is 509,194,352 which is the number of shares of our common stock outstanding at the time of the July 1999 offering adjusted for the two-for-one splits of our common stock in November 1999 and October 2000. Each of the numerator and denominator are to be adjusted in the future for stock splits or stock combinations. As long as Roche's percentage ownership is greater than 50%, prior to issuing any shares, we must repurchase a sufficient number of shares of our common stock to ensure that, immediately after its issuance of shares, Roche's percentage ownership will be greater than 50%. We have also agreed, upon Roche's request, to repurchase shares of our common stock to increase Roche's ownership to the Minimum Percentage. Roche currently owns approximately 58.4% of our common stock. In addition, we are required to provide information to Roche each month, or more frequently if requested, regarding the status of the repurchase program and previous and expected future issuances of common stock by us, and we also will be obligated to notify Roche the day after the number of shares of common stock issued in a month equals or exceeds 500,000. Our obligations with respect to this stock repurchase program will terminate upon Roche owning less than 40% of our stock. 6 9 Furthermore, Roche has (i) a continuing option (which is assignable by Roche to any of its affiliates) to buy from us, prior to the occurrence of any event that could result in a decrease in the percentage of common stock owned by Roche and its affiliates, a sufficient amount of common stock to ensure that Roche and its affiliates maintain the percentage ownership of our common stock owned by them, and (ii) a continuing option (which is assignable by Roche to any of its affiliates) to buy from us 80% of any class of stock issued by us other than common stock, in each case with a price per share equal to either the average of the last sale price on each of the five immediately preceding trading days on a U.S. national securities exchange on which the shares are traded or, if the sale prices are unavailable, the value of the shares determined in accordance with procedures reasonably satisfactory to Roche and us. These provisions of the affiliation agreement may have the effect of limiting our ability to use our capital stock as consideration for acquisitions. TAX SHARING AGREEMENT From the redemption of our special common stock in June 1999 until Roche completed its public offering of our common stock in October 1999, we were included in Roche's U.S. consolidated federal income tax group and included with Roche and/or one or more Roche subsidiaries in consolidated or combined income tax groups for certain state and local tax jurisdictions. Accordingly, we entered into a tax sharing agreement with Roche. Pursuant to the tax sharing agreement, we and Roche are to make payments such that the net amount paid by us on account of consolidated or combined income taxes is determined as if we had filed separate, stand-alone federal, state and local income tax returns as the common parent of an affiliated group of corporations filing consolidated or combined federal, state and local returns. Effective upon the consummation of the public offering in October 1999, we ceased to be a member of the consolidated federal income tax group (and certain consolidated or combined state or local income tax groups) of which Roche is the common parent. Accordingly, our tax sharing agreement with Roche now pertains only to the state and local tax returns in which we will be consolidated or combined with Roche. We will continue to calculate our tax liability or refund with Roche for these state and local jurisdictions as if we were a stand-alone entity. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth as of December 31, 2000, certain information regarding all stockholders known by Genentech to be the beneficial owners of more than five percent of any class of Genentech's voting securities, according to Securities and Exchange Commission filings pursuant to Section 13(d) and Section 13(g) of the Securities Exchange Act of 1934, as amended:
NUMBER OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS PERCENT OF CLASS ------------------------------------ ----------- ------------ ---------------- Roche Holdings, Inc. .......................... 306,594,352 Common Stock 58.4% One Commerce Center, Suite 1050 Wilmington, DE 19801
PROPOSAL 1 -- ELECTION OF DIRECTORS NOMINEES The Company's board consists of two Roche directors, Franz B. Humer and Jonathan K.C. Knowles, three independent directors, Herbert W. Boyer, Charles A. Sanders and Sir Mark Richmond, and one Genentech employee, Arthur D. Levinson, who is also the chairman of the board. Each of these individuals is being nominated for election at the Annual Meeting for a one year term expiring on the date of the Annual Meeting in 2002 or until each such director's successor shall have been duly elected or appointed. It is intended that the shares represented by proxies will be voted for the election of all the nominees, unless the proxy withholds authority to vote for any of them. 7 10 THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE In the event any of such nominees becomes unable or unwilling to serve, the shares represented by the proxies will be voted for the election of the balance of those named and such other person as the Board of Directors may select. The Board of Directors has no reason to believe that any such nominee will be unable to serve. The following table sets forth the name and age (as of the date of the Annual Meeting) of each of the directors, their principal occupations at present, the positions and offices held by each with Genentech in addition to the position as a director, and the period during which each has served as a director of Genentech.
SERVED AS DIRECTOR NAME AGE PRINCIPAL OCCUPATION/POSITION HELD SINCE ---- --- ---------------------------------- --------- Herbert W. Boyer, Ph.D. ............. 64 Director of Genentech 1976 Franz B. Humer....................... 54 Chief Executive Officer, The Roche Group 1995 Jonathan K.C. Knowles, Ph.D. ........ 53 Head of Global Pharmaceutical Research, The Roche Group 1998 Arthur D. Levinson, Ph.D. ........... 51 Chairman, President and Chief Executive Officer of Genentech 1995 Sir Mark Richmond, Ph.D. ............ 70 Sr. Research Fellow, School of Public Policy at University College, London 1999 Charles A. Sanders, M.D. ............ 69 Director of Genentech 1999
Dr. Boyer, a founder of Genentech, had been a director of Genentech since 1976 when he resigned from the Board in June 1999 in connection with the redemption of our callable putable common stock. He was reelected to the Board in September 1999. Dr. Boyer is a consultant to Genentech. He served as a Vice President of Genentech from 1976 to 1991. Dr. Boyer, a Professor of Biochemistry at the University of California at San Francisco from 1976 to 1991, demonstrated the usefulness of recombinant DNA technology to produce medicines economically, which laid the groundwork for Genentech's development. In 1993, Dr. Boyer received the 1993 Helmut Horten Research Award. He also received the National Medal of Science from President Bush in 1990, the National Medal of Technology in 1989 and the Albert Lasker Basic Medical Research Award in 1980. He is an elected member of the National Academy of Sciences and a Fellow in the American Academy of Arts and Sciences. In addition, Dr. Boyer serves as Chairman of the Board of Directors of Allergan, Inc. Dr. Humer was elected a director of Genentech in the spring of 1995. He joined The Roche Group in 1995 as the Head of its Pharmaceuticals Division, and became Chief Executive Officer of The Roche Group in 1998. He will become Chairman of the Board of Directors of The Roche Group in April 2001. Prior to joining The Roche Group, Dr. Humer was an Executive Director and Chief Operating Officer of Glaxo Holdings, a United Kingdom public limited company. Dr. Humer also serves as a director of Cadbury Schweppes p.l.c. Pursuant to the affiliation agreement, Dr. Humer is a designee of Roche. Dr. Knowles was elected a director of Genentech in February 1998. He joined The Roche Group as Head of Global Pharmaceutical Research in September 1997. In January 1998, he became a member of the Executive Committee of The Roche Group. Prior to joining The Roche Group, Dr. Knowles served as the Director of Research for Europe of Glaxo from 1995 and served as the Director of the Geneva Institute of Glaxo from 1989 to 1995. Pursuant to the affiliation agreement, Dr. Knowles is a designee of Roche. Dr. Levinson was appointed Chairman of the Board of Directors on September 1999 and was elected President and Chief Executive Officer and a director of the Company in July 1995. Since joining the Company in 1980, Dr. Levinson has been a Senior Scientist, Staff Scientist and the Director of the Company's Cell Genetics Department. Dr. Levinson was appointed Vice President of Research Technology in April 1989, Vice President of Research in May 1990 and Senior Vice President in January 1993. Dr. Levinson was formerly on the editorial boards of "Molecular Biology and Medicine" and "Molecular and Cellular Biology," and is active in the American Society of Microbiology, the New York Academy of Sciences, the American Association for the Advancement of Science, and the American Society for Biochemistry and Molecular Biology. From 1977 8 11 to 1980, Dr. Levinson was a Postdoctoral Fellow in the Department of Microbiology at the University of California, San Francisco. In 1977, Dr. Levinson received his Ph.D. in Biochemistry from Princeton University. Dr. Levinson also serves as a member of the Board of Directors of Apple Computer, Inc. Dr. Richmond was elected a director of Genentech in August 1999. He has been a senior research fellow at the School of Public Policy, University College London since February 1996. Previously, he held positions as science advisor at Glaxo Wellcome plc from 1995 to February 1996, as Group Head of Research at Glaxo plc from 1993 to 1995, as chairman of the Science and Engineering Council, London, from 1990 to 1993, as vice chancellor at the University of Manchester from 1981 to 1990, and professor and head of the Department at Bacteriology at the University of Bristol from 1968 to 1981. Dr. Richmond is currently a member of the Scientific Advisory Committee of the Institute for Biotechnology, ETH, Zurich, a member of the Scientific Advisory Board of the SPP-Biotechnology, Swiss National Foundation and a member of the Boards of Directors of Targeted Genetics Corporation and OSI Pharmaceuticals, Inc. Dr. Sanders was elected a director of Genentech in August 1999. He served as Chief Executive Officer of Glaxo Inc. from 1989 to 1994, and was the Chairman of the Board of Glaxo Inc. from 1992 to 1995. He also has served on the Board of Directors of Glaxo plc. Previously, he held a number of positions at Squibb Corporation, a multinational pharmaceutical corporation, including Vice Chairman, Chief Executive Officer of the Science and Technology Group and Chairman of the Science and Technology Committee on the Board. Dr. Sanders is a member of the Boards of Directors of Scios Inc., Magainin Pharmaceuticals, Vertex Pharmaceuticals, Edgewater, Inc., Kendle International Inc., Trimeris, Inc., Biopure Corporation and Pharmacopeia, Inc. COMMITTEES AND MEETINGS During 2000, the Board of Directors held five meetings, the Audit Committee held eight meetings, the Compensation Committee held four meetings, the Corporate Governance Committee held three meetings, the Executive Committee did not meet and the Nominations Committee held one meeting. All of the directors attended at least 75% of the aggregate meetings of the Board and the committees of which he is a member. The Audit Committee currently consists of Drs. Boyer, Richmond and Sanders, none of whom is an employee of Genentech. The Audit Committee recommends the independent auditors to the Board and provides a direct line of communication between the auditors and the Board. The Audit Committee, with and without Company management present, meets with the Company's independent auditors to review and discuss various matters, including Genentech's financial statements, the quarterly reporting process and management's control thereof, the inventory and receivable reserve policies, the tax compliance program and strategy, the scope of external and general audit activities, the independent auditor's fees and performance, the Company's investment policy and risk management programs, the report of the independent auditors and accompanying management letter on the scope and results of their work and their recommendations concerning Genentech's financial practices and procedures. The Compensation Committee currently consists of Drs. Boyer, Humer, Knowles, Richmond and Sanders, none of whom is an employee of Genentech. The Compensation Committee administers Genentech's stock option plans, the stock purchase plan and other corporate benefits programs. The Compensation Committee also reviews and approves the annual bonus plan, bonus plan payouts, annual stock option grants, the corporate benefits strategy, incentive plan status, compensation philosophy and current competitive status, and executive officer compensation. In addition, the Compensation Committee recommends executive officers of the Company for election as executive officers by the Board of Directors. The Corporate Governance Committee currently consists of Drs. Knowles and Richmond. The Corporate Governance Committee reviews the Company's sales and marketing policies and compliance, investor relations, corporate communications, government relations, human resources, legal and regulatory affairs, compliance with laws and regulations, and Board of Directors and Board committee effectiveness. The Executive Committee currently consists of Drs. Levinson, Humer and Boyer. The Executive Committee was established to act when the full Board of Directors is unavailable. It has all the authority of 9 12 the Board in the management of the business and affairs of Genentech, except those powers that by law cannot be delegated by the Board of Directors. The Nominations Committee currently consists of Drs. Knowles, Humer and Boyer. The purpose of the Nominations Committee is to identify, review and recommend potential nominees to the Board of Directors of Genentech, and to recommend executive officers of the Company for election as executive officers by the Board of Directors. The Nominations Committee will consider nominees to the Board of Directors recommended by Genentech stockholders. To be considered, stockholders wishing to nominate a person to the Board of Directors should send a letter to the Secretary of Genentech. Any stockholder's notice regarding director nominations must set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated, (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder, (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors, and (e) the consent of each nominee to serve as a director of the corporation if so elected. PROPOSAL 2 -- AMENDMENT OF COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION On February 6, 2001, the Board of Directors unanimously adopted a resolution approving an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 600,000,000 to 1,200,000,000. Each additional share of common stock will have the same rights and privileges as each share of currently authorized common stock. This amendment requires the approval of the Company's stockholders. As amended, the relevant Section of Article 4 of the Company's Amended and Restated Certificate of Incorporation will read as follows: Section 4.01. Capital Stock. (a) The Corporation is authorized to issue two classes of stock to be designated, respectively, preferred stock and common stock. The total number of shares which the Corporation is authorized to issue is one billion three hundred million (1,300,000,000) shares. One hundred million (100,000,000) shares shall be designated preferred stock, par value $0.02 per share ("Preferred Stock"). One billion two hundred million (1,200,000,000) shares shall be designated common stock, par value $0.02 per share ("Common Stock"). The common stock of the Corporation shall be all of one class. (b) The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of a majority in voting power of the outstanding stock of the Corporation entitled to vote thereon irrespective of the provisions of Section 242(b)(2) of Delaware Law. In October 2000, a two-for-one stock split was effected by the issuance of additional shares of common stock as a stock dividend to stockholders. This action was taken to facilitate ownership of common stock and to bring the market price of the common stock within a trading range more attractive to independent investors. The Board of Directors believes it is in the best interests of the Company to increase the number of authorized shares in order to give the Company greater flexibility in considering and planning for future business needs. The shares will be available for issuance by the Board of Directors for proper corporate purposes, including but not limited to, stock dividends, stock splits, acquisitions, financings and compensation plans. The issuance of additional shares of common stock, other than in connection with stock splits and stock dividends, could have the effect of diluting earnings per share, voting power and shareholdings of stockholders. It could also have the effect of making it more difficult for a third party to acquire control of the Company. Other than in connection with the Company's existing employee stock option and stock purchase plans, the 10 13 Company has no present intent to issue any shares of common stock. Current stockholders do not have preemptive rights to subscribe for, purchase or reserve any shares of the authorized capital stock of the Company. If the amendment is approved, the amendment to the Amended and Restated Certificate of Incorporation will be filed with the Secretary of State of Delaware as soon as practicable after the meeting. The affirmative vote of the holders of a majority of the number of shares of common stock outstanding is required for approval of this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth the beneficial ownership of shares of common stock and of the equity securities of Roche Holding Ltd as of December 31, 2000, unless otherwise noted, of (i) each director of Genentech, (ii) Genentech's Chief Executive Officer, (iii) each of Genentech's four other most highly compensated executive officers (together with Genentech's Chief Executive Officer, the "Named Executive Officers"), and (iv) all directors and executive officers of Genentech as a group. All Genentech stock numbers reflect the two-for-one stock split that was effective October 24, 2000. Unless otherwise indicated, each person has sole voting and investment power, subject to the powers that may be shared with the person's spouse under applicable law. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
EQUITY SECURITIES OF GENENTECH COMMON STOCK ROCHE HOLDING LTD ----------------------------- -------------------------- NAME OF BENEFICIAL OWNER SHARES PERCENT OF CLASS SHARES PERCENT OF CLASS ------------------------ --------- ---------------- ------ ---------------- Herbert W. Boyer.......................... 7,050(1) * 0 0 Susan D. Desmond-Hellmann................. 383,257(2) * 0 0 Franz B. Humer(3)......................... 0 * 50 ** Stephen G. Juelsgaard..................... 275,452(4) * 0 0 Jonathan K. C. Knowles(3)................. 0 * 0 0 Louis J. Lavigne, Jr. .................... 354,295(5) * 0 0 Arthur D. Levinson........................ 1,031,839(6) * 0 0 Myrtle S. Potter.......................... 382 * 0 0 Sir Mark Richmond......................... 6,250(7) * 0 0 Charles A. Sanders........................ 7,250(8) * 0 0 All Directors and Executive Officers as a Group (29 persons)............................ 3,143,921(9) * 50 **
Asterisk (*) indicates that the amount beneficially owned is less than one percent (1%) of the outstanding shares of common stock. A double asterisk (**) indicates that the amount beneficially owned is less than one percent (1%) of the outstanding equity securities of Roche Holding Ltd. - --------------- (1) Includes stock options exercisable on December 31, 2000 or exercisable by March 1, 2001 to purchase 6,250 shares of common stock. (2) Includes stock options exercisable on December 31, 2000 or exercisable by March 1, 2001 to purchase 382,473 shares of common stock. 11 14 (3) As of December 31, 2000, Roche owned 306,594,352 shares of common stock, representing 58.4% of the class. Pursuant to the Affiliation Agreement, Roche has appointed Drs. Humer and Knowles as its representatives on Genentech's Board of Directors. (4) Includes stock options exercisable on December 31, 2000 exercisable or exercisable by March 1, 2001 to purchase 274,378 shares of common stock. (5) Includes stock options exercisable on December 31, 2000 exercisable or exercisable by March 1, 2001 to purchase 353,221 shares of common stock. (6) Includes stock options exercisable on December 31, 2000 exercisable or exercisable by March 1, 2001 to purchase 1,030,113 shares of common stock. (7) Includes stock options exercisable on December 31, 2000 exercisable or exercisable by March 1, 2001 to purchase 6,250 shares of common stock. (8) Includes stock options exercisable on December 31, 2000 exercisable or exercisable by March 1, 2001 to purchase 6,250 shares of common stock. (9) Includes stock options held by 19 other executive officers exercisable on December 31, 2000 or exercisable by March 1, 2001 to purchase 1,055,352 shares of common stock. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors, officers and persons who own more than 10% of any class of the Company's equity securities (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of such securities. Reporting Persons are required by Securities and Exchange Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. The Company believes that all Forms 3, 4 and 5 required to be filed by its directors, officers and greater than 10% shareholders were filed on time during 2000, except David Nagler, Vice President, Human Resources, inadvertently failed to timely file a Form 3. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Each of the directors of Genentech, except Dr. Levinson, are paid an annual retainer of $30,000. Dr. Levinson is not paid for his services as a director. In addition, the directors, with the exception of Dr. Levinson, receive a total of $1,500 for each Board and committee meeting at which the director was present in person and a total of $500 for each Board and committee meeting at which the director was present by telephone. All directors are reimbursed for expenses incurred in connection with their service on the Board. Dr. Boyer also serves as a consultant to Genentech and received compensation in the amount of $38,000 for his services as a consultant in 2000. Drs. Boyer, Richmond and Sanders each received an option to purchase 4,000 shares of common stock as additional compensation. Under the 1999 Stock Plan, each non-Roche and non-Genentech Board member (an "Independent Director") will be granted a stock option to purchase 20,000 shares of common stock upon election to the Board. In addition, each Independent Director will be granted a stock option to purchase 4,000 shares of common stock upon reelection to the Board. Each option will vest over four years, with the first 25% vesting one year from the grant date, and the remainder vesting monthly during the 36-month period following the initial vesting date. The exercise price will be equal to the closing price of the common stock as reported in the Wall Street Journal on the day of the election or reelection, as applicable. 12 15 COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION The following table shows for the fiscal years ended December 31, 2000, 1999 and 1998, certain compensation paid by Genentech to the Named Executive Officers, including salary, bonuses, stock options and certain other compensation: SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------ AWARDS/ OTHER ANNUAL SECURITIES ALL OTHER COMPENSATION UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (3) OPTIONS(4)(#) (5) --------------------------- ---- --------- -------- ------------ ------------- ------------ Arthur D. Levinson.................. 2000 $750,000 $985,000 -- 360,000 $69,400 Chairman, President and Chief 1999 $750,000 $985,000 -- 1,932,852 $68,000 Executive Officer 1998 $650,000 $950,000 -- 350,000(7) $41,600 Susan D. Desmond-Hellmann........... 2000 $451,319 $425,000 -- 250,000 $34,000 Executive Vice President, 1999 $375,208 $400,000 -- 933,104 $27,400 Development and Product 1998 $310,000 $310,000 -- 150,000(7) $18,400 Operations and Chief Medical Officer Louis J. Lavigne, Jr. .............. 2000 $367,771 $310,000 -- 160,000 $27,100 Executive Vice President and 1999 $367,500 $310,000 -- 839,792 $27,100 Chief Financial Officer 1998 $350,000 $310,000 -- 150,000(7) $21,400 Myrtle S. Potter(6)................. 2000 $314,912 $500,000(2) $684,666 300,000 $10,000 Executive Vice President, 1999 -- -- -- -- -- Commercial Operations and 1998 -- -- -- -- -- Chief Operating Officer Stephen G. Juelsgaard............... 2000 $310,000 $225,000 -- 160,000 $21,400 Senior Vice President, General 1999 $295,000 $239,939 -- 519,872 $20,000 Counsel and Secretary 1998 $263,542 $205,000 -- 80,000(7) $15,542
- --------------- (1) Includes amounts earned but deferred at the election of the executive, such as salary deferrals under Genentech's Tax Reduction Investment Plan (the "401(k) Plan") established under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (2) The amount disclosed in this column for Ms. Potter includes payment by Genentech of a sign-on bonus of $250,000. (3) As permitted by rules promulgated by the Securities and Exchange Commission ("SEC"), no amounts are shown for any Named Executive Officer, other than Ms. Potter, with respect to certain "perquisites" (such as imputed interest on loans at below market value rates), where such amounts do not exceed the lesser of (i) 10% of the sum of the amounts of Salary and Bonus for the Named Executive Officer, or (ii) $50,000. The amount disclosed in this column for Ms. Potter includes payment by Genentech of a relocation benefit valued at $424,553 (including a gross-up payment of $147,885 included therein to reimburse Ms. Potter for the estimated income taxes attributable to the relocation benefit) and a gross-up payment of $260,113 to reimburse Ms. Potter for the estimated income taxes attributable to the sign-on bonus disclosed in footnote (2) above. (4) Genentech has awarded no stock appreciation rights ("SARs"). (5) Consists of Genentech's matching payments under its 401(k) Plan and Supplemental Plan for 2000, 1999 and 1998. Each of the Named Executive Officers other than Ms. Potter received $6,800 in matching payments under the 401(k) Plan for 2000 and $6,400 in matching payments under the 401(k) Plan for 1999 and 1998, and under the Supplemental Plan, Dr. Levinson, Dr. Desmond-Hellmann, Mr. Lavigne, Ms. Potter and Mr. Juelsgaard received matching payments of $62,600, $27,200, $20,300, $10,000 and $14,600, respectively, for 2000 and Dr. Levinson, Dr. Desmond-Hellmann, Messrs. Lavigne and Juelsgaard received matching payments of $61,600, $21,000, $20,700 and $13,600, respectively, for 1999 and of $35,200, $12,000, $15,000 and $9,142, respectively, for 1998. (6) Ms. Potter began her employment with Genentech effective May 15, 2000. 13 16 (7) In connection with Roche's redemption of Genentech's special common stock in 1999, the unvested portion of the options granted in 1998 was cancelled and replacement options, in the amount of 1.333 times the number of options cancelled, were granted in 1999. The option grant numbers for 1998 reflect the vested options remaining after cancellation of the unvested options. For each Named Executive Officer, the following numbers of unvested options were cancelled in 1998: Dr. Levinson -- 1,050,000; Dr. Desmond-Heller -- 450,000; Mr. Lavigne -- 450,000; and Mr. Juelsgaard -- 240,000. The stock options received in replacement of the cancelled, unvested options are included in the option grants for 1999. STOCK OPTION GRANTS AND EXERCISES OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL OPTIONS GRANT DATE SECURITIES UNDERLYING GRANTED TO EXERCISE OR PRESENT OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION VALUE(5) NAME (#)(1) FISCAL YEAR(2) ($/SH)(3) DATE(4) (IN MILLIONS) ---- --------------------- -------------- ----------- ---------- ------------- Arthur D. Levinson.............. 360,000 3.6% $81.97 09/20/10 $15.7 Susan D. Desmond-Hellmann....... 250,000 2.5% $81.97 09/20/10 $10.9 Louis J. Lavigne, Jr. .......... 160,000 1.6% $81.97 09/20/10 $ 7.0 Myrtle S. Potter................ 200,000 2.0% $65.69 05/15/10 $ 7.0 Myrtle S. Potter................ 100,000(6) 1.0% $65.69 05/15/10 $ 3.9 Stephen G. Juelsgaard........... 160,000 1.6% $81.97 09/20/10 $ 7.0
- --------------- (1) The options were granted pursuant to the 1999 Stock Plan and vest over four years, with the first 25% vesting one year from the grant date, and the remainder vesting monthly during the 36-month period following the initial vesting date. (2) Based on a total of approximately 10 million options granted in 2000 under our 1999 Stock Plan to employees, including the Named Executive Officers. Approximately 87% of these options were granted to more than 4,000 employees, other than the Named Executive Officers, representing more than 95% of the eligible employee population. (3) The exercise price per share of options granted represented the fair market value of the underlying shares of common stock as based on the closing selling price per share of the Company's common stock on the date of grant. As of the Record Date, the exercise prices of the options are greater than the closing price of Genentech's common stock. (4) These options have a term of ten years subject to earlier termination upon the occurrence of certain events related to termination of employment. (5) Option value was determined using the Black-Scholes option pricing model based on the following assumptions: expected volatility of 75% based on historical volatility for the year and implied volatility from traded options and a risk free rate of 5.3% for the vesting term of the option. Each option is valued at its exercise price, which is assumed to be equivalent to the market price at the date of grant. This valuation model was not adjusted for the vesting restrictions or the risk of forfeiture of the options. Under SFAS 123, forfeitures may be estimated or assumed to be zero; in this model, the forfeiture rate was assumed to be zero. Our use of this model in accordance with rules adopted by the Securities and Exchange Commission does not constitute an endorsement of the model nor an acknowledgment that such model can accurately determine the value of options. The valuation calculations do not necessarily represent the fair market value of individual options, and are not intended to forecast possible future appreciation, if any, of the price of our common stock on the date of exercise as compared to the exercise price of the option. 14 17 (6) The options were granted pursuant to the 1999 Stock Plan and vest over five years, with the first 25% vesting two years from the grant date, and the remainder vesting monthly during the 36-month period following the initial vesting date. The following table shows for the fiscal year ended December 31, 2000, certain information regarding options exercised by, and held at year end by, the Named Executive Officers: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FY-END(#) AT FY-END(3)(4) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ----------- ----------- ------------- ----------- ------------- Arthur D. Levinson, Ph.D. ................... 890,000 $57,320,860 922,732 1,020,120 $52,897,983 $58,401,857 Susan D. Desmond-Hellmann, M.D., M.P.H. ............ 260,000 $15,203,225 330,634 492,470 $18,928,845 $28,193,859 Louis J. Lavigne, Jr. ..... 360,000 $23,970,926 306,566 443,226 $17,550,933 $25,374,659 Myrtle S. Potter........... 0 0 0 300,000 $ 0 $ 4,743,750 Stephen G. Juelsgaard...... 298,000 $20,579,294 245,496 274,376 $14,054,691 $15,707,981
- --------------- (1) Genentech has awarded no SARs. (2) Sale price of Genentech's common stock on the date of exercise minus the exercise price. (3) The value of the unexercised in-the-money options is based on the fair market value of Genentech's common stock, $81.50, at the close of business on December 29, 2000, the last business day of 2000, minus the exercise price of the options. (4) Shown below is a calculation of the value of the unexercised in-the-money options as of a more recent date, February 28, 2001. The calculation is based on the fair market value of Genentech's common stock, $52.50, at the close of business on February 28, 2001 minus the exercise price of the options.
VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT FEBRUARY 28, 2001(4) ---------------------------- NAME EXERCISABLE UNEXERCISABLE ---- ----------- ------------- Arthur D. Levinson, Ph.D. ........................ $26,138,748 $28,818,384 Susan D. Desmond-Hellmann, M.D., M.P.H. .......... $ 9,340,434 $13,912,254 Louis J. Lavigne, Jr. ............................ $ 8,660,504 $12,521,120 Myrtle S. Potter.................................. $ 0 $ 0 Stephen G. Juelsgaard............................. $ 6,935,284 $ 7,751,100
CHANGE IN CONTROL AGREEMENTS Genentech and Ms. Potter, Executive Vice President, Commercial Operations and Chief Operating Officer, entered into a Change of Control Agreement on January 20, 2001 (the "Agreement"). The Agreement is effective through the earlier of May 15, 2005 or 24 months following a Change of Control (as that term is defined in the Agreement). The Agreement generally provides that, in the event Ms. Potter's employment with Genentech is terminated (i) by Genentech, except for Cause or (ii) by Ms. Potter with Good Reason (as these terms are defined in the Agreement) following a Change of Control, Genentech will pay Ms. Potter a lump sum severance payment equal to two times the sum of (i) Ms. Potter's annual base salary and (ii) Ms. Potter's average annual bonus and provide 24 months of health care and other insurance coverage. If the foregoing severance payments are subject to excise tax, then Genentech will pay Ms. Potter an additional amount to cover such tax. 15 18 LOANS AND OTHER COMPENSATION In 1994, Genentech lent $250,000 to Ms. Kimberly Popovits, Senior Vice President, Sales and Marketing, for the purchase of a home in connection with her relocation to the San Francisco Bay Area. The loan is imputed to bear interest at the rate of 8.20%. $100,000 of the loan was forgiven in five equal amounts on the anniversary dates of the loan. The remaining $150,000 was repaid in 2000. The largest amount outstanding under the loan during 2000 was $150,000. As of the date of this Proxy Statement no amount of the loan remains outstanding. The imputed interest on the loan is compensatory to Ms. Popovits and amounted to $1,067 in 2000. In 1999, Genentech lent $250,000 to Dr. Stephen Dilly, Vice President, Medical Affairs, for the purchase of a home in connection with his relocation to the San Francisco Bay Area. The loan is imputed to bear interest at the rate of 5.21%. $175,000 of this loan is due and payable in equal installments of $58,333 each on the fifth, sixth and seventh anniversary of the date of the loan or, if earlier, the remaining balance is due on the date of termination of Dr. Dilly's employment with Genentech. The remaining $75,000 will be forgiven on April 12, 2004, if Dr. Dilly remains employed by Genentech. The largest amount outstanding under this loan during 2000 was $250,000. The amount of this loan outstanding as of the date of this Proxy Statement is $250,000. The imputed interest on this loan is compensatory to Dr. Dilly and amounted to $9,904 in 2000. In 1999, Genentech made interest free loans for a total of $450,000 to Ms. Diane Parks, Vice President, Managed Healthcare and Commercial Support, for the purchase of a home in connection with her relocation to the San Francisco Bay Area. In July 1999, Genentech lent Ms. Parks $250,000. $150,000 of this loan is due and payable on the earlier of the fifth anniversary of the date of the loan or the date of termination of Ms. Parks' employment with Genentech. The remaining $100,000 will be forgiven in five equal installments of $20,000 on the anniversary date of the loan, provided that, Ms. Parks is employed by Genentech on the forgiveness date. In November 1999, Genentech lent Ms. Parks $200,000, of which $175,000 was repaid in November 1999. The remaining $25,000 is due and payable on the earlier of the fifth anniversary of the date of the loan or the date of termination of Ms. Parks' employment with Genentech or sale of her current residence. The largest amount outstanding under all loans during 2000 was $275,000. The amount of the loans outstanding as of the date of this Proxy Statement is $255,000. In 2000, Genentech made an interest free loan of $2,200,000 to Ms. Myrtle Potter, Executive Vice President, Commercial Operations and Chief Operating Officer, for the purchase of a home in connection with her relocation to the San Francisco Bay Area. $1,000,000 of the loan is due and payable on the earlier of May 15, 2005 or within 30 days from the date of termination of Ms. Potter's employment with Genentech. $1,000,000 of the loan will be forgiven in equal installments of $200,000 each on May 15, 2001 through 2005, provided that, Ms. Potter is employed by Genentech on these dates. Genentech has agreed to pay to Ms. Potter the amount equal to the grossed-up federal and state income taxes payable in connection with the forgiveness of the repayment of each installment. The remaining $200,000 of the loan shall be due and payable in four equal installments of $50,000 each on the dates Ms. Potter receives her annual performance bonus from Genentech. The largest amount outstanding under this loan during 2000 was $2,200,000. The amount of this loan outstanding as of the date of this Proxy Statement is $2,150,000. COMPENSATION COMMITTEE REPORT(1) The Compensation Committee of the Board of Directors (the "Committee") is currently composed of all the directors, except Dr. Levinson. The Committee is responsible for setting and administering the policies that govern annual executive salaries, bonuses (if any) and stock ownership programs. The Committee annually evaluates the performance, and determines the compensation, of the Chief Executive Officer - --------------- (1) The material in this report and under the caption "Performance Graph" are not "soliciting material," are not deemed filed with the SEC and are not to be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language therein. 16 19 ("CEO") and the other executive officers of Genentech based upon a mix of the achievement of the corporate goals, individual performance and comparisons with other pharmaceutical and biotechnology companies. The CEO is not present during the discussion of his compensation. The policies of the Committee with respect to executive officers, including the CEO, are to provide compensation sufficient to attract, motivate and retain executives of outstanding ability and potential and to establish an appropriate relationship between executive compensation and the creation of shareholder value. To meet these goals, the Committee has adopted a mix among the compensation elements of salary, bonus and stock options, with some bias toward stock options, to emphasize the link between executive incentives and the creation of shareholder value as measured by the equity markets. In general, the salaries and stock option awards of executive officers are not determined by the Company's achievement of specific corporate performance criteria. Instead, the Committee determines the salaries for executive officers based upon a review of salary surveys of other pharmaceutical, biotechnology and San Francisco Bay Area high technology companies performed for the Committee. To provide the Committee with more information for making salary and bonus compensation comparisons, Genentech surveys a broader group of pharmaceutical and biotechnology companies than those companies included in the Standard & Poors Healthcare (Drug) Index shown on Genentech's Performance Graph. Based upon such surveys, the executive officers' salaries are targeted at the fiftieth (50th) percentile, and officers' salaries and bonuses, together with all other benefits, are targeted at the seventy-fifth (75th) percentile, as compared to other biotechnology companies, while stock options are set in the mid range compared to a comparable group, based on market capitalization, of biotechnology and pharmaceutical companies. In awarding stock options, the Committee considers individual performance, overall contribution to Genentech, officer retention, the total number of stock options to be awarded and an analysis of stock option awards granted by a comparable group, based on market capitalization, of biotechnology and pharmaceutical companies and by a comparable growth, in terms of market capitalization of high technology companies in the San Francisco Bay Area. In determining where a given officer's total compensation, including the CEO's, is set within the ranges and in light of the considerations described above, the Committee subjectively evaluates such factors as the individual's performance and the success of Genentech as measured by earnings per share, product sales revenues, product development progress, research prospects, and other critical success factors. Bonuses are provided to executive officers in connection with Genentech's company-wide bonus plan. Payment of bonuses is expressly linked to the attainment of specified corporate goals that the Committee sets at each year's December meeting for the next year. Among other things, these goals determine whether a bonus will be paid to all eligible employees and the amount of funding available for the bonus pool. For the bonus for services rendered in 2000, the corporate performance goals, in order of importance, related to: (i) accelerating and expanding product development by filing Investigational New Drug Applications, initiating or completing specified clinical trials investigating the use of new products, selecting new products for development and filing New Drug Applications or Product License Applications for new indications of marketed products; (ii) business and financial performance, including but not limited to increasing earnings per share, revenues and net income percentage; (iii) commercial performance, including increasing US product sales revenues, increasing efficiency in the cost of producing Genentech's products and forming strategic alliances by in-licensing products and establishing relationships with other companies; and (iv) enhancing employee development. In setting these goals, the Committee is cognizant of the long development cycle for human pharmaceuticals. The corporate performance goals for bonuses selected by the Committee seek to balance the desire for immediate earnings and the longer term goal of enhancing shareholder value by bringing to market many of the potential therapies in Genentech's research and development pipeline. In February 2001, the Committee reviewed the corporate performance goals for bonuses and determined that approximately $23.3 million of the total potential goal values of $28.4 million under the 2000 Bonus Plan were achieved. The Committee allocated a bonus to the current CEO based on the achievement of the requisite corporate goals, as discussed above, and based on the Committee's view that the CEO's performance in achieving those goals had been excellent. In determining the 2000 bonuses, the Company's Executive Committee requested that Executive Committee officer bonuses, including the CEO's bonus, should not exceed in any significant manner their 1999 bonuses (paid in 2000) and that the standard 17 20 incorporation of the 75th percentile comparison (which would have resulted in increased bonuses beyond what the general population received) not be considered as a determining factor. The Committee set a range of 50% to 100% of salary for bonuses for members of the Company's Executive Committee other than the CEO (Dr. Desmond-Hellmann, Ms. Potter and Messrs. Juelsgaard and Lavigne.) Within the applicable range, the Committee set the bonus for each Executive Committee member based on the Committee's subjective evaluation of the individual's performance and the recommendation of the CEO. The Committee uses the same procedures described above for the other executive officers in setting the annual salary, bonus and stock option awards for the CEO. The CEO's salary is determined based on comparisons with pharmaceutical and biotechnology companies as described above. In awarding stock options, the Committee considers the CEO's performance, overall contribution to Genentech, retention, the total number of options to be awarded and a review of stock options awarded to CEO's by a comparable group, in terms of market capitalization of biotechnology and pharmaceutical companies and by a comparable group, in terms of market capitalization, of high technology companies in the San Francisco Bay Area. The CEO's bonus is dependent on Genentech achieving the performance goals outlined above and the Committee's subjective evaluation of the CEO's performance. As described above, in determining where the CEO's total compensation is set within the ranges and in light of the considerations described above, the Committee subjectively evaluates such factors as the individual's performance and the success of Genentech as measured by the factors outlined above. Compared to other companies surveyed by Genentech, the current CEO's salary, bonus and stock options are competitive. Section 162(m) of the Code limits the federal income tax deductibility of compensation paid to Genentech's CEO and to each of the Named Executive Officers. Under Section 162(m), Genentech generally may deduct compensation paid to such an officer only to the extent that it does not exceed $1 million during any calendar year or is "performance-based" as defined in Section 162(m). Genentech expects that the deductibility limit of Section 162(m) currently will have an insignificant effect on Genentech. Current cash compensation paid to each of Genentech's executives, with one exception, is less than $1 million per year and is thus generally fully deductible to the Company. In addition, Genentech expects to receive a federal income tax deduction in connection with the exercise of stock options granted to the Named Executive Officers. From the members of the Compensation Committee of Genentech: Herbert W. Boyer Franz B. Humer Jonathan K.C. Knowles Sir Mark Richmond Charles A. Sanders 18 21 AUDIT COMMITTEE REPORT The Audit Committee of the Board of Directors currently consists of Drs. Boyer, Richmond and Sanders, and operates under a formal written charter which is attached as Appendix A. The Audit Committee recommends the independent auditors to the Board, and reviews the Company's financial reporting process on behalf of the Board. The Audit Committee has prepared the following report on its activities with respect to the Company's audited financial statements for the year ended December 31, 2000. Genentech's management is responsible for the preparation, presentation and integrity of the Company's financial statements. Management is also responsible for maintaining appropriate accounting and financial reporting practices and policies as well as internal controls and procedures designed to provide reasonable assurance that Genentech is in compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for planning and performing an independent audit of the Company's financial statements in accordance with generally accepted accounting principles. The independent auditors are responsible for expressing an opinion on the conformity of those audited financial statements with accounting principles generally accepted in the United States. In this context, the Audit Committee has reviewed and discussed the audited financial statements for the year ending December 31, 2000 with management and the independent auditors, Ernst & Young LLP. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61 (Communications with Audit Committees), as amended by Statement on Auditing Standards No. 90 (Audit Committee Communications). Ernst & Young LLP has provided the Audit Committee with the written disclosures and letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent auditors that firm's independence. Based on the reviews and discussions referred to above, the Audit Committee recommended to the board of directors that the audited financial statements referred to above be included in Genentech's Annual Report on Form 10-K for the year ended December 31, 2000. Each of the members of the Audit Committee is independent as defined under the listing standards of the New York Stock Exchange. From the members of the Audit Committee of Genentech: Herbert W. Boyer Sir Mark Richmond Charles A. Sanders COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 2000, Genentech's Compensation Committee consisted of Drs. Boyer, Humer, Knowles, Richmond and Sanders. Dr. Boyer, a founder of the Company, was a vice president of Genentech from 1976 to 1991 and is currently a consultant to the Company. Dr. Humer joined The Roche Group in 1995 as the Head of its Pharmaceuticals Division and is currently Chairman and Chief Executive Officer of The Roche Group. He is also Chairman of the Executive Committee of The Roche Group. Dr. Knowles joined The Roche Group in 1997 as Head of Global Pharmaceutical Research. He is a member of the Executive Committee of The Roche Group. Pursuant to the terms of the affiliation agreement, Drs. Humer and Knowles are serving on Genentech's Compensation Committee as designees of Roche. See "Relationship with Roche" above and "Certain Relationships and Related Transactions" below for a description of Genentech's relationship with Roche. 19 22 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January 1980, Genentech and Hoffmann-La Roche entered into an agreement regarding the development and commercialization of human leukocyte ("alpha") and fibroblast ("beta") interferons (the "Interferon License Agreement"). Pursuant to this agreement, as amended from time to time, Genentech granted Hoffmann-La Roche a sole and exclusive, worldwide license to use and sell (and, under certain circumstances, manufacture) alpha and beta interferons using organisms and knowhow developed by Genentech and under patent rights belonging to Genentech, for a period of 20 years. Pursuant to this agreement, Genentech is entitled to royalties on sales of interferons by Hoffmann-La Roche for 10 years after commercial introduction, unless the period of exclusivity is extended for an additional 5-year, royalty-bearing period. These royalties totaled $700,000 in 2000. Herceptin Licensing Agreement On July 6, 1998, we entered into an agreement with Hoffmann-La Roche to provide Hoffmann-La Roche exclusive marketing rights outside of the United States for Herceptin. Under the agreement, Hoffmann-La Roche paid $40 million to us and has agreed to pay cash milestones tied to future product development activities, to contribute equally with us up to a maximum of $40 million on global development costs and to make royalty payments of 20% on aggregate net product sales outside the United States up to $500 million in each calendar year and 22.5% on such sales in excess of $500 million in each calendar year. Amended and Restated Licensing Agreement Summary of Key Changes: Under an agreement dated October 25, 1995, we granted to Hoffmann-La Roche an option for ten years for licenses to use and sell some of our products in non-U.S. markets. In July 1999, we amended this licensing agreement with Hoffmann-La Roche by extending until at least 2015 Hoffmann-La Roche's option to license to use and sell products in non-U.S. markets. Other key changes to the license agreement are summarized as follows: - Hoffmann-La Roche may choose to exercise its option at the end of a Phase III trial, if it pays a $10 million fee to us to extend its option on the product; - if Hoffmann-La Roche exercises its option after the completion of a Phase III trial, Hoffmann-La Roche will reimburse us for 75% of our development costs incurred after the completion of the Phase II trial through the completion of the Phase III trial, and 50% of our development costs incurred before completion of the Phase II trial. Subsequent development costs for other indications will be shared 75%/25% by Hoffmann-La Roche and Genentech; - on each Genentech product for which Hoffmann-La Roche exercises its option after completion of the Phase III trials, we will receive a royalty of 15% on all sales until the later in each country of the expiration of our relevant patent or 25 years from the first commercial introduction; however, $5 million of any option extension fee paid by Hoffmann-La Roche shall be credited against royalties payable to us in the first calendar year of sales by Hoffmann-La Roche in which aggregate sales of the product exceeds $100 million; - Hoffmann-La Roche will have the right to manufacture our products itself if it can demonstrate that it is able to manufacture products at a lower price than our supply price, if we are not able to supply Hoffmann-La Roche's commercial requirements or if we intend to have a third party manufacture the product; - Hoffmann-La Roche will have the right to terminate a license for a product upon 30 days notice; - if Hoffmann-La Roche terminates its license based on a good faith determination, after consultation with appropriate regulatory authorities in the relevant country, that the product cannot be approved for sale in one or more major European countries because of safety issues, Hoffmann-La Roche will be liable for all obligations incurred primarily to support registration outside the United States of that product for up to six months after the termination is given; and 20 23 - if Hoffmann-La Roche terminates its license for other than safety reasons, Hoffmann-La Roche shall be liable for all of its obligations regarding the product for up to twelve months after the notice of termination. Genentech and Roche have also entered into a Small Molecule Screening Agreement for the screening of Roche's chemical library using certain mutually agreed Genentech assays to find lead molecules for development into small molecule therapeutics. Roche has the responsibility for supplying the chemical library to be screened. Genentech has the responsibility for supplying the assays and for undertaking the initial screening. If the screening results in the identification of a molecule of interest to one of the parties, that party shall advise the other party of its interest. The second party can then elect to proceed with the interested party and jointly develop the molecule or it can choose to let the interested party develop the molecule on its own. If a molecule is jointly developed, the parties are to share equally the cost of joint development and to agree to a plan proportioning research and development responsibilities between them based on their capability. If a product is jointly developed, both Genentech and Roche have the right to make, use and sell that product and will negotiate an allocation of the major marketing territories between them as well as appropriate royalties payable by each to the other for sales of that product in that party's marketing territory. As a general principle, the markets for each product are to be allocated on an equal basis, but Genentech is to have at least 50% of the marketing rights in North America and Roche is to have at least 50% of the marketing rights in Europe, subject to certain exceptions. After allocation of marketing rights, each party is to pay the other a royalty on sales in that party's marketing territory with the royalty to be determined by negotiation. As a general principle, the percentage royalty payable on sales by either party to the other should have equivalent royalty rates. If a product is unilaterally developed, the party unilaterally developing that product has the sole right to make, use and sell that product throughout the world and will pay the other party a royalty of 5% of sales. See also "Relationship with Roche" starting on page 2. 21 24 PERFORMANCE GRAPH The following chart shows a comparison of five-year cumulative total stockholder return as of December 31 among Genentech, the Standard & Poors Healthcare (Drug) 500 Index, and the Standard & Poors 500 Index:(1) TOTAL STOCKHOLDER RETURNS [PERFORMANCE GRAPH]
- ---------------------------------------------------------------------------------------------------------------- December 95 December 96 December 97 December 98 December 99 December 00 - ---------------------------------------------------------------------------------------------------------------- Genentech, Inc. 100.00 101.18 114.38 150.35 509.09 616.96 S&P 500 Index 100.00 122.96 163.98 210.85 255.21 231.98 Healthcare (Drugs -- Major Pharmaceuticals) -- 500 100.00 124.71 198.63 301.34 247.83 341.63 - ----------------------------------------------------------------------------------------------------------------
- --------------- (1) The total return on investment (change in year end stock price plus reinvested dividends) assumes $100 invested on December 31, 1995, in Genentech, the Standard & Poors 500 Index, and the Standard & Poors Healthcare (Drug) 500 Index (comprised at December 31, 2000 of Allergan, Inc., Forest Laboratories, Inc., Eli Lilly and Company, Merck & Co., Inc., Pfizer Inc., Pharmacia Corporation and Schering-Plough Corporation). 22 25 PROPOSAL 3 -- RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS The Board of Directors has selected Ernst & Young LLP as Genentech's independent auditors for the year ending December 31, 2001, and has further directed that management submit the selection of independent auditors for ratification by the stockholders at the Annual Meeting. Ernst & Young LLP has audited Genentech's financial statements since its inception in 1976. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting, will have an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. Stockholder ratification of the selection of Ernst & Young LLP as Genentech's independent auditors is not required by the bylaws or otherwise. The Board of Directors has elected to seek such ratification as a matter of good corporate practice. Should the stockholders fail to ratify the selection of Ernst & Young LLP as independent auditors, the Board of Directors will consider whether to retain that firm for the year ending December 31, 2001. The following table sets forth the aggregate fees billed by Ernst & Young LLP to Genentech for: (i) Audit Fees in connection with the audit of Genentech's 2000 annual financial statements and the review of financial statements in Genentech's quarterly reports on Form 10-Q filed in 2000; (ii) Financial Information Systems Design and Implementation Fees for the year 2000; and (iii) All Other Fees for the year 2000 other than for services covered in (i) or (ii). Audit Fees............................................... $ 565,000 Financial Information Systems Design and Implementation Fees......................... $1,813,000 All Other Fees........................................... $ 595,000
The affirmative vote of the holders of a majority of the common stock represented at the Annual Meeting is required for approval of this proposal. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR SUCH RATIFICATION. OTHER MATTERS The Board of Directors knows of no other business to be presented at the Annual Meeting, but if other matters do properly come before the Annual Meeting, it is intended that the persons named on the Proxy Card will vote on such matters in accordance with their best judgment. Stockholder Proposal for 2002 Annual Meeting. Notice of any stockholder proposal that is intended to be presented by such stockholder at Genentech's 2002 Annual Meeting and included in the Proxy Statement relating to that meeting must be received by the Secretary of the Company no later than November 27, 2001 in order that it may be considered for possible inclusion in the Proxy Statement and the form of Proxy Card relating to that meeting. 23 26 APPENDIX A GENENTECH, INC. AUDIT COMMITTEE CHARTER AND ANNUAL AGENDA PURPOSE OF COMMITTEE Genentech's financial reporting is the responsibility of senior management, but is overseen by the Board of Directors. It is the charter of the Genentech Audit Committee to assist the Board as follows: - Carry out the oversight responsibility for monitoring the integrity of Genentech's financial reporting process. - Review management's programs to: 1. Maintain adequate systems of internal controls regarding finance and accounting and related legal compliance matters, 2. Safeguard Company assets, 3. Provide appropriate reserves for any legal or regulatory issues, and 4. Assess and manage risk. - Monitor the independence and performance of Genentech's independent auditors, including annual financial audit, quarterly reviews, general audit and non-audit services. The independent auditor is ultimately accountable to the Board of Directors and the Audit Committee, and the Audit Committee is responsible for recommending to the Board of Directors the selection, evaluation and replacement, where appropriate, of the auditors. - Provide an avenue of communication among the independent auditors, management and the Board of Directors. - Assure that the Company has provided the NYSE with annual written reaffirmation that the Board of Directors has reviewed, on an annual basis, this charter for adequacy. - Assure that the Company has disclosed this charter in an appendix to Genentech's proxy statement at least once every three years. - Discuss, with the independent auditors, the matters required to be discussed by Statement on Auditing Standards No. 61(1), and as amended by Statement on Auditing Standards No. 90(2). - Review the report of the Audit Committee as required by the rules of the Securities and Exchange Commission to be included in the Company's annual proxy statement, in accordance with the required frequency. - --------------- (1) SAS No. 61 requires an independent auditor to communicate to the Audit Committee matters related to the conduct of the audit such as the selection of and changes in significant accounting policies, the methods used to account for significant unusual transactions, the effect of significant accounting policies in controversial or emerging areas, the process used by management in formulating particularly sensitive estimates and the basis for the auditor's conclusions regarding the reasonableness of those estimates, significant adjustments arising from the audit, and disagreements with management over the application of accounting principles, the basis for management's accounting estimates and the disclosures in the financial statements. (2) SAS No. 90 states that discussions on the quality of an entity's accounting principles should include such matters as consistency of accounting policies and their application, and the clarity and completeness of financial statements, which include related disclosures. A-1 27 - Request the review of significant changes or new events in the Company or significant developments in accounting rules which have significant financial implications or risks or will likely require additional reporting or changes in accounting or operating practices. To carry out these responsibilities, the Audit Committee shall meet regularly and report its activities to the full Board after such meetings. While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Company's financial statements are complete and accurate and are in accordance with generally accepted accounting principles. This is the responsibility of management and the independent auditor. Nor is it the duty of the Audit Committee to conduct investigations, to resolve disagreements, if any, between management and the independent auditor or to assure compliance with laws and regulations and the Company's Good Operating Practices. TERM AND MEMBERSHIP The Audit Committee shall be appointed by the Board of Directors and shall consist of three independent directors. Audit Committee membership will conform to the following independence limitations: - An employee of the company or its affiliates may not serve on the Audit Committee until three years following termination of such employment, subject to the Board's override - A director who (1) is a partner, controlling shareholder or executive officer of an organization that has a business relationship with the Company or (2) has a direct business relationship with the Company (e.g., a consultant), cannot serve on the Audit Committee until three years after the termination of such relationship, unless the Company's Board determines in its business judgement that the relationship does not interfere with the director's exercise of independent judgement, taking into account among other things, the materiality of the relationship to the Company, the director or such organization - A director who is employed as an executive of another company where any of the Company's executives serves on that company's Compensation Committee may not serve on the Audit Committee - A director who is an immediate family member of an individual who is an executive officer of the Company or any of its affiliates cannot serve on the Audit Committee until three years following the termination of such employment relationship, subject to the Board's override Each Audit Committee member shall serve until resignation from the Committee or replacement by the Board. Each Audit Committee member shall be "financially literate," as defined by the Board, or attain such status within a reasonable period after appointment. At least one member shall have "accounting or related financial expertise" as defined by the Board. RESPONSIBILITIES -- MEETING FREQUENCY In general, it is expected that the Audit Committee be vigilant and effective overseers of the financial reporting process and the Company's internal financial controls. In so doing, it is intended that the following standing annual agenda of the Committee represents the Board's expectations of the Committee's activities. Four meetings and four teleconferences of the Committee have been established to provide sufficient time for discussion of the agenda topics. In addition, any other business which either the Audit Committee, the independent auditors, or management feels is appropriate will be added to the agenda along with review of any significant financing transactions. Also, the Audit Committee shall have the authority to retain special legal, accounting or other consultants to advise the Committee. The Audit Committee may request any officer or employee of the A-2 28 Company or the Company's outside counsel or independent auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee.
DATE AGENDA ---- ------ Each Meeting - Provide time for the Committee to meet with management as well as separately with the independent auditors (representing financial audit and general audit) and for the review of significant general audit reports. Review and approve the Minutes of the prior meeting. Quarterly - Conduct a quarterly teleconference to review with management, and the independent auditors, the company's quarterly (or annual) financial results prior to the release of quarterly (or annual) results. February - Review and discuss audited financial statements with management and discuss audit and other matters as required by SAS No. 61, and as amended by SAS No. 90, with independent auditors. - Review independent auditor's management letter and management's responses. - Review the report of the Audit Committee as required by the rules of the Securities and Exchange Commission to be included in the Company's annual proxy statement, in accordance with the required frequency. - Review and reassess the adequacy of this Charter and recommend any proposed changes to the Board for approval. - Review the statement of affirmation for the NYSE related to the adequacy of the charter. May - Review quarterly reporting process and managements' control thereof. - Review tax compliance program and plan. September - Review scope of annual financial audit, quarterly review and general audit activities for coming year. - Review independence of independent auditors and their staffing, fees and nature of annual financial audit, quarterly reviews, and general audit and non-audit services. - Review Company's investment policy, interest rate management program and foreign exchange hedging program. December - Review Company's insurance coverage and other risk management programs. - Review with management, including General Counsel or his/her designee, any legal matters that could have a significant impact on the Company's financial statements. Discuss the relevant reserves with management. - Review performance of independent auditors, for their annual financial audit, quarterly reviews, general audit and non-audit services, with management and recommend independent auditors for upcoming year for Board of Director approval.
A-3 -----END PRIVACY-ENHANCED MESSAGE-----