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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Check One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1996 Commission File Number: 0-12798
CHIRON CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-2754624
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(state or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4560 Horton Street, Emeryville, California 94608
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(Address of principal executive offices) Zip code)
(510) 655-8730
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 1996
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Common Stock, $0.01 par value 42,287,304
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CHIRON CORPORATION
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
March 31, 1996 and December 31, 1995 . . . . . . . . .3
Consolidated Statements of Operations for the
three months ended March 31, 1996 and 1995 . . . . . .4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 . . . . . .5
Notes to Consolidated Financial Statements . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . 23
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS. . . . . . . . . . . . . . . 23
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 37
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CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 84,809 $ 74,318
Short-term investments in marketable debt securities 65,318 61,066
---------- -----------
Total cash and short-term investments in marketable debt securities 150,127 135,384
Accounts receivable 295,577 285,779
Inventories 170,139 165,941
Other current assets 54,591 49,899
---------- -----------
Total current assets 670,434 637,003
Noncurrent investments in marketable debt securities 69,209 88,833
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings 209,708 208,233
Laboratory, production and office equipment 298,126 292,828
Leasehold improvements 102,196 95,472
Construction in progress 82,197 62,046
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692,227 658,579
Less: accumulated depreciation and amortization 157,120 140,761
---------- -----------
Net property, plant, equipment and leasehold improvements 535,107 517,818
Purchased technology, net 78,649 80,600
Other intangible assets, net 73,425 71,571
Investments in equity securities and affiliated companies 45,056 54,359
Other assets 39,495 40,014
---------- -----------
$ 1,511,375 $ 1,490,198
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 80,870 $ 81,081
Accrued compensation and related expenses 41,854 56,994
Short-term borrowings 55,179 50,036
Current portion of unearned revenue 20,025 20,838
Taxes payable 31,353 27,551
Other current liabilities 135,000 132,095
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Total current liabilities 364,281 368,595
Long-term debt 416,924 413,248
Other noncurrent liabilities 36,102 35,943
Commitments and contingencies
Stockholders' equity:
Common stock 422 417
Additional paid-in capital 1,749,699 1,727,711
Accumulated deficit (1,074,955) (1,087,699)
Cumulative foreign currency translation adjustment ( 2,545) 721
Unrealized gain from investments 21,447 31,262
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Total stockholders' equity 694,068 672,412
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$ 1,511,375 $ 1,490,198
--------- ----------
--------- ----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
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CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Revenues:
Product sales, net $ 238,259 $ 183,909
Equity in earnings of unconsolidated joint businesses 23,608 18,178
Collaborative agreement revenues 31,414 5,567
Other revenues 12,470 10,592
-------- --------
Total revenues 305,751 218,246
Expenses:
Cost of sales 101,979 90,282
Research and development 84,048 99,055
Selling, general and administrative 92,330 84,894
Write-off of purchased in-process technologies -- 230,657
Costs related to Ciba transaction -- 49,520
Restructuring and reorganization costs -- 37,641
Other operating expenses 3,107 2,280
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Total expenses 281,464 594,329
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Income (loss) from operations 24,287 (376,083)
Other expense, net (5,818) (1,389)
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Income (loss) before income taxes 18,469 (377,472)
Provision for income taxes 5,725 8,306
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Net income (loss) $ 12,744 $ (385,778)
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Net income (loss) per share $ 0.29 $ (9.64)
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Weighted average number of shares
used in computing per share amounts 44,621 40,013
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</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
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CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 31, March 31,
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 12,744 $ (385,778)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 27,666 22,666
Write-off of purchased in-process technologies -- 230,657
Other 5,548 24,754
Changes, excluding effects of acquisitions, to:
Accounts receivable (12,571) 63,604
Inventories (10,814) (26,749)
Other current assets (6,556) 3,139
Accounts payable (5,784) 3,035
Accrued compensation and related expenses (15,251) 4,670
Taxes payable 3,893 7,906
Other current liabilities 4,690 47,324
Other noncurrent liabilities 1,784 (2,053)
-------- --------
Net cash provided by (used in) operating activities 5,349 (6,825)
Cash flows from investing activities:
Purchase of investments in marketable debt securities (44,517) (19,877)
Sale and maturities of investments in marketable debt securities 59,317 86,880
Capital expenditures (31,841) (28,586)
Businesses acquired, net of cash acquired -- (81,788)
Increase in other assets (1,156) (11,984)
-------- --------
Net cash used in investing activities (18,197) (55,355)
Cash flows from financing activities:
Net borrowings under line of credit arrangements 5,600 42,971
Repayment of notes payable and capital leases (3,849) (2,450)
Proceeds from capital contribution from Ciba -- 24,845
Proceeds from issuance of common stock 21,588 3,060
-------- --------
Net cash provided by financing activities 23,339 68,426
-------- --------
Net increase in cash and cash equivalents 10,491 6,246
Cash and cash equivalents at beginning of the period 74,318 84,876
-------- --------
Cash and cash equivalents at end of the period $ 84,809 $ 91,122
-------- --------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
5
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CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Chiron Corporation (the "Company" or "Chiron") is a science-driven
healthcare company that applies biotechnology and other techniques of modern
biology and chemistry to develop, produce and sell products intended to
improve the quality of life by diagnosing, preventing and treating human
disease. Chiron participates in four global human healthcare markets:
diagnostics, therapeutics, pediatric and adult vaccines, and ophthalmic
surgical products. Chiron also has research programs underway in gene
therapy and gene transfer, combinatorial chemistry, cardiovascular disease
and critical care.
Chiron's diagnostic business includes immunodiagnostics, critical care
diagnostics and quantitative probe tests. Chiron, through its subsidiary
Ciba Corning Diagnostics Corp. ("CCD"), provides critical blood analyte
systems which are used by hospitals to diagnose and monitor patients in
critical care settings. Chiron also provides blood screening tests, used to
detect the presence of hepatitis viruses and retroviruses, through its joint
business with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson & Johnson
company. Chiron's therapeutics business emphasizes oncology and provides
products to hospitals and large clinics in the United States and Europe.
Chiron's vaccine business is based primarily on the sale of non-recombinant
pediatric and flu vaccines in Italy and to a lesser extent in Southern Europe
and other geographic regions and to certain international health services.
Chiron is also involved in the development and marketing of new pediatric and
adult vaccines. Through its ophthalmic business, Chiron provides products for
the surgical correction of vision, as well as intraocular implants that
deliver drugs to the eye. Chiron's ophthalmic business markets its products
in the United States, Europe, and other geographic regions.
BASIS OF PRESENTATION
The information at March 31, 1996, and for the three months ended March 31,
1996 and 1995, is unaudited, but includes all normal recurring adjustments
which Chiron's management believes to be necessary for fair presentation of
the periods presented. The consolidated balance sheet amounts at December
31, 1995, have been derived from audited financial statements. Certain
previously reported amounts have been reclassified to conform with the
current period presentation. Interim results are not necessarily indicative
of results for a full year. This information should be read in conjunction
with Chiron's audited consolidated financial statements for the year ended
December 31, 1995.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Investments in joint
ventures, partnerships and interests in which Chiron has an equity interest
of 50 percent or less are accounted for using the equity or cost method, or
in accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as
appropriate. Certain foreign subsidiaries are accounted for on a one-month
lag. The preparation of financial statements in conformity with
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generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from
those estimates.
FISCAL YEAR
The fiscal year of the Company is a 52 or 53-week year ending on the Sunday
nearest the last day in December of each year. As a result, the first
quarters of 1996 and 1995 represent the thirteen-week periods ended March 31,
1996, and April 2, 1995, respectively. For presentation purposes, dates used
in the consolidated financial statements and notes refer to the calendar
month end.
INVENTORIES
Pharmaceutical inventories are stated at the lower of cost or market using
the average cost method or, in the case of vaccine products, using the
last-in, first-out ("LIFO") method. Diagnostic and ophthalmic products are
valued at cost, using the first-in, first-out ("FIFO") method which is less
than market value. Inventories consist of the following:
MARCH 31, DECEMBER 31,
1996 1995
------------ ----------
(IN THOUSANDS)
Finished goods $ 99,878 $ 96,327
Work in progress 28,645 28,794
Raw material 41,616 40,820
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$ 170,139 $ 165,941
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INCOME TAXES
Income tax expense for the quarter ended March 31, 1996 is based on an
estimated annual effective income tax rate. Income tax expense for the
quarter ended March 31, 1995 includes a provision for state and foreign taxes
based on estimated annual effective rates applicable to certain of the
Company's subsidiaries.
PER SHARE DATA
Per share information is based on the weighted average number of common and
dilutive common equivalent shares outstanding. Common equivalent shares
result from the assumed exercise of outstanding options and warrants that
have a dilutive effect when applying the treasury stock method. Shares
assumed to be issued upon conversion of the Company's convertible debentures
are not included for any of the periods presented since their inclusion would
be anti-dilutive. Fully diluted per share data has not been presented, as
the amounts would not differ materially from primary per share data.
2. BUSINESS COMBINATIONS
FIRST QUARTER 1995 ACQUISITIONS
Effective January 1, 1995, under a series of agreements between Chiron and
Ciba-Geigy Ltd. and its affiliates ("Ciba"), Chiron acquired all of the
outstanding common stock of CCD and
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Ciba's interests in Chiron Biocine Company (formerly The Biocine Company) and
Biocine S.p.A. (through JV Vax B.V., a Netherlands company). On March 31,
1995, Chiron Vision acquired the ophthalmic surgical product division of
IOLAB from Johnson & Johnson. These acquisitions were accounted for under
the purchase method of accounting. As a result of the acquisitions and as
required by generally accepted accounting principles, during the first
quarter of 1995, Chiron recognized as an expense the amount allocated to
purchased in-process technology resulting in a charge against earnings of
$230.7 million. Costs related to the Ciba transaction totaling $49.5 million
were also included in the first quarter of 1995, primarily representing
employee payments and related taxes, and legal and investment advisor fees.
ACQUISITION OF VIAGENE INC. ("VIAGENE")
On September 29, 1995, Chiron acquired all of the outstanding common stock
of Viagene, not previously owned by the Company, in exchange for
approximately $35.5 million in cash and 916,000 shares of Chiron common
stock. Additionally, on September 29, 1995, unexercised options to purchase
Viagene common stock were converted into options to purchase approximately
132,000 shares of Chiron common stock. Prior to the acquisition, Chiron had
an ongoing collaboration with Viagene in the area of gene therapy and,
pursuant to the collaboration arrangement, held an investment in the
outstanding voting stock of Viagene with a carrying value, net of unrealized
gains and a realized loss, of approximately $14.1 million as of September 29,
1995. The Viagene acquisition has been accounted for under the purchase
method of accounting, and accordingly, Viagene's financial results are
included in Chiron's consolidated operating results from September 29, 1995
forward.
The following unaudited pro forma information presents the results of
operations of Chiron and Viagene for the three months ended March 31, 1995,
with pro forma adjustments as if the acquisition had been consummated on
January 1, 1995. This pro forma information does not purport to be
indicative of what would have occurred had the acquisition been made as of
those dates or of results which may occur in the future. The pro forma
information does not include the write-off of purchased in-process technology
of $130.3 million related to the acquisition recognized as an expense in the
third quarter of 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1995
------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C>
Total revenues $220,503
Loss before non-recurring charges (390,303)
Loss before non-recurring charges per share (9.54)
</TABLE>
AGREEMENT WITH BEHRINGWERKE AG
On February 17, 1996, Chiron and Behringwerke AG, a subsidiary of Hoechst
AG, reached an agreement whereby Chiron will purchase a 49 percent interest
in the human vaccine business of Behringwerke AG for Deutsche mark 171.5
million in cash. Under the terms of the agreement, Chiron has an option to
purchase the remaining 51 percent interest in March 1998, 1999, 2000 or 2001
and Behringwerke AG has the option to have Chiron acquire the remaining 51
percent interest in March 2001. During the period of mutual ownership,
Chiron and Behringwerke AG will operate the vaccine business as a joint
venture. Chiron will report its share of the joint venture's results as
equity in earnings of unconsolidated joint businesses. Consummation of the
transaction is subject to certain conditions, including regulatory approvals
and customary conditions prior to closing.
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3. RESTRUCTURING AND REORGANIZATION COSTS
During 1995, Chiron recorded $39.1 million in restructuring and
reorganization charges, including $16.9 million arising from the acquisition
and integration of IOLAB, representing the expected costs of integrating the
acquired business with Chiron's existing business as well as write-downs of
previously capitalized costs. Of the total charge of $39.1 million, $8.0
million is due to a change in plans to expand the Company's Emeryville
research and development facilities, $7.7 million is related to the idling of
the Company's Puerto Rico manufacturing facility and $1.0 million is related
to a scale-back of manufacturing operations at the Company's Amsterdam
facility. The majority of these facility-related charges, as well as $3.7
million of other facility-related charges, were paid in 1995. Of the $16.9
million recorded as a result of the acquisition of IOLAB, approximately $6.7
million related to write-downs of previously capitalized facility and
inventory costs. The remaining $10.2 million consists of $5.5 million of
employee termination costs and $4.7 million of lease termination and other
costs. The integration process is expected to be substantially completed by
the end of 1997.
The current status of the accrued restructuring charges is summarized below:
<TABLE>
<CAPTION>
AMOUNT
AMOUNT OF UTILIZED AMOUNT TO
TOTAL THROUGH BE UTILIZED
RESTRUCTURING MARCH 31, IN FUTURE
CHARGE 1996 PERIODS
------------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Chiron Vision restructuring charges:
Employee-related costs $ 5,506 $ (5,028) $ 478
Facility and lease termination costs 6,242 (2,589) 3,653
Duplicate and excess inventory 3,476 (2,366) 1,110
Other 1,724 (600) 1,124
-------- --------- --------
16,948 (10,583) 6,365
Puerto Rico manufacturing facility 7,650 (3,627) 4,023
Postponement of Emeryville facility expansion 7,990 (7,990) --
Amsterdam manufacturing facility 1,000 (1,000) --
Other facility-related 3,718 (3,718) --
Other 1,750 (1,312) 438
-------- --------- --------
$ 39,056 $(28,230) $ 10,826
-------- --------- --------
</TABLE>
4. COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS
GENERAL
The Company has entered into a number of collaborative arrangements with
other pharmaceutical and biotechnology companies for the development and
marketing of certain technologies and products. The majority of these
collaborations are in the development or clinical trial phase. Chiron and
its collaborative partners generally contribute certain technologies and
research efforts to the collaboration. In addition, Chiron and its
collaborative partners commit, subject to certain limitations and
cancellation clauses, to share in the funding of the collaborations' ongoing
research and clinical trial costs. Chiron, under certain of the
arrangements, has purchased equity securities, including common and preferred
stock and warrants to purchase common and preferred stock, of the
collaborative partner.
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JAPAN TOBACCO INC. ("JT")
In March 1996, the Company and JT entered into a technology transfer and
development agreement whereby the pharmaceutical division of JT acquired a
non-exclusive, perpetual license to apply certain of Chiron's combinatorial
chemistry technologies in JT's research and product development programs.
Both Chiron and JT will share in certain improvements to the technology made
by either party, subject to certain conditions. The agreement provides an
initial technology transfer term of two years and may be extended at the
option of JT for an additional two years. In the first quarter of 1996,
Chiron recorded initial collaborative research agreement revenues from JT of
$7.5 million, pursuant to the agreement.
5. CONTINGENCIES
ABBOTT LABORATORIES. On December 13, 1993, Chiron filed a patent
infringement action against Abbott Laboratories ("Abbott") in the United
States District Court for the Northern District of California. The suit
alleged infringement of Chiron's U.S. Patent No. 5,156,949 ("the '949
patent"), which claims the use of recombinant envelope antigens in
immunoassays for Human Immunodeficiency Virus ("HIV") antibodies. On April 1,
1996, Chiron and Ortho, Chiron's exclusive licensee under the '949 patent,
entered into a settlement agreement with Abbott under which Abbott will be
granted a royalty-bearing non-exclusive license to the '949 patent and
foreign counterparts thereof. It is expected that the subject litigation will
be dismissed upon the execution of definitive agreements.
On September 12, 1995, the United States Patent & Trademark Office ("PTO")
declared an interference between the '949 patent and an application owned by
the U.S. Government and Centocor, Inc. ("Centocor"). Chiron is the junior
party. In the above described litigation with Abbott, the District Court
granted Chiron's request for summary judgment that the U.S.
Government/Centocor application in the subject interference neither enabled
the claimed invention nor disclosed the best mode of practicing the
invention. If the PTO makes a similar ruling on either enablement or best
mode, then Chiron will become the senior party. It is not known when or on
what basis the PTO will resolve the subject interference.
On April 26, 1994, Abbott filed suit against Chiron in the United States
District Court for the Northern District of Illinois alleging that the
Company's bDNA probe assays infringed three patents licensed or acquired by
Abbott from third parties. On April 1, 1996, Chiron and Abbott entered into
a settlement agreement under which Chiron will be granted a royalty-bearing
non-exclusive license to the three patents in suit and the foreign
counterparts thereof. It is expected that the subject litigation will be
dismissed upon the execution of definitive agreements.
BIOANALYSIS/GEN-PROBE. CCD, a wholly-owned subsidiary of Chiron, filed suit
in the United States District Court for the Southern District of California
against Bioanalysis Limited, Gen-Probe Incorporated and the University of
Wales College of Medicine alleging, among other things, patent infringement,
intentional interference with contractual rights, and breach of contract.
CCD's claims arise under its 1984 license from Bioanalysis of
chemiluminescense technology used by CCD in its ACS-TM- and Magic-Registered
Trademark- Lite diagnostic test kits. After CCD filed suit, Bioanalysis gave
notice of default by CCD under the license and demanded that CCD cure the
alleged breaches of the license agreement, including nonpayment of royalties,
failing which the agreement would be terminated. In response to the notice
of default, CCD commenced an arbitration proceeding in New York against
Bioanalysis under the agreement and removed Bioanalysis as a party to the
District Court proceeding. In the arbitration, CCD seeks a declaration that
CCD is not in default under the license agreement and
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that the license agreement covers the use of the licensed technology in
diagnostic test kits incorporating nucleic acid hybridization technology.
Bioanalysis filed a counterclaim to the District Court lawsuit and a counter
demand for arbitration, both of which seek relief based on the alleged
contractual defaults identified in the default letter to CCD. CCD,
Bioanalysis, the University of Wales and Gen-Probe have now executed a
Standstill and Tolling Agreement whereby all litigation activity (except for
certain procedural matters) will be halted until June 23, 1996 and any
contract cure period will be extended until June 30, 1996.
EVANS. Biocine S.p.A. ("Biocine"), a wholly-owned subsidiary of Chiron,
filed an action against Evans Medical Limited (a division of Medeva plc)
("Evans") in the Tribunal of Milan on October 23, 1995 alleging invalidity of
Evans' Italian counterpart to its European Patent No. 0 162 639 ("the '639
patent"), allegedly relating to the p69 antigen of BORDATELLA PERTUSSIS.
Biocine later filed a claim against Evans with the Milan court which seeks a
judgment establishing that Biocine's Acelluvax-TM- and Acelluvax-TM- DTP
vaccines do not infringe the Italian counterpart to the '639 patent. Evans'
response to the Milan actions, filed in February 1996, asserts that Biocine's
vaccines infringe the '639 patent. The Milan court has ordered appointment
of one or more technical consultants to investigate issues raised in this
dispute. Also in February 1996, Chiron and Chiron B.V. filed an action
alleging invalidity and non-infringement of Evans' Dutch equivalent to the
'639 patent in the District Court of The Hague in The Netherlands. On April
4, 1996, a similar claim was filed by Chiron against Evans' U.K. equivalent
to the '639 patent in the High Court of Justice, Chancery Division, Patents
Court of the U.K. SmithKline Beecham Biologicals S.A., Evans' exclusive
licensee to the '639 patent for England and Wales, will be named as a
defendant in the U.K. Chiron believes that the Biocine vaccines do not
infringe any valid claim of the '639 patent or its foreign counterparts.
Biocine previously had opposed issuance of the '639 patent before the
European Patent Office ("EPO") and, along with other parties, has appealed
the EPO opposition decision which maintained the patent in amended form.
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION. Chiron, Ortho, and certain
Ortho affiliates have been involved in a series of legal actions against
subsidiaries of International Murex Technologies Corporation ("IMTC").
Beginning on March 2, 1992, Chiron, Ortho and Ortho Diagnostics Systems,
Ltd. ("Ortho Ltd."), brought two successive actions in the High Court for
England and Wales against Murex Diagnostics, Ltd. ("MD"), alleging
infringement of Chiron's U.K. Patent No. 2,212,511 ("the '511 patent") which
covers certain hepatitis C virus ("HCV") immunodiagnostic tests. On May 27,
1994, the High Court granted judgment for Chiron, Ortho and Ortho Ltd., holding
the '511 patent valid and infringed, and ordered MD to pay damages in an amount
to be determined. On November 30, 1994, the High Court granted Chiron's,
Ortho's and Ortho Ltd.'s request for an injunction. Both MD and the
Chiron/Ortho parties appealed various aspects of the High Court's judgments.
In rulings on November 2 and 7, 1995, the U.K. Court of Appeal held that,
with the exception of one claim, the '511 patent is valid and infringed, and
that Chiron could amend the patent by deleting the invalid claim, thus
allowing damage proceedings in the High Court to continue. The Court of
Appeal also reversed a ruling by the High Court that MD had a defense to the
damages claimed by Ortho Ltd. prior to October 13, 1993 on the basis of
provisions in a licensing agreement between Chiron and Ortho. The Court of
Appeal denied all parties leave to appeal to the House of Lords.
Nevertheless, the parties have applied directly to the House of Lords for
leave to appeal. While the Appeal Committee of the House of Lords has
granted preliminary leave to appeal, it is not known when the House of Lords
will make a final decision regarding leave to appeal.
On February 16, 1996, the High Court ordered MD to make an interim
damages payment of 6,000,000 British pounds to the Chiron/Ortho parties by
February 23, 1996. On February 22, 1996, MD made it known that it had
changed its name to Specialist Diagnostics Ltd. ("SDL"), and filed a petition
for voluntary liquidation. The High Court has ordered that a damages inquiry
be held with respect
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to SDL in November 1996. It is not known how much (if any) of the original
6,000,000 British pounds interim award or any further damages award will be
collected from the allegedly insolvent SDL, or when such collection could be
effected.
Infringement proceedings against IMTC subsidiaries on German and European
patents corresponding to the '511 patent were also brought by Chiron (and in
some cases with Ortho and/or its affiliated companies) in Germany, Italy, The
Netherlands and Belgium. On January 23, 1995, Chiron was granted an
injunction in Germany by the Dusseldorf District Court on Chiron's German and
European patents for HCV. On May 8, 1995, Chiron was granted a cross-border
preliminary injunction by the District of The Hague in The Netherlands based
on Chiron's European HCV patent, preventing infringement by IMTC subsidiaries
in The Netherlands, Belgium, France, Spain and Luxembourg. An infringement
action also has been brought against IMTC and certain of its subsidiaries in
the Federal Court of Australia, New South Wales District Registry, in
response to a suit seeking revocation of the Australian counterpart of the
'511 patent. The Australian litigation is scheduled for trial beginning June
24, 1996.
On April 11, 1996, the Opposition Division of the EPO upheld Chiron's
European HCV patent (Pat. No. 0 318 216) ("the '216 patent")
over the oppositions of MD/SDL, United Biomedical, Inc., F. Hoffmann-La Roche
& Co. AG., Behringwerke AG and the Research Foundation for Microbial Diseases
of Osaka University. The Opposition Division's decision is subject to appeal.
On March 5, 1996, IMTC filed a complaint against Chiron, Johnson & Johnson
("J&J"), Institut Pasteur and Abbott Laboratories with the European
Commission in Belgium ("EC"), alleging violations of Articles 85 and 86 of
the EC Treaty and Articles 53 and 54 of the European Economic Area
Agreement concerning licensing practices under Chiron's '511 patent and its
European Patent equivalent, the '216 patent. The EC complaint charges that
Chiron and J&J have entered into license agreements with competitors which
constitute market sharing and price fixing in the HCV and other blood testing
fields, thus abusing an allegedly dominant position in the HCV market. IMTC
claims that Chiron's HCV patents constitute an "essential facility" which
must be "freely licensed on reasonable commercial terms." The EC complaint
seeks, INTER ALIA, interim measures in the form of a compulsory license from
Chiron to IMTC applicable in all European Union member states for the
manufacture of HCV antigen and nucleic acids for immunodiagnostic reasons.
The EC has taken no formal action on IMTC's complaint to date. Chiron
believes that the IMTC complaint is without merit.
UNITED BIOMEDICAL, INC.. On May 4, 1994, Chiron instituted summary legal
proceedings against Organon Teknika, B.V., Akzo Pharma, B.V., subsidiaries of
Akzo N.V. (all subsidiaries of Akzo N.V. (collectively referred to as
"Organon")), and United Biomedical, Inc. ("UBI"), the supplier of Organon's
HCV antigens and kits, in the District Court of The Hague, The Netherlands,
alleging infringement of the '216 patent as a result of the defendants'
manufacture and sale of HCV immunoassay kits. On July 22, 1994, Chiron was
granted a cross-border preliminary injunction against further infringement,
including sale of the UBI kit, by Organon in Austria, Belgium, Switzerland,
Germany, Spain, France, Italy, Liechtenstein, Luxembourg, The Netherlands and
Sweden. Organon and UBI appealed the injunction. The '216 patent is a
counterpart of the British '511 patent, described under the heading
INTERNATIONAL MUREX TECHNOLOGIES CORPORATION above. Chiron, Ortho, Ortho,
Ltd. and Organon settled all European HCV litigation on October 9, 1995, and
Chiron and Ortho were compensated for past infringement. UBI did not
participate in the settlement and has been ordered to pay Ortho Ltd. damages
by the U.K. Court of Appeal, along with Murex, as described above. A damages
inquiry has not yet been scheduled.
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SICOR. As of April 10, 1996, Chiron entered into a settlement agreement
which will result in dismissal of a 1991 lawsuit filed in the United States
District Court for the Northern District of California against Cetus Oncology
Corporation ("Cetus"), Ben Venue Laboratories, Inc. ("Ben Venue"), Cetus Ben
Venue Therapeutics ("CBVT") and Erbamont, Inc. ("Erbamont") and its
affiliates by Alco Chemicals, Ltd. ("Alco") and Sicor, S.p.A. ("Sicor"). The
Sicor complaint alleged breach of a CBVT contract to purchase bulk
doxorubicin from Sicor, as well as antitrust violations and interference with
contract and prospective advantage, and sought unspecified damages. Cetus
denied any entitlement to recovery in this lawsuit and had filed
counterclaims. In February 1995, Sicor and Alco filed a further action in
the United States District Court for the Northern District of California and
an arbitration against CBVT for amounts allegedly owed by CBVT to Sicor and
Alco for the supply of doxorubicin, plus interest and attorneys' fees. Under
the April 10, 1996 settlement agreement, each of the matters described in
this paragraph will be dismissed with prejudice.
SMITHKLINE BEECHAM BIOLOGICALS S.A. ("SKB"). Chiron owns issued European
Patent No. 0 120 551 ("the '551 patent") which relates to yeast expression
vectors containing foreign gene sequences including, for example, Hepatitis B
virus surface antigen, and expression methods thereof. Chiron filed a
divisional application, European Patent No. 0 460 716 ("the '716 patent"),
which will issue soon and which contains related claims. Chiron believes that
SKB's Engerix-B-Registered Trademark-vaccine against Hepatitis B virus
infringes the '551 patent and will infringe the '716 patent once it issues.
In April 1996, SKB filed suit against Chiron in the Tribunal of First
Instance of Brussels seeking a declaration that the '551 and '716 Patents
are: (1) null and void in Belgium; and (2) not infringed by SKB in a variety
of European countries. SKB also filed an application for preliminary relief
which, if granted, would suspend the effects of the '551 and '716 patents and
would allow SKB to continue production and commercialization of
Engerix-B-Registered Trademark- in all designated countries until a decision
on validity and infringement is rendered. A hearing on SKB's preliminary
relief application is expected to be held in September 1996. Chiron believes
that both the '551 and '716 patents are valid and infringed and that it has
significant defenses to SKB's claims.
STOCKHOLDER LITIGATION. In November 1994, Chiron, its directors, and
certain of its officers were sued in three essentially identical lawsuits
filed as class actions on behalf of Chiron stockholders, alleging that the
directors had violated their fiduciary duty by failing to maximize
stockholder value in connection with the series of transactions affected with
Ciba-Geigy, Ltd. which were announced on November 20, 1994, by, among other
things, not taking all possible steps to seek out and encourage the best
offer for the Company once the Company had been put in play. Two of the
actions filed respectively on November 14, 1994 and November 22, 1994 (HANNA
V. CHIRON CORP., ET AL., C.A. No. 13874, and DEZUBE V. CHIRON CORPORATION ET
AL., C.A. 13896) were filed in the Court of Chancery of the State of
Delaware in and for New Castle County. These complaints seek injunctive
relief, rescission and attorneys' fees. Plaintiff in the HANNA action
additionally seeks damages in an unspecified amount. Plaintiff in the DEZUBE
action additionally seeks an accounting. The complaints have been answered
by all defendants, who deny the material allegations of the complaints. The
third action was filed in the Superior Court of California, Alameda County,
Northern Division, on December 1, 1994 (PERERA ET AL., V. CHIRON CORPORATION
ET AL., C.A. No. 744522-2). Plaintiff sought injunctive and declaratory
relief, and an accounting, costs and disbursements, including attorneys' and
experts' fees, and other relief.
On October 17, 1995, the PERERA plaintiffs commenced a new action (the
"Federal Action") in the United States District Court for the Northern
District of California, against the same defendants and Ciba-Geigy, Ltd.,
Ciba-Geigy's Chairman Alex Krauer, Ciba-Geigy Corporation, and Ciba Biotech
Partnership, Inc. (collectively, the "Ciba Defendants"). The Federal Action
asserts both state and federal claims, including a claim under Sections
10(b), 14(d) and 14(e) of the Securities Exchange Act of 1934, and seeks
damages and injunctive relief. On October 23, 1995,
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in light of the filing of the Federal Action, the PERERA action was dismissed
by stipulation of the parties.
Plaintiffs and all of the defendants other than the Ciba Defendants have
entered into an agreement to settle the Federal Action on a class-wide basis,
subject to approval by the Court. Under the terms of that settlement
agreement, Chiron will pay plaintiffs' counsel up to $300,000 in attorneys
fees and expenses, as may be awarded by the Court, and will pay the costs of
class notice. Chiron has no other financial obligations under the settlement
agreement, which also contemplates that the HANNA and DEZUBE actions will be
dismissed as moot following approval of the settlement and dismissal of the
Federal Action. At a status conference held in March 1996, the District Court
preliminarily approved the settlement. The class has received notice of the
settlement, and a final approval hearing has been scheduled for May 21, 1996.
The Company is party to certain other lawsuits, each of which is described
in Item 3, Legal Proceedings, on page 10 of the Company's report on Form 10-K
for the period ended December 31, 1995, and as to which there have been no
material developments since such Form 10-K was filed.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
THE DISCUSSION BELOW CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CHIRON
CORPORATION (THE "COMPANY" OR "CHIRON"), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED BELOW AND UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS.
Chiron is a science-driven healthcare company that applies biotechnology and
other techniques of modern biology and chemistry to develop, produce and sell
products intended to improve the quality of life by diagnosing, preventing and
treating human disease. Chiron participates in four human healthcare markets:
diagnostics, including blood screening tests, automated immunodiagnostic
systems, critical blood analyte systems and new quantitative probe tests;
therapeutics, with an emphasis on oncology, serious infectious diseases and
critical care diseases; adult and pediatric vaccines; and ophthalmic surgical
products, including instruments and devices used for the surgical correction of
vision and an intraocular implant to deliver drugs into the eye. Chiron also
develops or acquires new technologies, employing these technologies to discover
new products for the Company or for its partners.
RESULTS OF OPERATIONS
REVENUES
The Company's revenues are derived from a variety of sources, including
product sales, joint business arrangements, collaborative agreements and product
royalty agreements. Product sales, Chiron's largest revenue category, consists
of the following product lines for each of the three-month periods ended March
31:
1996 1995
--------- --------
(IN THOUSANDS)
Diagnostic products $ 134,349 $127,440
Ophthalmic products 44,941 24,320
Vaccine products 20,834 15,844
Betaseron-Registered Trademark- 20,892 1,817
Oncology products 16,148 12,767
Other products 1,095 1,721
--------- --------
$ 238,259 $183,909
--------- --------
Diagnostic product sales include direct sales and sales-type leases of fully-
automated, random-access immunodiagnostic (ACS-TM-) testing systems and reagents
for these systems, as well as sales of critical blood analyte systems (CBA-TM-),
clinical chemistry products and manual immunodiagnostic systems. Sales of
diagnostic systems often include the sale of service and maintenance contracts.
Revenue from these contracts is included in product sales revenue and is
recognized ratably over the life of the contracts. The increase in diagnostic
product sales in the first quarter of 1996 over the first quarter of 1995 is
primarily due to growth in immunodiagnostic product sales resulting from
increased penetration of the instruments market and increased sales volume
resulting from an expanded menu on the ACS-TM- system.
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Sales of ophthalmic products increased between periods due to significant
growth in intraocular lens sales as a result of the March 1995 acquisition of
the surgical product division of IOLAB from Johnson & Johnson, and the
continuing evolution in the marketplace favoring foldable lens technology-based
products. Phacoemulsification and viscoelastic product sales also increased
during the first quarter of 1996 over the same period of the preceding year. In
addition, during the first quarter of 1996, Chiron received approval by the U.S.
Food and Drug Administration ("FDA") to market its Vitrasert-TM- Implant
(Cytovene-Registered Trademark-; Roche Laboratories) product, the first drug
delivery system to provide local, sustained therapy for the eye. The Company
recorded $1.0 million of Vitrasert-TM- Implant sales during the first quarter of
1996.
Vaccine product sales consist of sales of pediatric and adult vaccines
primarily in Italy and to public health organizations by Chiron's Biocine S.p.A.
subsidiary ("Chiron Biocine"). Chiron Biocine's vaccine products include
Acelluvax-Registered Trademark-, a recombinant acellular pertussis vaccine;
Agrippal-Registered Trademark-, a flu vaccine; and Polioral-TM-, an oral polio
vaccine. Sales of Chiron Biocine's flu vaccine are seasonal, with strong sales
generally occurring during the pre-flu season in the fourth quarter of the year.
The increase in Chiron Biocine's vaccine product sales in the first quarter of
1996 over that of 1995 is due to Chiron Biocine's expansion into new export
markets for its polio vaccine as well as new sales of Chiron Biocine's combined
diphtheria, tetanus and acellular pertussis vaccine in Italy.
Under the terms of a development and supply agreement with Schering AG,
Germany ("Schering"), and its U.S. affiliate, Berlex Laboratories, Inc.
("Berlex"), Chiron manufactures Betaseron-Registered Trademark- (interferon
beta-1b) for Berlex. Under the terms of the agreement, Chiron earns a partial
payment for Betaseron-Registered Trademark- upon shipment to Berlex and a
subsequent payment for Betaseron-Registered Trademark- upon Berlex's net sales
of the product. The increase in Betaseron-Registered Trademark- product sales
during the first three months of 1996 over the same period in 1995 is due, in
part, to an increase in commercial vials shipped to Berlex in 1996 as compared
to 1995. Because Berlex had previously built adequate inventory levels to
satisfy patient demand, Chiron did not ship any commercial-use vials during the
first three months of 1995. The increase in Betaseron-Registered Trademark-
product sales during 1996 is also due to additional revenues recorded by Chiron
from Berlex's net sales of Betaseron-Registered Trademark- and the receipt in
1996 of $2.8 million of revenues for Betaseron-Registered Trademark- shipped to
Berlex and distributed by Schering for use in an early access program for
European patients prior to commercial approval in Europe.
Future levels of Chiron's Betaseron-Registered Trademark- shipments will
depend upon the rate at which new patients are enrolled from existing and future
markets, the extent to which patients, once enrolled, remain compliant with the
prescribed treatment regimen and continue to regularly receive Betaseron-
Registered Trademark-, and the timing of approval and market launch of competing
products, including another beta interferon product. Chiron anticipates that
1996 shipments of Betaseron-Registered Trademark- will be lower than 1995
levels, however, reported revenue from Betaseron-Registered Trademark- will be
approximately equal to, or slightly less than, that of 1995. Based upon the
level of inventories carried by Berlex, the timing of future shipments to Berlex
in 1996 may vary by quarter.
Sales of oncology products, principally Proleukin-Registered Trademark-
(aldesleukin, interleukin-2), increased during the first three months of 1996
over the same period in 1995 primarily due to an increase in Proleukin-
Registered Trademark- quantities sold of 21 percent and 23 percent,
respectively, in the European and domestic markets. Proleukin-Registered
Trademark- average net unit sales prices remained constant in Europe but
increased by 13 percent in the domestic market between 1996 and 1995.
The Company markets many of its commercial products internationally. As a
result, product revenues in almost all product lines are affected by fluctuating
foreign currency exchange rates. Foreign product sales were approximately
$133.6 million and $117.5 million for the three-month periods ended March 31,
1996 and 1995, respectively. International sales of diagnostic and vaccine
products accounted for the majority of the increase in foreign product sales
between periods. For the three-month period ended March
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31, 1996, approximately 56 percent of Chiron's product sales were denominated
in foreign currencies. Although, for the first quarter of 1996, the net
effect of changing foreign currency exchange rates did not significantly
impact product sales when compared with 1995, changing currency exchange
rates have had, and will continue to have, an impact on Chiron's results.
The Company's other revenues, discussed below, are largely denominated in
U.S. dollars but are impacted by our joint partners' and collaborators'
non-U.S. operations.
As of March 31, 1996, Chiron owned a 50 percent interest in two joint
businesses: a joint diagnostic business with Ortho Diagnostic Systems, Inc.
("Ortho") and a generic cancer chemotherapeutics business with Ben Venue
Laboratories, Inc. ("Ben Venue"). Chiron's one-half interest in the pretax
operating earnings of its joint diagnostic business with Ortho represents the
largest component of joint business revenues. The joint business receives a
royalty from Abbott Laboratories ("Abbott") for Abbott's sales of hepatitis C
virus ("HCV") tests which use the Chiron technology and which compete directly
with tests marketed by Ortho. Results from the joint venture are recorded by
Chiron on a one-month lag based upon estimates supplied by Ortho and are subject
to a final annual accounting during the first quarter of the subsequent year.
Chiron's share of the pretax earnings of the joint business increased by $4.4
million in the first quarter of 1996 as compared to 1995, primarily due to
adjustments arising from the final 1995 accounting. In addition, the joint
venture experienced a growing volume of HCV tests sold to overseas markets and
increased royalties received from Abbott's sales of HCV tests. These increases
more than offset a reduction between periods in gross profit margins and an
increase in research and development spending.
Results for Chiron's equity interest in the generic cancer chemotherapeutics
business increased by $0.9 million in the first quarter of 1996 as compared to
the first quarter of 1995. Under the terms of a purchase agreement, effective
May 1, 1996, Chiron agreed to sell its one-half interest in the generic cancer
chemotherapeutics business to Ben Venue. Chiron expects to record a gain from
the sale of approximately $10.0 million to $12.0 million during the second
quarter of 1996.
Collaborative agreement revenues consist of fees received for research
services as they are performed, fees received for completed research or
technology, fees received upon attainment of benchmarks specified in the related
research agreements, and proceeds of sales of biological materials to research
partners for clinical and preclinical testing. Collaborative agreement revenues
for the first quarter of 1996 increased by $25.8 million compared to 1995. A
portion of this increase is comprised of $16.0 million received from Ciba-Geigy
Limited of Basel, Switzerland ("Ciba") under the terms of a research funding
agreement. In 1995, Ciba agreed to provide $250 million (which may be
increased up to $300 million subject to certain conditions) in support of
research at Chiron. Chiron anticipates continued utilization of the research
funding provided by Ciba under the terms of the research funding agreement.
Also contributing to the increase in collaborative agreement revenues in the
first quarter of 1996 over 1995, as discussed further in Note 4 of Notes to
Consolidated Financial Statements, are initial revenues of $7.5 million earned
from Japan Tobacco Inc. ("JT"). In March 1996, the Company and JT entered into
a technology transfer and development agreement whereby the pharmaceutical
division of JT acquired a non-exclusive, perpetual license to apply certain of
Chiron's combinatorial chemistry technologies in JT's research and product
development programs.
Other revenues consist principally of product royalties, government grants
and sales fees earned by the Company for sales and marketing services
rendered on behalf of its generic chemotherapeutics joint venture and on
behalf of Ciba-Geigy. Other revenues increased in the first quarter of 1996
primarily due to increased sales fees received from Ciba for sales of
Aredia-Registered Trademark- (pamidronate disodium) and increased nucleic
acid probes reference laboratory service revenues.
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COSTS AND EXPENSES
Cost of sales increased consistent with the increase in product sales between
years. The gross profit margin increased to 57 percent in the first quarter of
1996 from 51 percent in 1995. The gross profit margin was affected negatively
during the first quarter of 1995 due to additional operating expenses associated
with the Company's Puerto Rico manufacturing facility which was idled during
1995 as well as the lack of commercial shipments of Betaseron-Registered
Trademark-. During the first quarter of 1996, Chiron's gross profit margin
improved when compared to 1995 as a result of increased commercial shipments of
Betaseron-Registered Trademark- as well as additional revenues received from
Berlex's net sales of Betaseron-Registered Trademark-. The improvement in the
gross profit margin in the first quarter of 1996 over 1995 is also due to
increased margins on ophthalmic product sales of intraocular lenses, as well as
improved margins on diagnostic product sales of critical blood analyte systems.
Gross margin percentages may fluctuate significantly in future periods as the
Company's product mix continues to evolve and as the costs of new facilities are
included in cost of goods sold.
Research and development expenses decreased in the first quarter of 1996 as
compared to 1995 primarily due to the following items, recognized as research
and development expense pursuant to collaborative arrangements with other
pharmaceutical and biotechnology companies in 1995:
- The Company paid $8.8 million to G.D. Searle & Co. for the development and
marketing of Tissue Factor Pathway Inhibitor products;
- Chiron made a $3.5 million milestone payment to DepoTech Corporation
("DepoTech") for the research, development and marketing of products
incorporating certain drug delivery technologies developed by DepoTech;
- An initial license payment of $2.5 million was paid by Chiron to
Progenitor, Inc. ("Progenitor"), pursuant to a collaboration for the
development and commercialization of therapeutic and vaccine products
incorporating Progenitor's proprietary gene therapy technology;
- The Company reached an agreement with Genelabs Technologies, Inc.
("Genelabs"), whereby Chiron and Genelabs cross-licensed certain rights to
hepatitis C virus, hepatitis G virus, human T-cell leukemia virus - I and
human T-cell leukemia virus - II diagnostic tests. Of an initial payment
of $5.0 million, approximately $4.2 million was recognized as expense in
the first quarter of 1995;
- Chiron made a $5.0 million initial payment to New York University ("NYU")
under an agreement whereby Chiron and its sublicensee, Ciba, acquired
certain rights to NYU's optical gene mapping technology.
Partially offsetting these reductions in research and development expense in
1996 was an increase of $2.4 million primarily related to Chiron's effort to
obtain FDA approval of its combined diphtheria, tetanus and acellular pertussis
vaccine as well as an increase of $5.0 million due to the Company's acquisition
of Viagene, Inc. ("Chiron Viagene") in the third quarter of 1995. Chiron
Viagene is engaged in the discovery and development of gene transfer drugs for
the treatment of severe viral infections, cancers and other diseases.
Selling, general and administrative expenses ("SG&A expenses") increased in
the first quarter of 1996 over 1995 primarily due to additional sales and
marketing efforts related to the entrance into new markets and the expansion of
existing markets for immunodiagnostic products. SG&A expenses in the ophthalmic
business were also higher in 1996 due to the acquisition of IOLAB and increased
costs related to the ophthalmic sales force, resulting from the integration of
Chiron's operations with IOLAB. Selling and marketing expenses represent the
largest portion of total SG&A expenses, as Chiron devoted significant resources
to support sales volumes in the diagnostic, ophthalmic, therapeutic and vaccine
product lines.
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The write-off of purchased in-process technology in 1995 includes $220.4
million for the acquisitions from Ciba of Ciba Corning Diagnostics Corp. ("CCD")
and Ciba's interests in Biocine S.p.A. and The Biocine Company ("Chiron Biocine
Company"), and $10.3 million for the acquisition of IOLAB.
In 1995, costs related to the Ciba transaction consist primarily of employee
payments and related tax liabilities and legal and investment advisor fees.
Restructuring and reorganization costs in 1995 represent certain accrued
costs of integrating the acquired businesses with Chiron's existing businesses,
costs related to the idling of the Company's Puerto Rico manufacturing facility
and the scaling-back of manufacturing operations at the Company's Amsterdam
facility, and costs related to the write-down of duplicate facilities at the
Company's Emeryville, California, headquarters. Also included was a charge
related to the change in plans to expand the Company's Emeryville research and
administrative facilities.
OTHER ITEMS
Other expense, net, consists primarily of investment income on the Company's
cash and investment balances and interest expense on convertible subordinated
debentures, other debt and capital leases. Other expense, net, increased between
the first quarter of 1996 and 1995 primarily as a result of reduced investment
income arising from lower cash balances in the Company's investment portfolio.
The provision for income taxes in 1996 is based on an estimated annual
effective income tax rate. The provision for income taxes in the first quarter
of 1995 was comprised primarily of foreign taxes on certain foreign operations
of the Company. Substantially all of the write-off of purchased in-process
technologies was not deductible for income tax purposes and thus did not create
a tax benefit in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements are funded from public and private sales of
equity and convertible debt and cash provided by operations. In addition to
these sources of capital, future capital requirements may be financed through a
combination of debt, utilization of research funding from Ciba, possible off-
balance-sheet financing (such as R&D limited partnerships and operating leases),
cash generated from operations and the use of existing cash and investment
balances. Until required for operations, Chiron's policy is to keep its cash
and investments in a diversified portfolio of investment grade financial
instruments, including money market instruments, corporate notes and bonds,
government or government agency securities, or other debt securities. By
policy, the amount of credit exposure to any one institution is limited. These
investments are generally not collateralized and primarily mature within three
years. Investments with maturities in excess of one year are presented on the
balance sheet as noncurrent investments. To the extent that Chiron has balance
sheet exposure resulting from completed transactions denominated in a foreign
currency, the Company's policy is to mitigate exposure to exchange rate
fluctuations by entering into forward currency contracts. These contracts are
settled quarterly. At March 31, 1996, the Company had outstanding forward
currency contracts totaling approximately $67.6 million. In addition, the
Company has commenced a program, consisting of purchased average rate options,
designed to reduce the impact of fluctuating foreign currency exchange rates on
the results of anticipated transactions. At March 31, 1996, the Company had
outstanding purchased average rate option contracts totaling approximately $57.3
million.
In future periods, Chiron expects to incur substantial capital spending
consistent with the Company's commitment to expand its manufacturing capacity.
During the first quarter of 1996, Chiron continued the expansion of certain
vaccine production facilities in Italy as well as the planned expansion of its
research and development and certain administrative facilities in Emeryville.
The expansion of research and
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development and certain administrative facilities in Emeryville is projected
to occur in stages over the next thirty years. The Company anticipates
entering into leasing arrangements which will provide third-party funding for
a significant portion of the Emeryville expansion.
On February 17, 1996, Chiron and Behringwerke AG, a subsidiary of Hoechst AG,
reached an agreement whereby Chiron will purchase a 49 percent interest in the
human vaccine business of Behringwerke AG for Deutsche mark 171.5 million in
cash. Consummation of the transaction is subject to certain conditions,
including regulatory approvals and customary conditions prior to closing. The
Company anticipates that the transaction will close prior to the 1996 year-end.
Chiron's liquidity may be further impacted in future periods by its decision
to fund its share of expenses in certain of its joint ventures and collaboration
arrangements. Over the next several years, Chiron anticipates funding
collaborations with a number of its research partners, and may make additional
equity investments in collaborative partners. In addition, during the first
quarter of 1996, Chiron entered into a binding heads of agreement with a third
party pursuant to which Chiron expects to invest approximately $30.0 million for
a combination of preferred stock, debt and prepaid services. Consummation of
this transaction is subject to the negotiation and execution of definitive
agreements, as well as regulatory approvals and customary closing conditions.
During the three months ended March 31, 1996, cash and cash equivalents
increased by $10.5 million. Of this amount, $5.3 million was provided by the
Company's operating activities, compared to $6.8 million used in operating
activities in the first quarter of 1995.
Investing activities consumed cash of $18.2 million during the first three
months of 1996, versus $55.4 million in 1995. The first quarter of 1996
included net sales of marketable debt securities of $14.8 million compared to
net sales of marketable debt securities of $67.0 million in 1995. Capital
expenditures on plant and equipment were $31.8 million during the first three
months of 1996 and $28.6 million in 1995. During the first quarter of 1995,
Chiron received $14.2 million, net of cash paid, through its acquisition of CCD,
Biocine S.p.A. and Chiron Biocine Company. The first quarter of 1995 also
included the acquisition of IOLAB for $95.0 million in cash.
Cash provided by financing activities of $23.3 million in the first quarter
of 1996 largely reflects cash proceeds of $16.1 million and $3.9 million,
respectively, received from the exercise of stock options and for issuance of
stock under the Company's employee stock purchase plan as well as cash received
from short-term borrowings of $5.6 million. Cash provided by financing
activities of $68.4 million in the first three months of 1995 includes
approximately $43.0 million primarily related to borrowings under a line of
credit arrangement, and a capital contribution of $24.8 million pursuant to the
1995 agreements with Ciba.
Chiron believes that its cash and cash equivalents and short and long-term
investments, together with funds provided by operations and the funding
arrangements discussed above will be sufficient to meet its cash requirements
during the upcoming twelve months and through the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Chiron wishes to caution stockholders and investors that the following
important factors, among others, in some cases have affected, and in the future
could affect, Chiron's actual results and could cause Chiron's actual
consolidated results for the second quarter of 1996, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Chiron. The statements under this caption are intended to serve as
cautionary statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The following information is not intended to limit in any
way the
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characterization of other statements or information under other captions as
cautionary statements for such purpose:
- Delays, difficulties or failure in obtaining regulatory approval (including
approval of its facilities for production) for the Company's products,
including delays or difficulties in development because of insufficient
proof of safety or efficacy.
- Inability to maintain or initiate third party arrangements which generate
revenues, in the form of license fees, research and development support,
royalties and other payments, in return for rights in technology or
products under development by the Company.
- Delays or difficulties in developing and acquiring technology and technical
and managerial personnel to manufacture and/or deliver the Company's
products in commercial quantities at reasonable costs and in compliance
with applicable quality assurance and environmental regulations and
governmental permitting requirements.
- Difficulties in obtaining key raw materials and supplies for the
manufacture of the Company's products.
- Increased and irregular costs of development, regulatory approval,
manufacture, sales, and marketing associated with introduction of novel
products.
- Difficulties in launching or marketing the Company's products, many of
which are novel products based on biotechnology, and unpredictability of
customer acceptance of such products.
- The ability and willingness of customers to substitute competitive products
for the Company's products once other products for similar indications are
approved for marketing.
- Continued flattened growth rate in the Betaseron-Registered Trademark-
customer base in the U.S.; the extent to which patients, once enrolled,
remain compliant with the prescribed treatment regimen and continue to
regularly receive Betaseron-Registered Trademark-; timing, approval and
market launch of competing products, including another beta interferon
product; pricing, promotional and marketing decisions by the Company's
partner, Schering.
- Continued lower product margins resulting from the Chiron-Ortho joint
business' renegotiated contract with the American Red Cross; changes in the
product mix whereby the proportion of higher margin HCV tests sold relative
to other lower margin products is less; continued increases in research and
development spending in order to develop new products and increase market
share; introduction of competing tests by unlicensed third parties.
- Continued or increased pressure to reduce selling prices of the Company's
products.
- Underutilization of the Company's existing or new manufacturing facilities
or of any facility expansions, resulting in production inefficiencies and
higher costs; start-up costs and inefficiencies and delays and increased
depreciation costs in connection with the start of production in new plants
and expansions.
- The cost of acquiring in-process technology, either by license,
collaboration or purchase of another entity.
- Amount and rate of growth in Chiron's selling, general and administrative
expenses; and the impact of unusual or infrequent charges resulting from
Chiron's ongoing evaluation of its business strategies and organizational
structures, including the continued costs of integration of newly acquired
businesses.
- The acquisition of fixed assets and other assets, including inventories and
receivables; and the making or incurring of any expenditures and expenses,
including, among others, depreciation and research and development
expenses; any revaluation of assets, including, among others, the Company's
investments in the equity securities of other companies with whom it
collaborates, or related expenses, and the amount of, and any changes to,
tax rates.
- The ability or inability of Chiron to obtain, or hedge against, foreign
currency, foreign exchange rates and fluctuations in those rates.
21
<PAGE>
- The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product-related or environmental, or
criminal); settlements and investigations; developments or assertions by or
against Chiron relating to intellectual property rights and licenses; the
issuance and use of patents and proprietary technology by Chiron and its
competitors, including the possible negative effect on the Company's
ability to develop, manufacture and sell its products in circumstances
where it is unable to obtain licenses to patents which may be required for
such products.
- Failure of corporate partners to commercialize successfully the Company's
products or to retain and expand the markets served by the commercial
collaborations; conflicts of interest, priorities and commercial strategies
which may arise between the Company and such corporate partners.
22
<PAGE>
ITEM 1. LEGAL PROCEEDINGS
Information responding to Item 1 is set forth in Part 1., Item 1., Notes
to Consolidated Financial Statements, Note 5. "Contingencies," which
information is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES. None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
<S> <C>
2.01 Agreement and Plan of Merger, made as of February 6, 1987, incorporated by reference to
Exhibit 2.01 of the Registrant's Form 10-Q report for the period ended September 30, 1994.
3.01 Restated Certificate of Incorporation of the Registrant, dated August 18, 1987,
incorporated by reference to Exhibit 3.01 of the Registrant's Form 10-K report for fiscal
year 1991.
3.02 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, dated
December 12, 1991, incorporated by reference to Exhibit 3.01 of the Registrant's Form 10-K
report for fiscal year 1991.
3.03 Bylaws of the Registrant, as amended, incorporated by reference to Exhibit 3.03 of the
Registrant's Form 10-K report for fiscal year 1994.
4.01 Indenture, dated as of May 21, 1987, between Cetus Corporation and Bankers Trust Company,
Trustee, incorporated by reference to Exhibit 4.01 of the Registrant's Form 10-Q report for
the period ended September 30, 1994.
4.02 First Supplemental Indenture, dated as of December 12, 1991, by and among Registrant,
Cetus Corporation, and Bankers Trust Company, incorporated by reference to Exhibit 4.02 of
the Registrant's Form 10-K report for fiscal year 1992.
4.03 Indenture, dated as of November 15, 1993, between Registrant and The First National Bank
of Boston, as Trustee, incorporated by reference to Exhibit 4.03 of the Registrant's Form
10-K report for fiscal year 1993.
23
<PAGE>
4.04 Rights Agreement, dated as of August 25, 1994, between the Company and Continental Stock
Transfer & Trust Company, which includes the Certificate of Designations for the Series A
Junior Participating Preferred Stock as Exhibit A, the form of Right Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C,
incorporated by reference to Exhibit 4.04 of the Registrant's current report on Form 8-K
dated August 25, 1994.
4.05 Amendment No. 1 to Rights Agreement dated as of November 20, 1994, between Chiron
Corporation and Continental Stock Transfer & Trust Company, incorporated by reference to
Exhibit 4.05 of the Registrant's current report on Form 8-K, dated November 20, 1994.
4.06 $1,000,000 County of Lorain, Ohio Variable Rate Industrial Revenue Bonds dated as of July
1, 1984, due July 1, 2014, incorporated by reference to Exhibit 4.06 of the Registrant's
Form 10-Q report for the period ended April 2, 1995. The Registrant agrees to furnish to
the Commission upon request a copy of such agreement which it has elected not to file
under the provisions of Regulation 601(b)(4)(iii).
4.07 $1,000,000 Walpole Industrial Development Authority 6.75% Industrial Revenue Bonds dated
as of July 1, 1979, due July 1, 2004, incorporated by reference to Exhibit 4.07 of the
Registrant's Form 10-Q report for the period ended April 2, 1995. The Registrant agrees to
furnish to the Commission upon request a copy of such agreement which it has elected not
to file under the provisions of Regulation 601(b)(4)(iii).
10.01 Lease between Registrant and BGR Associates, a California limited partnership, dated May
26, 1989, incorporated by reference to Exhibit 10.01 of the Registrant's Form 10-Q report
for the period ended September 30, 1994.
10.02 First Amendment to Lease between Registrant and BGR Associates, a California limited
partnership, incorporated by reference to Exhibit 10.02 of the Registrant's Form 10-K
report for fiscal year 1995.
10.03 Lease between Registrant and BGR Associates II, a California limited partnership, dated
May 26, 1989, incorporated by reference to Exhibit 10.02 of the Registrant's Form 10-Q
report for the period ended September 30, 1994.
10.04 First Amendment to Lease between Registrant and BGR Associates II, a California limited
partnership, dated as of March 15, 1995, incorporated by reference to Exhibit 10.04 of the
Registrant's Form 10-K report for fiscal year 1995.
24
<PAGE>
10.05 Agreement and Plan of Merger dated as of April 23, 1995 between Viagene, Inc., a Delaware
corporation, and Chiron Corporation, incorporated by reference to Exhibit 10.67 of the
Registrant's current report on Form 8-K dated April 24, 1995.
10.06 Stockholders' Agreement dated as of April 23, 1995 among certain stockholders of Viagene,
Inc., a Delaware corporation, and Chiron Corporation, incorporated by reference to Exhibit
10.68 of the Registrant's current report on Form 8-K dated April 24, 1995.
10.07 Stock and Asset Purchase Agreement dated as of March 6, 1995, by and among Johnson &
Johnson, a New Jersey corporation, Site Microsurgical Systems, Inc., a Pennsylvania
corporation, and Chiron Corporation and Amendment No. 1 to Stock and Asset Purchase
Agreement, entered into March 31, 1995 by and among Johnson & Johnson, Site Microsurgical
Systems, Inc. and Chiron Corporation, incorporated by reference to Exhibit 10.05 of the
Registrant's Form 10-Q report for the period ended April 2, 1995.
10.08 Revolving Credit Facility dated as of March 24, 1995, between Chiron Corporation and Swiss
Bank Corporation, San Francisco Branch, incorporated by reference to Exhibit 10.06 of the
Registrant's Form 10-Q report for the period ended April 2, 1995.
10.09 Joint Venture Agreement by and between Chiron Biocine Corporation, a California
corporation, and CIBA-GEIGY Biocine Corporation, a Delaware corporation, dated April 15,
1987 (with certain confidential information deleted), incorporated by reference to Exhibit
10.23 of the Registrant's Form 8 filed with the Commission on February 14, 1992.
10.10 Amendment to Biocine Joint Venture Agreement by and between Chiron Biocine Corporation, a
California corporation, and CIBA-GEIGY Biocine Corporation, a Delaware corporation,
effective as of January 1, 1992, incorporated by reference to Exhibit 10.63 to
Registrant's Form 10-Q report for the period ended June 30, 1992.
10.11 Research and License Agreement by and between Registrant and The Biocine Company, a
Delaware partnership, dated April 15, 1987 (with certain confidential information
deleted), incorporated by reference to Exhibit 10.24 of the Registrant's Form 8 filed with
the Commission on February 14, 1992.
25
<PAGE>
10.12 License Agreement by and between CIBA-GEIGY Biocine Corporation, a Delaware corporation,
and The Biocine Company, a Delaware partnership, dated April 15, 1987 (with certain
confidential information deleted), incorporated by reference to Exhibit 10.25 of the
Registrant's Form 8 filed with the Commission on February 14, 1992.
10.13 License Agreement by and between Chiron Biocine Corporation, a California corporation, and
The Biocine Company, a Delaware partnership, dated April 15, 1987 (with certain
confidential information deleted), incorporated by reference to Exhibit 10.26 of the
Registrant's Form 8 filed with the Commission on February 14, 1992.
10.14 Letter Agreement signed by CIBA-GEIGY Corporation, dated April 15, 1987, incorporated by
reference to Exhibit 10.13 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
10.15 Agreement between the Registrant and Ortho Diagnostic Systems, Inc., a New Jersey
corporation, dated August 17, 1989, and Amendment to Collaboration Agreement between Ortho
Diagnostic Systems, Inc. and Registrant, dated December 22, 1989 (with certain
confidential information deleted), incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.16 License and Supply Agreement between Ortho Diagnostic Systems, Inc., a New Jersey
corporation, the Registrant and Abbott Laboratories, an Illinois corporation, dated
August 17, 1989 (with certain confidential information deleted), incorporated by reference
to Exhibit 10.15 of the Registrant's Form 10-Q report for the quarter ended June 30, 1994.
10.17 Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Annex 2 of the
Registrant's Proxy Statement dated April 11, 1996.*
10.18 Forms of Option Agreements, Chiron 1991 Stock Option Plan, as amended, incorporated by
reference to Exhibit 10.17 of the Registrant's Form 10-K report for fiscal year 1993.*
10.19 Forms of Option Agreements, Cetus Corporation Amended and Restated Common Stock Option
Plan, incorporated by reference to Exhibit 10.33 of Registrant's Form 10-K report for
fiscal year 1991.*
26
<PAGE>
10.20 Forms of Supplemental Letter concerning the assumption of Cetus Corporation options by
Chiron, incorporated by reference to Exhibit 10.34 of Registrant's Form 10-K report for
fiscal year 1991.*
10.21 Agreement and Plan of Reorganization dated as of October 11, 1991 by and among the
Registrant, Chiron Ophthalmics, Inc., COI Acquisition Corp., IntraOptics, Inc. and James
R. Cook, M.D., incorporated by reference to Exhibit 28.2 of Registrant's current report on
Form 8-K dated October 14, 1991.
10.22 Indemnification Agreement between the Registrant and Dr. William J. Rutter, dated as of
February 12, 1987 (which form of agreement is used for each member of Registrant's Board
of Directors), incorporated by reference to Exhibit 10.21 of the Registrant's Form 10-Q
report for the period ended September 30, 1994.
10.23 Stock Purchase Agreement by and between the Registrant and Johnson & Johnson Development
Corporation, a corporation organized and existing under the laws of the State of New
Jersey, dated as of October 3, 1986, incorporated by reference to Exhibit 10.22 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.24 Ciba Corning Diagnostics Corp. Policies, Guidelines and Procedures regarding Severance
Pay, incorporated by reference to Exhibit 10.24 of the Registrant's Form 10-K report for
fiscal year 1995.*
10.25 Form of Debenture Purchase Agreement between the Registrant and CIBA-GEIGY, Limited, a
corporation organized and existing under the laws of Switzerland, dated June 22, 1990,
incorporated by reference to Exhibit 10.25 of the Registrant's Form 10-K report for fiscal
year 1994.
10.26 Chiron Corporation 1.90% Convertible Subordinated Note due 2000, Series B, incorporated by
reference to Exhibit 10.25 of the Registrant's Form 10-K report for fiscal year 1993.
10.27 Investment Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy
Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation, incorporated by
reference to Exhibit 10.54 of the Registrant's current report on Form 8-K dated
November 20, 1994.
27
<PAGE>
10.28 Governance Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy
Corporation and Chiron Corporation, incorporated by reference to Exhibit 10.55 of the
Registrant's current report on Form 8-K dated November 20, 1994.
10.29 Subscription Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy
Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation, incorporated by
reference to Exhibit 10.56 of the Registrant's current report on Form 8-K dated
November 20, 1994.
10.30 Cooperation and Collaboration Agreement dated as of November 20, 1994, between Ciba-Geigy
Limited and Chiron Corporation, incorporated by reference to Exhibit 10.57 of the
Registrant's current report on Form 8-K dated November 20, 1994.
10.31 Registration Rights Agreement dated as of November 20, 1994 between Ciba Biotech
Partnership, Inc. and Chiron Corporation, incorporated by reference to Exhibit 10.58 of
the Registrant's current report on Form 8-K dated November 20, 1994.
10.32 Market Price Option Agreement dated as of November 20, 1994 among Ciba-Geigy Limited,
Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation,
incorporated by reference to Exhibit 10.59 of the Registrant's current report on Form 8-K
dated November 20, 1994.
10.33 Amendment dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation,
Ciba Biotech Partnership, Inc. and Chiron Corporation, incorporated by reference to
Exhibit 10.60 of the Registrant's current report on Form 8-K dated January 4, 1995.
10.34 Supplemental Agreement dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy
Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation, incorporated by
reference to Exhibit 10.61 of the Registrant's current report on Form 8-K dated January 4,
1995.
10.35 Amendment with Respect to Employee Stock Option Arrangements dated as of January 3, 1995
among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and
Chiron Corporation, incorporated by reference to Exhibit 10.62 of the Registrant's current
report on Form 8-K dated January 4, 1995.*
28
<PAGE>
10.36 Supplemental Benefits Agreement, dated July 21, 1989, between the Registrant and
Dr. William J. Rutter, incorporated by reference to Exhibit 10.27 of the Registrant's Form
10-Q report for the period ended September 30, 1994.*
10.37 Lease dated as of July 1, 1983 between Cetus Corporation and H.B. Chapman, Jr.,
incorporated by reference to Exhibit 10.28 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.
10.38 Amendment to Lease, made as of March 20, 1990, amending Lease dated July 1, 1983, between
Harold B. Chapman, Jr. and Cetus Corporation, incorporated by reference to Exhibit 10.37
of the Registrant's Form 10-Q report for the period ended April 2, 1995.
10.39 Second Amendment to Lease made as of January 1, 1995 between Harold B. Chapman, Jr. and
the Registrant, incorporated by reference to Exhibit 10.39 of the Registrant's Form 10-K
report for fiscal year 1995.
10.40 Lease commencing March 1, 1987, between EuroCetus B.V. and the Municipal Land Company of
the City of Amsterdam (Translation), incorporated by reference to Exhibit 10.40 of the
Registrant's Form 10-K report for fiscal year 1995.
10.41 Form of Option Agreement (with Purchase Agreements attached thereto) between Cetus
Corporation and each former limited partner of Cetus Healthcare Limited Partnership, a
California limited partnership, incorporated by reference to Exhibit 10.31 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.42 Form of Option Agreement (with forms of Purchase Agreements attached thereto), dated
December 30, 1986, between Cetus Corporation and each former limited partner of Cetus
Healthcare Limited Partnership II, a California limited partnership, incorporated by
reference to Exhibit 10.32 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
10.43 Big-O Property Purchase and Leaseback Agreement, dated as of October 31, 1988, between
Cetus Corporation and Richard K. Robbins, incorporated by reference to Exhibit 10.33 of
the Registrant's Form 10-Q report for the period ended September 30, 1994.
29
<PAGE>
10.44 Triple Net Lease dated as of January 20, 1989, between Cetus Corporation and BGR
Associates III, a California limited partnership, and Marin County Exchange Corporation,
incorporated by reference to Exhibit 10.34 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.
10.45 License Agreement between the Registrant and the Board of Trustees of the Leland Stanford
Junior University, dated December 15, 1981, incorporated by reference to Exhibit 10.07 of
the Registrant's Form 10-Q report for the period ended September 30, 1994.
10.46 Stock Purchase and Warrant Agreement dated May 9, 1989, between Cetus Corporation and
Hoffmann-La Roche Inc., incorporated by reference to Exhibit 10.36 of the Registrant's
Form 10-Q report for the period ended September 30, 1994.
10.47 Letter Agreement, dated as of December 12, 1991, relating to Stock Purchase and Warrant
Agreement between Registrant and Hoffmann-La Roche Inc., incorporated by reference to
Exhibit 10.59 of Registrant's Form 10-K report for fiscal year 1991.
10.48 Agreement and Plan of Merger dated as of July 21, 1991, by and among Registrant, Chiron
Acquisition Subsidiary, Inc. and Cetus Corporation, incorporated by reference to Exhibit
28.2 of Registrant's Form 8-K report dated July 22, 1991.
10.49 Letter Agreement dated September 26, 1990 between the Registrant and William G. Green,
incorporated by reference to Exhibit 10.41 of the Registrant's Form 10-K report for fiscal
year 1992.*
10.50 Letter Agreement dated December 18, 1991 between Registrant and Jack Schuler, incorporated
by reference to Exhibit 10.42 of the Registrant's Form 10-K report for fiscal year 1992.*
10.51 Lease between Sclavo S.p.A. and Biocine Sclavo S.p.A., dated January 7, 1992, incorporated
by reference to Exhibit 10.49 of the Registrant's Form 10-Q report for the period ended
April 2, 1995.
30
<PAGE>
10.52 Agreement made as of November 11, 1993 by and between Kodak Clinical Diagnostics Limited,
a company registered in England, and Ciba Corning Diagnostics Corp., a Delaware
corporation, and Letter dated October 7, 1994 from Kodak Clinical Diagnostics Limited to
Ciba Corning Diagnostics Corp., incorporated by reference to Exhibit 10.50 of Amendment
No. 1 to the Registrant's Form 10-Q report for the period ended April 2, 1995. [Certain
information has been omitted from the Agreement pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2.]
10.53 Letter Agreement dated September 9, 1991 between the Registrant and Walter Moos,
incorporated by reference to Exhibit 10.47 of the Registrant's Form 10-K report for fiscal
year 1992.*
10.54 Letter Agreement between the Registrant and Walter Moos, dated February 1, 1993,
incorporated by reference to Exhibit 10.48 of the Registrant's Form 10-K report for fiscal
year 1992.*
10.55 Letter Agreement between Registrant and Renato Fuchs, dated May 13, 1993, incorporated by
reference to Exhibit 10.47 of the Registrant's Form 10-K report for fiscal year 1993.*
10.56 Agreement made as of December 6, 1984, by and between Corning Glass Works, a New York
corporation, and Bioanalysis Limited, a company incorporated in England and Wales, and
Letter dated July 26, 1985 from Bioanalysis Limited to Corning Glass Works, incorporated
by reference to Exhibit 10.54 of the Registrant's Form 10-Q report for the period ended
April 2, 1995. [Certain information has been omitted from the Agreement pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.]
10.57 Description of Executive Officer Variable Compensation Program, incorporated by reference
to Exhibit 10.57 of the Registrant's Form 10-K report for fiscal year 1995.
10.58 Chiron Corporation 1995 Executive Officer Variable Cash Compensation Plan, incorporated by
reference to Annex 2 of the Registrant's Proxy Statement dated April 18, 1995.*
10.59 Regulatory Filing, Development and Supply Agreement between the Registrant, Cetus Oncology
Corporation, a wholly- owned subsidiary of the Registrant, and Schering AG, a German
company, dated as of May 10, 1993 (with certain confidential information deleted),
incorporated by reference to Exhibit 10.50 of the Registrant's current report on Form 8-K
dated February 9, 1994.
31
<PAGE>
10.60 Letter Agreement dated December 30, 1993 by and between Registrant and Schering AG, a
German company (with certain confidential information deleted), incorporated by reference
to Exhibit 10.51 of the Registrant's Form 10-K report for fiscal year 1993.
10.61 Guaranty, dated as of September 29, 1994, made by Registrant, in favor of Bankers Trust
Company, as trustee, incorporated by reference to Exhibit 10.52 of the Registrant's Form
10-Q report for the period ended September 30, 1994.
10.62 Guaranty, dated as of September 29, 1994, made by Cetus Corporation, in favor of The First
National Bank of Boston, as trustee, incorporated by reference to Exhibit 10.53 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.63 Letter Agreements dated September 11, 1992, July 15, 1994 and September 14, 1994 between
the Registrant and Lewis T. Williams, incorporated by reference to Exhibit 10.54 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.*
10.64 Letter dated January 4, 1995 to C. William Zadel, incorporated by reference to Exhibit
10.65 of the Registrant's Form 10-K report for fiscal year 1994.*
10.65 Letter dated June 28, 1995 to C. William Zadel, incorporated by reference to Exhibit 10.65
of the Registrant's Form 10-K report for fiscal year 1995.*
10.66 Letter to Dino Dina dated April 24, 1984, incorporated by reference to Exhibit 10.66 of
the Registrant's Form 10-K report for fiscal year 1994.*
10.67 Research Agreement, dated as of July 15, 1985, between Ciba-Geigy Limited, a Swiss
corporation, and Ciba Corning Diagnostics Corp., a Delaware corporation, incorporated by
reference to Exhibit 10.64 of the Registrant's Form 10-Q report for the period ended April
2, 1995.
32
<PAGE>
10.68 Licensing Agreement, effective December 18, 1986, by and between Miles Laboratories, Inc.,
a Delaware corporation, and Ciba Corning Diagnostics Corp., a Delaware corporation, and
Letter dated December 18, 1992 from Ciba Corning Diagnostics Corp. to Miles Laboratories,
Inc., incorporated by reference to Exhibit 10.65 of Amendment No. 1 to the Registrant's
Form 10-Q report for the period ended April 2, 1995. [Certain information has been
omitted from the Agreement pursuant to a request by Registrant for confidential treatment
pursuant to Rule 24b-2.]
10.69 Magnetocluster Binding Assay Technology Agreement, dated as of January 21, 1983, by and
between Bioclinical Group, Inc., a Delaware corporation, and Corning Glass Works, a New
York corporation, incorporated by reference to Exhibit 10.66 of Amendment No. 1 to the
Registrant's Form 10-Q report for the period ended April 2, 1995. [Certain information has
been omitted from the Agreement pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2.]
10.70 Turn-back License Agreement, dated as of May 30, 1986, by and between Ciba Corning
Diagnostics Corp., a Delaware corporation, and Advanced Magnetics, Inc., a Delaware
corporation, incorporated by reference to Exhibit 10.67 of the Registrant's Form 10-Q
report for the period ended April 2, 1995. [Certain information has been omitted from the
Agreement pursuant to a request by Registrant for confidential treatment pursuant to Rule
24b-2.]
10.71 Settlement Agreement, dated August 30, 1989, between Ciba Corning Diagnostics Corp. and
Advanced Magnetics, Inc., incorporated by reference to Exhibit 10.68 of the Registrant's
Form 10-Q report for the period ended April 2, 1995. [Certain information has been
omitted from the Agreement pursuant to a request by Registrant for confidential treatment
pursuant to Rule 24b-2.]
10.72 Lease made and entered into December 17, 1984 between BGR Associates, a California limited
partnership, and Cetus Corporation and Amendment to Lease dated December 17, 1984 entered
into effective February 1, 1986, incorporated by reference to Exhibit 10.69 of the
Registrant's Form 10-Q report for the period ended April 2, 1995.
10.73 Second Amendment to Lease dated as of March 15, 1995 between BGR Associates, a California
limited partnership, and Registrant, incorporated by reference to Exhibit 10.73 of the
Registrant's Form 10-K report for fiscal year 1995.
33
<PAGE>
10.74 Agreement, effective as of December 21, 1988, by and between Hoffmann-La Roche Inc., a New
Jersey corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.70 of
the Registrant's Form 10-Q report for the period ended April 2, 1995. [Certain information
has been omitted from the Agreement pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2.]
10.75 Agreement, effective as of December 21, 1988, by and among F. Hoffmann-La Roche Ltd., a
Swiss corporation, Cetus Corporation, and EuroCetus International, B.V., a Netherlands
Antilles corporation, incorporated by reference to Exhibit 10.71 of the Registrant's Form
10-Q report for the period ended April 2, 1995. [Certain information has been omitted from
the Agreement pursuant to a request by Registrant for confidential treatment pursuant to
Rule 24b-2.]
10.76 Agreement, by and between Cetus Oncology Corporation, EuroCetus International, N.V., and
F. Hoffmann-La Roche Ltd., incorporated by reference to Exhibit 10.72 of the Registrant's
Form 10-Q report for the period ended April 2, 1995. [Certain information has been omitted
from the Agreement pursuant to a request by Registrant for confidential treatment pursuant
to Rule 24b-2.]
10.77 Agreement commencing January 1, 1991, between EuroCetus B.V. and the Municipal Development
Corporation (Translation), incorporated by reference to Exhibit 10.41 of the Registrant's
Form 10-K report for fiscal year 1994.
10.78 Settlement Agreement on Purified IL-2, made as of April 14, 1995, by and between Cetus
Oncology Corporation, dba Chiron Therapeutics, a Delaware corporation, and Takeda Chemical
Industries, Ltd., a Japanese corporation, incorporated by reference to Exhibit 10.74 of
the Registrant's Form 10-Q report for the period ended July 2, 1995. [Certain information
has been omitted from the Agreement pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2.]
10.79 License Agreement made and entered into December 1, 1987, by and between Sloan Kettering
Institute for Cancer Research, a not-for-profit New York corporation, and Cetus
Corporation, incorporated by reference to Exhibit 10.75 of the Registrant's Form 10-Q
report for the period ended July 2, 1995. [Certain information has been omitted from the
Agreement pursuant to a request by Registrant for confidential treatment pursuant to Rule
24b-2.]
34
<PAGE>
10.80 Chiron Funding L.L.C. Limited Liability Company Agreement, entered into and effective as
of December 28, 1995, among the Registrant, Chiron Biocine Company and Biocine S.p.A. and
Ciba-Geigy Corporation, incorporated by reference to Exhibit 10.80 of the Registrant's
Form 10-K report for fiscal year 1995. [Certain information has been omitted from the
Agreement and filed separately with the Securities and Exchange Commission pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2. The omitted
confidential information has been identified by the following statement: "Confidential
Treatment Requested".]
10.81 Agreement between Ciba-Geigy Limited and the Registrant made November 15, 1995,
incorporated by reference to Exhibit 10.81 of the Registrant's Form 10-K report for fiscal
year 1995. [Certain information has been omitted from the Agreement and filed separately
with the Securities and Exchange Commission pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2. The omitted confidential information has
been identified by the following statement: "Confidential Treatment Requested".]
10.82 Reimbursement Agreement dated as of March 24, 1995, between Ciba-Geigy Limited, a Swiss
corporation, and the Registrant, incorporated by reference to Exhibit 10.76 of the
Registrant's Form 10-Q report for the period ended July 2, 1995.
10.83 Promissory Note, as amended and restated, dated January 1, 1995 by Ciba Corning
Diagnostics Corp., incorporated by reference to Exhibit 10.83 of the Registrant's Form 10-
K report for fiscal year 1995.
10.84 Commercial lease between Domilyon Corporation and Domilens Laboratories and Amendment No.
1 to Commercial Lease dated May 9, 1994, incorporated by reference to Exhibit 10.84 of the
Registrant's Form 10-K report for fiscal year 1995.
10.85 Agreement between the Registrant and Cephalon, Inc. dated as of January 7, 1994, and
Letter Agreements between the Registrant and Cephalon dated January 13, 1995 and May 23,
1995, incorporated by reference to Exhibit 10.85 of the Registrant's Form 10-K report for
fiscal year 1995. [Certain information has been omitted from the Agreements and filed
separately with the Securities and Exchange Commission pursuant to a request by Registrant
for confidential treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential Treatment Requested".]
35
<PAGE>
11 Statement of Computation of Earnings per Share.
27 Financial Data Schedule.
</TABLE>
---------------------------
*Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K
Chiron filed a current report on Form 8-K, dated February 16, 1996,
reporting under Item 5 that, on February 16, 1996, Chiron and
Behringwerke AG, a subsidiary of Hoechst AG, issued a press release
announcing that the two companies have signed an agreement under
which Chiron will purchase 49 percent of the human vaccine business of
Behringwerke AG for Deutsche mark 171.5 million in cash.
36
<PAGE>
CHIRON CORPORATION
March 31, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHIRON CORPORATION
DATE: May 14, 1996 BY: /s/Edward E. Penhoet
------------ --------------------
Edward E. Penhoet
President and Chief
Executive Officer
DATE: May 14, 1996 BY: /s/Dennis L. Winger
------------- -------------------
Dennis L. Winger
Senior Vice President,Finance
and Administration, Chief Financial
Officer, and Principal Accounting
Officer
37
<PAGE>
EXHIBIT 11
CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three Months Ended March 31,
------------------------------
1996 1995
------------- ---------------
EARNINGS PER SHARE
Net income (loss) available for
common shares and common stock
equivalent shares deemed to have a
dilutive effect $ 12,744,000 $ (385,778,000)
------------ --------------
------------ --------------
Primary earnings (loss) per share $ 0.29 $ (9.64)
------------ --------------
------------ --------------
Fully diluted earnings (loss) per share $ 0.29 $ (9.64)
------------ ---------------
------------ ---------------
Shares used in primary earnings (loss)
per share computation:
Weighted average common shares
outstanding 42,009,000 40,013,000
Weighted average dilutive
incremental common shares
issuable from exercise of warrants 113,000 --
Weighted average dilutive
incremental common shares
issuable under employee stock
option programs 2,499,000 --
------------ --------------
Total common shares and common
stock equivalent shares deemed to
have a dilutive effect 44,621,000 40,013,000
------------ --------------
------------ --------------
Shares used in fully dilutive earnings
(loss) per share computation:
Weighted average common shares
outstanding 42,009,000 40,013,000
Weighted average dilutive
incremental common shares
issuable from exercise of warrants 114,000 --
Weighted average dilutive
incremental common shares
issuable under employee stock
option programs 2,500,000 --
------------ --------------
Total common shares and common
stock equivalent shares deemed to
have a dilutive effect 44,623,000 40,013,000
------------ --------------
------------ --------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S CONSOLIDATED BALANCE SHEET DATED MARCH 31, 1996, AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 84,809
<SECURITIES> 134,527<F1>
<RECEIVABLES> 295,577
<ALLOWANCES> 19,530
<INVENTORY> 170,139
<CURRENT-ASSETS> 670,434
<PP&E> 692,227
<DEPRECIATION> 157,120
<TOTAL-ASSETS> 1,511,375
<CURRENT-LIABILITIES> 364,281
<BONDS> 419,148<F2>
0
0
<COMMON> 422
<OTHER-SE> 693,646<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,511,375
<SALES> 238,259
<TOTAL-REVENUES> 305,751
<CGS> 101,979
<TOTAL-COSTS> 101,979
<OTHER-EXPENSES> 179,485<F4>
<LOSS-PROVISION> 418
<INTEREST-EXPENSE> 6,794<F5>
<INCOME-PRETAX> 18,469
<INCOME-TAX> 5,725
<INCOME-CONTINUING> 12,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,744
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
<FN>
<F1>CONSISTS OF BOTH SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT
SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES, CAPITAL LEASE OBLIGATIONS AND
NOTES PAYABLE.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, CUMULATIVE FOREIGN
CURRENCY TRANSLATION ADJUSTMENT AND UNREALIZED GAIN FROM INVESTMENTS.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT; SELLING, GENERAL AND ADMINISTRATIVE; AND
OTHER OPERATING EXPENSES.
<F5>CONSISTS OF INTEREST EXPENSE AND RELATED COSTS OF CONVERTIBLE DEBENTURES AND
OTHER INTEREST EXPENSE.
</FN>
</TABLE>
