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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 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 October 31, 1997
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Common Stock, $0.01 par value 175,620,272
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CHIRON CORPORATION
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996. . . . . . . . . . . . . .3
Consolidated Statements of Operations for the
three months and nine months ended September 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . . . . . .6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.. . . . . . . . . . . . . . 25
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2
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CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
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(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 103,537 $ 68,114
Short-term investments in marketable debt securities 40,342 38,694
----------- -----------
Total cash and short-term investments 143,879 106,808
Accounts receivable 324,185 351,971
Inventories 185,355 180,534
Other current assets 72,292 57,455
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Total current assets 725,711 696,768
Noncurrent investments in marketable debt securities 34,299 22,027
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings 208,820 231,998
Laboratory, production and office equipment 415,622 381,421
Leasehold improvements 120,724 114,282
Construction in progress 62,383 69,120
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807,549 796,821
Less accumulated depreciation and amortization (257,059) (213,217)
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Net property, plant, equipment and leasehold improvements 550,490 583,604
Purchased technology, net 57,653 65,592
Other intangible assets, net 77,128 76,669
Investments in equity securities and affiliated companies 193,741 184,328
Other assets 62,740 59,682
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$ 1,701,762 $ 1,688,670
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 77,458 $ 96,157
Accrued compensation and related expenses 50,823 56,695
Short-term borrowings 150,812 137,467
Current portion of unearned revenue 23,787 19,638
Taxes payable 39,399 33,407
Other current liabilities 124,145 129,805
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Total current liabilities 466,424 473,169
Long-term debt 395,640 419,589
Other noncurrent liabilities 25,281 31,057
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Total liabilities 887,345 923,815
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Commitments and contingencies
Stockholders' equity:
Common stock 1,750 1,707
Additional paid-in capital 1,826,603 1,774,406
Accumulated deficit (1,014,157) (1,032,554)
Cumulative foreign currency translation adjustment (24,103) (6,318)
Unrealized gain from investments 24,933 28,574
Notes receivable from stock sales (609) (960)
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Total stockholders' equity 814,417 764,855
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$ 1,701,762 $ 1,688,670
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</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THIS STATEMENT.
3
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CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product sales, net $ 205,326 $ 193,380 $ 609,762 $ 582,904
Equity in earnings of unconsolidated
joint businesses 28,849 30,073 82,835 75,689
Collaborative agreement revenues 36,398 31,231 92,374 85,792
Other revenues 19,331 16,954 65,916 44,285
---------- ---------- ---------- ----------
Total revenues 289,904 271,638 850,887 788,670
---------- ---------- ---------- ----------
Expenses:
Cost of sales 91,292 84,272 257,344 245,079
Research and development 97,540 85,232 279,760 252,206
Selling, general and administrative 76,907 76,060 231,778 224,495
Impairment loss on long-lived assets (Note 2) 31,300 - 31,300 -
Other operating expenses 1,124 1,050 3,491 2,440
---------- ---------- ---------- ----------
Total expenses 298,163 246,614 803,673 724,220
---------- ---------- ---------- ----------
Income (loss) from operations (8,259) 25,024 47,214 64,450
Gain on sale of interest in affiliated company - 160 - 12,226
Interest expense (8,545) (8,747) (24,823) (22,713)
Other income, net 6,796 1,408 12,003 5,103
---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income taxes (10,008) 17,845 34,394 59,066
Provision for income taxes 4,179 5,017 17,393 16,608
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Income (loss) from continuing operations (14,187) 12,828 17,001 42,458
---------- ---------- ---------- ----------
Discontinued operations (Note 3):
Income (loss) from discontinued operations
(net of income tax benefit of $685 for
the three months ended September 30, 1997
and provision for income taxes of
$177, $85 and $1,308 for the three months
ended September 30, 1996 and nine months
ended September 30, 1997 and 1996,
respectively) 1,506 (1,050) 1,396 (2,582)
---------- ---------- ---------- ----------
Net income (loss) $ (12,681) $ 11,778 $ 18,397 $ 39,876
---------- ---------- ---------- ----------
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Net income (loss) per share:
Income (loss) from continuing operations $ (0.08) $ 0.07 $ 0.10 $ 0.24
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) $ (0.07) $ 0.07 $ 0.10 $ 0.22
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of shares
used in computing per share amounts 174,221 175,848 177,553 177,292
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THIS STATEMENT.
4
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CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
September 30, September 30,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,397 $ 39,876
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 77,555 82,036
Impairment loss on long-lived assets 31,300 -
Gain on sale of interest in affiliated company - (12,226)
Gain on sale of equity securities (3,637) -
Other, net (84) 7,347
Changes, excluding effect of acquisitions, to:
Accounts receivable 12,557 (57,072)
Inventories (41,172) (44,073)
Other current assets (8,174) (10,588)
Accounts payable (16,130) (14,904)
Accrued compensation and related expenses (1,982) (5,257)
Current portion of unearned revenue 4,505 730
Taxes payable 6,358 6,746
Other current liabilities 6,340 12,343
Other noncurrent liabilities (2,123) 5,087
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Net cash provided by operating activities 83,710 10,045
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Cash flows from investing activities:
Purchases of investments in marketable debt securities (58,523) (55,008)
Proceeds from sale and maturity of investments in
marketable debt securities 44,810 128,648
Capital expenditures (49,904) (69,514)
Purchases of investments in equity securities and
affiliated companies (10,942) (133,700)
Proceeds from sale of equity securities and interest in
affiliated company 951 14,000
Increase in other assets (11,835) (33,076)
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Net cash used in investing activities (85,443) (148,650)
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Cash flows from financing activities:
Net payments under line of credit arrangements - (23,899)
Proceeds from issuance of short-term debt 15,931 111,040
Repayment of notes payable and capital leases (31,237) (5,725)
Proceeds from issuance of common stock 52,462 36,838
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Net cash provided by financing activities 37,156 118,254
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Net increase (decrease) in cash and cash equivalents 35,423 (20,351)
Cash and cash equivalents at beginning of the period 68,114 74,318
--------- ---------
Cash and cash equivalents at end of the period $ 103,537 $ 53,967
--------- ---------
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</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
SEPTEMBER 30, 1997
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at September 30, 1997, and for the three months and
nine months ended September 30, 1997 and 1996, is unaudited, but includes
all normal recurring adjustments which the management of Chiron Corporation
(the "Company" or "Chiron") believes to be necessary for fair presentation
of the periods presented. Included in the Company's results for the nine
months ended September 30, 1997 were the impact of certain changes in
estimated accruals recorded during the second quarter of 1997, including a
$6.6 million reduction in cost of sales due to a revised estimate of
royalties to be paid on sales of certain products; a $4.7 million reduction
in selling, general and administrative expenses due to changes in estimated
accruals created in prior periods; and $0.9 million of other revenues
recognized as a result of a reduction in estimated royalty reserves created
in the first quarter of 1997. The consolidated balance sheet amounts at
December 31, 1996 have been derived from audited financial statements.
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 29, 1996,
which are included in the Annual Report on Form 10-K filed by the Company
with the Securities and Exchange Commission.
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
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
third quarters of 1997 and 1996 represent the thirteen-week periods ended
September 28, 1997 and September 29, 1996, 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:
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(IN THOUSANDS)
Finished goods $ 90,068 $ 94,875
Work in process 53,815 45,874
Raw materials 41,472 39,785
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$ 185,355 $ 180,534
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INCOME TAXES
Income tax expense for the three and nine months ended September 30,
1997 and 1996 is based on estimated annual effective income tax rates. The
charge for the impairment loss on long-lived assets during the third
quarter of 1997 did not create a corresponding current income tax benefit
and, therefore, increased the effective tax rate for the 1997 year-to-date
period. Without such charge, the annual estimated effective tax rate
decreased to 26 percent from 31 percent in 1996 and the first two quarters
of 1997. This decrease is principally due to changes in estimates of the
mix of foreign versus domestic
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profits, changes in estimates of the benefits of certain tax credits and
loss carryforwards, and anticipated foreign sales corporation benefits.
Application of the reduced annual estimated effective tax rate to pre-tax
income recognized during the first half of 1997 resulted in a tax benefit
of $2.3 million during the third quarter of 1997 due to the change in
estimate.
PER SHARE DATA
Per share data 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 stock 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.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which will be effective for financial statements for periods
ending after December 15, 1997, including interim periods, and establishes
standards for computing and presenting earnings per share. Earlier
application is not permitted. In its consolidated financial statements for
the year ending December 31, 1997, the Company will make the required
disclosures of basic and diluted earnings per share and provide a
reconciliation of the numerator and denominator of its basic and diluted
earnings per share computations. All prior period earnings per share data
will be restated by the Company upon adoption of SFAS 128. Basic earnings
per share excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Basic and diluted earnings per share would
have been as follows for each of the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Basic Earnings Per Share:
------------------------
Income (loss) from continuing operations $ (0.08) $ 0.08 $ 0.10 $ 0.25
Income (loss) from discontinued operations $ 0.01 $ (0.01) $ 0.01 $ (0.01)
Net income (loss) $ (0.07) $ 0.07 $ 0.11 $ 0.24
Diluted Earnings Per Share:
--------------------------
Income (loss) from continuing operations $ (0.08) $ 0.07 $ 0.10 $ 0.24
Income (loss) from discontinued operations $ 0.01 $ 0.00 $ 0.00 $ (0.02)
Net income (loss) $ (0.07) $ 0.07 $ 0.10 $ 0.22
</TABLE>
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Nos. 130 and 131, "Reporting
Comprehensive Income" ("SFAS 130") and "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal
years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting of comprehensive income and its components in annual
financial statements. SFAS 131 establishes standards for reporting
financial and descriptive information about an enterprise's operating
segments in its annual financial statements and selected segment
information in interim financial reports. Reclassification or restatement
of comparative financial statements or financial information for earlier
periods is required upon adoption of SFAS 130 and SFAS 131, respectively.
Application of the Statements' disclosure requirements will have no impact
on the Company's
7
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consolidated financial position, results of operations or earnings per
share data as currently reported.
2. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," the Company reviews, as circumstances
dictate, the carrying amount of its long-lived assets, including the
Company's idle pharmaceutical fill and finishing facility in Puerto Rico
(the "Puerto Rico facility"). The purpose of these reviews is to determine
whether the carrying amounts are recoverable. Recoverability for assets
held for use is determined by comparing the projected undiscounted net cash
flows of the long-lived assets against their respective carrying amounts.
The amount of impairment, if any, is measured based on the excess of the
carrying value over the fair value.
The cumulative impact on the Company's manufacturing needs of recent
product developments prompted management to conclude that the Company
currently has excess manufacturing capacity relative to its projected
needs. Specifically, management concluded that its need for the Puerto
Rico facility, originally outfitted as a second manufacturing site of
Betaseron-Registered Trademark- (interferon beta-1b), was eliminated due to
manufacturing process improvements and the cumulative impact of the
introduction of a competing product in the second quarter of 1996. In
September 1997, management determined that it could not find a suitable use
for the Puerto Rico facility consistent with its previous expectations for
the facility's use as a contract manufacturing plant. As a result, the
Company reviewed the carrying amount of the Puerto Rico facility and
related machinery and equipment assets for impairment. Consequently,
during the third quarter of 1997, the Company recorded a $31.3 million
impairment loss to record the Puerto Rico facility and related machinery
and equipment assets at their individual estimated fair market values,
determined on the basis of independent appraisals. Chiron continues to
investigate options concerning the Puerto Rico facility, including possible
sale.
3. DISCONTINUED OPERATIONS
On October 21, 1997, the Company and Bausch & Lomb
Incorporated ("B&L") signed a definitive agreement (the "Agreement")
under which B&L has agreed to acquire 100 percent of the common stock of
the Company's wholly-owned subsidiary, Chiron Vision Corporation ("Chiron
Vision"), for a purchase price of approximately $300 million in cash. Cash
and cash equivalents aggregating $10.8 million at September 30, 1997 and
certain Chiron Vision real estate assets will be transferred to the Company
at actual balances upon closing of the transaction. For a period of three
years following the closing of the transaction, B&L has the right to use
the currently occupied portion of those real estate assets exclusively and
on a rent-free basis. Consummation of the transaction is subject to
standard closing conditions, including receipt of required regulatory
approvals, and is expected to occur no later than the first quarter of
1998. Additionally, the Company has agreed to provide customary
indemnities under the terms of the Agreement.
In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," Chiron Vision is reported as a
discontinued operation in each of the three and nine month periods ended
September 30, 1997 and 1996. Management's current best estimate indicates
that a net gain will result from disposal of the discontinued operation.
8
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Chiron Vision recognized total revenues of $47.6 million and $49.9
million in the three months ended September 30, 1997 and 1996,
respectively. For the nine months ended September 30, 1997 and 1996,
Chiron Vision recognized total revenues of $150.7 million and $154.4
million, respectively. The net assets of discontinued operations, which
include the real estate assets referred to above, are summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
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(IN THOUSANDS)
Net current assets $ 49,317 $ 58,273
Net noncurrent assets 115,024 119,173
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$ 164,341 $ 177,446
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4. COLLABORATION ARRANGEMENT
HYSEQ, INC. In May 1997, the Company entered into an agreement with
Hyseq, Inc. ("Hyseq") to collaborate in the identification of genetic
targets for the development of pharmaceutical treatments for cancer.
Subject to the collaboration and in return for a license and other rights,
Chiron made an initial payment of $1.0 million, which was recorded as
research and development expense during the three months ended June 30,
1997. In addition, the Company is obligated to fund allowable research
costs, in amounts not less than $8.5 million in the first year and $5.5
million in each of the second and third years of the collaboration term,
incurred by Hyseq in performing research requested by the Company. As a
result,
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research funding of $2.1 million was recognized by the Company as research
and development expense in the third quarter of 1997. Under the agreement,
Chiron is required to make certain additional payments upon achievement of
specified milestones. In addition, Hyseq will receive a royalty from any
commercial sales of products resulting from the collaboration.
Concurrent with this collaboration agreement, Hyseq and Chiron entered
into a stock purchase agreement whereby Chiron invested $5 million in
Hyseq's convertible preferred stock, which was converted to common stock
upon closing of Hyseq's initial public offering in August 1997 (the "IPO").
Pursuant to the stock purchase agreement, Chiron invested an additional
$2.5 million in the common stock of Hyseq upon closing of the IPO. The
Company's aggregate investment, representing approximately 4.6 percent of
the outstanding common stock of Hyseq, is accounted for under the cost
method and is reflected in the accompanying consolidated balance sheets
at fair value in accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," as investments in equity
securities and affiliated companies as of September 30, 1997.
5. LONG-TERM DEBT
In January 1997, the Company purchased a manufacturing facility and
related buildings for $29.8 million that had previously been leased under
a long-term capital lease obligation. As a result, the Company eliminated
the related obligation which totaled $29.4 million.
6. CONTINGENCIES
The Company is party to various claims, investigations and legal
proceedings arising out of the normal course of its business. These
claims, investigations and legal proceedings relate to intellectual
property rights, including claims brought separately by two competitors
that the Company's acellular pertussis vaccine infringes claims under four
distinct patents. Pending claims also relate to contractual rights and
obligations, employment matters, shareholder derivative claims, claims of
product liability, and other issues. While there can be no assurance that
an adverse determination of any such matters could not have a material
adverse impact in any future period, management does not believe, based
upon information known to it, that the final resolution of these matters
will have a material adverse effect upon the Company's consolidated
financial position and annual results of operations and cash flows.
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 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. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCES OF
UNANTICIPATED EVENTS.
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I, ITEM 1,
"FINANCIAL STATEMENTS," OF THIS QUARTERLY REPORT ON FORM 10-Q AND PART II, ITEMS
7 AND 8, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA,"
RESPECTIVELY, OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 29, 1996.
Chiron is a 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 three human healthcare markets: (i)
diagnostics, including blood screening tests, automated immunodiagnostic
systems, critical blood analyte systems and new quantitative probe tests; (ii)
therapeutics, with an emphasis on oncology, serious infectious diseases and
critical care diseases; and (iii) adult and pediatric vaccines. Chiron also
develops or acquires new technologies, employing these technologies to discover
new products for the Company or for its partners. In October 1997, the
Company and Bausch & Lomb Incorporated ("B&L") signed a definitive agreement
under which B&L has agreed to acquire the Company's ophthalmic business unit.
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 and nine-month
periods ended September 30:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
--------- --------- --------- ---------
(IN THOUSANDS)
Diagnostic products $ 148,106 $ 137,577 $ 452,057 $ 419,692
Vaccine products 16,386 21,374 52,096 61,680
Betaseron-Registered
Trademark- sales 14,385 16,807 42,478 49,948
Oncology products 18,186 16,595 53,389 48,415
Other products 8,263 1,027 9,742 3,169
--------- --------- --------- ---------
$ 205,326 $ 193,380 $ 609,762 $ 582,904
--------- --------- --------- ---------
--------- --------- --------- ---------
As Chiron continues to increase the sales of certain seasonal products and
expand its presence in international markets, particularly European markets,
seasonal fluctuations in product sales and the related gross profit amounts
11
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have become more significant. For this reason, revenues and gross profit amounts
from certain product lines are generally higher in the first half and fourth
quarter of the year. As a result, Chiron's results in any one quarter are not
necessarily indicative of results to be expected for a full year.
Diagnostic product sales include sales-type leases of fully-automated,
random-access immunodiagnostic testing systems (ACS:180-Registered Trademark-
automated chemiluminescence system) and reagents for these systems; direct
sales of ACS:180-Registered Trademark- instruments and related operating
leases; and sales of critical care systems, clinical chemistry products,
manual immunodiagnostic systems and branched DNA ("bDNA") probe kits for
human immunodeficiency virus ("HIV"). Sales of diagnostic products increased
in both the third quarter and first nine months of 1997 as compared with the
same periods in 1996, primarily due to increased sales of ACS:System
immunodiagnostic products and research sales of bDNA probe kits, reflecting
the continued overall growth in viral load testing for HIV. The growth in
ACS:System immunodiagnostic product sales of $5.1 million and $17.2 million
during the third quarter and first nine months of 1997, respectively,
resulted from increases during both periods in sales volume of reagents
resulting from the compounding effect of increased ACS:180-Registered
Trademark- system placements as compared with the prior year. Sales of bDNA
probe kits increased $4.4 million and $18.8 million in the third quarter and
first nine months of 1997, respectively, as compared with the same periods of
1996. The overall increases in diagnostic product sales in the third quarter
and first nine months of 1997 were partially offset by reduced sales of
manual immunodiagnostic systems and critical care products, as well as the
impact of unfavorable foreign currency exchange rates, primarily in Germany,
France and Japan. When compared with rates in effect for the third quarter
and first nine months of 1996, the increases in diagnostic products sales
were reduced by $9.1 million and $22.6 million, respectively, in the
comparable periods of 1997.
Vaccine product sales consist primarily of sales by Chiron's Italian
subsidiary of pediatric and flu vaccines in Italy and certain international
markets. The overall decrease in vaccine product sales in both the third
quarter and first nine months of 1997 as compared with the same periods of
1996 is substantially due to unfavorable changes in foreign currency exchange
rates between years and decreased sales of certain pediatric vaccines. Sales
of Polioral-TM-, a pediatric oral polio vaccine, decreased $1.8 million and
$4.9 million in the third quarter and first nine months of 1997,
respectively, from the same periods of the prior year. Sales of Morupar-TM-,
a pediatric measles, mumps and rubella vaccine, decreased $1.3 million and
$1.6 million in the third quarter and first nine months of 1997,
respectively, as compared with the same periods of 1996. Supply constraints
during the third quarter of 1997, as well as during the second quarter of
1997 with respect to Polioral-TM-, resulted in the decreases in sales during
these periods. Decreased sales of TriAcelluvax-TM-(formerly Acelluvax
DTP-TM-), a recombinant pediatric acellular pertussis vaccine, contributed
$2.3 million and $4.2 million to the overall decrease in vaccine product
sales during the third quarter and first nine months of 1997, respectively,
due to supply constraints during the third quarter of 1997 and higher sales
volume in the prior year resulting from introduction of the acellular
pertussis vaccine in late 1995.
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 and Schering. Under the terms of the agreement, Chiron
earns an initial partial payment for Betaseron-Registered Trademark- upon
shipment to Berlex and Schering and a subsequent secondary payment for
Betaseron-Registered Trademark- upon net sales of the product to patients.
Beginning July 1997, the terms of payment changed, with a larger portion due
when sales are realized rather than at the time of initial shipment.
Betaseron-Registered Trademark- product sales during the third quarter
decreased from $16.8 million in 1996 to $14.4 million in 1997 primarily due
to reductions in the number of commercial vials shipped to Berlex and in
contracted initial revenues per vial from sales of Betaseron-Registered
Trademark-. Partially offsetting the overall decrease in Betaseron-Registered
Trademark- product sales during the third quarter of 1997 was an increase in
average secondary revenues per vial of Betaseron-Registered Trademark- as
compared with the third quarter of the prior year. In the first nine months
of 1997, Betaseron-Registered Trademark- product sales decreased $7.5 million
as compared with the same period of 1996 due to a decrease in commercial
vials shipped to Berlex during the first and third quarters of 1997, as
Berlex continued to reduce its existing inventory, and an overall decrease in
secondary revenues as a result of the introduction of a competing product in
the second quarter of 1996.
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The number of commercial vials shipped to Berlex in the second quarter of 1997
increased, primarily as the result of a voluntary reduction during the second
quarter of 1996 in shipments to Berlex pending FDA approval of certain labeling
changes. Betaseron-Registered Trademark- product sales recognized by the Company
represent a fraction of the total revenues derived from Betaseron-Registered
Trademark- sales by Berlex and Schering.
Future levels of Chiron's Betaseron-Registered Trademark- sales 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 impact of competing products, including
other beta interferon products that were approved for sale in the U.S. during
1996. In addition, based upon the level of inventories carried by Berlex, the
timing of future shipments to Berlex and the related revenue may vary.
Sales of oncology products, principally consisting of
Proleukin-TM-(aldesleukin, interleukin-2), increased $1.6 million and $5.0
million in the third quarter and first nine months of 1997, respectively,
over the comparable periods of 1996. These increases were substantially due
to overall 7 percent and 10 percent increases in the third quarter and first
nine months of 1997, respectively, in Proleukin-TM- units sold. The overall
7 percent increase in unit sales in the third quarter of 1997 as compared
with the third quarter of 1996 reflects a 9 percent increase in vials sold in
European markets and a 5 percent increase in vials sold in the U.S. In the
first nine months of 1997, sales of Proleukin-TM- reflect an increase in unit
sales of 10 percent and 9 percent over the same period of 1996 in European
and domestic markets, respectively. Worldwide average selling price, which
increased slightly during the third quarter of 1997 and decreased slightly
during the first nine months of 1997 as compared with the same periods of
1996, generally fluctuates between periods due to changes in foreign currency
exchange rates and the geographic mix of units sold. Additionally, the
worldwide average selling price during the third quarter and first nine
months of 1997 reflects a domestic sales price increase in April 1997.
The Company's first sales of platelet-derived growth factor, or PDGF,
the active ingredient in Johnson & Johnson's Regranex-Registered
Trademark-(Becaplermin) Gel (recombinant human platelet-derived growth factor
- -rhPDGF-BB), a wound healing agent, contributed $7.6 million to Chiron's net
product sales during the third quarter and first nine months of 1997. On
July 14, 1997, the Dermatologic and Ophthalmic Drugs Advisory Committee to
the Food and Drug Administration ("FDA"), voted in an 11 to 4 decision that
Regranex-Registered Trademark- is safe and effective for the treatment of
diabetic ulcers that occur on the lower limbs and feet. Biological License
Applications for Regranex-Registered Trademark- were filed with the FDA in
December 1996. Sales of PDGF in the third quarter of 1997 to Ortho Biotech
Inc., a pharmaceuticals group of Johnson & Johnson ("J&J"), were made in
preparation for J&J's commercial launch of Regranex-Registered Trademark-,
which is planned to occur if and when the product is approved by the FDA.
Sales of PDGF will likely fluctuate in future periods depending upon the
timing of FDA approval of Regranex-Registered Trademark-, if such approval is
granted, and J&J's demand, neither of which Chiron can control. A definitive
agreement under which the Company will supply PDGF on an ongoing basis is
currently under negotiation with J&J.
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 $115.5 million and $360.4 million for the third quarter and
first nine months of 1997, respectively, as compared with $115.1 million and
$349.9 million for the third quarter and first nine months of 1996,
respectively. The overall increases in foreign product sales between periods
were due primarily to increased international sales of diagnostic products,
partially offset by decreased sales by Chiron's Italian subsidiary of
pediatric vaccines. For the third quarter and first nine months of 1997,
approximately 56 percent and 59 percent, respectively, of Chiron's product
sales were denominated in foreign currencies. Product sales would have been
$13.3 million and $31.0 million higher in the third quarter and first nine
months of 1997, respectively, if currency exchange rates had remained
constant with the same periods of 1996. 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 affected by the Company's joint partners' and collaborators'
non-U.S. operations.
Equity in earnings of unconsolidated joint businesses consists
substantially of Chiron's one-half interest in the pretax operating earnings of
its joint diagnostics business with Ortho Diagnostic Systems, Inc. ("Ortho"), a
J&J
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company. The joint business sells tests used to screen blood for the
potential presence of hepatitis C virus ("HCV") and HIV. The joint business
also holds the immunodiagnostic rights to Chiron's hepatitis and retrovirus
technology and receives royalties from several companies, including Abbott
Laboratories ("Abbott"), Pasteur Sanofi Diagnostics and International Murex
Technologies, Inc., for their sales of certain tests. Chiron and Ortho
separately are developing new instrument systems expected to contain broad
menus of immunodiagnostic tests to serve the clinical diagnostic segment of
the market. Chiron must obtain Ortho's agreement in order that hepatitis and
retrovirus tests may be marketed for use on Chiron Diagnostics' new systems.
There can be no assurance that Chiron can obtain such agreement on acceptable
terms or at all.
In the third quarter of 1997, Chiron's share of the pretax operating
earnings of the joint business, which is recorded by Chiron on a one-month
lag based upon estimates supplied by Ortho, decreased to $23.7 million from
$30.0 million for the comparable period of 1996. This decrease resulted
primarily from $6.9 million of royalties resulting from a settlement with
Abbott in the third quarter of 1996 related to prior sales of HIV
immunodiagnostic tests (the "Abbott settlement"). Under the terms of the
Abbott settlement, the joint business continues to receive a royalty from
Abbott based on the sale of products incorporating technology covered by
certain of Chiron's HIV patents. Excluding the impact of the Abbott
settlement, Chiron's share of the pretax operating earnings of the joint
business in the third quarter of 1997 increased slightly from the third
quarter of the prior year. In the first nine months of 1997, Chiron's share
of the pretax operating earnings of the joint business, including the impact
during the first quarters of 1997 and 1996 of the final annual accounting,
decreased to $72.1 million from $73.2 million for the first nine months of
1996. The overall decrease in the first nine months of 1997 was due to the
Abbott settlement and a reduction of revenue derived from the final annual
accounting, partially offset by increased royalties and increased sales by
the joint business of HCV and HIV tests. In the first quarter of 1997,
Chiron recognized joint business revenue of $0.8 million from the final
accounting for 1996, as compared with $3.8 million recognized in the first
quarter of 1996 from the final accounting for 1995.
Equity in earnings of unconsolidated joint businesses also includes
Chiron's 49 percent share of the after-tax operating results of a joint venture
with Behringwerke AG of Germany, which was acquired in July 1996. Results from
the joint venture are recorded by Chiron on a one-month lag. Chiron's share of
earnings in the third quarter and first nine months of 1997 was $3.5 million and
$9.7 million, respectively. The operating results of the joint venture in the
third, second and first quarters of 1997 of $3.5 million, $6.1 million and $0.1
million, respectively, reflect the seasonal nature of the business.
Additionally, these results were negatively affected by unfavorable changes in
foreign currency exchange rates between years. Chiron's share of earnings in
the first nine months of 1997 also included amortization of intangibles and
Chiron's share of a $2.0 million up-front license fee that was expensed by the
joint venture during the first quarter of 1997.
Equity in earnings of unconsolidated joint businesses for the third quarter
and first nine months of 1996 also included a $0.6 million loss and $1.9 million
of income, respectively, related to Chiron's 50 percent interest in a generic
cancer chemotherapeutics business with Ben Venue Laboratories, Inc. ("Ben
Venue"). Effective May 1, 1996, Chiron sold its interest to Ben Venue for $14.0
million in cash, resulting in a $12.2 million gain arising from the sale during
the first nine months 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 from sales of biological materials to research
partners for clinical and preclinical testing. Collaborative agreement revenues
for the third quarter of 1997 increased to $36.4 million from $31.2 million in
the third quarter of 1996, largely as the result of $7.5 million of revenues
recognized by Chiron under a technology transfer and development agreement with
Japan Tobacco Inc. ("JT"). Pursuant to this agreement, 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. In the first quarter of 1996, Chiron also recognized
revenues of $7.5 million from JT upon signing the technology transfer and
development agreement. License fees of $3.8 million related to royalty-bearing
licenses for certain herpes simplex virus thymidine kinase ("HSV-tk") patent
rights, discussed below, also contributed to the overall increase in
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collaborative agreement revenues in the third quarter of 1997 as compared
with the third quarter of the prior year. These increases were partially
offset by a reduction in research and development funding, discussed below,
from Novartis AG ("Novartis"), the successor to Ciba-Geigy Ltd. ("Ciba"),
and $1.8 million of revenues recognized during the third quarter of 1996 from
Ribozyme Pharmaceuticals Inc. for Chiron's expenditures on various gene
therapy and delivery research projects. Collaborative agreement revenues for
the first nine months of 1997 increased to $92.4 million from $85.8 million
in the first nine months of 1996, largely due to $11.3 million of license
fees related to HSV-tk patent rights, discussed below. Partially offsetting
the overall increase in collaborative agreement revenues in the first nine
months of 1997 as compared with the same period of the prior year were the
$1.8 million of revenues recognized during the third quarter of 1996 from
Ribozyme Pharmaceuticals Inc. and a $1.7 million reduction in Novartis
research and development funding, discussed below. A $1.6 million decrease
in revenues recognized from Chiron Viagene's collaborative agreement with
Green Cross Corporation of Japan for HIV gene therapy research and clinical
development also partially offset the overall increase in collaborative
agreement revenues during the first nine months of 1997 as compared with the
same period of the prior year.
During the third quarter and first nine months of 1997, Chiron recognized
$3.8 million and $11.3 million, respectively, of collaborative agreement
revenues pursuant to a November 1996 agreement with Novartis, which was
primarily executed in conjunction with a consent and agreement that resolved the
Federal Trade Commission's review of the merger between Ciba and Sandoz Ltd.
which created Novartis. In partial consideration for Chiron agreeing to grant
royalty-bearing licenses for certain patent rights on the HSV-tk gene in the
field of gene therapy, Novartis agreed to pay Chiron up to $60.0 million over
the next five years, $15.0 million of which relates to 1997 and will be
recognized ratably throughout the year.
Collaborative agreement revenues also include amounts from Novartis.
Pursuant to the terms of a December 1995 research and development funding
agreement, Novartis agreed to provide $250 million (which may be increased to
$300 million subject to certain conditions) over five years in support of
research and development at Chiron, subject to aggregate annual funding
limitations. As a result, the Company recognized revenues of $16.5 million
and $21.0 million under this agreement during the third quarters of 1997 and
1996, respectively. In the first nine months of 1997 and 1996, Chiron
recognized revenues of $50.3 million and $52.0 million, respectively, from
Novartis' research and development funding. Through September 30, 1997,
Chiron has cumulatively recognized revenues of $149.3 million pursuant to
this agreement. Through the first nine months of 1997, the Company has
utilized the entire amount of its aggregate annual funding limitation for
1997. No additional funding will be utilized during the fourth quarter of
1997 unless the Company's aggregate annual funding limitation is increased by
the mutual agreement of Chiron and Novartis. Subject to current and future
aggregate annual funding limitations, Chiron anticipates continued
utilization of the research and development funding provided by Novartis.
Other revenues consist principally of product royalties, including
royalty revenues resulting from Schering's European sales of
Betaferon-Registered Trademark-, and revenues generated from Aredia-TM-
(pamidronate disodium for injection). Other revenues increased $2.4 million
and $21.6 million in the third quarter and first nine months of 1997,
respectively, over the comparable periods of 1996. In the third quarter and
first nine months of 1996, Chiron recognized $5.6 million and $16.8 million,
respectively, of sales fees earned by the Company for Aredia-TM- sales and
marketing services provided on behalf of Novartis. Chiron provided these
services pursuant to an agreement with Novartis which provided Chiron
exclusive promotional rights to Aredia-TM- in the U.S. This agreement expired
in March 1997. Pursuant to a November 1996 agreement with Novartis, Chiron
began to co-promote Aredia-TM- in the U.S. for a 2-1/2 year period beginning
April 1997. During the first nine months of 1997, Chiron recognized $11.6
million of revenues related to Aredia-TM- co-promotion services provided to
Novartis during the second and third quarters and $12.5 million of sales fees
under the exclusive agreement which expired in March. Discussions, which
could result in early termination of the co-promotion period, are continuing
regarding a definitive agreement covering many of the terms of the
co-promotion arrangement. These discussions may extend into 1998. Royalty
revenues resulting from Schering's European sales of Betaferon-Registered
Trademark-, which started during the second quarter of 1996, contributed $3.5
million and $12.4 million to the overall increase in other revenues during
the third quarter and first nine months of 1997, respectively, as compared
with the same periods of 1996. The sale of certain oncology-
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related marketing rights for $2.0 million during the second quarter of 1997
and increased royalties related to hepatitis B also contributed to the
overall increase in other revenues during the first nine months of 1997 as
compared with the first nine months of 1996. A contractual reduction in
royalties related to insulin partially offset the overall increase in other
revenues in the third quarter and first nine months of 1997 as compared with
the same periods of 1996.
COSTS AND EXPENSES
Gross profit margin remained constant at 56 percent of net product sales
for the third quarters of 1997 and 1996. Improvements in gross profit margin
percentage in the third quarter of 1997 as compared with the third quarter of
1996 resulted from sales of PDGF, increased secondary revenues from Berlex's
net sales of Betaseron-Registered Trademark- and increased sales of bDNA
probe kits. Gross profit margin percentage for vaccine product sales
increased in the third quarter of 1997 relative to the third quarter of 1996
due to charges recorded in the prior year related to inventory reserves and
temporarily idled manufacturing facilities in Italy. These improvements in
gross profit margin percentage during the third quarter of 1997 were offset
by the impact of declining average selling prices of ACS:180-Registered
Trademark- diagnostic assays, as well as a $2.3 million charge recorded
during the third quarter of 1997 for inventory-related reserves. For the
first nine months of 1997 and 1996, the gross profit margin remained constant
at 58 percent of net product sales. During the second quarter of 1997, a
$6.6 million reduction in cost of sales was recognized within Chiron
Diagnostics due to a revised estimate of royalties to be paid on sales of
certain products. Excluding the impact of this reduction in cost of sales,
gross profit margin in the first nine months of 1997 decreased approximately
1 percentage point, to 57 percent of net product sales, as compared with the
same period of the prior year. In the first nine months of 1997, this
decrease in gross profit margin percentage resulted primarily from an adverse
sales mix of lower margin critical blood analyte systems to foreign
distributors, as well as sales of clinical chemistry products in certain
lower margin international markets. Partially offsetting the decrease in
gross profit margin percentage in the first nine months of 1997 as compared
with the first nine months of 1996 were improvements in gross profit margin
resulting from sales of PDGF and bDNA probe kits, as well as the charges
recorded in the third quarter of 1996 related to inventory reserves and
temporarily idled manufacturing facilities in Italy. Gross profit margin
percentages may fluctuate significantly in future periods as the Company's
product mix continues to evolve.
Research and development expenses increased in the third quarter from
$85.2 million in 1996 to $97.5 million in 1997. In the first nine months of
the year, research and development expenses increased from $252.2 million in
1996 to $279.8 million in 1997. Chiron's research and development expenses
fluctuate from period to period depending upon the extent of clinical
trial-related activities, including the manufacturing of material; the number
of products under development and their progress; and the acquisition of
companies and new technology and licensing rights. These increases in
research and development expenses were due to the continued development of
bDNA probes and PDGF, as well as additional amounts related to research
involving gene therapies and HCV, pertussis and other vaccines.
Additionally, during the third quarter of 1997, Chiron recorded $4.6 million
of research and development expenses related to license and assignment
agreements with Pharmacia & Upjohn Inc. ("Pharmacia & Upjohn"), discussed
below. During the second quarter of 1997, Chiron made $1.0 million upfront
payments to both Biomira, Inc. ("Biomira"), under a May 1997 agreement to
co-develop Biomira's Theratope-TM- immunotherapeutic vaccine, and to Hyseq
Inc. ("Hyseq"), under a May 1997 collaboration agreement for the
identification of genetic targets for the development of pharmaceutical
treatments for cancer. In addition to the upfront payment to Hyseq, Chiron
also recorded research and development expenses of $2.1 million in the third
quarter of 1997 related to its funding of allowable research costs incurred
by Hyseq in performing research requested by the Company. During the second
quarter of 1997, Chiron also made a $1.0 million milestone payment to
DepoTech Corporation upon submission to the FDA of the first new drug
application ("NDA") in the U.S. for DepoCyt-TM- (injectable sustained-release
cytarabine), an anticancer agent. During the first quarter of 1997, Chiron
made a $1.5 million payment to Novartis resulting from the February 1997
filing of a NDA with the FDA for Myotrophin-TM-(rhIGF-1 or mecasermin
[recombinant DNA origin]) Injection. On May 8, 1997, an FDA advisory
committee found that there was not substantial evidence that Myotrophin-TM-
Injection is effective in the treatment of amyotrophic lateral sclerosis ("ALS"
or Lou Gehrig's disease). Chiron and its collaborative partner, Cephalon,
Inc., have provided additional information to the FDA in support of their
jointly filed application for approval to market Myotrophin-TM- for
ALS. The Company expects that the FDA will act on the application in
November 1997.
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Continued development during the first half of 1997 of the ACS:Centaur-TM-, a
more powerful immunoassay system designed to increase laboratory productivity
and provide a platform for proprietary analytes that will help clinicians
manage disease progression, also contributed to the increase in research and
development expenses in the first nine months of 1997 as compared with the
same period of the prior year. Partially offsetting the increases in
research and development expenses in the third quarter and first nine months
of 1997 from the comparable periods of 1996 were expenses incurred in the
third quarter of 1996 related to Chiron's effort to obtain FDA approval of
Pertugen-TM-, a diphteria, tetanus and genetically engineered
acellular pertussis ("DTaP") vaccine for infants and children.
During 1995 and 1996, Chiron, together with J&J, co-funded the development
and introduction of a home HIV testing service business, Direct Access
Diagnostics. Chiron elected not to exercise its option, which expired in May
1997, to participate in this venture with J&J. During the third quarter and
first nine months of 1996, Chiron recognized research and development expenses
of $2.5 million and $7.6 million, respectively, related to its option to
participate in this venture.
In July 1997, Chiron and Pharmacia & Upjohn entered into license and
assignment agreements whereby Pharmacia & Upjohn granted to Chiron a semi-
exclusive, royalty-bearing worldwide license related to the rhIGF-1
manufacturing process and a non-exclusive, royalty-bearing worldwide license to
a cardiovascular indication. In exchange for the assignment to Chiron of
certain intellectual property rights, Chiron granted to Pharmacia & Upjohn a
worldwide, non-exclusive, non-transferable royalty-free license to such
intellectual property for any use. Upon execution of the agreements, Chiron
recorded research and development expense of $4.6 million, and made an initial
payment of $3.3 million, in July 1997. The remainder, or $1.3 million, is
payable by Chiron on January 1, 1998.
Selling, general and administrative ("SG&A") expenses represented 37
percent and 38 percent of net product sales during the third quarter and first
nine months of 1997, respectively. In both the third quarter and first nine
months of 1996, SG&A expenses represented 39 percent of net product sales.
Selling and marketing expenses continued to represent the largest portion of
total SG&A expenses, as Chiron devoted significant resources to support sales
volumes in its existing product lines as well as new products, such as Chiron's
bDNA probes. During the third quarter and first nine months of 1997, total SG&A
expenses were offset by $2.6 million and $7.2 million, respectively, of changes
to estimated accruals created in prior periods.
IMPAIRMENT LOSS ON LONG-LIVED ASSETS
As circumstances dictate, Chiron's management reviews the carrying value
of all facilities to determine whether an impairment of the carrying value
has occurred in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The purpose of these reviews is to
determine whether the carrying amounts are recoverable. Recoverability for
assets held for use is determined by comparing the projected undiscounted net
cash flows of the long-lived assets against their respective carrying
amounts. The amount of impairment, if any, is measured based on the excess
of the carrying value over the fair value.
The cumulative impact on the Company's manufacturing needs of recent
product developments prompted management to conclude that the Company
currently has excess manufacturing capacity relative to its projected needs.
Specifically, management concluded that its need for the Puerto Rico
facility, originally outfitted as a second manufacturing site of
Betaseron-Registered Trademark- (interferon beta-1b), was eliminated due to
manufacturing process improvements and the cumulative impact of the
introduction of a competing product in the second quarter of 1996. In
September 1997, management determined that it could not find a suitable use
for the Puerto Rico facility consistent with its previous expectations for
the facility's use as a contract manufacturing plant. As a result, the
Company reviewed the carrying amount of the Puerto Rico facility and related
machinery and equipment assets for impairment. Consequently, during the
third quarter of 1997, the Company recorded a $31.3 million impairment loss
to record the Puerto Rico facility and related machinery and
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equipment assets at their individual estimated fair market values, determined
on the basis of independent appraisals. Chiron continues to investigate
options concerning the Puerto Rico facility, including possible sale.
To date, management has concluded that no impairment of the carrying value
of any of its facilities, other than the Puerto Rico facility, has occurred.
There, however, can be no assurance that global manufacturing needs for existing
products will continue unchanged and product development programs will be
successful. Accordingly, changes in assumptions and manufacturing plans, needs
and capacity may occur in the future which may require a reduction of the
carrying value of certain facilities to their fair value.
OTHER ITEMS
Effective May 1, 1996, Chiron sold its 50 percent interest in a generic
cancer chemotherapeutics business to Ben Venue, Chiron's joint venture partner,
for $14.0 million in cash, resulting in a $12.2 million gain reported as gain on
sale of interest in affiliated company during the first nine months of 1996.
Interest expense in the third quarters of 1997 and 1996 remained relatively
constant. In the first nine months of 1997, interest expense increased $2.1
million over the first nine months of 1996 due to increased average borrowings
outstanding during the period.
Other income, net, consists primarily of investment income on the
Company's cash and investment balances and other non-operating gains and
losses. Other income, net, increased in the third quarter and first nine
months of 1997 over the comparable periods of 1996, primarily as the result
of realized gains of $3.6 million on sales of equity securities during the
third quarter of 1997, as well as foreign exchange hedging gains realized in
the current year. The cost of equity securities sold was based on the
average cost method. The overall increase in other income, net, in the first
nine months of 1997 as compared with the same period in 1996 also reflects a
$1.5 million loss on an investment recorded by Chiron in the first quarter of
1996. Partially offsetting the increase in other income, net, in the first
nine months of 1997 was a reduction of $1.5 million in investment income
arising from a lower average balance in the Company's investment portfolio
during 1997.
The provision for income taxes in 1997 and 1996 is based on estimated
annual effective income tax rates. The estimated effective rate is determined
based on management's estimate of taxable income and is subject to change in
future periods. The charge for the impairment loss on long-lived assets during
the third quarter of 1997 did not create a corresponding current income tax
benefit and, therefore, increased the effective tax rate for the 1997 year-to-
date period. Without such charge, the annual estimated effective tax rate
decreased to 26 percent from 31 percent in 1996 and the first two quarters of
1997. This decrease is principally due to changes in estimates of the mix of
foreign versus domestic profits, changes in estimates of the benefits of certain
tax credits and loss carryforwards, and anticipated foreign sales corporation
benefits. The 1997 rate is less than the U.S. Federal statutory rate primarily
due to the utilization of foreign and U.S. net operating losses. Application of
the reduced annual estimated effective tax rate to pre-tax income recognized
during the first half of 1997 resulted in a tax benefit of $2.3 million during
the third quarter of 1997 due to the change in estimate.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements have been generally funded from cash and
investments on hand, debt borrowings and sales of equity. In addition to
these sources of capital, future capital requirements may be financed through
a combination of research and development funding provided by Novartis,
possible off-balance-sheet financing and cash generated from operations.
Chiron's cash and investments, which totaled $178.2 million at September 30,
1997, are invested in a diversified portfolio of investment grade financial
instruments, including money market instruments, corporate notes and bonds,
government or government agency securities, and 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.
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Chiron attempts to reduce its exposure to fluctuations in foreign currency
exchange rates by entering into forward currency contracts ("forwards") and
options. The Company is primarily exposed to fluctuations in currencies in
western European countries and Japan. Forwards are used to hedge balance sheet
exposure resulting from completed transactions denominated in a foreign
currency, and options are used to hedge certain anticipated transactions.
Forward contracts are settled quarterly, and option contracts expire quarterly
through December 1998. As of September 30, 1997, the Company held forward and
option contracts totaling $76.6 million and $112.8 million, respectively.
At September 30, 1997, the Company had borrowed $100.0 million in the U.S.
under an aggregate $200.0 million in revolving, committed, unsecured credit
lines with three separate financial institutions. One of the agreements,
providing for borrowings up to $100.0 million, expired in October 1997 and was
simultaneously amended to extend the availability through December 12, 1997
under the same terms and conditions as those in the original credit agreement.
The Company intends to execute a replacement multi-year revolving credit
agreement providing for borrowings up to $100.0 million, under similar terms and
conditions, with the same financial institution.
Chiron selectively enters into cross currency interest rate swaps ("swaps")
to modify the interest and currency characteristics of specific outstanding debt
obligations. In June 1997, Chiron entered into a five-year swap agreement with
a notional amount of $26.4 million, effectively converting debt denominated in
U.S. Dollars to Japanese Yen and modifying the interest rate from a variable
rate to a fixed Japanese Yen rate of 2.1 percent.
In future periods, Chiron expects to incur substantial capital spending.
Chiron's liquidity may be further affected 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.
CASH FLOWS
During the nine months ended September 30, 1997, cash and investments in
marketable debt securities increased by $49.3 million. The increase was
primarily due to $83.7 million of cash provided by operations, $52.5 million
of proceeds related to the issuance of common stock under the Company's stock
option and employee stock purchase plans and $15.9 million of incremental
short-term debt borrowings. These cash inflows were partially offset by
$49.9 million of capital expenditures, the repayment of a long-term capital
lease obligation totaling $29.4 million, an increase in other noncurrent
assets of $11.8 million and $10.9 million of purchases of investments in
equity securities and affiliated companies. In January 1997, Chiron purchased
a manufacturing facility and related buildings in Emeryville, California that
had been previously leased under the long-term capital lease obligation.
During the nine months ended September 30, 1996, cash and investments in
marketable debt securities decreased by $94.4 million. The decrease was
primarily due to $133.7 million of purchases of investments in equity
securities and affiliated companies, $69.5 million of capital expenditures,
an increase in other noncurrent assets of $33.1 million, $23.9 million of net
payments under line of credit arrangements and the repayment of notes payable
and capital leases totaling $5.7 million. These decreases were partially
offset by cash inflows resulting from $111.0 million of proceeds from
issuance of short-term debt, $36.8 million of proceeds related to the
issuance of common stock under the Company's stock option and employee stock
purchase plans, $14.0 million of proceeds from the sale of Chiron's interest
in Ben Venue and $10.0 million of cash provided by operations.
Cash provided by operations of $83.7 million in the first nine months of
1997, as compared with cash provided by operations of $10.0 million in the
first nine months of 1996, primarily reflects the decrease in accounts
receivable at September 30, 1997 and increase in accounts receivable at
September 30, 1996 over respective prior year end amounts. The decrease in
accounts receivable in 1997 resulted primarily from significant collections
by Chiron's Italian subsidiary, the timing of payments from Novartis and the
Chiron-Ortho joint business, and from a greater receivable balance at
December 31, 1996 than at December 31, 1995 due to revenue growth in the
fourth quarter of 1996. The increase in accounts receivable in 1996 resulted
primarily from research and development funding from
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Novartis, increased royalties receivable and amounts due from collaborative
partners.
Chiron believes that its cash and investments, funds provided by operations
and capital market transactions, as well as the proceeds from the sale of Chiron
Vision, discussed below, will be sufficient to meet its cash requirements during
the upcoming twelve months and through the foreseeable future.
DISCONTINUED OPERATIONS
On October 21, 1997, the Company and Bausch & Lomb Incorporated ("B&L")
signed a definitive agreement (the "Agreement") under which B&L has agreed to
acquire 100 percent of the common stock of the Company's wholly-owned
subsidiary, Chiron Vision Corporation ("Chiron Vision"), for a purchase price
of approximately $300 million in cash. Cash and cash equivalents aggregating
$10.8 million at September 30, 1997 and certain Chiron Vision real estate
assets will be transferred to the Company at actual balances upon closing of
the transaction. For a period of three years following the closing of the
transaction, B&L has the right to use the currently occupied portion of those
real estate assets exclusively and on a rent-free basis. Consummation of the
transaction is subject to standard closing conditions, including receipt of
required regulatory approvals, and is expected to occur no later than the
first quarter of 1998. Additionally, the Company has agreed to provide
customary indemnities under the terms of the Agreement.
In accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," Chiron Vision is reported as a discontinued
operation in each of the three and nine month periods ended September 30,
1997 and 1996. Management's current best estimate indicates that a net gain
will result from disposal of the discontinued operation.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which will be effective for financial statements for periods ending after
December 15, 1997, including interim periods, and establishes standards for
computing and presenting earnings per share. Earlier application is not
permitted. In its consolidated financial statements for the year ending
December 31, 1997, the Company will make the required disclosures of basic and
diluted earnings per share and provide a reconciliation of the numerator and
denominator of its basic and diluted earnings per share computations. All prior
period earnings per share data will be restated by the Company upon adoption of
SFAS 128. Refer to Note 1 in the accompanying Notes to Consolidated Financial
Statements.
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In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" ("SFAS 130") and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), respectively (collectively, the
"Statements"). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' disclosure requirements will have
no impact on the Company's consolidated financial position, results of
operations or earnings per share data as currently reported.
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 fourth quarter of 1997, 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 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 systems, procedures and facilities for
production) for the Company's products. These may include, for
example, approval of the Company's Italian manufacturing facilities
and processes as satisfying regulatory requirements for production of
the Company's diphtheria, tetanus and genetically engineered acellular
pertussis and adjuvanted flu vaccines, approval for Myotrophin-TM- for
which additional clinical trials may be required by the FDA, and
approval for Quantiplex-TM- for HIV and follow-on bDNA probe products,
for which the FDA may require substantial additional process and
systems validation.
- Charges that may be incurred and accrued resulting from implementation
of restructuring plans currently under consideration, including
possible disposal of excess manufacturing and other general
facilities.
- Inability to maintain or initiate third party arrangements which
generate revenues, in the form of license fees, research and
development support, royalties, sales fees and other payments, in
return for rights in technology or products under development or
promotional or other services provided by the Company.
- 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 if it
is
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unable to obtain licenses to patents which may be required for such
products.
- Failure of corporate partners to successfully commercialize 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, including conflicts as to the strategy for
realizing value arising from evolving opportunities.
- Delay, difficulty or inability on acceptable terms to resolve
conflicts with partners, including resolution with Ortho of Chiron's
ability to market hepatitis and retrovirus immunodiagnostic tests for
use on its ACS:Centaur-TM- immunoassay system and resolution of the
terms under which Chiron is continuing to co-promote Aredia-TM- for
Novartis.
- 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.
- Possible changes in laws, regulations and guidelines of regulatory
agencies, which may affect the development, manufacturing and sale of
certain of the Company's products including, for example, off-label
sales of pharmaceuticals and research use only sales of diagnostic
tests and systems.
- 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.
- Difficulties in obtaining key raw materials and supplies of acceptable
quality used in the manufacture of the Company's products.
- Increased costs of development, regulatory approval, manufacture,
sales, and marketing associated with the introduction of novel
products and fluctuation of such costs between periods.
- 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.
- Further decline 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-; the impact of
competing products, including other beta interferon products; pricing,
promotional and marketing decisions by the Company's partner,
Schering.
- Changes in the product mix of the Chiron-Ortho joint business, whereby
the proportion of higher margin HCV tests sold relative to other lower
margin products decreases; continued margin erosion of HCV tests.
- Continued increases in research and development spending in order to
develop new products and increase market share.
- 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.
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- Changes in the Company's plans involving the utilization of its long-
lived assets in response to changes in the projected level of demand
for the Company's products, product pricing, success of clinical
trials, timing of regulatory approval, introduction of competing
products, available information regarding contract manufacturing
alternatives and excess manufacturing capacity which currently exists.
- Increased financing costs resulting from the expanded use of debt for
operating and acquisition-related activities.
- 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 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.
- 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.
- Seasonal fluctuations in product sales and resulting gross margin
amounts.
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ITEM 1. LEGAL PROCEEDINGS.
The Company is party to certain lawsuits, which are described in Part I,
Item 3, "Legal Proceedings," on page 10 of the Company's Annual Report on Form
10-K for the year ended December 29, 1996. No material developments in the area
of legal proceedings have occurred since such Form 10-K was filed except as
described in each of the Company's Quarterly Reports for the periods ended March
30, 1997 and June 29, 1997 and except as follows:
CONNAUGHT. On June 7, 1997, Connaught Laboratories, Limited
("Connaught") filed an emergency proceeding with the Tribunale di Siena,
Italy, against Chiron S.p.A. seeking to enjoin production, manufacture, and
sale of TriAcelluvax-TM-(formerly Acelluvax DTP-TM-) which Connaught alleges
infringes its European Patent 0 527 753 (the "'753 patent"). The '753 patent
claims allegedly relate to the pertactin protein of BORDETELLA PERTUSSIS. In
June, the Siena Court heard oral argument on Connaught's application. On June
17, 1997, Chiron S.p.A. filed an action challenging the validity of the '753
patent in the Tribunale di Milano, Italy, against Connaught. On September
30, 1997, Connaught renewed its application for injunctive relief before the
Tribunale di Milano, Italy. This application is currently under submission.
Connaught also is the owner of EP 0 322 115 (the "'115 patent")
allegedly relating to pertussis toxin mutants. On July 17, 1997, Connaught
filed suit in the Landgericht Dusseldorf, Germany, against Chiron Behring
GmbH, Chiron S.p.A., and Behringwerke AG asserting imminent infringement of
the '115 patent. Connaught seeks to prevent introduction of TriAcelluvax-TM-
in Germany. Also, Connaught seeks damages and an order enjoining Chiron
S.p.A. from manufacturing and selling TriAcelluvax-TM- in Italy. Trial of
this matter is expected to take place in July 1998.
EVANS. Evans Medical Limited (a division of Medeva plc) ("Evans") owns
European Patent 0 162 639 (the "'639 patent") which Evans claims relates to
the p69 antigen of BORDETELLA PERTUSSIS. Chiron S.p.A. had opposed the '639
patent before the European Patent Office ("EPO") and, along with other
parties, has appealed the EPO Opposition Division decision which maintained
the patent in amended form. Chiron is involved in litigation with Evans,
Medeva plc and its exclusive licensee, SmithKline Beecham Biologicals in
several jurisdications concerning the '639 patent and various of its national
counterparts. Those jurisdications include the UK, Italy, The Netherlands,
and the U.S.
Trial has begun in the High Court of Justice in the UK on Chiron's petition
to declare the UK portion of the '639 patent invalid and an Evans counterclaim
for infringement of that patent by Chiron's TriAcelluvax-TM- vaccine as used in
certain clinical trials. SmithKline Beecham Biologicals is also a party to that
trial. A decision of the High Court is expected by the end of 1997.
In the Italian case, technical briefing has been completed in Milan and a
technical expert's report is expected in June 1998.
In the Dutch case, the District Court of The Hague issued a decision on May
14, declaring, INTER ALIA, itself to have jurisdiction to hear Chiron's claim
for a declaratory judgment of non-infringement on a pan-European basis. Evans
has appealed this decision. A hearing is scheduled on December 11, 1997, at the
Court of Appeals in The Hague.
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The action pending in the United States District Court for the Eastern
District of Texas was transferred to United States District Court for the
District of Delaware in April 1997, by stipulation of the parties. Chiron has
answered and filed a counterclaim alleging the invalidity of two U.S. patents in
suit owned by Evans and which allegedly relate to the p69 protein of BORDETELLA
PERTUSSIS. Chiron seeks judgment declaring that its products do not infringe
any claims of these patents. Chiron further seeks a judgment declaring that the
Evans' patents are invalid and unenforceable.
In the first quarter of 1997, Medeva brought suit against Chiron in The
Netherlands seeking a pan-European injunction under EP 0 471 726 (the "'726
patent"), a patent allegedly relating to p69 and filamentous hemagglutinin
("FHA"). The District Court of The Hague issued a decision on July 22 wherein
it refused Evans' request for a pan-European injunction. Evans has appealed
that decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit
Number Exhibit
------ -------
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, as filed with the Office of the Secretary
of State of Delaware on August 17, 1987, incorporated
by reference to Exhibit 3.01 of the Registrant's Form
10-K report for fiscal year 1996.
3.02 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on
December 12, 1991, incorporated by reference to Exhibit
3.02 of the Registrant's Form 10-K report for fiscal
year 1996.
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.
3.04 Certificate of Amendment of Restated
Certificate of Incorporation of the
Registrant, as filed with the Office of
the Secretary of State of Delaware on
May 22, 1996, incorporated by reference
to Exhibit 3.04 of the Registrant's Form
10-Q report for the period ended
June 30, 1996.
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 Second Supplemental Indenture, dated as of March 25,
1996, by and among the Registrant, Cetus Oncology
Corporation (formerly Cetus Corporation), and Bankers
Trust Company, incorporated by reference to Exhibit
4.03 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
4.04 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.
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4.05 $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).
4.06 $1,000,000 Walpole Industrial Development Authority
6.75 percent 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 Second Amendment to Lease, dated as of May 9, 1996,
between BGR Associates, a California limited
partnership, as lessor and Registrant, as lessee [BGR I
Property Building NQ Lease], incorporated by reference
to Exhibit 10.03 of the Registrant's Form 10-K report
for fiscal year 1996.
10.04 Third Amendment to Triple Net Lease, dated as of
January 31, 1997, between BGR Associates, a California
limited partnership, as lessor and Registrant, as
lessee [BGR I Property Building NQ Lease], incorporated
by reference to Exhibit 10.04 of the Registrant's Form
10-K report for fiscal year 1996.
10.05 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.
10.06 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.
10.07 Second Amendment to Lease, dated as of May 9, 1996,
between BGR Associates II, a California limited
partnership, as lessor and Registrant, as lessee,
incorporated by reference to Exhibit 10.07 of the
Registrant's Form 10-K report for fiscal year 1996.
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10.08 Third Amendment to Triple Net Lease, dated as of
January 31, 1997, between BGR Associates II, a
California limited partnership, as lessor and
Registrant, as lessee [BGR II Property Lease],
incorporated by reference to Exhibit 10.08 of the
Registrant's Form 10-K report for fiscal year 1996.
10.09 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.
10.10 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.
10.11 Third Amendment to Lease, dated as of May 9, 1996,
between BGR Associates, a California limited
partnership, as lessor and Registrant, as lessee [BGR I
Property Building R Lease], incorporated by reference
to Exhibit 10.11 of the Registrant's Form 10-K report
for fiscal year 1996.
10.12 Fourth Amendment to Triple Net Lease, dated as of
January 31, 1997, between BGR Associates, a California
limited partnership, as lessor and Registrant, as
lessee [BGR I Property Building R Lease], incorporated
by reference to Exhibit 10.12 of the Registrant's Form
10-K report for fiscal year 1996.
10.13 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.
10.14 First Amendment to Triple Net Lease, dated as of
September 10, 1996, between BGR Associates III, a
California limited partnership, as lessor and
Registrant, as lessee, incorporated by reference to
Exhibit 10.14 of the Registrant's Form 10-K report for
fiscal year 1996.
10.15 Second Amendment to Triple Net Lease, dated as of
January 31, 1997, between BGR Associates III, a
California limited partnership, as lessor and
Registrant, as lessee [BGR III Lease], incorporated by
reference to Exhibit 10.15 of the Registrant's Form 10-
K report for fiscal year 1996.
10.16 Assignment of Lessor Claims, dated as of January 31,
1997, between BGR Associates III, a California limited
partnership, as assignor and Registrant, as assignee,
incorporated by reference to Exhibit 10.16 of the
Registrant's Form 10-K report for fiscal year 1996.
10.17 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
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report on Form 8-K dated April 24, 1995.
10.18 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.
10.19 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.
10.20 Amended and Restated Revolving Credit Agreement dated
as of March 20, 1997, between Chiron Corporation and
Swiss Bank Corporation, New York and Cayman Island
Branches, incorporated by reference to Exhibit 10.20 of
the Registrant's Form 10-Q report for the period ended
June 30, 1997.
10.21 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.
10.22 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.
10.23 Chiron 1991 Stock Option Plan, as amended, incorporated
by reference to Annex 2 of the Registrant's Proxy
Statement dated April 11, 1997.*
10.24 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.*
10.25 Form of Automatic Share Right Agreement, Chiron 1991
Stock Option Plan, as amended, incorporated by
reference to Exhibit 10.19 of Registrant's Form 10-Q
report for the period ended September 29, 1996.*
10.26 Forms of Option Agreements, Cetus Corporation Amended
and Restated Common Stock Option Plan, incorporated by
reference to Exhibit 10.27 of Registrant's Form 10-Q
report for the period ended March 30, 1997.*
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10.27 Forms of Supplemental Letter concerning the assumption
of Cetus Corporation options by the Registrant,
incorporated by reference to Exhibit 10.27 of
Registrant's Form 10-K report for fiscal year 1996.*
10.28 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.
10.29 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.
10.30 Revolving Credit Agreement, dated as of July 12, 1996,
between Registrant and Bank of America National Trust
and Savings Association, incorporated by reference to
Exhibit 10.24 of the Registrant's Form 10-Q report for
the period ended June 30, 1996.
10.31 First Amendment to Revolving Credit Agreement, dated as
of July 11, 1997, between Registrant and Bank of
America National Trust and Savings Association,
incorporated by reference to Exhibit 10.31 of the
Registrant's Form 10-Q report for the period ended
June 30, 1997.
10.32 Second Amendment to Revolving Credit Agreement,
dated as of August 18, 1997, between Registrant and
Bank of America National Trust and Savings
Association.
10.33 Third Amendment to Revolving Credit Agreement,
dated as of October 10, 1997, between Registrant and
Bank of America National Trust and Savings
Association.
10.34 Form of Debenture Purchase Agreement between the
Registrant and Ciba-Geigy, Limited, a Swiss
corporation, dated June 22, 1990, incorporated by
reference to Exhibit 10.25 of the Registrant's Form
10-K report for fiscal year 1994.
10.35 Chiron Corporation 1.90 percent 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.
10.36 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.
10.37 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.
10.38 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.
10.39 Cooperation and Collaboration Agreement dated as of
November 20, 1994, between Ciba-Geigy Limited and
Chiron Corporation,
29
<PAGE>
incorporated by reference to Exhibit 10.57 of the
Registrant's current report on Form 8-K dated
November 20, 1994.
10.40 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.
10.41 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.
10.42 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.
10.43 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.
10.44 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.*
10.45 Agreement, dated November 27, 1996, between Ciba-Geigy
Limited and the Registrant, incorporated by reference
to Exhibit 10.92 of the Registrant's Form 8-K report
filed with the Commission on December 17, 1996.
10.46 Amendment dated March 26, 1997, to Agreement dated
November 27, 1996, between Novartis Pharma AG and the
Registrant, incorporated by reference to Exhibit 10.44
of the Registrant's Form 10-Q report for the period
ended March 30, 1997.
10.47 Letter Agreement, dated May 6, 1996, as to consent
to assignment of contracts to Novartis Limited,
among the Registrant, Ciba-Geigy Limited, Ciba-Geigy
Corporation and Ciba Biotech Partnership, Inc.,
incorporated by reference to Exhibit 10.43 of the
Registrant's Form 10-K report for fiscal year 1996.
10.48 Letter Agreement, dated December 19, 1996, regarding
compensation paid by the Registrant for director
services performed by employees of Ciba-Geigy Limited,
incorporated by reference to Exhibit 10.44 of the
Registrant's Form 10-K report for fiscal year 1996.*
10.49 Supplemental Benefits Agreement, dated July 21, 1989,
between the
30
<PAGE>
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.*
10.50 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.
10.51 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.
10.52 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.
10.53 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.
10.54 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.
10.55 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 10.51 of
Registrant's Form 10-K report for fiscal year 1996.
10.56 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.*
10.57 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.*
10.58 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.
10.59 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
31
<PAGE>
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.]
10.60 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.
10.61 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.
10.62 Description of Executive Officer Variable Compensation
Program, incorporated by reference to Exhibit 10.58 of
the Registrant's Form 10-K report for fiscal year
1996.*
10.63 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.*
10.64 Amended and Restated License Agreement effective April
1, 1996, between Ciba Corning Diagnostics Corp., a
Delaware corporation, and Bioanalysis Limited, a
corporation organized under the laws of the United
Kingdom of Great Britain and Northern Ireland,
incorporated by reference to Exhibit 10.56 of the
Registrant's Form 10-Q report for the period ended
September 29, 1996. [Certain confidential 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.]
10.65 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.
10.66 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.
10.67 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.*
32
<PAGE>
10.68 Letters dated May 6, 1996 and May 25, 1996 to Magnus
Lundberg, incorporated by reference to Exhibit 10.61 of
the Registrant's Form 10-Q report for the period ended
September 29, 1996.*
10.69 Letter dated January 8, 1997 to Magnus Lundberg,
incorporated by reference to Exhibit 10.65 of the
Registrant's Form 10-K report for fiscal year 1996.*
10.70 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.
10.71 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.]
10.72 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.]
10.73 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.]
10.74 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.]
10.75 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
33
<PAGE>
a request by Registrant for confidential treatment
pursuant to Rule 24b-2.]
10.76 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.]
10.77 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.]
10.78 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.
10.79 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.]
10.80 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.]
10.81 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".]
10.82 Agreement between Ciba-Geigy Limited and the Registrant
made
34
<PAGE>
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".]
10.83 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.
10.84 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.
10.85 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.
10.86 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".]
10.87 Reimbursement Agreement, dated as of June 28, 1996,
between Ciba-Geigy Limited, a Swiss corporation, and
the Registrant, incorporated by reference to Exhibit
10.94 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
10.88 Reimbursement Agreement, dated as of May 20, 1996,
between Ciba-Geigy Limited, a Swiss corporation, and
the Registrant, incorporated by reference to Exhibit
10.95 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
10.89 Letter Agreement between the Registrant and Dr. Richard
W. Barker, dated May 1, 1996, incorporated by reference
to Exhibit 10.88 of the Registrant's Form 10-Q report
for the period ended June 30, 1996.*
10.90 Revolving Credit Agreement, dated as of March 23, 1996,
between the Registrant and Morgan Guaranty Trust
Company of New York, incorporated by reference to
Exhibit 10.89 of the Registrant's Form 10-Q report for
the period ended June 30, 1996.
35
<PAGE>
10.91 Amendment No. 1 to Revolving Credit Agreement, dated as
of March 18, 1997, between the Registrant and Morgan
Guaranty Trust Company of New York, incorporated by
reference to Exhibit 10.89 of the Registrant's
Form 10-Q report for the period ended June 30, 1997.
10.92 Purchase and Assignment Agreement between Behringwerke
Aktiengesellschaft, on the one side, and 31.CORSA
Verwaltungsgesellschaft mbH and the Registrant, on the
other side, dated February 17, 1996, Closing Agreement,
by and among Behringwerke Aktiengesellschaft, on the
one side, and the Registrant and 31.CORSA
Verwaltungsgesellschaft mbH, on the other side, dated
June 29, 1996 and Letter Agreement dated June 29, 1996
between the Registrant, 31.CORSA
Verwaltungsgesellschaft mbH and Behringwerke
Aktiengesellschaft, incorporated by reference to
Exhibit 10.86 of the Registrant's Form 10-Q report for
the period ended September 29, 1996. [Certain
confidential 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.]
10.93 Royalty Projects Agreement by and between Ciba Corning
Diagnostics Corp., a Delaware corporation, and Ciba-
Geigy Limited, a Swiss corporation, incorporated by
reference to Exhibit 10.87 of the Registrant's Form 10-
Q report for the period ended September 29, 1996.
[Certain confidential 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.]
10.94 Purchase Agreement between BNP Leasing Corporation and
the Registrant, dated June 28, 1996, incorporated by
reference to Exhibit 10.90 of the Registrant's Form 10-
Q report for the period ended June 30, 1996.
10.95 Lease Agreement between BNP Leasing Corporation and the
Registrant, dated June 28, 1996, incorporated by
reference to Exhibit 10.91 of the Registrant's Form 10-
Q report for the period ended June 30, 1996.
10.96 Ground Lease between BNP Leasing Corporation and the
Registrant, dated June 28, 1996, incorporated by
reference to Exhibit 10.92 of the Registrant's
Form 10-Q report for the period ended June 30, 1996.
10.97 Reimbursement Agreement, dated as of July 12, 1996,
between Ciba-Geigy Limited, a Swiss corporation, and
the Registrant, incorporated by reference to Exhibit
10.93 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
10.98 Form of Performance Unit Agreement, Chiron 1991 Stock
Option Plan, as amended, incorporated by reference to
Exhibit 10.94 of the Registrant's Form 10-K report for
fiscal year 1996.*
11 Statement of Computation of Earnings (Loss) per Share.
36
<PAGE>
27 Financial Data Schedule.
------------------------
* Management contract, compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K.
Chiron filed a current report on Form 8-K dated October 22, 1997,
reporting under Item 5 that on October 21, 1997, Chiron Corporation
issued a press release announcing that Bausch & Lomb Incorporated, a
New York corporation, had signed an agreement under which Bausch &
Lomb has agreed to purchase Chiron's opthalmic products unit, Chiron
Vision Corporation, for $300 million in cash.
37
<PAGE>
CHIRON CORPORATION
SEPTEMBER 28, 1997
SIGNATURE
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: November 10, 1997 BY: /s/ Edward E. Penhoet
---------------------- ---------------------------------------
Edward E. Penhoet, Ph.D.
President and Chief Executive Officer,
and Chief Financial Officer (Principal
Accounting Officer)
38
<PAGE>
SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT
----------------------------------------------
THIS SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT (the "AMENDMENT"),
dated as of August 18, 1997, effective as of August 11, 1997, is entered into
by and between CHIRON CORPORATION (the "BORROWER") and BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK").
RECITALS
--------
A. The Borrower and the Bank are parties to a Revolving Credit
Agreement dated as of July 12, 1996, as amended by a First Amendment to
Revolving Credit Agreement dated as of July 11, 1997 (as amended, the "CREDIT
AGREEMENT") pursuant to which the Bank has extended certain credit facilities
to the Borrower.
B. The Borrower has requested that the Bank agree to a certain
amendment of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in the
Credit Agreement.
2. AMENDMENT TO CREDIT AGREEMENT. Paragraph 1 of the Credit Agreement
shall be amended and restated in its entirety so as to read as follows:
1. THE ADVANCES. Subject to and upon the terms and conditions
set forth herein, the Bank agrees to make advances (the
"ADVANCES") to the Borrower at any time and from time to time
prior to October 11, 1997 (the "EXPIRY DATE"); provided, however,
that the aggregate principal amount of Advances outstanding shall
at no time exceed U.S. $100,000,000 (the "COMMITMENT").
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Bank as follows:
(a) No Event of Default or condition, event or act which, with
the giving of notice or lapse of time, or both, would constitute an Event
of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all
<PAGE>
necessary corporate and other action and do not and will not require any
registration with, consent or approval of, notice to or action by, any
person (including any governmental authority) in order to be effective and
enforceable. The Credit Agreement as amended by this Amendment constitutes
the legal, valid and binding obligations of the Borrower, enforceable
against it in accordance with its respective terms, without defense,
counterclaim or offset.
(c) All representations and warranties of the Borrower contained
in the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the
Bank or any other person.
4. EFFECTIVE DATE. This Amendment will become effective as of August
11, 1997 (the "EFFECTIVE DATE"), PROVIDED THAT the Bank has received from the
Borrower a duly executed original (or, if elected by the Bank, an executed
facsimile copy) of this Amendment by August 20, 1997.
5. RESERVATION OF RIGHTS. The Borrower acknowledges and agrees that
the execution and delivery by the Bank of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Bank to
execute similar amendments under the same or similar circumstances in the
future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment
shall be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective successors
and assigns. No third party beneficiaries are intended in connection with
this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
Each of the parties hereto understands and agrees
2
<PAGE>
that this document (and any other document required herein) may be
delivered by any party thereto either in the form of an executed original
or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank
of a facsimile transmitted document purportedly bearing the signature of
the Borrower shall bind the Borrower with the same force and effect as the
delivery of a hard copy original. Any failure by the Bank to receive the
hard copy executed original of such document shall not diminish the binding
effect of receipt of the facsimile transmitted executed original of such
document which hard copy page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement, contains
the entire and exclusive agreement of the parties hereto with reference to
the matters discussed herein and therein. This Amendment supersedes all
prior drafts and communications with respect thereto.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or
the Credit Agreement, respectively.
(g) Borrower covenants to pay to or reimburse the Bank, upon
demand, for all reasonable costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
CHIRON CORPORATION
By: /s/ JE Kent
-------------------
Title: VP, Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ K McMahon
-------------------
Title: Managing Director
4
<PAGE>
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
---------------------------------------------
THIS THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT (this "AMENDMENT"),
dated as of October 10, 1997, is entered into by and between CHIRON
CORPORATION (the "BORROWER") and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION (the "BANK").
RECITALS
--------
A. The Borrower and the Bank are parties to a Revolving Credit
Agreement dated as of July 12, 1996, as amended by a First Amendment to
Revolving Credit Agreement dated as of July 11, 1997, and a Second Amendment
to Revolving Credit agreement dated as of August 18, 1997 (as so amended, the
"CREDIT AGREEMENT") pursuant to which the Bank has extended certain credit
facilities to the Borrower.
B. The Borrower has requested that the Bank agree to a certain
amendment of the Credit Agreement.
C. The Bank is willing to amend the Credit Agreement, subject to the
terms and conditions of this Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in the
Credit Agreement.
2. AMENDMENT TO CREDIT AGREEMENT. Paragraph 1 of the Credit Agreement
shall be amended and restated in its entirety so as to read as follows:
1. THE ADVANCES. Subject to and upon the terms and conditions
set forth herein, the Bank agrees to make advances (the
"ADVANCES") to the Borrower at any time and from time to time
prior to December 12, 1997 (the "EXPIRY DATE"); provided, however,
that the aggregate principal amount of Advances outstanding shall
at no time exceed U.S. $100,000,000 (the "COMMITMENT").
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Bank as follows:
(a) No Event of Default or condition, event or act which, with
the giving of notice or lapse of time, or both, would constitute an Event
of Default has occurred and is continuing.
(b) The execution, delivery and performance by the Borrower of
this Amendment have been duly authorized by all
<PAGE>
necessary corporate and other action and do not and will not require any
registration with, consent or approval of, notice to or action by, any
person (including any governmental authority) in order to be effective and
enforceable. The Credit Agreement as amended by this Amendment constitutes
the legal, valid and binding obligations of the Borrower, enforceable
against it in accordance with its respective terms, without defense,
counterclaim or offset.
(c) All representations and warranties of the Borrower contained
in the Credit Agreement are true and correct.
(d) The Borrower is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the
Bank or any other person.
4. EFFECTIVE DATE. This Amendment will become effective as of
October 10, 1997 (the "EFFECTIVE DATE"), PROVIDED THAT the Bank has
received from the Borrower a duly executed original (or, if elected by the
Bank, an executed facsimile copy) of this Amendment.
5. RESERVATION OF RIGHTS. The Borrower acknowledges and agrees that
the execution and delivery by the Bank of this Amendment shall not be
deemed to create a course of dealing or otherwise obligate the Bank to
execute similar amendments under the same or similar circumstances in the
future.
6. MISCELLANEOUS.
(a) Except as herein expressly amended, all terms, covenants and
provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment
shall be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective successors
and assigns. No third party beneficiaries are intended in connection with
this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
Each of the parties hereto understands and agrees
2
<PAGE>
that this document (and any other document required herein) may be
delivered by any party thereto either in the form of an executed original
or an executed original sent by facsimile transmission to be followed
promptly by mailing of a hard copy original, and that receipt by the Bank
of a facsimile transmitted document purportedly bearing the signature of
the Borrower shall bind the Borrower with the same force and effect as the
delivery of a hard copy original. Any failure by the Bank to receive the
hard copy executed original of such document shall not diminish the binding
effect of receipt of the facsimile transmitted executed original of such
document which hard copy page was not received by the Bank.
(e) This Amendment, together with the Credit Agreement, contains
the entire and exclusive agreement of the parties hereto with reference to
the matters discussed herein and therein. This Amendment supersedes all
prior drafts and communications with respect thereto.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or
the Credit Agreement, respectively.
(g) Borrower covenants to pay to or reimburse the Bank, upon
demand, for all reasonable costs and expenses (including allocated costs of
in-house counsel) incurred in connection with the development, preparation,
negotiation, execution and delivery of this Amendment.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
CHIRON CORPORATION
By: /s/ JE Kent
-------------------
Title: VP, Treasurer
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By: /s/ K McMahon
-------------------
Title: Managing Director
4
<PAGE>
EXHIBIT 11
CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Net income (loss) from continuing operations
available for common shares and common
stock equivalent shares deemed to have a
dilutive effect $(14,187,000) $ 12,828,000 $ 17,001,000 $ 42,458,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Primary earnings per share $ (0.08) $ 0.07 $ 0.10 $ 0.24
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted earnings per share $ (0.08) $ 0.07 $ 0.09 $ 0.24
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) available for common shares
and common stock equivalent shares deemed
to have a dilutive effect $(12,681,000) $ 11,778,000 $ 18,397,000 $ 39,876,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Primary earnings per share $ (0.07) $ 0.07 $ 0.10 $ 0.22
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully diluted earnings per share $ (0.07) $ 0.07 $ 0.10 $ 0.22
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in primary earnings per share computation:
Weighted average common shares outstanding 174,221,000 169,927,000 172,930,000 168,968,000
Weighted average dilutive incremental common
shares issuable from exercise of warrants - 208,000 206,000 324,000
Weighted average dilutive incremental common
shares issuable under employee stock option
programs - 5,713,000 4,417,000 8,000,000
------------ ------------ ------------ ------------
Total common shares and common stock equivalent
shares deemed to have a dilutive effect 174,221,000 175,848,000 177,553,000 177,292,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in fully diluted earnings per share
computation:
Weighted average common shares outstanding 174,221,000 169,927,000 172,930,000 168,968,000
Weighted average dilutive incremental common
shares issuable from exercise of warrants - 208,000 260,000 326,000
Weighted average dilutive incremental common
shares issuable under employee stock option
programs - 5,708,000 6,438,000 8,000,000
------------ ------------ ------------ ------------
Total common shares and common stock equivalent
shares deemed to have a dilutive effect 174,221,000 175,843,000 179,628,000 177,294,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S UNAUDITED CONSOLIDATED BALANCE SHEET DATED SEPTEMBER 30, 1997 AND
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997<F5>
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997<F5>
<CASH> 103,537
<SECURITIES> 74,641<F1>
<RECEIVABLES> 324,185
<ALLOWANCES> 0
<INVENTORY> 185,355
<CURRENT-ASSETS> 725,711
<PP&E> 807,549
<DEPRECIATION> 257,059
<TOTAL-ASSETS> 1,701,762
<CURRENT-LIABILITIES> 466,424
<BONDS> 395,640<F2>
0
0
<COMMON> 1,750
<OTHER-SE> 812,667<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,701,762
<SALES> 609,762
<TOTAL-REVENUES> 850,887
<CGS> 257,344
<TOTAL-COSTS> 257,344
<OTHER-EXPENSES> 314,551<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,823
<INCOME-PRETAX> 34,394
<INCOME-TAX> 17,393
<INCOME-CONTINUING> 17,001
<DISCONTINUED> 1,396
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,397
<EPS-PRIMARY> 0.10<F6>
<EPS-DILUTED> 0.10<F6>
<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, NET OF CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, CUMULATIVE
FOREIGN CURRENCY TRANSLATION ADJUSTMENT, UNREALIZED GAIN FROM INVESTMENTS AND
NOTES RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, IMPAIRMENT LOSS ON LONG-LIVED ASSETS AND
OTHER OPERATING EXPENSES.
<F5>ACTUAL FISCAL YEAR END WILL BE, AND PERIOD END WAS, DEC-28-1997 AND
SEP-28-1997, RESPECTIVELY. FOR PRESENTATION PURPOSES, DATES USED IN THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE CALENDAR MONTH END.
<F6>REPRESENTS NET INCOME PER SHARE.
</FN>
</TABLE>
