<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
Commission file No. 0-12798
------------------------
CHIRON CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-2754624
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>
4560 HORTON STREET
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 655-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
------------------------
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 28, 1997, was $1.9 billion.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 28, 1997:
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF SHARES
- -------------------------------------- --------------------------------------
<S> <C>
Common Stock, $0.01 par value 172,027,422
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Consolidated Financial Statements for the fiscal year ended
December 29, 1996, are incorporated by reference into Parts II and IV of this
Form 10-K Report and are filed as Exhibit 13 to this Form 10-K Report. Portions
of the Proxy Statement to be filed in connection with the solicitation of
proxies for the Annual Meeting of Stockholders to be held on May 15, 1997, are
incorporated by reference into Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
THIS REPORT 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" CONTAINED IN THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN CHIRON'S
CONSOLIDATED FINANCIAL STATEMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K,
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.
Chiron is a diversified, science-driven, market-directed healthcare company
that applies biotechnology and other techniques of modern biology and chemistry
to develop, produce and sell products intended to improve the quality of life by
diagnosing, preventing and treating human disease. Chiron participates in four
human healthcare markets: (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; (iii) adult and
pediatric vaccines; and (iv) ophthalmic surgical products, including instruments
and devices used for the surgical correction of vision and intraocular implants
to deliver drugs to the eye. Chiron also develops or acquires new technologies,
employing these technologies to discover new products for the Company or for its
partners.
Effective January 1, 1995, Chiron began a biotechnology alliance with
Ciba-Geigy Ltd., of Basel, Switzerland, ("Ciba"), which in December 1996 merged
with Sandoz Limited ("Sandoz") to form Novartis AG ("Novartis"). Novartis
increased its ownership interest in Chiron common stock to 49.9 percent (now
approximately 46 percent as a result of subsequent stock issuances to parties
other than Novartis). In addition, Chiron and Novartis have an agreement to
cooperate in research, development, manufacturing and marketing of biotechnology
products on an arms-length basis while remaining independent to pursue other
opportunities. The two companies have a separate agreement to collaborate in
combinatorial chemistry. For a further description of the alliance with
Novartis, see Part II, Item 8., Note 2 of Notes to Consolidated Financial
Statements.
Chiron operates through the following business units: Chiron Diagnostics,
which includes immunodiagnostic and critical care instrument systems,
quantitative probe tests and an interest in a joint immunodiagnostic business;
Chiron Vaccines, which includes a fully integrated vaccine business in Italy and
a vaccine joint venture in Germany; Chiron Therapeutics, which provides products
for use primarily by oncologists and manufactures the therapeutic product,
Betaseron-TM-; and Chiron Vision, the Company's ophthalmic business. A fifth
business unit, Chiron Technologies, manages the Company's research and
development programs, principally those that pertain to the development of new
pharmaceutical products, and develops new technologies with potential utility
throughout Chiron.
Chiron is a global organization with facilities on four continents. Chiron's
corporate headquarters is located at 4560 Horton Street, Emeryville, California,
94608-2916, and its telephone number at that address is (510) 655-8730.
CHIRON DIAGNOSTICS
Chiron, through its Chiron Diagnostics business unit, is one of the world's
largest providers of critical blood analyte systems used to measure blood gases,
blood electrolytes and metabolites. These systems are used by hospitals to
diagnose and monitor patients in critical care settings. Chiron Diagnostics also
1
<PAGE>
markets the ACS:180-TM- and ACS:180 Plus-TM-, which are automated,
high-throughput random access immunodiagnostic instrument systems used by
hospital and reference laboratories to detect and measure thyroid, anemia,
fertility, cancer and STAT cardiac indicators. Two new instrument systems are
scheduled for introduction in 1997: the Rapidpoint-TM- 400, a critical care
system designed specifically for critical care settings in hospitals, and the
ACS:Centaur-TM-, a more powerful immunoassay system designed to markedly
increase laboratory productivity and provide a platform for unique analytes that
will help clinicians manage disease progression.
Chiron Diagnostics develops branched DNA ("bDNA") probe tests to quantify
levels of virus and other indicators of disease. Research suggests that Chiron's
bDNA probe tests may have utility in predicting disease progression, selection
of patients for treatment based on probability of response and monitoring
response to therapy. Chiron is selling bDNA probe tests for human
immunodeficiency virus ("HIV"), hepatitis C virus ("HCV"), and hepatitis B virus
("HBV") for research use only in the U.S. Chiron's bDNA probe test for HIV has
been approved for use in France and Australia. The U.S. Food and Drug
Administration ("FDA") is reviewing Chiron's application to market its bDNA
probe test for HIV in the U.S. Chiron has licensed rights to sell bDNA probe
tests in Japan and Taiwan to Daiichi Pure Chemicals Co., Ltd. ("Daiichi").
Daiichi currently markets Chiron's Quantiplex-TM- bDNA tests for HCV and HBV in
Japan.
Chiron has a joint business with a significant worldwide presence in the
immunodiagnostic market with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson
& Johnson ("J&J") company, based largely on sales of tests used to screen blood
for the potential presence of HCV. The joint business sells a full line of tests
required to screen blood for hepatitis viruses and retroviruses, and provides
confirmatory tests and microplate-based instrument systems to automate test
performance and data collection. Chiron and Ortho share equally in the pretax
profit generated by the joint business. In early 1997, the Chiron-Ortho joint
business reached an agreement to supply the American Red Cross with its entire
requirements for blood screening tests and reagents. The joint business holds
the immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and
receives royalty payments for the sale of HCV and HIV tests by Abbott
Laboratories ("Abbott") and HCV tests by Pasteur Sanofi Diagnostics. Chiron and
Ortho are presently seeking, through arbitration, resolution of certain
disagreements with respect to the manner in which one or both companies will
market certain clinical diagnostics products using intellectual property which
is the subject of the 1989 agreement between them creating the joint business.
While the result of arbitration is uncertain, the Company believes that the
parties ultimately will reach a satisfactory conclusion, consistent with
Chiron's best interests.
CHIRON VACCINES
Chiron Vaccines, headquartered in Emeryville, California, with operations in
Siena, Italy, and a joint venture in Marburg, Germany, develops and markets
adult and pediatric vaccines. Chiron Vaccines' present business is based
primarily on the sale of traditional pediatric and flu vaccines in Italy and, to
a lesser extent, in the Middle East, the Far East, Africa, South America, and to
international health services such as the World Health Organization. Among its
products is a new genetically engineered acellular pertussis (whooping cough)
vaccine, combined with diphtheria and tetanus ("DTaP"), currently marketed in
Italy and exported to other countries. Chiron Vaccines is preparing an
application to market the DTaP vaccine in Europe. Its application to market this
vaccine under the trade name Pertugen-TM- is under review at the FDA. These
applications are based on the results of large-scale U.S. government-sponsored
trials in Italy that demonstrated that the Chiron acellular pertussis vaccine is
safer and more effective than a current U.S. licensed whole-cell pertussis
vaccine. Chiron Vaccines is also preparing an application to market an
adjuvanted flu vaccine in Europe.
Chiron Vaccines is developing a new generation of vaccines for serious adult
infections. These vaccines utilize genetically engineered antigens which are
displayed in a manner that mimics the appearance of the actual agent, combined
in a formulation with adjuvants that amplify the immune response. In
2
<PAGE>
November 1996, Chiron Vaccines announced that its preliminary analysis of data
available from prophylactic genital herpes vaccine trials did not indicate
efficacy for the product. Based upon these results, Chiron Vaccines decided not
to pursue a Product License Application for the product. With respect to other
vaccine trials, a Phase 1 trial of an HIV antigen is on-going in the U.S., a
Phase 1 trial of an HIV vaccine is underway in Thailand, in collaboration with
the Thai Royal Army and the U.S. Department of the Army, and additional trials
of HIV vaccines are also planned to be conducted by the National Institutes of
Health. A vaccine for HCV is in preclinical trials. Chiron Vaccines is also
collaborating with North American Biologicals, Inc. in the development of a new
family of human immunoglobulin products, using Chiron's vaccines as the
stimulating agent and initially focused on the development of a hyperimmune
globulin product to prevent and treat CMV infections.
In July 1996, Chiron purchased a 49 percent interest in the human vaccine
business of Behringwerke AG, a subsidiary of Hoechst AG, for approximately
$120.0 million in cash. Under the terms of the purchase agreement, Chiron has an
option to purchase the remaining 51 percent in March 1998, 1999, 2000 or 2001,
and Behringwerke AG has the option to require Chiron to acquire the remaining 51
percent interest in March 2001. During the period of mutual ownership, Chiron
and Behringwerke AG will operate the vaccine business as a joint venture which
has been named Chiron Behring GmbH & Co. ("Chiron Behring").
Chiron Behring, one of the largest vaccine suppliers in Germany,
manufactures and markets vaccines for flu, diphtheria, tetanus, pertussis,
rabies, tick-borne encephalitis, tuberculosis, cholera, an oral vaccine for
polio, and, under license from other companies, distributes vaccines in Germany
for measles, mumps, rubella, HBV, typhoid fever, pneumonia, haemophilus
influenza as well as an inactivated polio vaccine. Chiron Behring also provides
an outlet for Chiron's vaccines in the German market and expands Chiron's
presence in the European vaccine market.
In addition to its Chiron Vaccines activities, Chiron has received royalty
payments since 1986 from the sales of Recombivax-TM- HB, a vaccine against HBV
developed, manufactured and marketed by Merck & Co., Inc. ("Merck"), using
technology developed by Chiron. Recombivax-TM- HB was the first vaccine using
genetic engineering to be licensed by the FDA for human use.
CHIRON THERAPEUTICS
Chiron Therapeutics, Chiron's hospital and large clinic-based business in
the U.S. and Europe, markets products for use principally by oncologists. Its
leading product is Proleukin-TM- (aldesleukin), interleukin-2, the first
treatment approved for metastatic kidney cancer. Proleukin is also being
developed for additional indications, including metastatic melanoma and HIV
infection. In addition, on behalf of Novartis, Chiron promotes in the U.S.
Aredia-TM- (pamidronate disodium for injection), a drug to treat hypercalcimia
of malignancy, Paget's disease and osteolytic bone lesions of multiple myeloma.
In November 1996, Novartis and the Company agreed to a modification of Chiron's
contract, which expires in March 1997, for sole promotional rights for
Aredia-TM-. Under the new arrangements, Chiron, through a co-promotion
arrangement with Novartis, will promote Aredia-TM- for two years after a
six-month transitional period. Chiron is also co-developing DepoCyt for the
treatment of neoplastic meningitis. In May 1996, Chiron sold its 50 percent
interest in a generic cancer chemotherapeutics business to its partner, Ben
Venue Laboratories, Inc.
Chiron Therapeutics manufactures Betaseron-TM- (interferon beta-1b) for
Berlex Laboratories, Inc., a U.S. affiliate of Schering AG of Germany
("Schering"), which markets the product primarily in the U.S. and Canada. In
Europe, Schering is marketing the product under the trade name Betaferon-TM-,
manufactured by Boehringer Ingelheim, for which Chiron receives a royalty.
3
<PAGE>
CHIRON VISION
Chiron Vision, headquartered in Claremont, California, is the Company's
business in ophthalmic surgical products, with sales in the U.S. and more than
20 other countries. Chiron Vision's line of products for the surgical correction
of vision includes both hard and foldable intraocular lenses for cataract
replacement surgeries, phacoemulsification instruments for small-incision
cataract surgeries, and refractive surgical instruments, including corneal
shapers and excimer lasers.
In March 1996, Chiron Vision received FDA approval to begin marketing the
Vitrasert-TM- Implant to deliver ganciclovir for the treatment of CMV retinitis
in people with AIDS. Recently, the Vitrasert-TM- Implant was approved in Europe
for the same indication. In Phase 3 clinical trials, the Vitrasert-TM- Implant
demonstrated a clinically important improvement over intravenously administered
ganciclovir in delaying the progression of CMV retinitis in these individuals.
Chiron Vision is co-marketing the Vitrasert-TM- Implant worldwide, including in
the U.S. and Europe, with Hoffmann-La Roche, Inc. ("Roche"), which manufactures
and markets ganciclovir.
CHIRON TECHNOLOGIES
Chiron Technologies applies enabling technologies in combinatorial
chemistry, gene therapy and recombinant proteins to develop products intended
for use as therapeutics, and develops new technologies with potential utility
throughout the Company. Chiron Technologies combines the Company's own
proprietary technologies in combinatorial chemistry, robotic screening and
selection and molecular biology with the knowledge and participation of a select
group of leading academic scientists in the fields of structural biology and
bio-organic chemistry. Chiron also engages in collaborations to create libraries
of compounds for characterization and screening with other pharmaceutical
companies, including Janssen Pharmaceutica NV, a J&J company, Novartis, Japan
Tobacco and Organon Teknika N.V. ("Organon"), as well as with organizations in
other fields such as Dow Elanco, an agricultural company.
Chiron is developing gene therapy and gene transfer products, and drug
activation technology for the prevention and treatment of a broad range of human
diseases. Chiron's gene therapy program includes collaborations with Baxter,
Inc., Green Cross of Japan, Ribozyme Pharmaceuticals, Inc. and the Virus
Research Institute.
Chiron, in collaboration with J&J, is developing a growth factor to treat
topical wounds. In December 1996, Chiron and J&J submitted applications to the
FDA to manufacture and market their wound healing agent Regranex-TM-
(becaplermin), a formulation containing recombinant human platelet-derived
growth factor (rhPDGF). Chiron manufactures rhPDGF in bulk for final formulation
into Regranex-TM-. J&J is responsible for clinical development, regulatory
matters, product formulation, marketing and sales.
Chiron is collaborating with Cephalon, Inc. ("Cephalon") to develop and
market products for the treatment of neurological disorders. In June 1996, an
advisory committee to the FDA recommended that, based on results from two
clinical trials, Myotrophin-TM- (rhIGF-1 or mecasermin [recombinant DNA origin])
Injection be made available to patients with amyotrophic lateral sclerosis (ALS,
or Lou Gehrig's Disease), on a compassionate-use basis while it undergoes
further regulatory review. The FDA granted treatment IND status for
Myotrophin-TM- in August 1996, and a small number of ALS patients are receiving
the drug. At the June 1996 meeting, the advisory committee expressed the view
that the second trial, which was conducted in Europe, did not determine a
positive effect for Myotrophin-TM-, and that conducting another controlled trial
was advisable. In February 1997, Chiron and Cephalon submitted a new drug
application to the FDA seeking to market Myotrophin-TM-. In May 1997, the same
FDA advisory committee will review the application.
In the area of cardiovascular disease and critical care, Chiron has a
collaboration with G.D. Searle & Co. ("Searle"), to develop tissue factor
pathway inhibitor ("TFPI"), a coagulation inhibitor
4
<PAGE>
with potential applications in thrombotic and inflammatory diseases, trauma and
critical care. Chiron and Searle have started a Phase 2 clinical trial studying
the use of TFPI in sepsis.
Chiron is engaged in development of a number of products and businesses in
collaboration with third parties. The success of these collaborations will
depend upon contributions by each collaborator of existing and future
intellectual property and of activities and other resources. Success will also
depend upon the continuing agreement of the collaborators as to their joint and
separate rights and obligations with respect to opportunities in and relating to
the subject matter of the collaboration as such opportunities arise and evolve
over time.
COMPETITION
Chiron competes against a large number of other biotechnology and
pharmaceutical companies in the U.S. and internationally, and although no single
company competes in every area of Chiron's interests, the competition is intense
and expected to increase. Biotechnology and drug discovery are rapidly evolving
fields in which new developments frequently result in product obsolescence and
price competition. To compete effectively, Chiron's direct and joint businesses
invest heavily in research and development, maintain multiple sales forces that
concentrate efforts on individual classes of customers, and spend significant
amounts on advertising, promotion and selling. Substantial consolidation is
underway in the global healthcare industry, and is expected to produce greater
efficiencies and even more intense competition.
In the diagnostic market, the major competitor to both the Chiron-Ortho
joint business and to the Chiron Diagnostics business is Abbott. In addition,
although initial patents for the Chiron HCV invention have been issued and are
being upheld through litigation, other companies in Japan and Europe have
introduced, or may be preparing to introduce, competing HCV tests. In addition
to Abbott, Chiron faces competition in the immunoassay market from several
companies, including Boehringer Mannheim and J&J, which purchased the diagnostic
and clinical chemistry business of Eastman Kodak. Chiron's bDNA probe tests
compete with products from affiliates of Roche (which markets tests based on
polymerase chain reaction-PCR), Abbott, Organon and Digene and may compete with
Gene-Trak Systems and Gen-Probe Incorporated. In the critical blood analyte
market, Chiron Diagnostics faces competition in large systems from Radiometer
Medical A/S and Instrumentation Laboratory Company and in the point-of-care
segment from I-STAT, which has a collaboration with Hewlett-Packard.
Four large companies hold the greatest share of the worldwide vaccine
market: Merck and SmithKline Beecham Biologicals ("SmithKline"), both of which
market the only widely sold recombinant vaccines for hepatitis B infection;
Wyeth Lederle Vaccines & Pediatrics ("Lederle"), a division of American Home
Products; and Pasteur Merieux Connaught ("PMC") (which separately has a
strategic alliance with Merck). All four of these companies have substantial
businesses and development programs in pediatric vaccines. SmithKline, Lederle
and PMC have been granted licenses to market in the U.S. acellular pertussis
vaccines that demonstrated superiority compared to whole-cell pertussis
vaccines, in combination with diphtheria and tetanus. North American Vaccines
has regulatory applications for its DTaP vaccine in review in Europe and by the
FDA. The vaccine will be marketed in the U.S. by Abbott and, subject to
successful regulatory approvals, by Chiron Behring in Germany and Austria. In
addition, SmithKline, Lederle, PMC and North American Vaccines are conducting
clinical trials studying combinations of DTaP with other pediatric vaccines.
These companies, as well as other biotechnology companies, are researching and
developing vaccines using proteins and DNA for adult infectious diseases and
cancers.
In the therapeutics market, Proleukin-Registered Trademark- competes with
alpha interferon sold by Schering Plough Corporation and Roche as a treatment
for metastatic kidney cancer. Several other biotechnology companies are
developing IL-2 or other interferons as immune-system-based therapies for
cancers and infectious diseases, including Roche, Genentech, Inc. ("Genentech"),
and Amgen Inc. Chiron's therapeutic products in development for cancer,
infectious diseases and cardiovascular disease face competition from companies
5
<PAGE>
such as Genetics Institute, Immunex Corporation, Genentech and many other
biotechnology companies. Novartis' Aredia-TM-, which Chiron promotes in the
U.S., may face competition from companies with other bone growth factor
products.
Betaseron-TM-, licensed in the U.S. to treat relapsing-remitting multiple
sclerosis, began usage by patients in October 1993. Avonex, a recombinant beta
interferon from Biogen, Inc., was licensed in the U.S. in May 1996, has gained
significant market share, and was approved in early 1997 for marketing in
Europe. Late in 1996, Copaxone from Teva Pharmaceuticals was approved in the
U.S. for treatment of multiple sclerosis. Other companies have entered, or are
preparing to enter, products into clinical trials for multiple sclerosis. In
certain European countries, Schering's product, Betaferon-TM-, faces competition
from Ares Serono, who sells an extracted form of beta interferon which is used
for, among other purposes, treatment of multiple sclerosis, and holds licenses
for other indications in several European countries.
Chiron Vision competes against numerous healthcare, pharmaceutical and
biotechnology companies in the research, development and marketing of devices
and therapeutic products for the ophthalmic surgery market. Chiron Vision's
competition in its largest product line, intraocular lenses, includes Alcon
Laboratories, Inc., a division of Nestle SA; Allergan, Inc.; Pharmacia AB; Storz
Instrument Company, a subsidiary of American Home Products; and Staar Surgical
Co. Gilead Sciences, Inc., markets a systematically injectable pharmaceutical
that competes against Chiron Vision's ganciclovir Vitrasert-TM- Implant. Summit
Technology, Inc. and VISX, Inc. are marketing FDA-approved excimer lasers in the
U.S. to correct vision. Additionally, Nidek, Inc. and LaserSight Technologies,
Inc. are marketing excimer lasers in non-U.S. markets.
A significant amount of research in biotechnology is performed in
universities and nonprofit research organizations. These entities are becoming
more active in seeking patent protection and licensing revenues for their
discoveries. The competition among large pharmaceutical companies and smaller
biotechnology companies to acquire technologies from these entities also is
intensifying. While Chiron actively collaborates with such entities in research
and has and will continue to license their technologies for further development,
these institutions also compete with Chiron to recruit scientific personnel and
to establish proprietary technology positions.
MANUFACTURING
Chiron has licensed manufacturing facilities in Emeryville, California for
the production of biologicals and clinical grade materials for clinical trials
of certain products in development. Chiron also has manufacturing facilities in
St. Louis, Missouri; Vacaville, California; Puerto Rico; and Amsterdam, The
Netherlands. Due to lower than expected domestic commercial demand for
Betaseron-TM-, the Puerto Rico facility was idled in 1995.
Following the acquisition of IOLAB in 1995, Chiron Vision consolidated the
majority of its domestic operations at IOLAB's facilities in Claremont,
California. Chiron Vision also leases additional manufacturing facilities in
Irvine, California; Lyon, France; and Munich, Germany.
Chiron Vaccines leases manufacturing and administrative facilities in Siena,
Italy, and owns manufacturing facilities in Rosia, Italy. Chiron Diagnostics
owns manufacturing facilities in Oberlin, Ohio and Walpole, Massachusetts. Other
manufacturing sites are leased including Irvine, California; Alameda,
California; Medfield, Massachusetts; and Sudbury, England.
Regulatory approvals for each of the facilities described above are
necessary before Chiron can begin any new commercial production. Failure to
obtain all necessary approvals and permits would materially and adversely affect
the continued development and introduction of Chiron products.
6
<PAGE>
MAJOR CUSTOMERS
During 1996, no single customer contributed ten percent or more to total
revenues. Novartis is a related party and contributed less than ten percent of
total revenues in 1996 and 1995, and 11 percent in 1994. J&J and its affiliates
are also related parties and collectively contributed less than ten percent of
total revenues in 1996 and 1995, and 22 percent in 1994. Sales of Betaseron-TM-
to Chiron's marketing partner accounted for less than ten percent of total
revenues in 1996 and 1995, and 23 percent in 1994.
For a discussion of revenues by geographic area, see Part II, Item 8., Note
11 of Notes to Consolidated Financial Statements.
RESEARCH AND DEVELOPMENT
The Company's two primary sources of new product candidates are internal
research and development and collaboration and licensing with other healthcare
companies. Research and development expense for the years ended December 31,
1996, 1995 and 1994, including payments to collaborative partners, was $371.1
million, $343.8 million and $166.2 million, respectively. The increase in
research and development expenditures in 1995 over 1994 was primarily due to the
acquisition of Chiron Diagnostics, Chiron S.p.A. and Viagene in 1995. Under
contracts where reimbursement is based upon work performed, the related research
and development expenses were $103.8 million, $51.8 million and $72.4 million in
1996, 1995 and 1994, respectively.
RAW MATERIALS
Raw materials and laboratory supplies utilized in the Company's research are
generally available from several commercial sources. In certain projects, sample
tissues and cell strains used for the Company's research and development may be
difficult to obtain. The Company relies upon its good relations with other
researchers and institutions to obtain the majority of such strains and samples.
Sources include blood banks, hospitals, universities and national laboratories.
Most raw materials necessary for process development, production scale-up and
commercial manufacturing are generally available from multiple commercial
sources. However, certain processes require materials from sole sources or
materials that are difficult for suppliers to produce and certify to the
Company's specifications or for which the raw materials may be in short supply.
Although Chiron maintains an awareness of the condition of these suppliers,
their ability to supply the Company's needs and the market conditions for these
materials, there is a risk that material shortages could impact production
efforts. The Company believes that its relationships with its commercial
suppliers are good.
GOVERNMENT REGULATION
Regulation by governmental agencies in the U.S. and other countries is a
significant and changing factor in Chiron's research and development effort, and
in the Company's plans to produce and market both approved products and those
nearing approval. Intent to market products in Europe brings an added regulatory
burden, as the role of the European Economic Community has increased
significantly in recent years.
The Company's products (both marketed and investigational) in the U.S.
include biologicals, drugs, diagnostic tests and instruments and ophthalmic
devices. All are regulated under the Food, Drug, and Cosmetic Act ("FDCA") and
supporting regulations. The biological products are additionally regulated under
the Public Health Service Act ("PHSA") and supporting regulations. Licensing of
a biological product in the U.S. not considered well-characterized is
accompanied by a requirement to simultaneously license the manufacturing
establishment.
Licensing of the establishment includes a requirement that all facilities
used to manufacture, fill, test and distribute the product in interstate
commerce be inspected and approved by the FDA's Center for
7
<PAGE>
Biologics Evaluation and Research. The review and inspection process includes a
review of all labeling, including the vial, carton, box and packers, as well as
promotional and advertising materials.
The FDA has amended the biologics regulation to eliminate the establishment
license application requirement for well-characterized biotechnology products
licensed under the PHSA. The rule exempts well-characterized biotechnology
products, licensed under the PHSA, from certain biologics regulations and
harmonize the requirements applicable to these products with those applicable to
similar drug products approved under the FDCA. One submission, Biologics
Licensing Application, is now required, which covers both product and
establishment information.
Since every FDA decision requires submission of an application and
substantial supporting documentation (such as a New Drug Application, Premarket
Approval Application, Product License Application, or Establishment License
Application), the preparation of the documentation, its submission and audit
review determines the speed with which a research program is translated into a
marketed product.
Licensing procedures in the European Union ("EU") were revised in 1995
leading to the establishment of the following two new registration procedures: a
Centralized Procedure for licensing of medicinal products derived from the use
of high technology/biotechnology processes, and a Decentralized Procedure
whereby a license granted in one Member State of the EU is mutually recognized
by other Member States, leading to the granting of equivalent licenses in those
Member States recognizing the original license.
The Centralized Procedure is mandatory for those medicinal products derived
from genetic engineering/monoclonal antibody technologies and optional for other
high technology-derived medicinal products and any drug with a new chemical
entity as an active substance, a new delivery system of significant innovation,
or an entirely new indication of significant therapeutic interest. This
procedure leads to the granting of a single license for the entire EU by the
newly established European Medicines Evaluation Agency based in London.
For existing national licensing procedures, a transition period to January
1, 1998 will exist. At that time, the Decentralized Procedure will replace
independent national licensing of products in the EU.
Experience to date with the Centralized Procedure indicates an average time
period of 15 to 18 months from the filing of a license application to the
receipt of a marketing authorization. In contrast, under the Decentralized
Procedure, once mutual recognition has been agreed, which usually takes between
four to five months from the receipt of an initial marketing authorization, the
national approval from other member states has been lengthy and highly variable.
PATENTS AND PROPRIETARY RIGHTS
Intellectual property (e.g., patents, trade secrets and trademarks) is
important to the business of the Company. Chiron and its subsidiaries have a
substantial number of pending patent applications and granted patents in the
U.S. and in foreign countries. It is not known how many of these pending patent
applications will be granted as patents, and some of the pending applications
may be abandoned. A number of patents and patent applications owned by third
parties have been licensed exclusively, semi-exclusively or nonexclusively to
Chiron and its subsidiaries for one or more fields of use. Chiron and its
subsidiaries also own a number of trademarks in the U.S. and foreign countries.
Due to unresolved issues regarding the scope of protection provided by such
patents, as well as the possibility of patents being granted to others, there
can be no assurance that the patents owned or licensed to Chiron and its
subsidiaries will provide substantial protection or commercial benefit. The
rapid rate of development and the intense research efforts throughout the world
in biotechnology, the significant time lag between the filing of a patent
application and its review by appropriate authorities and the lack of
significant legal precedent involving biotechnology inventions make it difficult
to predict accurately the breadth or degree of protection that patents will
afford Chiron's or its subsidiaries' biotechnology products or their underlying
technology. It is also difficult to predict whether valid patents will be
granted based on
8
<PAGE>
biotechnology patent applications or, if such patents are granted, to predict
the nature and scope of the claims of such patents or the extent to which they
may be enforceable.
Important legal questions remain to be resolved as to the extent and scope
of available patent protection in the U.S. and abroad. Under U.S. law, although
a patent has a statutory presumption of validity, the issuance of a patent is
not conclusive as to validity or as to the enforceable scope of its claims.
Accordingly, there can be no assurance that Chiron's patents will afford legal
protection against competitors with similar inventions, nor can there be any
assurance that the patents will not be infringed or designed around by others or
that others will not obtain patents that Chiron would need to license or design
around.
Trade secrets and confidential information are likely to be important to
Chiron's commercial success. Although Chiron and its subsidiaries seek to
protect trade secrets and confidential information they believe to be
significant, there can be no assurance that others will not either develop
independently the same or similar trade secrets or confidential information or
obtain access to such trade secrets or confidential information. Furthermore,
there can be no assurance that others have not obtained or will not obtain
patent protection that will preclude Chiron or its subsidiaries from using their
trade secrets or confidential information.
Most countries limit the enforceability of patents against government
agencies or government contractors. Generally, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement. This can be of
particular importance in countries where a major customer of Chiron or its
licensees is a governmental agency. The inability to enjoin such infringement
and the necessity of relying exclusively on monetary compensation could
materially diminish the value of a particular patent. Furthermore, many
countries (including European countries) have compulsory licensing laws under
which third parties may compel the grant of non-exclusive licenses under certain
circumstances (for example, failure to "work" the invention in the country,
patenting of improvements by a third party or failure to supply a product
related to health and safety). The mere existence of such limits on injunctive
relief and compulsory licensing systems could force Chiron to grant a license it
would not have otherwise granted.
Chiron is aware that others, including various competitors, educational
institutions and governmental organizations, have intellectual property,
particularly patents and pending patent applications, in the U.S. and other
countries potentially useful or necessary to Chiron's and its subsidiaries'
businesses including vaccines, diagnostics, therapeutics and ophthalmics. Some
of these patents and applications claim only specific products or methods of
making such products, while others claim more general processes or techniques.
There may be similar third-party intellectual property important to the business
of Chiron or its subsidiaries of which the Company is not currently aware. It is
likely that in the future others will obtain patents or develop proprietary
rights that might be necessary or useful for the manufacture, use or sale of
some products by Chiron or its subsidiaries. Certain of these patents or rights
may be sufficiently broad to prevent or delay Chiron or its subsidiaries from
practicing necessary technology, including the manufacture and/or marketing of
products important to Chiron's current and future business. The scope, validity
and enforceability of such patents, if granted, the extent to which Chiron or
its subsidiaries may wish or need to obtain licenses thereunder and the cost and
availability of such licenses are not susceptible to accurate prediction. If
Chiron or its subsidiaries do not obtain such licenses, products may be
withdrawn from the market, or delays could be encountered in market introduction
while an attempt is made to design around such patents. Alternatively, Chiron or
its subsidiaries could find that the development, manufacture or sale of such
products is foreclosed. Chiron or its subsidiaries could also incur substantial
costs in challenging the validity or scope of such patents.
Chiron is currently involved in legal proceedings involving patents and
expects that litigation relating to the validity and scope of its patents and
proprietary rights and those of third parties will continue to arise in the
future. Substantial costs could be incurred in defending the validity or scope
of patents owned by or licensed to Chiron or its subsidiaries. If Chiron and its
subsidiaries are unable to obtain strong
9
<PAGE>
proprietary rights to protect a product after the expenditure of funds to obtain
regulatory approval, competitors may be able to market competing products
without being required to undertake the same lengthy and expensive development
efforts that Chiron and its subsidiaries already have completed. In these cases,
it is possible that price competition could become a principal factor in the
marketing of such products. If Chiron or any of its subsidiaries should lose
litigation with respect to third party intellectual property rights, Chiron and
its subsidiaries could be precluded from manufacturing or marketing certain
products and incur substantial liability for damages and attorney fees.
EMPLOYEES
At December 31, 1996, Chiron and its subsidiaries employed 7,434 people on
four continents.
ITEM 2. PROPERTIES
Chiron's operations are conducted in owned and leased facilities located
throughout the world. Chiron's principal facilities are located in Emeryville,
California, and are used for research and development, manufacturing and
administrative activities. Although the Company leases the majority of these
facilities, Chiron owns certain facilities as well as land held for future
expansion. In June 1996, Chiron entered into a seven-year agreement with a group
of financial institutions to rent a research and development facility that is
currently under construction in Emeryville, California.
The Company also owns manufacturing facilities located in Vacaville,
California; St. Louis, Missouri; and Amsterdam, The Netherlands. Certain of
these facilities have available capacity due to lower than expected domestic
demand for certain of the Company's products. Chiron also owns a manufacturing
facility in Puerto Rico which was idled in 1995 due to lower than expected
demand for Betaseron-TM-. Chiron Vaccines leases and owns manufacturing
facilities in Italy for the production of pediatric and adult vaccines.
Additionally, Chiron owns manufacturing facilities in Oberlin, Ohio and
Walpole, Massachusetts, which are used for the development and manufacture of
diagnostic products. The Company also owns a sales and administrative facility
in Norwood, Massachusetts, and a sales office and warehouse in Halstead,
England. Chiron leases manufacturing facilities relating to its diagnostic
products in Irvine and Alameda, California; Medfield, Massachusetts; and
Sudbury, England.
The Company owns administrative and manufacturing facilities in Claremont,
California, and leases manufacturing facilities in Irvine, California; Lyon,
France; and Munich, Germany, which are used in the Company's ophthalmic
business.
Chiron leases additional facilities in several cities across the U.S. These
properties are primarily sales and service offices. The Company also leases
additional facilities in Canada, Mexico, Italy, Belgium, The Netherlands, Spain,
Sweden, Switzerland, Austria, England, France, Germany, Japan, Korea, Hong Kong,
Singapore, Taiwan and Australia, primarily for sales and service offices.
The Company believes its present facilities are adequate for its current
needs. The Company continually evaluates future requirements for its facilities.
ITEM 3. LEGAL PROCEEDINGS
BRADLEY. On December 20, 1994, Dr. Daniel W. Bradley, formerly with the U.S.
Centers for Disease Control, brought suit in the United States District Court
for the Northern District of California against Chiron, Ortho, certain employees
of Chiron, and the United States government. Subsequently, Bradley dismissed the
United States government as a defendant. Bradley, who collaborated with Chiron
scientists on the research that led to the discovery of HCV, alleged he has been
wrongly excluded as an inventor of HCV. He requested various forms of relief,
including declarations that he was an inventor of Chiron's patents related to
HCV and that these patents were unenforceable. Bradley further sought monetary
10
<PAGE>
damages and a constructive trust on all past and future profits, as well as
penalties under federal and state Racketeering and Corrupt Organization (RICO)
statutes. On July 15, 1996, the Court dismissed Bradley's second amended
complaint with prejudice. Bradley is in the process of appealing the District
Court's decision to the United States Court of Appeals for the Federal Court.
The Company is opposing that appeal.
BRILLIANT TRADING CO., Wolfson. Following the announcement by Chiron of the
acquisition of Viagene, two lawsuits purporting to be class actions were filed
on April 24 and May 1, 1995, respectively, in the Court of Chancery of the State
of Delaware, against named directors and officers of Viagene and against Viagene
and Chiron. In one case, Chiron is sued on the theory that it aided and abetted
alleged breaches of fiduciary duty by Viagene's directors and officers in
approving the proposed acquisition by Chiron. In the other case, Chiron is sued
for alleged breaches of fiduciary duty as a controlling stockholder of Viagene.
Plaintiffs seek declaratory and injunctive relief, an accounting and costs and
disbursements. Defendants have received an open extension of time to answer or
otherwise respond in both of these matters. Chiron believes these suits are
without merit.
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 in several jurisdictions concerning the '639
patent and various of its national counterparts. Those jurisdictions include the
UK (where a trial is set to begin in November 1997), Italy (where a
court-appointed technical consultancy is underway), The Netherlands and the
U.S., (in the U.S. District Court, Eastern District of Texas, Marshall Division,
where the U.S. counterparts of the '639 patent, U.S. Patent Nos. 5,237,052 and
5,438,120 are at issue and where Chiron has not yet responded to the complaint).
In each of these jurisdictions, Chiron/Chiron S.p.A. are challenging the
validity of the patents at issue and seeking findings that Chiron S.p.A.'s
Acelluvax-TM- and TriAcelluvax-TM- DTaP vaccines do not infringe any valid claim
of either the '639 patent or its U.S. counterparts. Evans, for its part, seeks
findings of infringement and declarations of validity. 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"). Chiron believes
that the Chiron S.p.A. vaccines do not infringe any valid claim of the '726
patent, or the '639 patent or its counterparts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of Chiron's stockholders in the quarter
ended December 31, 1996.
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who serve at the discretion of the
Board of Directors, are as follows, in alphabetical order:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---------------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Richard W. Barker, Ph.D................. 48 Senior Vice President; President, Chiron Diagnostics
Rajen K. Dalal.......................... 43 Vice President, Corporate Development
William G. Green, Esq................... 52 Senior Vice President, General Counsel and Secretary
William J. Link, Ph.D................... 50 Vice President; Chairman and Chief Executive Officer, Chiron
Vision
Magnus Lundberg......................... 41 Vice President; President, Chiron Therapeutics and Chiron
Vaccines
Edward E. Penhoet, Ph.D................. 56 President and Chief Executive Officer
William J. Rutter, Ph.D................. 68 Chairman
Pablo D.T. Valenzuela, Ph.D............. 55 Senior Vice President, Biologicals Research and Development
Lewis T. Williams, M.D., Ph.D........... 47 Senior Vice President; President, Chiron Technologies
Dennis L. Winger........................ 49 Senior Vice President, Finance and Administration, and Chief
Financial Officer
</TABLE>
DR. BARKER joined the Company in May 1996, as Senior Vice President, and
President of Chiron Diagnostics. From 1994 to 1996, he was General Manager of
IBM Worldwide Healthcare Solutions, and also headed the IBM Consulting Group's
healthcare activities. From 1980 to 1983, Dr. Barker led the European Healthcare
Practice for McKinsey & Company, an international consulting firm, also serving
healthcare clients in North America and Asia, on issues of corporate strategy
and alliances, organizational change and international marketing. He has a Ph.D.
in biophysics.
MR. DALAL joined the Company in December 1991 as Vice President, Corporate
Development. From 1983 until joining the Company, he was employed by the
international consulting firm of McKinsey & Company, where he performed general
management consulting in the firm's pharmaceuticals, medical devices and
diagnostics industries practice.
MR. GREEN joined the Company as Vice President and General Counsel in
October 1990, having served as Secretary or Assistant Secretary since the
Company's inception in 1981. In February 1992, he became Senior Vice President,
General Counsel and Secretary. From 1981 to 1990, he was a partner in the San
Francisco law firm of Brobeck, Phleger & Harrison.
DR. LINK joined the Company as President of Chiron Vision in February 1986
and held that title until 1995. In November 1990 he became Vice President of the
Company, in January 1992 he became Chief Executive Officer of Chiron Vision, and
in April 1995 he became Chairman of Chiron Vision.
MR. LUNDBERG joined the Company in September 1996, as Vice President; and
President of Chiron Therapeutics, and was appointed President of Chiron Vaccines
in January 1997. From 1981 until joining the Company, Mr. Lundberg held sales,
marketing, clinical development and general management positions in various
divisions of Pharmacia, including diagnostics, dermatology, drug delivery,
urology and cardiovascular products. Recently, he was the General Manager of
Pharmacia AB, Biopharmaceuticals, and Peptide Hormones, where he was responsible
for both international consolidation, pharmaceutical development and global
marketing, including the development of a growth hormone product. From January
1996 to August 1996, he was head of metabolic diseases with global
responsibility for all growth hormone, thrombosis and diabetes products.
12
<PAGE>
DR. PENHOET, a co-founder of the Company, has been Chief Executive Officer
and a Director since the Company's inception in 1981, and was President from
1981 to 1989 and Vice Chairman from 1989 until 1993. Dr. Penhoet reassumed the
title of President, effective April 1, 1993. He has been a faculty member at the
University of California, Berkeley for 24 years.
DR. RUTTER, a co-founder of the Company, has served as its Chairman since
the Company's inception in 1981. He was Director of the Hormone Research
Institute at the University of California, San Francisco Medical Center, from
1983 to May 1989 and has been on the faculty at the University of California,
San Francisco, since 1969, becoming a Professor Emeritus in 1991. He has served
as a director of Novartis since 1995. Since 1992, Dr. Rutter has served on the
Board of Overseers, Harvard University. He has also served on the Board of
Trustees, Carnegie Institution of Washington since 1995.
DR. VALENZUELA, a co-founder of the Company, became Senior Vice President in
March 1989, having served as Vice President and Director of Research since the
Company's inception in 1981. He was associated with the University of
California, San Francisco, and also has held adjunct faculty positions at
Catholic University in Santiago, Chile.
DR. WILLIAMS joined the Company in August 1994 as Senior Vice President and
President of Chiron Technologies. From 1988 until joining the Company, he was a
professor of medicine at the University of California, San Francisco. Prior to
joining UCSF, he was on the faculty of Harvard Medical School. In addition, he
was a co-founder and director of COR Therapeutics, Inc. from 1988 until joining
the Company.
MR. WINGER joined the Company in August 1989 as Vice President, Finance and
Administration, and Chief Financial Officer. He became Senior Vice President,
Finance and Administration, and Chief Financial Officer, in February 1992. From
1982 to 1989, he was with The Cooper Companies and served as its vice president
and chief financial officer from 1987 to 1989.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information under the caption "Market Price of Common Stock" included in
the 1996 Consolidated Financial Statements, which is included as Exhibit 13 to
this Form 10-K Report, is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total revenues.................................... $ 1,312,844 $ 1,100,582 $ 453,979 $ 317,535 $ 246,260
Income (loss) from operations..................... 90,382 (482,428) 42,400 15,138 (95,544)
Other income (expense), net....................... (10,408) (8,346) (10,403) 7,949 6,973
Income (loss) before extraordinary item........... 55,145 (512,463) 18,325 18,384 (92,595)
Net income (loss)................................. 55,145 (512,463) 18,325 18,384 (99,252)
Income (loss) per share before extraordinary
item............................................ 0.31 (3.15) 0.13 0.14 (0.77)
Net income (loss) per share....................... 0.31 (3.15) 0.13 0.14 (0.82)
Weighted average shares outstanding............... 177,052 162,442 137,172 134,724 120,800
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------ ----------- -----------
(IN THOUSANDS, EXCEPT EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital................................... $ 223,599 $ 268,408 $ 314,174 $ 256,419 $ 250,874
Total assets...................................... 1,688,670 1,489,847 1,049,742 968,597 701,115
Long-term debt.................................... 419,589 413,248 338,061 332,991 110,681
Accumulated deficit............................... (1,032,554) (1,087,699) (575,236) (593,561) (611,945)
Stockholders' equity.............................. 764,855 672,061 572,631 522,289 478,681
Number of employees................................. 7,434 6,894 2,668 2,179 1,867
</TABLE>
During 1996, Chiron's Board of Directors declared a 4-for-1 stock split
effected in the form of a dividend on the Company's common stock that was
distributed on August 2, 1996. All references to share data above have been
restated to reflect the effect of the stock split.
On May 10, 1994, Chiron acquired Laboratoires Domilens S.A. ("Domilens"), in
a transaction accounted for by the purchase method; therefore, the operating
results of Domilens are included from the date of the acquisition.
Effective January 1, 1995, under a series of agreements between Chiron and
Novartis, Chiron acquired Chiron Diagnostics and Novartis' interest in Chiron
Vaccines and Chiron S.p.A. The acquisition of those entities was accounted for
by the purchase method; therefore, the operating results for those entities are
included for the entire year. On March 31, 1995, Chiron Vision acquired the
surgical division of IOLAB from J&J in a transaction accounted for by the
purchase method; therefore, the operating results of IOLAB are included from the
date of the acquisition. On September 29, 1995, Chiron acquired Viagene, Inc.
("Viagene") in a transaction accounted for by the purchase method; therefore,
the operating results of Viagene are included from the date of the acquisition.
14
<PAGE>
The 1992 extraordinary loss is the result of the redemption of the Company's
7.25 percent convertible subordinated debentures.
The Company has not paid cash dividends on its common stock and does not
expect to do so in the foreseeable future.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in the 1996 Consolidated
Financial Statements, which is included as Exhibit 13 to this Form 10-K Report,
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data included in the 1996
Consolidated Financial Statements, which is included as Exhibit 13 to this Form
10-K Report, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers has been omitted from
this Report since the Company intends to file with the Securities and Exchange
Commission, not later than 120 days after the close of its fiscal year, a
definitive proxy statement prepared pursuant to Regulation 14A, which
information is hereby incorporated by reference.
Information as to Chiron's executive officers appears at the end of Part I
of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation has been omitted from this
Report since the Company intends to file with the Securities and Exchange
Commission, not later than 120 days after the close of its fiscal year, a
definitive proxy statement prepared pursuant to Regulation 14A, which
information is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership has been omitted from this Report
since the Company intends to file with the Securities and Exchange Commission,
not later than 120 days after the close of its fiscal year, a definitive proxy
statement prepared pursuant to Regulation 14A, which information is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions has
been omitted from this Report since the Company intends to file with the
Securities and Exchange Commission, not later than 120 days after the close of
its fiscal year, a definitive proxy statement prepared pursuant to Regulation
14A, which information is hereby incorporated by reference.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) 1. FINANCIAL STATEMENTS
The 1996 Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Independent Auditors' Report, which are included as
Exhibit 13 to this Report, are incorporated herein by reference.
2. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted, since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the Consolidated
Financial Statements and notes thereto.
The Independent Auditors' Report on the Consolidated Financial Statement
Schedule appears on page 29 of this Report.
b) REPORTS ON FORM 8-K
On December 17, 1996, Chiron filed a current report on Form 8-K, dated
December 17, 1996, reporting under Item 5 the issuance of a press release
announcing it has agreed to grant royalty-bearing licenses involving Chiron's
patent rights for HSV-tk (herpes simplex virus thymidine kinase), in conjunction
with a consent and agreement that resolves the Federal Trade Commission review
of the merger between Ciba and Sandoz, creating Novartis. Also filed under Item
7 of the Form 8-K report was an agreement dated as of November 27, 1996 between
Ciba and Chiron containing as Annex A an Agreement containing Consent Order
before the United States Federal Trade Commission in the matter of Ciba, et. al.
c) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
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.
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.
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, dated May
21, 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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
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.
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% 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].
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].
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.
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].
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
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].
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].
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.
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].
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.
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 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 Revolving Credit Facility dated as of March 24, 1995, between Chiron Corporation and Swiss Bank
Corporation, San Francisco Branch, incorporated by reference to Exhibit 10.06 of the
Registrant's Form 10-Q report for the period ended April 2, 1995.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
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 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, 1996.*
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 10.33 of Registrant's Form 10-K report for fiscal year
1991.*
10.27 Forms of Supplemental Letter concerning the assumption of Cetus Corporation options by the
Registrant.*
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 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.
10.32 Chiron Corporation 1.90% Convertible Subordinated Note due 2000, Series B, incorporated by
reference to Exhibit 10.25 of the Registrant's Form 10-K report for fiscal year 1993.
10.33 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.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.34 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.
10.35 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.
10.36 Cooperation and Collaboration Agreement dated as of November 20, 1994, between Ciba-Geigy
Limited and Chiron Corporation, incorporated by reference to Exhibit 10.57 of the Registrant's
current report on Form 8-K dated November 20, 1994.
10.37 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.
10.38 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.
10.39 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.
10.40 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.
10.41 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.*
10.42 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.
10.43 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.
10.44 Letter Agreement, dated December 19, 1996, regarding compensation paid by the Registrant for
director services performed by employees of Ciba-Geigy Limited.*
10.45 Supplemental Benefits Agreement, dated July 21, 1989, between the Registrant and Dr. William J.
Rutter, incorporated by reference to Exhibit 10.27 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.*
10.46 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.47 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.
10.48 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.
10.49 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.
10.50 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.
10.51 Letter Agreement, dated as of December 12, 1991, relating to Stock Purchase and Warrant
Agreement between Registrant and Hoffmann-La Roche Inc.
10.52 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.*
10.53 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.*
10.54 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.
10.55 Agreement made as of November 11, 1993 by and between Kodak Clinical Diagnostics Limited, a
company registered in England, and Ciba Corning Diagnostics Corp., a Delaware corporation, and
Letter dated October 7, 1994 from Kodak Clinical Diagnostics Limited to Ciba Corning
Diagnostics Corp., incorporated by reference to Exhibit 10.50 of Amendment No. 1 to the
Registrant's Form 10-Q report for the period ended April 2, 1995. [Certain information has been
omitted from the Agreement pursuant to a request by Registrant for confidential treatment
pursuant to Rule 24b-2.]
10.56 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.
10.57 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.
10.58 Description of Executive Officer Variable Compensation Program.*
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.59 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.*
10.60 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 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.]
10.61 Guaranty, dated as of September 29, 1994, made by Registrant, in favor of Bankers Trust
Company, as trustee, incorporated by reference to Exhibit 10.52 of the Registrant's Form 10-Q
report for the period ended September 30, 1994.
10.62 Guaranty, dated as of September 29, 1994, made by Cetus Corporation, in favor of The First
National Bank of Boston, as trustee, incorporated by reference to Exhibit 10.53 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.63 Letter Agreements dated September 11, 1992, July 15, 1994 and September 14, 1994 between the
Registrant and Lewis T. Williams, incorporated by reference to Exhibit 10.54 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.*
10.64 Letters dated May 6, 1996 and May 25, 1996 to Magnus Lundberg, incorporated by reference to
Exhibit 10.61 of Registrant's Form 10-Q Report for the period ended September 29, 1996.*
10.65 Letter dated January 8, 1997 to Magnus Lundberg.*
10.66 Letter to Dino Dina dated April 24, 1984, incorporated by reference to Exhibit 10.66 of the
Registrant's Form 10-K report for fiscal year 1994.*
10.67 Research Agreement, dated as of July 15, 1985, between Ciba-Geigy Limited, a Swiss corporation,
and Ciba Corning Diagnostics Corp., a Delaware corporation, incorporated by reference to
Exhibit 10.64 of the Registrant's Form 10-Q report for the period ended April 2, 1995.
10.68 Licensing Agreement, effective December 18, 1986, by and between Miles Laboratories, Inc., a
Delaware corporation, and Ciba Corning Diagnostics Corp., a Delaware corporation, and Letter
dated December 18, 1992 from Ciba Corning Diagnostics Corp. to Miles Laboratories, Inc.,
incorporated by reference to Exhibit 10.65 of Amendment No. 1 to the Registrant's Form 10-Q
report for the period ended April 2, 1995. [Certain information has been omitted from the
Agreement pursuant to a request by Registrant for confidential treatment pursuant to Rule
24b-2.]
10.69 Magnetocluster Binding Assay Technology Agreement, dated as of January 21, 1983, by and between
Bioclinical Group, Inc., a Delaware corporation, and Corning Glass Works, a New York
corporation, incorporated by reference to Exhibit 10.66 of Amendment No. 1 to the Registrant's
Form 10-Q report for the period ended April 2, 1995. [Certain information has been omitted from
the Agreement pursuant to a request by Registrant for confidential treatment pursuant to Rule
24b-2.]
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.70 Turn-back License Agreement, dated as of May 30, 1986, by and between Ciba Corning Diagnostics
Corp., a Delaware corporation, and Advanced Magnetics, Inc., a Delaware corporation,
incorporated by reference to Exhibit 10.67 of the Registrant's Form 10-Q report for the period
ended April 2, 1995. [Certain information has been omitted from the Agreement pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.]
10.71 Settlement Agreement, dated August 30, 1989, between Ciba Corning Diagnostics Corp. and
Advanced Magnetics, Inc., incorporated by reference to Exhibit 10.68 of the Registrant's Form
10-Q report for the period ended April 2, 1995. [Certain information has been omitted from the
Agreement pursuant to a request by Registrant for confidential treatment pursuant to Rule
24b-2.]
10.72 Agreement, effective as of December 21, 1988, by and between Hoffmann-La Roche Inc., a New
Jersey corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.70 of the
Registrant's Form 10-Q report for the period ended April 2, 1995. [Certain information has been
omitted from the Agreement pursuant to a request by Registrant for confidential treatment
pursuant to Rule 24b-2.]
10.73 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.]
10.74 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.]
10.75 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.
10.76 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.]
10.77 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.]
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.78 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".]
10.79 Agreement between Ciba-Geigy Limited and the Registrant made November 15, 1995, incorporated by
reference to Exhibit 10.81 of the Registrant's Form 10-K report for fiscal year 1995. [Certain
information has been omitted from the Agreement and filed separately with the Securities and
Exchange Commission pursuant to a request by Registrant for confidential treatment pursuant to
Rule 24b-2. The omitted confidential information has been identified by the following
statement: "Confidential Treatment Requested".]
10.80 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.
10.81 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.
10.82 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.
10.83 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".]
10.84 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.
10.85 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.
10.86 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.*
10.87 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.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -----------------------------------------------------------------------------------------------
<C> <S>
10.88 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.]
10.89 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.]
10.90 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.
10.91 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.
10.92 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.
10.93 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.
10.94 Form of Performance Unit Agreement, Chiron 1991 Stock Option Plan, as amended.*
11 Statement of Computation of Earnings per Share.
13 Consolidated Financial Statements.
21 List of Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors. The consent set forth on page 30 is
incorporated herein by reference.
24 Power of Attorney. The Power of Attorney set forth on pages 27 and 28 incorporated herein by
reference.
27 Financial Data Schedule.
</TABLE>
- ------------------------
* Management contract, compensatory plan or arrangement.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1997
CHIRON CORPORATION
By /s/ EDWARD E. PENHOET
--------------------------------------
Edward E. Penhoet, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Chiron Corporation do hereby
constitute and appoint Edward E. Penhoet, Ph.D., and William J. Rutter, Ph.D.,
and each of them, the lawful attorney and agent or attorneys and agents with
power and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable Chiron Corporation to comply with
the Securities Exchange Act of 1934, as amended, and any rules or regulations or
requirements of the Securities and Exchange Commission in connection with this
Form 10-K Report. Without limiting the generality of the foregoing power and
authority, the powers granted include the power and authority to sign the names
of the undersigned officers and directors in the capacities indicated below to
this Form 10-K report or amendments or supplements thereto, and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents or
either of them, shall do or cause to be done by virtue hereof. This Power of
Attorney may be signed in several counterparts.
27
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------------- -----------------
<C> <S> <C>
/s/ EDWARD E. PENHOET
---------------------------- President and Chief Executive Officer March 31, 1997
Edward E. Penhoet, Ph.D.
/s/ DENNIS L. WINGER Senior Vice President, Finance and Administration,
---------------------------- Chief Financial Officer, and Principal March 31, 1997
Dennis L. Winger Accounting Officer
/s/ WILLIAM J. RUTTER
---------------------------- Chairman March 31, 1997
William J. Rutter, Ph.D.
/s/ LEWIS W. COLEMAN
---------------------------- Director March 31, 1997
Lewis W. Coleman
/s/ PIERRE E. DOUAZE
---------------------------- Director March 31, 1997
Pierre E. Douaze
DONALD A. GLASER
---------------------------- Director March 31, 1997
Donald A. Glaser, Ph.D.
/s/ PAUL L. HERRLING
---------------------------- Director March 31, 1997
Paul L. Herrling, Ph.D.
/s/ ALEX KRAUER
---------------------------- Director March 31, 1997
Alex Krauer, Ph.D.
/s/ HENRI SCHRAMEK
---------------------------- Director March 31, 1997
Henri Schramek, Ph.D.
/s/ JACK W. SCHULER
---------------------------- Director March 31, 1997
Jack W. Schuler
PIETER J. STRIJKERT
---------------------------- Director March 31, 1997
Pieter J. Strijkert, Ph.D.
</TABLE>
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Chiron Corporation:
Under date of January 31, 1997, we reported on the consolidated balance
sheets of Chiron Corporation and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
San Francisco, California
January 31, 1997
29
<PAGE>
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(File Numbers 33-20181, 33-35182, 2-90595, 33-23899, 33-58305, 33-44477,
33-65024, 33-65177, 333-10419, 33-45822 and 33-63297 on Form S-8 and File Number
33-43574 on Form S-3) of Chiron Corporation of our reports dated January 31,
1997, relating to the consolidated balance sheets of Chiron Corporation and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996 and the related schedule,
which reports appear in the December 31, 1996 annual report on Form 10-K of
Chiron Corporation.
KPMG PEAT MARWICK LLP
San Francisco, California
March 31, 1997
30
<PAGE>
CHIRON CORPORATION
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGES OF 1996
CONSOLIDATED FINANCIAL
STATEMENTS INCORPORATED
BY REFERENCE FORM 10-K PAGE
----------------------- ---------------
<S> <C> <C>
Financial Statements and Notes..................................... 47-84 --
Report of KPMG Peat Marwick LLP.................................... 85 29
Schedule II--Valuation and Qualifying Accounts..................... -- 32
</TABLE>
31
<PAGE>
CHIRON CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS RECLASSIFICATIONS YEAR
- ----------------------------------- ----------- ----------- ------------ ----------- --------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996:
Accounts receivable................ $ 18,524 $ 8,848 $ -- $ (6,680) $ -- $ 20,692
1995:
Accounts receivable................ 7,210 8,815 6,680(1) (4,181) -- 18,524
1994:
Accounts receivable................ 5,194 5,880 2,424(1) (4,880) (1,408)(2) 7,210
</TABLE>
- ------------------------
(1) Represents accounts receivable allowances as of the acquisition date related
to acquired businesses.
(2) Represents amounts reclassified to other current liabilities.
32
<PAGE>
STATE OF DELAWARE
[SEAL]
OFFICE OF SECRETARY OF STATE
-------------------
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF RESTATED
CERTIFICATE OF INCORPORATION OF CHIRON CORPORATION FILED IN THIS OFFICE ON THE
SEVENTEENTH DAY OF AUGUST, A.D. 1987, AT 9 O'CLOCK A.M.
/s/ Michael Harkins
[SEAL] -----------------------------------
Michael Harkins, Secretary of State
AUTHENTICATION: 1365957
877229043 DATE: 08/18/1987
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION OF CHIRON CORPORATION
Chiron Corporation, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. Previously this corporation was called Chiron Delaware
Corporation. The original certificate of incorporation was filed on November 21,
1986. The name was changed by amendment to Chiron Corporation on December 24,
1986.
2. This Restated Certificate of Incorporation ("Certificate") was
duly adopted by the Board of Directors of the Corporation on June 11, 1987 and
approved by the stockholders of the Corporation at the
Corporation's Annual Meeting of Stockholders on August 12, 1987 in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware. The text of the Certificate of Incorporation as amended
and restated shall be read in full as follows:
FIRST: The name of this corporation is: CHIRON CORPORATION.
SECOND: The address of the registered office of the corporation in
the State of Delaware is 1209 Orange Street, the City of Wilmington, County of
New Castle, and the name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The name and mailing address of the incorporator of the
corporation is:
William G. Green
Chiron Corporation
c/o Brobeck, Phleger & Harrison
One Market Plaza, Spear Street Tower
San Francisco, CA 94105
FOURTH: The purpose of this corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FIFTH: This corporation is authorized to issue two classes of
shares to be designated, respectively, "Preferred Stock" and "common stock." The
total number of shares which this corporation is authorized to issue is thirty-
five million (35,000,000). Five million (5,000,000) shares shall be Preferred
Stock and thirty million (30,000,000) shares shall be common stock. The
Preferred Stock shall have a par value of $0.01 per share; the common stock
shall have a par value of $0.01 per share.
1. PREFERRED STOCK.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued series of
Preferred Stock, to fix, state and
1.
<PAGE>
express the powers, rights, designations, preferences, qualifications,
limitations and restrictions thereof, including without limitation: the rate of
dividends upon which and the times at which dividends on shares of such series
shall be payable and the preference, if any, which such dividends shall have
relative to dividends on shares of any other class or classes or any other
series of stock of the corporation; whether such dividends shall be cumulative
or noncumulative, and if cumulative, the date or dates from which dividends on
shares of such series shall be cumulative; the voting rights, if any, to be
provided for shares of such series; the rights, if any, which the holders of
shares of such series shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the corporation; the
rights, if any, which the holders of shares of such series shall have to convert
such shares into or exchange such shares for shares of stock of the corporation,
and the terms and conditions, including price and rate of exchange of such
conversion or exchange; and the redemption rights (including sinking fund
provisions), if any, for shares of such series; and such other powers, rights,
designations, preferences, qualifications, limitations and restrictions as the
Board of Directors may desire to so fix. The Board of Directors is also
expressly authorized to fix the number of shares constituting such series and to
increase or decrease the number of shares of any series prior to the issuance
of shares of that series and to increase or decrease the number of shares of
any series subsequent to the issuance of shares of that series, but not to
decrease such number below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
2. COMMON STOCK.
The common stock may be issued from time to time in one or more
series. Twenty-nine million five hundred thousand (29,500,000) shares of common
stock are designated "Common Stock." All other series of common stock shall
collectively consist of five hundred thousand (500,000) shares and shall be
designated, as a group, "Restricted Common Stock."
3. RESTRICTED COMMON STOCK.
(a) AUTHORITY OF BOARD TO FIX RIGHTS OF RESTRICTED COMMON STOCK.
The Board of Directors is expressly authorized, in the resolution or resolutions
providing for the issuance of any wholly unissued series of Restricted Common
Stock, to fix, state and express, within the limits expressed hereinbelow, the
powers, designations, preferences and rights of the Restricted Common Stock, and
the qualifications, limitations or restrictions thereof. The Board of Directors
is also expressly authorized to fix the number of shares constituting such
series and to increase or decrease the number of shares of any series prior to
the issuance of shares of that series and to increase or decrease the number of
shares of any series; subsequent to the issue of shares of that series, but not
to decrease such number below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
(b) SPECIFIC RIGHTS. The rights, preferences, privileges and
restrictions of the Common Stock and Restricted Common Stock shall be
identical in all respects, except as follows, or, for the Restricted Common
Stock, as fixed and determined by the Board of Directors within the
limitations which follow:
2.
<PAGE>
(i) CONVERSION RIGHTS. The Restricted Common Stock
may be convertible into or exchangeable for Common Stock, at a
conversion or exchange ratio of not more than one share of Common
Stock for each share of Restricted Common Stock and upon such other
terms and conditions as the Board of Directors may establish.
(ii) VOTING RIGHTS. Subject to the special voting
rights (if any) of the Preferred Stock set forth or determined as
provided in this Article FIFTH, each holder of Common Stock of this
corporation shall be entitled to one vote for each share of such stock
outstanding in the name of such holder on the books of this
corporation on the record date designated for the purpose of such
vote, and each holder of Restricted Common Stock of the corporation
shall be entitled, for each share of such Restricted Common Stock
outstanding in the name of such holder on the books of the corporation
on the record date designated for the purpose of such vote, to the
number of votes as has been fixed by the Board of Directors, but the
vote per share of Restricted Common Stock shall not be more than the
proportionate vote of the Common Stock into which such Restricted
Common Stock is convertible or exchangeable.
(iii) DIVIDEND RIGHTS. Subject to the prior rights (if
any) of the holders of the Preferred Stock as to dividends, the
holders of outstanding shares of Common Stock and Restricted Common
Stock shall be entitled to receive, when and as declared by the Board
of Directors, out of the assets of the corporation at the time legally
available therefor, dividends at the rate determined by the Board of
Directors; provided, however, that the dividend on each share of
Restricted Common Stock shall be less than the proportionate dividend
on each share of Common Stock into which it is convertible or
exchangeable.
(iv) LIQUIDATION RIGHTS. In the event of any
liquidation, dissolution or winding up of this corporation either
voluntarily or involuntarily, but subject to the liquidation
preference (if any) of the holders of the Preferred Stock by reason
of their ownership thereof, the holders of Common Stock and Restricted
Common Stock shall be entitled to receive pro rata the remaining
assets of the corporation available for distribution to shareholders
except that the amount per share paid in liquidation on each share of
the Restricted Common Stock shall be less than the proportionate
amount per share paid on each share of the Common Stock into which it
is convertible or exchangeable.
(v) ADJUSTMENTS. The Board of Directors shall make
appropriate adjustments to the conversion or exchange ratio and to the
voting, dividend and liquidation rights of the Restricted Common Stock
in the event of any stock split, stock dividend or similar transaction
affecting the number of outstanding shares of Common Stock or
Restricted Common Stock without the corporation's receipt of
consideration therefor.
SIXTH: A Director of this corporation shall not be personally
liable to this corporation or its stockholders for monetary damages for breach
of fiduciary duty as a Director, except for liability (i) for any breach of the
Director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of
3.
<PAGE>
the Delaware General Corporation Law, or (iv) for any transaction from which the
Director derived any improper personal benefit. The foregoing sentence
notwithstanding, if the Delaware General Corporation Law hereafter is amended to
authorize further limitations of the liability of a director of a corporation,
then a Director of this corporation, in addition to the circumstances in which a
Director is not personally liable as set forth in the preceding sentence, shall
not be liable to the fullest extent permitted by the Delaware General
Corporation Law as so amended. Any repeal or modification of the foregoing
provisions of this Article SIXTH by the stockholders of this corporation shall
not adversely affect any right or protection of a Director of this corporation
existing at the time of such repeal or modification.
SEVENTH:
1. The number of directors which shall constitute the whole Board of
Directors of this corporation shall be as specified in the Bylaws of this
corporation, subject to the provisions of Article NINTH hereof and this Article
SEVENTH.
2. The Board of Directors shall be and is divided into three
classes: Class I, Class II and Class III, which shall be as nearly equal in
number as possible. Each director shall serve for a term ending on the date of
the third annual meeting of stockholders following the annual meeting at which
the director was elected; provided, however, that each initial director in Class
I shall hold office until the annual meeting of stockholders in 1988, each
initial director in Class II shall hold office until the annual meeting of
stockholders in 1989, and each initial director in Class III shall hold
office until the annual meeting of stockholders in 1990. Notwithstanding the
foregoing provisions of this Article SEVENTH, each director shall serve until
his or her successor is duly elected and qualified or until his or her death,
resignation or removal.
3. In the event of any increase or decrease in the authorized number
of directors, (i) each director then serving as such shall nevertheless continue
as a director of the class of which he or she is a member until the expiration
of his or her current term, or his or her earlier resignation, removal from
office or death, and (ii) the newly created or eliminated directorship resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to maintain such classes as nearly
equal as possible.
EIGHTH: Except as provided by applicable law, the Board of Directors
shall have the exclusive power and authority to fill any vacancies or any newly
created directorships on the Board of Directors upon a vote of two-thirds (2/3)
of the remaining or existing members of the Board of Directors; the stockholders
shall have no right to fill such vacancies. A director appointed by the Board of
Directors to fill a vacancy shall serve for the remainder of the term of the
vacated directorship he or she is filling.
NINTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind from time to time any or all of the Bylaws of this
corporation; provided, however, any Bylaw amendment adopted by the Board of
Directors increasing or reducing the authorized number of directors shall
require a resolution adopted by the affirmative vote of not less than seventy-
five percent of the directors.
4.
<PAGE>
TENTH: No action shall be taken by the stockholders except at an
annual or special meeting of stockholders. No action shall be taken by
stockholders by written consent.
ELEVENTH:
1. The affirmative vote of the holders of not less than sixty-six
and two-thirds percent (66-2/3%) of the outstanding shares of "Voting Stock" (as
hereinafter defined) shall be required for the approval or authorization of any
"Business Combination" (as hereinafter defined) of this corporation or any
Subsidiary of this corporation with any "Related Person" (as hereinafter
defined), notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified by applicable law, in any agreement with any
national securities exchange or otherwise; provided, however, that:
(a) the Voting Stock of which the Related Person is the
beneficial owner (as hereinafter defined) shall not be included in the
denominator or the numerator in calculating the sixty-six and two-thirds percent
(66-2/3%) of the outstanding shares of Voting Stock required to approve or
authorize the Business Combination unless all of the following conditions are
met:
(i) The Business Combination shall include the
acquisition of all of the outstanding stock of this corporation of
which the Related Person otherwise involved is not the Beneficial
Owner and the consideration to be received per share by holders of a
particular class or series of capital stock, as the case may be, of
this corporation in the Business Combination is not less than the
highest of:
(A) the highest per share price (including
brokerage commissions, transfer taxes and soliciting
dealers' fees) paid by or on behalf of such Related Person
in acquiring beneficial ownership of any of its holdings of
such class or series of capital stock of this corporation
(i) within the two-year period immediately prior to the date
of the consummation of the Business Combination (the
"Combination Date") or (ii) in the transaction or series of
transactions in which such Related Person became a Related
Person, whichever is higher; or
(B) the Fair Market Value per share of the shares
of capital stock being acquired in the Business Combination
as of the Combination Date; or
(C) in the case of Common Stock, the per share
book value of the Common Stock as reported at the end of the
fiscal quarter immediately prior to the Combination Date,
and in the case of Preferred Stock, the highest preferential
amount per share to which the holders of shares of such
class or series of Preferred Stock would be entitled in the
event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of this
corporation, regardless of whether the Business Combination
to be consummated constitutes such an event.
5.
<PAGE>
The provisions of this paragraph 1(a)(i) shall be
required to be met with respect to every class or series of
outstanding capital stock, whether or not such Related Person has
previously acquired any shares of a particular class or series of
capital stock and whether or not any shares of a particular class or
series or of any class or series otherwise are involved in the
Business Combination. In all above instances, appropriate adjustments
shall be made for recapitalization and for stock dividends, stock
splits and like distributions;
(ii) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of
the Securities Exchange Act of 1934, as amended, and the general rules
and regulations thereunder (or any subsequent provisions replacing
such Act, rules or regulations) shall be mailed by such Related Person
to the stockholders of the Company at least 30 days prior to the
Consummation Date (whether or not such proxy or information statement
is required to be mailed pursuant to such Act or subsequent provisions
thereof); and
(iii) The consideration to be received by holders of a
particular class or series of capital stock shall be in cash;
and provided further that:
(b) The voting requirements set forth above shall not be
applicable and such Business Combination shall require only such affirmative
vote, if any, as is required by applicable law, any agreement with any national
securities exchange, or otherwise, if the "Continuing Directors" (as hereinafter
defined) of this corporation by at least a two-thirds (2/3) vote have expressly
approved such Business Combination either in advance of or subsequent to such
Related Person becoming a Related Person (it being understood that this
condition shall not be capable of satisfaction unless there is at least one
Continuing Director).
2. For purposes of this Article ELEVENTH:
(a) The term "Business Combination" shall mean any (i) merger or
consolidation of this corporation or a Subsidiary with a Related Person or any
other corporation which is, or after such merger or consolidation would be, an
"Affiliate" or "Associate" (as hereinafter defined) of a Related Person, (ii)
sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one
transaction or a series of transactions) of all or any "Substantial Part" (as
hereinafter defined) of the assets of this corporation or of a Subsidiary to a
Related Person, (iii) adoption of any plan or proposal for the liquidation or
dissolution of this corporation proposed by or on behalf of a Related Person,
(iv) sale, lease, exchange or other disposition, including without limitation a
mortgage or other security device, of all or any Substantial Part of the assets
of a Related Person to this corporation or a Subsidiary, (v) issuance or pledge
of securities of this corporation or a Subsidiary to or with Related Person,
(vi) reclassification of securities (including any reverse stock split) or
recapitalization of this corporation or any other transaction that would have
the effect, either directly or indirectly, of increasing the proportionate share
of any class of equity or convertible securities of this corporation or any
Subsidiary which is directly or indirectly beneficially owned by any Related
Person, and (vii) agreement, contract or other arrangement providing for any of
the transactions described in this definition of Business Combination.
6.
<PAGE>
(b) The term "person" shall mean any individual, firm,
corporation or other entity and shall include any group comprised of any person
and any other person with whom such person or any Affiliate or Associate of such
person has any agreement, arrangement, or understanding, directly or indirectly,
for the purpose of acquiring, holding, voting or disposing of Voting Stock of
this corporation (other than proxies acquired pursuant to a solicitation under
Regulation 14 of the Securities and Exchange Commission).
(c) The term "Related Person" shall mean any person (other than
this corporation or a Subsidiary, or any person who shall have been a director
of this corporation on January 1, 1987, and other than any profit-sharing,
employee stock ownership or other employee benefit plan of this corporation, or
any Subsidiary or any trustee of or fiduciary with respect to any such plan when
acting in such capacity) who or which:
(i) is the beneficial owner (as hereinafter defined) of
ten percent (10%) or more of the Voting Stock;
(ii) is an Affiliate or Associate of any Related Person
other than an Affiliate or Associate of such Related Person solely by
reason of being an Affiliate or Associate of this corporation or one
of its Subsidiaries; or
(iii) is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of Voting Stock which were at any
time within the two-year period immediately prior to the date in
question beneficially owned by any Related Person, if such assignment
or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the
meaning of the Securities Act of 1933, as amended.
(d) A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or
Associates beneficially owns directly or indirectly;
(ii) which such person or any of its Affiliates or
Associates has, directly or indirectly, (A) the right to acquire
(whether such right is exercisable immediately or only after the
passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement, or understanding (other than
proxies acquired pursuant to a proxy solicitation under Regulation 14
of the Securities and Exchange Commission); or
(iii) which are beneficially owned, directly or
indirectly, by any other person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding (other than proxies acquired pursuant to a proxy
solicitation under Regulation 14 of the Securities and Exchange
Commission).
7.
<PAGE>
(e) For the purposes of determining whether a person is a
Related Person pursuant to subparagraph (c) of this paragraph 2, the number of
shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of subparagraph (d) of this paragraph 2 but shall not
include any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
(f) The terms "Affiliate" or "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as in effect on
January 1, 1987.
(g) The term "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or indirectly, by
this corporation; provided, however, that for the purposes of the definition of
Related Person set forth in subparagraph (c) of this paragraph 2, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by this corporation.
(h) The term "Continuing Director" means:
(i) any member of the Board of Directors, while
such person is a member of the Board of Directors, who was member of
the Board of Directors on January 1, 1987, or who (a) is not a Related
Person, or a representative of any Related Person, who has been a
Related Person for less than the immediately preceding twenty-four
months, and (b) was a member of the Board of Directors prior to the
time that any Related Person, who has been a Related Person for less
than the immediately preceding twenty-four months, became a Related
Person, and
(ii) any successor of a Continuing Director, while
such successor is a member of the Board of Directors, who (a) is not a
Related Person, or a representative of a Related Person and (b) was
recommended or elected to succeed a Continuing Director by a majority
of Continuing Directors.
(i) The term "Substantial Part" shall mean (1) more than twenty
percent (20%) of the fair market value, as determined by a majority of the
Continuing Directors, of the total consolidated assets of this corporation and
its Subsidiaries taken as a whole as of the end of its most recent fiscal year
ended prior to the time the determination is being made, and (2) such other
assets as shall be deemed by two-thirds (2/3) of the Continuing Directors to
constitute a substantial part of the assets of this corporation.
(j) The term "Unaffiliated Stockholders" shall mean all persons
holding shares of the Corporation entitled to vote on a Business Combination
other than a Related Person.
(k) The term "Voting Stock" shall mean all of the outstanding
shares of Common Stock and the outstanding shares of Preferred Stock entitled to
vote for the election of directors, and each reference to a proportion of shares
of Voting Stock shall refer to such proportion of the votes entitled to be cast
by such shares voting as one class.
8.
<PAGE>
(l) The term "Fair Market Value" means, in the case of stock,
the highest closing sale price during the thirty-day period immediately
preceding the date in question of a share of such stock on the principal United
States securities exchange registered under the Securities Exchange Act of 1934
on which such stock is listed, or on the National Association of Securities
Dealers, Inc. Automated Quotations System or any successor system then in use,
or if no such quotations are available, the fair market value on the date in
question of a share of such stock as determined in good faith by a majority of
the Continuing Directors.
(m) A Related Person shall be deemed to have acquired a share of
the Voting Stock of this corporation at the time when such Related Person became
the beneficial owner thereof. If a majority of the Continuing Directors is not
able to determine the price at which a Related Person has acquired a share of
Voting Stock of this corporation, such price shall be deemed to be the Fair
Market Value of the shares in question at the time when the Related Person
became the beneficial owner thereof. With respect to shares owned by Affiliates,
Associates or other persons whose ownership is attributed to a Related Person
under the foregoing definition of a Related Person, the price deemed to be paid
therefor by such Related Person shall be the price paid upon the acquisition
thereof by such Affiliate, Associate or other person, or, if such price is not
determinable by a majority of the Continuing Directors, the Fair Market Value of
the shares in question at the time when the Affiliate, Associate or other such
person became the beneficial owner thereof.
3. (a) Notwithstanding any other provision of this Restated
Certificate of Incorporation, the provisions of this Article ELEVENTH may not be
repealed, altered or amended in any respect, and no provision to this Restated
Certificate of Incorporation may be adopted that is inconsistent with the terms
of this Article ELEVENTH, unless such repeal, alteration, amendment or adoption
is approved by the affirmative vote of the holders of not less than sixty-six
and two-thirds percent (66-2/3%) of the Voting Stock of this corporation other
than Voting Stock beneficially owned by Related Persons, unless such action is
declared advisable by the affirmative vote of not less than two-thirds (2/3) of
both (a) the entire Board of Directors and (b) the Continuing Directors, in
which event the stockholder vote required for any such approval shall be as now
or hereafter prescribed by the provisions of the General Corporation Law of
Delaware.
(b) The fact that any Business Combination complies with the
provisions of paragraph 1(b) of this Article ELEVENTH shall not be construed to
impose any fiduciary duty, obligation or responsibility on the Board of
Directors, or any member thereof, to approve such Business Combination or
recommend its adoption or approval to the stockholders of this corporation, nor
shall such compliance limit, prohibit or otherwise restrict in any manner the
Board of Directors, or any member thereof, with respect to evaluations of or
actions and responses taken with respect to such Business Combination.
TWELFTH: This corporation reserves the right to amend, alter, change
or repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
on stockholders herein are granted subject to this reservation. Notwithstanding
the foregoing, the provisions set forth in Article SEVENTH, Article EIGHTH,
Article NINTH, Article TENTH and this Article TWELFTH may not be repealed or
amended in any respect unless such repeal or amendment is approved by the
affirmative vote of not less than sixty-six and two-
9
<PAGE>
thirds percent (66-2/3%) of the total voting power of all outstanding shares
of stock in this corporation entitled to vote thereon, unless such action is
declared advisable by the affirmative vote of not less than two-thirds (2/3)
of the entire Board of Directors, in which event the stockholder vote
required for any such approval shall be as now or hereafter prescribed by the
provisions of the General Corporation Law of Delaware.
THIRTEENTH: This corporation reserves the right to amend, alter,
change or repeal any provision contained in this Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
10.
<PAGE>
AMENDMENT OF CERTIFICATE OF INCORPORATION
Subject to the provision of Section 242 of the General Corporation Law
of the State of Delaware, the Corporation reserves the right to amend, alter,
change, or repeal any provision contained in this Certificate in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
IN WITNESS WHEREOF, said CHIRON CORPORATION has caused its corporate
seal to be hereunto affixed and this Certificate to be signed by EDWARD E.
PENHOET, its President and Chief Executive Officer, and attested by WILLIAM G.
GREEN, its Secretary, this 13th day of August, 1987.
CHIRON CORPORATION
By /s/ Edward E. Penhoet
-------------------------
Edward E. Penhoet
President and Chief
Executive Officer
[SEAL]
Attest: /s/ William G. Green
---------------------------
William G. Green, Secretary
<PAGE>
EXHIBIT 3.02
STATE OF DELAWARE
[SEAL]
OFFICE OF SECRETARY OF STATE
------------------
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "CHIRON CORPORATION" FILED IN THIS OFFICE ON THE TWELFTH DAY OF
DECEMBER, A.D. 1991, AT 11:24 O'CLOCK A.M.
* * * * * * * * * * *
[SEAL]
/s/Michael Harkins
-----------------------------------
Michael Harkins, Secretary of State
AUTHENTICATION: #3267833
DATE: 12/12/1991
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
CHIRON CORPORATION, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of CHIRON
CORPORATION, resolutions were duly adopted setting forth a proposed amendment
of the Restated Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and calling a meeting of the stockholders of
said corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Restated Certificate of Incorporation of this
corporation be amended by changing the Article thereof numbered "FIFTH" so
that, as amended, said Article shall be and read as follows:
"FIFTH: This corporation is authorized to issue two classes of shares to
be designated, respectively, `Preferred Stock' and `common stock.' The total
number of shares which this corporation is authorized to issue is one hundred
five million (105,000,000). Five million (5,000,000) shares shall be
Preferred Stock and one hundred million (100,000,000) shares shall be common
stock. The Preferred Stock shall have a par value of $0.01 per share; the
common stock shall have a par value of $0.01 per share.
1. PREFERRED STOCK.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is expressly authorized, in the
resolution or resolutions providing for the issuance of any wholly
unissued series of Preferred Stock, to fix, state and express the
powers, rights, designations, preferences, qualifications, limitations
and restrictions thereof, including without limitation: the rate of
dividends upon which and the times at which dividends of shares of such
series shall be payable and the preference, if any, which such
dividends shall have relative to dividends on shares of any other class
or classes or any other series of stock of the corporation; whether
such dividends shall be cumulative or noncumulative, and if cumulative,
the date or dates from which dividends on shares of such series shall
be cumulative; the voting rights, if any, to be provided for shares of
such series: the rights, if any, which the holders of shares of such
series shall have in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
corporation; the rights, if any, which the holders of shares of such
series shall have to convert such shares into or exchange such shares
for shares of stock of the corporation, and the terms and conditions,
including price and rate of exchange of such conversion or
<PAGE>
exchange; and the redemption rights (including sinking fund provisions),
if any, for shares of such series; and such other powers, rights,
designations, preferences, qualifications, limitations and restrictions
as the Board of Directors may desire to so fix. The Board of Directors
is also expressly authorized to fix the number of shares constituting
such series and to increase or decrease the number of shares of any
series prior to the issuance of shares of that series and to increase
or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not to decrease such number
below the number of shares outstanding. In case the number of shares of
any series shall be so decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
2. COMMON STOCK.
The common stock may be issued from time to time in one or more
series. Ninety-nine million five hundred thousand (99,500,000) shares of
common stock are designated `Common Stock.' All other series of common
stock shall collectively consist of five hundred thousand (500,000) shares
and shall be designated, as a group, `Restricted Common Stock.'
3. RESTRICTED COMMON STOCK.
(a) AUTHORITY OF BOARD TO FIX RIGHTS OF RESTRICTED COMMON STOCK.
The Board of Directors is expressly authorized, in the resolution or
resolutions providing for the issuance of any wholly unissued series of
Restricted Common Stock, to fix, state and express, within the limits
expressed hereinbelow, the powers, designations, preferences and rights
of the Restricted Common Stock, and the qualifications, limitations or
restrictions thereof. The Board of Directors is also expressly
authorized to fix the number of shares constituting such series and to
increase or decrease the number of shares of any series prior to the
issuance of shares of that series and to increase or decrease the number
of shares of any series subsequent to the issue of shares of that
series, but not to decrease such number below the number of such series
then outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
(b) SPECIFIC RIGHTS. The rights, preferences, privileges and
restrictions of the Common Stock and Restricted Common Stock shall be
identical in all respects, except as follows, or, for the Restricted
Common Stock, as fixed and determined by the Board of Directors within
the limitations which follow:
i) CONVERSION RIGHTS. The Restricted Common Stock may be
convertible into or exchangeable for Common Stock, at a conversion or
2.
<PAGE>
exchange ratio of not more than one share of Common Stock for each share
of Restricted Common Stock and upon such other terms and conditions as
the Board of Directors may establish.
ii) VOTING RIGHTS. Subject to the special voting rights (if
any) of the Preferred Stock set forth or determined as provided in
this Article FIFTH, each holder of Common Stock of this corporation
shall be entitled to one vote for each share of such stock outstanding
in the name of such holder on the books of this corporation on the
record date designated for the purpose of such vote, and each holder of
Restricted Common Stock of the corporation shall be entitled, for each
share of such Restricted Common Stock outstanding in the name of such
holder on the books of the corporation on the record date designated for
the purpose of such vote, to the number of votes as has been fixed by
the Board of Directors, but the vote per share of Restricted Common
Stock shall not be more than the proportionate vote of the Common Stock
into which such Restricted Common Stock is convertible or exchangeable.
iii) DIVIDEND RIGHTS. Subject to the prior rights (if any)
of the holders of the Preferred Stock as to dividends, the holders of
outstanding shares of Common Stock and Restricted Common Stock shall be
entitled to receive, when and as declared by the Board of Directors, out
of the assets of the corporation at the time legally available therefor,
dividends at the rate determined by the Board of Directors: provided,
however, that the dividend on each share of Restricted Common Stock
shall be less than the proportionate dividend on each share of Common
Stock into which it is convertible or exchangeable.
iv) LIQUIDATION RIGHTS. In the event of any liquidation,
dissolution or winding up of this corporation either voluntarily or
involuntarily, but subject to the liquidation preference (if any) of the
holders of Preferred Stock by reason of their ownership thereof, the
holders of Common Stock and Restricted Common Stock shall be entitled to
receive pro rata the remaining assets of the corporation available for
distribution to shareholders except that the amounts per share paid in
liquidation on each share of Restricted Common Stock shall be less than
the proportionate amount per share paid on each share of the Common
Stock into which it is convertible or exchangeable.
v) ADJUSTMENTS. The Board of Directors shall make
appropriate adjustments to the conversion or exchange ratio and to
the voting, dividend and liquidation rights of the Restricted Common
Stock in the event of any stock split, stock dividend or similar
transaction affecting the number of outstanding shares of Common Stock
or Restricted Common Stock without the corporation's receipt of
consideration thereof."
3.
<PAGE>
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said CHIRON CORPORATION has caused this certificate
to be signed by EDWARD E. PENHOET, its Vice Chairman of the Board of
Directors and Chief Executive Officer, and attested by WILLIAM G. GREEN, its
Secretary, this 12th day of December, 1991.
By /s/Edward E. Penhoet
--------------------------
Edward E. Penhoet
Vice Chairman and
Chief Executive Officer
(SEAL)
Attest: /s/William G. Green
--------------------------------
William G. Green, Secretary
<PAGE>
[BGR I Property Building NQ Lease]
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is entered into as of
May 9, 1996, by and between BGR ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP
("Lessor"), and CHIRON CORPORATION, a Delaware corporation ("Lessee"), with
reference to the following facts:
A. Lessor and Lessee are parties to that certain Triple Net Lease dated
May 26, 1989, entered into by Lessor and Lessee's predecessor, Chiron
Corporation, a California corporation, as amended by that certain First
Amendment to Lease dated as of October 1, 1993 (as so amended, the "Lease").
The Lease Term expires August 14, 2001; and Lessee has the right to extend the
Lease Term for two (2) terms of five (5) years each.
B. Lessor, Lessee and certain other parties related to Lessor have
entered into that certain Option Agreement dated as of March 15, 1995 (the
"Option Agreement"), pursuant to which Lessor has been granted to Lessee the
option, subject to the terms and conditions of the Option Agreement, to purchase
the property covered by the Lease as well as other property in the vicinity
thereof (the "Option"). As provided for in of the Option Agreement, as
additional consideration for the grant of said Option, Lessee agreed that if
Lessee entered into a Development Agreement (as defined in the Option
Agreement), the Lease Term would be extended through December 31, 2003.
C. Lessee has entered into such a Development Agreement; and Lessor and
Lessee are entering into this Second Amendment to evidence the extension of the
Lease Term as provided for in the Option Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessor and Lessee hereby agree as follows (capitalized terms used
herein but not herein defined shall have the meaning ascribed to them in the
Lease):
1. AMENDMENT OF PARAGRAPH 1.2 (LEASE TERM). Lessor and Lessee hereby
agree that the Lease Term is hereby extended through December 31, 2003. In
furtherance of the foregoing, Lessor and Lessee hereby amend the Lease by
deleting therefrom in its entirety the existing Paragraph 1.2 and inserting in
its place the following new Paragraph 1.2:
1.2 LEASE TERM: The term of this Lease ("Lease Term") shall be
the period beginning with the
<PAGE>
Commencement Date and ending December 31, 2003; provided, however, that
Lessee shall have the option to extend the term of this Lease for two terms
of five (5) years each as described in Paragraph 19 hereof. As used
herein, the phrase "Lease Term" shall include any extension period obtained
through the exercise of such options.
2. AMENDMENT TO PARAGRAPH 4.2 (ANNUAL RENT ADJUSTMENT). The Base Monthly
Rent provided for in Paragraph 1.3 of the Lease has been subject to annual
adjustment pursuant to Paragraph 4.2 of the Lease, and as of the date hereof
said Base Monthly Rent for the Premises is $1.02 per rentable square foot. The
Base Monthly Rent shall continue to be adjusted annually through August 14, 1999
(as provided for in the First Amendment to Lease), and shall thereafter remain
unchanged for the balance of the Lease Term provided for in this Second
Amendment (I.E., until December 31, 2003); provided, however, that if the Lease
Term is extended pursuant to Paragraph 19 of the Lease, the Base Monthly Rent
shall again be subject to annual adjustment during each option term. In
furtherance of the foregoing, Lessor and Lessee hereby amend Paragraph 4.2 of
the Lease by amending and restating the first two sentences thereof (as provided
for in Paragraph 5 of the First Amendment to Lease) to read as follows:
During the first ten (10) years of the Lease Term (ending
August 14, 1999), and thereafter during any extension of the
Lease Term pursuant to Paragraph 19 of this Lease, the Base
Monthly Rent specified in Paragraph 1.3 shall be subject to
annual increases determined by reference to the Consumer Price
Index for All Urban Consumers, San Francisco-Oakland-San Jose,
California, All Items (1982-84 = 100), published by the United
States Bureau of Labor Statistics (the "CPI"). During the period
from the commencement of the eleventh year of the Lease Term
(I.E., August 15, 1999), until December 31, 2003, the Base
Monthly Rent shall not be subject to such annual adjustment and
shall remain the same as the Base Monthly Rent due and payable
under the terms of this Lease for the last month of the tenth
year of the Lease Term.
3. TERMS OF LEASE. Except as otherwise provided in this Second
Amendment, the terms of the Lease for the period from August 15, 2001, through
December 31, 2003, shall be the same as the terms of the Lease prior to
August 15, 2001. In addition, the terms of Paragraph 19 of the Lease providing
for two (2) extension options of five (5) years each shall remain in effect,
with the first extension term, if exercised, commencing on January 1, 2004.
4. DELETION OF PARAGRAPH 3.2. Paragraph 3.2 of the Lease is no longer
applicable and is hereby deleted in its entirety.
2
<PAGE>
5. STATUS OF LEASE. Except as amended hereby, the Lease remains
unamended; and as amended hereby, the Lease and all the terms and conditions
thereof remain in full force and effect.
6. COUNTERPARTS. This Second Amendment may be executed in multiple
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Second Amendment
as of the date first set forth above.
LESSEE: LESSOR:
CHIRON CORPORATION, BGR ASSOCIATES, A CALIFORNIA
a Delaware corporation LIMITED PARTNERSHIP
By: /s/ Dennis L. Winger By: /s/ Richard K. Robbins
------------------------------- -----------------------------------
Its: Senior Vice President Richard K. Robbins
----------------------------- Managing General Partner
Finance and Administration
3
<PAGE>
[BGR I PROPERTY BUILDING NQ LEASE]
THIRD AMENDMENT TO TRIPLE NET LEASE
THIS THIRD AMENDMENT TO TRIPLE NET LEASE (this "Third Amendment") is
entered as of the 31st day of January, 1997, by and between BGR ASSOCIATES, A
CALIFORNIA LIMITED PARTNERSHIP ("Lessor"), and CHIRON CORPORATION, a Delaware
corporation ("Lessee").
THIS THIRD AMENDMENT IS ENTERED on the basis of the following facts,
intentions and understandings of the parties:
A. Lessor is the owner of the improved real property (the "BGR I
Property") in the City of Emeryville, State of California, commonly known as
4560 Horton Street. The BGR I Property includes the buildings known as
"Building N," "Building Q," "Building R," and "Building E."
B. Lessor and Chiron Corporation, a California corporation (predecessor
to Lessee), entered a Triple Net Lease (the "Original Lease") dated May 26,
1989. Pursuant to the Original Lease, Lessor leased to Lessee (as successor to
Chiron Corporation, a California corporation) all of Building E (referred to as
"Building P" in the Original Lease) and portions of Building N and Building Q.
C. Lessor and Chiron Corporation, a California corporation (predecessor
to Lessee), entered a First Amendment to Lease (the "First Amendment") dated as
of October 1, 1993. Lessor and Lessee also entered a Second Amendment to Lease
(the "Second Amendment") dated as of May 9, 1996. The Original Lease as
amended by the First Amendment and the Second Amendment is hereinafter referred
to as the "Lease." Terms which are capitalized in this Third Amendment and not
defined herein shall have the meanings set forth in the Lease.
D. Lessor and Cetus Corporation (predecessor to Chiron) entered a lease
(the "Original Building BGR I Property Building R Lease") dated December 17,
1984, pursuant to which Lessor leased to Lessee (as successor to Cetus
Corporation) all of Building R and portions of Building N and Building Q. The
Original Building BGR I Property Building R Lease, as amended, is referred to in
this Third Amendment as the "BGR I Property Building R Lease."
E. Lessor (together with other entities) and Lessee entered an Option
Agreement dated as of March 15, 1995. Pursuant to the Option Agreement, Lessee
has the option ("Lessee's Purchase Option"), subject to the terms of the Option
Agreement,
1.
<PAGE>
to purchase the Premises (together with other properties leased by Lessor and
affiliates of Lessor).
F. As of the date of this Third Amendment, (i) Lessee is leasing all of
Building N and Building Q pursuant to the Lease and the BGR I Property Building
R Lease and (ii) has contracted to lease all of Building N and Building Q for
the remainder of the term of the Lease (I.E., the Term).
G. Lessor and Lessee desire to amend the Lease to provide that, so long
as Lessee's Purchase Option remains in effect, Lessee will not be required to
obtain Lessor's consent for non-structural repairs or alterations to the
Premises which do not affect any central or core building systems and which do
not affect the exterior architectural appearance of the Premises.
NOW, THEREFORE, IN CONSIDERATION of mutual covenants and promises the
parties, the parties agree as follows:
1. ALTERATIONS. So long as Lessee's Purchase Option is in full
force and effect, Section 7.3 of the Original Lease is amended to provide as
follows:
a. LESSOR'S CONSENT. Lessee shall not be required to obtain
Lessor's consent with respect to any change, alteration or addition to the
Premises which (i) is non-structural, (ii) does not affect any central or core
building systems, and (iii) does not affect the exterior architectural
appearance of the Premises.
b. NO COMPLETION BOND. Lessee shall not be required to provide
a lien and completion bond to Lessor in connection with any change, alteration
or addition.
2. COUNTERPARTS. This Third Amendment may be executed in
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
2.
<PAGE>
3. REMAINDER UNAFFECTED. Except as provided in this Third
Amendment, the Lease shall remain in full force and effect and unamended.
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amendment, on the date(s) set forth below, as of the day and year first above
written.
BGR ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP
/s/ Richard K. Robbins
-------------------------------------------------
By: Richard K. Robbins
Its: Managing General Partner
Date: 1/28/97
---------------------------------------------
CHIRON CORPORATION, a Delaware corporation
By: /s/ Dennis L. Winger
---------------------------------------------
Its: DENNIS L. WINGER, Senior VP Finance & Admin
----------------------------------------
Date: 1/30/97
---------------------------------------------
3.
<PAGE>
[BGR II Property Lease]
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE ("Second Amendment") is entered into as of
May 9, 1996, by and between BGR ASSOCIATES II, A CALIFORNIA LIMITED PARTNERSHIP
("Lessor"), and CHIRON CORPORATION, a Delaware corporation ("Lessee"), with
reference to the following facts:
A. Lessor and Lessee are parties to that certain Triple Net Lease dated
May 26, 1989, entered into by Lessor and Lessee's predecessor, Chiron
Corporation, a California corporation, as amended by that certain First
Amendment to Lease dated March 15, 1995 (as so amended, the "Lease"). The
property covered by the Lease is located in Emeryville, California, and is more
particularly described in the Lease.
B. Lessor, Lessee and certain other parties related to Lessor have
entered into that certain Option Agreement dated as of March 15, 1995 (the
"Option Agreement"), pursuant to which Lessor has been granted to Lessee the
option, subject to the terms and conditions of the Option Agreement, to purchase
the property covered by the Lease as well as other property in the vicinity
thereof (the "Option"). As provided for in the Option Agreement and the First
Amendment to Lease, the Term of the Lease previously was extended from
August 15, 1999, through August 14, 2000. Further, as provided for in the
Option Agreement, as additional consideration for the grant of said Option,
Lessee agreed that if Lessee entered into a Development Agreement (as defined in
the Option Agreement), the Term of the Lease would be further extended through
December 31, 2003.
C. Lessee has entered into such a Development Agreement; and Lessor and
Lessee are entering into this Second Amendment to evidence the extension of the
Term of the Lease as provided for in the Option Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessor and Lessee hereby agree as follows (capitalized terms used
herein but not herein defined shall have the meaning ascribed to them in the
Lease):
1. AMENDMENT OF PARAGRAPH 1.2. Lessor and Lessee hereby agree that the
Term of the Lease is hereby extended through December 31, 2003. In furtherance
of the foregoing, Lessor and Lessee hereby amend Paragraph 1.2 of the Lease by
deleting therefrom the words "Eleven (11) years" (as provided for in the First
<PAGE>
Amendment to Lease) at the beginning of said paragraph and substituting therefor
the words "Period from the Commencement Date to December 31, 2003."
2. TERMS OF LEASE. The terms of the Lease for the period from August 15,
2000, through December 31, 2003, shall be the same as the terms of the Lease
prior to August 15, 2000, without any adjustment to the base monthly rent for
the period from August 15, 2000, through December 31, 2003 (i.e., the base
monthly rent in effect as of August 15, 2000, shall remain in effect through
December 31, 2003). In addition, the terms of Paragraph 18 of the Lease
providing for two (2) extension options of five (5) years each shall remain in
effect, with the first extension term, if exercised, commencing on January 1,
2004.
3. STATUS OF LEASE. Except as amended hereby, the Lease remains
unamended; and as amended hereby, the Lease and all the terms and conditions
thereof remain in full force and effect.
4. COUNTERPARTS. This Second Amendment may be executed in multiple
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Second Amendment
as of the date first set forth above.
LESSEE: LESSOR:
CHIRON CORPORATION, BGR ASSOCIATES II, A CALIFORNIA
a Delaware corporation LIMITED PARTNERSHIP
By: /s/ Dennis L. Winger By: /s/ Richard K. Robbins
------------------------------- ---------------------------------
Richard K. Robbins
Its: Senior Vice President Managing General Partner
------------------------------
Finance and Administration
2
<PAGE>
[BGR II PROPERTY LEASE]
THIRD AMENDMENT TO TRIPLE NET LEASE
THIS THIRD AMENDMENT TO TRIPLE NET LEASE (this "Third Amendment") is
entered as of the 31st day of January, 1997, by and between BGR ASSOCIATES II, A
CALIFORNIA LIMITED PARTNERSHIP ("Lessor"), and CHIRON CORPORATION, a Delaware
corporation ("Lessee").
THIS THIRD AMENDMENT is entered on the basis of the following facts,
intentions and understandings of the parties:
A. Lessor is the owner of the improved real property (the "BGR II
Property") in the City of Emeryville, State of California, commonly known as
4510 Horton Street. The BGR II Property includes the building known as
"Building D."
B. Lessor and Chiron Corporation, a California corporation
(predecessor to Lessee), entered a Triple Net Lease (the "Original Lease") dated
May 26, 1989.
C. Pursuant to the Original Lease, Lessor leased to Lessee (as
successor to Chiron Corporation, a California corporation) all of the BGR II
Property.
D. Lessor and Lessee entered (i) a First Amendment to Lease (the
"First Amendment") dated as of October 1, 1993 and (ii) a Second Amendment to
Lease (the "Second Amendment") dated as of May 9, 1996. The Original Lease as
modified by the First Amendment and the Second Amendment is hereinafter referred
to as the "Lease". Terms which are capitalized in this Third Amendment and not
defined herein shall have the meaning set forth in the Lease.
E. Lessor (together with affiliates of Lessor) and Lessee entered an
Option Agreement dated as of March 15, 1995. Pursuant to the Option Agreement,
Lessee has the option ("Lessee's Purchase Option"), subject to the terms of the
Option Agreement, to purchase the Premises (together with other property leased
by Lessor and affiliates of Lessor).
F. Lessor and Lessee desire to amend the Lease to provide that, so
long as Lessee's Purchase Option remains in effect, Lessee will not be required
to obtain Lessor's consent for nonstructural repairs or alterations to the
Premises which do not affect any central or core building systems and which do
not affect the exterior architectural appearance of Building D.
<PAGE>
NOW, THEREFORE, in consideration of mutual covenants and promises of
the parties, the parties agree as follows:
1. ALTERATIONS. So long as Lessee's Purchase Option is in full
force and effect, Section 7.3 of the Original Lease is hereby amended to provide
as follows:
a. LESSOR'S CONSENT. Lessee shall not be required to obtain
Lessor's consent with respect to any change, alteration or addition to the
Premises which (i) is nonstructural, (ii) does not affect any central or core
building systems, and (iii) does not affect the exterior architectural
appearance of the Premises.
b. NO COMPLETION BOND. Lessee shall not be obligated to
provide Lessor a lien in completion bond in connection with any change,
alteration or addition.
2. COUNTERPARTS. This Third Amendment may be executed in
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one in the same agreement.
3. REMAINDER UNAFFECTED. Except as provided in this Third
Amendment, the Lease shall remain in full force and effect and amended.
2.
<PAGE>
IN WITNESS HEREOF, the parties hereto have executed this Third
Amendment, on the date(s) set forth below, as the of the day and the year first
above written.
BGR ASSOCIATES II, A
CALIFORNIA LIMITED PARTNERSHIP
By: /s/ Richard K. Robbins
-------------------------------------
Richard K. Robbins
Its: Managing General Partner
Date: 1/28/97
-----------------------------------
CHIRON CORPORATION, a
Delaware corporation
By: /s/ Dennis L. Winger
-------------------------------------
Its: Dennis L. Winger, Senior VP Finance
and Admin
------------------------------------
Date: 1/30/97
-----------------------------------
3.
<PAGE>
[BGR I Property Building R Lease]
THIRD AMENDMENT TO LEASE
THIS THIRD AMENDMENT TO LEASE ("Third Amendment") is entered into as of
May 9, 1996, by and between BGR ASSOCIATES, A CALIFORNIA LIMITED PARTNERSHIP
("Lessor"), and CHIRON CORPORATION, a Delaware corporation ("Lessee"), with
reference to the following facts:
A. Lessor and Lessee are parties to that certain Lease dated December 17,
1984, entered into by Lessor and Lessee's predecessor, Cetus Corporation, as
amended by that certain Amendment to Lease dated February 1, 1986, and by that
certain Second Amendment to Lease dated as of March 15, 1995 (as so amended, the
"Lease"). The property covered by the Lease is located in Emeryville,
California, and is more particularly described in the Lease. The Term of the
Lease expires June 30, 2004.
B. Lessor, Lessee and certain other parties related to Lessor entered
into that certain Option Agreement dated March 15, 1995 (the "Option
Agreement"), pursuant to which Lessor granted to Lessee the option, subject to
the terms and conditions of the Option Agreement, to purchase the property
covered by the Lease as well as other property in the vicinity thereof (the
"Option"). As provided for in the Option Agreement, as additional consideration
for the grant of said Option, Lessee agreed that, if Lessee entered into a
Development Agreement (as defined in the Option Agreement), Lessee's rights to
terminate the Lease under Paragraph 3.2 of the Lease would be waived.
C. Lessee has entered into such a Development Agreement; and Lessor and
Lessee are entering into this Third Amendment to evidence Lessee's waiver of the
termination rights specified in Paragraph 3.2 of the Lease, as provided for in
the Option Agreement.
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, Lessor and Lessee hereby agree as follows (capitalized terms used
herein but not herein defined shall have the meaning ascribed to them in the
Lease):
1. AMENDMENT OF PARAGRAPH 3.2. Lessee hereby irrevocably waives and
relinquishes any and all of Lessee's rights under Paragraph 3.2 of the Lease to
terminate the Lease. In furtherance of the foregoing, Lessor and Lessee hereby
amend Paragraph 3.2 of the Lease by deleting in its entirety the third sentence
of said paragraph, which sentence begins in the tenth (10th) line of said
paragraph with the phrase "Notwithstanding anything to the contrary in this
Lease, . . ."
<PAGE>
2. AMENDMENT TO PARAGRAPH 4.2 (ANNUAL RENT ADJUSTMENT). The Monthly Rent
provided for in Paragraph 4.1 of the Lease has been subject to annual adjustment
pursuant to Paragraph 4.2 of the Lease, and as of the date hereof said Monthly
Rent for the Premises is $1.56 per rentable square foot. The Monthly Rent shall
continue to be adjusted annually as provided in Paragraph 4.2 through May 31,
2001, and shall thereafter remain unchanged for the balance of the Term (I.E.,
until June 30, 2004). In furtherance of the foregoing, Lessor and Lessee hereby
amend the Lease as follows:
(a) In the fifth (5th) sentence of Paragraph 4.2 of the Lease
beginning in line 21 thereof, the initial phrase "On the eleventh Adjustment
Date and each subsequent Adjustment Date during the Term and any extension
thereof" is hereby deleted and the phrase "On the eleventh Adjustment Date and
on each subsequent Adjustment Date occurring prior to May 31, 2001" is
substituted therefor.
(b) The following sentence is added to Paragraph 4.2 of the Lease
after the fifth (5th) sentence thereof:
"Following the annual adjustment to Monthly Rent that occurs on
the Adjustment Date preceding May 31, 2001, there shall be no
further annual adjustments to Monthly Rent, and the Monthly Rent
for the balance of the Term shall remain the same as the Monthly
Rent due and payable for the month of May, 2001.
3. STATUS OF LEASE. Except as amended hereby, the Lease remains
unamended; and as amended hereby, the Lease and all the terms and conditions
thereof remain in full force and effect.
4. COUNTERPARTS. This Third Amendment may be executed in multiple
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Third Amendment as
of the date first set forth above.
LESSEE: LESSOR:
CHIRON CORPORATION, BGR ASSOCIATES, A CALIFORNIA
a Delaware corporation LIMITED PARTNERSHIP
By: /s/ Dennis L. Winger By: /s/ Richard K. Robbins
------------------------------- -----------------------------------
Dennis L. Winger Richard K. Robbins
Managing General Partner
Its: /s/ Senior Vice President
------------------------------
Finance and Administration
2
<PAGE>
[BGR I PROPERTY BUILDING R LEASE]
FOURTH AMENDMENT TO TRIPLE NET LEASE
THIS FOURTH AMENDMENT TO TRIPLE NET LEASE (this "Fourth Amendment") is
entered as of the 31st day of January, 1997, by and between BGR ASSOCIATES, A
CALIFORNIA LIMITED PARTNERSHIP ("Lessor"), and CHIRON CORPORATION, a Delaware
corporation ("Lessee").
THIS FOURTH AMENDMENT IS ENTERED on the basis of the following facts,
intentions and understandings of the parties:
A. Lessor is the owner of the improved real property (the "BGR I
Property") in the City of Emeryville, State of California, commonly known as
4560 Horton Street. The BGR I Property includes the buildings known as
"Building N," "Building Q," "Building R" and "Building E."
B. Lessor and Cetus Corporation (predecessor to Lessee) entered a Lease
(the "Original Lease") dated December 17, 1984. Pursuant to the Original Lease,
Lessor leased to Lessee (as successor to Cetus Corporation) all of Building R
and portions of Building N and Building Q.
C. Lessor and Chiron Corporation, a California corporation (predecessor
to Lessee), entered an Amendment to Lease (the "First Amendment") dated
February 1, 1986. Lessor and Lessee entered (i) a Second Amendment to Lease
(the "Second Amendment") dated as of March 15, 1995, and (ii) a Third Amendment
to Lease (the "Third Amendment") dated as of May 9, 1996. The Original
Lease as amended by the First Amendment, Second Amendment and Third Amendment is
hereinafter referred to as the "Lease". Terms which are capitalized in this
Fourth Amendment and not defined herein shall have the meanings set forth in the
Lease.
D. Lessor and Cetus Corporation, (predecessor to Lessee), entered a
Triple Net Lease ("Building BGR I Property Building NQ Lease") dated May 26,
1989 pursuant to which Lessor leased to Cetus Corporation (predecessor to
Lessee) all of Building E and portions of Building N and Building Q. The
Original Building BGR I Property Building R Lease, as amended, is referred to in
this Fourth Amendment as the "Building BGR I Property Building NQ Lease."
E. Lessor (together with other entities) and Lessee entered an Option
Agreement dated as of March 15, 1995. Pursuant to the Option Agreement, Lessee
has the option ("Lessee's
1.
<PAGE>
Purchase Option"), subject to the terms of the Option Agreement, to purchase the
Premises (together with other properties leased by Lessor and affiliates of
Lessor).
F. As of the date of this Fourth Amendment, (i) Lessee is leasing all of
Building N and Building Q pursuant to the Lease and the BGR I Property Building
NQ Lease and (ii) has contracted to lease all of Building N and Building Q for
the remainder of the term of the Lease (I.E., the Term).
G. Lessor and Lessee desire to amend the Lease to provide that, so long
as Lessee's Purchase Option remains in effect, Lessee will not be required to
obtain Lessor's consent for non-structural repairs or alterations to the
Premises which do not affect any central or core building systems and which do
not affect the exterior architectural appearance of the Premises.
NOW, THEREFORE, IN CONSIDERATION of mutual covenants and promises the
parties, the parties agree as follows:
1. ALTERATIONS. So long as Lessee's Purchase Option is in full
force and effect, Section 7.4 of the Original Lease is amended to provide as
follows:
a. LESSOR'S CONSENT. Lessee shall not be required to obtain
Lessor's consent with respect to any change, alteration or addition to the
Premises which (i) is non-structural, (ii) does not affect any central or core
building systems, and (iii) does not affect the exterior architectural
appearance of the Premises.
b. NO COMPLETION BOND. Lessee shall not be required to provide
a lien and completion bond to Lessor in connection with any change, alteration
or addition.
2. COUNTERPARTS. This Fourth Amendment may be executed in
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
2.
<PAGE>
3. REMAINDER UNAFFECTED. Except as provided in this Fourth
Amendment, the Lease shall remain in full force and effect and unamended.
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment, on the date(s) set forth below, as of the day and year first above
written.
BGR ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP
/s/ Richard K. Robbins
---------------------------------------------
By: Richard K. Robbins
Its: Managing General Partner
Date: 1/28/97
----------------------------------------
CHIRON CORPORATION, a Delaware
corporation
By: /s/ Dennis L. Winger
------------------------------------------
Its: DENNIS L. WINGER, Senior VP Finance
& Admin.
------------------------------------
Date: 1/30/97
----------------------------------------
3.
<PAGE>
FIRST AMENDMENT TO TRIPLE NET LEASE
THIS FIRST AMENDMENT TO TRIPLE NET LEASE ("First Amendment") is
entered into as of this 10th day of September, 1996, by and between BGR
Associates III, a California limited partnership ("Lessor"), and Chiron
Corporation, a Delaware corporation, as successor to Cetus Corporation
("Lessee"). Lessor and Lessee are collectively referred to herein as the
"Parties".
THE PARTIES ENTER INTO THIS FIRST AMENDMENT on the basis of the
following facts, intentions and understandings:
A. The Parties entered into a Triple Net Lease ("Lease") dated
January 20, 1989 covering certain real property more particularly described in
EXHIBIT A to the Lease (the "Premises").
B. The Parties have requested, and the City of Emeryville has
approved, a Certificate of Compliance and Lot Line Adjustment ("Lot Line
Adjustment") which relocates a portion of the boundary line between one of the
parcels comprising the Premises (Parcel 5 as described in EXHIBIT A to the
Lease) and an adjacent parcel outside the Premises (which is owned by Lessee)
with the result that the Premises will be reduced in size by approximately four
thousand three hundred eighty-five (4,385) square feet.
C. The Parties desire to enter into this First Amendment in order to
modify the description of the Premises to take into account the effect of the
Lot Line Adjustment.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and promises
of the Parties, the Parties hereto agree as follows:
1. The legal description of Parcel Five in EXHIBIT A to the Lease is
hereby replaced in its entirety with the following legal description:
PARCEL FIVE:
PARCEL A, AS SAID PARCEL IS SHOWN UPON PARCEL MAP NO. 2108, FILED ON JUNE
17, 1977 IN BOOK 97 OF PARCEL MAPS AT PAGES 40 - 41, IN THE ALAMEDA COUNTY
RECORDER'S OFFICE.
EXCEPTING THEREFROM THE FOLLOWING DESCRIBED PARCEL:
1
<PAGE>
ALL OF SAID PARCEL A, LYING EASTERLY OF THE NORTHERLY PROLONGATION OF THAT
CERTAIN COURSE "SOUTH 17 DEG. 32' EAST 582.48 FEET", AS SAID COURSE IS
SHOWN UPON SAID PARCEL MAP.
2. EFFECT OF FIRST AMENDMENT. Except as specifically provided in
this First Amendment, the Lease shall remain in full force and effect and
unamended.
3. COUNTERPARTS. This First Amendment may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
IN WITNESS WHERE0F, the Parties have executed this First Amendment to
be effective as of the day and year first above written.
LESSOR
BGR ASSOCIATES III, a California limited
partnership
By: /s/ Richard K. Robbins
--------------------------------------
Its: Managing General Partner
-------------------------------------
LESSEE
CHIRON CORPORATION, a Delaware corporation
By: /s/ Dennis L. Winger
--------------------------------------
Its: CFO, SVP, Finance & Admin
-------------------------------------
2
<PAGE>
[BGR III Lease]
SECOND AMENDMENT TO TRIPLE NET LEASE
THIS SECOND AMENDMENT TO TRIPLE NET LEASE (this "Second Amendment") is
entered as of the 31st day of January, 1997, by and between BGR ASSOCIATES III,
A CALIFORNIA LIMITED PARTNERSHIP ("Lessor"), and CHIRON CORPORATION, a Delaware
corporation ("Lessee").
THIS SECOND AMENDMENT IS ENTERED on the basis of the following facts,
intentions and understanding of the parties:
A. Lessor (together with Marin County Exchange Corporation) and Cetus
Corporation (predecessor to Lessee), entered a Triple Net Lease (the "Original
Lease") dated January 20, 1989. The term of the Original Lease (the "Term")
commenced on January 20, 1989 and extends to October 31, 2018.
B. Lessor has acquired all the interest under the Original Lease of Marin
County Exchange Corporation. Lessee has acquired, by merger with Cetus
Corporation, all the interest under the Original Lease of Cetus Corporation.
C. Lessor and Lessee entered a First Amendment to Triple Net Lease (the
"First Amendment") dated as of September 10, 1996. The Original Lease as
amended by the First Amendment is hereinafter referred to as the "Lease." Terms
which are capitalized in this Second Amendment and not defined herein shall have
the meanings stated in the Lease.
D. The real property subject to the Original Lease (I.E., the "Premises")
was Lessor's interest in the property commonly known as the "Big O Property" in
Emeryville, California. The Premises included the buildings known as: (i) 1401
Stanford Avenue ("Building U"); (ii) 1401 Stanford Avenue ("Building F");
(iii) 1403 Stanford Avenue ("Building CMF"); (iv) 5325 Horton Street
("Building L," which also is frequently referred to as "Building S"); (v) 5309
Horton Street ("Building J"); and (vi) 5317-21 Horton Street ("Building K").
Building U has been demolished in accordance with the terms of the Original
Lease.
E. Pursuant to Paragraph 17.0 of the Original Lease, Lessor granted to
Lessee (i) the option to purchase the entire Premises during the 10th, 13th,
16th, 20th and 25th Lease Years and (ii) the option to purchase at any time
prior to the 26th Lease Year any of the portions of the Premises (including the
real property improvements) commonly known as Building J, K, L, and F, all in
accordance with the terms of Paragraph 17.0 of the Original Lease.
1
<PAGE>
F. Lessor and Lessee desire to provide that Lessee will purchase the
buildings (and related real property) known as (i) Building U (I.E., the real
property remaining after demolition of Building U), (ii) Building F,
(iii) Building CMF, (iv) Building L, (v) Building J, and (vi) Building K
(collectively, the "Sale Property") at any time after the date of this Second
Amendment and prior to February 1, 1997. The Sale Property consists of all of
the Premises other than the Portion of Premises Previously Transferred (as
defined below).
G. Lessor and Lessee also desire to state the terms upon which Lessor
will transfer the Sale Property to Lessee.
H. Lessor previously conveyed a portion of the Premises to Lessee in
connection with a lot line adjustment undertaken by Lessor and Lessee. The lot
line adjustment is more particularly described in the First Amendment. The
portion of the Premises previously conveyed by Lessor to Lessee (the "Portion of
Premises Previously Transferred") is the most northerly portion of the Premises
on the boundary between (i) the property owned by Lessee (previously owned by
Lessor) which is sometimes referred to as the "BGR III Rail Parcel" (APN49-1041-
60) and (ii) the northern portion of the Premises (APN49-1041-48).
I. Pursuant to the transfer of the Portion of Premises Previously
Transferred, Lessee paid Seventy Thousand One Hundred Sixty Dollars ($70,160.00)
(the "Prior Payment") to Lessee. Lessor and Lessee desire to provide that the
amount of the Prior Payment will be credited against the Purchase Price (as
hereinafter defined) for the Sale Property.
J. Upon the closing (the "Closing"), (i) Lessor will convey the Sale
Property to Lessee, and (ii) the Original Lease (as amended by the First
Amendment and this Second Amendment) (the "Amended Lease") will terminate.
K. Lessor and Lessee also desire to provide that Lessee will have the
right to purchase the Sale Property pursuant to Paragraph 17.0 of the Original
Lease if, for any reason, Lessee does not purchase the Sale Property pursuant to
this Second Amendment.
2.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and promise of the
parties, the parties agree as follows:
1. LESSEE'S OBLIGATIONS TO PURCHASE. Lessee shall purchase the Sale
Property in accordance with the terms of this Second Amendment.
2. PURCHASE PRICE. The purchase price (the "Purchase Price") for
the Sale Property pursuant to this Second Amendment shall be Twenty-Nine Million
Eight Hundred Sixteen Thousand Six Hundred Fifty-Four Dollars ($29,816,654.00).
3. PAYMENT OF PURCHASE PRICE.
a. PAYMENT IN CASH. The Purchase Price shall be paid all in
cash at the closing for Lessee's purchase of the Sale Property (I.E., the
Closing).
b. CREDITS. Lessee shall receive a credit against the Purchase
Price in the amount of the sum of the following: (i) the amount of the Prior
Payment (I.E., Seventy Thousand One Hundred Sixty Dollars ($70,160.00)) and (ii)
the outstanding principal balance, as of the Closing, of the assessments
described as exceptions 5, 6 and 7 in the First Amended Preliminary Report
(described below).
4. CLOSING.
a. DATE. The Closing shall occur upon the date established by
Lessee; provided, however, that the Closing shall not occur later than
January 31, 1997.
b. LOCATION. The Closing shall occur at the Oakland office
(One Kaiser Plaza, Suite 1450) of Chicago Title Company of Alameda County
("Title Company").
5. TITLE TO SALE PROPERTY.
a. TITLE POLICY. Title to the Sale Property shall be conveyed
by Lessor to Lessee by grant deed in accordance with the terms of Paragraph 17.4
of the Original Lease and subject only to exceptions 1-7 (each modified to show
all taxes and assessments as current), 8, 9, 14, 15 and 16 (collectively, the
"Permitted Exceptions") stated in the First Amended Preliminary Report dated
December 6, 1996 and issued by Title Company. A condition of Lessee's
obligation to purchase the Sale Property shall be the willingness of the Title
Company to issue to Lessee an ALTA Extended Form Owner's Policy of Title
Insurance (1992) (the "Title Policy") which: (i) insures title to the Sale
Property in Lessee subject only to the Permitted Exceptions and
3.
<PAGE>
(ii) contains such endorsements as are reasonably requested by Lessee.
b. PREPAYMENT PENALTIES AND FEES. Lessor hereby acknowledges
that Lessee shall not have any obligation for any prepayment penalties or fees
related to any obligations secured by the Sale Property or any unamortized costs
of any points, prepaid interest or other charges or expenses incurred by Lessor
in creating such obligations.
6. CLOSING COSTS. The closing costs incurred in connection with
Lessee's purchase of the Sale Property pursuant to this Second Amendment shall
be allocated between Lessor and Lessee as follows:
a. LESSOR'S COSTS. Lessor shall pay (i) all documentary
transfer taxes and all City of Emeryville transfer taxes, (ii) all sales taxes,
and (iii) fifty percent of the recording fees, escrow fees and other costs and
charges of the Escrow (as hereinafter defined); and
b. LESSEE'S COSTS. Lessee shall pay (i) the premiums for the
Title Policy, and (ii) fifty percent (50%) of the recording fees, escrow fees
and other costs and charges of the Escrow.
7. CLOSING. Prior to or on the Closing, the parties shall deposit
the following into the escrow (the "Escrow") to be established at Title Company:
a. DEPOSITS BY LESSOR. Lessor shall deposit:
(i) GRANT DEED. A duly executed and acknowledged grant
deed for the Sale Property;
(ii) NON-FOREIGN PERSON CERTIFICATE. A Non-Foreign Person
Certificate under Section 1445 of the Internal Revenue Code (the "Code") stating
that Lessor is not a "foreign person" for purposes of Section 1445;
(iii) WITHHOLDING CERTIFICATE. Any Real Estate Withholding
Exemption Certificate (Form 590-RE), or comparable document, required by the
State of California;
(iv) ADDITIONAL DOCUMENTS, ETC. Such additional documents,
funds, agreements and instruction as are required to close the transfer
contemplated by this Second Amendment in accordance with the terms of this
Second Amendment (and, to the extent applicable, the Amended Lease).
4.
<PAGE>
b. DEPOSITS BY LESSEE. Lessee shall deposit:
(i) BALANCE OF PURCHASE PRICE. The balance of the
Purchase Price (I.E, the Purchase Price, reduced by the credits under Section
3.b of this Second Amendment);
(ii) ADDITIONAL FUNDS. Such additional funds as may be
necessary to pay Lessee's share of closing costs and prorations, if any; and
(iii) ADDITIONAL DOCUMENTS, ETC. Such additional
documents, funds, agreements and instructions as are required to close the
transfer contemplated by this Second Amendment in accordance with the terms of
this Second Amendment (and, to the extent applicable, the Amended Lease).
8. TERMINATION OF AMENDED LEASE.
a. PRORATIONS. The Amended Lease shall terminate as of the
Closing. Amounts paid by Lessee under the Amended Lease which are attributable
to the period after the Closing (E.G., any security deposit and prepaid rent
under the Amended Lease) shall be credited to the Purchase Price.
b. PRORATIONS AND CLOSING COSTS. The following items shall be
paid, prorated and adjusted in the manner hereinafter set forth:
(i) REAL PROPERTY TAXES. Real property taxes and general
and special assessments which are not the obligation of Lessee as the tenant of
the Sale Property under the Amended Lease shall be prorated as of the Closing;
(ii) OPERATING EXPENSES. The operating expenses of the
Sale Property (E.G., insurance premiums and landscaping costs) which are not the
obligation of Lessee as the tenant of the Sale Property under the Amended Lease
shall be prorated as of the Closing; and
(iii) SECURITY DEPOSITS. Any unapplied security deposits
and prepaid rents under the Amended Lease shall be credited to Lessee.
c. POST-CLOSING ADJUSTMENT. If, under the Amended Lease,
either Lessor or Lessee collects an amount after the Closing which is properly
allocable in whole or in part to the period of time prior to the Closing, the
amount shall be promptly apportioned between Lessor and Lessee in accordance
with the proration provisions stated in Section 8.b. Any error in the
calculation of the adjustments and Closing shall be corrected or adjusted as
soon as practical after the Closing. The provisions
5.
<PAGE>
hereof shall survive the Closing for a period of one (1) year thereafter.
d. SURVIVAL. Any obligations of Lessor or Lessee under the
Amended Lease which accrue prior to the Closing and which, pursuant to the
Amended Lease, are to survive, shall survive the Closing.
9. INDEMNITY FOR BROKERAGE COMMISSIONS.
a. REPRESENTATIONS. Lessor and Lessee each represent and
warrant for the benefit of the other that (i) it has not employed a broker or
finder in connection with this Second Amendment or the transactions contemplated
by this Second Amendment and (ii) no broker can properly claim a right to any
commission or finder's fee based upon contacts between the claimant and the
representing party with respect to the other party or the Sale Property.
b. INDEMNITY. Lessor and Lessee each shall indemnify, defend
by counsel acceptable to the other, and hold the other harmless, against any
loss, cost or expense, including attorneys' fees and court costs, resulting from
any claim for a commission or finder's fees from any party claiming through any
alleged agreement with the indemnifying party.
10. CONTINUATION OF OPTION. Lessee's right to purchase the Sale
Property pursuant to Paragraph 17.0 of the Original Lease (and Lessee's right of
first refusal under Paragraph 18.0 of the Original Lease) shall not terminate as
a result of Lessee not purchasing the Sale Property pursuant to this Second
Amendment.
11. ASSIGNMENT. Lessee shall have the right to assign its rights to
purchase the Sale Property pursuant to this Second Amendment to one or more
entities designated by Lessee.
12. ASSIGNMENT OF CLAIMS.
a. ASSIGNMENT. At the Closing, Lessor shall execute an
assignment of claims ("Assignment") pursuant to which Lessor shall assign to
Lessee all claims Lessor may have under common law, contract, statute,
regulation or any other legal theory against any person or entity not a party to
this Second Amendment or the Amended Lease, relating to the condition of soils,
subsurface soils, surface or ground waters or air at, in, on, under and above
the Sale Property ("Lessor Claims").
b. POSSIBLE REASSIGNMENT. If, after the Closing, (i) Lessor
incurs reasonable costs in responding to environmental conditions at the Sale
Property, and (ii) a person
6.
<PAGE>
or entity not a party to this Second Amendment or the Lease serves Lessor with a
complaint relating to environmental conditions at the Sale Property, then Lessee
shall reassign Lessor Claims to Lessor for the sole and limited purpose of
allowing Lessor to recover its reasonable response costs. For all other
purposes, Lessee shall be deemed to have retained the Lessor Claims.
c. NO ALTERATION OF RIGHTS AND OBLIGATIONS. Nothing in this
Section 12 shall alter the rights and obligations under the Toxic and Hazardous
Materials Indemnity Agreement dated as of November __, 1988 of Lessee (as
successor to Cetus Corporation and Buyer (as defined in the Toxic and Hazardous
Materials Indemnity Agreement).
13. TAX DEFERRED EXCHANGES.
a. COOPERATION OF LESSEE. Lessee shall cooperate with Lessor
in effecting Lessor's transfer of the Sale Property from Lessor to Lessee as an
exchange in accordance with Section 1031 of the Code, subject to the following:
(i) NO EXPENSE TO LESSEE. The exchange shall be at no
expense to Chiron;
(ii) NO DELAY. The exchange shall not delay the Closing
for transfer of the Sale Property; and
(iii) NO ACQUISITION OF TITLE. Lessee shall not be
required to acquire title to any proposed exchange property to accommodate
Lessor's exchange.
b. LESSOR INDEMNITY. Lessor shall indemnify, defend and hold
Lessee harmless from and against any and all claims, demands, costs and expenses
which Lessee may sustain or incur resulting from the consummation of the
transfer of the Sale Property as a Section 1031 exchange rather than a sale.
14. NOTICE. All notices, elections and other communications
(collectively, "Notices") authorized, required or desired to be given pursuant
to this Second Amendment shall be given in writing and either personally
delivered to the party to whom it is given; delivered by an established delivery
service by which receipts are given; mailed by registered or certified mail,
postage prepaid; or sent by facsimile, telegram or electronic telecopier,
addressed as follows:
7.
<PAGE>
If to Lessor:
BGR Associates
1120 Nye Street, Suite 400
San Rafael, California 94901
Attention: Mr. Richard K. Robbins
Telephone: (415) 457-4964
Facsimile: (415) 459-4605
With a copy to:
David H. Kremer, Esq.
Shartsis, Friese & Ginsburg
One Maritime Plaza, Suite 1800
San Francisco, California 94111
Telephone: (415) 421-6500
Facsimile: (415) 421-2922
If to Lessee:
Chiron Corporation
4560 Horton Street
Emeryville, California 94608-2916
Attention: Jane L. Stratton, Esq.
Telephone: (510) 923-2906
Facsimile: (510) 654-5360
With a copy to:
A. Bruce Gilmore, Esq.
Brobeck, Phleger & Harrison LLP
One Market, Spear Street tower
San Francisco, California 94105
Telephone: (415) 442-0900
Facsimile: (415) 979-2912
15. COUNTERPARTS. This Second Amendment may be executed in
counterparts, each of which shall constitute an original hereof, and all of
which taken together shall constitute one and the same agreement.
16. REMAINDER OF ORIGINAL LEASE. Except as provided in this Second
Amendment, the Lease shall remain in full force and effect and unamended.
8.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment, on the date(s) set forth below, as of the day and year first above
written.
BGR ASSOCIATES III, A
CALIFORNIA LIMITED PARTNERSHIP
By: /s/ Richard K. Robbins
------------------------------------------
Its: Managing General Partner
--------------------------------------
Date: 1/28/97
----------------------------------------
CHIRON CORPORATION, a Delaware
corporation
By: /s/ Dennis L. Winger
------------------------------------------
Its: DENNIS L. WINGER, Sr. VP Finance
and Admin.
--------------------------------------
Date: 1/30/97
----------------------------------------
9.
<PAGE>
ASSIGNMENT OF LESSOR CLAIMS
THIS ASSIGNMENT OF LESSOR CLAIMS ("Assignment") is entered as of the
31st day of January, 1997, by and between CHIRON CORPORATION, a Delaware
corporation ("Assignee") and BGR III ASSOCIATES, A CALIFORNIA LIMITED
PARTNERSHIP ("Assignor").
THIS ASSIGNMENT IS ENTERED on the basis of the following facts,
intentions and understandings of the parties:
A. Contemporaneously with execution and delivery of this Assignment,
Assignee is acquiring certain improved real property ("Real Property"), commonly
known as the "Big O Property," in Emeryville, California pursuant to the Second
Amendment to Triple Net Lease ("Agreement") dated as of January 31, 1997,
between Assignor and Assignee. The Real Property is more particularly described
in the Agreement.
B. In connection with the conveyance of the Real Property to
Assignee, Assignor and Assignee have agreed that Assignor will transfer and
assign to Assignee all of Assignor's right, title and interest in and to the
Lessor Claims (as defined in the Agreement).
NOW, THEREFORE, in consideration of the mutual covenants, premises and
conditions herein set forth, Ten and 00/100 Dollars ($10.00) and other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. RECITALS. The Recitals stated above are hereby incorporated
herein by reference as if fully set forth at this point in the text of this
Assignment.
2. TRANSFER AND ASSIGNMENT. Assignor hereby sells, transfers,
assigns, delivers, grants and conveys to Assignee and its successors and
assigns, all right, title and interest of Assignor in and to the Lessor Claims.
3. CONDITIONS OF ASSIGNMENT. Assignor's sale, transfer, assignment,
delivery, grant and conveyance of the Lessor's Claims shall be subject to the
terms of Section 12.b and 12.c. of the Agreement.
4. REPRESENTATION AND WARRANTY. Assignor represents and warrants
that the Lessor Claims are free of all liens, encumbrances and claims of others,
financing agreements and/or encumbrances.
<PAGE>
5. HEADINGS. The headings used in this Assignment are for purposes
of convenience only and shall not be used in construing the provisions hereof.
6. COVENANT OF FURTHER ASSURANCES. The parties hereto agree to
execute such other documents and perform such other acts as may be necessary or
desirable to carry out the purposes of this Assignment.
7. SUCCESSORS AND ASSIGNS. This Assignment shall bind and benefit
the personal representatives, successors and assigns of the parties hereto.
8. GOVERNING LAW. This Assignment shall be governed by and
construed in accordance with the laws of the State of California.
9. SEVERABILITY. The provisions of this Assignment shall be deemed
severable, and the invalidity or unenforceability of any one or more of the
provisions hereof shall not affect the validity or enforceability of the other
provisions hereof.
10. MODIFICATION. This Assignment may not be modified except by the
written agreement of the parties hereto.
11. COUNTERPARTS. This Assignment may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
2.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Assignment to
be executed, on the date(s) set forth below, as of the day and year first above
written.
"ASSIGNEE"
Chiron Corporation, a Delaware
corporation
By: /s/ Dennis L. Winger
-----------------------------------
Name: Dennis L. Winger
------------------------------
Its: Senior VP, Finance & Admin.
------------------------------
Date: 1/30/97
------------------------------
"ASSIGNOR"
BGR III Associates, A California
Limited Partnership
By: /s/ Richard K. Robbins
-----------------------------------
Name: Richard K. Robbins
------------------------------
Its: Managing General Partner
------------------------------
Date: 1/28/97
------------------------------
3.
<PAGE>
EXHIBIT 10.27
THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933
December 12, 1991
Dear ______________________
Re: AMENDMENT OF OPTION AGREEMENT UNDER THE CETUS CORPORATION AMENDED AND
RESTATED COMMON STOCK OPTION PLAN
Our records indicate that you held an option under the above-referenced
plan ("Plan"). On December 12, 1991, pursuant to the provisions of the Chiron
1991 Stock Option Plan described in the proxy/prospectus dated October 30,
1991 and pursuant to the merger ("Merger") described in an Agreement and Plan
of Merger ("Agreement") dated as of July 21, 1991 by and among Chiron
Corporation - ("Chiron"), Cetus Corporation ("Cetus") and Chiron Acquisition
Subsidiary, Inc., Chiron assumed all unexpired, unexercised options to
purchase shares of Cetus Common Stock ("Cetus Options") and all related
unexpired, unexercised stock appreciation rights under the Plan.
Pursuant to this assumption, effective as of the effective date of the
Merger, each Cetus Option Agreement is amended as follows:
1. Each Cetus Option is converted into an option ("Chiron Option") to
purchase shares of Chiron Common Stock.
2. The number of shares purchasable under, and the exercise price of,
options under the Plan are adjusted as follows to take into account the
difference in value between Cetus Common Stock and Chiron Common Stock:
(a) The number of shares of Chiron Common Stock (rounded to the
nearest whole number) purchasable under a Chiron Option equals the number of
shares of Cetus Common Stock that could have been purchased under the
replaced Cetus Option multiplied by the Exchange Ratio in the Merger, which
is .3.
(b) The per share exercise price of each Chiron Option equals the
per share exercise price determined pursuant to the replaced Cetus Option
divided by the Exchange Ratio in the Merger, which is .3.
<PAGE>
Page 2.
December 12, 1991
3. The terms and conditions of the Chiron Options are administered
and interpreted by Chiron's Board of Directors or by a Committee appointed by
Chiron's Board of Directors with references to Cetus deemed references to
Chiron where appropriate.
4. For purposes of vesting, service as an Advisory Counsellor (as
defined in the Agreement) constitutes service as a director.
5. If Cetus Options for which Chiron Options are substituted have
Limited Stock Appreciation Rights ("LSARS") attached thereto, then each such
LSAR will be honored by Chiron in accordance with its terms and remain
exercisable for a period of 60 days following the date that stockholders of
Cetus approve the Merger; provided, however, that if the LSAR was originally
granted within 6 months of the date that Cetus stockholders approve the
Merger, then the LSAR will be exercisable for a period of 60 days following
expiration of such 6-month period. Upon expiration of the applicable 60 day
period, each such LSAR not previously exercised shall expire. Upon exercise
of an LSAR, the related option will be cancelled, and Chiron will pay to the
LSAR holder an amount in cash for each share with respect to which the LSAR
is exercised determined in accordance with the terms of the Cetus Corporation
Amended and Restated Common Stock Option Plan. This provision shall not
affect obligations under any other agreement regarding whether or not the
holder of an LSAR will exercise that LSAR.
Except as provided above, the grant date, the expiration date and the
vesting schedule of each Chiron Option will remain the same as the grant
date, the expiration date and the vesting schedule of the Cetus Option that
it replaces. Chiron and Cetus intend that each Chiron Option will constitute
an incentive stock option within the meaning of Section 422 of the Internal
Revenue Code to the extent that the Cetus Option it replaces would have
constituted an incentive stock option prior to December 12, 1991.
Please keep this amendment with the documentation that was forwarded to you
before the Merger under the Cetus Corporation Amended and Restated Common
Stock Option Plan. If you have any questions about this amendment, please
contact ___________________________________.
Very truly yours,
<PAGE>
THIS DOCUMENT CONSTITUTES PART OF THE OFFICIAL PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933
December 12, 1991
Dear______________________
Re: AMENDMENT OF OPTION AGREEMENT UNDER THE CETUS CORPORATION NON-EMPLOYEE
DIRECTORS' STOCK OPTION PLAN
Our records indicate that you held an option under the above-referenced
plan ("Plan"). On December 12, 1991, pursuant to the provisions of the Chiron
1991 Stock Option Plan described in the proxy/prospectus dated October 30,
1991 and pursuant to the merger ("Merger") described in an Agreement and Plan
of Merger ("Agreement") dated as of July 21, 1991 by and among Chiron
Corporation - ("Chiron"), Cetus Corporation ("Cetus") and Chiron Acquisition
Subsidiary, Inc., Chiron assumed all unexpired, unexercised options to
purchase shares of Cetus Common Stock ("Cetus Options") and all related
unexpired, unexercised stock appreciation rights under the Plan.
Pursuant to this assumption, effective as of the effective date of the
Merger, each Cetus Option Agreement is amended as follows:
1. Each Cetus Option is converted into an option ("Chiron Option") to
purchase shares of Chiron Common Stock.
2. The number of shares purchasable under, and the exercise price of,
options under the Plan are adjusted as follows to take into account the
difference in value between Cetus Common Stock and Chiron Common Stock:
(a) The number of shares of Chiron Common Stock (rounded to the
nearest whole number) purchasable under a Chiron Option equals the number of
shares of Cetus Common Stock that could have been purchased under the
replaced Cetus Option multiplied by the Exchange Ratio in the Merger, which
is .3.
(b) The per share exercise price of each Chiron Option equals the
per share exercise price determined pursuant to the replaced Cetus Option
divided by the Exchange Ratio in the Merger, which is .3.
<PAGE>
Page 2.
December 12, 1991
3. The terms and conditions of the Chiron Options are administered
and interpreted by Chiron's Board of Directors or by a Committee appointed by
Chiron's Board of Directors with references to Cetus deemed references to
Chiron where appropriate.
4. For purposes of vesting, service as an Advisory Counsellor (as
defined in the Agreement) constitutes service as a director.
5. If Cetus Options for which Chiron Options are substituted have
Limited Stock Appreciation Rights ("LSARS") attached thereto, then each such
LSAR will be honored by Chiron in accordance with its terms and remain
exercisable for a period of 60 days following the date that stockholders of
Cetus approve the Merger; provided, however, that if the LSAR was originally
granted within 6 months of the date that Cetus stockholders approve the
Merger, then the LSAR will be exercisable for a period of 60 days following
expiration of such 6-month period. Upon expiration of the applicable 60 day
period, each such LSAR not previously exercised shall expire. Upon exercise
of an LSAR, the related option will be cancelled, and Chiron will pay to the
LSAR holder an amount in cash for each share with respect to which the LSAR
is exercised determined in accordance with the terms of the Cetus Corporation
Non-Employee Directors' Stock Option Plan. This provision shall not affect
obligations under any other agreement regarding whether or not the holder of
an LSAR will exercise that LSAR.
Except as provided above, the grant date, the expiration date and the
vesting schedule of each Chiron Option will remain the same as the grant
date, the expiration date and the vesting schedule of the Cetus Option that
it replaces.
Please keep this amendment with the documentation that was forwarded to
you before the Merger under the Cetus Corporation Non-Employee Directors'
Stock Option Plan. If you have any questions about this amendment, please
contact ____________________.
Very truly yours,
<PAGE>
CIBA-GEIGY AG, etal.
[LETTERHEAD]
LETTER AGREEMENT
Basle, May 6, 1996
Dear Sirs:
We refer to the agreements set forth on Annex 1 hereto, among one or more of
us and you (collectively, the "Agreements"). Capitalized terms used in this
Letter Agreement but not defined shall have the meanings set forth in the
Agreements.
Ciba-Geigy-Limited ("Ciba") and Sandoz Limited ("Sandoz") have agreed to
effect a business combination, subject to approval by the relevant
governmental entities. To effectuate this business combination, Ciba and
Sandoz will form Novartis Limited, a Swiss corporation ("Novartis"), that
will be owned initially 50% by Ciba and 50% by Sandoz. Ciba and Sandoz will
thereafter combine with Novartis, as a result of which all the assets and
liabilities of Ciba and Sandoz will become assets and liabilities of
Novartis, each of Ciba and Sandoz will be absorbed by Novartis and cease
separate legal existence, and the stockholders of Ciba and Sandoz will become
the stockholders of Novartis (such transactions being referred to as the
"Combination").
In connection with the Combination, we ask you to agree as follows:
1. If and to the extent applicable to any of the Agreements, including
Section 5.01 of the Governance Agreement, and subject to execution and
delivery of the
<PAGE>
- 2 -
assignment and assumption agreements referred to in the next
paragraph, Chiron (i) consents to the ownership by Novartis or any wholly
owned subsidiary of Novartis of shares of Common Stock or shares of any Ciba
subsidiary holding shares of Common Stock, in each case as and to the extent
that the Agreements would, without regard to this Letter Agreement, permit
Ciba to hold such shares of Common Stock or shares of a Ciba subsidiary
holding such shares of Common Stock, (ii) agrees to waive any violations of
any Agreement that may result solely from such ownership, and (iii) agrees
that the Agreements shall be deemed amended to permit such ownership.
2. In connection with the Combination, Ciba's rights and obligations under
the Agreements shall be assigned to, and assumed by, Novartis, and rights and
obligations under the Agreements of any subsidiary of Ciba may be assigned
to, and assumed by, a subsidiary of Novartis, by operation of law. Ciba
agrees that Chiron may request in writing that Novartis deliver within a
reasonable period following any such assignment and assumption an executed
written assumption agreement reasonably satisfactory to Chiron pursuant to
which Novartis or the applicable subsidiary of Novartis, agrees to be bound
by the provisions of such Agreement. Subject to compliance with the preceding
sentence, Chiron consents to such assignment and assumption of each
Agreement, to the extent applicable to each such Agreement. Upon each such
assignment and assumption, all references to Ciba or subsidiaries of Ciba in
the Agreement assigned and assumed shall be deemed references to Novartis or
subsidiaries of Novartis, as the case may be, all references to Ciba-Geigy
Corporation or Ciba Biotech Partnership, Inc. shall be deemed references to
the wholly owned subsidiary of Novartis assuming the obligations of such
entity, and such Agreement shall be deemed to be amended
accordingly.
3. Chiron confirms that, after giving effect to this Letter Agreement, the
consummation of the Combination will not conflict with or give rise to any
right of termination, cancellation or acceleration by Chiron or any of its
subsidiaries, or the loss by Ciba or any of its subsidiaries of any benefit
under, any of the Agreements.
4. The provisions of this Letter Agreement that amend, modify or otherwise
affect any Agreement shall be governed by and construed in accordance with
the choice of law provisions of such Agreement. All other provisions of this
Letter Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware, regardless of the laws that might otherwise
govern under applicable principles of conflicts of law. As used herein, the
term "including" means including, without limitation. Except as expressly set
forth herein, following the Combination each Agreement shall remain in full
force and effect in accordance with its terms.
<PAGE>
- 3 -
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us, whereupon this letter and your acceptance shall
represent a binding agreement among each of us.
Very truly yours,
Ciba-Geigy Limited
by:
Name: /s/ Peter Sidler /s/ Dr. Herbert Gut
------------------ -------------------------
Title: Peter Sidler Dr. Herbert Gut
Senior Tax and Senior Division Counsel
Corporate Counsel
Ciba-Geigy Corporation
by:
Name: /s/ John McGraw
------------------
Title: Vice President
Ciba Biotech Partnership, Inc.
by:
Name: /s/ John McGraw
------------------
Title: Vice President
The foregoing is hereby confirmed and accepted as of the date first above
written.
CHIRON Corporation
by:
Name: /s/ William G. Green
-----------------------
Title: Senior Vice President
<PAGE>
ANNEX A
to Letter Agreement
The Investment Agreement dated as of November 20, 1994 among Ciba-Geigy
Limited, a Swiss Corporation ("Ciba"), Ciba-Geigy Corporation, a New York
Corporation ("CGC"), Ciba Biotech Partnership, Inc., a Delaware Corporation
("Biotech"), and Chiron Corporation, a Delaware Corporation ("Chiron"), the
Governance Agreement dated as of November 20, 1994 (the "Governance Agreement")
among Ciba, CGC and Chiron, Market Price Option Agreement dated as of
November 20, 1994 among Ciba, CGC, Biotech and Chiron, Subscription Agreement
dated as of November 20, 1994 among Ciba, Biotech and Chiron, Cooperation and
Collaboration Agreement dated as of November 20, 1994 between Ciba and
Chiron, the Registration Rights Agreement between Biotech and Chiron dated as
of November 20, 1994, the IgF Termination Agreement dated as of January 7,
1994 between Ciba and Chiron, the Registration and License Agreement on
Optical Mapping and Sequencing Technology (including the Side Letter thereto
to which Ciba is a party) dated as of March 31, 1995 between Chiron and New
York University, the CRU Research Services and Toll Research Services
Agreements dated as of January 4, 1995 between Ciba Corning Diagnostics Corp.
and Ciba, the Reimbursement Agreement dated as of March 24, 1995 between Ciba
and Chiron, the NYU Registration and License Agreement dated as of April 2,
1995 between Ciba and Chiron and the Technology Transfer and Research
Collaboration Agreement dated as of November 15, 1995 between Ciba and Chiron.
<PAGE>
[LETTERHEAD]
December 19, 1996
Dr. Herbert Gut
Ciba-Geigy Limited
Rechtsabteilung
CH-4002 Basel, Switzerland
Dear Herbert:
The purpose of this letter is to set forth our understanding of our agreement
regarding compensation paid by Chiron for director services performed by
employees of Ciba-Geigy Limited.
1. Dr. Alex Krauer, Dr. Francois L'Eplattenier, and Pierre Doauze, the "Ciba
directors", are employees of Ciba Geigy Limited, and have performed services
as directors of Chiron Corporation beginning on January 4, 1995. Chiron
Corporation has made cash payments to the Ciba directors in return for such
services. These individuals are required to pay over to Ciba-Geigy Limited
such amounts received for director services in accordance with the terms of
their employment with Ciba-Geigy Limited. All amounts paid since January 4,
1995 for board meetings and retainer fees were paid by the Ciba directors to
Ciba-Geigy Limited.
2. Ciba-Geigy Limited desires to have payment made directly to Ciba-Geigy
Limited for fees paid by Chiron for director services performed by employees
of Ciba-Geigy Limited.
3. Based on the above, all future cash payments made by Chiron in return for
directors services performed by employees of Ciba-Geigy Limited will be
remitted directly to Ciba-Geigy Limited. Payments will be made in U.S.
dollars, drawn on a U.S. bank, and forwarded directly to you or such other
party you may designate.
Please sign where indicated below to confirm your agreement with the above
arrangement.
Very truly yours,
/s/ William G. Green
William G. Green, Esq.
Senior Vice President & General Counsel
I agree with the above arrangement.
/s/Dr. Herbert Gut Dec. 20, 1996
- -------------------------------------- --------------------
Dr. Herbert Gut, Senior Legal Counsel Date
Ciba Geigy Limited
/s/Dr. Peter Sidler Dec. 20, 1996
- -------------------------------------- --------------------
Dr. Peter Sidler, Head of Date
Corporate Legal & Tax Matters
<PAGE>
CHIRON
[Letterhead]
February 4, 1992
As of December 12, 1991
Hoffmann-La Roche Inc.
340 Kingsland Street
Nutley, New Jersey 07110
Attention: David E. Alpert, Esq.
Ladies and Gentlemen:
You have requested a letter confirming the treatment of Roche's existing
warrants ("Warrants") to purchase an aggregate of 1,000,000 shares of
common stock of Cetus Corporation ("Cetus") in the proposed merger of Cetus
with a subsidiary of Chiron Corporation ("Chiron"). Pursuant to Section
1.08 of the Agreement and Plan of Merger dated as of July 21, 1991, by and
among Cetus, Chiron and Chiron Acquisition Subsidiary, Inc. (the "Merger
Agreement"), which was filed as Appendix VIII to the Cetus/Chiron Joint
Proxy Statement/Prospectus dated October 30, 1991, Chiron has agreed to
assume the Warrants effective as of the "Effective Time" (as defined in the
Merger Agreement).
Pursuant to the Merger Agreement and to the Stock Purchase and Warrant
Agreement between Cetus and Hoffmann-La Roche Inc. dated as of May 9, 1989
(the "Warrant Agreement"), upon the Effective Time the Warrants will be
changed into Warrants to purchase 300,000 shares of Chiron common stock at
$52.50 per share, subject to the terms and conditions of the Warrants and the
Agreement, and subject to further adjustment from time to time, all as stated
in the Warrants and the Warrant Agreement.
Chiron further agrees that upon the Effective Time it will assume all
obligations of Cetus owed immediately prior to the Effective Time under the
Warrant Agreement as if Chiron had originally executed the Warrant Agreement
in the place and stead of Cetus and had been named the "Seller" therein,
and you agree that all obligations under the Warrant Agreement that you owe
to Cetus immediately prior to the Effective Time shall be owed to Chiron from
and after such Effective Time as if Chiron had originally executed the Warrant
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 2
Agreement in the place and stead of Cetus, subject to the following
exceptions, terms and conditions, in respect of which terms defined in the
Warrant Agreement are used in their defined senses:
1. (a) Chiron's obligations as to registration under Article 6 of the
Warrant Agreement shall not extend to the Shares, but only to the Warrant
Shares.
(b) The references to "both the Shares and the Warrants" and to
"the Shares and the Warrants" in the second sentence of Section 10.8 of the
Warrant Agreement shall be deemed to be references solely to "the Warrants."
In addition, Eligible Owners (as defined in Section 2 of this letter
agreement) shall have registration rights as specified in this letter
agreement, as shall other Persons whose Registrable Warrant Shares are
included in a demand made under subsection 2(c) of this letter agreement, or
whose Registrable Warrant Shares are otherwise included in a registration
statement under Article 6 of the Warrant Agreement as amended by this letter
agreement. As a condition upon the rights of registration provided for in
Article 6 of the Warrant Agreement as amended by this letter agreement, every
Eligible Owner or other Person whose Registrable Warrant Shares are included
in a registration statement required to be maintained under such Article 6 as
amended hereby shall comply with the obligations of the "Purchaser" contained
in such Article 6, as fully as if such Person were the Purchaser thereunder,
but only in respect of the Warrant Shares beneficially owned by such Person.
2. The obligations of Chiron with respect to registration of the
Warrant Shares shall be modified as follows:
(a) As used in this letter agreement, the following terms shall have
the following meanings:
"Registrable Warrant Shares" means Warrant Shares which at the time of
determination have not been sold by their holder or holders pursuant to an
effective registration under Article 6 of the Warrant Agreement as amended by
this letter agreement and which at the time of determination may not publicly
and free of volume limitations be sold without registration under the 1933
Act. "Sell publicly" as used in this definition and otherwise in this Section
2 is a reference to selling to the general public, it being understood that
the ability to sell without registration to specific classes of buyers on a
public basis, such as under Rule 144A of the General Rules and Regulations
under the 1933 Act, is not an ability to "sell publicly" as used in this
definition or otherwise in this Section 2. "Without volume limitations" as
used in this definition and otherwise in this Section 2 shall also include
reference to selling without limitations as to volume even though the Warrant
Shares proposed to be sold
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 3
are of a quantity which is less than any applicable volume limitations, so
long as such volume limitations are also combined with limitations on the
manner of sale, as they presently are under paragraphs (e), (f) and (g) of
Rule 144 of the General Rules and Regulations under the 1933 Act. If the
Warrant Shares proposed to be sold are entitled at the time of such proposal
to the benefits of paragraph (k) of such Rule 144 (or any substantially
similar successor provision), they then may be sold "without volume
limitations" as such term is used in this definition and otherwise in this
Section 2.
"Registrable First Warrant Shares" means those Registrable Warrant
Shares which have been issued, or which may be issued, upon exercise of the
First Warrant.
"Registrable Second Warrant Shares" means those Registrable Warrant
Shares which have been issued, or which may be issued, upon exercise of the
Second Warrant. For the purposes of this definition and of any other
definition in this Section 2, it shall be deemed that the Second
Warrant is exercisable although it is exerciseability has not yet commenced,
and it shall be deemed that any Person is the beneficial owner of Warrant
Shares for which the Second Warrants beneficially owned by such Person might
be exerciseable, notwithstanding that their exerciseability may not have
commenced.
"Eligible Owner With Respect to First Warrant Shares" is a reference
to a Person or Persons who at the time of determination is or are, either
individually or collectively, the beneficial owner of a majority of the
Registrable First Warrant Shares.
"Eligible Owner With Respect to Second Warrant Shares" is a reference
to a Person or Persons who at the time of determination is or are, either
individually or collectively, the beneficial owner of a majority of the
Registrable Second Warrant Shares.
"Eligible Owner" is a collective reference to either an Eligible Owner
With Respect to First Warrant Shares or an Eligible Owner With Respect to Second
Warrant Shares.
"Maintain the effectiveness of a registration" for a specified period,
means, at the option of Chiron, either (a) to maintain the effectiveness of the
S-4 Registration for such specified period or (b) to file another registration
statement under the 1933 Act to cover the Registrable Warrant Shares which
are included in the demand, and to prosecute its effectiveness diligently,
and to maintain for such specified period the effectiveness of such
registration statement under the Act; and
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 4
in any such case to perform the obligations referred to in Section 6.1 of the
Warrant Agreement, for such specified period, together with the related
obligations of Section 6.2 and 6.4 of the Warrant Agreement, so that Warrant
Shares may be sold by their holders under such registration statement. In
case of an election by Chiron to maintain the effectiveness of a registration
upon a demand through use of the S-4 Registration, Chiron shall as promptly
as is reasonably possible (and in any event, if the prospectus to be used may
then be a prospectus on Form S-3 or other similar short form, within ten
business days after receipt of the demand, provided that Chiron has been
timely provided with such information concerning each Person proposing to
offer and sell Warrant Shares under such registration, and each such Person's
proposed method of offer and sale of such Warrant Shares, as shall be
required by the 1933 Act and the rules, regulations and forms thereunder to
be included in such registration), file with the Securities and Exchange
Commission ("SEC"), a post-effective amendment or supplement to prospectus or
other papers and documents appropriate to make such S-4 Registration an
effective registration with respect to the Registrable Warrant Shares included
in the demand. In case Chiron elects to maintain the effectiveness of a
registration upon a demand by filing another registration statement under
the 1933 Act, such registration statement shall be filed by Chiron as
promptly as is reasonably possible (and, in any event, if Chiron is then
eligible to file such registration statement on Form S-3 or other similar
short form, within ten business days after the receipt of such demand,
provided that Chiron has been timely provided with such information
concerning each Person proposing to offer and sell Warrant Shares under such
registration, and each such Person's proposed method of offer and sale of
such Warrant Shares, as shall be required by the 1933 Act and the rules,
regulations and forms thereunder to be included in such registration). A
reference to a "similar short form" refers to provisions, similar to those
presently contained in Form S-3 under the 1933 Act, under which substantial
information, including annual, and, if applicable, quarterly financial
statements, of the issuer, need not be physically presented in the prospectus
but may be incorporated by reference from other filings with the SEC.
"S-4 Registration" means Chiron's registration statement No. 33-43574
on Form S-4 under the 1933 Act which became effective on October 30, 1991.
(b) The Warrant Shares have been registered under the 1933 Act on
the S-4 Registration, but Chiron makes no representation that there exists
a current prospectus under the S-4 Registration which may be used in
connection with the offer or sale of Warrant Shares.
(c) Upon demand of any Eligible Owner made from time to time, Chiron
shall maintain, for such period of time (not to exceed nine months) as is
specified by
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 5
the Eligible Owner in such demand, the effectiveness of a registration in
respect of the offer and sale of the Registrable Warrant Shares referred to
in such demand; provided that only six such demands may be made in total
under this subsection 2(c), and only three may be made by an Eligible Owner
With Respect to the First Warrant Shares, and only three may be made by an
Eligible Owner With Respect to the Second Warrant Shares. An Eligible Owner
who is both an Eligible Owner with Respect to the First Warrant Shares and an
Eligible Owner with Respect to the Second Warrant Shares shall be subject
only to the overall limitation of six demands for registration, and any such
demand by such an Eligible Owner which relates both to Registrable First
Warrant Shares and Registrable Second Warrant Shares shall nonetheless be
considered only a single demand, and for the purposes of computing the
numerical limitations on demands such single demand shall be allocable to the
Registrable First Warrant Shares or the Registrable Second Warrant Shares as
elected in such demand.
(d) Notwithstanding any provision of Section 6 of the Warrant
Agreement Chiron shall not be required to continue to maintain the
effectiveness of any particular registration for particular Warrant Shares
after all of such Warrant Shares so included in such registration have been
sold by their holders under such registration, or to maintain the effectiveness
of any registration for any of the Warrant Shares at any time except as
provided in this Section 2, or (notwithstanding any other provision of this
Section 2 or any provision of Section 6 of the Warrant Agreement) to maintain
the effectiveness of any registration for any Warrant Shares which have been
sold by their holders under an effective registration under Article 6 of the
Warrant Agreement as amended by this letter agreement or if the entirety of
the Warrant Shares which have not been the subject of such sales may then be
sold publicly without volume limitations.
(e) Upon demand of an Eligible Owner any registration statement under
Section 2(c) of this letter agreement, and the related prospectus, shall relate
to the exercise of the Warrants as well as, or in lieu of, the sale of the
Warrant Shares by Purchaser; but this subsection (e) shall not increase the
number of registrations which may be demanded hereunder.
(f) If a demand for registration is made by an Eligible Owner which is
or are not the beneficial owner or owners of the entirety of the Registrable
Warrant Shares, such Eligible Owner may include any or all of the remainder of
the Registrable Warrant Shares in its demand and the holder or holders of such
shares to be registered shall be entitled to the benefits of Article 6 in
respect of such demand as specified in Section 1(b) of this letter agreement,
on the terms therein specified.
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 6
(g) Notwithstanding any other provision of this Section 2, for so long
as there shall be any Registrable Warrant Shares, during a period when Chiron
is maintaining an effective registration pursuant to subsection (b) or
subsection (c) of this Section 2, if Chiron shall propose to effect an
underwritten public offering for cash of Common Stock or securities
evidencing the right of purchase of or privilege of conversion or exchange
for Common Stock, then
(i) at the request of the managing underwriter of such public
offering, the holders of Registrable Warrant Shares then being
registered hereunder shall refrain from sales of such Registrable
Warrant Shares (except in transactions not requiring registration)
except as provided in paragraph (ii) below for the period specified
by the managing underwriter (which period shall not exceed 90 days);
provided that if any holder of Registrable Warrant Shares then being
registered hereunder does not sell Registrable Warrant Shares pursuant
to paragraph (ii) below, the period for which Chiron shall maintain
the effectiveness of the registration statement covering the
Registrable Warrant Shares which is then in effect shall be extended
for such period for which any such Person is required to refrain from
selling by this paragraph (i); and
(ii) if any such Person is required to refrain from sales pursuant
to paragraph (i) above, then any such Person shall be afforded an
opportunity to participate in such underwritten public offering by
including such quantity of outstanding Registrable Warrant Shares in
such underwritten public offering as the managing underwriter
determines in its sole discretion will not jeopardize the success of
the offering by Chiron and such Registrable Warrant Shares shall be
offered on the terms and conditions as agreed upon between Chiron and
the underwriters selected by Chiron, making due allowance for
differences in representations, warranties and the like between an
issuer and a selling securityholder.
(h) Chiron may make reasonable requests of any Person who is not the
record holder of Warrant Shares or of Warrants who claims to be the beneficial
owner of Warrant Shares for evidence establishing that such Person is the
beneficial owner of such Warrant Shares.
3. (a) The references in Section 3.3(a), 3.3(b), and Section 3.6(b)
of the Warrant Agreement to "50,000 Warrant Shares", shall, from and after the
Effective Time to be deemed to be references to "15,000 Warrant Shares" with
respect to the common stock of Chiron.
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 7
(b) Any stockholder rights plan of Chiron in effect at the Effective
Time or thereafter effective shall be deemed to be a "successor or additional
stockholder rights plan" of Seller for the purpose of construction,
application and enforcement of the final sentence of Section 3.7(e) of the
Warrant Agreement.
(c) The references in Section 3.3(b) and (c) of the Warrant Agreement,
governing the exercise of the Second Warrant, to a "fiscal year" ending June
30 of each calendar year, shall, from and after the Effective Time, be deemed
to be references to a special computation year ending on the 30th day of June
in each calendar year and commencing on the first day of July in the
preceding calendar year, whether or not such special computational year shall
be the fiscal year of Chiron; it being understood by the parties that at the
present time the fiscal year of Chiron is the calendar year, and it being the
intent of the parties that the period for computation of the exerciseability
of the Second Warrant is not to be changed as a result of the Merger.
4. From and after the Effective Time, appropriate adjustments shall
be deemed to be made in the text of the First Warrant and of the Second
Warrant to reflect the succession of Chiron to the obligations of Cetus in
respect of the Warrants and the other provisions hereof, and upon the
surrender of the certificate evidencing any such Warrant, a new certificate
for such Warrant reflecting the same, together with such formal changes as
may be appropriate and agreed upon between the holders of such Warrant and
Chiron, shall be issued in lieu thereof to such holder.
5. From and after the Effective Time, any demand or notice required or
permitted to be given to the Seller under the Warrant Agreement shall be
given exclusively to:
Chiron Corporation
4560 Horton Street
Emeryville, California 94608
Attention: Chief Executive Officer
With a copy to:
Chiron Corporation
4560 Horton Street
Emeryville, California 94608
Attention: General Counsel
<PAGE>
Letter to David E. Alpert, Esq.
February 4, 1992
Page 8
Such address may be changed from time to time as provided in the
Warrant Agreement.
6. This letter agreement does not affect any provision of the Warrant
Agreement other than the provisions expressly referred to above, and none of
the other provisions of the Warrant Agreement shall be deemed to be amended
hereby. This letter agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
If the foregoing accurately expresses our understanding, please so
indicate by your countersignature in the place provided below.
Very truly yours,
CHIRON CORPORATION
By: /s/ William G. Green
--------------------------------
Name: William G. Green
Title: Vice President and
General Counsel
Agreed to:
HOFFMANN-LA ROCHE INC.
By: /s/ Harold F. Boardman (Approved as to Form
---------------------------- Law Dept.)
Name: Harold F. Boardman
Title: Vice President and
General Counsel
<PAGE>
EXHIBIT 10.58
DESCRIPTION OF CHIRON'S 1996
EXECUTIVE OFFICER VARIABLE COMPENSATION PROGRAM
The compensation of Chiron's executive officers (including annual
variable cash compensation) is determined by the Compensation Committee of
the Board of Directors. For 1996, the Compensation Committee continued the
Company's approach that base salaries for executive officers generally should
be targeted to the median (50th percentile) of salaries for benchmark
positions in comparator companies. Variable cash compensation for executive
officers overall was targeted to yield total cash compensation at the 50th
percentile, but with the opportunity to receive total cash up to the 75th
percentile, as shown by comparative data, based upon individual, business
unit, and overall Company performance.
In evaluating the Company's overall performance in 1996, the Committee
reviewed the quantitative Measurement Standard adopted by the Board pursuant
to the Governance Agreement with Novartis (successor to Ciba-Geigy, Ltd.).
The Measurement Standard included: (i) relative total stockholder return
measured against two indices of comparator companies, (ii) revenue and
earning performance, and, (iii) measures of innovation based principally
upon accomplishment of specific milestones. While the Committee found the
Measurement Standard to have been satisfied for 1996, it noted that the
Company's overall performance against these quantitative measures was
disappointing, principally because of low relative stock price appreciation.
The
<PAGE>
Committee also evaluated the Company's performance from a qualitative
perspective and concluded that continued strategic progress by the Company,
particularly in integrating and positioning each of its business units for
sustainable and profitable growth and to play an important role in the
markets it serves, balanced the quantitative measures discussed above, with
the result that the component of executive officer compensation that depends
upon overall Company performance was slightly above the target level for 1996.
The Committee also reviewed management's quantitative assessment of the
performance of each business unit in 1996 as measured by the specific
"performance metrics" established for each unit. These metrics included
financial targets and specific innovation milestones linking each unit's
contribution to the Company's overall performance on the Measurement Standard
described above.
Chiron's 1995 Executive Officer Variable Cash Compensation Plan, a
performance-based plan qualifying for certain income tax benefits under
Section 162(m) of the Internal Revenue Code, was not used in 1996.
- 2 -
<PAGE>
[LETTERHEAD]
January 8, 1997
Magnus Lundberg
Gullvivivevagen #5
75655 Uppsala, Sweden
Dear Magnus:
The following is what is hopefully the final list of provisions related to
your employment in Emeryville that were not included in or have been revised
since your offer letter.
You will be provided a relocation allowance of $30,000. This is based on an
estimate of the cost to move your household goods from Sweden to Emeryville
and back. The money may be used for the shipment of household goods you wish
to bring with you and the purchase of supplemental household items here. Our
records show that the expenses to date against this amount are $24,639.00.
The Company will provide you a leased automobile and will reimburse you for
the following expenses associated with its use; insurance, maintenance parts,
repairs and gas for business and personal use.
The Company will provide you with financial assistance in the renting of a
home through a monthly rental payment of $3,100.00.
Sincerely,
/s/ Barbara Kerr
Barbara Kerr
Vice President Human Resources
AGREED & ACCEPTED:
/s/ Magnus Lundberg
- ------------------------
Magnus Lundberg
<PAGE>
CHIRON
[Letterhead]
[Date]
Re: Award of Performance Units
Dear _____________:
Pursuant to the Chiron 1991 Stock Option Plan (the "Plan"), Chiron
Corporation (the "Company") hereby confirms the award to you of performance
units ("Performance Units") with respect to its Common Stock ("Common Stock").
Adjusted for the four-for-one stock split effective as of August 2, 1996, your
award is ____ Performance Units. These Performance Units are granted to you in
accordance with the restrictions, terms, and conditions hereinafter set forth
and are in all respects limited and conditioned by the provisions of the Plan.
1. Each Performance Unit entitles you to receive one share of
Common Stock multiplied by the Payout Multiple determined in accordance with
Paragraph 2 below, provided that your Performance Units have not been terminated
or canceled before December 31, 1998 (the "Determination Date") in accordance
with the provisions hereinafter set forth. However, the Compensation Committee
of the Board of Directors retains the right in extraordinary circumstances at
any time before payment would otherwise be made under the Performance Units to
reduce the Payout Multiple, or to determine not to make any payment with respect
generally to all Performance Units with respect to this performance period.
<PAGE>
2. The Payout Multiple shall be determined as soon as practicable
following the Determination Date and will be the factor opposite the
Performance Factor for the three fiscal years of the Company ending on the
Determination Date (the "Performance Period"):
Performance Factor Payout Multiple
------------------ ---------------
Less than or equal to .85 0
.86 .50
1.00 .75
1.10 .88
1.20 1.00
1.30 1.25
1.40 1.50
1.70 1.85
1.90 2.15
2.20 2.50
2.50 or greater 3.00
If the Performance Factor falls in between two of the Performance Factors
listed in the above chart, the Payout Multiple will be determined by straight
line interpolation from the chart, rounding the Payout Multiple to the
nearest one one-hundredth. For example, if the Performance Factor is 1.80,
the Payout Multiple will be 2.00.
The Performance Factor is based on a series of calculations where the total
return of Chiron stock is compared to the total return earned on a chosen
stock-based benchmark. The Chiron Total Shareholder Return ("TSR") is the
total shareholder return on Common Stock rounded to the nearest one
one-hundredth. The Benchmark TSR is the average total shareholder return on
common stock of companies included in the S&P Healthcare Index (SPHLTC) and
the AMEX Biotechnology Index (BTK), weighted 75% to the former index and 25%
to the latter and including dividends. The relative return calculation
equals (i) the Chiron TSR LESS (ii) the Benchmark TSR PLUS (iii) one. The
Performance Factor for the three-year Performance Period will be calculated
by averaging each of the thirty-six month-end calculations as described in
the previous sentence. If the Performance Factor does not exceed .85, your
Performance Units will be cancelled and no amounts will be paid thereunder.
3. If your employment with the Company terminates for any
reason before the Determination Date, your Performance Units will be cancelled
and no amounts will be paid
<PAGE>
[DATE]
Page 3
thereunder; provided that if (i) your employment terminates by reason of
death, permanent disability, retirement (on or after age 65 or pursuant to a
uniform retirement policy or the retirement provisions of any defined benefit
pension plan adopted by the Company) at any time before the Determination
Date or (ii) the Company terminates your employment after December 31, 1997
but before the Determination Date for any reason other than cause, a reduced
number of Performance Units (determined by multiplying the total number of
Performance Units set forth in Paragraph 1 by a fraction, the numerator of
which is the number of whole months of your actual employment during the
Performance Period and the denominator of which is thirty-six (36)), will
remain outstanding and will be payable at the end of the Performance Period
as if you had remained employed through the Determination Date. For this
purpose, cause includes, but is not limited to, any act of dishonesty,
willful misconduct, fraud, embezzlement or any unauthorized disclosure of
confidential information or trade secrets. You will be deemed to be
permanently disabled if, by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration
of not less than 12 months, you are unable to engage in any substantial
gainful employment.
4. Any payment under your Performance Units shall be subject to
applicable tax withholding obligations. In order to satisfy those obligations,
the number of shares of Common Stock which you would otherwise be entitled to
receive under your Performance Units will be reduced by that number of shares
which, as of the date of payment, has an aggregate Fair Market Value (as
determined under the Plan) equal to the total amount of tax withholding
obligations applicable to the shares otherwise issuable on that date.
5. Your Performance Units hereunder may not be sold, assigned,
transferred, alienated, subject to garnishment or otherwise encumbered in any
manner other than by transfer by Will or the laws of descent and distribution.
In the event of your death prior to the issuance of shares of Common Stock or
cash under your Performance Units, any shares or cash issuable thereunder by
reason of your death will pass pursuant to your Will or by the laws of descent
and distribution.
6. The issuance of shares of Common Stock or payment of cash
hereunder shall be subject to compliance by the Company and yourself or your
beneficiary with all applicable requirements of law relating thereto and with
all regulations of any stock exchange on which the Common Stock may be listed at
the time of such issuance. You should also be aware that for purposes of the
short-swing liability rules of Section 16(b) of the Securities Exchange Act of
1934 [which requires the forfeiture of any profit realized by an officer from
the purchase and sale (or sale and purchase) of Company Stock within six
months], the issuance of shares will be considered a non-exempt purchase if the
shares are sold or otherwise disposed of within six months after issuance.
7. In the event any change is made to the Common Stock issuable
hereunder after August 2, 1996 and while your Performance Units are outstanding
(whether
<PAGE>
[DATE]
Page 4
by reason of merger, consolidation, reorganization, recapitalization, stock
dividend, stock split, combination of shares, exchange of shares, or other
change in capital structure without receipt of consideration), then the
Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee") will make appropriate adjustments to such
Performance Units to prevent the enlargement or dilution of your rights
thereunder.
8. Neither you nor, in the event of your death, your
beneficiary shall have any rights as a shareholder with respect to shares of
Common Stock issuable hereunder until you shall have been issued a stock
certificate for such shares. It is the intention of the parties that the
Company's obligations under your Performance Units are unfunded for purposes of
the Internal Revenue Code and that the Employee Retirement Income Security Act
of 1974 does not apply to your Performance Units.
9. The Compensation Committee has full authority to administer
the Plan, including authority to interpret and construe any provision thereof
and hereof and to adopt such rules and regulations for administering the Plan as
it may deem necessary. Decisions of the Compensation Committee are final and
binding on all persons who have an interest in the Plan.
10. This award shall not constitute a contract of employment.
The Company (or any subsidiary employing you) may terminate or change the terms
of your employment at any time and for any reason and whether or not such
termination or change causes a loss of rights under the Plan, except to the
extent that the terms of any employment contract or, with respect to changes in
your compensation, any written compensation agreement between the Company and
you may expressly provide otherwise.
Very truly yours,
CHIRON CORPORATION
By _____________________
<PAGE>
EXHIBIT 11
CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
-------------- --------------- --------------
<S> <C> <C> <C>
EARNINGS PER SHARE
Net income (loss) available for common shares and common
stock equivalent shares deemed to have a dilutive effect... $ 55,145,000 $ (512,463,000) $ 18,325,000
-------------- --------------- --------------
-------------- --------------- --------------
Primary earnings (loss) per share.............................. $ 0.31 $ (3.15) $ 0.13
-------------- --------------- --------------
-------------- --------------- --------------
Fully diluted earnings (loss) per share........................ $ 0.31 $ (3.15) $ 0.13
-------------- --------------- --------------
-------------- --------------- --------------
Shares used in primary earnings (loss) per share computation:
Weighted average common shares outstanding................. 169,345,000 162,442,000 131,888,000
Weighted average dilutive incremental common shares
issuable from exercise of warrants....................... 257,000 -- 272,000
Weighted average dilutive incremental common shares
issuable under employee stock option programs............ 7,450,000 -- 5,012,000
-------------- --------------- --------------
Total common shares and common stock equivalent shares
deemed to have a dilutive effect......................... 177,052,000 162,442,000 137,172,000
-------------- --------------- --------------
-------------- --------------- --------------
Shares used in fully dilutive earnings (loss) per share
computation:
Weighted average common shares outstanding................. 169,345,000 162,442,000 131,888,000
Weighted average dilutive incremental common shares
issuable from exercise of warrants....................... 257,000 -- 412,000
Weighted average dilutive incremental common shares
issuable under employee stock option programs............ 7,451,000 -- 6,552,000
-------------- --------------- --------------
Total common shares and common stock equivalent shares
deemed to have a dilutive effect......................... 177,053,000 162,442,000 138,852,000
-------------- --------------- --------------
-------------- --------------- --------------
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
THE DISCUSSION BELOW CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CHIRON
CORPORATION (THE "COMPANY" OR "CHIRON"), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED 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.
Chiron is a diversified, science-driven, market-directed healthcare company
that applies biotechnology and other techniques of modern biology and chemistry
to develop, produce and sell products intended to improve the quality of life by
diagnosing, preventing and treating human disease. Chiron participates in four
human healthcare markets: (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; (iii) adult and
pediatric vaccines; and (iv) ophthalmic surgical products, including instruments
and devices used for the surgical correction of vision and intraocular implants
to deliver drugs to the eye. Chiron also develops or acquires new technologies,
employing these technologies to discover new products for the Company or for its
partners.
BUSINESS COMBINATIONS
AGREEMENTS WITH NOVARTIS AG ("NOVARTIS")
As discussed further in Note 2 of the Notes to Consolidated Financial
Statements (collectively, the "Notes"), effective January 1, 1995, under a
series of agreements between Chiron and Novartis, successor to Ciba-Geigy Ltd.
("Ciba"), including an investment agreement, a cooperation and collaboration
agreement and a governance agreement (collectively the "Agreements"), Novartis
increased its ownership interest in Chiron common stock to 49.9 percent (now
approximately 46 percent as a result of subsequent stock issuances to parties
other than Novartis). At the same time, Chiron acquired from Novartis all of the
outstanding common stock of Chiron Diagnostics Corporation ("Chiron
Diagnostics"), formerly Ciba Corning Diagnostics Corp., and Novartis' interest
in Chiron Vaccines Company ("Chiron Vaccines"), formerly Chiron Biocine Company,
and Chiron S.p.A., formerly Biocine S.p.A., in exchange for 26.4 million
newly-issued Chiron common shares and a cash payment of $23.5 million. The
acquisitions of Chiron Diagnostics and Novartis' interests in Chiron Vaccines
and Chiron S.p.A. were accounted for under the purchase method of accounting and
resulted in a $222.9 million charge in 1995 against earnings for purchased
in-process technology. The results of operations of Chiron Diagnostics, Chiron
S.p.A. and Chiron Vaccines are included in Chiron's consolidated operating
results from January 1, 1995, forward. Chiron's share of the operating results
of Chiron S.p.A. and Chiron Vaccines were included in the Company's 1994 results
under the equity method of accounting.
In connection with the Agreements, Novartis agreed to guarantee $425.0
million of new debt for Chiron, agreed to provide $250.0 million (which may be
increased to $300.0 million subject to certain reductions in the debt guarantee)
over five years in support of research at Chiron and provided Chiron with the
option to issue up to $500.0 million of new equity to Novartis.
During 1995, Chiron and Novartis entered into a limited liability company
agreement ("the Research Funding Agreement") to utilize research funding to be
provided by Novartis. Under the terms of the agreement, Novartis will fund from
time to time through December 31, 1999, at Chiron's request, research
34
<PAGE>
and development costs for adult vaccines, pediatric vaccines and insulin-like
growth factor-1 ("IGF-1"). Annual funding amounts are subject to certain
limitations. In return, Novartis will receive an interest in a stream of
variable royalties from future worldwide sales of certain adult vaccines,
certain pediatric vaccines and IGF-1. Royalties will be paid for a minimum
period of ten years, subject to an extension under certain conditions, following
the later of October 1, 2001, or the date of the first commercial sale of
individual products covered by the agreement. In addition, Novartis will also
receive an interest in promotional rights, in countries other than in North
America and Europe, for certain adult vaccines.
Under the terms of the Research Funding Agreement, Chiron was granted an
option through December 31, 2001, to repurchase Novartis' interest, at cost plus
an agreed-upon return, as defined in the agreement. In addition, if Chiron
chooses to exercise the option, Novartis will receive an option to acquire
certain exclusive marketing rights, in countries other than those in North
America and Europe, with respect to certain adult vaccines in countries in which
Novartis has exercised its co-promotion rights. Pursuant to the agreement,
Chiron recognized $72.0 million and $27.0 million of funding from Novartis
during 1996 and 1995, respectively, as collaborative agreement revenues. Chiron
anticipates receiving substantial additional funding from Novartis in future
periods, pursuant to the terms of the Research Funding Agreement.
As discussed in Note 2 of the Notes, in November 1996, Chiron entered into
another agreement with Novartis that involved certain patent rights to herpes
simplex virus thymidine kinase ("HSV-tk"); an extension of the contract for
Chiron's promotional efforts in the United States ("U.S.") for Novartis' product
Aredia-TM- (pamidronate disodium for injection) through a co-promotion
arrangement; certain changes to the Research Funding Agreement involving
research funding; and changes to Novartis' commitment to provide debt guarantees
pursuant to the Agreements. The November 1996 agreement was primarily executed
in conjunction with a consent and agreement that resolves the Federal Trade
Commission's review of the merger between Ciba and Sandoz Ltd., which created
Novartis.
Under the November 1996 agreement, Chiron agreed to grant royalty-bearing
licenses to Rhone-Poulenc Rorer Inc. and Novartis for HSV-tk in the field of
gene therapy. As partial consideration, Novartis will pay Chiron up to $60.0
million over the next five years, $15.0 million of which relates to 1997.
Novartis also agreed to cross-license to the Company certain Novartis-controlled
gene therapy technologies.
Additionally, Novartis and the Company agreed to a modification of Chiron's
contract, which expires in March 1997 and provides Chiron with sole promotional
rights in the U.S. with respect to Novartis' product Aredia-TM-. Under the new
arrangements, Chiron, through a co-promotion arrangement with Novartis, will
promote Aredia-TM- for two years after a six-month transitional period.
Novartis and Chiron also agreed to extend the deadline for payment of the
repurchase amount under the Research Funding Agreement from January 1, 2002 to
January 1, 2005, if Chiron chooses to exercise this option. However, this will
not affect the term of the repurchase option which expires on December 31, 2001.
Novartis also agreed to extend the term during which Novartis is committed
to provide a debt guarantee from 1999 to January 1, 2008. Further, Novartis
granted an option to Chiron to increase the amount of the debt guarantee from
$425.0 million to $725.0 million with a corresponding equivalent dollar
reduction in the equity put now available to Chiron (from $500.0 million to
$200.0 million).
Also, should Chiron elect to replace certain existing convertible debt,
Novartis agreed to provide additional guarantees totaling $200.0 million for
such purposes.
Definitive agreements regarding certain aspects of the November 1996
agreement with Novartis will be drafted in 1997.
35
<PAGE>
OTHER BUSINESS COMBINATIONS
As discussed further in Note 2 of the Notes, on March 31, 1995, Chiron
Vision acquired the surgical division of IOLAB from Johnson & Johnson ("J&J")
for approximately $95.0 million. The acquisition was accounted for under the
purchase method of accounting and resulted in a $10.3 million charge against
1995 earnings for purchased in-process technology. The Company recorded
additional charges in 1995 for IOLAB restructuring and integration-related
expenses totaling $16.9 million. IOLAB's results of operations are included in
Chiron's consolidated operating results from March 31, 1995, forward.
Additionally, as discussed further in Note 2 of the Notes, on September 29,
1995, Chiron acquired all of the outstanding common stock of Viagene, Inc.
("Viagene") in exchange for approximately $35.5 million in cash and 3.7 million
shares of Chiron common stock. Additionally, on September 29, 1995, unexercised
options to purchase Viagene common stock were converted into options to purchase
approximately 528,000 shares of Chiron common stock. The acquisition was
accounted for under the purchase method of accounting and resulted in a $130.3
million charge against 1995 earnings for purchased in-process technology.
Viagene's results of operations are included in Chiron's consolidated operating
results from September 29, 1995, forward. Prior to September 29, 1995, Chiron
accounted for its interest in Viagene at fair value as a marketable equity
investment.
As discussed further in Note 2, in July 1996, Chiron purchased a 49 percent
interest in the human vaccine business of Behringwerke AG, a subsidiary of
Hoechst AG, a German company. The total acquisition price, which was payable in
cash, was approximately $120.0 million, including costs directly related to the
acquisition. Under the terms of the agreement, Chiron has an option to purchase
the remaining 51 percent interest in the joint venture in March 1998, 1999, 2000
or 2001, and Behringwerke AG has the option to require Chiron to purchase the
remaining interest in March 2001. During the period of mutual ownership, Chiron
and Behringwerke AG will operate the vaccine business as a joint venture which
has been named Chiron Behring GmbH & Co. ("Chiron Behring"). Results of the
venture are reported on a one-month lag.
As discussed further in Note 4 of the Notes, in September 1996, Chiron
entered into an agreement with Biological and Popular Culture, Inc. ("BPC"), a
newly organized holding company for General Injectables & Vaccines, Inc. and
affiliated companies (collectively, "GIV"), pursuant to which GIV agreed to
perform certain distribution and promotional services for Chiron's vaccine
products in the U.S. The initial term of the service agreement is five years,
with potential one year extensions thereafter. In connection with the agreement,
Chiron invested $30.0 million in BPC, of which $13.8 million consisted of BPC
voting preferred stock, which is convertible at Chiron's option into 30 percent
of the outstanding common stock of BPC. The remainder of the $30.0 million
investment consisted primarily of interest-bearing loans. Results of the joint
business are reported on a one-quarter lag.
36
<PAGE>
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 years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Diagnostic products.................................... $ 566,221 $ 541,113 $ 21,678
Ophthalmic products.................................... 211,004 176,951 106,062
Vaccine products....................................... 91,934 74,837 --
Betaseron-TM- sales.................................... 67,238 67,666 100,121
Oncology products...................................... 64,078 58,042 43,254
Other products......................................... 4,352 4,244 4,851
------------ ---------- ----------
$ 1,004,827 $ 922,853 $ 275,966
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Diagnostic product sales include direct sales and sales-type leases of
fully-automated, random-access immunodiagnostic testing systems (ACS:180-TM-,
automated chemiluminescence system) and reagents for these systems, as well as
sales of critical blood analyte systems (CBA-TM-), clinical chemistry products
and manual immunodiagnostic systems. Sales of diagnostics products increased
from $541.1 million in 1995 to $566.2 million in 1996. The increase of $25.1
million, or 5 percent, is primarily due to increased sales of branched DNA probe
tests for human immunodeficiency virus ("HIV") and increased immunodiagnostics
sales. The growth in immunodiagnostics product sales is primarily due to a 23
percent increase in reagent sales resulting from continued penetration of the
fully-automated instruments market. ACS:180-TM- placements increased 27 percent
during 1996 as compared to 1995. The increases in Chiron Diagnostics' sales were
partially offset by reduced sales of manual immunodiagnostic systems and
unfavorable foreign currency exchange rates, primarily in Japan and Germany,
which when compared to rates in effect for 1995, reduced the increase by $17.0
million.
As a result of the January 1995 acquisition of Chiron Diagnostics,
diagnostic product sales increased from $21.7 million in 1994 to $541.1 million
in 1995. The acquisition added $510.1 million of new revenues to Chiron's
operating results for 1995. Chiron Diagnostics' product sales for 1994, which
are not included in Chiron's results, were $455.7 million. Between 1994 and
1995, Chiron Diagnostics' major product lines, immunodiagnostic systems and
CBA-TM- systems, continued to increase due to increased market penetration,
particularly in international markets, ongoing menu expansion of existing ACS
systems, the introduction in 1995 of a new CBA-TM- system product line, and
favorable changes in foreign currency exchange rates between years.
Sales of ophthalmic products increased from $177.0 million in 1995 to $211.0
million in 1996. The increase of $34.0 million, or 19 percent, is primarily due
to increased sales of viscoelastic, refractive surgery products and the
Company's new Vitrasert-TM- Implant product (Cytovene-TM-; Roche Laboratories),
which is the first drug delivery system to provide local, sustained therapy for
the eye. Chiron received approval from the U.S. Food and Drug Administration
("FDA") during the first quarter of 1996 to market this product. Accordingly,
the Company recognized $12.2 million of Vitrasert-TM- Implant sales during 1996.
The 1996 results also reflect a full year of activity related to the surgical
division of IOLAB which was acquired in March 1995.
Ophthalmic sales increased from $106.1 million in 1994 to $177.0 million in
1995. The increase of $70.9 million, or 67 percent, was due to the acquisition
of the surgical division of IOLAB, the May 1994 acquisition of Laboratoires
Domilens S.A. ("Domilens"), and the continuing evolution in the marketplace
favoring foldable lens technology-based products.
37
<PAGE>
Prior to Chiron's acquisition of Novartis' interest in Chiron S.p.A. on
January 1, 1995, the Company's share of the operating results of Chiron S.p.A.
was included as joint business revenues. Since January 1, 1995, Chiron S.p.A. is
consolidated with its vaccine sales reflected as a component of total vaccine
product sales. Vaccine product sales consist of sales of pediatric and flu
vaccines primarily in Italy and to certain international health services. Chiron
S.p.A.'s vaccine products include Acelluvax-TM-, a recombinant acellular
pertussis vaccine; Agrippal-TM-, a flu vaccine; and Polioral-TM-, an oral polio
vaccine. Sales of Chiron S.p.A.'s flu vaccine are seasonal, with strong sales
generally occurring during the pre-flu season in the fourth quarter of the year.
Chiron S.p.A.'s product sales for 1994, which are not included in Chiron's
results, were $56.7 million. The increase in Chiron S.p.A.'s vaccine product
sales between 1996 and 1995 and between 1995 and 1994 is due to Chiron S.p.A.'s
expansion into new export markets of its polio and other viral and bacterial
vaccines.
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-TM- (interferon beta-1b) for Berlex.
Through December 31, 1994, Chiron manufactured Betaseron-TM- under the terms of
an amended development and supply agreement whereby the Company received payment
for the product upon shipment to Berlex. Effective January 1, 1995, Chiron
exercised its option to revert to the terms of the original Betaseron-TM- supply
agreement. Under those original terms, Chiron earns an initial partial payment
for Betaseron-TM- upon shipment to Berlex and a subsequent secondary payment for
Betaseron-TM- upon Berlex's net sales of the product to patients. Betaseron-TM-
product revenues decreased slightly from $67.7 million in 1995 to $67.2 million
in 1996. The increase in secondary payments of $24.5 million from 1995 to 1996
were primarily offset by a $24.4 million reduction in initial payments due to
lower shipments to Berlex. Betaseron-TM- revenues were significantly higher in
1994 since 1994 was the first full year of commercial shipments and as Berlex
built product inventories sufficient to supply all of the patients on the
initial enrollment list.
Future levels of Chiron's Betaseron-TM- shipments will depend upon the rate
at which new patients are enrolled from existing and future markets, the extent
to which patients, once enrolled, remain compliant with the prescribed treatment
regimen and continue to regularly receive Betaseron-TM-, 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 Proleukin-TM- (aldesleukin,
interleukin-2), increased from $58.0 million in 1995 to $64.1 million in 1996,
primarily due to a 10 percent and 13 percent increase in Proleukin-TM-
quantities sold in European and domestic markets, respectively. Average
worldwide selling prices remained roughly constant between these periods.
Oncology product sales increased from 1994 to 1995 due to an increase in
Proleukin-TM- quantities sold of 23 percent and 24 percent, respectively, in the
European and domestic markets, as well as an overall increase in average
worldwide selling prices.
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 $566.6
million, $519.4 million and $71.6 million in 1996, 1995 and 1994, respectively.
International sales of diagnostic, vaccine and ophthalmic products accounted for
the majority of the increase in foreign product sales between periods. For 1996
and 1995, 56 percent of Chiron's product sales were denominated in foreign
currencies as compared to 26 percent in 1994. The net effect of changing foreign
currency exchange rates did not significantly impact total product sales in 1996
and 1994 when compared with the respective prior years. In 1995, however, total
product sales would have been 3 percent lower if exchange rates had remained the
same as in 1994. Changing currency exchange rates have had, and will continue to
have, an impact on Chiron's results. The Company's other revenues, discussed
below, are largely denominated in U.S. dollars but are impacted by the Company's
joint partners' and collaborators' non-U.S. operations.
38
<PAGE>
Joint business revenues consist 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 company. Approximately 68 percent of
the sales of the Chiron-Ortho joint business arise from sales of hepatitis C
virus ("HCV") tests. The joint business also receives a royalty from Abbott
Laboratories ("Abbott") for Abbott's sales of HCV tests which use the Chiron
technology and which compete directly with tests marketed by Ortho. Results from
the joint business are recorded by Chiron on a one-month lag based upon
estimates supplied by Ortho and are subject to a final accounting during the
first quarter of the subsequent year. In 1996, Chiron recognized $3.8 million
from the final accounting related to 1995. The amounts recognized in 1995 and
1994 from the final accounting in prior years were nominal.
The Chiron-Ortho joint business revenue increased from $76.9 million in 1995
to $95.8 million in 1996. The increase was due to an increase in the volume of
HCV and HIV tests sold, the introduction of a new HIV antigen test, increased
profits from sales growth to Ortho's overseas affiliates, and a $6.9 million
settlement from Abbott in the third quarter of 1996 related to prior period
sales of HIV immunodiagnostic tests, all of which were partially offset by a
decline in certain product margins. Under the terms of the settlement agreement,
the joint business will receive an ongoing royalty from Abbott based on the sale
of products incorporating technology covered by certain Chiron HIV patents. In
1996, Chiron recognized $0.9 million as its share of the ongoing royalty from
Abbott pursuant to the terms of the settlement agreement.
Joint business revenues for the Chiron-Ortho joint business increased from
$74.3 million in 1994 to $76.9 million in 1995. The $2.6 million increase was
primarily due to an increase in the volume of HCV tests sold, increased royalty
revenues and Chiron's share of a legal settlement regarding certain European HCV
patents. These increases were offset by reduced margins resulting from the
renegotiation of a supply contract in 1994 with the American Red Cross and
increased research and development spending.
Joint business revenues also include $1.9 million, $4.1 million and $1.1
million in 1996, 1995 and 1994, respectively, from Chiron's 50 percent interest
in a generic cancer chemotherapeutics business with Ben Venue Laboratories, Inc.
("Ben Venue"). Chiron sold its interest in this business to Ben Venue in May
1996, resulting in a $12.2 million gain which was included in other expense,
net.
Also included in equity in earnings of unconsolidated joint businesses for
1996 is $4.2 million from Chiron's 49 percent share of the operating results of
the new joint venture with Behringwerke AG. Chiron acquired its interest in July
1996. The results of the venture are reported on a one-month lag.
As noted previously, prior to January 1, 1995, the Company's share of Chiron
S.p.A.'s profits were included as joint business revenue. In 1994, Chiron and
Novartis entered into a settlement agreement with the former owner of Chiron
S.p.A. regarding a dispute over representations made in connection with the
acquisition of Chiron S.p.A. Included in joint business results for 1994 was
approximately $4.8 million representing Chiron's share of this settlement.
Without the impact of the settlement, Chiron's joint business revenue from
Chiron S.p.A. for 1994 was $2.5 million.
Collaborative agreement revenue consists of fees received for research
services as they are performed, fees received for completed research or
technology, fees received upon attainment of benchmarks specified in the related
research agreements, and proceeds of sales of biological materials to research
partners for clinical and preclinical testing. Collaborative agreement revenues
increased from $58.1 million in 1995 to $122.1 million in 1996. Of the $64.0
million increase, $3.9 million and $45.0 million relate to a combinatorial
chemistry agreement with Novartis and research funding from Novartis for IGF-1
and certain adult and pediatric vaccine research programs, respectively.
Also contributing to the increase in collaborative agreement revenues are
amounts earned by Chiron's wholly-owned subsidiary, Viagene, which was acquired
in September 1995. In 1996, Chiron recognized increased revenues of $6.9 million
from Viagene's collaborative agreement with Green Cross of Japan for HIV gene
therapy research and clinical development. In 1996, Chiron also received $7.7
million under a
39
<PAGE>
new collaboration with Japan Tobacco Inc. ("JT") pursuant to the terms of a
technology transfer and development agreement whereby the pharmaceutical
division of JT acquired a non-exclusive, perpetual license to apply certain of
Chiron's combinatorial chemistry technologies in JT's research and product
development programs. In addition, during 1996, Chiron received $1.8 million
from Ribozyme Pharmaceuticals Inc. for Chiron's expenditures on various gene
therapy and delivery research projects.
Collaborative agreement revenues decreased from $67.5 million in 1994 to
$58.1 million in 1995. Research funding of $27.0 million from Novartis in 1995
as well as additional funding of $5.5 million from Novartis for non-exclusive
access to Chiron's combinatorial techniques were offset by a decrease in
research funding from Chiron Vaccines. Prior to the acquisition on January 1,
1995 of Novartis' interest in Chiron Vaccines, Chiron received reimbursement for
its vaccine research expenses from Chiron Vaccines and recorded such
reimbursement as collaborative agreement revenue, which totaled $40.9 million in
1994. After the acquisition, Chiron Vaccines became a wholly-owned subsidiary of
Chiron and thus no longer provided research revenues to Chiron.
Other revenues consist principally of product royalties, laboratory services
and sales fees earned by the Company for sales and marketing services for
Aredia-TM- that were rendered on behalf of Novartis. Other revenues increased
from $39.3 million in 1995 to $83.9 million in 1996, primarily due to an
increase in sales fees of $23.5 million resulting from increased sales of
Aredia-TM- in the U.S., new royalty revenues of $13.6 million resulting from
Schering's European sales of Betaferon-TM-, and an increase of $4.8 million in
probes reference laboratory service revenues. Chiron's contract with Novartis
for exclusive promotion of Aredia-TM- in the U.S. will expire in March 1997.
Under a new agreement, the details of which will be finalized in 1997, Chiron
and Novartis will co-promote Aredia-TM- for two additional years after a
six-month transitional period.
Other revenues increased from $28.1 million in 1994 to $39.3 million in
1995. The $11.2 million increase was primarily due to an increase of $4.2
million in sales fees related to Aredia-TM- sales, an increase of $2.9 million
in probes reference laboratory services and increases in product royalty
revenues due to increased sales of recombinant human insulin and Japanese
nucleic probe products.
COSTS AND EXPENSES
Gross profit margins, which may fluctuate significantly in future periods as
the Company's product mix continues to evolve, increased from 55 percent in 1995
to 56 percent in 1996. The increase in gross profit margin percentages resulted
from the receipt of increased secondary revenues from Berlex's net sales of
Betaseron-TM-, increased sales of immunodiagnostic assays and branched DNA
probes, and improved margins arising from changes in the sales mix of ophthalmic
products and non-recurring 1995 costs resulting from the acquisition of IOLAB.
These increases were partially offset by reduced margins resulting from a change
in the mix of vaccine product sales and costs arising during the second quarter
of 1996 from temporarily idled manufacturing facilities in Italy.
Gross profit margins increased from 54 percent in 1994 to 55 percent in
1995. Higher margin diagnostic and vaccine product sales were partially offset
by the reversion to the original Betaseron-TM- supply agreement, discussed
previously, and additional operating expenses associated with the Company's
Puerto Rico manufacturing facility which was idled during 1995.
Research and development expenses increased from $343.8 million in 1995 to
$371.1 million in 1996. 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. The $27.3 million increase between years was
partially due to the acquisition of Viagene in September 1995. As a result,
Viagene, which is involved in the discovery and development of gene transfer
drugs for the treatment of severe viral infections, cancers and other diseases,
added $13.0 million of expenses in 1996. In addition, vaccine research and
development costs increased by $19.4 million in 1996. These costs
40
<PAGE>
related to Chiron's effort to obtain FDA approval of Pertugen-TM-, a diphtheria,
tetanus and genetically engineered acellular pertussis ("DTaP") vaccine for
infants and children; additional amounts related to the herpes clinical trials;
and research related to hepatitis C and other new vaccines. Additionally,
diagnostics research and development increased by $16.8 million, primarily as a
result of continued improvements of existing immunodiagnostic instrument systems
and continued development of branched DNA probe tests which are used to quantify
levels of virus and other indicators of disease. The increases that resulted
from the acquisition of Viagene and increased vaccine and diagnostics research
and development costs were partially offset by reduced expenses related to
IGF-1. In 1995 Chiron incurred approximately $34.0 million related to the
funding of certain collaboration expenses related to IGF-1 and the purchase of
additional program rights from Cephalon, Inc. Additionally, in 1995 Chiron made
a $3.5 million milestone payment to DepoTech Corporation ("DepoTech") for the
research, development and marketing of products incorporating certain drug
delivery technologies developed by DepoTech. Chiron also paid G.D. Searle & Co.
$8.8 million in 1995 for the development and marketing of tissue factor pathway
inhibitor products.
Additionally, Chiron, together with J&J, co-funded the development and
introduction of a home HIV testing service business, Direct Access Diagnostics.
Chiron has an option, which will expire in May 1997, to participate as an equal
partner with J&J in this business.
Research and development expenses increased significantly from $166.2
million in 1994 to $343.8 million in 1995, largely due to the acquisitions of
Chiron Diagnostics, Chiron S.p.A. and Viagene which added $71.3 million, $25.1
million, and $6.0 million, respectively, in expenses for 1995. Adjusting for the
impact of these acquisitions, Chiron's research and development expenses
increased by $75.2 million as the Company's products in development continued to
move towards commercialization, and as the Company entered into a number of
collaborative arrangements in 1995 with other pharmaceutical and biotechnology
companies. As part of these collaborative arrangements, Chiron made various
investments in the equity securities of the collaborative partners and, in some
cases, agreed to provide specified levels of funding to the collaboration.
These new or continuing collaborations as well as the purchase of certain
program rights contributed an additional $56.0 million to research and
development expense in 1995. The Company also increased spending at Chiron
Vision by $6.2 million over that of 1994 due to a general increase in costs
resulting from the acquisition of IOLAB and inclusion of a full year of research
and development activity at Domilens.
Selling, general and administrative ("SG&A") expenses increased from $357.1
million in 1995 to $397.6 million in 1996. SG&A expenses were higher due to
selling and marketing costs to support Chiron's vaccine and diagnostic product
sales; Chiron's new Vitrasert-TM- Implant product; and increased costs in the
ophthalmic business resulting from the acquisition of IOLAB, including costs
related to an expanded international sales force. Selling and marketing expenses
continue 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.
SG&A expenses increased significantly from $110.0 million in 1994 to $357.1
million in 1995, largely due to the acquisitions of Chiron Diagnostics and
Chiron S.p.A., which added $179.5 million and $18.2 million, respectively, in
SG&A expenses in 1995. SG&A expenses in the ophthalmic business were higher in
1995 due to the acquisition of IOLAB and increased costs related to the
ophthalmic sales force, resulting from the integration of Chiron Vision's
operations with IOLAB.
The $365.3 million write-off of purchased in-process technology in 1995
consisted of $222.9 million related to the acquisitions of Chiron Diagnostics,
Chiron S.p.A. and Chiron Vaccines; $130.3 million for the acquisition of
Viagene; and $10.3 million for the acquisition of IOLAB. Also included was $1.8
million related to the acquisition of an additional interest in a subsidiary of
Chiron Vision. The fair value of the net assets acquired in the acquisitions of
Chiron Diagnostics, Chiron S.p.A., Chiron Vaccines and IOLAB, including
in-process technology, were estimated based on independent valuations of the
acquired net
41
<PAGE>
assets. The fair value of the net assets acquired in the Viagene acquisition
were determined to be equal to book value as Viagene was an early-stage company
with no intangible assets other than in-process technology. Amounts allocated to
base technology for Chiron Diagnostics, Chiron S.p.A. and IOLAB were $21.6
million, $6.6 million and $27.0 million, respectively, and are being amortized
over periods ranging from 10 to 15 years using the straight-line method.
Approximately $15.2 million was allocated to goodwill for IOLAB and is being
amortized over 15 years using the straight-line method.
In 1995, costs related to the Novartis transaction consist primarily of
employee payments and related tax liabilities and legal and investment advisor
fees. Under the Agreements reached with Novartis, Novartis reimbursed the
Company $24.8 million for a portion of the employee payments and such
reimbursement was recorded as a capital contribution.
Restructuring and reorganization costs in 1995 represent certain accrued
costs of integrating the acquired businesses with Chiron's existing businesses,
costs related to the idling of the Company's Puerto Rico manufacturing facility
and the scaling-back of manufacturing operations at the Company's Amsterdam
facility, and costs related to the write-down of duplicate facilities at the
Company's Emeryville, California, headquarters. Also included was a charge
related to the change in plans to expand the Company's Emeryville research and
administrative facilities. Of the $39.1 million in total charges in 1995,
approximately $27.1 million related to write-downs of assets, including $8.0
million related to the change in plans for expansion of the Company's research
and administrative facilities. The remaining charges of $12.0 million consisted
of employee costs of $5.5 million and lease termination and other costs of $6.5
million. At December 31, 1996, the accrual for restructuring and reorganization
costs totaled $7.4 million and consisted primarily of $2.5 million of lease
termination costs and $3.7 million related to the idling of the Puerto Rico
manufacturing facility. The liability for the lease termination costs will be
settled over the life of the lease terms which expire through 2012. The accrual
for the Puerto Rico manufacturing facility is expected to be settled in 1997.
Other operating expenses consist primarily of the amortization of purchased
technologies, goodwill and other intangible assets. Other operating expenses
slightly increased in 1996 to $14.9 million from $12.6 million in 1995. The
increase in other operating expenses from $5.1 million in 1994 to $12.6 million
in 1995 was the result of increased amortization of purchased technologies,
goodwill and other intangible assets arising from the 1995 acquisitions of
Chiron Diagnostics, Chiron S.p.A. and IOLAB.
OTHER ITEMS
Other expense, net, generally consists of investment income on the Company's
cash and investment balances, interest expense on outstanding debt obligations
and other non-operating gains and losses.
The increase of $2.1 million in other expense, net, between 1995 and 1996
was primarily due to $1.3 million of increased interest expense, $8.6 million of
lower investment income, $1.3 million of expense associated with the write-down
of certain investments, and $1.1 million of foreign exchange losses, all of
which were partially offset by a $12.2 million gain arising from the sale of the
Company's 50 percent interest in a generic cancer chemotherapeutics business in
May 1996.
Other expense, net, decreased in 1995 to $8.3 million from $10.4 million in
1994 primarily due to a $3.0 million gain on the sale of land. Additional
interest expense incurred in 1995 as a result of debt assumed in connection with
the acquisitions of Chiron Diagnostics and Chiron S.p.A. was offset by increased
investment income.
The provision for income taxes in 1996 and 1995 consisted primarily of
foreign taxes on certain foreign operations of the Company. The amount of
foreign taxes provided significantly increased since the January 1995
acquisition of Chiron Diagnostics and Chiron S.p.A., each of which have
operations in foreign countries upon which income tax is provided. The provision
for 1996 also includes $7.4 million for federal taxes. No provision for federal
taxes was recorded in 1995. Contributing to the change in the effective tax
42
<PAGE>
rate from 1994 to 1995 is the write-off of purchased in-process technologies in
1995, substantially all of which was not deductible for income tax purposes and
thus did not create a tax benefit in 1995. The provision for 1994 was primarily
due to federal and state taxes.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements are generally funded from debt borrowings and
sales of equity. In addition to these sources of capital, future capital
requirements may be financed through a combination of debt, utilization of
research funding from Novartis, possible off-balance-sheet financing, cash
generated from operations and the use of existing cash and investment balances.
Chiron's cash and investments, which totaled $128.8 million at December 31,
1996, are invested in a diversified portfolio of investment grade financial
instruments, including money market instruments, corporate notes and bonds,
government or government agency securities, or other debt securities. By policy,
the amount of credit exposure to any one institution is limited. These
investments are generally not collateralized and primarily mature within three
years. Investments with maturities in excess of one year are presented on the
balance sheet as noncurrent investments.
Chiron attempts to reduce its exposure to fluctuations in foreign currency
exchange rates by entering into forward currency contracts ("forwards") and
average rate put options ("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 over a 12 month period. As of December 31, 1996, the
Company held forward contracts totaling $70.9 million, and had no options
outstanding. In January 1997, the Company purchased option contracts that have a
contract value of $88.0 million and mature in various quarters through December
1997.
As circumstances dictate, management reviews the carrying value of all
facilities, including the Company's idle pharmaceutical fill and finishing
facility in Puerto Rico. The primary purpose of these reviews is 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 reviews consider, among other factors, the Company's global manufacturing
needs and plans for existing commercial products, as well as products in
development, and the projected undiscounted net cash flows that would be
generated from the operations at each facility. The estimates used in the
reviews are dependent upon several key assumptions, including management's best
estimates of the projected level of demand for the Company's products, product
pricing, success of clinical trials, timing of regulatory approval, and the
introduction of competing products. Additionally, management is in the process
of expanding its reviews to include the impact of potentially acquiring the
remaining 51 percent interest in the Chiron Behring joint venture.
Management has concluded that no impairment of the carrying value of its
facilities 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.
During 1996, Chiron continued the expansion of certain vaccine production
facilities in Italy as well as the expansion of its research and development and
certain administrative facilities near the Company's headquarters in Emeryville,
California. The expansion of the Emeryville facilities is projected to occur in
stages over the next thirty years. In June 1996, Chiron entered into a
seven-year operating lease agreement with a group of financial institutions to
rent a research and development facility that is currently under construction as
part of the Emeryville expansion project. Under the terms of this agreement, the
financial
43
<PAGE>
institutions committed $195.0 million towards the total cost of the project. No
lease payments will be required during the construction period which is expected
to be completed by the end of 1998.
During 1996, Chiron expanded its short-term borrowing capacity in the U.S.
by entering into two additional, separate one-year revolving, unsecured credit
agreements with major financial institutions. These facilities bring the total
committed, unsecured short-term revolving facilities available to the Company to
$200.0 million in the U.S. Credit facilities available outside the U.S. total
$117.0 million. The credit facilities in the U.S. are guaranteed by Novartis. As
of December 31, 1996, the Company had $137.5 million of short-term borrowings
outstanding.
During 1996, Chiron selectively entered into cross currency interest rate
swaps ("swaps") to modify the interest and currency characteristics of specific
outstanding debt obligations. During the second quarter of 1996, Chiron entered
into a one-year swap agreement with a notional amount of $24.9 million,
effectively converting debt denominated in U.S. dollars to Japanese yen and
lowering the effective variable interest rate. During July 1996, Chiron also
entered into swap agreements that mature in July 2001 with an aggregate notional
amount of $112.6 million, effectively converting debt denominated in U.S.
dollars to German marks and modifying the interest rate from a variable rate to
a fixed German mark rate of 6.2 percent.
Chiron's liquidity may be further impacted in future periods by its decision
to fund its share of expenses in certain of its joint ventures and collaboration
arrangements. Over the next several years, Chiron anticipates funding
collaborations with a number of its research partners, and may make additional
equity investments in collaborative partners.
During the year ended December 31, 1996, cash and investments in marketable
debt securities decreased by $95.1 million. The decrease was primarily due to
$120.2 million of capital expenditures and $130.7 million of acquisition-related
activity. These expenditures were offset by cash generated from operations of
$51.6 million, net debt borrowings of $77.8 million and $46.0 million of
proceeds related to the issuance of common stock under the Company's stock
option and employee stock purchase plans.
During the year ended December 31, 1995, cash and investments in marketable
debt securities decreased by $186.1 million. The decrease was primarily due to
$101.1 million of capital expenditures, $113.5 million of acquisition-related
activity and $34.0 million of cash used in operations. These expenditures were
offset by $40.4 million of proceeds related to the issuance of common stock
under the Company's stock option and employee stock purchase plans and a $24.8
million capital contribution from Novartis.
During the year ended December 31, 1994, cash and investments in marketable
debt securities decreased by $124.2 million. The decrease was primarily due to
$105.7 million of capital expenditures, $41.7 million of acquisition-related
activity and $6.5 million of repayments of outstanding debt obligations. These
expenditures were offset by $15.2 million of cash generated from operations and
$27.1 million of proceeds related to the issuance of common stock under the
Company's stock option and employee stock purchase plans.
In January 1997, Chiron entered into an agreement to purchase a
manufacturing facility and related buildings in Emeryville, California for $29.8
million. The Company had previously leased these facilities under a long-term
capital lease obligation. Chiron subsequently paid this amount and accordingly
eliminated the capital lease obligation.
Chiron believes that its cash and investments, funds provided by operations
and capital market transactions which may be guaranteed by Novartis will be
sufficient to meet its cash requirements during the upcoming twelve months and
through the foreseeable future.
44
<PAGE>
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 first 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 DTaP
and adjuvanted flu vaccines, approval for Myotrophin-TM-, a drug under
development by Chiron and Cephalon, Inc., 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.
- 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 unable to
obtain licenses to patents which may be required for such products.
- Failure of corporate partners to commercialize successfully the Company's
products or to retain and expand the markets served by the commercial
collaborations; conflicts of interest, priorities and commercial
strategies which may arise between the Company and such corporate
partners, including conflicts as to the strategy for realizing value
arising from evolving opportunities.
- 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 and sales 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.
- Decline in the Betaseron-TM- 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
45
<PAGE>
Betaseron-TM-; 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.
- Changes in the Company's plans involving the utilization of the Company's
long-lived assets in response to changes in market and other conditions.
- 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 newly acquired
businesses.
- The acquisition of fixed assets and other assets, including inventories
and receivables; and the making or incurring of any expenditures and
expenses, including, among others, depreciation and research and
development expenses; any revaluation of assets, including, among others,
the Company's investments in the equity securities of other companies with
whom it collaborates, or related expenses, and the amount of, and any
changes to, tax rates.
- The ability or inability of Chiron to obtain, or hedge against, foreign
currency, foreign exchange rates and fluctuations in those rates.
- 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.
46
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 68,114 $ 74,318
Short-term investments in marketable debt securities........................ 38,694 61,066
------------- -------------
Total cash and short-term investments..................................... 106,808 135,384
Accounts receivable, net of allowances of $20,692 in 1996 and $18,524 in
1995:
Related parties........................................................... 61,187 30,157
Unrelated parties......................................................... 290,784 255,622
------------- -------------
351,971 285,779
Inventories................................................................. 180,534 165,941
Other assets:
Related parties........................................................... 5,000 --
Unrelated parties......................................................... 52,455 49,899
------------- -------------
57,455 49,899
------------- -------------
Total current assets...................................................... 696,768 637,003
Noncurrent investments in marketable debt securities.......................... 22,027 88,833
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings.......................................................... 231,998 208,233
Laboratory, production and office equipment................................. 381,421 292,828
Leasehold improvements...................................................... 114,282 95,472
Construction in progress.................................................... 69,120 62,046
------------- -------------
796,821 658,579
Less accumulated depreciation and amortization.............................. (213,217) (140,761)
------------- -------------
Net property, plant, equipment and leasehold improvements................. 583,604 517,818
Purchased technology, net of accumulated amortization of $28,089 in 1996 and
$21,508 in 1995............................................................. 65,592 80,600
Other intangible assets, net of accumulated amortization of $38,382 in 1996
and $27,712 in 1995......................................................... 76,669 71,571
Investments in equity securities and affiliated companies:
Related parties............................................................. 133,123 4,850
Unrelated parties........................................................... 51,205 49,509
------------- -------------
184,328 54,359
Other assets:
Related parties............................................................. 12,724 1,846
Unrelated parties........................................................... 46,958 37,817
------------- -------------
59,682 39,663
------------- -------------
$ 1,688,670 $ 1,489,847
------------- -------------
------------- -------------
(Continued)
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
47
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable............................................................ $ 96,157 $ 81,081
Accrued compensation and related expenses................................... 56,387 56,994
Short-term borrowings....................................................... 137,467 50,036
Current portion of unearned revenue......................................... 19,638 20,838
Taxes payable............................................................... 33,715 27,551
Other current liabilities................................................... 129,805 132,095
------------- -------------
Total current liabilities................................................. 473,169 368,595
Long-term debt:
Payable to Novartis......................................................... 66,305 62,949
Unrelated parties........................................................... 353,284 350,299
------------- -------------
419,589 413,248
Other noncurrent liabilities.................................................. 31,057 35,943
------------- -------------
Total liabilities......................................................... 923,815 817,786
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none
outstanding............................................................... -- --
Common stock, $0.01 par value; 499,500,000 shares authorized; 170,675,375
outstanding (41,737,849 outstanding at December 31, 1995)................. 1,707 417
Restricted common stock, $0.01 par value; 500,000 shares authorized; none
outstanding............................................................... -- --
Additional paid-in capital.................................................. 1,774,406 1,727,711
Accumulated deficit......................................................... (1,032,554) (1,087,699)
Cumulative foreign currency translation adjustment.......................... (6,318) 721
Unrealized gain from investments............................................ 28,574 31,262
Notes receivable from stock sales........................................... (960) (351)
------------- -------------
Total stockholders' equity................................................ 764,855 672,061
------------- -------------
$ 1,688,670 $ 1,489,847
------------- -------------
------------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
48
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
------------ ------------ ---------
<S> <C> <C> <C>
Revenues:
Product sales, net:
Related parties........................................................ $ 20,013 $ 21,483 $ 11,787
Unrelated parties...................................................... 984,814 901,370 264,179
------------ ------------ ---------
1,004,827 922,853 275,966
Equity in earnings of unconsolidated joint businesses.................... 102,061 80,356 82,395
Collaborative agreement revenues:
Related parties........................................................ 93,686 45,920 52,015
Unrelated parties...................................................... 28,419 12,161 15,486
------------ ------------ ---------
122,105 58,081 67,501
Other revenues:
Related parties........................................................ 32,387 11,156 5,439
Unrelated parties...................................................... 51,464 28,136 22,678
------------ ------------ ---------
83,851 39,292 28,117
------------ ------------ ---------
Total revenues......................................................... 1,312,844 1,100,582 453,979
------------ ------------ ---------
Expenses:
Cost of sales............................................................ 438,885 415,798 128,209
Research and development................................................. 371,103 343,752 166,175
Selling, general and administrative...................................... 397,563 357,066 109,990
Write-off of purchased in-process technologies........................... -- 365,286 --
Costs related to Novartis transaction.................................... -- 49,407 2,117
Restructuring and reorganization charges................................. -- 39,056 --
Other operating expenses................................................. 14,911 12,645 5,088
------------ ------------ ---------
Total expenses......................................................... 1,222,462 1,583,010 411,579
------------ ------------ ---------
Income (loss) from operations.............................................. 90,382 (482,428) 42,400
Other expense, net......................................................... (10,408) (8,346) (10,403)
------------ ------------ ---------
Income (loss) before income taxes.......................................... 79,974 (490,774) 31,997
Provision for income taxes................................................. 24,829 21,689 13,672
------------ ------------ ---------
Net income (loss).......................................................... $ 55,145 $ (512,463) $ 18,325
------------ ------------ ---------
------------ ------------ ---------
Net income (loss) per share................................................ $ 0.31 $ (3.15) $ 0.13
------------ ------------ ---------
------------ ------------ ---------
Weighted average number of shares used in calculating per share amounts.... 177,052 162,442 137,172
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
49
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN UNREALIZED NOTES
COMMON STOCK ADDITIONAL CURRENCY GAIN (LOSS) RECEIVABLE
---------------------- PAID-IN ACCUMULATED TRANSLATION FROM FROM STOCK
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS SALES
--------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993....... 32,677 $ 327 $ 1,124,743 $ (593,561) $ (9,220) $ -- $ --
Exercise of stock options, including
tax effect........................ 394 4 21,943 -- -- -- --
Exercise of warrants................ 150 1 7,874 -- -- -- --
Employee stock purchase plan........ 158 2 7,382 -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- 7,501 -- --
Unrealized loss from investments.... -- -- -- -- -- (12,690) --
Net income.......................... -- -- -- 18,325 -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1994....... 33,379 334 1,161,942 (575,236) (1,719) (12,690) --
Issuance of common stock to
Novartis.......................... 6,600 66 407,484 -- -- -- --
Capital contribution by Novartis.... -- -- 24,845 -- -- -- --
Issuance of common stock and stock
options related to the Viagene
acquisition....................... 916 9 91,393 -- -- -- --
Exercise of stock options, including
tax effect........................ 670 6 32,921 -- -- -- --
Exercise of warrants................ -- -- 97 -- -- -- --
Employee stock purchase plan........ 173 2 9,029 -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- 2,440 -- --
Unrealized gain from investments.... -- -- -- -- -- 43,952 --
Loans to employees for stock sales.. -- -- -- -- -- -- (351)
Net loss............................ -- -- -- (512,463) -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1995....... 41,738 417 1,727,711 (1,087,699) 721 31,262 (351)
Exercise of stock options, including
tax effect........................ 2,219 22 26,481 -- -- -- --
Exercise of warrants................ 61 -- 1,570 -- -- -- --
Employee stock purchase plan........ 1,443 15 19,897 -- -- -- --
Additional shares issued in four-
for-one stock split............... 125,214 1,253 (1,253) -- -- -- --
Foreign currency translation
adjustment........................ -- -- -- -- (7,039) -- --
Unrealized loss from investments.... -- -- -- -- -- (2,688) --
Loans to employees for stock sales.. -- -- -- -- -- -- (609)
Net income.......................... -- -- -- 55,145 -- -- --
--------- ----------- ----------- ------------ ----------- ----------- -----
Balances at December 31, 1996....... 170,675 $ 1,707 $ 1,774,406 $(1,032,554) $ (6,318) $ 28,574 $ (960)
--------- ----------- ----------- ------------ ----------- ----------- -----
--------- ----------- ----------- ------------ ----------- ----------- -----
<CAPTION>
TOTAL
----------
<S> <C>
Balances at December 31, 1993....... $ 522,289
Exercise of stock options, including
tax effect........................ 21,947
Exercise of warrants................ 7,875
Employee stock purchase plan........ 7,384
Foreign currency translation
adjustment........................ 7,501
Unrealized loss from investments.... (12,690)
Net income.......................... 18,325
----------
Balances at December 31, 1994....... 572,631
Issuance of common stock to
Novartis.......................... 407,550
Capital contribution by Novartis.... 24,845
Issuance of common stock and stock
options related to the Viagene
acquisition....................... 91,402
Exercise of stock options, including
tax effect........................ 32,927
Exercise of warrants................ 97
Employee stock purchase plan........ 9,031
Foreign currency translation
adjustment........................ 2,440
Unrealized gain from investments.... 43,952
Loans to employees for stock sales.. (351)
Net loss............................ (512,463)
----------
Balances at December 31, 1995....... 672,061
Exercise of stock options, including
tax effect........................ 26,503
Exercise of warrants................ 1,570
Employee stock purchase plan........ 19,912
Additional shares issued in four-
for-one stock split............... --
Foreign currency translation
adjustment........................ (7,039)
Unrealized loss from investments.... (2,688)
Loans to employees for stock sales.. (609)
Net income.......................... 55,145
----------
Balances at December 31, 1996....... $ 764,855
----------
----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
50
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 55,145 $ (512,463) $ 18,325
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........................................... 112,326 99,097 49,429
Gain on sale of interest in affiliated company.......................... (12,226) -- --
Write-off of purchased in-process technologies.......................... -- 365,286 --
Write-offs of fixed assets.............................................. 5,031 18,400 --
Reserves................................................................ 16,895 11,321 15,892
Deferred income taxes................................................... 6,972 9,041 --
Write-down of investments in equity securities.......................... 2,243 -- 11,607
Undistributed earnings of affiliates.................................... (6,841) (3,944) (5,666)
Changes, excluding effect of acquisitions, to:
Accounts receivable................................................... (75,825) 2,000 (58,019)
Inventories........................................................... (48,545) (36,094) (7,394)
Other current assets.................................................. (20,187) (21,462) (13,692)
Accounts payable and accrued expenses................................. 11,427 7,719 8,535
Payable to Chiron Vaccines............................................ -- -- 1,658
Other current liabilities............................................. 1,921 21,808 2,542
Current portion of unearned revenue................................... (1,162) 5,979 (10,132)
Other noncurrent liabilities.......................................... 4,379 (719) 2,086
---------- ---------- ----------
Net cash provided by (used in) operating activities................. 51,553 (34,031) 15,171
---------- ---------- ----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.................... (55,008) (158,533) (180,365)
Proceeds from sale and maturity of investments in marketable debt
securities.............................................................. 143,922 334,117 232,900
Businesses acquired, net of cash acquired................................. (374) (112,633) (17,726)
Capital expenditures...................................................... (120,162) (101,052) (105,691)
Proceeds from sale of interest in affiliated company...................... 14,000 -- --
Purchases of investments in equity securities and affiliated companies.... (130,308) (900) (24,010)
Increase in other assets.................................................. (33,573) (3,773) (12,525)
---------- ---------- ----------
Net cash used in investing activities............................... (181,503) (42,774) (107,417)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (payments) under line of credit arrangements............... (12,606) 4,686 --
Proceeds from issuance of short-term debt................................. 100,000 -- --
Proceeds from issuance of common stock.................................... 45,995 40,421 27,126
Proceeds from capital contribution from Novartis.......................... -- 24,845 --
Repayment of notes payable and capital leases............................. (9,643) (3,705) (6,520)
---------- ---------- ----------
Net cash provided by financing activities........................... 123,746 66,247 20,606
---------- ---------- ----------
Net decrease in cash and cash equivalents........................... (6,204) (10,558) (71,640)
Cash and cash equivalents at beginning of the year.......................... 74,318 84,876 156,516
---------- ---------- ----------
Cash and cash equivalents at end of the year................................ $ 68,114 $ 74,318 $ 84,876
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
51
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Chiron Corporation (the "Company" or "Chiron") is a science-driven,
market-directed healthcare company that applies biotechnology and other
techniques of modern biology and chemistry to develop, produce and sell products
intended to improve the quality of life by diagnosing, preventing and treating
human disease. Chiron participates in four human healthcare markets:
diagnostics, therapeutics, pediatric and adult vaccines, and ophthalmic surgical
products. Chiron also develops or acquires new technologies, employing these
technologies to discover and develop new products for the Company or for its
partners.
Chiron's diagnostics business includes automated immunodiagnostic systems,
new quantitative probe tests and critical blood analyte systems which are used
by hospitals to diagnose and monitor patients in critical care settings. Chiron
also provides blood screening tests, used to detect the presence of the human
immunodeficiency virus ("HIV"), hepatitis viruses and retroviruses, through its
joint business with Ortho Diagnostic Systems, Inc. ("Ortho"), a Johnson &
Johnson ("J&J") company. Chiron's therapeutics business emphasizes oncology,
serious infectious diseases and critical care diseases and provides products to
hospitals and large clinics in the United States ("U.S.") and Europe. Chiron's
vaccines business is based primarily on the sale of adult and pediatric and flu
vaccines in Italy and Germany and to certain international health service
organizations. Chiron is also involved in the development and marketing of new
pediatric and adult vaccines. Through its ophthalmic business, Chiron provides
products for the surgical correction of vision, as well as intraocular implants
that deliver drugs to the eye. Chiron's ophthalmic business markets its products
in the U.S., Europe, and other geographic regions.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Investments in joint
ventures, partnerships and interests in which Chiron has an equity interest of
50 percent or less are accounted for using either the equity or cost method. For
those investments that are accounted for under the cost method, Chiron applies
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
as appropriate. Certain foreign subsidiaries and investments in affiliated
companies are accounted for either on a one-month or one-quarter lag.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
FISCAL YEAR
During 1995, the Company changed its fiscal year from a December 31 calendar
year-end to a 52 or 53-week year ending on the Sunday nearest the last day in
December of each year. Therefore, the 1996 and 1995 fiscal years ended on
December 29, 1996 and December 31, 1995, respectively. Both fiscal years were
52
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
52 weeks long. For presentation purposes, dates used in the consolidated
financial statements and notes refer to the calendar month end.
CASH EQUIVALENTS AND INVESTMENTS
All highly liquid investments with a maturity of three months or less at the
date of purchase are considered to be cash equivalents. Cash equivalents and
short-term investments consist principally of money market instruments which
include corporate notes, corporate bonds, commercial paper, and government or
government agency securities. Noncurrent investments consist principally of
corporate notes, corporate bonds, government or government agency securities and
investments in equity securities and affiliated companies.
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 at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.................................... $ 94,875 $ 96,327
Work in process................................... 45,874 36,560
Raw materials..................................... 39,785 33,054
---------- ----------
$ 180,534 $ 165,941
---------- ----------
---------- ----------
</TABLE>
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation on property, plant and equipment, including assets held under
capital leases, is computed by the straight-line method over the estimated
useful lives of the assets (3 to 20 years for equipment and 15 to 40 years for
buildings). Capitalized start-up costs for completed manufacturing facilities
are amortized over 3 years. Leasehold improvements are amortized on a
straight-line basis over the remaining fixed lease term or asset life, whichever
is shorter.
LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS
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 Company reviews, as circumstances dictate, the carrying
amount of its intangible assets and manufacturing facilities, including the
Company's idle pharmaceutical fill and finishing facility in Puerto Rico. The
purpose of these reviews is to determine whether the carrying amounts are
recoverable. Recoverability 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.
53
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As they relate to the Company's manufacturing facilities, management's
reviews consider, among other factors, the Company's global manufacturing needs
and plans for existing commercial products, as well as products in development.
The estimates used in the reviews are dependent upon several key assumptions,
including the projected level of demand for the Company's products, product
pricing, success of clinical trials, timing of regulatory approval and the
introduction of competing products. Additionally, management is in the process
of expanding its reviews to include the impact of potentially acquiring the
remaining 51 percent interest in the Chiron Behring joint venture (see Note 2).
Management believes that no impairment of the carrying value of long-lived
assets, including intangible assets, has occurred. However, there can be no
assurance that global manufacturing needs for existing products will continue
unchanged and product development programs will be successful. Excess
manufacturing capacity may occur in the future requiring an adjustment of the
carrying value of certain facilities to their fair value.
Intangible assets consist primarily of purchased technologies, goodwill and
patents and are amortized on a straight-line basis over their estimated useful
lives ranging from 3 to 17 years. Amortization expense for the years ended
December 31, 1996, 1995 and 1994 was $18.7 million, $19.2 million, and $9.5
million, respectively. Amortization of purchased technologies and goodwill is
primarily included in "Other operating expenses" and amortization of patents is
primarily included in "Research and development" expense in the Consolidated
Statements of Operations.
REVENUE
"Product sales, net" in the Consolidated Statements of Operations consists
of revenue from product sales which is generally recognized upon shipment;
revenue from service contracts which is recognized ratably over the life of the
contract; and revenue from the sale of equipment under sales-type leases which
is recognized at the inception of the lease. During 1994, Chiron recognized
Betaseron-TM- revenues under the terms of an amended supply agreement whereby
Chiron recognized the majority of its Betaseron-TM- revenues upon shipment of
the product to its marketing partner. During 1995, the Company reverted to the
terms of the original supply agreement, under which Chiron recognizes a partial
share of Betaseron-TM- revenues upon shipment and an additional share upon
subsequent sale of the product by its marketing partner.
"Equity in earnings of unconsolidated joint businesses" represents the
Company's share of the operating results generated by its commercial joint
businesses. "Collaborative agreement revenues" are earned and recognized based
upon work performed, upon the sale of product rights, upon shipment of product
for use in preclinical and clinical testing or upon the attainment of benchmarks
specified in the related agreements. Under contracts where reimbursement is
based upon work performed, the related research and development expenses were
$103.8 million, $51.8 million and $72.4 million in 1996, 1995 and 1994,
respectively. "Other revenues" consist primarily of product royalty payments
under license agreements, laboratory services, fees for sales and marketing
services performed and grants from government agencies, and are recognized when
earned.
54
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
At the annual meeting of stockholders in May 1996, stockholders approved an
amendment to the Company's restated certificate of incorporation, increasing the
number of authorized common shares from 100 million to 500 million.
Subsequently, Chiron's Board of Directors declared a 4-for-1 stock split
effected in the form of a dividend on the Company's common stock that was
distributed on August 2, 1996, to stockholders of record on July 19, 1996. As a
result, the Company increased its common stock balance by $1.3 million for the
par value of the common stock issued to effect the stock split, and
correspondingly reduced additional paid-in capital. The exercise prices for all
warrants and stock options and the convertible bond conversion rates were
adjusted for the effect of the split. All references in these financial
statements to share and per share amounts have been retroactively restated to
reflect the increased number of common shares outstanding.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which defines a fair value method of accounting for
stock-based awards. As permitted by SFAS 123, the Company elected to continue to
follow the existing accounting requirements for stock options and other
stock-based awards contained in APB Opinion No. 25, "Accounting for Stock Issued
to Employees." However, the Company has provided in Note 8 the required pro
forma disclosures pursuant to SFAS 123.
STATEMENT OF CASH FLOWS
Supplemental disclosure to the Consolidated Statements of Cash Flows is as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax effect of stock option deductions................... $ 1,398 $ 912 $ 9,895
Cash paid for interest, net of amounts capitalized...... 19,354 18,603 12,866
Cash paid for income taxes.............................. 14,505 8,597 1,263
</TABLE>
55
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental disclosure regarding noncash investing and financing activities
is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisitions:
Fair value of assets acquired......................... $ 2,143 $ 962,124 $ 42,810
Liabilities assumed................................... (1,769) (289,025) (24,103)
Acquisition costs..................................... -- (6,013) --
Stock and options issued.............................. -- (498,952) --
Carrying value of original investment................. -- (14,130) --
--------- ----------- ----------
Total cash paid......................................... $ 374 $ 154,004 $ 18,707
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
As further described in Note 2, effective January 1, 1995, under a series of
agreements between Chiron and Novartis AG and its affiliates ("Novartis"),
successor to Ciba-Geigy Ltd. ("Ciba"), Chiron acquired all of the outstanding
common stock of Chiron Diagnostics Corporation ("Chiron Diagnostics"), formerly
Ciba Corning Diagnostics Corp., and Novartis' interests in Chiron Vaccines
Company ("Chiron Vaccines"), formerly Chiron Biocine Company, and Chiron S.p.A.,
formerly Biocine S.p.A., in exchange for 26.4 million newly-issued shares of
Chiron common stock and a cash payment of $23.5 million. The fair value of
assets acquired in the transaction was $694.9 million, and liabilities of $261.5
million were assumed by the Company.
During 1995, Chiron acquired the ophthalmic surgical products division of
IOLAB from J&J for approximately $95.0 million in cash. The fair value of assets
acquired in the transaction (including goodwill and purchased in-process
technology) was $108.8 million, and liabilities of $12.8 million were assumed by
the Company.
In September 1995, Chiron acquired all of the outstanding common stock of
Viagene, Inc. ("Viagene"), not previously owned by the Company, in exchange for
approximately $35.5 million in cash and 3.7 million shares of Chiron common
stock. Additionally, unexercised options to purchase Viagene stock were
converted into options to purchase approximately 528,000 shares of Chiron common
stock. The fair value of assets acquired (including purchased in-process
technology) was $158.5 million, and liabilities of $14.7 million were assumed by
the Company.
During 1994, Chiron acquired all of the common stock of Laboratoires
Domilens S.A. for approximately $18.7 million in cash. The fair value of assets
acquired (including goodwill) was $42.8 million, and liabilities of $24.1
million were assumed by the Company.
FOREIGN CURRENCY
Local foreign currencies are generally considered to be the functional
currency of the Company's foreign subsidiaries and equity investments.
Accordingly, the assets and liabilities of subsidiaries and equity investments
denominated in foreign currencies are translated at the exchange rates in effect
at the appropriate year-end. The revenues and expenses of such subsidiaries and
investments are translated at the average exchange rates for the period of
operation. Adjustments resulting from such translations are
56
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in "Cumulative foreign currency translation adjustment," a separate
component of stockholders' equity.
FINANCIAL INSTRUMENTS
FOREIGN CURRENCY CONTRACTS. A portion of the Company's operations consist
of manufacturing and sales activities in foreign countries. As a result, the
Company's financial results will be affected by changes in foreign currency
exchange rates. The Company is primarily exposed to fluctuations in currencies
in western European countries and Japan.
To provide an economic hedge against fluctuations in foreign currency
exchange rates, the Company enters into forward currency contracts ("forwards")
and starting in 1996, purchases average rate put options ("options"). These
financial instruments are not used for trading or speculative purposes. The
Company has established a control environment that includes policies and
procedures for risk assessment and the approval, reporting and monitoring of
foreign currency hedging activities.
Forwards are used to hedge material foreign currency denominated receivables
and payables. They are generally settled at the end of each quarter with gains
or losses recorded in "Other expense, net," to offset gains or losses on foreign
currency receivables and payables.
The Company has purchased, and may in the future purchase, options to reduce
the exchange rate impact of a strengthening U.S. dollar on the underlying hedged
amounts. Counterparties to these hedging agreements are major international
financial institutions. The Company's financial statement exposure is limited to
the amount paid for the options. The cost of the options, which is recorded in
"Other current assets" is deferred and amortized over the relevant term of the
period hedged. As of December 31, 1996, there were no options outstanding.
Foreign currency transaction gains and (losses), net of the impact of
hedging, were a net ($1.7) million in 1996 and were not significant in 1995 and
1994.
CROSS CURRENCY INTEREST RATE SWAPS. The Company selectively enters into
cross currency interest rate swaps ("swaps") through major financial
institutions to modify the interest and/or currency characteristics of specific
outstanding debt obligations. Each swap agreement corresponds to all or a
portion of the principal balance and term of a specific debt obligation. These
swap agreements involve the exchange of interest payments denominated in
different currencies, based upon the terms described in the swap agreements,
with an exchange of the underlying notional principal amounts upon maturity. The
net difference between the interest amounts paid and received is recognized as
interest expense. The related interest amount payable or receivable from the
major financial institutions is included in other current liabilities or assets.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash investments and trade accounts
receivable. The Company invests cash which is not required for immediate
operating needs principally in a diversified portfolio of financial instruments
issued by institutions with investment-grade credit ratings. By policy, the
amount of credit exposure to any one
57
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
institution is limited. These investments are generally not collateralized and
primarily mature within three years. The Company has not experienced any
significant realized losses on these investments.
The Company has not experienced any credit losses from its accounts
receivable from joint business partners or collaborative research agreements,
and none are currently expected. Other accounts receivable arise from product
sales to customers. The Company performs ongoing credit evaluations of these
customers and generally does not require collateral. Reserves are maintained for
potential trade receivable credit losses, and such losses have been within
management's expectations.
RETIREMENT SAVINGS PLAN
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
U.S. employees. Participating employees may defer a portion of their pretax
earnings up to the Internal Revenue Service annual contribution limit. The
Company matches employee contributions according to a specified formula. The
Company's matching contributions totaled $6.2 million, $5.3 million and $1.8
million in 1996, 1995 and 1994, respectively.
MAJOR CUSTOMERS
During 1996, no single customer contributed ten percent or more to total
revenues. As discussed in Notes 2 and 4, Novartis is a related party and
contributed less than ten percent of total revenues in 1996 and 1995, and 11
percent in 1994. As discussed in Note 4, J&J and its affiliates are related
parties and collectively contributed less than ten percent of total revenues in
1996 and 1995, and 22 percent in 1994. Sales of Betaseron-TM- to Chiron's
marketing partner accounted for less than ten percent of total revenues in 1996
and 1995, and 23 percent in 1994.
NOTE 2--BUSINESS COMBINATIONS
AGREEMENTS WITH NOVARTIS
Effective January 1, 1995, under a series of agreements between Chiron and
Novartis, including an investment agreement, a cooperation and collaboration
agreement and a governance agreement (collectively, the "Agreements"), Novartis
increased its ownership interest in Chiron common stock to 49.9 percent (now
approximately 46 percent as a result of subsequent stock issuances to parties
other than Novartis), partially through a tender offer for approximately 38
percent of Chiron's outstanding common stock for $29.25 per share. At the same
time, Chiron acquired from Novartis all of the outstanding common stock of
Chiron Diagnostics and Novartis' interest in Chiron Vaccines and Chiron S.p.A.,
in exchange for 26.4 million newly-issued Chiron common shares and a cash
payment of $23.5 million. Prior to the acquisition, Chiron Vaccines and Chiron
S.p.A. were joint businesses between Chiron and Novartis with each having a 50
percent ownership interest.
In connection with the Agreements, Novartis agreed to guarantee $425.0
million of new debt for Chiron, agreed to provide $250.0 million (which may be
increased to $300.0 million subject to certain reductions in the debt guarantee)
over five years in support of research at Chiron, and provided Chiron with the
option to issue up to $500.0 million of new equity to Novartis. Additionally,
under the terms of the Agreements, Novartis is entitled to name three members to
Chiron's Board of Directors and has limited rights to review and approve certain
Chiron transactions.
58
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
During 1995, Chiron and Novartis entered into a limited liability company
agreement (the "Research Funding Agreement") to utilize research funding to be
provided by Novartis. Under the terms of the agreement, Novartis will fund from
time to time through December 31, 1999, at Chiron's request, research and
development costs for adult vaccines, pediatric vaccines and insulin-like growth
factor-1 ("IGF-1"). Annual funding amounts are subject to certain limitations.
In return, Novartis will receive an interest in a stream of variable royalties
from future worldwide sales of certain adult vaccines, certain pediatric
vaccines and IGF-1. Royalties will be paid for a minimum period of ten years,
subject to an extension under certain conditions, following the later of October
1, 2001, or the date of the first commercial sale of individual products covered
by the agreement. In addition, Novartis will also receive an interest in
promotional rights, in countries other than in North America and Europe, for
certain adult vaccines.
Under the terms of the Research Funding Agreement, Chiron was granted an
option through December 31, 2001, to repurchase Novartis' interest, at cost plus
an agreed-upon return, as defined in the agreement. In addition, if Chiron
chooses to exercise the option, Novartis will receive an option to acquire
certain exclusive marketing rights, in countries other than those in North
America and Europe, with respect to certain adult vaccines in countries in which
Novartis has exercised its co-promotion rights. Pursuant to the agreement,
Chiron recognized $72.0 million and $27.0 million of funding from Novartis
during 1996 and 1995, respectively, as collaborative agreement revenues. Chiron
anticipates receiving substantial additional funding from Novartis in future
periods, pursuant to the terms of the Research Funding Agreement.
Certain guarantees stated within the Agreements were subsequently modified
on November 27, 1996 in conjunction with a consent and agreement that resolves
the Federal Trade Commission's review of the merger between Ciba and Sandoz
Ltd., which created Novartis. Under the November 27, 1996 agreement, Chiron
agreed to grant royalty-bearing licenses to Rhone-Poulenc Rorer Inc. and
Novartis for certain patent rights on the herpes simplex virus thymidine kinase
gene in the field of gene therapy. As partial consideration, Novartis will pay
the Company up to $60.0 million over the next five years, $15.0 million of which
relates to 1997. Novartis also agreed to cross-license to the Company certain
Novartis-controlled gene therapy technologies.
Additionally, Novartis and the Company agreed to a modification of Chiron's
contract, which expires in March 1997 and provides for sole promotional rights
in the U.S. with respect to Novartis' product Aredia-TM- (pamidronate disodium
for injection). Under the new arrangements, Chiron, through a co-promotion
arrangement with Novartis, will promote Aredia-TM- for two years after a
six-month transitional period.
Novartis and Chiron also agreed to extend the deadline for payment of the
repurchase amount under the Research Funding Agreement from January 1, 2002 to
January 1, 2005, if Chiron chooses to exercise this option. However, this will
not affect the term of the repurchase option which expires on December 31, 2001.
Novartis also agreed to extend the term during which Novartis is committed
to provide a debt guarantee from 1999 to January 1, 2008. Further, Novartis
granted an option to Chiron to increase the amount of the debt guarantee from
$425.0 million to $725.0 million with a corresponding equivalent dollar
reduction in the equity put now available to Chiron (from $500.0 million to
$200.0 million).
Also, should Chiron elect to replace certain existing convertible debt,
Novartis agreed to provide additional guarantees totaling $200.0 million for
such purposes.
59
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
Definitive agreements covering certain aspects of the November 1996
agreement with Novartis will be drafted in 1997.
ACQUISITIONS OF CHIRON DIAGNOSTICS AND INTERESTS IN CHIRON VACCINES AND
CHIRON S.P.A.
The acquisitions of Chiron Diagnostics and Novartis' interests in Chiron
Vaccines and Chiron S.p.A. (the "Acquisitions") were accounted for under the
purchase method of accounting. The purchase price of approximately $433.4
million was allocated to the acquired assets and assumed liabilities based upon
their estimated fair value on the acquisition date. The fair value of the net
assets acquired in the Acquisitions, including purchased in-process technology,
was estimated based on an independent valuation of the acquired net assets. The
aggregate purchase price of approximately $433.4 million was less than the fair
value of the net assets acquired by approximately $57.3 million. This amount was
ratably allocated as a reduction of the noncurrent assets of the acquired
companies. In connection with the acquisition, liabilities were assumed as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired, net of negative goodwill....................... $ 694,895
Common stock issued........................................................... (407,550)
Cash paid..................................................................... (23,504)
Acquisition costs............................................................. (2,304)
--------------
Liabilities assumed........................................................... $ 261,537
--------------
--------------
</TABLE>
As part of the purchase accounting, Chiron recognized as an expense the
amount allocated to purchased in-process technology, resulting in a noncash
charge against earnings of $222.9 million. Other transaction-related charges
totaling $49.4 million related to employee payments and the related taxes, and
legal and investment advisor fees were also recognized as expenses. Novartis
agreed to reimburse the Company $24.8 million for a portion of the employee
payments and such reimbursement has been recorded as a capital contribution.
Other purchased intangible assets of approximately $25.6 million consisting of
base technology are being amortized over their estimated useful lives of 10 to
15 years, using the straight-line method.
The operations of Chiron Diagnostics, Chiron Vaccines and Chiron S.p.A. are
included in Chiron's consolidated operating results from January 1, 1995
forward. Chiron's interest in the operating results of Chiron Vaccines and
Chiron S.p.A. were included in the Company's 1994 operating results under the
equity method of accounting.
ACQUISITION OF IOLAB
On March 31, 1995, Chiron acquired the ophthalmic surgical product division
of IOLAB from J&J for approximately $95.0 million. The acquisition was accounted
for under the purchase method of accounting, and accordingly, IOLAB's financial
results have been included in Chiron's consolidated results of operations from
the date of purchase. The purchase price was allocated to the acquired assets
and assumed liabilities based upon their estimated fair value on the acquisition
date. The fair value of the net assets
60
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
acquired, including in-process technology, was estimated based on independent
valuations of the acquired net assets. In connection with the acquisition,
liabilities were assumed as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired................................................. $ 108,768
Cash paid..................................................................... (95,000)
Acquisition costs............................................................. (1,013)
--------------
Liabilities assumed........................................................... $ 12,755
--------------
--------------
</TABLE>
The amount allocated to purchased in-process technology of $10.3 million was
charged against earnings in the first quarter of 1995. Other purchased
intangible assets of approximately $46.5 million consisting of base technology,
goodwill, trade name and a customer list are being amortized over their
estimated useful lives of 10 to 15 years using the straight-line method. Also,
the Company recorded additional charges for IOLAB restructuring and
integration-related expenses totaling $16.9 million in 1995 (Note 3).
ACQUISITION OF VIAGENE
On September 29, 1995, Chiron acquired all of the outstanding common stock
of Viagene, not previously owned by the Company, in exchange for approximately
$35.5 million in cash and 3.7 million shares of Chiron common stock.
Additionally, on September 29, 1995, unexercised options to purchase Viagene
common stock were converted into options to purchase approximately 528,000
shares of Chiron common stock. Viagene is a biotechnology company involved in
the discovery, development and commercialization of gene transfer products for
the treatment or prevention of severe viral infections, cancers and other
diseases. Prior to the acquisition, Chiron had an ongoing collaboration with
Viagene in the area of gene therapy and, pursuant to the collaboration
arrangement, held an investment in the outstanding voting stock of Viagene with
a carrying value, net of unrealized gains and a realized loss, of approximately
$14.1 million as of September 29, 1995.
The Viagene acquisition has been accounted for under the purchase method of
accounting. The purchase price of approximately $143.7 million was allocated to
the acquired assets and assumed liabilities based upon their estimated fair
value on the acquisition date. In connection with the acquisition, liabilities
were assumed as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Fair value of assets acquired................................................. $ 158,461
Carrying value of original investment in Viagene.............................. (14,130)
Common stock and options issued............................................... (91,402)
Cash paid..................................................................... (35,500)
Acquisition costs............................................................. (2,696)
--------------
Liabilities assumed........................................................... $ 14,733
--------------
--------------
</TABLE>
61
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
As part of the purchase accounting, Chiron recognized as an expense the
amount allocated to purchased in-process technology in the third quarter of
1995. This resulted in a noncash charge against earnings of $130.3 million. The
results of operations of Viagene are included in Chiron's consolidated operating
results from September 29, 1995 forward.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of
operations of Chiron, Chiron Diagnostics, Chiron Vaccines, Chiron S.p.A. and
Viagene for the years ended December 31, 1995 and 1994, with pro forma
adjustments as if the acquisitions had been consummated as of the beginning of
the periods presented. This pro forma information does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future. The pro forma
information does not include the write-off of purchased in-process technology of
$222.9 million or other transaction-related costs totaling $49.4 million
(related to employee payments and the related taxes, and investment advisor and
legal fees) which were recognized as expense during 1995, relating to the
acquisition of Chiron Diagnostics, Chiron Vaccines and Chiron S.p.A. Also, the
pro forma information does not include the write-off of purchased in-process
technology related to the Viagene acquisition of $130.3 million.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
------------ ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Total revenues...................................................... $ 1,107,958 $ 968,568
Income (loss) before non-recurring charges.......................... (127,212) 17,806
Income (loss) before non-recurring charges per share................ (0.78) 0.11
</TABLE>
AGREEMENT WITH BEHRINGWERKE AG
Effective July 1, 1996, Chiron purchased a 49 percent interest in the human
vaccine business of Behringwerke AG, a subsidiary of Hoechst AG, a German
company. Chiron accounts for its interest under the equity method. The total
acquisition price, which was payable in cash, was approximately $120.0 million,
including costs directly related to the acquisition. This amount has been
reflected as a component of "Investments in equity securities and affiliated
companies" in the accompanying Consolidated Balance Sheets. Of the total
acquisition price, approximately $97.0 million was allocated to various
intangible assets such as goodwill, trademarks and patents, and is being
amortized on a straight-line basis over lives ranging from 5 to 20 years.
Under the terms of the agreement, Chiron has an option to purchase the
remaining 51 percent interest in the joint venture in March 1998, 1999, 2000 or
2001, and Behringwerke AG has the option to require Chiron to acquire the
remaining 51 percent interest in March 2001. During the period of mutual
ownership, Chiron and Behringwerke AG will operate the vaccine business as a
joint venture, which has been named Chiron Behring GmbH & Co. ("Chiron
Behring").
62
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 2--BUSINESS COMBINATIONS (CONTINUED)
The joint venture will pay to Behringwerke AG an annual royalty comprised of
a percentage of the excess of net sales of certain Chiron vaccine products in
Germany over forecasted amounts for the years 1997 through 2001.
In 1996, Chiron recognized $4.2 million as its share of the joint venture's
results, which includes amortization of the aforementioned intangible assets, as
"Equity in earnings of unconsolidated joint businesses." The results of the
joint venture are reported on a one-month lag.
NOTE 3--RESTRUCTURING AND REORGANIZATION COSTS
During 1995, Chiron recorded $39.1 million in restructuring and
reorganization charges, including $16.9 million arising from the acquisition and
integration of IOLAB (Note 2), representing the expected costs of integrating
the acquired business with Chiron's existing business as well as write-downs of
certain previously capitalized costs. Of the total charge of $39.1 million, $8.0
million was due to a change in plans to expand the Company's Emeryville research
and development facilities and $7.7 million was related to the idling of the
Company's Puerto Rico manufacturing facility. The majority of these
facility-related charges, as well as $3.7 million of other facility related
charges, were paid in 1995. Employee termination costs related to the Company's
restructuring were not significant.
Of the $16.9 million recorded as a result of the acquisition of IOLAB,
approximately $6.7 million related to write-downs of previously capitalized
facility and inventory costs. The remaining $10.2 million consisted of $5.5
million of employee termination costs and $4.7 million of lease termination and
other costs. Chiron Vision is consolidating its European intraocular lens
manufacturing operations into its facility in Lyon, France, and the North
American manufacturing operations into its facility in Claremont, California.
The related workforce reduction was the result of increased manufacturing
efficiencies as plants were closed, a concentration of research and development
efforts and an elimination of overlap in sales and marketing and general and
administrative areas.
At December 31, 1996, the accrual for restructuring and reorganization costs
totaled $7.4 million and consisted primarily of $2.5 million of lease
termination costs and $3.7 million related to the idling of the Puerto Rico
manufacturing facility. The liability for the lease termination costs will be
settled over the life of the lease terms which expire through 2012. The accrual
for the Puerto Rico manufacturing facility is expected to be settled in 1997.
63
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 3--RESTRUCTURING AND REORGANIZATION COSTS (CONTINUED)
The current status of the accrued restructuring charges is summarized below:
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT AMOUNT TO
TOTAL UTILIZED BE UTILIZED
RESTRUCTURING THROUGH IN FUTURE
CHARGE DECEMBER 31, 1996 PERIODS
------------- ----------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Chiron Vision restructuring charges:
Employee-related costs....................... $ 5,506 $ (5,506) $ --
Facility and lease termination costs......... 6,242 (3,730) 2,512
Duplicate and excess inventory............... 3,476 (2,888) 588
Other........................................ 1,724 (1,369) 355
------------- -------- -----------
16,948 (13,493) 3,455
Puerto Rico manufacturing facility............. 7,650 (3,988) 3,662
Postponement of Emeryville facility
expansion.................................... 7,990 (7,990) --
Amsterdam manufacturing facilities............. 1,000 (1,000) --
Other facility related......................... 3,718 (3,718) --
Other.......................................... 1,750 (1,510) 240
------------- -------- -----------
$ 39,056 $ (31,699) $ 7,357
------------- -------- -----------
------------- -------- -----------
</TABLE>
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS
GENERAL
The Company has entered into a number of collaborative arrangements with
other pharmaceutical and biotechnology companies for the development and
marketing of certain technologies and products. The majority of these
collaborations are in the development or clinical trial phase. Chiron and its
collaborative partners generally contribute certain technologies and research
efforts to the collaboration. In addition, Chiron and its collaborative partners
commit, subject to certain limitations and cancellation clauses, to share in the
funding of the collaborations' ongoing research and clinical trial costs.
Chiron, under certain of the arrangements, has purchased equity securities,
including common and preferred stock and warrants to purchase common and
preferred stock, of the collaborative partner.
DIAGNOSTIC JOINT BUSINESS
In 1989, Chiron entered into an agreement with Ortho to jointly develop,
manufacture and market certain immunoassay diagnostic products. Under the terms
of the agreement, Chiron receives 50 percent of the pretax operating profits
generated by the joint business and is reimbursed for its continuing research,
development and manufacturing costs. Ortho and Chiron also licensed Abbott
Laboratories ("Abbott") and Pasteur Sanofi Diagnostics to sell their own
immunoassay diagnostic tests for hepatitis C ("HCV"), using certain technology
from the joint business.
Chiron records its share of profits of the Chiron-Ortho diagnostic business
on a one-month lag using estimates provided by Ortho. These estimates are
subject to a final adjustment 90 days after the end of each calendar year, and
profit sharing distributions are payable to Chiron within 90 days after the end
of
64
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
each quarter. At December 31, 1996 and 1995, $24.4 million and $19.6 million,
respectively, were due from Ortho for profit sharing and reimbursement of costs.
Chiron's 50 percent share of the profits from the joint business was $95.8
million in 1996, which includes $3.8 million for the final 1995 accounting and
$6.9 million for a settlement from Abbott related to prior period sales of HIV
immunodiagnostic tests. In 1995, Chiron recognized $76.9 million, of which $1.8
million was a result of the final 1994 accounting. In 1994, Chiron recognized
$74.3 million as its share of the profits, including a negligible adjustment
relating to the final 1993 accounting. Revenues recognized under the cost
reimbursement portion of the agreement with Ortho for collaborative research
were $8.6 million, $9.6 million and $8.5 million in 1996, 1995 and 1994,
respectively. Revenues recognized under the cost reimbursement portion of the
agreement with Ortho for product sales were $15.0 million, $16.1 million and
$11.8 million in 1996, 1995 and 1994, respectively.
CEPHALON, INC. ("CEPHALON")
In January 1994, Chiron and Cephalon established a collaboration for the
research, development and marketing of certain products for the treatment of
neurological disorders. Under the terms of the agreement, Chiron and Cephalon
will each contribute certain technology and licenses and will share profits
equally. Each party was responsible for its own collaboration-related expenses,
subject to certain conditions, until total collaboration-related expenses were
either equalized or until the products reached commercialization. The expenses
were equalized during 1995, and thereafter, all expenses are shared equally.
Chiron invested $15.0 million in the equity securities of Cephalon in 1994.
Expenses recognized by Chiron related to this agreement for the years ended
December 31, 1996, 1995 and 1994, were $20.4 million, $34.1 million and $5.4
million, respectively.
DEPOTECH CORPORATION ("DEPOTECH")
In March 1994, Chiron entered into an agreement with DepoTech for the
research, development and marketing of certain products incorporating certain
drug delivery technologies developed by DepoTech, and in some cases, certain of
Chiron's therapeutic compounds. Under the terms of the agreement, Chiron agreed
to make specified payments to DepoTech upon the attainment of product
development milestones, and agreed to fund all or a portion of the development
costs of the collaboration in exchange for marketing rights to the resulting
commercial products. In addition, the parties agreed to share in the revenues of
any resulting commercial products. During 1994, Chiron invested $3.5 million in
the equity securities of DepoTech. In 1995, DepoTech reached the first
milestone, and accordingly, a warrant to purchase capital stock of DepoTech was
converted into a technology license fee, and Chiron commenced funding its
portion of development costs, resulting in a $3.5 million charge to research and
development expense for the year ended December 31, 1995. In 1996, Chiron
recognized expenses of $5.0 million related to this agreement.
65
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
G.D. SEARLE & CO. ("SEARLE")
In October 1994, Chiron entered into a collaboration agreement with Searle
for the research, development and marketing of Tissue Factor Pathway Inhibitor.
Under the terms of the agreement, Chiron made a $3.5 million payment to Searle,
which was expensed in 1994. Except for this payment, each party agreed to fund
its own collaboration-related expenses through 1994. Beginning in 1995,
development expenses are shared equally by the parties. In 1995, in addition to
funding its equal share of continuing development expenses, Chiron exercised its
option to accelerate the funding of certain development expenses of Searle in
exchange for a right of first negotiation to manufacture certain clinical
supplies. Accordingly, Chiron paid $8.8 million to Searle in 1995 which was
recorded as research and development expense. Expenses of $14.6 million were
recognized by Chiron related to this agreement in 1996.
PROGENITOR, INC. ("PROGENITOR")
In March 1995, the Company reached an agreement with Progenitor, a
subsidiary of Interneuron Pharmaceuticals, Inc., to collaborate in the
development and commercialization of therapeutic and vaccine products
incorporating Progenitor's proprietary gene therapy technology. Under the
agreement, Chiron received a license to Progenitor's nonviral gene expression
system for use in the development of products for the treatment of certain
cancers and cardiovascular disorders, development of infectious disease vaccines
and for development of certain other gene therapy products. Chiron has the right
to manufacture and market any resulting products of the collaboration. In return
for the license and other rights, Chiron made an initial license payment of $2.5
million to Progenitor, which was recorded as research and development expense in
1995. During 1996, Chiron paid $0.5 million to Progenitor which was recorded as
research and development expense. Under the agreement, Chiron is required to
make certain additional license and milestone payments to Progenitor. In
addition, Progenitor will receive a royalty from any commercial sales of
products resulting from the collaboration.
GENELABS TECHNOLOGIES, INC. ("GENELABS")
In March 1995, the Company reached an agreement with Genelabs, whereby
Chiron and Genelabs cross-licensed certain rights to HCV; hepatitis G virus
("HGV"), a hepatitis virus discovered by Genelabs; human T-cell leukemia virus -
I ("HTLV-I") and human T-cell leukemia virus - II ("HTLV-II") diagnostic tests.
Under the agreement, Chiron acquired certain rights to develop and market
diagnostic products for the detection of HGV, HTLV-I and HTLV-II. In return,
Genelabs acquired development and marketing rights in Asia, except Japan, for
certain products incorporating Chiron's HCV technology. Ortho, Chiron's joint
diagnostic business partner, agreed to participate as Chiron's equal partner in
the collaboration with Genelabs and therefore will share equally in all payments
under the agreement, including equity investments. Chiron and Ortho agreed to
pay $5.0 million in up front license fees and up to $9.0 million in HGV
development milestones. Chiron and Ortho also agreed to invest a total of $10.0
million in the equity securities of Genelabs. Also, under the terms of the
agreement, Chiron and Ortho have the option to acquire substantially all of the
diagnostics business of Genelabs in the year 2000 through the conversion of the
$10.0 million equity investment for approximately one-half of the business and
an additional payment equal to the then fair market value of the remaining half.
Under a separate agreement, Chiron agreed to pay Genelabs $1.0 million in cash
in exchange for a right of first refusal to obtain an exclusive license to
Genelabs' HGV technology for use in vaccines. Chiron paid Genelabs a total of
$8.5 million during 1995
66
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
pursuant to the terms of these agreements. Of this total, $2.1 million was
recorded as an investment in securities of Genelabs and $6.4 million was
recorded as research and development expense. No amounts were incurred in 1996
related to this collaboration.
NEW YORK UNIVERSITY ("NYU")
In March 1995, the Company reached an agreement with NYU for the license of
optical mapping technology for use by Chiron and its sublicensee, Novartis, in
the development of diagnostics, therapeutics and vaccines, and Chiron also
acquired the right to commercialize a potential optical mapping instrument.
Under the terms of the agreement, Chiron made a $5.0 million initial payment to
NYU, which was recorded as research and development expense in 1995, for the
license and for funding certain research facilities at NYU. If Chiron and NYU
both agree to continue development of the instrument, Chiron will be obligated
to make milestone payments totaling $4.0 million to NYU and will make royalty
payments to NYU based upon any future product sales of the instrument, subject
to certain minimum royalties. In addition, Novartis has agreed to make certain
further research payments to NYU in connection with development of the
instrument in exchange for the sublicense and in exchange for royalty payments
by Chiron to Novartis based upon sales of the instrument. The amount of expenses
incurred in 1996 related to this collaboration was not significant.
NOVARTIS
In November 1995, Chiron and Novartis entered into a collaboration agreement
through which Novartis acquired a non-exclusive, perpetual license to broadly
apply Chiron's combinatorial chemistry technologies in Novartis' research
programs. In addition, Chiron and Novartis agreed to collaborate on the
identification of new drug candidates for specific disease targets. In exchange
for these rights, Novartis agreed to pay certain license, milestone and royalty
payments to Chiron.
In addition, Novartis agreed to make certain payments to Chiron in exchange
for access to Chiron's technology, chemical libraries and exclusive rights
relating to specific drug discovery targets. Novartis was also granted the right
to develop and market products resulting from the drug discovery targets in
exchange for certain milestone and royalty payments to Chiron. Chiron was
granted commercialization rights to products developed for non-competing
indications, subject to the payment of royalties to Novartis. Novartis also
agreed to fund Chiron's activities relating to the collaboration for a period of
three years, and up to five years at Novartis' option.
Under the terms of the agreement, Novartis will pay $26.0 million to Chiron
over a five-year period, subject to certain adjustments, in exchange for the
non-exclusive, perpetual license to utilize Chiron's combinatorial chemistry
techniques. In 1996 and 1995, Chiron recognized $9.4 million and $5.5 million,
respectively, related to the agreement as "Collaborative agreement revenues" in
the accompanying Consolidated Statements of Operations.
JAPAN TOBACCO INC. ("JT")
In March 1996, the Company and JT entered into a technology transfer and
development agreement whereby the pharmaceutical division of JT acquired a
non-exclusive, perpetual license to apply certain of Chiron's combinatorial
chemistry technologies in JT's research and product development programs. Both
67
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
Chiron and JT will share in certain improvements to the technology made by
either party, subject to certain conditions. The agreement provides an initial
technology transfer term of two years and may be extended at the option of JT
for an additional two years. In 1996, Chiron recognized collaborative agreement
revenues from JT of $7.7 million.
NOVARTIS AND FOCAL INC. ("FOCAL")
In April 1996, Chiron, Novartis and Focal entered into an agreement in the
area of restenosis, the reclosure of arteries following angioplasty. Chiron and
Novartis will each individually utilize its own cardiovascular drugs together
with Focal's drug delivery technology to develop products designed to prevent
restenosis. Under the terms of the agreement, Chiron and Novartis will receive
exclusive worldwide rights to Focal's technology in selected restenosis fields
for their respective drug compounds entered into the research program. Chiron
and Novartis will be individually responsible for developing and marketing the
resulting products, and Focal will retain manufacturing rights for the final
products. Chiron and Novartis will jointly provide funding for certain
preclinical studies, after which each company will fund development for its own
products. Each company will also be individually responsible to make milestone
payments to Focal for its products developed, totaling $10.0 million per
product. In 1996, Chiron incurred $0.3 million for its share of costs related to
this agreement which was recorded as "Research and development" expense.
RIBOZYME PHARMACEUTICALS INC. ("RPI")
Since 1994, Chiron and RPI have been involved in several collaborations. In
an agreement entered into in May 1996, Chiron and RPI agreed to collaborate to
use RPI's ribozyme technology to determine the function of a number of genetic
sequences. Chiron will select a certain number of gene sequences and RPI will
synthesize ribozymes that will selectively inhibit the action of the target
sequences in Chiron's assays. Chiron will have the option to develop, and, in
certain circumstances, manufacture ribozymes or other products found to be
important in disease pathology. Under the terms of the agreement, Chiron will
pay RPI for the ribozymes used in the research and make milestone payments
depending upon the number of products successfully developed. Chiron also agreed
to pay RPI royalties from the sale of commercialized products. The royalty
payments will be reduced by up to 50 percent of the milestone payments made as
they relate to specific products. In 1996, Chiron incurred $1.8 million of
expenses related to the various collaboration agreements with RPI.
GENERAL INJECTABLES & VACCINES, INC. ("GIV")
In September 1996, Chiron entered into an agreement with Biological and
Popular Culture, Inc. ("BPC"), a newly organized holding company for GIV and
affiliated companies, pursuant to which GIV and its affiliates agreed to perform
certain distribution and promotional services for Chiron's vaccine products in
the U.S. The initial term of the service agreement is five years, with potential
one-year extensions thereafter.
In connection with the agreement, Chiron invested $30.0 million in BPC, of
which $13.8 million consisted of BPC voting preferred stock, which is
convertible at Chiron's option into 30 percent of the outstanding common stock
of BPC. Alternatively, Chiron, at its option, may require BPC to redeem the
preferred stock at par plus accrued dividends of 8 percent at a future date. Of
the preferred stock
68
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 4--COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
investment, a significant amount represents excess purchase price and is being
amortized over 15 years. The remainder of the $30.0 million investment consisted
primarily of two interest-bearing loans to BPC and its subsidiaries with various
maturities. Chiron agreed to make additional capital contributions in the event
BPC exceeds certain earnings requirements and which BPC agreed to use to repay
one of the two loans.
In 1996, Chiron recognized $0.2 million as its share of BPC's results, which
includes amortization of the aforementioned intangible assets, as "Equity in
earnings of unconsolidated joint businesses." Chiron's share of BPC's results
are reported on a one-quarter lag.
In January 1997, BPC repaid one of the two interest-bearing loans which
totaled $5.0 million. Chiron then advanced this same amount to BPC as a
prepayment for future distribution and promotional services.
BEN VENUE LABORATORIES, INC. ("BEN VENUE")
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 which has been
included in "Other expense, net" in the accompanying Consolidated Statements of
Operations.
NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
In accordance with the requirements of SFAS 115, the Company has classified
its investments in certain debt and equity securities as "available-for-sale."
Such investments are recorded at fair value based upon year-end quoted market
prices, with unrealized gains and losses, deemed by the Company as temporary in
nature, reported as a separate component of stockholders' equity.
Available-for-sale securities consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------- --------------------------------------------------
ADJUSTED UNREALIZED UNREALIZED FAIR ADJUSTED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
----------- ----------- ------------- --------- ----------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government....... $ 30,179 $ 17 $ (151) $ 30,045 $ 69,659 $ 298 $ (125) $ 69,832
Mortgage-backed....... 7,913 22 (1) 7,934 11,317 17 (43) 11,291
Corporate debt........ 32,803 2 (92) 32,713 130,150 128 (213) 130,065
----------- ----------- ----- --------- ----------- ----------- ----- ---------
70,895 41 (244) 70,692 211,126 443 (381) 211,188
Equity................ 17,665 28,777 -- 46,442 9,100 31,200 -- 40,300
----------- ----------- ----- --------- ----------- ----------- ----- ---------
$ 88,560 $ 28,818 $ (244) $ 117,134 $ 220,226 $ 31,643 $ (381) $ 251,488
----------- ----------- ----- --------- ----------- ----------- ----- ---------
----------- ----------- ----- --------- ----------- ----------- ----- ---------
</TABLE>
69
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
These securities are classified in the Consolidated Balance Sheets as
follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash equivalents...................................................... $ 9,971 $ 61,289
Short-term investments in marketable debt securities.................. 38,694 61,066
Noncurrent investments in marketable debt securities.................. 22,027 88,833
Investments in equity securities and affiliated companies............. 46,442 40,300
---------- ----------
$ 117,134 $ 251,488
---------- ----------
---------- ----------
</TABLE>
The cost and estimated fair value of available-for-sale debt securities by
contractual maturity consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
ADJUSTED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................................. $ 47,854 $ 47,732
Due in one to three years............................................... 15,128 15,026
--------- ---------
62,982 62,758
Mortgage-backed securities.............................................. 7,913 7,934
--------- ---------
$ 70,895 $ 70,692
--------- ---------
--------- ---------
</TABLE>
The proceeds received from the sale and maturity of securities held as
available-for-sale were $143.9 million, $334.1 million and $232.9 million during
1996, 1995 and 1994, respectively. During 1996, the gross realized gains and
gross realized losses on sales of securities held as available-for-sale were not
significant. During 1995, the gross realized gains and gross realized losses on
sales of securities held as available-for-sale were $0.4 million and $3.5
million, respectively. Gross realized gains and losses during 1994 were not
significant. The cost of securities sold is based on the specific identification
method. The change in the net unrealized holding gain on available-for-sale
securities, included as a separate component of stockholders' equity, was ($2.7)
million, $44.0 million and ($12.7) million for 1996, 1995 and 1994,
respectively.
70
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 5--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
other than those accounted for in accordance with SFAS 115 are as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CARRYING/ CARRYING/
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonmarketable equity investments:
(accounted for under the cost method)...... $ 4,763 $ 9,003 $ 9,209 $ 11,559
Notes receivable............................. 20,478 20,518 3,519 3,073
Deposits..................................... 3,549 3,413 4,643 4,509
Long-term debt:
Convertible subordinated debentures........ 319,713 325,293 312,467 360,677
Notes payable.............................. 65,964 65,964 64,755 64,741
Foreign currency hedging contracts (off-
balance sheet financial instruments)....... 70,883 70,883 65,106 65,188
</TABLE>
The fair value of nonmarketable equity investments that are accounted for
using the cost method are primarily based on estimated market prices determined
by a broker. The carrying value of variable rate notes receivable approximates
fair value due to the market based nature of these instruments. The fair values
of the notes payable and deposits are based on the discounted value of expected
future cash flows using current rates for assets and liabilities with similar
maturities. The fair value of convertible subordinated debentures is based on
the market price at the close of business on the last day of the fiscal year.
The fair value of the foreign currency hedging contracts is based on the
exchange rate in effect on the last business day of the year. The notional
amount approximates the fair value as the majority of the contracts were entered
into shortly before year-end.
Included in current assets and current liabilities are certain other
financial instruments whose carrying values approximate fair value due to the
short-term nature of such instruments.
71
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--DEBT OBLIGATIONS AND CAPITAL LEASES
Long-term debt and capital lease obligations consist of the following at
December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
1.9 percent convertible subordinated debentures....................... $ 230,587 $ 225,215
5.25 percent convertible subordinated debentures...................... 89,126 87,252
Capital lease obligations............................................. 34,999 38,940
Note payable to Novartis.............................................. 57,159 54,016
Other notes payable................................................... 10,734 14,765
---------- ----------
422,605 420,188
Less current portion.................................................. 3,016 6,940
---------- ----------
$ 419,589 $ 413,248
---------- ----------
---------- ----------
</TABLE>
CONVERTIBLE SUBORDINATED DEBENTURES
In 1993, Chiron issued 1.9 percent convertible subordinated debentures with
a face value of $253.9 million and a yield to maturity of 4.5 percent. The notes
are convertible, at the holders' option, into common stock at 34.4 shares per
$1,000 principal amount and are due in November 2000. Interest is paid
semi-annually. The debentures may be redeemed by the Company at any time, at a
redemption price starting at $905.78 per $1,000 principal amount increasing to a
redemption price equal to 100 percent of the principal amount at maturity. The
debentures are carried net of an initial issue discount of $39.3 million which
is being accreted over the life of the debentures using the interest method.
Debentures with a carrying value of $9.1 million and $8.9 million were held by
Novartis at December 31, 1996 and 1995, respectively.
As a result of the 1991 merger with Cetus Corporation ("Cetus"), the Company
has outstanding 5.25 percent convertible subordinated debentures, which are due
in 2002, have a face value of $100.0 million and are convertible at the holders'
option at any time into common stock at 32.4 shares per $1,000 principal amount.
Interest is paid annually. At the option of the Company, the debentures may be
redeemed at any time at face value. These debentures are carried at a discount
and the difference between the face value of the debentures and their present
value is being accreted over the remaining term of the debentures using the
interest method.
CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist primarily of one lease involving a Chiron
manufacturing facility and other related buildings in Emeryville, California.
The lease obligation bears interest at 10.5 percent and matures in 2004. In
January 1997, Chiron entered into an agreement to purchase the facility and
related buildings for $29.8 million. Chiron subsequently paid this amount and
accordingly eliminated this obligation.
At December 31, 1996 and 1995, the gross amount of land, buildings and
equipment leased under noncancelable capital leases totaled $22.1 million and
$23.8 million, respectively, and accumulated depreciation totaled $8.9 million
and $5.2 million, respectively. Future payments under capital lease obligations
(including interest of approximately $1.5 million) are as follows: 1997--$1.6
million, 1998--
72
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 6--DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
$1.7 million, 1999--$0.8 million, 2000--$0.6 million, 2001--$0.5 million and
$1.9 million thereafter. These amounts do not include the recent settlement of
the lease obligation described above.
NOTES PAYABLE
The note payable to Novartis for approximately $57.2 million at December 31,
1996 was assumed by the Company as part of the acquisition of Chiron
Diagnostics. The note bears interest at a variable rate based on LIBOR
(approximately 5.7 percent at December 31, 1996) and is due in 2000 together
with accrued interest.
At December 31, 1996, the Company had various other notes payable with an
average interest rate of 5.3 percent and maturities ranging from 1997 through
2014. Future maturities of notes payable are as follows: 1997--$1.7 million,
1998--$1.7 million, 1999--$1.8 million, 2000--$1.9 million, 2001--$1.9 million
and $1.7 million thereafter.
SHORT-TERM BORROWINGS
Short-term borrowings totaled $137.5 million as of December 31, 1996,
consisting of borrowings of $100.0 million under the Company's U.S. credit
facilities, $36.0 million under the Company's credit facilities outside the U.S.
and a $1.5 million obligation to Novartis.
Under three separate revolving, committed, unsecured credit agreements with
major financial institutions, the Company can borrow up to $200.0 million in the
U.S. These credit facilities are guaranteed by Novartis, have various maturities
through July 1997, and provide for various borrowing rate options, as defined in
the agreements. As of December 31, 1996, the interest rate on the outstanding
borrowings was tied to U.S. dollar LIBOR (5.7 percent).
Additionally, the Company has credit facilities available outside the U.S.
that allow for total borrowings of $117.0 million at December 31, 1996. These
revolving facilities are unsecured and are primarily maintained for Chiron
Diagnostics and Chiron S.p.A. As of December 31, 1996, the average interest rate
on the outstanding borrowings was 6.1 percent.
CROSS CURRENCY INTEREST RATE SWAPS
In May 1996, the Company entered into a swap agreement that matures in June
1997 with a notional amount of $24.9 million. The Company effectively converted
debt denominated in U.S. dollars to Japanese yen. The agreement provides for the
Company to make quarterly interest payments based on a variable rate tied to
three-month Japanese LIBOR (0.5 percent at December 31, 1996) while receiving
interest based on a variable rate tied to three-month U.S. dollar LIBOR (5.7
percent at December 31, 1996).
In July 1996, the Company also entered into swap agreements that mature in
July 2001 with an aggregate notional amount of $112.6 million. The Company
effectively converted debt denominated in U.S. dollars to German marks. The
agreements provide for the Company to make quarterly interest payments based
upon a fixed German mark rate of 6.2 percent while receiving interest based on a
variable rate tied to three-month U.S. dollar LIBOR.
73
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7--COMMITMENTS AND CONTINGENCIES
LEASES
Chiron leases laboratory, office and manufacturing facilities, land and
equipment under noncancelable operating leases which expire at various times
through 2037. Rent expense under these leases was $32.6 million, $28.0 million
and $12.7 million in 1996, 1995 and 1994, respectively.
Future minimum lease payments under these leases are as follows: 1997--$30.3
million, 1998-- $26.4 million, 1999--$20.6 million, 2000--$15.9 million,
2001--$10.5 million and $29.8 million thereafter.
Additionally, in June 1996, the Company entered into a seven-year operating
lease agreement with a group of financial institutions to rent a research and
development facility that is currently under construction in Emeryville,
California. Under the terms of the lease agreement, the financial institutions
have committed $195.0 million toward the total construction cost of the project.
No lease payments are required during the construction period which is expected
to last less than three years. Thereafter, rent amounts will be due quarterly,
based upon the total construction costs incurred. Assuming that construction is
completed on schedule and assuming a current interest rate of 6.0 percent,
future minimum lease payments would be $11.7 million annually, beginning in the
fourth quarter of 1998.
Under this lease arrangement, which has been guaranteed by Novartis through
December 31, 1999, the Company has the option to purchase the constructed
properties. Alternatively, Chiron can cause the property to be sold to a third
party. The Company is also contingently liable under residual value guarantees
in the event of market value declines.
EQUIPMENT LEASING
Chiron Diagnostics is the lessor of certain equipment to customers under
sales-type leases as defined in Statement of Financial Accounting Standards No.
13, "Accounting for Leases." The current portion of the net investment in
sales-type leases is included in "Accounts receivable" and the long-term portion
is included in "Other assets" in the accompanying Consolidated Balance Sheets.
The components of the net investment in sales-type leases were as follows at
December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Minimum rentals receivable.............................................. $ 36,314 $ 40,842
Less unearned interest income........................................... 3,127 3,359
--------- ---------
Net investment in sales-type leases..................................... $ 33,187 $ 37,483
--------- ---------
--------- ---------
</TABLE>
74
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Included in the net investment in sales-type leases amounts are deferred
service revenues of $6.3 million and $8.3 million at December 31, 1996 and 1995,
respectively. Such amounts are recognized as product sales revenue ratably over
the life of the service contracts.
Future minimum rentals receivable under these leases at December 31, 1996,
are as follows: 1997-- $8.4 million, 1998--$14.3 million, 1999--$8.6 million,
2000--$4.0 million and 2001--$1.0 million.
CETUS HEALTHCARE LIMITED PARTNERSHIPS
Pursuant to certain agreements between the Company and the former partners
of Cetus Healthcare Limited Partnership ("CHLP"), the Company is obligated to
fund development of certain CHLP products through regulatory approval if, based
on the Company's assessment, the products are believed to be technically
feasible and commercially viable. Because of the inherent uncertainties both as
to the likelihood of any particular product continuing to be viewed as
technically feasible and commercially viable and as to the cost of developing
any particular product through regulatory approval, the Company is unable to
estimate future costs of developing the products subject to this obligation. In
addition, the former partners of CHLP are entitled to payments on net sales,
royalties or other fees received by Chiron for certain products.
In December 1990, Cetus exercised its purchase options to acquire all the
limited partners' interest in Cetus Healthcare Limited Partnership II. The
former partners are entitled to receive a fixed percentage of the net sales of
certain products in Europe (through December 31, 2005) and the United States
(until certain aggregate returns are realized).
OTHER COMMITMENTS
In connection with the expansion of its manufacturing capabilities, the
Company has various commitments under construction contracts totaling
approximately $17.9 million at December 31, 1996. The Company also has
performance bonds outstanding in the amount of $7.0 million as of December 31,
1996, primarily in connection with sales to public health authorities.
In June 1996, Chiron S.p.A. entered into an agreement to purchase in 1998
the manufacturing and administrative facilities in Siena, Italy which are
currently leased. The purchase price is approximately $34.0 million and is
payable in Italian lira. The purchase price will be reduced by certain amounts
due from the seller through the date of the purchase.
NOTE 8--STOCKHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 1996, the Company has four stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based awards and share rights.
75
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
Had compensation cost for the Company's other stock-based plans been
determined based upon the fair value method prescribed under SFAS 123, the
Company's net income (loss) and related net income (loss) per share would have
been reduced to the following pro forma amounts below:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Net income (loss)--in thousands
As reported......................................................... $ 55,145 $ (512,463)
Pro forma........................................................... $ 27,579 $ (529,759)
Net income (loss) per share
As reported......................................................... $ 0.31 $ (3.15)
Pro forma........................................................... $ 0.16 $ (3.26)
</TABLE>
FIXED STOCK OPTION PLANS
The Company's fixed stock option plan provides for the grant to employees of
either nonqualified or incentive options and provides for the grant to
directors, consultants and contractors of nonqualified options. Incentive
options are to be granted at not less than the fair market value of common stock
at the date of grant and nonqualified options at not less than 85 percent of
such fair market value. Options are exercisable based on vesting terms
determined by Chiron's Board of Directors (generally 4 years) and option terms
cannot exceed ten years.
Initially, the Company's stock option plan had reserved and available for
issuance 18.0 million shares of Chiron common stock and restricted common stock
plus any remaining shares of common stock and restricted stock remaining for
issuance under former option plans. This amount is increased annually by a
number of shares equal to 1.5 percent of the number of shares of common stock
outstanding plus shares issuable upon conversion or exercise of outstanding
warrants, options and convertible securities. For 1996, this increase in shares
available for grant was 3.1 million. At December 31, 1996, a total of 5.8
million shares were available for grant.
76
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding options at January 1,....................................... 23,337,652 19,787,536 17,370,472
Granted............................................................... 6,582,769 10,507,616 4,667,928
Forfeited............................................................. (1,159,973) (1,207,336) (675,336)
Surrendered against payment by Novartis............................... (363,525) (3,070,960) --
Exercised............................................................. (2,098,550) (2,679,204) (1,575,528)
------------ ------------ ------------
Outstanding options at December 31,..................................... 26,298,373 23,337,652 19,787,536
------------ ------------ ------------
------------ ------------ ------------
Options exercisable at year-end......................................... 11,411,534 8,859,788 10,267,220
Average exercise price of:
Outstanding options at year-end....................................... $ 16.80 $ 14.76 $ 12.82
Options granted....................................................... $ 22.25 $ 16.33 $ 17.67
Options forfeited..................................................... $ 19.11 $ 16.89 $ 14.61
Options exercised..................................................... $ 11.02 $ 10.61 $ 8.20
Weighted-average fair value of options granted during the year
calculated pursuant to SFAS 123....................................... $ 8.90 $ 7.33 $ --
</TABLE>
The weighted-average fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for 1996 and 1995: expected volatility of 35
percent; risk-free interest rate of 6.3 percent; and an average expected life of
5 years.
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE AS OF DEC. CONTRACTUAL EXERCISE AS OF DEC. EXERCISE
PRICES 31, 1996 LIFE PRICE 31, 1996 PRICE
- ------------------ ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Less than $13..... 8,005,011 6.26 $ 10.64 4,509,962 $ 9.25
13 to 18.......... 7,278,832 6.81 15.59 4,920,638 15.35
18 to 23.......... 8,444,802 8.90 20.56 1,837,740 21.09
Greater than 23... 2,569,728 9.11 27.36 143,194 25.30
------------ --- ----------- ------------ -----------
26,298,373 7.53 $ 16.80 11,411,534 $ 14.00
------------ --- ----------- ------------ -----------
------------ --- ----------- ------------ -----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Chiron has a stock purchase plan for U.S. employees in which eligible
employees may participate through payroll deductions. A total of 7.0 million
shares have been reserved for issuance under the plan, of which 2.4 million
shares were available for purchase at December 31, 1996. At the end of each
quarter, funds deducted from participating employees' salaries are used to
purchase common stock at 85 percent of
77
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
the lower of market value at the quarterly purchase date or the employees'
eligibility date for participation. Purchases of shares made under the plan were
1.4 million in 1996, 0.7 million in 1995 and 0.6 million in 1994.
Under SFAS 123, pro forma compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model with the following assumptions for 1996 and 1995: an expected life of one
year; expected volatility of 35 percent; and a risk-free interest rate of 5.7
percent. The weighted-average fair value of those purchase rights granted was
$4.78 per share in 1996 and 1995.
PERFORMANCE-BASED STOCK PLAN
In 1996, the stockholders approved an amendment to the Company's stock
option plan, allowing certain executives to receive performance units.
Performance units are stock awards for which vesting is contingent upon the
attainment of certain pre-established performance goals over a specified period,
as established by the Compensation Committee of the Board of Directors.
Currently, the performance units are based on total shareholder return over a
three year period as measured against certain published benchmark indices that
are representative of the Company's peer group.
In order for there to be a payout, Chiron's shareholder return must be
within 15 percent of the three-year rolling weighted-average of the benchmark
indices. In accordance with APB Opinion No. 25, compensation expense related to
these awards is based on the extent to which the performance criteria are met.
Through December 31, 1996, no expense was recognized in the accompanying
consolidated financial statements.
In 1996, the Company awarded performance units on 64,400 shares of common
stock. None of the units were exercisable at year-end. Pursuant to SFAS 123, the
weighted-average fair value of the awards was $7.57 per unit, based upon the
following assumptions: risk-free interest rate of 6 percent; expected volatility
of 35 percent; and an expected life of 3 years.
SHARE RIGHTS
In 1996, the stockholders also approved an amendment to the Company's stock
option plan, permitting the award of share rights. Share rights are awarded by
the Compensation Committee of the Board of Directors to certain key individuals,
allowing them the right to receive shares of the Company's stock. In 1996, the
Company awarded non-employee directors 10,320 share rights in aggregate and a
key executive 40,000 share rights that vest over five years and at the end of
five years, respectively. The value of the share rights is recognized ratably
over the related vesting periods and in 1996 the Company recognized $0.1 million
of compensation expense.
COMMON STOCK WARRANTS
As a result of the merger with Cetus, warrants to purchase 600,000 shares of
Chiron common stock are outstanding at December 31, 1996. The exercise price of
the warrants is $13.13 and the warrants expire in July 2001. The warrants are
currently exercisable.
78
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE FROM STOCK SALES
The notes receivable are due from certain key employees, resulting from the
exercise of stock options. The notes are full recourse promissory notes, bearing
interest at a rate of approximately six percent and are primarily collateralized
by the stock issued upon the exercise of the stock options. The notes are due
through June 1998.
NOTE 9--INCOME TAXES
For financial reporting purposes, "Income (loss) before income taxes"
includes the following components for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................. $ 94,609 $ (492,842) $ 36,829
Foreign................................................... (14,635) 2,068 (4,832)
---------- ----------- ---------
$ 79,974 $ (490,774) $ 31,997
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
COMPONENTS OF PROVISION FOR INCOME TAXES
Significant components of the provision for income taxes are as follows for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.................................................... $ 1,544 $ -- $ 10,741
State...................................................... 1,455 1,807 2,227
Foreign.................................................... 11,293 9,901 266
--------- --------- ---------
14,292 11,708 13,234
Deferred:
Foreign.................................................... 759 1,260 --
Charge in lieu of taxes resulting from recognition of
acquired tax benefits that are allocated to reduce
noncurrent intangible assets related to the acquired
entity..................................................... 9,778 8,721 438
--------- --------- ---------
Provision for income taxes................................... $ 24,829 $ 21,689 $ 13,672
--------- --------- ---------
--------- --------- ---------
</TABLE>
The benefit related to tax deductions for the Company's stock option plans
is recorded as an increase to additional paid-in capital when realized. Tax
benefits of approximately $1.4 million in 1996, $0.9 million in 1995 and $9.9
million in 1994 were realized.
79
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--INCOME TAXES (CONTINUED)
RATE RECONCILIATION
The reconciliation of the provision for income taxes, computed at the
statutory U.S. income tax rate, to the reported amounts is as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax provision (benefit) at statutory rates............................ $ 27,991 $ (171,771) $ 11,199
Tax effect of write-off of purchased in-process technology.................... -- 127,850 --
State taxes, net of federal benefit........................................... 1,593 4,895 2,300
Foreign income taxes.......................................................... 15,841 16,794 266
Losses of foreign subsidiaries not providing benefit in current year.......... 5,122 (724) 2,247
Amortization of intangible assets............................................. 884 696 927
Effect of net operating loss carryforward..................................... -- 31,691 --
Nontaxable earnings of joint business......................................... -- -- (2,547)
Nondeductible expenses related to Novartis transaction........................ -- 9,308 875
Utilization of deferred tax assets not previously benefited................... (28,065) -- (2,246)
Other......................................................................... 1,463 2,950 651
---------- ----------- ---------
Provision for income taxes.................................................... $ 24,829 $ 21,689 $ 13,672
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
SUMMARY OF DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
80
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--INCOME TAXES (CONTINUED)
purposes and the tax effects of net operating loss and credit carryforwards.
Significant components of the Company's deferred income tax liabilities and
assets are as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Basis differences--purchase accounting............................ $ 23,813 $ 19,537
Patent costs expensed for tax purposes............................ 8,715 7,205
Other............................................................. 4,944 5,036
----------- -----------
37,472 31,778
Deferred income tax assets:
Basis differences--purchase accounting and intangibles............ 93,493 89,074
Depreciation and purchased technologies........................... 5,864 22,345
Reserves and expense accruals..................................... 67,672 43,458
Net operating loss carryforwards.................................. 133,502 128,681
Business credit carryforwards..................................... 36,179 26,162
Other............................................................. 11,161 12,498
----------- -----------
347,871 322,218
Less valuation allowance.......................................... (305,703) (286,757)
----------- -----------
42,168 35,461
----------- -----------
Net deferred income tax asset....................................... $ 4,696 $ 3,683
----------- -----------
----------- -----------
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1996, 1995 and 1994, was an increase of $18.9 million, an increase of $139.0
million and a decrease of $13.9 million, respectively.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 1996 will be allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Income tax benefit............................................................ $ 225,864
Goodwill and other noncurrent intangible assets............................... 24,240
Additional paid-in capital.................................................... 55,599
--------------
$ 305,703
--------------
--------------
</TABLE>
81
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 9--INCOME TAXES (CONTINUED)
TAX OPERATING LOSS AND CREDIT CARRYFORWARDS
The following presents the carryforwards which are available to offset
future income tax liabilities at December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Federal net operating loss carryforwards expiring from 2002 through 2010...... $ 214,070
State net operating loss carryforwards expiring from 1997 through 2010........ 47,219
Foreign net operating loss carryforwards principally carried forward
indefinitely................................................................ 149,584
Federal tax credit carryforwards expiring from 1997 through 2009.............. 22,779
State tax credit carryforwards expiring from 1997 through 2010................ 13,400
</TABLE>
NOTE 10--OTHER EXPENSE, NET
Other expense, net, consists of the following for each of the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income.............................. $ 12,057 $ 21,463 $ 20,343
Capitalized interest...................................... -- 420 4,405
Interest expense and related costs on convertible
debentures.............................................. (18,103) (17,827) (16,782)
Write-downs of investments................................ (1,529) (200) (11,607)
Interest expense on the debt obligation to Novartis....... (3,407) (3,543) --
Other interest expense.................................... (9,231) (8,842) (3,404)
Gain on sale of interest in affiliated company............ 12,226 -- --
Net realized gain (loss) on sale of debt securities....... 41 (3,037) (2,234)
Realized/unrealized gain (loss) on foreign exchange
transactions............................................ (1,262) (193) 156
Other..................................................... (1,200) 3,413 (1,280)
---------- ---------- ----------
$ (10,408) $ (8,346) $ (10,403)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 11--GEOGRAPHIC AREA INFORMATION
Chiron operates in the global healthcare industry in four major markets:
diagnostics, ophthalmics, vaccines and therapeutics. The Company is a
multinational corporation with operations in many countries including the U.S.,
Canada, Japan, France, Germany, the United Kingdom, Italy, The Netherlands and
Australia. Transfers between geographic areas represent intercompany sales and
are accounted for based on established sales prices between related companies.
In computing earnings from operations for foreign subsidiaries, no allocations
of general corporate expenses or interest have been made. Identifiable assets of
foreign geographic areas relate to the operating assets of the Company's
subsidiaries in those countries. Domestic assets consist of all operating assets
of the Company located within the U.S.
82
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 11--GEOGRAPHIC AREA INFORMATION (CONTINUED)
Results of foreign operations for 1996 and 1995 consist of ophthalmic and
oncology sales in addition to sales of vaccines and diagnostic products. Results
of foreign operations for 1994 consist primarily of ophthalmic and oncology
product sales.
Information about the Company's operations in different geographic areas is
as follows for each of the years ended December 31:
<TABLE>
<CAPTION>
DOMESTIC EUROPE ASIA/PACIFIC OTHER ELIMINATIONS CONSOLIDATED
--------- --------- ----------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1996:
Sales to unaffiliated customers.......... $ 740,453 $ 408,282 $ 142,965 $ 21,144 $ -- $1,312,844
Transfers between geographic areas....... 225,713 92,211 139 -- (318,063) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 966,166 500,493 143,104 21,144 (318,063) 1,312,844
Net income (loss)........................ 87,012 (20,058) 2,045 (257) (13,597) 55,145
Identifiable assets...................... 2,164,792 374,552 66,230 19,311 (936,215) 1,688,670
1995:
Sales to unaffiliated customers.......... $ 592,524 $ 348,392 $ 136,668 $ 22,998 $ -- $1,100,582
Transfers between geographic areas....... 178,084 46,819 586 -- (225,489) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 770,608 395,211 137,254 22,998 (225,489) 1,100,582
Net loss................................. (453,524) (37,234) (1,222) (4,898) (15,585) (512,463)
Identifiable assets...................... 1,900,794 292,628 87,684 12,272 (803,531) 1,489,847
1994:
Sales to unaffiliated customers.......... $ 379,917 $ 65,569 $ 5,322 $ 3,171 $ -- $ 453,979
Transfers between geographic areas....... 22,919 1,108 1,370 -- (25,397) --
--------- --------- ----------- --------- ------------ ------------
Total revenue............................ 402,836 66,677 6,692 3,171 (25,397) 453,979
Net income (loss)........................ 25,356 (3,456) (732) (1,327) (1,516) 18,325
Identifiable assets...................... 1,091,648 62,034 1,345 (1,017) (104,268) 1,049,742
</TABLE>
Revenues by customer location, including both local revenues and exports
from other locations, were as follows for each of the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
North America......................................... $ 569,247 $ 502,090 $ 344,569
Europe................................................ 508,064 367,521 86,804
Asia and Pacific Basin................................ 197,421 169,367 17,982
South America, Africa and Other....................... 38,112 61,604 4,624
------------ ------------ ----------
$ 1,312,844 $ 1,100,582 $ 453,979
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
NOTE 12--LEGAL PROCEEDINGS
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, 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
83
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
NOTE 12--LEGAL PROCEEDINGS (CONTINUED)
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.
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1996
----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues..................................... $ 369,809 $ 321,549 $ 315,735 $ 305,751
Gross margin from product sales.............. 153,038 132,669 143,955 136,280
Net income................................... 15,269 11,778 15,355 12,744
Net income per share......................... .09 .07 .09 .07
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................... $ 325,897 $ 274,688 $ 281,752 $ 218,246
Gross margin from product sales............ 145,846 127,798 139,786 93,627
Net income (loss).......................... 17,592 (145,107) 830 (385,778)
Net income (loss) per share................ 0.10 (0.90) 0.01 (2.41)
</TABLE>
As Chiron expands its presence in international markets, particularly
European markets, seasonal fluctuations in product sales and the related gross
margin amounts have become more significant. As a result of this and other
factors, Chiron's results in any one quarter are not necessarily indicative of
results expected for a full year. Accordingly, the Company should be evaluated
on the basis of annual financial information.
As discussed in Notes 2 and 3, the first quarter of 1995 included a $230.7
million write-off of purchased in-process technology related to the acquisitions
of Chiron Diagnostics, Novartis' interests in Chiron Vaccines and Chiron S.p.A.,
and IOLAB. The first quarter of 1995 also included other charges related to the
Novartis transaction totaling $49.5 million, and restructuring-related charges
of $37.6 million. The third quarter of 1995 included a $130.3 million write-off
of purchased in-process technology related to the Viagene acquisition.
84
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Chiron Corporation:
We have audited the accompanying consolidated balance sheets of Chiron
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chiron
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Francisco, California
January 31, 1997
85
<PAGE>
CHIRON CORPORATION
MARKET PRICE OF COMMON STOCK
The common stock of Chiron Corporation is traded in the NASDAQ National
Market System under the symbol CHIR. As of December 31, 1996, there were 8,139
holders of record of Chiron common stock, 775 remaining holders of record of
Cetus common stock and 16 remaining holders of Viagene common stock. The Company
has declared no cash dividends since its inception and does not expect to pay
any dividends in the foreseeable future. The quarterly high and low closing
sales price of Chiron common stock for 1996 and 1995 are shown below.
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter........................... $29 1/2 $23 1/4 $20 1/4 $13
Second Quarter.......................... 26 5/8 23 17 1/4 12
Third Quarter........................... 25 1/8 17 1/2 25 1/2 15 5/8
Fourth Quarter.......................... 23 18 1/8 28 1/2 20 3/4
</TABLE>
86
<PAGE>
EXHIBIT 21
List of Subsidiaries of Chiron Corporation
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Cetus Generic Corporation Delaware, USA
Chiron (formerly EuroCetus) Benelux B.V. Netherlands
Cephalon/Chiron Nederlands b.v. (Formerly EuroCetus Nederlands b.v.) Netherlands
Chiron GmbH (formerly EuroCetus GmbH) Germany
Chiron France S.A.R.L. (formerly EuroCetus France SARL) France
Chiron Italia S.r.l./ (formerly EuroCetus Italia S.r.l.) Italy
Chiron UK Ltd. (formerly EuroCetus U.K. Ltd.) United Kingdom
Chiron Iberia SA (formerly EuroCetus Iberia S.A.) Spain
Chiron Partners, Inc. California, USA
Chiron Alpha Corporation California, USA
Chiron/Cephalon JV Delaware, USA
Chiron Beta Corporation California, USA
Chiron Properties, Inc. California, USA
Chiron Delta Corporation Delaware, USA
Chiron Biocine Acquisition Corporation Delaware, USA
Chiron Biocine Corporation California, USA
Chiron Vaccines Company (formerly Chiron Biocine Company) Delaware, USA
Chiron (Bermuda) Ltd. Bermuda
Chiron Redevelopment Corp. & Co. K.G. (99% owned) Germany
31 Corsa Verwaltungsgesellschaft GmbH Germany
Chiron Behring GmbH (49% owned) Germany
Chiron Behring GmbH & Co. (49% limited partnership interest) Germany
Chiron Biocine B.V. (formerly JV Vax) Netherlands
Chiron S.p.A. (formerly Biocine, S.p.A.) Italy
Biocine S.A.R.L. France
Chiron Technologies Pty. Ltd. (formerly Chiron Mimotopes Pty. Ltd.) Australia
Chiron Mimotopes U.S. California, USA
Chiron Redevelopment Corporation Missouri, USA
Chiron Diagnostics S.A. (merged with Ciba Corning Diagnostics S.A.) France
Chiron Foreign Sales Corporation U.S. Virgin Islands
Chiron Funding LLC Delaware, USA
Chiron Viagene, Inc. Delaware, USA
Centaur Insurance Company, Inc. Hawaii, USA
Chiron Diagnostics Corporation (formerly Ciba Corning Diagnostics
Corporation) Delaware, USA
Chiron Healthcare Holdings Pty. Ltd (formerly Ciba Corning
Diagnostics Australia Pty. Ltd.) Australia
Chiron Healthcare Australia Pty. Ltd. (formerly Ciba Corning
Diagnostics Australia Pty. Limited) Australia
Chiron Healthcare Pty. Ltd. (formerly Australian Diagnostics
Corporation Pty. Ltd.) Australia
Chiron GmbH (formerly Ciba Corning Diagnostics GmbH) Austria
Chiron N.V./S.A. (formerly Ciba Corning Diagnostics, S.A./N.V.) Belgium
Chiron N.V. (formerly Ciba Corning Diagnostics Netherlands Ltd.) Netherlands
Chiron Inc. (formerly Ciba Corning Canada Inc.) Canada
Chiron Diagnostics Ltd. (formerly Ciba Corning Diagnostics Limited) United Kingdom
(Russia branch)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Chiron Diagnostics S.A. (formerly Ciba Corning Diagnostics S.A.) France
Chiron Diagnostics GmbH (formerly Ciba Corning Diagnostics GmbH) Germany
Chiron Ltd. (formerly Ciba Corning Diagnostics (H.K.) Ltd. Hong Kong
Chiron Marketing Services Ltd. (formerly Ciba Corning Marketing
Services (H.K.) Ltd.) Hong Kong
(Singapore branch)
Chiron Diagnostics S.p.A. (formerly Ciba Corning Diagnostics S.p.A.) Italy
Chiron KK (formerly Ciba Corning Diagnostics K.K.) Japan
Chiron, S.A. de C.V. (formerly Ciba Corning Diagnostics de Mexico,
S.A. de C.V.) (49%) Mexico
Chiron Ltd. (formerly Ciba Corning Korea, Ltd.) Korea
Chiron Sp. z.o.o. (formerly Ciba Corning Diagnostics Sp.z.o.o.) Poland
Chiron Espana, S.A. (formerly Ciba Corning Diagnostics S.A.) Spain
Chiron Diagnostics A.G. (formerly Ciba Corning Diagnostics A.G.) Switzerland
Ciba Corning Diagnostics Foreign Sales Corporation U.S. Virgin Islands
Chiron Taiwan Co., Ltd. (formerly Ciba Corning Diagnostics Co., Ltd.) Taiwan
Chiron Diagnostics, Lda. (formerly Ciba Corning Diagnostics, Lda.) Portugal
Chiron Brasil Ltda. Brazil
Chiron Ltd. Thailand
Chiron Vision Corporation Delaware, USA
Adatomed Pharmazeutische und Medizintechnische GmbH Germany
IntraOptics GmbH Germany
Magnum Diamond Corporation South Dakota, USA
New Gluco, Inc. Delaware, USA
Chiron Vision Australia Pty. Ltd. Australia
Chiron Vision (UK) Ltd. United Kingdom
Chiron Vision Canada, Inc. Canada
Chiron Vision France, SA France
Laboratoires Domilens S.A. France
Chiron Vision Espana SA Spain
Domilens A.B. Sweden
Domilens, Inc. Delaware, USA
Iolab Corporation California, USA
Chiron Vision (Singapore) Pte., Ltd. Singapore
Chiron Vision Italia S.r.l. Italy
Hardlens Co., Inc. (50% owned) California, USA
Softlens Co., Inc. (50% owned) California, USA
Chiron Technolas Ophtalmologische Systeme GmbH (75% owned) Germany
1110237 Ontario Inc. Canada
Future Vision, Inc. California, USA
Steinway Instrument Company, Inc. California, USA
</TABLE>
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1996 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996<F6>
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996<F6>
<CASH> 68,114
<SECURITIES> 60,721<F1>
<RECEIVABLES> 351,971
<ALLOWANCES> 20,692
<INVENTORY> 180,534
<CURRENT-ASSETS> 696,768
<PP&E> 796,821
<DEPRECIATION> 213,217
<TOTAL-ASSETS> 1,688,670
<CURRENT-LIABILITIES> 473,169
<BONDS> 419,589<F2>
0
0
<COMMON> 1,707
<OTHER-SE> 763,148<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,688,670
<SALES> 1,004,827
<TOTAL-REVENUES> 1,312,844
<CGS> 438,885
<TOTAL-COSTS> 438,885
<OTHER-EXPENSES> 386,014<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,741<F7>
<INCOME-PRETAX> 79,974<F5>
<INCOME-TAX> 24,829
<INCOME-CONTINUING> 55,145
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,145
<EPS-PRIMARY> 0.31<F8>
<EPS-DILUTED> 0.31<F8>
<FN>
<F1> CONSISTS OF BOTH SHORT-TERM AND NON-CURRENT 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 AND OTHER OPERATING EXPENSES.
<F5> INCLUDES A $12.2 MILLION GAIN FROM THE SALE OF A PARTNERSHIP INTEREST
REFLECTED IN OTHER EXPENSE, NET; AND $6.9 MILLION IN ROYALTIES RELATED TO
PRIOR PERIOD SALES RESULTING FROM A SETTLEMENT, REFLECTED IN EQUITY IN
EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES.
<F6> ACTUAL FISCAL YEAR END AND PERIOD END WAS DEC-29-1996, BUT FOR PRESENTATION
PURPOSES DATES USED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
REFER TO THE CALENDAR MONTH END (DEC-31-1996).
<F7> CONSISTS OF $18.1 MILLION OF INTEREST EXPENSE ON CONVERTIBLE
DEBENTURES, $3.4 MILLION OF INTEREST EXPENSE ON RELATED PARTY
PAYABLE AND $9.2 MILLION OF OTHER INTEREST EXPENSE.
<F8> THE COMPANY DECLARED A 4-FOR-1 STOCK SPLIT EFFECTIVE AUG-02-1996.
PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED FOR THIS
RECAPITALIZATION.
</TABLE>
