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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
COMMISSION FILE NO. 0-12798
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CHIRON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2754624
(State of Incorporation) (IRS Employer Identification No.)
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4560 HORTON STREET
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
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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 27, 1998, was $1.9 billion.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 27, 1998:
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TITLE OF CLASS NUMBER OF SHARES
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Common Stock, $0.01 par value 176,294,384
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's Consolidated Financial Statements for the fiscal year ended
December 28, 1997, are incorporated by reference into Parts II and IV of this
Report and are filed as Exhibit 13 to this 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 14, 1998, are incorporated by
reference into Part III of this Report.
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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.
OVERVIEW AND CERTAIN RECENT DEVELOPMENTS
Chiron develops, manufactures and markets human healthcare products for the
treatment, prevention and diagnosis of disease utilizing innovations in biology
and chemistry.
Chiron has a strong commitment to research as an essential component of its
product development effort. The Company focuses its research and development
activities primarily on areas in which it has particular strengths, including
infectious diseases, cancer and cardiovascular diseases. An important part of
the Company's research and development effort is undertaken in collaborations
with third parties who are able to contribute significant enabling technologies
and other resources to the development and commercialization of the product,
including in some cases marketing and sales expertise.
Among the products currently sold by the Company are Proleukin(R)
(aldesleukin), a recombinant form of interleukin-2, which the Company markets as
a treatment for metastatic renal cell carcinoma and metastatic melanoma; a line
of traditional pediatric and adult vaccines; and diagnostic systems and tests,
including automated immunodiagnostic systems, critical blood analyte systems and
quantitative nucleic acid tests. The Company has an interest in a number of
other products through collaborations and joint businesses.
In January 1995 the Company established an alliance with Novartis AG
("Novartis"), a life sciences company headquartered in Basel, Switzerland. As of
February 27, 1998, Novartis held shares representing approximately 45% of the
outstanding common stock of the Company. For more on the Novartis alliance, see
"Relationship With Novartis", below.
Chiron recently sold certain businesses as it moved to focus on its core
businesses. On December 29, 1997, the Company completed the sale of its
ophthalmic products business to Bausch & Lomb Incorporated for approximately
$300 million in cash. On December 5, 1997, the Company completed the sale of its
diagnostic quality controls business (other than certain blood gas and
immunodiagnostic controls) to Bio-Rad Laboratories, Inc. for approximately $30
million in cash.
The Company was incorporated in California in 1981 and was merged into a
Delaware corporation in November 1986. Chiron is a global organization with
facilities on four continents. The Company's principal executive offices are
located at 4560 Horton Street, Emeryville, California 94608, and its telephone
number at that address is (510) 655-8730.
PRODUCTS
TREATMENT
The Company's leading therapeutic product is Proleukin(R) (aldesleukin), a
recombinant form of interleukin-2 ("IL-2"). IL-2 is a protein produced naturally
in the body in very small quantities. IL-2 stimulates the immune system to
increase the production of lymphocytes (white blood cells) that help fight viral
infections and, in some cases, cancers. While the precise mechanism of
anti-tumor action of
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Proleukin(R) is unknown, research has demonstrated that it induces the
proliferation of immune cells-- natural killer and cytotoxic T cells--that can
recognize and mobilize against tumor-specific antigens on the surface of
malignant cells. Proleukin(R) is marketed by the Company directly or through
distributors in the United States, Canada, Europe, and South America for the
treatment of metastatic renal cell carcinoma (a type of kidney cancer). In
January 1998, the Company received FDA approval to market Proleukin(R) in the
United States for the treatment of metastatic melanoma (a form of skin cancer).
Chiron manufactures recombinant human platelet-derived growth factor
(rhPDGF-BB), the active ingredient in Regranex(R) (becaplermin), developed with
Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson ("J&J") company through a
collaboration in growth factor research that began in 1984. Ortho-McNeil markets
Regranex(R) in the United States as a treatment for foot ulcers related to
diabetes. Regranex(R) works by enhancing the body's natural wound healing
processes. It stimulates the migration of cells to the site of the ulcer,
encouraging the patient's body to grow new tissue that helps heal these open
wounds. Regranex(R) is the first product demonstrated to assist in the healing
of diabetic foot ulcers.
Chiron manufactures Betaseron(R) (interferon beta-1b) for Berlex
Laboratories, Inc. ("Berlex") and its parent company, Schering AG of Germany.
Betaseron(R) is the result of a research collaboration initiated by the Company
in the early 1980's. Berlex markets Betaseron(R) primarily in the United States
and Canada to treat patients with multiple sclerosis. The Company also receives
royalties from the sale of a similar product in Europe, where it is manufactured
by Boehringer Ingelheim and marketed by Schering AG for the treatment of
multiple sclerosis under the trade name Betaferon(R). Multiple sclerosis is an
autoimmune disease in which the patient's immune system attacks and destroys an
element of the patient's own central nervous system.
On behalf of Novartis, Chiron has marketed and, since April 1997,
co-promotes in the United States Aredia(R) (pamidronate disodium for injection),
a drug to treat hypercalcimia of malignancy, Paget's disease and osteolytic bone
lesions of multiple myeloma. In December 1997, the Company and Novartis agreed
to an early termination of the Company's co-promotion services effective April
3, 1998.
No single therapeutic product or class of therapeutic products accounted for
10% or more of consolidated total revenues of the Company in any of the last
three fiscal years.
PREVENTION
Chiron's current vaccine portfolio consists primarily of traditional
vaccines. Through its subsidiary Chiron S.p.A., based in Siena, Italy, the
Company manufactures and markets vaccines, singly and in various combinations,
for diphtheria, tetanus, pertussis, meningococcus, haemophilus influenzae, flu,
measles, mumps, rubella, hepatitis A and an oral polio vaccine and, under
license, markets a vaccine for typhoid fever. These products are marketed in
Italy, the Middle East, the Far East, Africa and South America, and to
international health agencies such as the World Health Organization.
In July 1996, Chiron formed a joint venture with Behringwerke AG (which
subsequently merged into its parent company, Hoechst AG) under which the Company
purchased a 49% interest in the human vaccine business of Behringwerke. The
joint venture is based in Marburg, Germany and operates under the name Chiron
Behring GmbH & Co ("Chiron Behring"). In February 1998, the Company notified
Hoechst that Chiron intends to exercise its option to purchase the remaining 51%
interest in the joint venture. Chiron expects to close that acquisition in the
second fiscal quarter of 1998. Through Chiron Behring, the Company manufactures
and markets in Germany vaccines for diphtheria, tetanus, pertussis, flu, rabies,
tick-borne encephalitis, tuberculosis, cholera and an oral polio vaccine.
Certain of these products are marketed in other European countries and in the
Middle East, the Far East, Africa and South America, and to international health
agencies such as the World Health Organization. In 1997, the Company began
marketing Chiron Behring's rabies vaccine in the United States. Chiron Behring
also markets in Germany, under distribution agreements with other manufacturers,
traditional vaccines for hepatitis A, measles,
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mumps, rubella, typhoid fever, pneumococcal disease, haemophilus influenzae type
b and an inactivated polio vaccine and a recombinant vaccine for hepatitis B.
The Company has developed a genetically engineered acellular vaccine for
pertussis (whooping cough), which currently is marketed in Italy both as a
monovalent vaccine and in combination with diphtheria and tetanus ("DTaP").
Chiron has filed applications to market the DTaP vaccine in the United States
and Europe. These applications, which are under review, are based on the results
of large-scale U.S. government sponsored trials in Italy which demonstrated that
the Chiron acellular pertussis vaccine is safer and more effective than a U.S.
licensed whole-cell pertussis vaccine to which it was compared. The Company also
has developed an adjuvanted flu vaccine, which in 1997 received marketing
approval in Italy. The Company currently is considering its regulatory approval
strategy for this vaccine in Europe and elsewhere.
In addition to revenues from the sale of the vaccine products described
above, the Company receives royalties from the sale of Recombivax(R) HB, a
vaccine against hepatitis B developed, manufactured and marketed by Merck & Co.,
Inc. ("Merck") using technology developed by Chiron. Recombivax(R) HB was the
first vaccine produced using genetic engineering to be licensed by the FDA for
human use.
No single vaccine product or class of vaccine products accounted for 10% or
more of consolidated total revenues of the Company in any of the last three
fiscal years.
DIAGNOSIS
Chiron's diagnostic businesses include immunodiagnostics, critical care,
nucleic acid diagnostics, and (through a joint business with an affiliate of
J&J) blood screening.
The Company's principal immunodiagnostic products are the ACS:180(R),
ACS:180(R) Plus, and ACS:180(R) SE automated chemiluminescence systems and the
immunodiagnostic reagents and test kits that are performed on these systems.
These are high-throughput random access instruments used by hospitals and
reference laboratories to detect and measure thyroid, anemia, fertility, cancer
and cardiac indicators. The Company manufactures and sells the equipment as well
as the related reagents, test kits and other supplies. Over 3,700 systems are
placed worldwide.
Chiron's critical care products include the Rapidlab-TM- 800, a critical
blood analyte instrument system used to measure blood gases, blood electrolytes,
metabolites and co-oximetry. This system is used by hospitals to diagnose and
monitor patients in critical care settings. The laboratory product line also
includes the 200 and 300 series critical blood analyte instrument systems.
The Company's principal nucleic acid diagnostic products are the
Quantiplex(R) tests for human immunodeficiency virus ("HIV"), hepatitis C virus
("HCV") and hepatitis B virus ("HBV"). These tests, based on proprietary
technology called branched DNA signal amplification ("bDNA"), are used to
quantify the level of virus in blood and plasma samples. Research has suggested
that viral load testing may have utility in predicting disease progression,
selection of patients for treatment based on probability of response and
monitoring response to therapy. In the United States, Quantiplex(R) tests
currently are sold for research use only. The Quantiplex(R) HCV and HBV tests
have been approved for use in Japan, and the Quantiplex(R) HIV test has been
approved for use in certain countries in Europe and South America and in
Australia. In 1997 the Company launched in the United States the first
semiautomatic instrument platform for quantitative nucleic acid diagnostic
assays, the Quantiplex(R) bDNA 340 system. This system automates certain aspects
of performing bDNA probe assays and enhances operator efficiency and is
available for research use only.
Chiron's joint immunodiagnostics business with Ortho Diagnostic Systems,
Inc. ("Ortho"), a J&J company, is based largely on the screening of blood in
blood banks and other similar settings for the potential presence of HIV and
hepatitis viruses. The joint business sells a full line of tests required to
screen blood for hepatitis viruses and retroviruses, and provides supplemental
tests and microplate-based
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instrument systems to automate test performance and data collection. Chiron and
Ortho share equally in the pretax operating earnings generated by the joint
business. The joint business holds the immunodiagnostic rights to Chiron's
hepatitis and retrovirus technology and receives royalties from the sale of HCV
and HIV tests by Abbott Laboratories ("Abbott"), and from sales of HCV tests by
Pasteur Sanofi Diagnostics, International Murex Technologies Corporation and
Genelabs Diagnostic, Inc.
The ACS series of immunodiagnostic systems and related reagents and test
kits accounted for approximately 21%, 20% and 34% of the Company's consolidated
total revenues in fiscal years 1997, 1996 and 1995, respectively. The
Rapidlab-TM- 800 series of critical blood analyte systems accounted for
approximately 14%, 15% and 21% of the Company's consolidated total revenues in
fiscal years 1997, 1996 and 1995, respectively.
RESEARCH AND DEVELOPMENT
Chiron has a strong commitment to research as the essential component of its
product development effort. Technologies developed in collaboration with third
parties, as well as technologies licensed from outside parties, also are sources
of potential products.
TREATMENT
FUNCTIONAL GENOMICS. Genomics and other technologies are used to discover
new genes and to determine their role and the role of the encoded proteins in a
target disease. With this information, the Company then identifies and develops
potential products utilizing a variety of approaches, including recombinant
proteins, gene therapy and small molecule drug discovery for treatment of the
disease, vaccines with recombinant antigens for prevention of the disease, and
immunodiagnostic and bDNA probe assays for diagnosing and monitoring the
progress of the disease.
RECOMBINANT PROTEINS. Proteins produced naturally by the human body play a
variety of roles in controlling disease. When administered as therapeutic
agents, certain proteins can enhance the patient's natural ability to fight
disease. However, traditional methods of isolating or producing proteins can be
cost-prohibitive, particularly in the quantities needed for pharmaceutical use.
Through genetic engineering, certain proteins which might not otherwise be
available can be produced in relatively large quantities at reasonable cost.
The Company and its collaborators have a number of recombinant proteins in
clinical development. Proleukin(R), already approved for marketing as a
treatment for certain forms of kidney and skin cancer, is being clinically
evaluated for use to treat patients with HIV infection. Fibroblast Growth Factor
("FGF"), a growth factor which can stimulate the formation of new blood vessels,
is in clinical studies for use as a treatment for coronary artery disease.
Tissue Factor Pathway Inhibitor ("TFPI"), a coagulation inhibitor, is being
developed in collaboration with G.D. Searle & Co., a subsidiary of the Monsanto
Company; the Company and Searle are conducting clinical studies on the use of
TFPI as a treatment for patients with sepsis. Myotrophin(R) (mecasermin), a
recombinant form of Insulin-Like Growth Factor-1, is being developed by the
Company in collaboration with Cephalon, Inc. as a treatment for amyotrophic
lateral sclerosis (also known as ALS or Lou Gehrig's disease) and is being
developed by Chiron for other indications. On May 8, 1997 an FDA advisory
committee found that there was not sufficient evidence of efficacy to warrant
approval by the FDA as a treatment for ALS. In November 1997, Chiron and
Cephalon withdrew and resubmitted their application to the FDA to allow the FDA
additional time to review the application. The FDA has scheduled further
consideration of the application before the advisory committee on April 9, 1998.
GENE THERAPY. Traditional recombinant protein therapeutics are produced
outside the patient's body and administered to the patient, typically through
injection. Gene therapy enables the patient's own body to produce a desired
protein by inserting the gene for that protein into the patient's cells.
Currently there are no gene therapy products on the market; many studies suggest
that the technology is promising but
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considerable further study is required to determine whether this technology can
be safely and effectively utilized to treat disease. An example of a potential
application of gene therapy currently in preclinical development at the Company
is Factor VIII. Factor VIII is a protein that causes blood to clot.
Hemophiliacs, as a result of a hereditary defect, are born with faulty copies of
the gene that produces Factor VIII. Through gene therapy, it may be possible to
insert into a hemophiliac's cells the normal Factor VIII gene, so that the
patient's own cells can produce the blood clotting protein.
A key component of any gene therapy treatment will be the mechanism for
"inserting" the gene into the patient's cells. The Company is developing several
gene transfer systems, including retroviral and other viral vectors as well as
the Company's proprietary ELVS-TM- DNA vector system. Each gene transfer system
has different properties, including cell specificity (the type of cells it can
enter) as well as durability of expression (how long it will continue to make
the therapeutic protein). Different gene transfer systems are likely to be
required to meet different therapeutic needs. Viral vectors are derived from
viruses. The vectors have the "coat" of the original virus, which allows them to
enter the targeted cell. Certain viral genes are removed and therapeutic genes
are added so that the vector can no longer cause the disease characteristic of
the original virus and instead expresses the desired therapeutic protein. DNA
vectors include only the therapeutic gene and the control elements required to
express that gene. Studies have shown that certain types of cells, including
muscle cells, will take up the DNA and express the gene contained on the DNA.
The Company also is investigating whether gene therapy may be used as part
of a two-step treatment which combines gene therapy with more traditional
therapeutics. For example, HSV-tk is a gene encoding thymidine kinase derived
from herpes simplex virus. It may be possible to use a gene transfer system to
insert the HSV-tk gene into targeted cells (such as cancer cells), and then kill
the cells that have taken up the HSV-tk gene by treating the patient with
Gancyclovir, an antiviral for herpes. The Company is conducting clinical studies
on the use of HSV-tk gene therapy for the treatment of melanoma (a form of skin
cancer) and, in collaboration with Baxter Healthcare Corporation, for the
treatment of graft-versus-host disease.
The Company is also conducting clinical studies on the use of Gamma
Interferon in the treatment of melanoma. Gamma Interferon, like Betaseron(R) and
Proleukin(R) , is a cytokine, a class of messenger protein that controls the way
the cells of the immune system respond. Gamma interferon stimulates an immune
response, particularly that part of the immune response that kills tumor cells
and cells infected by viruses. The Company is conducting clinical studies to
determine whether expression of the gamma interferon gene in a tumor will
stimulate an immune response that will act not only against that primary tumor,
but also against any other sites in the body to which tumor cells may have
moved.
SMALL MOLECULE DRUG DISCOVERY. Chiron's small molecule drug discovery
program combines multiple disciplines, including combinatorial and computational
chemistry, robotic screening and selection and molecular biology, to screen,
identify and refine compounds which may be used as drugs for treating medical
conditions or disorders. In addition to drug discovery against specific disease
targets of interest to the Company, from time to time the Company enters into
collaboration agreements with third parties under which the Company utilizes its
proprietary technologies to identify drug candidates directed at specific
disease targets of interest to the partner. Certain compounds which may be of
interest have been identified and are being further optimized and tested prior
to moving into clinical development.
THERAPEUTIC VACCINES. The Company is investigating the potential use of
vaccines for therapeutic purposes, in which antigens are used to stimulate an
immune response against established infections and cancer. The Company is
collaborating with Biomira, Inc. in the development of Theratope-Registered
Trademark-, a therapeutic vaccine for breast cancer. This vaccine, which is in
clinical trials, consists of a synthetic mimic of a breast cancer-associated
antigen conjugated to a carrier protein.
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DEPOCYT-TM-. The Company is developing DepoCyt-TM- in collaboration with
DepoTech Corporation as a treatment for neoplastic meningitis. DepoCyt-TM-
consists of cytarabine (a generic chemotherapy product) encapsulated in a novel
delivery system, called Depofoam-TM-. The parties' application to market
DepoCyt-TM- is currently being reviewed by the FDA. In December 1997 an FDA
advisory committee declined to recommend approval of DepoCyt-TM-. Chiron and
Depotech subsequently agreed with the FDA to submit an amendment to the
application with certain additional clinical trial data.
PREVENTION
Chiron is developing a new generation of vaccines utilizing genetic
engineering and other techniques of modern biotechnology, including vaccines
based on recombinant antigens as well as DNA-based vaccines. The Company
currently is conducting clinical studies of a number of vaccine candidates,
including vaccines for HCV, HIV and meningococcus C, and is conducting
preclinical studies on vaccines for a number of other targets. The Company also
is developing novel adjuvants. Adjuvants are compounds that amplify the immune
response generated by vaccine antigens. One of Chiron's adjuvants, MF-59, is a
component of Chiron's new flu vaccine, which was launched in Italy in 1997, and
is also a component of a number of other candidate vaccines currently in
clinical development by Chiron. In addition, Chiron is conducting preclinical
investigations of alternative delivery systems for vaccines that may be used in
lieu of injection, such as nasally or orally delivered vaccines.
DIAGNOSIS
In diagnostics, the Company is focusing its efforts on developing innovative
technologies for specific disease panels that include qualitative and
quantitative assays, genotyping and resistance assays. Chiron is developing a
more powerful immunodiagnostic system, the ACS:Centaur-TM-, designed to markedly
increase laboratory productivity. In March 1998 the Company initiated a
controlled release of the ACS:Centaur-TM- system for commercial use beginning
with the Company's thyroid panel; additional panels (reproductive, oncology and
anemia) are expected to be released in the second quarter of 1998. The
Rapidpoint-TM- 400 is being developed as a critical care system designed
specifically for point-of-care settings in hospitals. This system is scheduled
for introduction in 1998. The Company is developing new versions of its
Quantiplex(R) bDNA probe tests for HIV, HCV and HBV that will be even more
sensitive and able to determine the presence of even smaller quantities of
virus. The Company expects to introduce an improved bDNA probe test for HIV in
the United States for research use only in 1998.
RESEARCH REVENUES AND EXPENSES
Collaborative arrangements with third parties are also a source of revenue
for the Company. The terms of collaborative agreements vary considerably; in
general, collaboration revenues include fees paid upon signing the agreement,
fees for research services as they are performed or completed and milestone
payments upon attainment of specified benchmarks.
Novartis and the Company have entered into an agreement under which Novartis
has agreed to provide research funding for certain projects. The funded projects
currently consist of adult and pediatric vaccines, Insulin Like Growth Factor
- -1, Factor VIII and HSV-tk Novartis has agreed to fund, at Chiron's request and
subject to certain annual and aggregate limits, 100% of the development costs of
these projects incurred between January 1, 1995 and December 31, 1999. In
exchange for providing this funding, Novartis has certain co-promotion rights
for certain vaccines as well as an interest in certain royalties on sales of
certain products resulting from the funded research.
Research and development expense for the years ended December 31, 1997, 1996
and 1995 for Company-sponsored research, including payments to collaboration
partners, was $376.0 million, $352.5 million and $327.9 million, respectively.
Of that, $79.5 million, $103.8 million and $51.8 million in 1997, 1996 and 1995,
respectively, was reimbursed by third parties.
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COMMERCIALIZATION
Technologies arising out of the Company's research and development efforts
are commercialized in a variety of ways. Certain products are marketed and
distributed by the Company, either directly or through distributors. See
"Distribution", below. Other technologies are developed by the Company in
collaboration with third parties, and under the collaboration agreement
marketing rights may be allocated to the Company or to the collaborator or
shared by both parties. In the event marketing rights are allocated to the
collaborator, the Company generally retains the right to manufacture and supply
key raw materials to the collaborator. Still other technologies are licensed by
the Company to third parties, with the licensee assuming responsibility for
further development and the Company receiving royalties on sales of the
resulting product. Agreements under which the Company currently derives revenues
for technologies licensed to third parties include an agreement with Merck
relating to a vaccine against hepatitis B and an agreement with Nova Nordisk
relating to technology used in the manufacture of recombinant human insulin.
DISTRIBUTION
To remain competitive in an intensely competitive environment, Chiron
maintains several specialized marketing and sales forces that concentrate on
individual classes of customers.
Chiron's diagnostic sales and marketing organization for the U.S. is based
in Norwood, Massachusetts. The Company has regional sales offices in more than
twenty countries overseas, adding four additional offices in 1997. Sales efforts
are focused on hospitals and reference laboratories. In general, products are
sold directly to hospitals and reference labs, although distributors are used in
certain smaller overseas markets. Chiron's Quantiplex(R) bDNA probe tests for
HCV and HBV are distributed in Japan by Daiichi Pure Chemicals Co., Ltd.
The Company's vaccine marketing organization is based in Siena, Italy and
Marburg, Germany. Direct sales efforts are focused on pediatricians and general
practitioners. Products are also sold to the public sector through tenders and
to private sector pharmacies through wholesalers and distributors.
Chiron's therapeutics marketing, sales and distribution organization for the
U.S. is based in Emeryville, California and for Europe is headquartered in
Marburg, Germany. Sales efforts are focused on specialist physicians,
principally oncologists, who are based in hospitals and large clinics. In
general, products are sold to wholesalers, distributors, and hospital
pharmacies.
RAW MATERIALS
Raw materials and other supplies used in the manufacture of the Company's
products (both commercial and investigational) generally are available from
multiple commercial sources. Certain processes, however, use materials that are
available from sole sources or that are in short supply or that are difficult
for the supplier to produce and certify in accordance with the Company's
specifications. The Company's vaccine and therapeutic products are biologics;
from time to time concerns are raised with respect to potential contamination of
biological materials that are supplied to the Company for use in various
production processes. These concerns can further tighten market conditions for
materials that may be in short supply or available from limited sources.
Moreover, regulatory approvals to market the Company's products may be
conditioned upon obtaining certain materials from specified sources; the
Company's ability to substitute material from an alternate source may be subject
to delay pending regulatory approval of such alternate source. Although the
Company monitors the ability of certain suppliers to meet the Company's needs
and the market conditions for these materials, there is a risk that material
shortages could impact production.
PATENTS
Patents are very important to the business of the Company. Chiron has a
policy of seeking patents on inventions arising from its extensive research and
development activities. The time and expense required to
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develop and obtain regulatory approval to market human healthcare products is
significant. Without the protection of patents or trade secrets, competitors may
be able to use the Company's inventions to manufacture and market competing
products without being required to undertake the lengthy and expensive
development efforts made by Chiron. Chiron has a substantial number of granted
patents and pending patent applications in the United States and other important
markets, and a number of patents and patent applications owned by third parties
have been licensed to Chiron.
There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the United States and
other important markets. It is not known how many of the Company's pending
patent applications will be granted, nor the effective coverage of those that
grant. In the United States and other important markets, the issuance of a
patent is not conclusive as to its validity or the enforceable scope of its
claims. The Company has engaged in significant litigation to determine the scope
and validity of certain of its patents, and expects to continue to do so in the
future.
Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection.
Third parties may be able to design around the patents and develop competitive
products that do not use the inventions covered by the patents. Many countries,
including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties (for
example, the third party's product is needed to meet a threat to public health
or safety in that country, or the patent owner has failed to "work" the
invention in that country, or the third party has patented improvements.) And
most countries limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement, which could
materially diminish the value of the patent. Furthermore, most countries do not
provide discovery so the Company may not be able to meet its burden of proving
infringement. Nor can it be guaranteed that the Company will even become aware
of infringement of its patents.
To a lesser extent, trade secrets and confidential information are important
to Chiron's commercial success. Although the Company seeks to protect trade
secrets and confidential information, there can be no assurance that others will
not obtain access to such information or develop the same or similar information
independently, or that third parties will not obtain patent protection that
precludes Chiron from using its trade secrets or confidential information.
Chiron is aware that third parties, including competitors, educational
institutions and governmental organizations, have patents and patent
applications in the United States and other significant markets that may be
useful or necessary for the manufacture, use or sale of certain of the Company's
products (commercial and investigational). There may be other such patents and
patent applications of which the Company is not currently aware. It is likely
that third parties will obtain other such patents in the future. Certain of
these patents may be sufficiently broad to prevent or delay Chiron from
practicing necessary technology, including manufacturing or marketing products
important to the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which Chiron may wish
or need to obtain licenses to such patents, and the cost and availability of
such licenses cannot be accurately predicted. If Chiron does 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 could find that the development, manufacture
or sale of such products is foreclosed. Chiron could also incur substantial
costs in challenging the validity and scope of such patents.
TRADEMARKS
ACS:180(R) , Quantiplex(R) and Proleukin(R) are registered trademarks of the
Company or its subsidiaries. ELVS-TM-, ACS:Centaur-TM-, Rapidlab-TM- and
Rapidpoint-TM- are trademarks of the Company or its subsidiaries. DepoCyt-TM- is
a trademark owned by Chiron and DepoTech. The following registered trademarks
are owned
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by the indicated companies: Aredia(R) (Novartis AG), Betaseron(R) and
Betaferon(R) (Schering AG), Myotrophin(R) (Cephalon Inc.), Recombivax(R) HB
(Merck), Regranex(R) (J&J), and Theratope(R) (Biomira, Inc.).
SEASONALITY
Sales of the Company's diagnostic products are moderately seasonal, with
lower sales in the first and third quarters and higher sales in the second and
fourth quarters of the year. Sales of certain of the Company's vaccine products,
in particular flu vaccine, also are seasonal, with higher sales in the fourth
quarter of the year.
CERTAIN INVESTMENTS IN FIXED ASSETS
A majority of the Company's immunodiagnostic systems and a significant
number of the Company's critical care systems are placed with customers under
rental agreements. Under these agreements the Company retains title to the
equipment. As a result, the Company has a significant investment carried in
fixed assets related to these systems and, to remain competitive, the Company
must continue to make substantial investments in such assets.
MAJOR CUSTOMERS
The Company has a strategic alliance with Novartis and in connection
therewith has entered into a series of arrangements with Novartis. See
"Relationship With Novartis", below. These arrangements contributed 11% and 10%
of total revenues in 1997 and 1996, respectively, and less than 10% of total
revenues in 1995. The Company has a joint immunodiagnostics business with J&J.
See "Products-- Diagnosis", above. The J&J joint business, together with certain
other arrangements with J&J and its affiliates, contributed 12%, 11% and 11% of
total revenues in 1997, 1996 and 1995, respectively.
COMPETITION
Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
diagnostics companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and diagnostics companies, have
greater resources than the Company. The technologies applied by the Company and
its competitors are rapidly evolving, and new developments frequently result in
price competition and product obsolescence. Substantial consolidation is
underway in the global healthcare industry, and is expected to produce greater
efficiencies and even more intense competition.
To compete effectively, Chiron invests heavily in research and development,
maintains specialized sales forces that concentrate on individual classes of
customers, and spends significant amounts on advertising, promotion and selling.
Important biotechnology research 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
positions in technology.
TREATMENT
Proleukin(R) competes with alpha interferon sold by Schering Plough
Corporation and by F. Hoffman La-Roche, Ltd. ("Roche") as a treatment for
metastatic kidney cancer and metastatic melanoma, although many patients are
treated with both products. The Company estimates that Proleukin(R) has
approximately a 50% market share for these indications. The principal method of
competition is product performance.
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Several other companies are developing interferons as immune-system-based
therapies for cancers and infectious diseases, including Roche, Genentech, Inc.
and Amgen, Inc.
Regranex(R) is the first product approved by the FDA for treatment of
diabetic foot ulcers. A product from Advanced Tissue Sciences & Smith and
Nephew, Dermagraft, recently received recommendation for approval by an FDA
advisory committee for treatment of diabetic foot ulcers. Apligraf, an
Organogenesis/ Novartis product, has received recommendation for approval by an
FDA advisory committee for treatment of venous leg ulcers and is in clinical
trials for treatment of diabetic foot ulcers.
Betaseron(R), as a treatment for multiple sclerosis, competes with Avonex, a
recombinant interferon beta sold by Biogen, Inc., and with Copaxone from Teva
Pharmaceuticals. In certain European countries, Schering AG's product,
Betaferon(R), faces competition from Ares Serono, who sells an extracted form of
beta interferon that is used for, among other purposes, treatment of multiple
sclerosis. Ares has filed an application with the FDA for approval to market its
product in the United States. Other companies have treatments for multiple
sclerosis in clinical development.
PREVENTION
Four large companies hold the greatest share of the worldwide vaccine
market: Merck, SmithKline Beecham Biologics ("SB"), Wyeth Lederle Vaccines &
Pediatrics, a division of American Home Products Corporation ("Lederle"), and
Pasteur Merieux Connaught ("PMC"). PMC separately has a strategic alliance with
Merck. All four of these companies, as well as other biotechnology companies,
have substantial research and development programs. The Company estimates that
it has approximately a 38% and 37% market share in Germany and Italy,
respectively, and an aggregate market share of approximately 8% outside of the
United States, Europe and Japan.
The principal methods of competition in the vaccine industry are price and
introduction of new products, including vaccines against diseases for which no
vaccine product was previously available as well as new combination vaccines
that combine existing vaccines for several diseases into a single product.
Combination vaccines frequently are favored by public health authorities,
medical practitioners and patients, particularly in the case of pediatric
vaccines, because they eliminate the need for multiple injections and may
increase overall compliance with recommended vaccination schedules. As new
combination vaccines are introduced, older combinations and single products
often become obsolete. The Company may be limited in its ability to develop and
market certain combination vaccines if one of the vaccines which would otherwise
be included in the combination is covered by valid and enforceable patent or
other proprietary rights held by third parties.
DIAGNOSTICS
The principal competition for the Company's ACS:180(R), ACS:180(R) Plus, and
ACS:180(R) SE systems is an immunodiagnostic system produced by Abbott. Other
competitors in immunodiagnostics include Roche (which is acquiring the
diagnostics business of Boehringer Mannheim), Dade Behring Inc., Bayer AG, and
J&J, which purchased the diagnostics and clinical chemistry businesses of
Eastman Kodak. Chiron's overall market share in immunodiagnostics is
approximately 5%, with shares of up to 15% in segments in which the Company
currently competes. The Company's immunodiagnostic systems currently do not
include assays for hepatitis viruses and retroviruses, which are an important
part of the diagnostic market, because the Company's patents and other rights to
develop such assays have been exclusively licensed to its joint business with
Ortho. Without such assays, the competitiveness of the Company's systems will be
impaired as against other automated random access systems that include such
assays. There can be no assurance that hepatitis or retrovirus assays will be
available for use on the Company's systems. See "Legal Proceedings-- Ortho
Diagnostic Systems, Inc."
The principal competition for the Rapidlab-TM- 800 are lab-based systems
from Radiometer Medical A/S and Instrumentation Laboratory Company. Chiron has a
worldwide market leadership position in the core laboratory. The Company
estimates that it has approximately a 35% market share in the global critical
care market. The Rapidlab-TM- 800 increasingly is facing competition from
point-of-care systems, such as the
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system from I-STAT, which has a collaboration with Hewlett-Packard Company. The
Company expects to launch its own point-of-care system, the Rapidpoint-TM- 400,
in 1998.
Roche, which markets tests based on polymerase chain reaction ("PCR"), has
the largest share of the nucleic acid diagnostics market, followed by Gen-Probe
Incorporated and Chiron. Roche sells PCR tests for, among other things, HIV and
HCV that compete directly with the Company's Quantiplex(R) bDNA probe tests of
HIV and HCV. Gen-Probe's current portfolio is mainly limited to tests for
chlamydia and gonorrhea. Other competitors with nucleic acid diagnostic products
on the market (for research use only or, in some cases, commercial sale) include
Abbott (chlamydia/gonorrhea), Digene Corporation (human papilloma virus) and
Organon Teknika NV (HIV). The Company has approximately a 30% share in nucleic
acid diagnostic businesses in which it participates. In February 1998, Chiron
announced that it has been granted United States Patent Nos. 5,712,088 and
5,714,596 (the " '088 patent" and " '596 patent", respectively), which are
directed to oligonucleotides and PCR assays for the detection of HCV. Chiron
filed suit against Roche for infringement of the " '088 and the " '596 patents
in the United States and Europe; the suits ask for injunctions to prevent
further infringement by Roche. The Company's Quantiplex(R) bDNA system 340 is
the first semi-automated system for quantitative nucleic acid tests. Roche has a
system for qualitative assays which it is attempting to adapt for quantitative
assays.
In blood screening, the Chiron/Ortho joint business competes with Abbott,
with each having greater than 45% market share.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
important markets is a significant factor in the manufacture and sale of the
Company's products and in its research and development activities.
VACCINES AND THERAPEUTICS. In the United States, Chiron's therapeutic and
vaccine products (both commercial and investigational) are regulated primarily
under federal law and are subject to rigorous FDA approval procedures. No
product can be marketed in the United States until an appropriate regulatory
application is approved by the FDA. The approval procedures are applied on a
product-by-product basis and require, among other things, an extensive
three-phase human clinical testing program. In phase 1, studies are conducted
with a relatively small number of subjects to assess the safety of the product.
In phase 2, the product is evaluated in a larger group of subjects to begin to
assess efficacy. Phase 3 studies are conducted in the target population with a
number of subjects that is large enough to provide sufficient data to establish
statistically the safety and efficacy of the product. FDA approval of a product
is limited to treatment for specified medical conditions or disorders, and
further studies would be required to market the product for other indications.
All facilities used to manufacture, fill, test and distribute biologic products
are required to be inspected and approved by the FDA. If any change is made in
manufacturing facilities or processes after FDA approval is obtained, additional
regulatory review and possibly additional clinical studies may be required.
Licensing procedures in Europe are comparable to those in the United States.
In 1995, the European Union ("EU") established a centralized procedure for
licensing of products derived from the use of high technology/biotechnology
processes. This procedure leads to the grant of a single license for the entire
EU. Effective January 1, 1998, the EU has also adopted a decentralized procedure
under which a license granted in one member state is mutually recognized by the
other member states, leading to a grant of licenses in member states recognizing
the original license. This procedure is expected to replace independent national
licensing of products in the EU. In addition, each product must receive
individual country pricing approvals before it can be marketed in that country.
DIAGNOSTICS. U.S. regulatory requirements for Chiron's diagnostics products
range from premarket notification, in which new or modified products are
compared to products which are currently marketed, to premarket approval
applications or license applications, in which the product's safety and
effectiveness must be demonstrated through well controlled studies. Upon
clearance or approval of the regulatory
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submission, the product may be marketed for the specific indications for use
which were identified in the approval. Facilities used for the manufacture,
testing, storage and distribution of Chiron's diagnostic products are subject to
FDA inspection.
For therapeutic, vaccine and diagnostic products, the time and expense
needed to complete the required clinical studies, prepare and submit the
required applications and supporting documentation, and respond to inquiries
generated by regulatory review can far exceed the time and expense of the
research and development initially required to create the product. These factors
largely determine the speed with which a successful research program is
translated into a marketed product.
ENVIRONMENT
Expenses for compliance with environmental laws have not had and are not
expected to have a material impact upon the Company's capital expenditures,
earnings or competitive position.
EMPLOYEES
On December 31, 1997, Chiron and its subsidiaries had 6,482 employees,
excluding employees of Chiron Vision Corporation which was sold on December 29,
1997.
RELATIONSHIP WITH NOVARTIS
As noted above, the Company has an alliance with Novartis. Novartis is a
life sciences company headquartered in Basel, Switzerland which was formed as a
result of the December 1996 merger between Ciba-Geigy Limited ("Ciba") and
Sandoz Limited. Through a series of transactions that became effective in
January 1995, Ciba acquired shares of the Company's common stock which, when
combined with shares already held by Ciba, represented 49.9% of the
then-outstanding common stock of the Company. As a result of dilution pursuant
to employer stock option and stock participation plans, as of February 27, 1998
Novartis held shares representing approximately 45% of the Company's outstanding
common stock.
In connection with these transactions, Chiron and Novartis entered into a
series of agreements which provide, among other things and subject to certain
conditions and exceptions, that Novartis will not increase its ownership
interest in the Company above 49.9% before January 15, 2000 and thereafter will
not increase its ownership interest above 55% unless it acquires all of the
outstanding capital stock of the Company, provided that Novartis may exceed
these standstill amounts and increase its ownership interest up to 79.9% if the
transaction is approved by a majority of the independent members of the
Company's Board of Directors; that Novartis has the right to nominate three
members to Chiron's eleven member Board of Directors; that Novartis will provide
certain funding to the Company for research services (see "Research and
Development--Research Revenues and Expenses" above) and will guarantee certain
bank lines of credit on behalf of the Company; that Chiron may require Novartis
to purchase shares of the Company's common stock directly from the Company at
fair market value, up to a maximum subscription amount (initially $500 million,
subject to adjustment); that Novartis has an option to purchase newly issued
shares of the Company's common stock directly from the Company at fair market
value, subject to the standstill restrictions described above; and that Chiron
and Novartis will cooperate in research, development, manufacturing and
marketing of biotechnology products on an arms'-length basis while remaining
independent to pursue other opportunities.
ITEM 2. PROPERTIES
EMERYVILLE CAMPUS. Chiron's principal executive offices are located in
Emeryville, California. The Emeryville facilities include research and
development, manufacturing and administrative facilities in 27 buildings, of
which 14 are leased and 13 are owned. The research and development and
manufacturing activities in these facilities relate primarily to the Company's
therapeutics and vaccines businesses as well as the nucleic acid diagnostics
business. In 1996, the Company began development of a new research and
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development facility in Emeryville under an operating lease arrangement.
Completion of the facility is expected in 1998.
OTHER BIOPHARMACEUTICAL FACILITIES. The Company also owns manufacturing
facilities in Vacaville, California; St. Louis, Missouri; Amsterdam, The
Netherlands; and Puerto Rico used principally in connection with the Company's
therapeutics and vaccines businesses. Certain of these facilities have available
capacity due to lower than expected demand for certain of the Company's products
and improved production yields from other facilities. In March 1998 the Company
announced its intention to idle the St. Louis facility. The Puerto Rico facility
was idled in 1995. Both the St. Louis and the Puerto Rico facilities currently
are being marketed for sale.
The Company has research and development, manufacturing and administrative
facilities in Siena, Italy and Marburg, Germany and manufacturing facilities in
Rosia, Italy relating to its vaccine operations. The Rosia facility is owned and
the Marburg and Siena facilities are leased. The Company has entered into an
agreement to purchase the Siena facilities and expects to close that transaction
in 1998.
The Company leases research and development facilities in San Diego,
California in connection with its gene therapy activities.
DIAGNOSTICS FACILITIES. Chiron has research and development, manufacturing
and administrative facilities in Walpole, Massachusetts; Medfield,
Massachusetts; Oberlin, Ohio; and Sudbury, England relating to its diagnostics
business. The Walpole and Oberlin facilities are owned and the others are
leased.
CLAREMONT CAMPUS. The Company owns research and development, manufacturing
and administrative facilities in Claremont, California. The facilities were used
principally in connection with the Company's former ophthalmic products
business, which was sold to Bausch and Lomb Incorporated in December 1997.
Bausch & Lomb occupies a significant portion of the facilities under a three
year lease. The Claremont campus currently is being marketed for sale.
The Company leases a number of other facilities in North America, Europe,
Asia and Australia, primarily for sales and service offices.
The Company believes that its facilities are in good operating condition and
are adequate for its current needs. The Company continually evaluates future
requirements for its facilities.
ITEM 3. LEGAL PROCEEDINGS
BRADLEY
On February 20, 1998, the United States Court of Appeals for the Federal
Circuit affirmed a lower court decision, which dismissed with prejudice an
action filed against Chiron and others in 1994. In that action, Dr. Daniel W.
Bradley, a former scientist at the U.S. Centers for Disease Control (the "CDC"),
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. Bradley alleged he was wrongly excluded as an inventor of HCV
and that these patents are unenforceable. He requested various forms of relief,
including a declaration that these patents are unenforceable, monetary damages,
a constructive trust on all past and future profits, and penalties under federal
and state Racketeering and Corrupt Organization ("RICO") statutes. Chiron
successfully moved to dismiss the action on the grounds, among others, that all
claims were barred by a 1990 Settlement Agreement between Chiron, Bradley, and
the CDC. The decision is subject to appeal.
CONNAUGHT LABORATORIES, LIMITED
On June 17, 1997, Chiron S.p.A. filed an action in the Tribunale di Milano,
Italy, against Connaught challenging the validity of the Italian counterpart of
Connaught's European Patent 0 527 753 (the " '753
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patent"). The '753 patent claims allegedly relate to the pertactin protein of
bordetella pertussis. Connaught has counterclaimed for infringement and seeks an
injunction and damages. It is not known when nor on what basis the litigation
will be concluded.
Connaught also owns EP 0 322 115 (the " '115 patent") relating to pertussis
toxin mutants. On July 17, 1997, Connaught filed suit in the Landgericht
Dusseldorf, Germany, against Chiron Behring, Chiron S.p.A., and Behringwerke AG
asserting imminent infringement of the '115 patent. Connaught seeks to prevent
introduction of Chiron's acellular pertussis vaccine in Germany. Also, Connaught
seeks damages and an order from the German court enjoining Chiron S.p.A. from
manufacturing and selling the Company's acellular pertussis vaccine in both
Germany and Italy. It is not known when nor on what basis litigation will be
concluded.
On December 3, 1997, Chiron filed an action in the District Court of The
Hague, The Netherlands, against Connaught to revoke the Dutch counterpart of the
'115 patent on grounds of invalidity. It is not known when nor on what basis the
litigation will be concluded.
EVANS
Evans Medical Limited (a division of Medeva plc) ("Evans") owns European
Patent 0 162 639 (the " '639 patent") which allegedly relates to the p69 antigen
of bordetella pertussis. Chiron was involved in litigation with Evans, Medeva
plc and its exclusive licensee, SmithKline Beecham Biologicals in several
jurisdictions concerning the '639 patent before the European Patent Office (the
"EPO"). The EPO's Technical Board of Appeal revoked the Evans '639 patent
throughout Europe on March 10, 1998. This final and unappealable decision
effectively renders the other pending matters (in Italy, the U.K., and The
Netherlands) moot.
An action was filed on April 4, 1996 by Evans against the Company in the
United States District Court for the Eastern District of Texas alleging
infringement of U.S. Patent Nos. 5,237,052 and 5,438,120, counterparts to the
'639 patent. Evans also seeks damages and injunctive relief. That matter was
transferred to the United States District Court for the District of Delaware in
April 1997. Chiron has counterclaimed alleging the invalidity of the two U.S.
patents in suit. It is not known when nor on what basis this litigation will be
concluded.
F. HOFFMANN-LA ROCHE
On January 27, 1998, Chiron initiated an action against Roche, several of
its subsidiary companies, and Bradley (see BRADLEY, above) in the United States
Court for the Northern District of California. The Company asserts that Roche's
manufacture and sale of Amplicor-TM- HCV Test and Amplicor-TM- HCV Monitor Test
constitutes infringement of Chiron's U.S. Patent Nos. 5,712,088 (the " '088
patent") and 5,714,596 (the " '596 patent"). The action also asserts that
Bradley has breached a settlement agreement (see BRADLEY, above) and committed
the tort of slander of title with respect to Chiron's HCV technology. The action
seeks damages, injunctive relief, and a declaratory judgment that Chiron is the
sole and exclusive owner of its HCV technology. It is not known when nor on what
basis this litigation will be concluded.
In February 1998, Chiron filed an action in The District Court of The Hague,
The Netherlands against Roche, several of its subsidiary companies, and one of
Roche's Dutch customers asserting Roche's infringement of the Company's European
Patent 0 318 216 (the " '216 patent") relating to HCV technology. Chiron seeks a
cross-border injunction prohibiting the manufacture and sale of Roche's
Amplicor-TM- HCV Test and Amplicor-TM- HCV Monitor Test. Roche and Chiron are
both currently appealing to the EPO's Technical Board of Appeals a decision
upholding the '216 patent in amended form. It is not known when nor on what
basis these matters will be concluded.
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ORTHO DIAGNOSTIC SYSTEMS, INC.
In February 1998, Chiron filed a lawsuit against Ortho in the United States
District Court for the Northern District of California. The suit seeks to compel
arbitration regarding Ortho's obligation to maximize the profitability of the
joint immunodiagnostics business with Chiron by, among other things, accepting
Chiron's offer to contribute to the joint business the rights to develop and
market hepatitis and retrovirus assays for use on Chiron's immunodiagnostic
systems. It is not known when nor on what basis this matter will be concluded.
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 28, 1997.
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. 49 Senior Vice President; President, Chiron Diagnostics
Rajen K. Dalal 44 Vice President, Corporate Development
William G. Green, Esq. 53 Senior Vice President, General Counsel and Secretary
Sean P. Lance 50 Appointed President and Chief Executive Officer in March 1998,
effective no later than May 1, 1998
Magnus Lundberg 42 Vice President; President, Chiron Therapeutics and Chiron Vaccines
Philip K. Moody 46 Vice President, Financial Operations
Edward E. Penhoet, Ph.D. 57 President and Chief Executive Officer
William J. Rutter, Ph.D. 69 Chairman
Linda W. Short 52 Vice President, Human Resources
James R. Sulat 47 Appointed Chief Financial Officer in March 1998, effective April 1,
1998
Pablo D.T. Valenzuela, Ph.D. 56 Senior Vice President
Lewis T. Williams, M.D., Ph.D. 48 Chief Scientific Officer; President, Chiron Technologies
</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 1993, 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. Dr. Barker joined the Board of Sunquest Information Systems in
August 1996.
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.
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MR. LANCE was appointed President and Chief Executive Officer of the Company
in March 1998, effective no later than May 1, 1998. During the past twelve
years, Mr. Lance has held various executive positions with Glaxo Holdings plc,
London, England. In October 1996 he was appointed Managing Director of Glaxo
Wellcome plc and in January 1997 he was appointed Chief Operating Officer and
Chief Executive Designate of Glaxo. From 1993 to 1996, Mr. Lance was Executive
Director of Glaxo Holdings, responsible for commercial operations in the Middle
East, Africa, Europe and Latin America. Mr. Lance was also President of the
International Federation of Pharmaceutical Manufacturers Associations from
October 1996 to February 1998, an Executive Member of the International
Committee of Pharmaceutical Research and Manufacturers of America, and a
director of the British Pharma Group. He also serves on the Steering Committee
of Healthcare 2000.
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.
MR. MOODY joined the Company in February 1995, as Corporate Director,
Financial Planning. He was appointed Vice President, Financial Operations in
December 1997, and designated the principal financial accounting officer of the
Company in February 1998. Prior to joining the Company, Mr. Moody was the
Director of Corporate Planning of APL, Ltd., from May 1988 to February 1995.
DR. PENHOET, a cofounder of the Company and a director since 1981, has
served as Chief Executive Officer since the Company's inception. Dr. Penhoet
will assume the position of Vice Chairman of the Company upon the effectiveness
of Mr. Lance's appointment as President and Chief Executive Officer of the
Company. Dr. Penhoet has been a faculty member of the Biochemistry Department at
the University of California, Berkeley, for 24 years. Since 1983, he has been an
Adjunct Professor at that university. In 1997, Dr. Penhoet was appointed the
Chairman of California Healthcare Institute, a public policy research and
advocacy organization located in La Jolla, California, and a member of the board
of directors of Onyx Pharmaceuticals, Inc.
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
("UCSF"), from 1983 to May 1989, and has been on the faculty at UCSF 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.
MS. SHORT joined the Company in November 1997, as the Vice President, Human
Resources. Prior to that she was the Director of Human Resources of Industrial
Indemnity from 1994 to 1997. From 1989 to 1994, Ms. Short held various
managerial positions with the Bank of America, more recently in 1994, as Project
Manager in charge of the merger of Continental Bank into Bank of America, and as
Director of Human Resources for Wholesale Banking from 1993 to 1994, and
Director of Human Resources of the Asia Division from 1989 to 1993.
MR. SULAT was appointed Chief Financial Officer of the Company in March
1998, effective as of April 1, 1998. He was the Chief Financial Officer of
Stanford Health Services, the clinical healthcare delivery arm of the Stanford
University Medical Center, from 1993 to October 1997. In November 1997, Stanford
Health Services merged with the University of California at San Francisco, and
Mr. Sulat served as the Treasurer of the merged entity, UCSF Stanford Health
Care, until joining the Company. From 1990 to
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1993, Mr. Sulat was the Chief Financial Officer and Vice President, Operations,
of Esprit de Corp, a privately-owned apparel manufacturer. Mr. Sulat is also a
director of Vans, Inc., a shoe manufacturer, and General Surgical Innovations,
Inc., a medical device manufacturer.
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 an Associate Professor at 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. In 1998, he was promoted to Chief Scientific
Officer of the Company. 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. From 1992 to 1994, Dr. Williams served on the Scientific Advisory Board
of Geron Corporation.
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" in Exhibit
13 to this Report is incorporated herein by this reference.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Total revenues............................ $ 1,162,058 $ 1,101,840 $ 924,271 $ 345,211 $ 232,828
Research and development.................. 375,955 352,472 327,887 156,522 134,230
Income (loss) from continuing
operations.............................. 50,838 56,603 (465,274) 18,613 18,014
Income (loss) per common share from
continuing operations................... 0.29 0.33 (2.86) 0.14 0.14
Income (loss) per common share from
continuing operations-- assuming
dilution................................ 0.29 0.32 (2.86) 0.14 0.13
Weighted average shares outstanding....... 173,524 169,347 162,442 131,888 128,376
Weighted average shares
outstanding--assuming dilution.......... 177,988 177,104 162,442 136,885 134,259
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Working capital........................... $ 298,866 $ 223,599 $ 268,408 $ 314,174 $ 256,419
Total assets.............................. 1,768,478 1,688,670 1,489,847 1,049,742 968,597
Long-term debt............................ 397,217 419,589 413,248 338,061 332,991
Accumulated deficit....................... (961,986) (1,032,554) (1,087,699) (575,236) (593,561)
Stockholders' equity...................... 873,945 764,855 672,061 572,631 522,289
Number of employees......................... 7,460 7,434 6,894 2,668 2,179
</TABLE>
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 1997, 1996 and 1995 fiscal years ended on
December 28, 1997, December 29, 1996 and December 31, 1995, respectively. Each
fiscal year was 52 weeks long. For presentation purposes, dates used above refer
to the fiscal month end.
On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of its wholly owned ophthalmic products subsidiary, Chiron Vision
Corporation ("Chiron Vision"), to Bausch & Lomb Incorporated ("B&L") for $300.0
million in cash, subject to certain post-closing adjustments. The sale was
completed under the terms of a Stock Purchase Agreement (the "Agreement"), dated
as of October 21, 1997, between Chiron and B&L. In accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," the results of operations
of Chiron Vision are reported in the Company's consolidated financial statements
as discontinued operations and, therefore, are excluded from the consolidated
statements of operations data above.
At December 31, 1997, the consolidated balance sheets data above includes
the following amounts attributable to discontinued operations: total assets of
$208.9 million and long-term debt of $0.4 million. In addition, the number of
employees at December 31, 1997, included in the table above, is inclusive of 978
employees of Chiron Vision.
Effective January 1, 1995, under a series of agreements between Chiron and
Novartis, Chiron acquired Chiron Diagnostics and Novartis' interests in Chiron
Vaccines Company 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 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.
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" in Exhibit 13 to this Report is
incorporated herein by this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Management" in
Exhibit 13 to this Report, is incorporated herein by this reference.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data included in the Consolidated
Financial Statements, Exhibit 13 to this Report, are incorporated herein by this
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
incorporated by reference to the sections entitled "Election of Directors" and
"Section 16(a) Beneficial Reporting Compliance" in the Company's definitive
Proxy Statement with respect to Chiron's 1998 Annual Meeting to be filed with
the Securities and Exchange Commission within 120 days of December 28, 1997 (the
"Proxy Statement"). Information as to the Company's executive officers appears
at the end of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information in the section entitled "Compensation of Directors and
Executive Officers" in the Proxy Statement is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections entitled "Certain Beneficial Owners" and
"Security Ownership of Directors and Executive Officers" in the Proxy Statement
is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Financial Statements
The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Independent Auditors' Report, included in Exhibit
13 to this Report, are incorporated herein by this reference.
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts and Reserves
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 31 of this Report.
(b) Reports on Form 8-K
20
<PAGE>
On October 22, 1997, the Company filed a Current Report on Form 8-K
reporting under Item 5 that it had signed an agreement to sell its ophthalmic
products business to Bausch & Lomb Incorporated. On January 13, 1998, the
Company filed a Current Report on Form 8-K reporting under Item 2 the closing of
the sale of its ophthalmic products business to Bausch & Lomb Incorporated. On
March 25, 1998, the Company filed a Current Report on Form 8-K reporting under
Item 5 the appointment of Sean P. Lance as President and Chief Executive
Officer, effective no later than May 1, 1998, and the appointment of James R.
Sulat as Chief Financial Officer, effective April 1, 1998.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.01 Restated Certificate of Incorporation of the Registrant, as filed with the Office of the Secretary of
State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of the Registrant's Form
10-K report for fiscal year 1996.
3.02 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on December 12, 1991, incorporated by reference to Exhibit
3.02 of the Registrant's Form 10-K report for fiscal year 1996.
3.03 Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04
of the Registrant's Form 10-Q report for the period ended June 30, 1996.
3.04 Bylaws of the Registrant, as amended, incorporated by reference to Exhibit 3.03 of the Registrant's Form
10-K report for fiscal year 1994.
4.01 Indenture, dated as of May 21, 1987, between Cetus Corporation and Bankers Trust Company, Trustee,
incorporated by reference to Exhibit 4.01 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
4.02 First Supplemental Indenture, dated as of December 12, 1991, by and among Registrant, Cetus Corporation,
and Bankers Trust Company.
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).
10.001 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.
10.002 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.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.003 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.
10.004 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.
10.005 through 10.099 Reserved
10.101 Revolving Credit Agreement, dated as of February 27, 1998, between Registrant and Bank of America
National Trust and Savings Association.
10.102 Revolving Credit Agreement dated as of March 23, 1998, between Chiron Corporation and Swiss Bank
Corporation.
10.103 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.
10.104 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.
10.105 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.
10.106 Letter Agreement, dated as of December 12, 1991, relating to Stock Purchase and Warrant Agreement
between Registrant and Hoffmann-La Roche Inc., incorporated by reference to Exhibit 10.51 of
Registrant's Form 10-K report for fiscal year 1996.
10.107 through 10.199 Reserved
10.200 Agreement between the Registrant and Ortho Diagnostic Systems, Inc., a New Jersey corporation, dated
August 17, 1989, and Amendment to Collaboration Agreement between Ortho Diagnostic Systems, Inc. and
Registrant, dated December 22, 1989 (with certain confidential information deleted), incorporated by
reference to Exhibit 10.14 of the Registrant's Form 10-Q report for the period ended September 30, 1994.
10.201 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.
10.202 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.)
10.203 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.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.204 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.
10.205 Amendment Agreement (HDS Fees and Deeply Discounted Vials) dated as of September 23, 1997 between
Registrant and Schering Aktiengesellschaft. (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".)
10.206 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".)
10.207 Letter Agreement dated as of December 4, 1997, between the Registrant and Ortho Pharmaceutical
Corporation and Ortho Biotech, Inc. (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".)
10.208 through 10.299 Reserved
10.301 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.)
10.302 Amended and Restated License Agreement effective April 1, 1996, between Ciba Corning Diagnostics Corp.,
a Delaware corporation, and Bioanalysis Limited, a corporation organized under the laws of the United
Kingdom of Great Britain and Northern Ireland, incorporated by reference to Exhibit 10.56 of the
Registrant's Form 10-Q report for the period ended September 29, 1996. (Certain confidential information
has been omitted from the Agreement and filed separately with the Securities and Exchange Commission
pursuant to a request by Registrant for confidential treatment pursuant to Rule 24b-2.)
10.303 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.)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.304 Magnetocluster Binding Assay Technology Agreement, dated as of January 21, 1983, by and between
Bioclinical Group, Inc., a Delaware corporation, and Corning Glass Works, a New York corporation,
incorporated by reference to Exhibit 10.66 of Amendment No. 1 to the Registrant's Form 10-Q report for
the period ended April 2, 1995. (Certain information has been omitted from the Agreement pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.)
10.305 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.)
10.306 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.)
10.307 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.)
10.308 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.)
10.309 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.)
10.310 License Agreement made and entered into December 1, 1987, by and between Sloan Kettering Institute for
Cancer Research, a not-for-profit New York corporation, and Cetus Corporation, incorporated by reference
to Exhibit 10.75 of the Registrant's Form 10-Q report for the period ended July 2, 1995. (Certain
information has been omitted from the Agreement pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2.)
10.311 through 10.399 Reserved
10.401 Stock Purchase Agreement, dated as of October 21, 1997, between Bausch & Lomb Incorporated and
Registrant, incorporated by reference to Exhibit 99.1 of the Registrant's current report on Form 8-K
dated January 12, 1998.
10.402 through 10.499 Reserved
10.501 Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Annex 2 of the Registrant's
Proxy Statement dated April 11, 1997.*
10.502 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.*
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.503 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.*
10.504 Forms of Option Agreements, Cetus Corporation Amended and Restated Common Stock Option Plan,
incorporated by reference to Exhibit 10.27 of Registrant's Form 10-Q report for the period ended March
30, 1997.*
10.505 Forms of Supplemental Letter concerning the assumption of Cetus Corporation options by the Registrant,
incorporated by reference to Exhibit 10.27 of Registrant's Form 10-K report for fiscal year 1996.*
10.506 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.
10.507 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.
10.508 Description of Chiron Corporation's 1997 Executive Officers Variable Compensation Program.*
10.509 Form of Performance Unit Agreement, Chiron 1991 Stock Option Plan, as amended, incorporated by reference
to Exhibit 10.94 of the Registrant's Form 10-K report for fiscal year 1996.*
10.510 through 10.599 Reserved
10.601 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.
10.602 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.*
10.603 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.*
10.604 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.*
10.605 Letter Agreement dated January 27, 1998, between the Registrant and Lewis T. Williams.*
10.606 Letters dated May 6, 1996 and May 25, 1996 to Magnus Lundberg, incorporated by reference to Exhibit
10.61 of the Registrant's Form 10-Q report for the period ended September 29, 1996.*
10.607 Letter dated January 8, 1997 to Magnus Lundberg, incorporated by reference to Exhibit 10.65 of the
Registrant's Form 10-K report for fiscal year 1996.*
10.608 Letter dated March 17, 1998 to Magnus Lundberg.*
10.609 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.*
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.610 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.*
10.611 Letter Agreement dated March 18, 1998 between Registrant and Sean P. Lance.*
10.612 Letter Agreement dated March 19, 1998 between Registrant and James R. Sulat.*
10.613 through 10.699 Reserved
10.701 Investment Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation,
Ciba Biotech Partnership, Inc. and Chiron Corporation, incorporated by reference to Exhibit 10.54 of the
Registrant's current report on Form 8-K dated November 20, 1994.
10.702 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.
10.703 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.
10.704 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.
10.705 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.
10.706 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.
10.707 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.
10.708 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.
10.709 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.*
10.710 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.
10.711 Amendment dated March 26, 1997, to Agreement dated November 27, 1996, between Novartis Pharma AG and the
Registrant, incorporated by reference to Exhibit 10.44 of the Registrant's Form 10-Q report for the
period ended March 30, 1997.
10.712 Letter Agreement dated December 19, 1997, between Novartis Pharma AG and the Registrant.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.713 Letter Agreement dated December 24, 1997, between Novartis Corporation and the Registrant. (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".)
10.714 Letter Agreement, dated May 6, 1996, as to consent to assignment of contracts to Novartis Limited, among
the Registrant, Ciba-Geigy Limited, Ciba-Geigy Corporation and Ciba Biotech Partnership, Inc.,
incorporated by reference to Exhibit 10.43 of the Registrant's Form 10-K report for fiscal year 1996.
10.715 Letter Agreement, dated December 19, 1996, regarding compensation paid by the Registrant for director
services performed by employees of Ciba-Geigy Limited, incorporated by reference to Exhibit 10.44 of the
Registrant's Form 10-K report for fiscal year 1996.*
10.716 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.
10.717 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".)
10.718 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".)
10.719 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.
10.720 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.
10.721 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.
10.722 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.)
10.723 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.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.724 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.
10.725 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.
10.726 through 10.799 Reserved
10.801 through 10.899 Reserved
11 Statement of Computation of Earnings (Loss) per Share.
13 Management's Discussion and Analysis of Financial Condition and Results of Operations and 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 32 is incorporated
herein by reference.
24 Power of Attorney. The Power of Attorney set forth on pages 29 and 30 is incorporated herein by
reference.
27.1 Financial Data Schedule for Fiscal Year ended December 28, 1997.
27.2 Financial Data Schedule for Fiscal Year ended December 29, 1996 (Restated).
27.3 Financial Data Schedule for Fiscal Year ended December 31, 1995 (Restated).
</TABLE>
- ------------------------
* Management contract, compensatory plan or arrangement.
28
<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 27, 1998
CHIRON CORPORATION
By /s/ EDWARD E. PENHOET
-----------------------------------------
Edward E. Penhoet, Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned officers and directors of Chiron Corporation, a
Delaware 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 full power and authority to do any and all acts and
things and to execute any and all instruments which said attorneys and agents,
and any one of them, determine may be necessary or advisable or required to
enable said 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.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
29
<PAGE>
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>
President, Chief Executive March 27, 1998
Officer, Chief Financial
/s/ EDWARD E. PENHOET Officer and Director
- ------------------------------ (Principal Executive
Edward E. Penhoet, Ph.D. Officer and Principal
Financial Officer)
/s/ PHILIP K. MOODY Vice President, Financial March 27, 1998
- ------------------------------ Operations and Principal
Philip K. Moody Accounting Officer
/s/ WILLIAM J. RUTTER Chairman of the Board of March 27, 1998
- ------------------------------ Directors
William J. Rutter, Ph.D.
/s/ VAUGHN D. BRYSON Director March 27, 1998
- ------------------------------
Vaughn D. Bryson
/s/ LEWIS W. COLEMAN Director March 27, 1998
- ------------------------------
Lewis W. Coleman
/s/ PIERRE E. DOUAZE Director March 27, 1998
- ------------------------------
Pierre E. Douaze
/s/ DONALD A. GLASER Director March 27, 1998
- ------------------------------
Donald A. Glaser, Ph.D.
/s/ PAUL L. HERRLING Director March 27, 1998
- ------------------------------
Paul L. Herrling, Ph.D.
/s/ ALEX KRAUER Director March 27, 1998
- ------------------------------
Alex Krauer, Ph.D.
/s/ JACK W. SCHULER Director March 27, 1998
- ------------------------------
Jack W. Schuler
/s/ PIETER J. STRIJKERT Director March 27, 1998
- ------------------------------
Pieter J. Strijkert, Ph.D.
</TABLE>
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Chiron Corporation:
Under date of January 30, 1998, we reported on the consolidated balance
sheets of Chiron Corporation and subsidiaries as of December 31, 1997 and 1996,
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,
1997. 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.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
January 30, 1998
31
<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, 333-28257, 333-42469, 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 30, 1998, relating to the consolidated balance sheets of
Chiron Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997 and
the related schedule, which reports appear in the December 31, 1997 annual
report on Form 10-K of Chiron Corporation.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
March 27, 1998
32
<PAGE>
CHIRON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGES OF EXHIBIT 13
INCORPORATED FORM 10-K
BY REFERENCE PAGE
----------------------- ---------
<S> <C> <C>
Consolidated Financial Statements and
Notes................................. 14-52 --
Report of KPMG Peat Marwick............. 53 31
Schedule II--Valuation and Qualifying
Accounts and Reserves................. -- 34
</TABLE>
33
<PAGE>
CHIRON CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS RECLASSIFICATIONS YEAR
- ---------------------------------------- ---------- ---------- -------- ---------- ----------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997:
Accounts receivable..................... $20,692 $10,227 $ -- $ (8,001) $-- $22,918
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
</TABLE>
- ------------------------
(1) Represents accounts receivable allowances as of the acquisition date related
to acquired businesses.
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHIRON CORPORATION
AND
CETUS CORPORATION
TO
BANKERS TRUST COMPANY,
TRUSTEE
-----------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
DATED AS OF DECEMBER 12, 1991
-----------------------------------------------
5-1/4 PER CENT CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
----------------------------------------------------------------------
----------------------------------------------------------------------
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of the 12th day of December,
1991, by and among Chiron Corporation, a Delaware corporation, having its
principal office at 4560 Horton Street, Emeryville, California 94608 ("Parent"),
Cetus Corporation, a Delaware corporation, having its principal office at 1400
Fifty Third Street, Emeryville, California 94608 (the "Company"), and Bankers
Trust Company, a New York State banking corporation having its principal
corporate trust and agency office at Four Albany Street, New York, New York
10015, Trustee (the "Trustee").
WHEREAS, the Company has heretofore executed and delivered to the
Trustee an indenture, dated as of May 21, 1987 ("Indenture"), permitting the
issuance of 5-1/4 per cent Convertible Subordinated Debentures Due 2002 (the
"Securities");
WHEREAS, effective on or about December 12, 1991, Chiron Acquisition
Subsidiary, Inc., a Delaware corporation and a wholly owned subsidiary of
Parent, will be merged with and into the Company pursuant to Section 253 of the
General Corporation Law of the State of Delaware, and the Company shall be the
corporation surviving such merger; and
WHEREAS, after such merger, the Company shall be a wholly owned
subsidiary of Parent; and
WHEREAS, Section 1211(b) of the Indenture provides that in the case
of any merger of another corporation into the Company in which the Company is
the continuing corporation and in which the holders of the shares of Common
Stock thereafter receive securities and/or cash and/or other property for such
shares of Common Stock, (a) the Company shall execute and deliver to the Trustee
a supplemental indenture; (b) any issuer of securities and/or cash and/or
property exchanged for Common Stock shall join in such supplemental indenture;
(c) such supplemental indenture shall provide that the
1.
<PAGE>
Holder of each Security then outstanding shall have the right to convert such
Security, in lieu of conversion into the shares of Common Stock deliverable on
such conversion immediately prior to such event, only into the kind and amount
of securities and/or cash and/or other property, if any receivable upon such
merger by a holder of the number of shares of Common Stock into which such
Security might have been converted immediately prior to such merger, that the
Securities were convertible at the time of such merger at the initial Conversion
Price specified in Section 1201, without any adjustment pursuant to Section
1204; and (d) such supplemental indenture shall provide for adjustments which
shall be as nearly equivalent as may be practical to the adjustments provided
for in Article 12 of the Indenture;
WHEREAS, Parent desires to assume the obligations of the Company for
the issuance of shares of its common stock upon the conversion of a Security
after the date hereof;
WHEREAS, the Company and Parent have determined that this First
Supplemental Indenture complies with Section 801(4) of the Indenture and does
not require the consent of any Holders of Securities;
WHEREAS, in accordance with Sections and 803 and 1211 of the
Indenture, the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that the merger and this First
Supplemental Indenture complies with Articles Eight and Twelve of the Indenture
and that all conditions precedent set forth in the Indenture relating to the
merger and this First Supplemental Indenture have been complied with; and
WHEREAS, all things necessary to make this First Supplemental
Indenture a valid agreement of Parent, the Company and the Trustee and a valid
amendment of and supplement to the Indenture have been done;
2.
<PAGE>
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises, it is mutually covenanted
and agreed, for the equal and proportionate benefit of the holders of the
Securities, as follows:
ARTICLE ONE
ASSUMPTION OF OBLIGATIONS
SECTION 1.1 ASSUMPTION OF OBLIGATIONS UPON CONVERSION.
Parent hereby assumes the obligations of the Company pursuant to Article 12
of the Indenture to issue shares of its common stock upon conversion of a
Security, and the Company is hereby discharged from its obligations to issue
shares of its common stock upon such conversion.
ARTICLE TWO
AMENDMENTS OF INDENTURE
SECTION 2.1 AMENDMENT OF DEFINITIONS.
(a) In Section 101 of the Indenture, the definition of "COMMON STOCK" is
hereby amended by deleting "Company" each time it appears and substituting
therefor "Parent".
(b) In Section 101 of the Indenture, the definition of "CONVERSION AGENT"
is hereby amended in its entirety to read as follows:
"Conversion Agent" means any Person authorized by the Parent to
convert Securities in accordance with Article Twelve.
(c) In Section 101, the definition of "VICE PRESIDENT" is hereby amended
in its entirety to read as follows:
3.
<PAGE>
"Vice President", when used with respect to the Company, the Parent or
the Trustee, means any vice president, whether or not designated by a number or
a word or words added before or after the title "vice president".
(d) Section 101 of the Indenture is hereby amended to add the following
definitions:
"Board of Directors of Parent" means either the board of directors of
the Parent, or any duly authorized committee of that board.
"First Supplemental Indenture" means the First Supplemental Indenture
from Chiron Corporation and Cetus Corporation to Bankers Trust Company as
Trustee, dated as of December 12, 1991.
"Parent" means Chiron Corporation, a Delaware corporation, and shall
also include its successors and assigns.
"Parent Board Resolution" means a resolution duly adopted by the
Board of Directors of Parent, a copy of which, certified by the Secretary or an
Assistant Secretary of the Parent to be in full force and effect on the date of
such certification, shall have been delivered to the Trustee.
"Parent Officers' Certificate" means a certificate signed by the
Chairman of the Board, the President or a Vice President, and by the Chief
Financial Officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Parent, and delivered to the Trustee.
"Parent Request" or "Parent Order" means a written request or order in
the form of a Parent Officers' Certificate.
SECTION 2.2 AMENDMENT OF PROVISIONS OF GENERAL APPLICATION.
4.
<PAGE>
(a) Section 103(a) of the Indenture is hereby amended by adding at the end
of the second sentence thereof "or the Parent" and by deleting the fourth
sentence thereof and substituting therefore the following sentence:
"Proof of execution of any such instrument or of a writing appointing
any such agent or proxy, or of the holding by any Person of a Security, shall be
sufficient for any purpose of this Indenture and (subject to Section 601)
conclusive in favor of the Trustee, the Company and the Parent if made in the
manner provided in this Section."
(b) Section 104 of the Indenture is hereby amended by deleting subsections
(1) and (2) in their entireties and substituting therefor the following:
(1) the Trustee by any Holder of Securities or by the Company or by
the Parent shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee at its Corporate Trust
Office, or
(2) the Company or the Parent by the Trustee or by any Holder of
Securities shall be sufficient for every purpose hereunder (unless otherwise
herein expressly provided) if in writing, mailed, first-class postage prepaid,
or telexed or telecopied and confirmed by mail, first-class postage prepaid,
addressed to it at the address of its principal office specified in the first
paragraph of this instrument or any supplement to this instrument, to the
attention of its Treasurer, or at any other address previously furnished in
writing to the Trustee by the Company or the Parent.
SECTION 2.3 AMENDMENT OF PROVISIONS REGARDING SUPPLEMENTAL
INDENTURES.
5.
<PAGE>
(a) Section 801 of the Indenture is hereby amended in its entirety to read
as follows:
SECTION 801 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders of Securities or coupons, the
Company, when authorized by a Board Resolution, and the Trustee at any time and
from time to time, may enter into one or more indentures supplemental hereto, in
form satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company
and the assumption by any such successor of the covenants of the Company
herein in the Securities and in the coupons; or
(2) to add to the covenants of the Company for the benefit of the
Holders of Securities or coupons, or to surrender any right or power herein
conferred upon the Company; or
(3) to relax or eliminate the restrictions on payment of principal of
(and premium, if any) and interest on Bearer Securities in the United
States under the circumstances described in the last sentence of the first
paragraph of the face of the form of Bearer Securities set forth in Section
202; or
(4) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any provisions with respect to matters or
6.
<PAGE>
questions arising under this Indenture, PROVIDED such action pursuant to
this clause (4) shall not adversely affect the interest of the Holders of
Securities or coupons in any material respect.
Without the consent of any Holders of Securities or coupons, the
Parent, when authorized by a Parent Board Resolution, and the Trustee at any
time and from time to time, may enter into one or more indentures supplemental
hereto, in form satisfactory to the Trustee, for the following purpose:
(1) to make provision with respect to the conversion rights of
Holders of Securities pursuant to Section 1211.
(b) Section 806 of the Indenture is hereby amended in its entirety to read
as follows:
SECTION 806 NOTICE OF SUPPLEMENTAL INDENTURES.
Promptly after the execution by the Company or the Parent and the
Trustee of any supplemental indenture pursuant to the provisions of Section 802,
the Company shall give notice, setting forth in general terms the substance of
such supplemental indenture, in the manner provided in Section 105. Any failure
of the Company to give such notice, or any defect therein, shall not in any way
impair or affect the validity of any such supplemental indenture.
SECTION 2.4 AMENDMENT OF PROVISIONS RELATING TO THE TRUSTEE.
Section 602(b) of the Indenture is hereby amended in its entirety to
read in full as follows:
(b) any request or direction of the Company mentioned herein
7.
<PAGE>
shall be sufficiently evidenced by a Company Request or Company Order, any
request or direction of the Parent mentioned herein shall be sufficiently
evidenced by a Parent Request or Parent Order, any resolution of the Board of
Directors may be sufficiently evidenced by a Board Resolution and any resolution
of the Board of Directors of Parent may be sufficiently evidenced by a Parent
Board Resolution.
SECTION 2.5 AMENDMENT OF CONVERSION OF SECURITIES.
(a) Section 1201 of the Indenture is hereby amended to read in full as
follows:
SECTION 1201. CONVERSION PRIVILEGE AND CONVERSION
PRICE.
Subject to and upon compliance with the provisions of this Article,
at the option of the Holder thereof, any definitive Security or, in the case
of any Registered Security, any portion of the principal amount thereof which
is U.S. $5,000 or an integral multiple of U.S. $5,000 may be converted at the
principal amount thereof, or of such portion thereof, into fully paid and
nonassessable shares (calculated as to each conversion to the nearest 1/100
of a share) of Common Stock, at the Conversion Price, determined as
hereinafter provided, in effect at the time of conversion. Such conversion
right shall commence at the opening of business on the Exchange Date and
expire at the close of business on May 21, 2002. In case a Security or
portion thereof is called for redemption, such conversion right in respect of
the Security or portion so called shall expire at the close of business on
the date five business days next preceding the Redemption Date, unless the
Company defaults in making the payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "Conversion Price") shall be initially
U.S. $123.33 per share of Common Stock. The Conversion Price shall be adjusted
in
8.
<PAGE>
certain instances as provided in paragraphs (1), (2), (3) and (5) of Section
1204.
(b) Section 1202 of the Indenture is hereby amended to read in full as
follows:
SECTION 1202. EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of any
definitive Security to be converted shall surrender such Security, together in
the case of Bearer Securities with all unmatured coupons and any matured coupons
in default appertaining thereto, duly endorsed or assigned to the Company or in
blank, at any office or agency of the Company maintained for that purpose
pursuant to Section 1002, accompanied by written notice to the Parent at such
office or agency that the Holder elects to convert such Security or, in the case
of Registered Securities, if less than the entire principal amount thereof is to
be converted, the portion thereof to be converted that is U.S. $5,000 or an
integral multiple of U.S. $5,000. Registered securities surrendered for
conversion during the period from the close of business on any Regular Record
Date next preceding any Interest Payment Date to the opening of business on such
Interest Payment Date shall (except in the case of Registered Securities or
portions thereof which have been called for redemption on a Redemption Date
within such period) be accompanied by payment in funds reasonably acceptable to
the Company of an amount equal to the interest payable on such Interest Payment
Date on the principal amount of Registered Securities being surrendered for
conversion (or, if such Registered Security was issued in exchange for a Bearer
Security after the close of business on such Regular Record Date, by surrender
of one or more coupons relating to such Interest Payment Date or by both payment
in such funds and surrender of such coupon or coupons, in either case, in an
amount equal to the interest payable on such Interest Payment Date on the
principal amount of the Registered Security then being converted). Except as
9.
<PAGE>
provided in the preceding sentence and subject to the last paragraph of Section
307, no payment or adjustment shall be made upon any conversion on account of
any interest accrued on the Securities surrendered for conversion or on account
of any dividends on the Common Stock issued upon conversion.
Securities shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of such Securities for conversion
in accordance with the foregoing provisions, and at such time the rights of the
Holders of such Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such Common Stock at such
time. As promptly as practicable on or after the conversion date, the Parent
shall issue and shall deliver at such office or agency a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in Section 1203.
In the case of any Registered Security which is converted in part
only, upon such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Registered Security or Registered Securities of authorized denominations in
aggregate principal amount equal to the unconverted portion of the principal
amount of such Registered Securities, which new Registered Security or
Securities shall bear the same legend or legends as the Registered Security
surrendered for conversion.
(c) Section 1203 of the Indenture is hereby amended to read in full as
follows:
SECTION 1203. FRACTIONS OF SHARES.
No fractional shares or scrip representing fractional shares of
10.
<PAGE>
Common Stock shall be issued upon conversion of Securities. If more than one
Security shall be surrendered for conversion at one time by the same Holder,
the number of full shares which shall be issuable upon conversion thereof
shall be computed on the basis of the aggregate principal amount of the
Securities (or, in the case of Registered Securities, specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock
which would otherwise be issuable upon the conversion of any Security or
Securities (or in the case of Registered Securities, specified portions
thereof), the Parent shall pay a cash adjustment in respect of such fraction
in an amount equal to the current market value of such fractional interest
computed to the nearest cent on the basis of the Closing Market Price Per
Share of the Common Stock on the last day prior to the day of conversion on
which there is such a Closing Market Price Per Share.
(d) Section 1204 of the Indenture is hereby amended to read in full as
follows:
SECTION 1204. ADJUSTMENT OF CONVERSION PRICE.
(1) In case at any time after December 12, 1991, the Parent shall (i)
pay or make a dividend or other distribution on any class or series of capital
stock of the Parent in shares of Common Stock, (ii) subdivide its outstanding
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares, (iv) issue by reclassification of its Common
Stock any shares of its capital stock, or (v) make a distribution on its Common
Stock in shares of its capital stock other than Common Stock, the Conversion
Price in effect immediately prior thereto shall be adjusted so that the Holder
of a Security thereafter converted may receive the number of shares of Common
Stock or capital stock of the Parent which he would have owned immediately
following such action if he had converted the Security immediately prior to such
action. Such adjustment shall become effective immediately at the opening of
business on the day following the
11.
<PAGE>
record date, if any, in the case of a dividend, distribution, subdivision,
combination or reclassification with respect to which the Parent has fixed a
record date for the determination of shareholders entitled to receive such
dividend, distribution, subdivision, combination or reclassification, or if
no such record date has been fixed, such reduction shall become effective
immediately after the opening of business on the day following the effective
date of such dividend, distribution, subdivision, combination or
reclassification. For the purposes of paragraph (1)(i), the number of shares
of Common Stock at any time outstanding shall not include shares held in the
treasury of the Parent but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock. The
Parent will not pay any dividend or make any distribution on shares of Common
Stock held in the treasury of the Parent.
(2) In case at any time after December 12, 1991 the Parent shall
issue rights or warrants to all holders of its Common Stock entitling them
initially to subscribe for or purchase shares of Common Stock at a price per
share less than the current market price per share (determined as provided in
paragraph (4) of this Section 1204) of the Common Stock on the date fixed for
the determination of stockholders entitled to receive such rights or warrants,
the Conversion Price in effect at the opening of business on the day following
the date fixed for such determination shall be reduced by multiplying such
Conversion Price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate of the offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such current market price
and the denominator shall be the number of shares of Common Stock outstanding at
the close of business on the date fixed for such determination plus the number
of shares of Common Stock so offered for subscription or purchase, such
reduction to be made whenever such rights or warrants are
12.
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issued and will become effective immediately at the opening of business on
the day following the date fixed for such determination. For the purposes of
this paragraph (2), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Parent but
shall include shares issuable in respect of scrip certificates issued in lieu
of fractions of shares of Common Stock. The Parent will not issue any rights
or warrants in respect of shares of Common Stock held in the treasury of the
Parent.
(3) In case at any time after December 12, 1991 the Parent shall, by
dividend or otherwise, distribute to all holders of its Common Stock evidences
of its indebtedness or any of its assets, or any rights or warrants entitling
holders thereof to subscribe for or purchase securities of the Parent or any
other securities (but excluding any rights or warrants referred to in paragraph
(2) of this Section 1204, any dividend or distribution paid in cash, any
dividend or distribution paid out of the surplus of the Parent or the
consolidated net profits for the then current or preceding fiscal year of the
Parent and any dividend or distribution referred to in paragraph (1) of this
Section), the Conversion Price shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in effect immediately
prior to such action by a fraction of which the numerator shall be the current
market price per share (determined as provided in paragraph (4) of this Section)
of the Common Stock on the date fixed for the determination of stockholders
entitled to receive such distribution less the then fair market value (as
determined by the Board of Directors of Parent, whose determination shall be
conclusive and described in a Parent Board Resolution) of the portion of such
assets or evidences of indebtedness or shares or rights or warrants so
distributed applicable to one share of Common Stock and the denominator shall be
such current market price per share of the Common Stock, such adjustment to be
made whenever such distribution is made and shall become effective immediately
at the opening of business on the day following the date fixed for the
determination of stockholders entitled to receive such distribution. In
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the event that the Parent shall distribute or shall have distributed to all
holders of shares of Common Stock, rights or warrants to purchase securities
that are not initially detachable from the Common Stock (whether or not such
distribution shall have occurred prior to the date of this Indenture), then
the distribution of separate certificates representing such rights or
warrants subsequent to their initial distribution shall be deemed to be the
distribution of such rights or warrants for purposes of this paragraph (3).
Notwithstanding the foregoing, in the event that the Parent shall distribute
rights or warrants to purchase securities ("Rights") to holders of Common
Stock, the Parent may, in lieu of making the foregoing adjustment pursuant to
this paragraph (3) and to the extent such Rights would be issued with other
shares of Common Stock issued at the time of conversion, make proper
provision so that each Holder of a Security who converts such Security (or
any portion thereof) (a) before the record date for such distribution shall
be entitled to receive upon such conversion shares of Common Stock issued
with Rights and (b) after the record date for such distribution (but prior to
the expiration or redemption of the Rights) shall be entitled to receive upon
such conversion, in addition to the shares of Common Stock issuable upon such
conversion, the same number of Rights to which a holder of the number of
shares of Common Stock into which the principal amount of the Security so
converted was convertible immediately prior to the record date for such
distribution would have been entitled on the record date for such
distribution in accordance with the terms and provisions of and applicable to
the Rights.
(4) For the purpose of any computation under paragraphs (2) and (3) of
this Section, the current market price per share of Common Stock in any case
shall be deemed to be the average of the Closing Market Prices Per Share for 20
consecutive trading days selected by the Parent during the period commencing 30
trading days before the day in question.
(5) No adjustment in the Conversion Price shall be required unless
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such adjustment would require an increase or decrease of at least 1 percent in
the Conversion Price; PROVIDED, HOWEVER, that any adjustments which by reason of
this paragraph (5) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations shall be made
to the nearest cent or to the nearest one-hundredth of a share, as the case
may be.
(6) No adjustment in the Conversion Price shall be required in the
case of transactions (i) in which the Holders of Securities are entitled to
participate on a basis and with notice that the Board of Directors of Parent
determines to be fair and appropriate or (ii) which effectuate a change in
the par value or lack thereof of the Common Stock.
(7) The Parent from time to time may reduce the Conversion Price by
any amount for any period of time, provided that the reduction is effective
for at least 20 days and that the reduction is irrevocable during such
period. Whenever the Conversion Price is reduced, the Parent shall publish
notice of the reduction to Holders of Securities. The Parent shall publish
such notice at least 15 days before the date the reduced Conversion Price
takes effect. The notice shall state the reduced Conversion Price and the
period it will be in effect. After the expiration of such period, the
Conversion Price shall revert to the price immediately preceding such
reduction. The Parent may also, from time to time, reduce the Conversion
Price in order to avoid taxation of the Parent's stockholders in connection
with the transactions described in this Section 1204. The Parent may, but is
not required to, reduce the Conversion Price if the making of, or a failure
to make, an adjustment in the Conversion Price under this Article would cause
imposition of a tax on the Parent's stockholders.
(8) In any case in which this Section 1204 shall require that an
adjustment be made, the Parent may elect to defer (but only until five
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Business Days in the Place of Conversion following the effective date of such
adjustment) the issuance to the holder of any Securities converted after such
effective date of the shares of Common Stock or rights or warrants issuable on
such conversion in excess of or in addition to the shares of Common Stock
issuable on such conversion on the basis of the Conversion Price prior to such
adjustment.
(e) Section 1205 of the Indenture is hereby amended to read in full as
follows:
SECTION 1205. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever the Conversion Price is adjusted as herein provided:
(a) the Parent shall compute the adjusted Conversion Price in
accordance with Section 1204 and shall prepare a certificate signed by the
Treasurer of the Parent setting forth the adjusted Conversion Price and
showing in reasonable detail the facts upon which such adjustment is based,
and such certificate shall forthwith be filed with the Trustee and at each
office or agency maintained for the purpose of conversion of Securities
pursuant to Section 1002; and
(b) a notice stating that the Conversion Price has been adjusted and
setting forth in reasonable detail the facts upon which such adjustment is
based and the adjusted Conversion Price shall as soon as practicable after
the effectiveness of such adjustment be mailed by the Parent to all
Registered Holders at their last addresses as they shall appear in the
Security Register and shall be published (but only once) in accordance with
Section 105.
(f) Section 1206 of the Indenture is hereby amended to read in full as
follows:
16.
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Section 1206. NOTICE OF CERTAIN CORPORATE ACTION.
In case at any time after December 12, 1991:
(a) the Parent shall declare a dividend (or any other distribution)
on its Common Stock payable otherwise than in cash or out of its surplus or
its consolidated net profits for its then current or preceding fiscal year;
or
(b) the Parent shall authorize the granting to all holders of its
Common Stock of rights or warrants to subscribe for or purchase Common
Stock or of any other rights; or
(c) there shall occur any reclassification of the Common Stock of the
Parent (other than a subdivision or combination of its outstanding shares
of Common Stock), or any consolidation or merger to which the Parent is a
party and for which approval of any stockholders of the Parent is required,
or the sale or transfer of all or substantially all of the assets of the
Parent; or
(d) there shall occur the voluntary or involuntary dissolution,
liquidation or winding up of the Parent;
then (unless the Parent has filed and mailed a notice pursuant to Section 1205
with respect to the events described in this Section 1206) the Parent shall
cause to be filed with the Trustee and at each office or agency maintained for
the purpose of conversion of Securities pursuant to Section 1002, and shall
cause to be mailed to all Registered Holders at their last addresses as they
shall appear in the Security Register and shall publish (but only once) in
accordance with Section 105, in each case, at least 20 days (or 10 days in any
case specified in clause (a) or (b) above) prior to the applicable record date
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hereinafter specified, a notice stating (x) the date on which a record is to
be taken for the purpose of such dividend, distribution, rights or warrants,
or, if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution, rights
or warrants are to be determined, or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up is expected to become effective, and the date as of
which it is expected that holders of Common Stock of record shall be entitled
to exchange their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up. Failure to give any such
notice, or any defect therein, shall not affect the validity of the
proceedings referred to in clauses (a), (b), (c) or (d) above.
(h) Section 1207 of the Indenture is hereby amended to read in full as
follows:
Section 1207. PARENT TO RESERVE COMMON STOCK.
The Parent shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of Securities, the full number of shares of
Common Stock then issuable upon the conversion of all Outstanding Securities.
The Parent shall promptly after the issuance of the Global Security
endeavor (i) to cause all registrations with, and to obtain any approval by,
any governmental authority under any Federal or state law of the United
States that may be required before the shares of Common Stock may be lawfully
issued or transferred and delivered pursuant to this Article and (ii) to list
or arrange for the quotation of the shares of Common Stock required to be
issued or delivered upon conversion of Securities prior to such issue or
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<PAGE>
delivery on each national securities exchange or quotation system on which the
outstanding Common Stock is listed or quoted at the time of such delivery.
(g) Section 1208 of the Indenture is hereby amended to read in full as
follows:
SECTION 1208. TAXES ON CONVERSIONS.
The Parent will pay any and all stamp, excise or similar taxes or
duties that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of Securities pursuant hereto. The Parent shall not,
however, be required to pay any tax or duty which may be payable in respect of
any transfer involved in the issue and delivery of shares of Common Stock in a
name other than that of the Holder of the Security or Securities to be
converted, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to the Parent the amount of any such tax
or duty, or has established to the satisfaction of the Parent that such tax or
duty has been paid.
(i) Section 1209 of the Indenture is hereby amended to read in full as
follows:
SECTION 1209. COVENANT AS TO COMMON STOCK.
The Parent covenants that all shares of Common Stock which may be
issued upon conversion of Securities will upon issue be fully paid and
nonassessable and, except as provided in Section 1208, the Parent will pay all
taxes or duties, liens and charges with respect to the issue thereof.
(j) Section 1211 of the Indenture is hereby amended to read in full as
follows:
19.
<PAGE>
SECTION 1211. PROVISIONS IN CASE OF CONSOLIDATION,
MERGER, SALE OF ASSETS OR
RECLASSIFICATION.
(a) In case of any consolidation of the Parent with, or merger of
the Parent into, any other corporation (other than a merger or consolidation
in which the Parent is the continuing corporation), or in case of any sale or
transfer of all or substantially all of the properties and assets of the
Parent as an entirety, the corporation formed by such consolidation or
resulting from such merger or which acquires such assets, as the case may be,
shall execute and deliver to the Trustee a supplemental indenture providing
that the Holder of each Security then outstanding shall have the right
thereafter, during the period such Security shall be convertible as specified
in Section 1201, to convert such Security, in lieu of conversion into the
shares of Common Stock deliverable on conversion immediately prior to such
event, only into the kind and amount of securities and/or cash and/or other
property, if any, receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which such
Security might have been converted immediately prior to such consolidation,
merger, sale or transfer, assuming, if such consolidation, merger, sale or
transfer is prior to the Exchange Date, that the Securities were convertible
at the time of such consolidation, merger, sale or transfer at the initial
Conversion Price specified in Section 1201 as adjusted from December 12, 1991
to such time pursuant to Section 1204.
(b) In case of any reclassification or change of the shares of Common
Stock (other than a change in par value, or from par value to no par value, or
as a result of a subdivision or combination) or in case of any consolidation or
merger of another corporation into the Parent in which the Parent is the
continuing corporation and in which the holders of the shares of Common Stock
thereafter receive securities and/or cash and/or other property for such shares
of Common Stock (including for this purpose shares reflecting
20.
<PAGE>
a change in par value or from par value to no par value or as a result of a
subdivision or combination of the shares of Common Stock), the Parent (and any
issuer of securities and/or cash and/or property exchanged for Common Stock)
shall execute and deliver to the Trustee a supplemental indenture providing that
the Holder of each Security then outstanding shall have the right thereafter,
during the period such Security shall be convertible as specified in Section
1201, to convert such Security, in lieu of conversion into the shares of Common
Stock deliverable on such conversion immediately prior to such event, only into
the kind and amount of securities and/or cash and/or other property, if any,
receivable upon such reclassification, change, consolidation or merger by a
holder of the number of shares of Common Stock into which such Security might
have been converted immediately prior to such reclassification, change,
consolidation or merger, assuming, if such reclassification, change,
consolidation or merger is prior to the Exchange Date, that the Securities were
convertible at the time of such reclassification, change, consolidation or
merger at the initial Conversion Price specified in Section 1201 as adjusted
from December 12, 1991 to such time pursuant to Section 1204. If, as a result
of this subsection (b), the holder of any Securities thereafter surrendered for
conversion shall become entitled to receive shares of two or more classes of
capital stock of the Parent, the Board of Directors of Parent (whose
determination shall be conclusive and shall be described in a Parent Board
Resolution) shall determine the allocation of the Conversion Price between or
among shares of such classes of capital stock.
(c) Supplemental indentures referred to in subsections (a) and (b)
above shall provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Article. The above
provisions of this Section shall similarly apply to successive consolidations,
mergers, sales, transfers, reclassifications or changes.
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(j) Section 1212 of the Indenture is hereby amended to read in full as
follows:
SECTION 1212. RESPONSIBILITY OF TRUSTEE FOR
CONVERSION PROVISIONS.
The Trustee, subject to the provisions of Section 601, and any
Conversion Agent shall not at any time be under any duty or responsibility to
any Holder to determine whether any facts exist which may require any
adjustment of the Conversion Price, or with respect to the nature or extent
of any such adjustment when made, or with respect to the method employed, or
herein or in any supplemental indenture provided to be employed, in making
the same. Neither the Trustee, subject to the provisions of Section 601, nor
any Conversion Agent shall be accountable with respect to the validity or
value (or the kind or amount) of any shares of Common Stock, or of any other
securities or property, which may at any time be issued or delivered upon the
conversion of any Security; and it or they do not make any representation
with respect thereto. Neither the Trustee, subject to the provisions of
Section 601, nor any Conversion Agent shall be responsible for any failure of
the Parent to make any cash payment or to issue, transfer or deliver any
shares of stock or stock Certificates or other securities or property upon
the surrender of any Security for the purpose of conversion; and the Trustee,
subject to the provisions of Section 601, and any Conversion Agent shall not
be responsible for any failure of the Parent to comply with any of the
covenants of the Parent contained in this Article.
ARTICLE THREE
MISCELLANEOUS
SECTION 3.1. DEFINITIONS.
Except as otherwise expressly provided or unless the context otherwise
requires, all terms used herein which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
22.
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SECTION 3.2. EFFECTIVE DATE.
This First Supplemental Indenture shall be effective as of the date
first set forth above.
SECTION 3.3. RECITALS.
The recitals contained herein shall be taken as the statements of
Parent and the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this First Supplemental Indenture.
SECTION 3.4. GOVERNING LAW.
This First Supplemental Indenture shall be governed by and construed
in accordance with the laws of the jurisdiction which governs the Indenture and
its construction.
SECTION 3.5. COUNTERPARTS.
This First Supplemental Indenture may be executed in any number of
counterparts each of which shall be an original, but such counterparts shall
together constitute but one and the same instrument.
SECTION 3.6. INDENTURE RATIFIED.
Except as expressly amended hereby the Indenture is in all respects
ratified and confirmed, and all the terms, conditions and provisions thereof
shall remain in full force and effect. This First Supplemental Indenture shall
form a part of the Indenture for all purposes, and every holder of Securities
heretofore or hereafter authenticated and delivered shall be bound hereby.
23.
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IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed, and have caused their respective
seals to be hereunto affixed and attested, all as of the day and year first
above written.
CHIRON CORPORATION, a Delaware
corporation
By /s/ Edward E. Penhost
---------------------
Title: Vice Chairman and
Chief Operating Officer
[Seal]
Attest:
/s/ William G. Green
- --------------------
Title: Vice President and
Secretary
CETUS CORPORATION, Delaware
corporation
By /s/ Hollings C. Renton
---------------------
Title: President and
Chief Operating Officer
[Seal]
Attest:
/s/ Michael S. Ostrach
- ----------------------
Title: Secretary
BANKERS TRUST COMPANY,
as Trustee
By /s/ Sharon Chase
----------------
Title: Assistant Secretary
[Seal]
Attest:
/s/ John J. Mazzucca
- --------------------
Title: Assistant Secretary
24.
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REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT (this "AGREEMENT") dated as of February 27,
1998, between CHIRON CORPORATION, a Delaware corporation (the "BORROWER") and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "BANK").
NOW, THEREFORE, IT IS AGREED:
1. THE ADVANCES. Subject to and upon the terms and conditions set forth
herein, the Bank agrees to make advances (the "ADVANCES") to the Borrower at any
time and from time to time prior to February 27, 2003 (the "EXPIRY DATE");
provided, however, that the aggregate principal amount of Advances outstanding
shall at no time exceed U.S. $100,000,000 (the "COMMITMENT").
2. PURPOSE. The Borrower shall use the proceeds of the Advances for
general corporate purposes, including acquisition financing (PROVIDED, however,
that any acquisition financed by this facility, in whole or part, shall be
undertaken in accordance with all applicable requirements of law and the prior,
effective written consent or approval to such acquisition of the board of
directors or equivalent governing body of the acquiree shall have been
obtained). The Borrower agrees to indemnify the Bank and hold the Bank harmless
from and against any and all liabilities, claims, losses, damages, costs and
expenses of any kind (including all fees and disbursements of legal counsel, the
allocated cost of internal legal services and disbursements of internal counsel
("ATTORNEY COSTS")) which may be incurred by the Bank relating to or arising out
of any actual or proposed use of proceeds of Advances hereunder.
3. AVAILABILITY. The following Advances shall be available to the
Borrower hereunder: (a) Base Rate Advances; or (b) Eurodollar Rate Advances of
one, two, three, six or nine months. For the purposes of this Agreement, it is
understood that (i) the duration of each Eurodollar Rate Advance shall be
referred to as an "INTEREST PERIOD", (ii) the Borrower is required to repay each
Eurodollar Rate Advance on the last day of the Interest Period for such Advance;
and (iii) no Eurodollar Rate Advance shall have an Interest Period which extends
beyond the Expiry Date. The Borrower shall repay to the Bank on the Expiry Date
the aggregate principal amount of the Base Rate Advances and the Eurodollar Rate
Advances outstanding on such date.
4. LOAN ACCOUNTS; NOTES. The Advances shall be evidenced by one or more
loan accounts or records maintained by the Bank in the ordinary course of
business. Any failure to record any Advance or any error in doing so shall not,
however, limit or otherwise affect the obligation of the Borrower hereunder to
pay any amount owing with respect to the Advances or otherwise owing hereunder.
In addition, the Bank may at any time, in its discretion, require the Borrower
to sign one or more promissory notes (a "NOTE") as further evidence of such
indebtedness.
5. INTEREST. Interest shall be payable in respect of the outstanding
principal amount of each (i) Eurodollar Rate Advance on the last day of the
Interest Period thereof and on the Expiry Date, and (ii) each Base Rate Advance
on the last business day of each calendar quarter and on the Expiry Date.
Advances shall bear interest at the following rates per annum: (a) if a
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Base Rate Advance, at the Base Rate; or (b) if a Eurodollar Rate Advance, 0.13
of 1% in excess of the Eurodollar Rate.
Overdue principal and, to the extent permitted by law, overdue interest in
respect of each Advance and any other overdue amount payable by the Borrower
hereunder shall bear interest, payable on demand, at a rate per annum equal to
2-1/2% per annum in excess of the Base Rate in effect from time to time.
For the purposes of this Agreement, "BASE RATE" and "EURODOLLAR RATE" have
the meanings assigned to them on ATTACHMENT 1 hereto.
6. INCREASED COSTS; RESERVES; UNAVAILABILITY OF FUNDS. The Borrower
shall reimburse the Bank, upon demand, for the cost of all reserves under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System for determining the reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with respect to Eurocurrency
funding (currently referred to as "Eurocurrency liabilities") applied or
allocated using reasonable attribution or allocation methods by the Bank to the
Eurodollar Rate Advances. If at any time the Bank shall have determined (which
determination shall, absent manifest error, be final, conclusive and binding on
all parties hereto) that as a result of any changes in any applicable law or
governmental rule, regulation or order (including any applicable law or
governmental rule, regulation or order respecting capital adequacy), or any
interpretation thereof, including the enactment of any law or governmental rule,
regulation or order (whether or not having the force of law) or that as a result
of compliance by the Bank with any direction, requirements or request from any
regulatory authority, whether or not having the force of law, the cost to the
Bank of maintaining its Commitment hereunder or making, funding or maintaining
any Advance shall be increased or the yield to the Bank on such Advance shall be
diminished, then the Bank shall promptly notify the Borrower thereof, showing in
reasonable detail (without revealing any proprietary or confidential
information) the basis for the calculation of such increased costs or diminished
yield, and the Borrower shall pay to the Bank an amount sufficient to indemnify
the Bank thereagainst. The Bank shall have no obligation to make Eurodollar
Rate Advances if U.S. Dollar deposits in the principal amount of the Eurodollar
Rate Advances and for periods equal to the requested Interest Periods are not
available in the offshore U.S. Dollar inter-bank markets.
7. COMMITMENT FEE. The Borrower shall pay the Bank a fee ("COMMITMENT
FEE") computed at a rate per annum of 0.055 of 1% on the average daily unused
portion of the Commitment. The Accrued Commitment Fee shall be payable
quarterly on the last business day of each calendar quarter and on the Expiry
Date or earlier termination of the Commitment.
8. NOTICE OF INTENTION TO BORROW. The Borrower shall give the Bank prior
notice at its address on the signature page hereof (a "NOTICE OF BORROWING") by
telephone or facsimile (to be subsequently confirmed in writing) or in writing
(effective upon receipt) of its intention to borrow, specifying the date,
amount, type and tenor of the proposed Advance. The Borrower shall give such
Notice of Borrowing (i) by 11:00 a.m. (San Francisco time) at least three
business days prior to any proposed Eurodollar Rate Advance which will bear
interest based on the Telerate Screen quote as provided in clause (i) of the
definition of the "Eurodollar Rate"; (ii)
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<PAGE>
by 10:00 a.m. (San Francisco time) at least two business days prior to any
proposed Eurodollar Rate Advance which will bear interest based on a Grand
Cayman quote as provided in clause (ii) of the definition of the "Eurodollar
Rate"; and (iii) by 10:00 a.m. (San Francisco time) on the date of any proposed
Base Rate Advance.
9. PAYMENTS. All payments made hereunder or under any Note (as
hereinafter defined) shall be made to the Bank without deductions for any
present or future taxes, withholdings, deductions or any other charges
(excluding taxes imposed on or measured by the Bank's net income by the
jurisdiction (or any political subdivision thereof) under the laws of which the
Bank is organized or maintains a lending office) (the "TAXES") imposed or
required by any political or taxing authority, it being understood that the net
amount received by the Bank after payment of the Taxes by the Borrower shall not
be less than the payment provided for hereunder. All payments shall be made to
the Bank's Global Payments Operations, 1850 Gateway Blvd., Concord California
94520 in same day funds without set-off, recoupment or counterclaim; for credit
to Incoming Money Transfer Account #12331-83980; ABA #121-000-358; Ref: Chiron
Corporation. Commitment Fee and interest payments (except with respect to Base
Rate Advances bearing interest based on the Bank's "reference rate") shall be
calculated for the actual number of days elapsed on the basis of a 360-day year.
Interest payments with respect to Base Rate Advances bearing interest based on
the Bank's "reference rate" shall also be calculated for the actual number of
days elapsed but on the basis of a 365- or 366-day year, as the case may be.
10. PREPAYMENT; COSTS; VOLUNTARY TERMINATION OF COMMITMENT. (a) Subject
to subsection (b) of this Section, the Borrower may, at any time and from time
to time, upon not less than two business days prior notice to the Bank, prepay
Advances in whole or in part. Such notice of prepayment shall specify the date
and amount of such prepayment and the type(s) of Advances to be prepaid. If
such notice is given by the Borrower, the Borrower shall make such prepayment
and the payment amount specified in such notice shall be due and payable on the
date specified therein, together with accrued interest to each such date on the
amount prepaid and any amounts required pursuant to subsection (b) of this
Section.
(b) If for any reason Eurodollar Rate Advances are prepaid, as a result of
acceleration or otherwise, or if the Borrower fails for any reason to borrow in
accordance with a Notice of Borrowing, or fails to make any prepayment of such
an Advance in accordance with any notice delivered under this Section, the
Borrower shall pay to the Bank, on demand, an additional amount as shall be
required to compensate the Bank for any loss connected with its reemployment of
the amount so prepaid or failed to be prepaid or of those funds acquired by the
Bank to fund the Advance proposed in such Notice of Borrowing, as the case may
be.
(c) The Borrower may, upon not less than three Business Days' prior
written notice to the Bank, terminate the Commitment. Once terminated in
accordance with this subsection, the Commitment may not be reinstated. The
accrued Commitment Fee to the effective date of such termination shall be paid
on the effective date of such termination, along with the amount of all
outstanding Advances, together with accrued interest to such date on the amount
prepaid and any amounts required pursuant to subsection (b) of this Section.
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<PAGE>
11. CONDITIONS PRECEDENT. The obligation of the Bank to make Advances to
the Borrower hereunder is subject to the satisfaction of (i) the conditions set
forth in subsections (a), (c) and (d) of this Section at the time of the making
of the first Advance, and (ii) the conditions set forth in subsection (b) of
this Section, at the time of making each Advance (including the first Advance):
(a) There shall have been delivered to the Bank (i) certified copies of
(x) the Borrower's charter and by-laws and (y) resolutions of the Borrower's
board of directors or equivalent body authorizing the transaction evidenced
hereby, and (ii) evidence satisfactory to the Bank of the authority of the
Borrower's signatory (ies) hereto and to the Note.
(b) At the time of the making of each Advance, and after giving effect
thereto, there shall exist no Event of Default (as hereinafter defined) and no
condition, event or act which, with the giving of notice or lapse of time or
both, would constitute an Event of Default, and all representations and
warranties made by the Borrower herein shall be true and correct with the same
effect as if those representations and warranties had been made on and as of
such date.
(c) The Bank shall have received from Novartis AG, Basel, a Swiss
Corporation (the "Guarantor") a joint and several, unconditional guaranty of all
of the Borrower's obligations hereunder and under any Note in form and substance
satisfactory to the Bank (the "Guaranty"), and such certificates, organizational
documents and other documents or instruments in connection therewith as the Bank
may reasonably request.
Each Notice of Borrowing submitted by the Borrower hereunder shall
constitute a representation and warranty by the Borrower hereunder, as of the
date of the notice and as of the proposed borrowing date, that the conditions in
subsection (b) of this Section are satisfied.
12. REPRESENTATIONS AND WARRANTIES. The Borrower makes the following
representations and warranties, all of which shall survive the execution and
delivery of this Agreement.
(a) The Borrower is duly organized and validly existing in good standing
in the jurisdiction of its incorporation.
(b) This Agreement is and any Note will be duly and properly authorized
and executed by the Borrower and constitutes or will constitute, as applicable,
its legal, valid and binding obligations enforceable in accordance with their
respective terms.
13. COVENANTS. The Borrower covenants and agrees that, until all
obligations incurred by the Borrower under this Agreement are paid in full and
so long as the Commitment is in effect, the Borrower will:
(a) Provide to the Bank (i) as soon as they are available, copies of all
financial statements of the Borrower required to be filed with the Securities
and Exchange Commission; and (ii) with reasonable promptness, any other
information as the Bank may from time to time reasonably request.
4
<PAGE>
(b) Promptly give written notice to the Bank of any condition, event or
act which, with or without the giving of notice or the lapse of time, or both,
would constitute an Event of Default (as hereinafter defined).
(c) Not wind up, liquidate or dissolve its affairs or merge or consolidate
into any entity, or convey, sell, lease or otherwise dispose of (or agree to do
any of the foregoing at any future time) all or substantially all or a
substantial part of its property or assets, except that (i) any corporation may
merge or liquidate into the Borrower provided that either (x) the Borrower shall
be the surviving corporation, or (y) if the Borrower is not the surviving
corporation, the Guaranty shall remain in full force and effect on behalf of the
surviving corporation, and (ii) the Borrower may merge into the Guarantor.
14. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF
DEFAULT") shall occur and be continuing:
(a) The Borrower shall default in the payment of any principal amount due
hereunder or under any Note or shall default in the payment of any interest
amount due hereunder or under any Note and such default shall not be cured
within five days;
(b) The Borrower shall fail to perform or observe any term or covenant
contained in this Agreement and such failure shall not be remedied within 30
days, or any representation or warranty made by the Borrower in this Agreement
or in any certificate or other document or statement furnished at any time
hereunder or in connection herewith shall prove to have been incorrect or untrue
in any material respect on the date as of which made;
(c) A default or event of default with respect to payment shall occur in
respect of bonds, notes, other loans or similar evidences of indebtedness of the
Borrower or any subsidiary in a principal amount of at least U.S. $5,000,000.00,
the effect of which is to cause, or to permit the holder of such indebtedness to
cause, such indebtedness to become due prior to its stated maturity, or any such
indebtedness shall not be paid within any applicable grace period after the due
date thereof;
(d) The Guarantor shall materially breach any term or provision under, or
default under, the Guaranty or any document or instrument related thereto or
given by the Guarantor in connection therewith, or the Guaranty or any such
document or instrument shall be contested or liability shall be denied
thereunder by the Guarantor or any person claiming through the Guarantor, or
shall cease to be in full force and effect for any reason whatsoever; or
(e) The Borrower or the Guarantor shall (i) make an assignment for the
benefit of creditors, (ii) generally fail to pay its debts as they become due,
(iii) file a petition commencing a voluntary case under any reorganization or
bankruptcy laws, or (iv) an involuntary case under such laws shall be commenced
against the Borrower or the Guarantor and such proceeding shall remain
undismissed or unstayed for a period of 60 days;
then, and in any such event, the Bank may by notice to the Borrower take either
or both of the following, actions: (i) terminate the Commitment, whereupon the
same shall terminate forthwith, and/or (ii) declare the Advances and all
interest accrued and unpaid thereon, any
5
<PAGE>
accrued Commitment Fee, and all other sums due hereunder, to be immediately due
and payable without presentment, demand, protest or further notice of any kind,
all of which are hereby expressly waived by the Borrower; PROVIDED, that, upon
the occurrence of any event specified in subsection (e) of this Section (in the
case of clause (iv) thereof, upon the expiration of the 60-day period mentioned
therein), the Commitment shall automatically terminate and the unpaid principal
amount of the Advances and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Bank.
15. GOVERNING LAW AND JURISDICTION: WAIVER OF JURY TRIAL. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A
TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR
RELATED TO THIS AGREEMENT, ANY NOTE OR ANY OTHER DOCUMENT GIVEN IN CONNECTION
HEREWITH, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR
OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF
ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY.
16. MISCELLANEOUS. (a) The Borrower shall pay the Bank, on demand, all
(i) reasonable out-of-pocket expenses and reasonable Attorney Costs incurred by
the Bank in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to (in each case, whether or not consummated), and (ii) all
out-of-pocket expenses and Attorney Costs incurred by the Bank in connection
with the enforcement of this Agreement and any instruments or agreements
executed in connection with this Agreement.
(b) This Agreement supersedes all prior agreements and oral negotiations
with respect to the subject matter of this Agreement. Neither this Agreement
nor any Note is assignable by the Borrower, except in connection with a merger
permitted under Section 13(c)(i)(y) or 13(c)(ii).
(c) No delay or omission by Bank to exercise any right under this
Agreement or under any Note or other document related hereto shall impair such
right, nor shall it be construed as a waiver thereof. No waiver of any breach
or default shall be deemed a waiver of any subsequent breach or default.
(d) No amendment or waiver of any provision of this Agreement or any
Note or any other document given in connection herewith, and no consent or
approval with respect to any departure by the Borrower therefrom, shall be
effective unless the same shall be in writing and signed by the Bank and the
Borrower, and consented to in writing by the Guarantor, and then any such
waiver, consent or approval shall be effective only in the specific instance and
for the specific purpose for which given.
6
<PAGE>
(e) Section headings in this Agreement are for reference only and
shall not affect the interpretation of any provision of this Agreement.
(f) The credit referred to in and evidenced by this Agreement is
referenced as of the date hereof by the Bank as its loan number 3697-15407-09,
which loan number may change from time-to-time to a successor or replacement
loan number.
IN WITNESS WHEREOF, the Borrower and the Bank have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
CHIRON CORPORATION
By: /s/ J E Kent
-----------------------------------------
James E. Kent, Vice President and Treasurer
Address for Notices
-------------------
4560 Horton Street
Emeryville, CA 94608-2916
Phone: (510) 655-8730
Fax: (510) 923-3343
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Kevin McMahon
-----------------------------------------
Kevin McMahon, Managing Director
Address for Notices
-------------------
Credit Products-High Technology-
SF #3697
555 California Street, 41st Floor
San Francisco, CA 94104
Attn: Kevin McMahon, Managing Director
Phone: (415) 622-8088
Fax: (415) 622-2514
7
<PAGE>
ATTACHMENT 1
BASE
RATE: means, for any day, the higher of: (a) 0.50% per annum above the
latest Federal Funds Rate, which means, for any day, the rate set
forth in the weekly statistical release designated as H.15(519),
or any successor publication, published by the Federal Reserve
Bank of New York (including any such successor, "H.15(519)") on
the preceding business day opposite the caption "Federal Funds
(Effective)"; or, if for any relevant day such rate is not so
published on any such preceding business day, the rate for such
day will be the arithmetic mean as determined by the Bank of the
rates for the last transaction in overnight Federal funds
arranged prior to 9:00 a.m. (New York City time) on that day by
each of three leading brokers of Federal funds transactions in
New York City selected by the Bank; and (b) the rate of interest
in effect for such day as publicly announced from time to time by
the Bank in San Francisco, California, as its "reference rate."
(The "reference rate" is a rate set by the Bank based upon
various factors including the Bank's costs and desired return,
general economic conditions and other factors, and is used as a
reference point for pricing some loans, which may be priced at,
above, or below such announced rate.) Any change in the
reference rate announced by the Bank shall take effect at the
opening of business on the day specified in the public
announcement of such change.
EURODOLLAR
RATE: means for each applicable Interest Period, (i) the rate of
interest per annum equal to the rate for deposits in the
Applicable Currency for a period equal to the applicable Interest
Period which appears on the Telerate Page 3750 as of 11:00 a.m.,
London time, on the day that is two London business days prior to
the commencement of such Interest Period, or (ii) if such rate
does not appear on the Telerate Page 3750, or if the Borrower has
not given a Notice of Borrowing prior to the date and time
specified in clause (i) of Section 8, the Eurodollar Rate shall
mean for each applicable Interest Period the rate of interest at
which U.S. Dollar deposits for such Interest Period and in an
amount approximately equal to the principal amount of the advance
to be made or maintained would be offered by Bank's Grand Cayman
Branch, Grand Cayman, British West Indies, to major banks in the
offshore U.S. Dollar inter-bank markets upon the request of such
banks at or about 11:00 a.m. San Francisco time two business days
prior to the first day of such Interest Period.
8
<PAGE>
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT (this "AGREEMENT") dated as of March 23, 1998
(the "EFFECTIVE DATE") between CHIRON CORPORATION, a Delaware corporation (the
"BORROWER"), and SWISS BANK CORPORATION, STAMFORD BRANCH (the "BANK").
WHEREAS, subject to and upon the terms and conditions set forth herein, the
Bank is willing to make available to the Borrower the credit facility provided
for herein;
NOW, THEREFORE, IT IS AGREED:
1. THE ADVANCES. Subject to and upon the terms and conditions set forth
herein, the Bank agrees to make advances (the "ADVANCES") to the Borrower at any
time and from time to time prior to March 22, 1999 (the "EXPIRY DATE");
provided, however, that the aggregate principal amount of Advances outstanding
shall at no time exceed U.S. $100,000,000 (One Hundred Million U.S. Dollars)
(the "COMMITMENT").
2. PURPOSE. The Borrower shall use the proceeds of the Advances for
general corporate purposes, including acquisition financing. The Borrower
agrees to indemnify the Bank and hold the Bank harmless from and against any and
all liabilities, losses, damages, costs and expenses of any kind which may be
incurred by the Bank relating to or arising out of any actual or proposed use of
proceeds of Advances hereunder.
3. AVAILABILITY. The following Advances shall be available to the
Borrower hereunder: (a) Prime Rate Advances and Money Market Rate Advances of
up to 270 days; or (b) Eurodollar Rate Advances of one, two, three, six or nine
months. For the purposes of this Agreement, it is understood that (i) the
duration of each Advance shall be referred to as an "INTEREST PERIOD"; (ii) the
Borrower is required to repay each Advance on the last day of the Interest
Period for such Advance; and (iii) no Advance shall have an Interest Period
which extends beyond the Expiry Date.
4. INTEREST. Interest shall be payable in respect of the outstanding
principal amount of each Advance at the maturity thereof. Advances shall bear
interest at the following rates per annum: (a) if a Prime Rate Advance, at the
Bank's floating Prime Rate; (b) if a Money Market Rate Advance, at the quoted
Money Market Rate; or (c) if a Eurodollar Rate Advance, 0.14 of 1% in excess of
the Bank's Eurodollar Rate.
<PAGE>
Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Advance and any other overdue amount payable by the
Borrower hereunder shall bear interest, payable on demand, at a rate per annum
equal to 2-1/2% per annum in excess of the Bank's Prime Rate in effect from time
to time.
For the purposes of this Agreement, "PRIME RATE" and "MONEY MARKET
RATE" shall mean those rates so designated by the Bank or determined in
accordance with the practice of the Bank from time to time, it being understood
that the Prime Rate shall in no event be less than 1/2 of 1% in excess of the
rate payable by the Bank from time to time for overnight Federal funds. The
Bank shall determine the "EURODOLLAR RATE" by taking the rate for a loan of a
comparable amount and duration as the proposed Advance from page 3750 of the
"Telerate Screen".
5. INCREASED COSTS. If at any time the Bank shall have determined (which
determination shall, absent manifest error, be final, conclusive and binding on
all parties hereto) that as a result of any change in any applicable law or
governmental rule, regulation or order (including any applicable law or
governmental rule, regulation or order respecting capital adequacy), or any
interpretation thereof, including the enactment of any law or governmental rule,
regulation or order (whether or not having the force of law), the cost to the
Bank of maintaining its Commitment hereunder or making, funding or maintaining
any Advance shall be increased or the yield to the Bank on such Advance shall be
diminished, then the Bank shall promptly notify the Borrower thereof, showing in
reasonable detail the basis for the calculation of such increased costs or
diminished yield, and the Borrower shall pay to the Bank an amount sufficient to
indemnify the Bank thereagainst.
6. COMMITMENT FEE. The Borrower shall pay the Bank a fee ("COMMITMENT
FEE") computed at a rate per annum of 0.06 of 1% on the average daily unused
portion of the Commitment. Accrued Commitment Fee shall be payable quarterly on
the last business day of each calendar quarter and on the Expiry Date or earlier
termination of the Commitment.
7. NOTICE OF INTENTION TO BORROW. The Borrower shall give the Bank prior
notice at its address on the signature page hereof (a "NOTICE OF BORROWING") by
telephone or facsimile (to be subsequently confirmed in writing) or in writing
(effective upon receipt) of its intention to borrow, specifying the date,
amount, type and tenor of the proposed Advance. The Borrower shall give such
Notice of Borrowing at least two business days prior to any proposed Eurodollar
Rate Advance and by 10:00 a.m. New York time on the date of any proposed Prime
Rate Advance.
2
<PAGE>
8. MONEY MARKET RATE ADVANCES. The Borrower may request a Money Market
Rate quote by telephone on any business day. If the Borrower accepts such Money
Market Rate, it must confirm such acceptance in writing.
9. PAYMENTS. All payments made hereunder or under the Note (as
hereinafter defined) shall be made to the Bank without deductions for any
present or future taxes, withholdings, deductions or any other charges (the
"TAXES") imposed or required by any political or taxing authority, it being
understood that the net amount received by the Bank after payment of the Taxes
by the Borrower shall not be less than the payment provided for hereunder. All
payments shall be made to the office of Swiss Bank Corporation in Stamford,
Connecticut, Account Number 101-WA-183008-000 Ref. Chiron Corporation.
Commitment Fee and interest payments (except with respect to Prime Rate
Advances) shall be calculated for the actual number of days elapsed on the basis
of a 360-day year. Interest payments with respect to Prime Rate Advances shall
also be calculated for the actual number of days elapsed but on the basis of a
365- or 366-day year, as the case may be.
10. PREPAYMENT, FUNDING COSTS. Any Prime Rate Advance may be prepaid
without premium or penalty upon two business days' prior notice to the Bank. If
for any reason Eurodollar Rate or Money Market Rate Advances are prepaid, as a
result of acceleration or otherwise, or if the Borrower fails for any reason to
borrow in accordance with a Notice of Borrowing, the Borrower shall pay to the
Bank, on demand, an additional amount as shall be required to compensate the
Bank for any loss connected with its reemployment of the amount so prepaid or of
those funds acquired by the Bank to fund the Advance proposed in such Notice of
Borrowing, as the case may be.
11. CONDITIONS PRECEDENT. The obligation of the Bank to make Advances to
the Borrower hereunder is subject to the satisfaction of the following
conditions on or before the Effective Date (except as hereinafter indicated):
(a) The Bank shall have received a duly executed note (the "NOTE") in
the form of EXHIBIT A hereto.
(b) There shall have been delivered to the Bank (i) certified copies
of (x) the Borrower's charter and by-laws and (y) resolutions of the
Borrower's board of directors or equivalent body authorizing the
transaction evidenced hereby, and (ii) evidence satisfactory to the Bank of
the authority of the Borrower's signatory(ies) hereto and to the Note.
3
<PAGE>
(c) At the time of the making of each Advance, and after giving
effect thereto, there shall exist no Event of Default (as hereinafter
defined) and no condition, event or act which, with the giving of notice or
lapse of time or both, would constitute an Event of Default, and all
representations and warranties made by the Borrower herein shall be true
and correct with the same effect as if those representations and warranties
had been made on and as of such date.
(d) The Bank shall have received from Novartis AG (the "GUARANTOR")
an unconditional guaranty in the amount of US$100,000,000 (One Hundred
Million United States Dollars) of the Borrower's obligations hereunder and
under the Note (the "GUARANTY").
12. REPRESENTATIONS AND WARRANTIES. The Borrower makes the following
representations and warranties, all of which shall survive the execution and
delivery of this Agreement:
(a) The Borrower is duly organized and validly existing in good
standing in the jurisdiction of its incorporation.
(b) This Agreement and the Note are duly and properly authorized and
executed by the Borrower and will constitute its legal, valid and binding
obligations enforceable in accordance with their respective terms.
13. COVENANTS. The Borrower covenants and agrees that, until all
obligations incurred by the Borrower under this Agreement are paid in full and
so long as the Commitment is in effect, the Borrower will:
(a) Provide to the Bank (i) as soon as they are available, copies of
all financial statements of the Borrower required to be filed with the
Securities and Exchange Commission; and (ii) with reasonable promptness,
any other information as the Bank may from time to time reasonably request.
(b) Promptly give written notice to the Bank of any condition, event
or act which, with or without the giving of notice or the lapse of time, or
both, would constitute an Event of Default (as hereinafter defined).
(c) Not wind up, liquidate or dissolve its affairs or merge or
consolidate into any entity, or convey, sell, lease or otherwise dispose of
(or agree to do any of the foregoing at any future time) all or
substantially all or a
4
<PAGE>
substantial part of its property or assets, except that (i) any
corporation may merge or liquidate into the Borrower provided that either
(x) the Borrower shall be the surviving corporation, or (y) if the
Borrower is not the surviving corporation, the Guaranty shall remain in
full force and effect on behalf of the surviving corporation, and (ii)
the Borrower may merge into the Guarantor.
14. EVENTS OF DEFAULT. If any of the following events ("EVENTS OF
DEFAULT") shall occur and be continuing:
(a) The Borrower shall default in the payment of any principal amount
due hereunder or under the Note, or shall default in the payment of any
interest amount due hereunder or under the Note and such default shall not
be cured within five (5) days;
(b) The Borrower shall fail to perform or observe any material term
or covenant contained in this Agreement and such failure shall not be
remedied within 30 days, or any representation or warranty made by the
Borrower in this Agreement or in any certificate or other document or
statement furnished at any time hereunder or in connection herewith shall
prove to have been incorrect or untrue in any material respect on the date
as of which made;
(c) A default or event of default with respect to payment shall occur
in respect of bonds, notes, other loans or similar evidences of
indebtedness of the Borrower or any subsidiary in a principal amount of at
least U.S.$ 5,000,000.00, the effect of which is to cause, or to permit the
holder of such indebtedness to cause, such indebtedness to become due prior
to its stated maturity, or any such indebtedness shall not be paid within
any applicable grace period after the due date thereof;
(d) The Guaranty shall cease to be in full force and effect for any
reason whatsoever; or
(e) The Borrower or the Guarantor shall make an assignment for the
benefit of creditors, shall generally fail to pay its debts as they become
due, shall file a petition commencing a voluntary case under any
reorganization or bankruptcy laws, or an involuntary case under such laws
shall be commenced against the Borrower or the Guarantor and such
proceeding shall remain undismissed or unstayed for a period of 30 days;
then, and in any such event, the Bank may by notice to the Borrower take either
or both of the following actions: (i)
5
<PAGE>
terminate the Commitment, whereupon the same shall terminate forthwith,
and/or (ii) declare the Advances and all interest accrued and unpaid thereon,
any accrued Commitment Fee, and all other sums due hereunder, to be
immediately due and payable without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower.
15. GOVERNING LAW AND JURISDICTION; WAIVER OF JURY TRIAL. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDTIONALLY WAIVE TRIAL BY
JURY.
6
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Bank have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
CHIRON CORPORATION
By: /S/JE KENT
------------------------------
Title: James E. Kent
Vice President and Treasurer
ADDRESS FOR NOTICES
4460 Horton Street
Emeryville, CA 94608
Attention: Treasurer
Phone: 510-655-8730
Fax: 510-601-3343
SWISS BANK CORPORATION,
STAMFORD BRANCH
By /s/ JORG RAUTHE
------------------------------
Title: Associate Director
Loan Portfolio Support, US
By /s/ DOROTHY MCKINLEY
------------------------------
Title: Associate Director
Loan Portfolio Support, US
ADDRESS FOR NOTICES
Swiss Bank Corporation
677 Washington Boulevard
P.O. Box 120300
Stamford, Connecticut 06912
Attention: Lynn Alfaro
Phone: (203) 719-4308
Fax: (203) 719-3180
7
<PAGE>
PROMISSORY NOTE
U.S. $100,000,000 March 23, 1998
FOR VALUE RECEIVED, the undersigned, CHIRON CORPORATION, a Delaware
corporation the "BORROWER"), hereby promises to pay to the order of SWISS BANK
CORPORATION (the "BANK"), acting through its Stamford Branch, in lawful money of
the United States of America, in immediately available funds, at the principal
office of the Bank at 677 Washington Boulevard, Stamford, Connecticut 06912,
the principal amount of each advance (an "ADVANCE") endorsed on the schedule
attached hereto (the "SCHEDULE") on the maturity date thereof.
The Borrower promises also to pay interest on the unpaid principal amount
of each Advance in like money from and including the date of each Advance until
paid in full at the rate specified in the Schedule, such interest to be paid on
the last day of the Interest Period for such Advance. Interest shall be
calculated for the actual number of days elapsed (i) on the basis of a 365- or
366-day year, as the case may be, in the case of any Advance bearing interest at
a rate based on the Bank's Prime Rate, or (ii) on the basis of a 360-day year,
for all other Advances.
The Borrower hereby authorizes the Bank to endorse on the Schedule the
date, amount and maturity date of, and interest rate with respect to, each
Advance evidenced thereby and all payments of principal thereof, provided that
the failure to make or any error in making such endorsement shall not affect the
obligations of the Borrower to the Bank.
This note is the Note referred to in the Revolving Credit Agreement dated
as of March 23, 1998 between the Borrower and the Bank (as from time to time in
effect, the "AGREEMENT") and is entitled to the benefits thereof.
If an Event of Default (as defined in the Agreement) shall occur and be
continuing, the principal of and accrued interest on this note may be declared
to be due and payable in the manner and with the effect provided in the
Agreement.
The Borrower hereby waives presentment, demand, protest or notice of any
kind in connection with this note.
<PAGE>
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.
CHIRON CORPORATION
By: /S/ JE KENT
--------------------------------
Title: Vice President and Treasurer
<PAGE>
AMENDMENT AGREEMENT
(HDS FEES AND DEEPLY DISCOUNTED VIALS)
This Amendment Agreement is made and dated as of September 23, 1997 between
Schering Aktiengesellschaft ("Schering") and Chiron Corporation ("Chiron").
WHEREAS, Schering and Chiron have entered into the Regulatory Filing and
Development Agreement as of May 10, 1993 (the "RFDS Agreement"); and
WHEREAS, differences of opinion have developed between the Parties relating
to the exclusion of fees paid by Schering to HDS from Net Sales as calculated
under the RFDS Agreement and relating to the interpretation of Section 9.3 of
the RFDS Agreement; and
WHEREAS, the Parties have resolved their differences of opinion concerning the
such matters and wish to amend, modify, and supplement the RFDS Agreement to
reflect such resolution; and
WHEREAS, the Parties recognize that other issues have arisen between them with
respect to the RFDS Agreement which will be reflected in separate amendments
when they are resolved.
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which hereby are acknowledged, the Parties agree as follows:
Capitalized terms used in this Amendment Agreement and not defined herein shall
have the meanings assigned in the RFDS Agreement.
SECTION ONE: AMENDMENTS TO ARTICLE ONE: DEFINITIONS ARTICLE
Reference is made to Article 1 of the RFDS Agreement (entitled "Definitions").
1.1 NET SALES. The Parties agree to amend Article 1 to delete in its
entirety the definition of the term "Net Sales" at Section 1.33 and to replace
such definition with the following definition:
"1.33 "NET SALES" shall mean the gross sales by any of Schering or
its Affiliates or their sublicensees of Product hereunder as reflected in
invoices to independent third parties, less any applicable taxes or duties,
and any reasonable rebate or allowances (including but not limited to rebates
to public assistance programs, but not including allowances for bad debts),
chargebacks, shipping or freight charges prepaid or allowed, and less the
value of returned trade goods and reasonable trade cash discounts actually
given. In addition, gross sales also shall be reduced by the deduction of
any fees paid by Schering or its Affiliates to HDS or independent third
parties as long as these deductions are within the scope of the current
agreement between Berlex and HDS (the "Current HDS Agreement"). Net Sales
shall not include sales of Deeply Discounted Vials.
-1-
<PAGE>
Should Schering or its Affiliates expand the scope of the Current HDS
Agreement, it shall obtain Chiron's written consent prior to deducting the
related increase in fees from gross sales."
In addition to the foregoing amendment of the definition of the term "Net
Sales", the Parties agree that the calculation of Net Sales is within the terms
of Section 10.2, and that in determining Net Sales the parties will follow the
accounting principles set forth in Section 10.2.1.
1.2 ADDITIONAL DEFINED TERMS. The Parties agree to amend Article 1 to add
the following new definitions in the appropriate numerical order:
1.47 "DEEPLY DISCOUNTED VIAL" shall mean any Vial manufactured by
Chiron, which is provided by Schering without charge to an unaffiliated third
party, or for which Schering's payment to Chiron under Section 9.2 of the RFDS
Agreement, using the Effective Percentage Rate multiplied by the Chiron Sales
per Vial, would be less than the Chiron Variable Cost (as defined in Section
10.3.2) per Vial. For clarification and without limitation, Deeply Discounted
Vials include Vials provided to indigent patient programs or as a non-cash
rebate, and Vials provided to the Betaseron Foundation. Deeply Discounted Vials
shall exclude Vials that are returned to Schering by Schering's customers for
quality reasons. Deeply Discounted Vials shall also exclude Vials used in
clinical trials.
1.48 "RFDS AGREEMENT" shall mean that certain Regulatory Filing,
Development and Supply Agreement of May 10, 1993 between the Parties.
SECTION TWO: AMENDMENTS TO ARTICLE NINE: PAYMENTS ARTICLE
Reference is made to Article IX of the RFDS Agreement (entitled "Payments").
2.1 PAYMENT AMENDMENTS. The Parties agree to amend Article IX to delete
in their entirety Sections 9.1, 9.2 and 9.3, and to replace such Sections with
the following Sections:
"9.1 PAYMENT ON DELIVERY OR COMPLETION. Within 30 days after the
later of the delivery of each shipment of Betaseron to Schering by Chiron
pursuant to Section 7.11 or receipt of the related invoice, or written
notification of completion of Vial-Equivalents, unless any of them is
subsequently not accepted pursuant to Section 8.6, Schering shall pay Chiron an
amount equal to the number of Vials shipped or Vial-Equivalents completed
multiplied by the amount set forth herein applicable to the period in which such
Vials were ordered. For orders placed in the Initial Sales Period, the payment
pursuant to this Section 9.1 shall be [CONFIDENTIAL TREATMENT REQUESTED] per
Vial, [CONFIDENTIAL TREATMENT REQUESTED] per Vial-Equivalent of Acid Paste, and
[CONFIDENTIAL TREATMENT REQUESTED] per Vial-Equivalent of G-75; for orders
placed after the Initial Sales Period, the payment shall be [CONFIDENTIAL
TREATMENT REQUESTED] per Vial, [CONFIDENTIAL TREATMENT REQUESTED] per
Vial-Equivalent of Acid Paste, and [CONFIDENTIAL TREATMENT REQUESTED] per
Vial-Equivalent of G-75. No payment shall be due hereunder for Betaseron and/or
Vials delivered pursuant to Section 4.2. Any payment made by Schering
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pursuant to this Section 9.1 for a Vial later determined to be a Deeply
Discounted Vial shall be credited to Schering as provided in Section 9.2. Any
payment which has been made pursuant to this Section 9.1 for a Vial-Equivalent
which is incorporated into a Vial delivered hereunder shall be credited against
the payment otherwise due on account of such Vial. After 1993, payment for
Vial-Equivalents ordered by Schering shall only be made to the extent Chiron has
completed the manufacture of Vial-Equivalents in excess of Chiron's reasonable
need for inventory on hand in view of Schering's order history, good-faith
forecasts, and then-pending orders.
9.2. PAYMENT OF CHIRON SALES, GENERALLY. Within 60 days after the end
of each calendar quarter, Schering shall pay Chiron an amount equal to the
applicable Effective Percentage Rate multiplied by the Chiron Sales in such
quarter, less the following adjustments (which adjustments shall be carried
forward from quarter to quarter to the extent they exceed the amount otherwise
to be paid in any quarter pursuant to this Section):
1. a credit of any amounts paid under Section 9.1, plus a
credit of any amounts credited to Schering pursuant to Section 8.9, to the
extent such amounts have not previously been credited against payments under
this Section 9.2.1 and were paid for delivery of those Vials which account for
the Chiron Sales in such calendar quarter;
2. during Phase I only, a credit equal to the additional
shipping costs (including insurance) which were incurred by Schering or its
Affiliates as a result of Schering taking delivery of Betaseron used for Foreign
Chiron Sales at the Chiron Site as compared to taking delivery at BI's German
facility, assuming use of reasonable and appropriate carriers and comparable
delivery terms;
3. the application of any Schering credits under Section 9.4.2;
4. any credit due to Schering for payments made under Section
9.1 for any Vial later determined to be a Deeply Discounted Vial; and
5. any amounts credited to Schering under Section 9.7.
9.3 PAYMENT OF CHIRON VARIABLE COST. From and after July 1, 1997, if
the total quantity of Deeply Discounted Vials distributed by Schering in any
calendar year on a country by country basis, exceeds [CONFIDENTIAL TREATMENT
REQUESTED] percent of the total Vials ordered by Schering from Chiron during
such calendar year for use in such country, then, solely with respect to such
excess Deeply Discounted Vials over [CONFIDENTIAL TREATMENT REQUESTED] percent,
Schering shall pay to Chiron the Chiron Variable Cost for each such Deeply
Discounted Vial, such payment to be made within 60 days after the end of each
calendar year. (The quantity of Vials shall be pro-rated for 1997). Schering
shall act reasonably in determining the number of Deeply Discounted Vials to be
distributed."
2.2 AMENDMENT OF SECTION 9.7. The Parties agree to amend Section 9.7 to
delete in its entirety the last sentence of such Section and replace it with the
following sentence: "This Section shall not apply to Vials supplied pursuant to
Section 4.2 or to Deeply Discounted Vials."
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The parties acknowledge that the amounts payable for Vials used in clinical
trials is an issue which may be the subject of a separate amendment to the RFDS
Agreement, and this Amendment Agreement is not intended to ratify the remaining
terms of Section 9.7.
SECTION THREE: AMENDMENTS TO ARTICLE TEN: REPORTS AND BOOKS ARTICLE
Reference is made to Article X of the RFDS Agreement (entitled "Reports and
Books").
3.1 ACCOUNTING AMENDMENTS. The parties agree to amend Article X to delete
in its entirety Section 10.3, and replace such Section with the following
Section:
"10.3 COSTS.
"10.3.1 FULLY BURDENED COSTS. Where a Party hereunder is to be paid
or credited with its costs, such costs shall be fully burdened and shall be
calculated according to such Party's standard and established internal project
costing methodology, which methodology shall be calculated in compliance with
applicable accounting principles, including GAAP in the case of Chiron and any
U.S. Affiliate of Schering, and shall include a reasonable allocation of
corporate overhead, all in accordance with such established method. Each party
shall use its best efforts to perform activities to be charged to the other
Party in a cost-effective manner. This Section 10.3.1 shall not be applicable
to the calculation of Chiron Variable costs.
10.3.2 CHIRON VARIABLE COST. Chiron Variable Cost shall mean
Chiron's cost of direct materials; salaries, wages and benefits of personnel
directly engaged in manufacturing the Product; overhead associated with direct
production, excluding depreciation, leasehold improvements and equipment leases;
and general manufacturing overhead for Quality Assurance/Quality Control only;
all as set forth in paragraphs 1, 2, 3 (but excluding 3.a.) and 4.e of Exhibit
10.4 of the RFDS Agreement. Chiron's Variable Cost shall be determined on a
calendar year basis by Chiron (based on accounting standards and methods
historically employed by Chiron, consistently applied) and reported to Schering.
For calendar year 1997 Chiron Variable Cost as calculated above shall be
[CONFIDENTIAL TREATMENT REQUESTED] per Vial."
SECTION FOUR: PAYMENT BY SCHERING; RELEASE
4.1 PAYMENT BY SCHERING. In settlement of the dispute between the parties
with respect to Section 9.3 of the RFDS Agreement, Schering agrees to pay to
Chiron the sum of [CONFIDENTIAL TREATMENT REQUESTED] dollars by wire transfer to
the bank account designated by Chiron. Such payment shall be made within ten
(10) business days of the execution by Chiron of this Amendment Agreement.
4.2 RELEASE BY CHIRON. In consideration of the payment by Schering
described in Section 4.1, and of the execution of this Amendment, Chiron hereby
releases, acquits and forever discharges Schering of and from any and all past,
present or future claims for additional compensation from Schering, whether
known or unknown to Chiron, which Chiron has had, may have, now has, or which
may hereafter accrue or be otherwise acquired, on account of,
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relating to, based upon, or arising out of any of the following: (i) the
credits taken by Schering pursuant to Section 9.3 of the RFDS Agreement, as
such section existed prior to the effective date of this Amendment Agreement,
during the period from May 10, 1993 through June 30, 1997; or (ii) deductions
for fees paid to HDS which have been taken by Schering from gross sales in
calculating Net Sales under Section 1.33 of the RFDS Agreement during the
period from May 10, 1993 through July 1, 1997.
Nothing in this Amendment Agreement is intended to constitute a
release or waiver of any kind by either party with respect to any other matters
or issues related to the RFDS Agreement.
SECTION FIVE: MISCELLANEOUS
5.1 EFFECTIVE DATE. This Amendment Agreement shall be effective from and
after July 1, 1997. From and after July 1, 1997 all references to the RFDS
Agreement shall be deemed to be references to such agreement as amended by this
Amendment Agreement.
5.2 SCOPE OF AMENDMENT. This Amendment Agreement is limited as specified
herein, and shall not constitute a waiver, modification, or amendment of any
other provision of the RFDS Agreement, which shall continue in full force and
effect except as set forth herein.
5.3 APPLICABLE LAW. This Amendment Agreement shall be governed by,
subject to and construed in accordance with the laws of the State of California
and the parties consent to the jurisdiction of the courts of that state. Except
as set forth expressly herein, no dispute shall be submitted to arbitration
without the advance written consent of both Parties.
5.4 COUNTERPARTS. This Amendment Agreement may be executed in two or more
counterparts (and via facsimile), each of which shall constitute an original,
but all of which, when taken together, shall constitute but one instrument.
5.5 HEADINGS. The section headings contained in this Amendment Agreement
are included for convenience only and form no part of the agreement between the
Parties.
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5.6 CONSTRUCTION. This Amendment is the product of mutual negotiation and
is not to be construed strictly against either party.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement as of the
date first written above.
SCHERING AKTIENGESELLSCHAFT CHIRON CORPORATION
By: /s/ Ulrich Koestlin By: /s/ Magnus Lundberg
-------------------------- --------------------------
Title: Member Executive Board Title: President, Chiron Vaccines and
------------------------ ------------------------------
Therapeutics
------------
By: /s/ K. Pohle
---------------------------
Title: Vice Chairman
------------------------
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CONFIDENTIAL
December 4, 1997
Mr. Peter Tattle
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, NJ 08896
Dear Mr. Tattle:
This letter agreement (this "AGREEMENT") sets forth the agreement of Chiron
Corporation ("CHIRON"), on the one hand, and Ortho Pharmaceutical Corporation
and Ortho Biotech, Inc. (collectively, "ORTHO"), on the other hand, with respect
to the manufacture, purchase and sale of bulk platelet derived growth factor
("PDGF") for use by Ortho in the research, development and commercialization of
a finished product for wound healing, which is expected to be sold in the United
States under the name Regranex(R) (the "FINISHED PRODUCT").
1. PURCHASE AND SALE OF PDGF. Chiron will sell to Ortho, and Ortho will
purchase from Chiron, Ortho's requirements of PDGF during the term of this
Agreement.
2. DELIVERY; TRANSFER OF TITLE. Title will pass from Chiron to Ortho
upon delivery of PDGF, which will be FOB Chiron's designated manufacturing
facilities. All risk of loss of PDGF, whether in bulk form, incorporated in
Finished Product, or anywhere in the process of being converted into Finished
Product, will pass to Ortho at that time, including risk of destruction,
expiration of bulk PDGF, expiration of Finished Product prior to its sale to
an Invoiced Party (as defined in Item 7), failure to obtain required
regulatory approvals (other than regulatory approvals required for the
manufacture of PDGF, for which Chiron is responsible), etc., except that
Ortho will be entitled to a credit for Returned Full Price Units and for
Discounted Units as provided in Item 8 below. The foregoing will not limit
Ortho's recourse against Chiron for PDGF that, when delivered to Ortho, did
not comply with applicable specifications to be included in the definitive
Supply Agreement ("SPECIFICATIONS"). The definitive Supply Agreement shall
also include mutually agreeable procedures for determining compliance and
noncompliance with the Specifications.
3. SHELF LIFE. All PDGF sold to Ortho shall, when delivered to Ortho,
have a remaining shelf life of at least [CONFIDENTIAL TREATMENT REQUESTED]
(the "MINIMUM SHELF LIFE"). If Chiron is able to extend the longest period
of bulk stability set forth in its manufacturing regulatory filings with
respect to PDGF beyond its present level of [CONFIDENTIAL TREATMENT REQUESTED]
and up to [CONFIDENTIAL TREATMENT REQUESTED], the Minimum Shelf Life will
increase by one-half of the full
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amount of any such extension. If Chiron is able to extend the longest period
of bulk stability set forth in its manufacturing regulatory filings with
respect to PDGF beyond [CONFIDENTIAL TREATMENT REQUESTED], the Minimum Shelf
Life will increase by the full amount of any such extension.
4. FORECASTS; PURCHASE ORDERS; SHIPMENTS.
(a) Beginning no later than November 30, 1997, Ortho will provide
Chiron with rolling six calendar quarter forecasts of its PDGF
requirements (each a "FORECAST"). Each Forecast shall specify the
number of grams of bulk PDGF required by Ortho (the "FORECASTED
REQUIREMENTS") in each covered quarter. The Forecasted Requirements for
each quarter shall be in whole increments of [CONFIDENTIAL TREATMENT
REQUESTED], which approximates the anticipated yield from one production
lot, and will cover all uses by Ortho of bulk PDGF (i.e., both research
and development and commercial supplies). However, each Forecast shall
show an estimated, non-binding breakout (in grams) of the Forecasted
Requirements by intended use. Prior to the end of each quarter, Ortho
shall extend the previous Forecast by an additional quarter.
(b) Forecasted Requirements for any 100% binding quarter (i.e., one
of the first three quarters of a Forecast) will be no less than 50% of the
Forecasted Requirements for the immediately preceding 100% binding quarter,
except that Forecasted Requirements for any quarter may be zero grams of
PDGF if the Forecasted Requirements for the immediately preceding quarter
were [CONFIDENTIAL TREATMENT REQUESTED] of PDGF.
(c) After the first commercial sale of Finished Product Ortho will
take or pay for [CONFIDENTIAL TREATMENT REQUESTED] of the Forecasted
Requirements in each of the first three quarters of each Forecast; and
(i) Ortho will take or pay for at least [CONFIDENTIAL TREATMENT
REQUESTED] of the Forecasted Requirements in the fourth quarter of each
Forecast, and the amount of PDGF shall be no less that [CONFIDENTIAL
TREATMENT REQUESTED] of the immediately preceding quarter when such fourth
quarter becomes a 100% binding quarter. The Forecasted Requirements for
the fifth and sixth quarter of each Forecast shall be a non-binding
advisory estimate only.
(d) Ortho will submit firm purchase orders to Chiron specifying, in
whole increments of [CONFIDENTIAL TREATMENT REQUESTED], the number of grams
of bulk PDGF required (in accordance with the Forecasted Requirements) and
requested delivery dates. Each purchase order will specify in grams, based
on Ortho's good faith estimate, the portion of the ordered quantity of PDGF
to be used for research and development purposes, which will be invoiced at
the R&D Price, and for commercial purposes, which will be invoiced at the
Commercial Price then in effect. Each requested delivery date shall be at
least (i) three (3) months following delivery of any purchase order until
March 31, 1998, (ii) six (6) months following delivery of any purchase
order between April 1, 1998 and June 30, 1998, and (iii) nine (9) months
following delivery of any
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purchase order thereafter. Chiron will accept all purchase orders
within thirty (30) days, so long as they comply with the terms of this
Agreement.
(e) Within sixty (60) days after the end of each Forecast quarter,
Ortho shall pay Chiron an amount equal to the difference between the
Commercial Price and the R&D Price for all grams of PDGF that are
redirected from research and development purposes to commercial purposes.
(f) The parties acknowledge that Chiron intends to deliver bulk PDGF
to Ortho in whole production lot increments, and that, although an average
production lot is expected to approximate [CONFIDENTIAL TREATMENT
REQUESTED], deviations in gram yields (both upward and downward) are likely
to occur. Accordingly, for purposes of determining the quantity of PDGF to
be sold by Chiron to Ortho in any given quarter, a deviation of PLUS OR
MINUS [20%] (measured on a quarterly basis) will be allowed. For example:
(A) If Ortho purchase orders for a particular quarter specify an
aggregate of [CONFIDENTIAL TREATMENT REQUESTED] of PDGF, Ortho will
purchase up to [CONFIDENTIAL TREATMENT REQUESTED] of PDGF in that
quarter if required to enable Chiron to deliver bulk PDGF in whole
production lot increments; and
(B) If Ortho purchase orders for a particular quarter specify an
aggregate of [CONFIDENTIAL TREATMENT REQUESTED] of PDGF, Chiron will
be deemed to have fulfilled its obligations under those purchase
orders if it delivers at least [CONFIDENTIAL TREATMENT REQUESTED] of
PDGF that comply with the Specifications.
(g) Chiron will fill all orders that do not exceed 150% of the
Forecasted Requirements for each binding quarter (i.e., excluding Advisory
Quarters) by the requested delivery date, or upon mutual agreement of the
Parties. Chiron will use commercially reasonable efforts to fill any other
orders for bulk PDGF (i.e., orders exceeding 150% of the Forecasted Amount
for binding quarters) as promptly as practicable, but Chiron cannot
guarantee that those orders will be available by the requested delivery
date.
5. R&D PRICE. The price per gram for PDGF for research and development
purposes (including Phase I, II, III and, if applicable, Phase IV clinical
trials) (the "R&D PRICE") will be [CONFIDENTIAL TREATMENT REQUESTED]. All such
research and development shall be related to Finished Product. Orders under
this Item 5 will be invoiced at the [CONFIDENTIAL TREATMENT REQUESTED] per gram
price. If at the end of each calendar year Ortho has not submitted to Chiron
binding purchase orders for a total of more than [CONFIDENTIAL TREATMENT
REQUESTED] grams of PDGF (for all purposes) Ortho shall pay to Chiron
[CONFIDENTIAL TREATMENT REQUESTED]per gram of such PDGF within sixty (60) days
after the end of such calendar year. If Chiron demonstrates, to the reasonable
satisfaction of Ortho, that Chiron's manufacturing cost for PDGF exceeds
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[CONFIDENTIAL TREATMENT REQUESTED] per gram, then Ortho agrees to consider an
adjustment to the R&D Price.
6. COMMERCIAL PRICE. The price per gram of PDGF for commercial purposes
(the "COMMERCIAL PRICE") will equal, for each calendar quarter, (x) the product
of (i) the Chiron Percentage multiplied by (ii) the Net Sales of Full Price
Units in such calendar quarter, divided by (y) the Net Labelled Amount for such
calendar quarter.
(a) "CHIRON PERCENTAGE" means [CONFIDENTIAL TREATMENT REQUESTED]
until cumulative Net Sales of Total Units reaches [CONFIDENTIAL TREATMENT
REQUESTED] until cumulative Net Sales of Total Units reaches [CONFIDENTIAL
TREATMENT REQUESTED] and [CONFIDENTIAL TREATMENT REQUESTED] thereafter.
(b) "FULL PRICE UNITS" means units of Finished Product distributed at
a price equal to or greater than the Floor Price.
(c) "DISCOUNTED UNITS" means units of Finished Product distributed at
a price less than the Floor Price (including units distributed without
charge).
(d) "TOTAL UNITS" means Full Price Units and Discounted Units,
collectively.
(e) "FLOOR PRICE" means the price for a unit of Finished Product
that, if run through the pricing formula set forth in this Item 6, would
yield a Commercial Price of [CONFIDENTIAL TREATMENT REQUESTED] per gram of
PDGF given the Chiron Percentage then in effect. For example, assuming
that (i) the Labelled Amount of PDGF contained in a 15g tube of Finished
Product equals 1,500mcg, and (ii) the Chiron Percentage is [CONFIDENTIAL
TREATMENT REQUESTED], then the Floor Price for a 15g tube of Finished
Product would equal [CONFIDENTIAL TREATMENT REQUESTED. Similarly, the
Floor Price for a 15g tube of Finished Product would equal [CONFIDENTIAL
TREATMENT REQUESTED], if the Chiron Percentage is [CONFIDENTIAL TREATMENT
REQUESTED], and [CONFIDENTIAL TREATMENT REQUESTED]), if the Chiron
Percentage is [CONFIDENTIAL TREATMENT REQUESTED]. If Chiron demonstrates,
to the reasonable satisfaction of Ortho, that Chiron's manufacturing cost
for PDGF exceeds [CONFIDENTIAL TREATMENT REQUESTED] per gram, then Ortho
agrees to consider an adjustment to the Floor Price.
(f) "LABELLED AMOUNT" means the amount of PDGF contained in any unit
of Finished Product as set forth on the product labelling, and shall
expressly exclude any PDGF in excess of that amount (i.e., overfill).
(g) "NET LABELLED AMOUNT" means, with respect to any quarter, (i) the
aggregate Labelled Amount of PDGF contained in all Full Price Units sold in
such calendar quarter, minus (ii) the aggregate Labelled Amount of PDGF
contained in all Full Price Units for which Ortho takes a Return Credit (as
defined in Item 7) in such calendar quarter.
7. NET SALES. Net Sales will be defined as amounts invoiced for sales to
third parties not affiliated with Ortho (including end users), or to affiliates
of Ortho that are also end users of
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the applicable product (such unaffiliated third parties (including end users)
and affiliated end users, collectively, the "INVOICED PARTIES"), less credits
and refunds for returns allowed and taken (collectively, "RETURN CREDITS")
sales, excise and turnover tax, customer charges, import duties and other
governmental charges, imposed directly upon and actually paid by the seller,
and customary trade or quantity discounts, including but not limited to,
customer chargebacks, Medicaid and managed care rebates, allowed and taken.
Sales between Ortho and its affiliates (where such affiliate is not the end
user) or between affiliates for subsequent sale to end users shall not be
included. If Finished Products are sold in combination with other products,
gross sales, and deductions taken therefrom to arrive at Net Sales, will be
allocated proportionately between the various products in the combination
based on their list prices when sold separately.
8. CREDITS. Ortho shall be entitled to credits against future purchases
of PDGF from Chiron, as follows:
(a) For all Full Price Units returned to Ortho by Invoiced Parties
due to expiration or for any other reason (other than problems with Ortho's
manufacturing, for which Ortho shall be responsible) (collectively,
"RETURNED FULL PRICE UNITS"), Ortho shall be entitled to a credit equal to
(x) the amount of PDGF included in Returned Full Price Units (including
both the Labelled Amount of PDGF and any overfill) multiplied by
(y) (A) the Commercial Price then in effect minus (B) the Floor Price then
in effect. Such credit shall be available only during the period (the
"SHORT DATING PERIOD") beginning on the date of this Agreement and ending
on such date as Finished Product receives regulatory approval for
[CONFIDENTIAL TREATMENT REQUESTED] dating.
(b) For all Discounted Units, Ortho shall be entitled to a credit
equal to (x) the amount of PDGF included in Discounted Units (including
both the Labelled Amount of PDGF and any overfill) multiplied by
(y) (A) the Commercial Price then in effect minus (B) the Floor Price then
in effect. This provision shall remain in effect for the full term of the
Agreement.
(c) Ortho shall use commercially reasonable efforts to claim in full
all credits to which it is entitled (i) under Item 8(a) in the same
calendar quarter in which the applicable Returned Full Price Units are
returned and (ii) under Item 8(b) in the same calendar quarter in which the
applicable Discounted Units are distributed.
9. PAYMENT TERMS; REPORTING.
(a) The R&D Price shall be payable in full within forty-five days
after delivery of the PDGF to Ortho.
(b) The Commercial Price of PDGF will be payable in installments as
follows:
(i) The first installment will be payable in full within
forty-five days after delivery of the PDGF to Ortho, and shall equal
(x) [CONFIDENTIAL TREATMENT REQUESTED] prior to the first commercial
sale of Finished Product in any jurisdiction ("FIRST COMMERCIAL SALE")
and (y) the Estimated Commercial Price thereafter. The "ESTIMATED
COMMERCIAL PRICE" shall equal (x) [CONFIDENTIAL TREATMENT REQUESTED]
prior to Chiron's receipt of the first Report (as defined below), and
(y) thereafter, the Commercial Price for the period covered by the
most recently delivered Report.
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(ii) Within 60 days after receipt from the FDA of an approvable
letter with respect to Final Product, a second installment, in the
amount of [CONFIDENTIAL TREATMENT REQUESTED], will be payable with
respect to all quantities of PDGF as to which Ortho's first
installment under clause (i) above was [CONFIDENTIAL TREATMENT
REQUESTED].
(iii) Within sixty (60) days after the end of each calendar
quarter, Ortho will deliver to Chiron a written report setting forth
(A) gross sales of Full Price Units in the applicable quarter
(provided that where estimates rather than actuals are used, the
estimates will be in the ordinary course of Ortho's business and will
be reconciled no less frequently than once per year), (B) estimated
deductions taken therefrom to arrive at Net Sales of Full Price Units,
(C) the Net Labelled Amount for the applicable quarter, (D) the
Commercial Price for the applicable quarter, (E) the number of
Returned Full Price Units returned in the applicable quarter, and the
amount of PDGF included in such Returned Full Price Units (including
both Labelled Amount and overfill), (F) the number of Discounted Units
distributed in the applicable quarter, and the amount of PDGF
(including both Labelled Amount and overfill) included in such
Discounted Units, (G) Net Sales of Total Units for the applicable
quarter, (H) cumulative Net Sales of Total Units to date, and (I) the
amount of PDGF redirected from research and development to commercial
use (if any), including reasonable supporting documentation regarding
each of the foregoing items (each a "REPORT"). Chiron will have
reasonable, once annual audit rights regarding the Reports.
(iv) If the Report for a calendar quarter indicates that the
Commercial Price for that quarter is higher than the Estimated
Commercial Price previously paid by Ortho for PDGF purchased by it
in such quarter, Ortho shall pay Chiron, within thirty (30) days
after delivery of the Report, an amount equal to the product of (A)
the amount by which the Commercial Price exceeds the Estimated
Commercial Price, multiplied by (B) the number of grams of PDGF
purchased by Ortho in the quarter covered by such Report (RIDER 1).
/s/EPM, /s/CW, /s/LTW
(v) If the Report for a calendar quarter indicates that the
Estimated Commercial Price previously paid by Ortho for PDGF
purchased by it in such quarter is higher than the Commercial Price
for such quarter, Chiron shall pay Ortho, within thirty (30) days
after delivery of the Report, an amount equal to the product of (A)
the amount by which the Estimated Commercial Price exceeds the
Commercial Price, multiplied by (B) the number of grams of PDGF
purchased by Ortho in the quarter covered by such Report (RIDER 2).
/s/EPM, /s/CW, /s/LTW
/s/EPM, /s/LTW, /s/CW (RIDER 3)
10. ALLOCATION OF CONSIDERATION. The total consideration payable by Ortho
to Chiron under this Agreement shall be allocated as follows: (a) an amount
equal to [CONFIDENTIAL TREATMENT REQUESTED], shall be deemed to constitute the
transfer price for PDGF; and (b) the remainder of the total consideration shall
be deemed to constitute compensation for the other know-how, assets and services
provided by Chiron pursuant to this Agreement, that certain Master Agreement,
effective as of June 10, 1986, between Chiron and Ethicon, Inc., the
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RIDER 1
, except that any such adjustment resulting from the first Report shall be
payable as an increase to the aggregate purchase price of the next shipment
of PDGF sold to Ortho.
RIDER 2
, except that any such adjustment resulting from the first Report shall be
payable as a decrease to the aggregate purchase price of the next shipment of
PDGF sold to Ortho; PROVIDED, HOWEVER, that such adjustment may not reduce
the aggregate purchase price to less than [CONFIDENTIAL TREATMENT REQUESTED]
per gram. If the adjustment resulting from the first Report would otherwise
operate to reduce the aggregate purchase price to less than
[CONFIDENTIAL TREATMENT REQUESTED] per gram, the excess adjustment amount
shall be applied against the aggregate purchase price of the immediately
subsequent shipments until used in full.
RIDER 3
(vi) The adjustment mechanisms in clauses (iv) and (v) above, and the
payment terms in clause (ii) above, respectively, shall also apply to the
approximately [CONFIDENTIAL TREATMENT REQUESTED] of PDGF purchased by Ortho
in 1997 for commercial purposes, which have been invoiced at a price of
[CONFIDENTIAL TREATMENT REQUESTED] per gram, and such adjustment will be
based on the data contained in the first Report delivered by Ortho.
<PAGE>
predecessor in interest to Ortho ("ETHICON"), and the various agreements entered
into in association with the Master Agreement.
11. MANUFACTURING RESPONSIBILITIES. Chiron will be responsible for the
manufacture of bulk PDGF for delivery to Ortho. Chiron will have no
responsibility for any subsequent manufacturing and other activities required to
transform bulk PDGF into Finished Product, including gel formulation,
fill/finish and QA/QC of Finished Product, except that Chiron will also provide
mitogenic assay services on Finished Product for Ortho, at a price equal to
[CONFIDENTIAL TREATMENT REQUESTED] pursuant to a separate agreement to be
negotiated and agreed to by the parties.
12. THIRD PARTY ROYALTIES. Ortho and Chiron shall [CONFIDENTIAL TREATMENT
REQUESTED] all royalties payable to third parties on account of the manufacture,
use and/or sale of PDGF and Finished Product under the license agreements set
forth on EXHIBIT A. Upon payment of any such royalties, the paying party shall
invoice the other party for [CONFIDENTIAL TREATMENT REQUESTED]. The other party
shall pay any such invoice within thirty days after receipt thereof. The
parties may also, by subsequent mutual agreement, determine to acquire licenses
to other technology, in which event the parties will [CONFIDENTIAL TREATMENT
REQUESTED] the royalties and other amounts payable under such licenses.
13. TERM. The term of this Agreement will begin on the date hereof and
will end effective automatically upon the termination or expiration of that
certain License Agreement, effective as of June 10, 1986, between Chiron and
Ethicon, insofar as that agreement relates to PDGF.
14. BINDING AGREEMENT. The parties intend to be bound by this Agreement,
which sets forth all of the material terms of the transactions contemplated
hereby. The parties agree to negotiate diligently and in good faith a
definitive Supply Agreement, which shall contain the terms set forth herein and
other reasonable and customary terms, not inconsistent with the terms set forth
herein, as the parties may mutually agree. Until replaced by such definitive
Supply Agreement, this Agreement shall remain binding on the parties and their
respective successors and assigns. The parties intend to execute the definitive
Supply Agreement on or before December 31, 1997.
If the foregoing accurately reflects your agreement with respect to the
above issues, please execute and return a copy of this Agreement to Chiron.
Very truly yours,
CHIRON CORPORATION
By: /S/ LEWIS T. WILLIAMS
-------------------------------
Lewis T. Williams, M.D., Ph.D.
Senior Vice President
7
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Accepted and agreed to this
4th day of December, 1997
ORTHO PHARMACEUTICAL CORPORATION
By: /S/ ERIC P. MILLEDGE
-----------------------------
Eric P. Milledge
President
ORTHO BIOTECH, INC.
By: /S/ CAROL WEBB
-----------------------------
Carol A. Webb
President
8
<PAGE>
EXHIBIT A
1. ZymoGenetics/Novo Nordisk
2. University of California (Kurjan/Alpha Factor)
3. Washington Research Foundation (Hitzeman/Expression of Polypeptides in Yeast)
4. Genentech (Ikatura/Riggs patents)
5. Stanford University (Cohen/Boyer patents)
9
<PAGE>
DESCRIPTION OF CHIRON CORPORATION'S
1997 EXECUTIVE OFFICERS VARIABLE COMPENSATION PROGRAM
Decisions on compensation (base salary and variable compensation) of Chiron
Corporation's ("Chiron" or the "Company") executive officers are made by the
five-member Compensation Committee of the Board of Directors.
For 1997, the Compensation Committee continued the Company's approach that base
salaries for executive officers should be measured by reference to the median
(50th percentile) of salaries for benchmark positions in comparator companies.
Further, the Compensation Committee provided that a significant portion of total
cash compensation (salary plus variable compensation) in the form of annual
variable cash compensation potential should be "at risk", dependent upon
individual, business unit and overall Company performance. Variable cash
compensation for executive officers overall was targeted to yield total cash
compensation at the 50% percentile, but with the opportunity up to the 75%
percentile, of total cash compensation as shown by comparative data.
The Compensation Committee based its decisions regarding variable
compensation using the Company's Annual Incentive Plan as a guide. The
Annual Incentive Plan, which covers eligible employees in designated salary
grades, rewards performance against pre-established performance metrics
developed at the Company, business unit and functional or corporate unit
level. Below the level of executive officer, there is also a component of
individual performance.
Variable compensation for the Chairman and Chief Executive Officer is based
100% on the performance of the Company, as measured against the
pre-established Company metrics composed of financial objectives and business
innovation milestones.
The Business Unit Presidents are eligible for variable compensation based on
the pre-established Company metrics and on the achievement of their specific
pre-established business unit metrics.
Executive officers responsible for major functional or corporate units are
eligible for variable compensation based on the pre-established Company
metrics and on the achievement of their specific functional or corporate unit
metrics.
<PAGE>
[Letterhead]
PERSONAL and CONFIDENTIAL
January 27, 1998
Dr. Lewis T. Williams
Chiron Corporation
4560 Horton Street
Emeryville, CA 94608
Dear Rusty:
I am writing to confirm certain changes to the terms of your employment by
Chiron. These terms have been approved by the Compensation Committee of the
Board of Directors.
SALARY.
Effective January 1, 1998 your base salary is increased to $400,000 per annum.
EMPLOYMENT TERM.
Under Chiron's letters to you dated September 11, 1992 and July 15, 1994 you
have been an employee at will but with certain options to establish a research
program in the event that Chiron terminated your employment status as an
executive officer, other than for cause. These options phased down over time
and expired in August 2001. In consideration of the new terms in this letter,
these research program options are hereby terminated and replaced with a
three-year rolling employment benefit, which term shall be automatically
extended on a day for day basis, until either you or the Company gives to the
other written notice of termination, as follows: If your employment is
terminated by Chiron, other than for cause, including any constructive
termination as provided in the following sentence, Chiron will pay you in a
lump sum an amount equal to three years of your then existing base salary.
Chiron agrees that any material reduction by it in your compensation or in
the scope of your authority and responsibility, that is not reasonably
acceptable to you, may be treated by you as a constructive termination of
your employment by Chiron, other than for cause. You will have ninety
(90) days from notification of any change of the terms of your employment
within which to terminate your employment based upon such a constructive
termination.
<PAGE>
RESTRICTED STOCK.
You have been awarded 100,000 shares of Restricted Stock. The terms of the
Restricted Stock grant will be substantially identical to the recent "high value
position" Restricted Stock grants made by the Company, except that (i) the
transfer restrictions will lapse and your ownership of the stock will vest as to
all of these shares at the expiration of five (5) years from January 1, 1998;
(ii) vesting will be accelerated upon any change in control of Chiron, it being
understood that a change of control shall not be deemed to have occurred solely
by reason of an increase in the percentage of Chiron stock owned by Novartis AG
as permitted by that certain Governance Agreement dated as of November 20, 1994;
(iii) in the event of termination of your employment by Chiron, without cause,
the vesting of the Restricted Stock will be accelerated for that fraction of the
100,000 shares, not greater than one (1), the numerator of which is the number
of months after December 31, 1997 of your employment plus 36 (to give effect to
a three-year evergreen extension of such term), and the denominator of which is
60; and (iv) in the event of termination of your employment by reason of your
death or permanent disability, the vesting of the Restricted Stock will be
accelerated for the same fraction of the shares as provided in clause (iii)
above, but without giving effect to the evergreen extension.
If the foregoing is consistent with your understanding, please indicate your
agreement by signing and returning to me a copy of this letter.
Very truly yours,
CHIRION CORPORATION
By: /s/ William G. Green
-----------------------------
William G. Green
Senior Vice President and
General Counsel
Agreed: /s/ Lewis T. Williams
--------------------------
Lewis T. Williams, M.D.
<PAGE>
[Letterhead]
March 17, 1998
Magnus A. Lundberg
President, Chiron Vaccines & Therapeutics
Chiron Corporation
Emeryville, CA
Dear Magnus:
I am pleased to confirm that Chiron will continue to pay to you a $3,000 per
month housing allowance while you are in your current position. We may review
the appropriateness of the allowance and the amount from time to time in the
future but were it to change, apart from any relocation or change of your
position, we will give you 1 year's notice.
Please let me know if you have any questions.
Sincerely yours,
/s/ Linda Short
- ----------------------
Linda Short
Human Resources
<PAGE>
CHIRON
March 18, 1998
Mr. Sean P. Lance
25A Warrington Crescent
London W91ED
England
Dear Mr. Lance:
On behalf of the senior management and all members of the Chiron
community, I am very pleased to extend to you our offer to lead our Company, as
President and Chief Executive Officer. Subject to your agreement and approval
by the Board of Directors, which we will promptly obtain, this letter sets forth
the terms of your employment by Chiron.
1. POSITION, DUTIES AND RESPONSIBILITIES.
(a) You shall be the President and CEO of the Company and shall
in such capacity report directly to the Company's Board of Directors (the
"Board"). Your duties and responsibilities will be determined from time to time
by the Board, and will be consistent with your position as President and Chief
Executive Officer.
(b) You shall be appointed to the Board of Directors as a Management
Director as defined in Section 2.01 of the Governance Agreement between the
Company and Novartis Ltd. dated November 20, 1994 ("Governance Agreement"), and
serve on such Committees of the Board as elected or appointed by the Board.
(c) You shall devote your full business time, ability and attention
to the business of the Company, and shall not engage in or perform duties for
any other person which interfere with the performance of your duties hereunder.
It is expected and desirable for you to hold board of director positions on
outside civic organizations, and that reasonable time will be made available to
fulfill your duties in that regard as long as those activities do not interfere
with the performance of your duties hereunder. Any outside commercial board of
director's positions will be subject to approval by the Board.
(d) During any period with respect to which you are receiving or have
received payments from the Company hereunder, including any period following a
voluntary termination by you of your employment for Good Reason (as defined
below) but not including any period following an involuntary termination of your
employment by the Company other than for Cause (as defined below), you will not
(i) own (except as a passive investor in a publicly owned company), manage or be
employed in any manner with any enterprise which is engaged primarily in a
business competitive with the Company (currently biotechnology, pharmaceuticals,
vaccines and diagnostics) or to be engaged in any way in the management or
direction of that portion of an enterprise that is directly competitive with the
Company, or (ii) solicit the employment of any employee of the Company, or (iii)
solicit any customer of the Company, or interfere in any other manner with any
existing business relationship between the Company and any customer or other
third party.
<PAGE>
(e) You agree to sign the Company's standard proprietary information
agreement for employees.
2. SALARY AND BONUS COMPENSATION.
(a) BASE SALARY. As compensation for your services hereunder
(including your services as a member of the Board) you shall receive a base
salary of $700,000 per annum. This base salary may be increased, but not
decreased, annually by the Board, consistent with your performance and the
Company's policy regarding increases in officer compensation established from
time to time by the Board.
(b) BONUS COMPENSATION. You may, in addition, at the Board's
discretion, be awarded incentive compensation, in the form of a cash bonus for
each fiscal year during your employment, under the Company's 1995 Executive
Officer Variable Cash Compensation Plan, or its successor, for each given year,
based upon performance. If the targeted level of performance is satisfied, the
cash bonus amount will be equal to one hundred percent (100%) of your base
salary for the year in which you satisfied the bonus criteria, with a maximum
bonus of two hundred percent (200%) of base salary if your performance
substantially exceeds the targeted level. There is no guaranteed minimum level
of bonus compensation, and the maximum bonus compensation that can be achieved
will be equal to two hundred percent (200%) of your base salary.
3. BENEFITS.
(a) STANDARD BENEFITS. You shall be eligible to participate in
standard employee benefit programs (including medical, dental, life and
disability insurance, which shall be effective as of and from the date of your
employment hereunder) as the Company shall maintain from time to time for the
benefit of employees. Attached as Exhibit A is a copy of the Company's current
employee benefits for your information. You may receive such other and
additional benefits as the Board may determine from time to time in its sole
discretion.
(b) VACATION. You shall be entitled to four (4) weeks paid vacation
per annum under the Company's integrated paid time off program for executives,
and with such additional paid vacation time as the Board may reasonably
determine or is consistent with the company's vacation policy as it exists from
time to time. No unused vacation shall accrue and no unused vacation will be
paid on termination.
4. EXPENSE REIMBURSEMENT.
The Company shall reimburse you for certain expenses under the
standard executive benefits program of the Company. At a minimum, this will
include the lease of a company car and tax and financial planning services.
Additionally, the Company will reimburse you in accordance with the Company's
reimbursement policies in effect from time to time for all reasonable and
customary business expenses incurred during your employment, provided that you
furnish to the Company reasonably adequate records and documentary evidence of
such expense.
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<PAGE>
5. LONG-TERM INCENTIVE COMPENSATION.
Upon commencement of your employment at the Company you shall receive
the following grants in accordance with the terms of the Company's 1991 Stock
Option Plan, as amended. The 1991 Stock Option Plan, as amended, is set forth
in the Company's Proxy Statement for its 1997 Annual Meeting, a copy of which
has been provided to you.
(a) STOCK OPTION. You shall be granted a Stock Option for 750,000
shares of the Company's common stock exercisable at fair market value on the
date of grant and having a term of ten years. The Stock Option shall be an
incentive stock option under the federal tax laws to the maximum extent
permissible, and the balance of the option shall be a non-statutory option. You
shall vest in the option shares (i) as to 125,000 of the option shares at the
one-year anniversary of the start date of your employment with the Company, (ii)
as to 475,000 of the option shares in forty-eight (48) successive equal monthly
installments upon your completion of each month of service with the Company
measured from the first anniversary of your start date with the Company and
(iii) as to the remaining 150,000 of the option shares on the fifth anniversary
of your start date provided that up to 75,000 of these 150,000 option shares can
vest as early as the end of three years based on attainment of agreed upon
performance goals to be reflected in the option grant.
(b) ANNUAL AWARDS. You will be eligible to participate in the
Company's annual awards to executives of long-term incentive compensation,
presently awarded under the 1991 Stock Option Plan, in the form of stock
options, based upon performance as determined by the Board's Compensation
Committee. Under the program as presently administered, the target value of the
annual award at the grant date would be 200% of your base salary. These awards
are highly discretionary and are subject to review and adjustment to reflect
changes in the Company and competitive market conditions.
6. RELOCATION ASSISTANCE PACKAGE.
(a) HOME EQUITY LOAN. A loan shall be made available to you for the
purchase of a new home in the San Francisco area in an amount not to exceed the
unencumbered equity value in the purchase price (or construction and/or
renovation cost) of your new home, up to a maximum loan amount of $1 million.
The loan shall have a term of ten (10) years, shall be secured by a mortgage on
the property and shall bear interest at the "applicable federal rate" as defined
in Section 1274(d) of the Internal Revenue Code, which interest shall be payable
quarterly in arrears. This loan shall be forgiven over your period of service
hereunder at the rate of 0.83333% of the principal amount thereof per month;
provided that the aforementioned forgiveness shall cease upon the date of notice
of termination in accordance with Section 7 below, except as otherwise provided
in Section 8(d).
(b) REIMBURSEMENT OF RELOCATION EXPENSES. All customary expenses
associated with the cost of your relocation to California shall be reimbursed by
the Company. These expenses will include all moving and transportation costs of
the moving company of your choice, costs of trips to California for the purpose
of finding a new home, transportation costs for you and your family and for
household goods and automobiles, reimbursement of reasonable brokerage expenses
and other customary expenses associated with the selling of
3
<PAGE>
your present home, the reasonable transaction costs for the acquisition of
your new home, the cost of appropriate temporary housing for you for up to
six months. In lieu of the reimbursement of relocation expenses provided by
this Section 6(b), you may elect to receive an employment reimbursement bonus
of One Hundred Thousand Pounds (L 100,000), payable five (5) business days
after receipt by the Company of notice of your election.
7. TERM AND TERMINATION.
(a) TERM. The period of your employment with the Company pursuant to
the provisions of this letter shall be for a continually renewing three (3) year
period commencing upon your start date with the Company, which we currently
expect to be not later than May 1, 1998 provided, however, that you agree to
become a service provider to the Company by providing reasonable consulting
services to the Company on and after the date you sign this Agreement.
(b) TERMINATION. You may terminate your employment hereunder at any
time, with or without Good Reasons, as defined below, upon written notice to the
Company. The Company may terminate your employment hereunder upon written
notice to you, with or without Cause as defined below.
As used herein, "Good Reason" shall mean any of the following events
that are not consented to by you: (i) there has been a substantial diminution in
your duties and responsibilities hereunder, or the assignment to you of any
duties inconsistent in any respect with your position (including status,
offices, titles, and reporting requirements), authorities, duties, or other
responsibilities as in effect immediately prior to such assignment, or any other
action of the Company which results in a diminishment in such position,
authority, duties, or responsibilities or any change in your direct reporting
relationship to the Board as a whole (a change in your title and duties to
Chairman of the Board will not be a change or diminution under this clause,
whether or not you retain the title of President); or (ii) the Company
headquarters shall move more than 30 miles from its present location in
Emeryville, California; or (iii) any of the following shall occur: (A) a
reduction by the Company in your base salary as the same shall be increased from
time to time; (B) the failure by the Company to provide you with compensation
and benefits at least equal (in terms of benefit levels and/or reward
opportunities) to those provided for under each compensation or benefit plan,
program, policy and practice as in effect (or as in effect hereafter, if
greater); (C) the failure of the Company to obtain a satisfactory agreement from
any other successor to the Company to assume and agree to perform this
Agreement; or (D) a material breach by the Company of its obligations under this
Agreement after notice in writing from you and a reasonable opportunity for the
Company to cure or substantially mitigate any material adverse effect of such
breach; provided, however, that no change in ownership or control of the
Company, including any transaction by which Novartis AG acquires additional
ownership of Company, including a Buy-Out Transaction as defined in the
Governance Agreement shall itself constitute Good Reason; and provided, further,
that an insubstantial and inadvertent action which is remedied by the Company
promptly after receipt of notice thereof given by you shall not constitute Good
Reason hereunder. Your consent to any event which would otherwise constitute
"Good Reason" shall be conclusively presumed if you do not exercise your rights
under the first sentence of this Section 7(b) within 180 days of the event.
4
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As used herein, "Cause" shall mean any of the following events (i) any
willful misconduct on your part which has a material adverse effect upon the
business or affairs of the Company; or (ii) your conviction of a felony, or your
commission of any act of fraud against the Company or under federal or state
securities laws; or (iii) willful and continued failure by you to substantially
perform your duties as President and CEO (other than any failure resulting from
disability or from termination by you for Good Reason) as evaluated by a
majority of the Board and after written demand from the Board of Directors for
substantial performance is delivered to you, and you have failed to resume
substantial performance of your duties on a continuous basis within 30 days of
such notice. Failure to perform your duties with the Company during any period
of disability shall not constitute Cause.
(c) DEATH OR DISABILITY. The employment relationship created
hereunder shall immediately terminate upon your death or, at the election of you
or the Company, upon disability which would preclude you from performing your
usual duties for the Company for a period in excess of ninety (90) consecutive
days or for a period in excess of ninety (90) days within any consecutive twelve
(12) month period.
If your employment shall terminate all compensation and benefits other
than severance benefits described in Section 8 below, to the extent applicable,
shall immediately cease, except that you will be entitled to payment of your
salary through the date of termination and benefits under the Company benefit
programs and plans in accordance with their terms. For the avoidance of doubt,
except as provided in Section 8, you will not receive bonus cash compensation or
other long-term compensation for the period in which termination occurs.
8. SEVERANCE BENEFITS IN CERTAIN EVENTS.
If your employment shall be involuntarily terminated by the Company
other than for Cause, or if you terminate your employment for Good Reason, you
shall be entitled to receive as liquidated damages the following severance
benefits:
(a) CONTINUED COMPENSATION. You shall continue to receive your base
salary at the rate in effect pursuant to Section 2(a) above at the time of your
termination of employment, for a period of three (3) years following your
termination date. You may elect at any time following termination to require
that the Company prepay the unpaid balance of this amount, discounted to present
value at 7%, without thereby relieving you of your obligations under Section
1(d) above.
(b) BONUS. You shall be entitled to receive in lieu of the bonus
provided in Section 2(b) an amount equal to three (3) times the greater of (x)
your targeted level bonus in the year of termination or (y) your highest bonus
under Section 2(b) in the preceding three years, in either case payable monthly
over the salary continuation period. You may elect at any time following
termination to require that the Company prepay the unpaid balance of this
amount, discounted to present value at 7%, without thereby relieving you of your
obligations under Section 1(d) above.
5
<PAGE>
(c) HEALTH CARE AND LIFE INSURANCE COVERAGE. Continued health care
coverage under the Company's medical plan will be provided, without charge, to
you and your eligible dependents until the earlier of (i) three (3) years after
the effective date of your involuntary termination, or (ii) the first date that
you are covered under another employer's health benefit program providing
substantially the same or better benefit options to you without exclusion for
any pre-existing medical condition. This coverage will be in lieu of any other
continued health care coverage to which you or your dependents would otherwise,
at your own expense, be entitled to in accordance with the requirements of Code
Section 4980B by reason of your termination of employment. The Company will pay
the premium for continued life insurance coverage, if any, that you may have
elected under this Company's cafeteria benefit plan, subject to payment by you
of the portion of such premium not contributed by the Company under such plan,
until the earlier of three (3) years from the effective date of your separation
or your acceptance of employment with a successor employer. If you make the
election set forth in the last sentence of either Section 8(a) or 8(b), the
benefits under this Section 8(c) shall terminate.
(d) TAX MATTERS. All compensation described in this Section 8 will
be subject to the Company's collection of all applicable federal, state and
local income and employment withholding taxes. The provisions of this Section 8
are in all events to be interpreted in such a manner as will avoid the
imposition of excise taxes under Section 4999 of the Internal Revenue Code, and
the disallowance of deductions under Section 280G(a) of the Internal Revenue
Code, with respect to any severance payment paid pursuant to this Section 8 and
you will cooperate reasonably with the Company in implementing this
interpretation. Notwithstanding the foregoing, if any excise tax is imposed
under Section 4999 and/or deduction is lost under Section 280G(a), the Company
will bear the cost of the loss of deduction.
(e) REPATRIATION ASSISTANCE. The Company recognizes that you
hold citizenship of South Africa and agrees to contribute reasonably to your
repatriation from the United States following a termination of your employment
under this Section 8.
(f) VESTING. We will accelerate the immediate vesting of those
stock options granted pursuant to Section 5(a) above that would otherwise
have vested with continued employment during the next three (3) years
following such termination. You will have 90 days from the termination of
your employment to exercise vested stock options in accordance with the terms
of the Stock Option Plan.
The foregoing provisions are intended to be liquidated damages, and
represent your and our sole and exclusive remedies for any damages caused by any
involuntary termination without Cause or voluntary termination for Good Reason,
the parties having agreed that it would be impractical or extremely difficult to
fix actual damages.
9. INDEMNIFY AND HOLD HARMLESS.
Except to the extent inconsistent with the Company's Certificate of
Incorporation or bylaws, the Company will indemnify you and hold you harmless to
the fullest extent permitted by law with respect to your acts of service as an
officer and director of the
6
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Company. The Company further agrees that you will be covered by directors'
and officers' insurance policies with respect to your acts as an officer and
director hereunder to the same extent as all other officers and directors
under such policies, unless the Board, with your participation as a member of
the majority thereof, determines not to maintain such policies.
10. MISCELLANEOUS.
(a) ARBITRATION. Any dispute which may arise between you and the
Company with respect to the construction, interpretation or application of any
terms or provisions of this letter will be submitted to and resolved by
arbitration in San Francisco, California, in accordance with the rules of the
American Arbitration Association then in effect. The arbitration shall be
before a single arbitrator agreed by the parties. If we are unable to agree on
a single arbitrator within 60 days of the date either of us demands arbitration,
then a single arbitrator shall be designated by the San Francisco office of the
American Arbitration Association, which arbitrator shall be experienced in
executive employment and compensation matters. The arbitration decision shall
be final and binding to the fullest extent permitted by law and enforceable by
any court of competent jurisdiction. The prevailing party shall be entitled to
recover its costs and expenses as determined by the arbitration.
(b) TAXES. You agree that you will work reasonably with the Company
to structure your salary and bonus compensation and your restricted stock grant
in such a fashion as to qualify for tax deductibility under Section 162(m) of
the Internal Revenue Code while preserving the economic benefit intended to be
received by you. Additionally, all compensation paid to you under this letter
shall be subject to the Company's collection of all applicable federal, state
and local income and employment withholding taxes.
(c) GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with and be governed by the laws of the State of California.
(d) ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement
and understanding between you and the Company, and supersedes any other
negotiations, agreements, understandings, oral agreements, representations and
past or future practices whether written or oral.
(e) NOTICES. All notices required by this Agreement shall be given
in writing either by personal delivery or by first class mail, return receipt
requested, to the then most current address of the parties notified to the
other. Notice given by mail shall be deemed given five (5) days following the
date of mailing.
(f) SUCCESSORS. This Agreement shall be binding and inure to the
benefit of the Company and its successors.
(g) MODIFICATION OR WAIVER. This Agreement may not be amended,
modified, changed or discharged in any respect, except as agreed in writing. No
term or condition of this Agreement will be deemed to have been waived, nor will
there be any estoppel to enforce any provisions of this Agreement, except by a
statement in writing signed by the party against whom enforcement of the waiver
or estoppel is sought. Any written waiver will not be deemed a continuing
waiver unless specifically stated, will operate only as to
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the specific term or condition waived and will not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
(h) ASSIGNMENT. This Agreement is not assignable, in whole or in
part, by any party without the written consent of the other party.
(i) SEVERABILITY. To the extent that any provision of this Agreement
shall be determined to be invalid or unenforceable, the invalid or unenforceable
portion of such provision will be deleted from this Agreement, and the validity
and enforceability of the remainder of such provision and of this Agreement will
be unaffected. In furtherance of and not in limitation of the foregoing, it is
expressly agreed that should the duration of or geographical extent of, or
business activities covered by, the noncompetition covenant contained in Section
1(d) be determined to be in excess of that which is valid or enforceable under
applicable law, then such provision will be construed to cover only that
duration or extent, or those activities which may validly or enforceably be
covered. You acknowledge the uncertainty of the law in this respect and
expressly stipulate that this Agreement will be construed in a manner which
renders its provisions valid and enforceable to the maximum extent (not
exceeding its express terms) possible under applicable law.
(j) Your employment by the Company is subject to all applicable law,
including your ability to be employed in the United States under the U.S.
Immigration and Naturalization Act. The Company will provide assistance in
processing applications for appropriate immigration status.
We are all very pleased at the prospect that you will be joining the
Company. If the foregoing is acceptable to you, please sign the enclosed copy
of this letter and return it to me.
Very truly yours,
CHIRON CORPORATION
By: /s/ Edward E. Penhoet
-------------------------------
Edward E. Penhoet, Ph.D.
President and Chief Executive Officer
Agreed: /s/ Sean P. Lance
--------------------
Sean P. Lance
Dated: March 18, 1998
8
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CHIRON CORPORATION
EMPLOYEE BENEFITS AS OF 1/1/98
INSURANCE BENEFITS
MEDICAL INSURANCE Chiron offers several medical plans to eligible
employees and their eligible dependents (spouse,
domestic partner and/or children). All medical plans
include prescription and vision benefits. Employee
contributions are pretax.
DENTAL INSURANCE Chiron offers 2 dental plans to eligible employees and
their eligible dependents (spouse, domestic partner
and/or children). Employee contributions are pretax.
LIFE INSURANCE Eligible employees can purchase coverage for themselves
of $10,000, or 1, 2, 3, 4 or 5 times annual salary. The
maximum coverage is $800,000 for the first two times
salary and an additional $800,000 for the next three
times salary. Employee contributions are pretax.
DEPENDENT LIFE INSURANCE Eligible employees can purchase life insurance coverage
for eligible dependents on an after-tax basis. Options
include $10,000, $20,000 or $50,000 for spousal
coverage and $5,000 or $10,000 for children.
ACCIDENTAL DEATH & Eligible employees can purchase coverage for
DISMEMBERMENT themselves of 1,2, 3, 4 or 5 times annual
salary. The maximum coverage is $800,000 for
the first two times salary and an additional
$800,000 for the next three times salary.
Employee contributions are pretax
TRAVEL ACCIDENT Chiron provides Travel Accident Insurance coverage of 3
times annual salary at no cost to employees. This
provides 24-hour coverage for travel to and from work
or on company business.
SHORT-TERM DISABILITY Through the short-term disability program, Chiron
provides eligible employees with 100% of salary
for the first 30 calendar days (after a 7-day
waiting period) less state disability payments,
and 2/3 of salary for the next 150 days of
disability less state disability payments. Chiron
provides this coverage at no cost to the employee.
LONG-TERM DISABILITY For eligible employees disabled for more than 180
days, Chiron provides 60% of monthly salary up to
$18,000. Chiron provides this coverage at no cost
to the employee. Eligible employees also have the
option to purchase an additional 6 2/3% of monthly
salary up to $20,000 on a pretax basis.
WORKERS' COMPENSATION All employees are covered by Chiron's Workers'
Compensation insurance.
INVESTMENT PROGRAMS
401(K) PLAN Participation in the Chiron Corporation 401(k) plan is
available to eligible employees on the first of the
month following date of hire or immediately, if date of
hire is the first business day of the month. Employees
may designate pre-tax contributions of 1% to 15% of
salary. The Company provides a maximum 4% match on
employee contributions and the match is vested
immediately. For newly eligible employees there is a
wait period of 1 year before matching contributions are
given.
EMPLOYEE STOCK Eligible employees may purchase Chiron stock,
PURCHASE PLAN at a discount below market price.
Participation in the plan depends upon the
employee's date of hire.
9
<PAGE>
Employees can contribute to this program from 3% to
15% of their base salary on an after-tax basis.
STOCK OPTION PLAN Chiron has a Stock Option Program. The granting of
options to eligible employees is subject to Board of
Directors approval and program guidelines.
TIME-OFF BENEFITS
PAID TIME OFF (PTO) Chiron has a biweekly accrual based PTO program.
Eligible employees accrue 18 days per calendar year for
0 to 3 years of service. From 3 to 10 years the accrual
rate is 23 days per calendar year. From 10 to 20 years
the accrual rate is 28 days per calendar year. For
service of 20 years or more the accrual rate is 33 days
per calendar year. Eligible employees will receive the
higher accrual rate in the January beginning their
anniversary year in which they would reach a higher
level.
FIXED HOLIDAYS Eligible employees receive up to 7 paid holidays per
year.
LEAVE OF ABSENCE Chiron grants leaves of absence to accommodate
employees' medical/maternity disability, family or
personal needs.
OTHER BENEFITS
FLEXIBLE SPENDING Chiron offers Health Care and Dependent Care
reimbursement accounts to eligible employees. These
accounts give employees the advantage of paying for
eligible health and dependent care expenses with pretax
dollars.
EMPLOYEE ASSISTANCE Chiron provides a confidential counseling and
PROGRAM referral service to all employees and their
families.
EDUCATIONAL ASSISTANCE Regular full-time employees are eligible, after 6
months of service, for up to $2,000 per year in
reimbursement of tuition, textbooks, and lab
expenses for classes directly related to their
jobs
CREDIT UNION Regular full-time and part-time employees and members
of their families or household are eligible to join.
PREPAID LEGAL A Prepaid Legal Plan is available to eligible employees
to provide affordable, basic legal services. Employees
pay for this benefit on an after-tax basis.
DEPENDENT CARE Eligible employees are provided with this
CONNECTION counseling, education and referral service
which provides extensive services such as
child care, elder care, adoption and prenatal
planning.
NOTE: ELIGIBLE EMPLOYEES ARE DEFINED AS REGULARLY SCHEDULED TO WORK 20 HOURS
OR MORE PER WEEK. COVERAGE FOR MOST BENEFITS ARE EFFECTIVE THE FIRST OF THE
MONTH FOLLOWING DATE OF HIRE, OR IMMEDIATELY IF THE DATE OF HIRE IS THE FIRST
BUSINESS DAY OF THE MONTH, UNLESS OTHERWISE NOTED.
10
<PAGE>
CHIRON
March 19, 1998
CONFIDENTIAL
James R. Sulat
155 San Benito Way
San Francisco, CA 94127
Dear Jim:
We are pleased to confirm our offer of employment for you to join Chiron
Corporation.
Your employment offer with Chiron is as Chief Financial Officer reporting to me.
Your starting salary will be $300,000 per annum.
You will be eligible to participate in our stock option program. Subject to the
approval of the Board of Directors, you will be awarded two initial stock option
grants to purchase Chiron common stock. The first, for 100,000 shares, will
vest fully over a four-year period, with the first 25% of the shares vesting at
the one-year grant anniversary. Shares vest on a pro-rated monthly basis over
the remaining three years of the vesting period. In addition, you will be
awarded a special stock option grant of 50,000 options which will vest 100% at
the 5-year anniversary of your employment date. The exercise price of the
options will be set at the fair market value of a share of Chiron stock on the
date the option is approved. We expect the options will be approved as soon as
you accept our offer and thereby agree to act as a "service provider" or
consultant to Chiron. You will also be eligible to receive future option grants
under our long term incentive plan that presently provide for annual option
awards based upon individual, function and company performance.
You will also be eligible to participate in Chiron's Annual Incentive Plan for
this year. The Plan links corporate, business/functional unit and individual
performance metrics to support the accomplishment of Chiron's business goals.
The Plan, as structured, has an incentive range for your position from 0% to 90%
with a target of 45% of base salary. Plan participants hired between January 1
and September 30, 1998 are eligible to receive a pro-rated bonus which is paid
in the first quarter of the 1999 fiscal year.
We agree to pay to you a minimum severance payment equal to the greater of (i)
1-year base salary, declining in equal monthly increments to 6 months base
salary over the period from the end of the sixth month to the end of the
eighteenth month following commencement of your employment or (ii) the payment
to which you otherwise would be entitled under any then effective Chiron
Corporation Severance Plan, if your employment is terminated within the first
two years, either involuntarily by the Company without cause or voluntarily by
you for Good Reason. "Good Reason" shall mean any of the following events that
is not consented to by you: (i) the Company shall have taken an action which
results in a material diminishment in your position, authority, duties, or
responsibilities or a material impairment of your ability to perform your
duties, including, without limitation, (A) a reduction by the Company in your
<PAGE>
James R. Sulat
March 19, 1998
Page 2
base salary as the same shall be increased from time to time; (B) the failure by
the Company to provide you with compensation and benefits at least equal (in
terms of benefit levels and/or reward opportunities) to those provided generally
to senior officers under each compensation or benefit plan, program, policy and
practice as in effect (or as in effect hereafter, if greater); (C) the failure
of the Company to obtain a satisfactory agreement from any successor entity to
the Company to assume and agree to perform this Agreement; or (D) a material
breach by the Company of its obligations under this Agreement after notice in
writing from you and a reasonable opportunity for the Company to cure or
substantially mitigate any material adverse effect of such breach; provided,
however, that no change in ownership or control of the Company, including any
transaction by which Novartis AG acquires additional ownership of Company,
including a Buy-Out Transaction as defined in the Governance Agreement, shall
itself constitute Good Reason; and provided, further, that an insubstantial and
inadvertent action which is remedied by the Company promptly after receipt of
notice thereof given by you shall not constitute Good Reason hereunder. Your
consent to any event which would otherwise constitute "Good Reason" shall be
conclusively presumed if you do not terminate your employment within 90 days of
the event. In the circumstance described in this paragraph, we also will
accelerate the vesting of that number of shares of your initial stock option
grant that otherwise would have vested in accordance with their terms during the
fraction of the one year following your termination equal to the fraction of one
year's base salary that is paid to you as a severance payment pursuant to this
agreement. We also agree to pay you a minimum severance payment equal to the
greater of 1-year base salary or the payment to which you otherwise would be
entitled under any then effective Chiron Corporation Severance Plan if your
employment is involuntarily terminated by the Company or its successor without
cause within one year following a Buyout Transaction by Novartis. In that
circumstance, we also will accelerate the full vesting of your initial stock
option grants.
The information sheets following your offer letter contain some of the
highlights of Chiron's benefits programs. You will be eligible to participate as
well in all benefit and compensation plans available generally to executive
officers of the Company. You should note that while this offer is being made
under the terms of our current benefits and compensation programs, changes do
occur from time to time and any system-wide changes that occur will apply to you
as well.
Some of these programs are effective immediately upon your employment, while
there are established enrollment periods for others. Your group medical
insurance benefits generally start on the first day of the month FOLLOWING your
date of hire. Note also that with few exceptions, Chiron extends benefits
coverage to qualified family members including opposite and same sex domestic
partners.
As a part of Chiron's routine medical surveillance program, employees with
certain project assignments may be advised to provide a baseline blood sample
for archival storage. The Chiron Occupational Health Department will notify you
if a baseline blood draw is recommended.
Enclosed are a number of forms, including a Chiron Employee Invention and
Confidential Agreement, which must be signed returned to Human Resources as part
of your new hire process. Please make copies of any of the forms you wish to
retain for your own use.
<PAGE>
James R. Sulat
March 19, 1998
Page 3
This offer is contingent upon your ability as required by federal law, to
establish your employment eligibility as a U.S. citizen, a U.S. lawful permanent
resident, or an individual specifically authorized for employment in the U.S. by
the Immigration and Naturalization Service. Please read the enclosed notice
specifying the documentation required in this regard. If you have an employment
authorization document (EAD) issued by the Immigration & Naturalization Service,
please contact Elle Dupree in Emeryville, California at (510) 923-2513. This
allows us to ensure that you present your Social Security card for the purpose
of verifying that your payroll records are accurately recorded.
Under California law, employment with Chiron is not for any specified term and
can be terminated at any time for any reason by you or Chiron. Any contrary
representations which have been made or may be made to you are superseded by
this offer. When you accept the offer, the terms described in this letter and
the Chiron Employee Invention and Confidential Information Agreement shall
constitute the terms of your employment.
It is my understanding that you are ready to start your employment with Chiron
immediately. As soon as we have a copy of your signed acceptance of this
offer, we can set that date. If you have any questions in the mean time, please
feel free to contact me.
Sincerely,
CHIRON CORPORATION
/s/ EDWARD E. PENHOET
Edward E. Penhoet
President & Chief Executive Officer
Enclosures
cc: Linda Short, Human Resources
Please indicate your understanding of the terms of this offer and your
acceptance of this offer by signing this letter and returning it to me as soon
as possible.
/s/ JAMES R. SULAT 3/20/98
- --------------------- ------------
Name Date
<PAGE>
James R. Sulat
March 19, 1998
Page 4
CHIRON CORPORATION
EMPLOYEE BENEFITS AS OF 1/1/98
INSURANCE BENEFITS
MEDICAL INSURANCE Chiron offers several medical plans to eligible
employees and their eligible dependents (spouse,
domestic partner and/or children). All medical plans
include prescription and vision benefits. Employee
contributions are pretax.
DENTAL INSURANCE Chiron offers 2 dental plans to eligible employees and
their eligible dependents (spouse, domestic partner
and/or children). Employee contributions are pretax.
LIFE INSURANCE Eligible employees can purchase coverage for themselves
of $10,000, or 1, 2, 3, 4 or 5 times annual salary. The
maximum coverage is $800,000 for the first two times
salary and an additional $800,000 for the next three
times salary. Employee contributions are pretax.
DEPENDENT LIFE INSURANCE Eligible employees can purchase life insurance coverage
for eligible dependents on an after-tax basis. Options
include $10,000, $20,000 or $50,000 for spousal
coverage and $5,000 or $10,000 for children.
ACCIDENTAL DEATH Eligible employees can purchase coverage for
& DISMEMBERMENT themselves of 1,2, 3, 4 or 5 times annual
salary. The maximum coverage is $800,000 for
the first two times salary and an additional
$800,000 for the next three times salary.
Employee contributions are pretax
TRAVEL ACCIDENT Chiron provides Travel Accident Insurance coverage of 3
times annual salary at no cost to employees. This
provides 24-hour coverage for travel to and from work
or on company business.
SHORT-TERM DISABILITY Through the short-term disability program, Chiron
provides eligible employees with 100% of salary
for the first 30 calendar days (after a 7-day
waiting period) less state disability payments,
and 2/3 of salary for the next 150 days of
disability less state disability payments. Chiron
provides this coverage at no cost to the employee.
LONG-TERM DISABILITY For eligible employees disabled for more than 180
days, Chiron provides 60% of monthly salary up to
$18,000. Chiron provides this coverage at no cost
to the employee. Eligible employees also have the
option to purchase an additional 6 2/3% of monthly
salary up to $20,000 on a pretax basis.
WORKERS' COMPENSATION All employees are covered by Chiron's Workers'
Compensation insurance.
INVESTMENT PROGRAMS
401(K) PLAN Participation in the Chiron Corporation 401(k) plan is
available to eligible employees on the first of the
month following date of hire or immediately, if date of
hire is the first business day of the month. Employees
may designate pre-tax contributions of 1% to 15% of
salary. The Company provides a maximum 4% match on
employee contributions and the match is vested
immediately. For newly eligible employees there is a
wait period of 1 year before matching contributions are
given.
<PAGE>
James R. Sulat
March 19, 1998
Page 5
EMPLOYEE STOCK Eligible employees may purchase Chiron stock,
PURCHASE PLAN at a discount below market price.
Participation in the plan depends upon the
employee's date of hire. Employees can
contribute to this program from 3% to 15% of
their base salary on an after-tax basis.
STOCK OPTION PLAN Chiron has a Stock Option Program. The granting of
options to eligible employees is subject to Board of
Directors approval and program guidelines.
TIME-OFF BENEFITS
PAID TIME OFF (PTO) Chiron has a biweekly accrual based PTO program.
Eligible employees accrue 18 days per calendar year for
0 to 3 years of service. From 3 to 10 years the accrual
rate is 23 days per calendar year. From 10 to 20 years
the accrual rate is 28 days per calendar year. For
service of 20 years or more the accrual rate is 33 days
per calendar year. Eligible employees will receive the
higher accrual rate in the January beginning their
anniversary year in which they would reach a higher
level.
FIXED HOLIDAYS Eligible employees receive up to 7 paid holidays per
year.
LEAVE OF ABSENCE Chiron grants leaves of absence to accommodate
employees' medical/maternity disability, family or
personal needs.
OTHER BENEFITS
FLEXIBLE SPENDING Chiron offers Health Care and Dependent Care
reimbursement accounts to eligible employees. These
accounts give employees the advantage of paying for
eligible health and dependent care expenses with pretax
dollars.
EMPLOYEE ASSISTANCE Chiron provides a confidential counseling and
PROGRAM referral service to all employees and their
families.
EDUCATIONAL ASSISTANCE Regular full-time employees are eligible, after 6
months of service, for up to $2,000 per year in
reimbursement of tuition, textbooks, and lab
expenses for classes directly related to their
jobs
CREDIT UNION Regular full-time and part-time employees and members
of their families or household are eligible to join.
PREPAID LEGAL A Prepaid Legal Plan is available to eligible
employees to provide affordable, basic legal
services. Employees pay for this benefit on an
after-tax basis.
DEPENDENT CARE Eligible employees are provided with this
CONNECTION counseling, education and referral service
which provides extensive services such as
child care, elder care, adoption and prenatal
planning.
NOTE: ELIGIBLE EMPLOYEES ARE DEFINED AS REGULARLY SCHEDULED TO WORK 20 HOURS
OR MORE PER WEEK. COVERAGE FOR MOST BENEFITS ARE EFFECTIVE THE FIRST OF THE
MONTH FOLLOWING DATE OF HIRE, OR IMMEDIATELY IF THE DATE OF HIRE IS THE FIRST
BUSINESS DAY OF THE MONTH, UNLESS OTHERWISE NOTED.
<PAGE>
[LETTERHEAD]
December 19, 1997
Wayne Yetter, President
Novartis Pharma Corporation
59 Route 10
East Hanover, NJ 07936
Dear Wayne:
This letter is to confirm the terms to which you and I have agreed today
regarding the copromotion by Chiron Corporation ("Chiron") on behalf of Novartis
Pharmaceuticals Corporation ("Novartis") of Aredia. These terms implement that
certain agreement dated November 27, 1996, between Chiron and Ciba-Geigy Ltd.
(the "Agreement").
1. The duration of the copromotion services provided by Chiron to
Novartis shall extend from April 1, 1997 to April 3, 1998. Each party hereby
waives any right to require the other to perform such services under the
Agreement after April 3, 1998.
2. The parties agree that the terms and conditions reflected in this
letter represent reasonable and customary commercial terms for the performance
of the copromotion services rendered by Chiron.
3. Chiron shall direct its field sales force to devote equal and
co-primary promotional and sales effort to each of Aredia and Proleukin and
shall establish and maintain reasonable incentive programs intended to motivate
its sales force to provide such efforts. There shall be no specific accounting
of sales calls, details, or the proportions of full time equivalent employees
devoted to these copromotional services.
4. Novartis shall pay Chiron the following for these copromotional
services:
(a) In 1997, $4.5 million plus 30% of the sales of Aredia made in
1997 in excess of $144.5 million.
(b) In 1998, $1.2 million plus 25% of the sales of Aredia made in the
first quarter of 1998 in excess of 1.25 times the amount of sales of Aredia made
in the fourth quarter of 1997.
<PAGE>
Nothing in this letter affects the continuing obligation of Novartis to pay
the tailing compensation due Chiron under that certain promotion agreement
between Chiron and Ciba-Geigy Corporation dated April 2, 1994.
If the foregoing correctly expresses our understanding, please sign and
return to me a copy of this letter.
Thanks again for your help in resolving this matter, Wayne. I hope that
you have a happy holiday season and a really good New Year. I hope to have the
opportunity to meet with you soon.
Sincerely, yours,
/s/ Edward E. Penhoet
----------------------------------
Edward E. Penhoet
President
Chiron Corporation
Agreed:
December _____, 1997
/s/ Wayne P. Yetter
- -------------------------------
Wayne Yetter
President
Novartis Pharma Corporation
<PAGE>
[LETTERHEAD]
December 24, 1997 LAW DEPARTMENT
VIA FACSIMILE (908) 277-2598
and FEDERAL EXPRESS
Novartis Corporation
556 Morris Avenue
Summit, New Jersey 07901-1398
Attention: Jeff Benjamin, Esq.
Dear Gentlemen:
This letter confirms the agreement between Chiron Corporation ("Chiron") on
behalf of itself and its wholly owned subsidiary Chiron S.p.A., on the one hand,
and Novartis Corporation ("Novartis") to amend that certain Limited Liability
Company Agreement between them dated as of December 28, 1995 (the "LLC
Agreement") in certain respects. This letter supersedes in all respects
Chiron's letters dated December 22 and December 24, 1997 to Novartis AG
regarding this same matter. All terms used herein with initial capital letters
shall have the same meaning as in the LLC Agreement.
1. Pursuant to Section 2.2 of the LLC Agreement, Chiron shall contribute a
royalty interest in its products HSV/tk for graft vs. host disease and
Factor VIII for hemophilia to the capital of the Company, under
substantially the same terms as the Royalty Agreement dated as of December
28, 1995, except that (i) the Base Royalty rate shall be [CONFIDENTIAL
TREATMENT REQUESTED] of Net Sales, (ii) Section 1.03 and 1.04 are deleted,
and (iii) the Royalty Term shall continue until Novartis has received an
aggregate amount under the LLC Agreement, whether from the Royalty
Agreement, this letter agreement or any other arrangement thereunder, an
amount equal to the sum of all Unit purchase payments made by Novartis or
Ciba pursuant to Section 2.3 of the LLC Agreement plus interest thereon
from the date of payment at a rate equal to LIBOR.
2. In consideration of the foregoing, the Company shall create, authorize and
transfer to Chiron 15,000 Units of Membership Interest at an agreed price
of $1,000.00 per unit.
3. Novartis approves and consents to the foregoing contribution and transfer.
The foregoing contribution to the Company is in anticipation of, but does
not itself
<PAGE>
Novartis Corporation
December 24, 1997
Page 2 of 2
constitute, a request by Chiron that Novartis purchase additional Units
beyond the $250 million to which Novartis is committed under Section 2.3.2
(a) of the Agreement.
4. Section 2.3.3 of the Agreement shall be amended to replace subsection (c)
with the following:
"(c) In 1997, Sixty million, three hundred thousand dollars
(US$60,300,000);(d) In 1998, Fifty five million, three hundred
thousand dollars (US$55,300,000) plus any unused portion of the
funding limit for 1997; and (e) In 1999, Fifty million, three hundred
thousand dollars (US$50,300,000) plus any unused portion of the
funding limit for 1998."
If the foregoing accurately reflects our understanding effective as of the date
hereof, please sign and return to me a copy of this letter.
Very truly yours,
CHIRON CORPORATION
By: /s/ William G. Green
-----------------------------------
William G. Green
Senior Vice President and
General Counsel
Agreed:
NOVARTIS CORPORATION
By: /s/ D. Watson
-----------------------------------
Its: President & CEO
-----------------------------------
By:
-----------------------------------
Its:
-----------------------------------
<PAGE>
EXHIBIT 11
CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Earnings (loss) per share:
Income (loss) from continuing operations
available to common stockholders $50,838,000 $56,603,000 $(465,274,000)
----------- ----------- -------------
----------- ----------- -------------
Income (loss) per share $ 0.29 $ 0.33 $ (2.86)
----------- ----------- -------------
----------- ----------- -------------
Income (loss) per share - assuming dilution $ 0.29 $ 0.32 $ (2.86)
----------- ----------- -------------
----------- ----------- -------------
Net income (loss) available to common stockholders $71,219,000 $55,145,000 $(512,463,000)
----------- ----------- -------------
----------- ----------- -------------
Income (loss) per share $ 0.41 $ 0.33 $ (3.15)
----------- ----------- -------------
----------- ----------- -------------
Income (loss) per share - assuming dilution $ 0.40 $ 0.31 $ (3.15)
----------- ----------- -------------
----------- ----------- -------------
Shares used in earnings (loss) per share computations:
Weighted-average common shares outstanding 173,524,000 169,347,000 162,442,000
Effect of dilutive securities:
Options and equivalents 4,219,000 7,450,000 -
Warrants 204,000 297,000 -
Performance units 41,000 10,000 -
----------- ----------- -------------
Weighted-average common shares outstanding
plus assumed conversions 177,988,000 177,104,000 162,442,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
<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 develops, manufactures and markets human healthcare products for the
prevention, diagnosis and treatment of disease utilizing innovations in
biology and chemistry. Chiron participates in three human healthcare
markets: (i) diagnostics, including blood screening tests, automated
immunodiagnostic systems, critical blood analyte systems and nucleic acid
probe tests; (ii) therapeutics, with an emphasis on oncology, serious
infectious diseases and critical care diseases; and (iii) adult and pediatric
vaccines. Chiron also develops or acquires new technologies, employing these
technologies to discover new products for the Company or for its partners.
On December 29, 1997, Chiron completed the sale of its ophthalmic business
unit, Chiron Vision Corporation ("Chiron Vision"), to Bausch & Lomb
Incorporated ("B&L"). The Company's consolidated financial statements reflect
the after-tax results of Chiron Vision as discontinued operations for all
periods presented. In addition, Chiron is currently examining various
strategic transactions, including a possible joint venture arrangement,
involving significant portions of Chiron's diagnostics business.
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 the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Diagnostic products $ 606,734 $ 577,307 $ 541,113
Vaccine products 82,031 91,934 74,837
Therapeutic products 150,576 135,668 129,952
--------- --------- ---------
$ 839,341 $ 804,909 $ 745,902
--------- --------- ---------
--------- --------- ---------
</TABLE>
DIAGNOSTIC PRODUCTS Diagnostic product sales include sales and sales-type
leases of immunodiagnostic testing systems (ACS:180-Registered Trademark-
automated chemiluminescence systems), reagents and supplies for these systems
and revenues from instruments, reagents and supplies under related operating
leases; sales of critical care systems, clinical chemistry products and
manual immunodiagnostic systems; and sales of branched DNA ("bDNA") probe
systems and kits for human immunodeficiency virus ("HIV"), hepatitis C virus
("HCV") and hepatitis B virus ("HBV"), which are available in the U.S. for
research use only. Sales of diagnostic products increased from $577.3
million in 1996 to $606.7 million in 1997. The increase of $29.4 million, or
5 percent, resulted primarily from a 60 percent increase in sales of bDNA
probe kits, reflecting the continued overall growth in viral load testing for
HIV, and increased sales of ACS:180-Registered Trademark- immunodiagnostic
products. An increase in ACS:180-Registered Trademark- immunodiagnostic
product sales of $21.1 million in 1997 resulted from increased sales volume
of reagents resulting from the compounding effect of increased
ACS:180-Registered Trademark- system placements as compared with 1996. The
overall increase in diagnostic product sales in 1997 was partially offset by
declining average selling prices of ACS:180-Registered Trademark-
immunodiagnostic assays and nucleic acid diagnostic products, and by reduced
sales of manual immunodiagnostic systems, and of critical care and chemistry
products. The overall increase in diagnostic product sales was also
<PAGE>
reduced by the impact of unfavorable changes in foreign currency exchange rates
between years. Had exchange rates remained constant, particularly in Japan,
Germany and France, diagnostic product sales would have been higher by $31.9
million in 1997.
Sales of diagnostic products increased from $541.1 million in 1995 to $577.3
million in 1996. The increase of $36.2 million, or 7 percent, was primarily
due to increased sales of bDNA probe kits and increased sales of
ACS:180-Registered Trademark- immunodiagnostic products. The growth in
ACS:180-Registered Trademark- immunodiagnostic product sales was due
primarily to a 23 percent increase in sales of reagents, resulting from
continued penetration of the fully-automated instruments market.
ACS:180-Registered Trademark- placements increased 27 percent during 1996 as
compared with 1995. The overall increase in diagnostic product sales was
partially offset by reduced sales of manual immunodiagnostic systems and
unfavorable changes in foreign currency exchange rates between years. Had
exchange rates remained constant, particularly in Japan and Germany,
diagnostic product sales would have been higher by $17.0 million in 1996.
VACCINE PRODUCTS Vaccine product sales consist primarily of sales by
Chiron's Italian subsidiary of pediatric and flu vaccines in Italy and
certain international markets. Vaccine products include Polioral-TM-, a
pediatric oral polio vaccine; TriAcelluvax-TM- (formerly Acelluvax DTP-TM-),
a recombinant pediatric acellular pertussis vaccine; Agrippal-TM-, a flu
vaccine; and Morupar-TM-, a pediatric measles, mumps and rubella vaccine.
Vaccine product sales decreased from $91.9 million in 1996 to $82.0 million
in 1997. The overall decrease in vaccine product sales of $9.9 million as
compared with 1996 resulted primarily from decreased sales of Polioral-TM-
due to supply constraints during much of 1997. These supply constraints are
expected to be alleviated in the second quarter of 1998. Additionally, had
the United States ("U.S.") dollar and Italian lira exchange rate remained
constant in 1997 and 1996, vaccine product sales would have been higher by
$8.5 million in 1997. The overall increase of $17.1 million in vaccine
product sales from 1995 to 1996 was due to Chiron's expansion into new export
markets of its polio and other vaccines.
THERAPEUTIC PRODUCTS Sales of Proleukin-Registered Trademark- (aldesleukin,
interleukin-2), increased from $60.9 million in 1996 to $70.5 million in 1997,
due primarily to 16 percent and 15 percent increases in Proleukin-Registered
Trademark- units sold in domestic and European markets, respectively, and a
domestic sales price increase in April 1997. Sales of Proleukin-Registered
Trademark- increased from $54.8 million in 1995 to $60.9 million in 1996, due
primarily to 13 percent and 10 percent increases in Proleukin-Registered
Trademark- units sold in domestic and European markets, respectively. Average
worldwide selling prices remained roughly constant between 1996 and 1995.
Under the terms of a development and supply agreement with Schering AG,
Germany ("Schering AG"), and its U.S. affiliate, Berlex Laboratories, Inc.
("Berlex"), Chiron manufactures Betaseron-Registered Trademark- (interferon
beta-1b) for Berlex and Schering AG. Under the terms of the agreement,
Chiron earns an initial partial payment for Betaseron-Registered Trademark-
upon shipment to Berlex and Schering AG and a subsequent secondary payment
for Betaseron-Registered Trademark- upon net sales of the product to
patients. Beginning July 1997, the terms of payment changed, with a larger
portion due when sales are realized rather than at the time of initial
shipment. Betaseron-Registered Trademark- product sales decreased from $67.2
million in 1996 to $54.8 million in 1997 due primarily to the introduction of
a competing product in the second quarter of 1996, the decrease in contracted
initial revenues per vial and Berlex's management of its existing inventory
level. Betaseron-Registered Trademark- product sales in 1996, which decreased
slightly from 1995, reflect an increase in secondary revenues and an
offsetting decrease in initial revenues from 1995 to 1996. Offsetting these
decreases in Betaseron-Registered Trademark- product sales were increased
royalty revenues resulting from Schering AG's European sales of
Betaferon-Registered Trademark-. See additional discussion under OTHER
REVENUES herein. Based upon the level of inventories carried by Berlex, the
timing of future shipments to Berlex and the related revenue may vary.
The Company's first sales of platelet-derived growth factor ("PDGF")
contributed $18.3 million to Chiron's net product sales in 1997. PDGF is the
active ingredient in Johnson & Johnson's Regranex-Registered Trademark-
(becaplermin) Gel (recombinant human platelet-derived growth factor -
rhPDGF-BB). On December 17, 1997, Ortho-McNeil Pharmaceutical, Inc.
("Ortho-McNeil"), a Johnson & Johnson ("J&J") company, was granted Food and
Drug Administration ("FDA") approval to market Regranex-Registered Trademark-
as a treatment for diabetic foot ulcers. Chiron's sales of PDGF in the
second half of 1997 to Ortho-McNeil were made in preparation for J&J's
commercial launch of Regranex-Registered Trademark- in early 1998. Sales of
PDGF will likely fluctuate in future periods depending upon the level of
inventories carried by Ortho-McNeil and the timing of future PDGF shipments.
In December 1997, a binding agreement for supply of PDGF was executed by
Chiron and J&J.
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The Company markets most 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
$498.7 million, $486.8 million, and $453.5 million in 1997, 1996 and 1995,
respectively. The overall increase in foreign product sales from 1996 to 1997
was due primarily to increased international sales of diagnostic products,
partially offset by decreased sales of pediatric vaccines by Chiron's Italian
subsidiary. International sales of diagnostic and vaccine products accounted
for the majority of the increase in foreign product sales from 1995 to 1996. In
1997, 1996 and 1995, approximately 59 percent, 60 percent and 61 percent,
respectively, of Chiron's product sales were denominated in foreign currencies.
Product sales would have been $45.2 million higher in 1997 if currency exchange
rates had remained constant with the rates in 1996. The net effect of changing
foreign currency exchange rates did not significantly impact total product sales
in 1996 when compared with total product sales in 1995. Changing currency
exchange rates have had, and will continue to have, an impact on Chiron's
results. The Company's non-product revenues, discussed below, are largely
denominated in U.S. dollars but are affected by the Company's joint partners'
and collaborators' non-U.S. operations.
DIAGNOSTIC JOINT BUSINESS Equity in earnings of unconsolidated joint
businesses consists substantially of Chiron's one-half interest in the pretax
operating earnings of its joint diagnostics business with Ortho Diagnostic
Systems, Inc. ("Ortho"), a J&J company. The joint business sells a full line
of tests required to screen blood for hepatitis viruses and retroviruses, and
provides supplemental tests and microplate-based instrument systems to
automate test performance and data collection. The joint business also holds
the immunodiagnostic rights to Chiron's hepatitis and retrovirus technology
and receives royalties from several companies, including Abbott Laboratories
("Abbott"), Pasteur Sanofi Diagnostics, International Murex Technologies
Corporation and Genelabs Diagnostic, Inc., for their sales of certain tests.
Chiron and Ortho separately are developing new immunodiagnostic instrument
systems expected to contain broad menus of immunodiagnostic tests to serve
their respective clinical diagnostic businesses. Chiron must obtain Ortho's
agreement in order that hepatitis and retrovirus tests may be developed and
marketed for use on Chiron Diagnostics' new systems. There can be no
assurance that Chiron can obtain such agreement on acceptable terms or at
all. Refer to Item 3, "Legal Proceedings--Ortho Diagnostic Systems, Inc." of
Chiron's Form 10-K report for the fiscal year ended December 28, 1997.
Chiron's share of the pretax operating earnings of the joint business are
recorded by Chiron on a one-month lag based upon estimates supplied by Ortho.
These estimates are subject to a final adjustment 90 days after the end of each
calendar year (the "final annual accounting"). Chiron's share of the pretax
operating earnings of the Chiron-Ortho joint business decreased from $95.8
million in 1996 to $92.9 million in 1997. This decrease resulted primarily from
$6.9 million of royalties resulting from a settlement with Abbott in the third
quarter of 1996 related to prior sales of HIV immunodiagnostic tests by Abbott
(the "Abbott settlement"). Under the terms of the Abbott settlement, the joint
business continues to receive a royalty from Abbott based on the sale of
products incorporating technology covered by certain of Chiron's HIV patents.
In addition, the final annual accounting in the first quarter of 1997
contributed $2.9 million to the overall decrease in joint business revenue from
1996. Excluding the impact of the Abbott settlement and revenues derived from
the final annual accounting, Chiron's share of the pretax operating earnings of
the joint business in 1997 increased by $6.9 million as compared with Chiron's
share in 1996, primarily as a result of increased royalties.
Chiron's share of the pretax operating earnings of the Chiron-Ortho joint
business increased from $76.9 million in 1995 to $95.8 million in 1996. This
increase was due principally 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; the Abbott settlement; and $3.8 million
of revenues derived from the final annual accounting in the first quarter of
1996. Partially offsetting this overall increase from 1995 to 1996 was a decline
in certain product margins. The revenue recognized from the final annual
accounting in the first quarter of 1995 was not material.
Preliminary estimates of the final annual accounting for 1997 and certain
other adjustments to be recorded in Chiron's first quarter of 1998 indicate
that Chiron's share of the pretax operating earnings of the joint business in
the first quarter of 1998 will be significantly less than Chiron's share of
$25.1 million in the first quarter of 1997.
AGREEMENT WITH HOECHST AG Equity in earnings of unconsolidated joint
businesses also includes Chiron's 49 percent share of the after-tax operating
results of a joint venture, acquired in July 1996, with Hoechst AG, successor
to Behringwerke AG ("Behring"). Chiron's share of earnings from the joint
venture, including amortization of intangibles, was $13.8 million in 1997 and
$4.2 million in 1996. Chiron's share of earnings in 1997 included Chiron's
share of a $2.0
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million up-front license fee that was expensed by the joint venture during
the first quarter of 1997. Under the terms of the joint venture agreement,
Chiron has an option to purchase the remaining 51 percent interest in the
joint venture in March 1998, 1999, 2000 or 2001, and Hoechst AG has the
option to require Chiron to acquire the remaining 51 percent interest in
March 2001. In February 1998, Chiron gave notice to Hoechst AG that the
Company intends to exercise its option to purchase the remaining 51 percent
interest in the joint venture in Chiron's second fiscal quarter of 1998 for
approximately 210.7 million Deutsche marks.
BEN VENUE LABORATORIES, INC. Equity in earnings of unconsolidated joint
businesses in 1996 and 1995 includes $1.9 million and $4.1 million,
respectively, of revenues related to Chiron's 50 percent interest in a generic
cancer chemotherapeutics business with Ben Venue Laboratories, Inc. ("Ben
Venue"). In May 1996, Chiron sold its interest to Ben Venue.
COLLABORATIVE AGREEMENT REVENUES Collaborative agreement revenues consist of
fees received for research services as they are performed, proceeds from sales
of product rights, proceeds from sales of biological materials to research
partners for preclinical and clinical testing, and fees received upon attainment
of benchmarks specified in the related research agreements. Collaborative
agreement revenues recognized by the Company were $115.1 million, $122.1 million
and $58.1 million in 1997, 1996 and 1995, respectively.
During 1995, Chiron and Novartis AG ("Novartis"), successor to Ciba-Geigy
Ltd. ("Ciba"), 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 and pediatric vaccines and insulin-like growth factor-1
("IGF-1"). In return, Novartis will receive an interest in a stream of
royalties from future worldwide sales of certain adult and pediatric vaccines
and IGF-1. In addition, Novartis will receive an interest in promotional
rights, in countries other than in North America and Europe, for certain
adult vaccines. In December 1997, Chiron and Novartis amended the Research
Funding Agreement to add herpes simplex virus thymidine kinase ("HSV-tk") and
Factor VIII gene therapy to the funded projects. In return, Novartis will
receive a royalty stream from future worldwide sales of certain HSV-tk and
Factor VIII gene therapy products. Royalties on all specified products will
be paid for a minimum of 10 years from the later of October 1, 2001 or the
date of the first commercial sale of individual products covered by the
Research Funding Agreement, as amended. Further, such royalty payments will
continue until Novartis has received an aggregate amount equal to the sum of
all research and development funding provided by Novartis plus interest
thereon from the date of payment at a rate equal to the London Interbank
Offered Rate ("LIBOR"). In connection with these funding arrangements, Chiron
recognized collaborative agreement revenues of $53.3 million, $72.0 million
and $27.0 million from Novartis during 1997, 1996 and 1995, respectively.
The variability of this funding was principally responsible for the
fluctuation in the Company's collaborative agreement revenues between years.
In November 1995, Chiron and Novartis entered into a collaboration agreement
under which Novartis will pay $26.0 million to Chiron over a five-year period,
subject to certain adjustments, in exchange for a non-exclusive, perpetual
license to utilize Chiron's combinatorial chemistry techniques. In connection
with this agreement, Chiron recognized collaborative agreement revenues of $10.2
million, $9.4 million and $5.5 million in 1997, 1996 and 1995, respectively.
Under a November 1996 agreement with Novartis (the "November 1996 agreement"),
executed primarily in connection with a consent and agreement that resolved the
Federal Trade Commission's review of the Ciba and Sandoz Ltd. merger that
created Novartis, Chiron agreed to grant royalty-bearing licenses to
Rhone-Poulenc Rorer Inc. and Novartis for certain patent rights on the HSV-tk
gene in the field of gene therapy. As partial consideration, Novartis will pay
the Company, beginning in 1997, up to an aggregate of $60.0 million through
2001, $15.0 million of which was recognized as collaborative agreement revenues
in 1997.
In addition to increased revenues recognized under the Research Funding
Agreement, as amended, and the November 1995 collaboration agreement with
Novartis, the increase in collaborative agreement revenues from 1995 to 1996
was also attributable to amounts earned by Chiron's wholly owned subsidiary,
Viagene, Inc. ("Viagene"), which was acquired in September 1995, and Chiron's
new collaboration in 1996 with Japan Tobacco Inc. ("JT"). Chiron recognized
increased revenues of $6.9 million in
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1996 from Viagene's collaborative agreement with Green Cross of Japan for HIV
gene therapy research and clinical development. In 1996, Chiron received
$7.7 million under the collaboration with JT, whereby JT's pharmaceutical
division acquired a non-exclusive, perpetual license to apply certain of
Chiron's combinatorial chemistry technologies in its research and product
development programs. Collaborative agreement revenues recognized under the
collaboration with JT increased by an immaterial amount from 1996 to 1997.
OTHER REVENUES Other revenues consist principally of product royalties,
including royalty revenues resulting from Schering AG's European sales of
Betaferon-Registered Trademark-, and revenues generated from promotion and
co-promotion of Novartis' product Aredia-Registered Trademark- (pamidronate
disodium for injection). Other revenues recognized by the Company in 1997,
1996 and 1995 were $101.3 million, $72.8 million and $39.3 million,
respectively. Royalty revenues resulting from Schering AG's European sales
of Betaferon-Registered Trademark-, which began in the second quarter of
1996, contributed $24.1 million in 1997 and $13.6 million in 1996 to the
Company's other revenues. In 1997, increased royalties related to sales by
Merck & Co., Inc. of HBV vaccines also contributed to the increase in other
revenues from 1996.
Prior to April 1997, Chiron recognized other revenues from sales fees earned
under an agreement with Novartis which provided Chiron with sole promotional
rights in the U.S. to Novartis' product Aredia-Registered Trademark-. Under
this exclusive agreement which expired in March 1997, Chiron recognized
Aredia-Registered Trademark- sales fees of $12.5 million, $30.2 million and
$6.7 million in 1997, 1996 and 1995, respectively, as other revenues. The
November 1996 agreement provided that Chiron, through a co-promotion
arrangement with Novartis, would promote Aredia-Registered Trademark- for two
years after a six-month transitional period beginning April 1997. Chiron
recognized $31.1 million of other revenues in 1997 related to
Aredia-Registered Trademark- co-promotion services provided to Novartis. In
December 1997, the co-promotion arrangement with Novartis was modified such
that Chiron will no longer promote Aredia-Registered Trademark- after April
3, 1998. Other revenues to be recognized by Chiron in the first quarter of
1998 will approximate $9.2 million plus a percentage of Aredia-Registered
Trademark- sales in the first quarter of 1998 in excess of a specified
amount. Other revenues to be recognized by Chiron in the second quarter of
1998 will approximate $0.6 million.
COSTS AND EXPENSES
GROSS PROFIT Gross profit as a percentage of net product sales was 58 percent
in 1997 and 1996 and 56 percent in 1995. Relative to 1996, improvements in 1997
gross profit margin percentage resulted from sales of PDGF, increased sales of
bDNA probe kits and increased sales of Proleukin-Registered Trademark- in
domestic and European markets. In addition, during the second quarter of 1997,
a $6.6 million reduction in cost of sales was recognized due to a revised
estimate of royalties to be paid on sales of certain products. These
improvements in gross margin percentage were substantially offset in 1997 by the
impact, relative to 1996, of declining average selling prices of
ACS:180-Registered Trademark- immunodiagnostic assays, an adverse sales mix of
lower margin critical blood analyte systems to foreign distributors and
decreased secondary revenues from sales of Betaseron-Registered Trademark-. The
increase in gross profit margin percentage in 1996, relative to 1995, resulted
from increased secondary revenues from sales of Betaseron-Registered Trademark-,
increased sales of ACS:180-Registered Trademark- immunodiagnostic assays and
increased sales of bDNA probe kits. This increase in gross profit margin
percentage was partially offset, however, by charges recorded in 1996 related to
inventory reserves and temporarily idled manufacturing facilities in Italy.
Gross profit margin percentages may fluctuate significantly in future periods as
the Company's product mix continues to evolve.
RESEARCH AND DEVELOPMENT Chiron recognized research and development expense of
$376.0 million, $352.5 million and $327.9 million in 1997, 1996 and 1995,
respectively. Generally, Chiron's research and development expenses fluctuate
from period to period depending upon the extent of clinical trial-related
activities, including the manufacturing of clinical material; the number of
products under development and their progress; and the acquisition of companies
and new technology and licensing rights.
In 1997, the overall increase in research and development expense from 1996 was
due to the continued development of bDNA probes, as well as additional
expenditures related to Myotrophin-Registered Trademark- (rhIGF-1 or mecasermin
[recombinant DNA origin]) Injection; a collaboration in the field of genomics;
and research involving gene therapies and pertussis, HCV and other vaccines. In
July 1997, Chiron and Pharmacia & Upjohn AB ("Pharmacia & Upjohn") entered into
certain agreements under which Chiron was granted certain licenses related to
rhIGF-1. In connection with the agreements, Chiron recorded research and
development expense of $4.6 million in 1997. On May 8, 1997, an FDA
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advisory committee found that there was not sufficient evidence of efficacy
in the use of Myotrophin-Registered Trademark- Injection for the treatment of
amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease) to warrant FDA
approval. In November 1997, Chiron and its collaborative partner, Cephalon,
Inc. ("Cephalon"), withdrew and resubmitted their application to the FDA.
The FDA has scheduled further consideration of the application before the
advisory committee on April 9, 1998.
In May 1997, Chiron entered into an agreement with Hyseq, Inc. ("Hyseq") to
collaborate in the identification of genetic targets for the development of
pharmaceutical treatments for cancer. Under the agreement, Chiron is obligated
to fund allowable research costs, in amounts not less than $8.5 million in the
first year and $5.5 million in each of the second and third years of the
collaboration term, incurred by Hyseq in performing research requested by
Chiron. In connection with this agreement, Chiron recognized $5.3 million of
research and development expense in 1997.
The overall increase in research and development expenses from 1996 to 1997 was
partially offset by decreased expense related to agreements with J&J and G.D.
Searle & Co. ("Searle"). During 1996 and 1995, Chiron, together with J&J,
co-funded the development and introduction of a home HIV testing service
business, Direct Access Diagnostics. Chiron elected not to exercise its option,
which expired in May 1997, to participate in this venture with J&J. During 1996
and 1995, Chiron recognized research and development expense of $10.1 million
and $6.1 million, respectively, related to its option to participate in this
venture. In 1997, no amounts related to this option were recognized as research
and development expense. Further, in 1996, Chiron incurred research and
development expenses of $14.6 million in connection with a collaboration
agreement with Searle for the research, development and marketing of Tissue
Factor Pathway Inhibitor. In 1997 and 1995, Chiron recognized $8.0 million and
$8.8 million, respectively, of research and development expense under this
agreement.
In addition to increased expense incurred under the agreements with J&J and
Searle from 1995 to 1996, the overall increase in research and development
expense from 1995 to 1996 was also attributable to the acquisition of Viagene
in September 1995; research and development activities involving vaccines;
and an increase of $16.8 million in diagnostics research and development
expense, primarily related to the continued improvement of existing
immunodiagnostic instrument systems and development of bDNA probes. Chiron's
Viagene subsidiary, involved in the discovery and development of gene
transfer products for the treatment or prevention of severe viral infections,
cancers and other diseases, contributed $13.0 million to research and
development expense in 1996. Additionally, an increase in vaccines research
and development of $19.4 million from 1995 to 1996 resulted from Chiron's
effort to obtain FDA approval of Pertugen-TM-, a diphtheria, tetanus and
genetically engineered acellular pertussis ("DTaP") vaccine for infants and
children; expenditures related to the herpes simplex virus-2 clinical trials;
and research related to HCV and other new vaccines. The overall increase in
1996 research and development expense that resulted from the acquisition of
Viagene and increased vaccine and diagnostics research and development
activities was partially offset by reduced expenses related to
Myotrophin-Registered Trademark-. In 1995, Chiron incurred expenses of
approximately $34.1 million for the funding of certain collaboration expenses
related to Myotrophin-Registered Trademark- and the purchase of additional
program rights from Cephalon. In 1997 and 1996, Chiron recognized research
and development expenses of $17.6 million and $20.4 million, respectively, in
connection with its collaboration with Cephalon. Additionally, in 1995,
Chiron incurred research and development expenses of $6.4 million under an
agreement with Genelabs Technologies, Inc. for the cross-license of certain
rights to viral diagnostic tests and $5.0 million under an agreement with New
York University for certain licenses related to the use of optical mapping.
Expenses incurred in connection with these agreements in 1997 and 1996 were
not material.
OTHER OPERATING EXPENSES Selling, general and administrative ("SG&A") expenses
as a percentage of net product sales were 38 percent in 1997 and 1995 and 39
percent in 1996. In 1997, total SG&A expenses were offset by $8.6 million of
changes to estimated accruals created in prior years. Selling and marketing
expenses continued to represent the largest portion of total SG&A expenses, as
Chiron devoted significant resources to support sales volumes in its existing
product lines as well as new products.
In connection with the January 1995 agreements, Chiron acquired from Novartis
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, effective January 1, 1995. The
acquisitions of Chiron Diagnostics and Novartis' interests in Chiron Vaccines
and Chiron S.p.A. were accounted for under the purchase method of
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accounting and resulted in a $222.9 million charge in 1995 for purchased
in-process technology. The acquisition of Viagene in September 1995 resulted in
an additional charge to purchased in-process technology of $130.3 million in
1995. The fair value of the net assets acquired in the acquisitions of Chiron
Diagnostics, Chiron S.p.A. and Chiron Vaccines, including in-process technology,
was estimated based on independent valuations of the acquired net assets. The
fair value of the net assets acquired in the Viagene acquisition was determined
to be equal to book value, as Viagene was an early-stage company with no
intangible assets other than in-process technology.
Expenses of $45.3 million were also incurred in January 1995 in connection with
the Novartis transaction, consisting primarily of employee payments and related
tax liabilities and legal and investment advisor fees. Pursuant to the January
1995 agreements, Novartis reimbursed the Company $24.8 million for a portion of
the employee payments. This reimbursement, of which $4.2 million was
attributable to Chiron Vision, was recorded as a capital contribution from
Novartis.
During 1997, the cumulative impact on the Company's manufacturing needs of
recent product developments prompted management to conclude that Chiron
currently has excess manufacturing capacity relative to its projected needs.
Specifically, management concluded that the Company's need for its idle
pharmaceutical fill and finishing facility in Puerto Rico (the "Puerto Rico
facility"), originally outfitted as a second manufacturing site of
Betaseron-Registered Trademark-, was eliminated due to manufacturing process
improvements and the cumulative impact of the introduction of a competing
product in the second quarter of 1996. In the third quarter of 1997, management
determined that it could not find a suitable use for the Puerto Rico facility
consistent with its previous expectations for the facility's use as a contract
manufacturing plant. As a result, the Company recorded a $31.3 million
impairment loss to record the Puerto Rico facility and related machinery and
equipment assets at their individual estimated fair market values, determined on
the basis of independent appraisals.
In March 1998, the Company committed to plans to sell the Puerto Rico
facility and a manufacturing facility in St. Louis, Missouri. The resulting
adjustments, if any, in the first quarter of 1998 to record the assets held
for sale at the lower of their aggregate carrying amount or estimated fair
value, determined on the basis of independent appraisals, less cost to sell,
are not expected to be material. In the first quarter of 1998, the Company
expects to record certain restructuring and reorganization charges in
connection with the plans to dispose of the Puerto Rico and St. Louis
facilities.
As circumstances dictate, Chiron's management reviews the carrying value of all
facilities to determine whether an impairment of the carrying value has
occurred. To date, management has determined that no material impairment of the
carrying value of any of its facilities, other than the Puerto Rico facility,
has occurred. There can be no assurance, however, 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 1997, Chiron commenced a restructuring of certain of its operations
and recorded a restructuring and reorganization charge of $3.3 million,
consisting primarily of employee termination and other costs related to the
closure of Chiron Diagnostics' electrophoresis business and to the sale of
its Quality Controls business. In 1995, restructuring and reorganization
charges of $22.1 million resulted primarily from the idling of the Puerto
Rico facility and the Company's change in plans to expand its Emeryville
research and development facilities. The charges recorded in 1995 also
reflected the scale-back of manufacturing operations at the Company's
Amsterdam facility and the write-down of duplicate facilities at Chiron's
Emeryville, California headquarters. Employee termination costs related to
the Company's 1995 restructuring were not material. At December 31, 1997,
the accrued liability for restructuring and reorganization charges totaled
$6.9 million (exclusive of amounts related to Chiron Vision) and consisted
primarily of $3.6 million related to the idling of the Puerto Rico facility
and $2.4 million of employee-related costs recorded in 1997. Liabilities
associated with the Company's restructuring activities in 1997 and the
remaining accrual for the Puerto Rico facility are expected to be
substantially settled in 1998.
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NON-OPERATING INCOME AND EXPENSE In December 1997, Chiron Diagnostics completed
the sale of certain of the assets of its worldwide Quality Controls business to
Bio-Rad Laboratories, Inc. In connection with this sale, Chiron recognized a
gain on sale of assets of $18.6 million. In May 1996, Chiron sold its 50
percent interest in a joint venture to Ben Venue, its joint venture partner.
Chiron recognized a $12.2 million gain on this sale in 1996.
In 1997, interest expense increased $2.3 million from 1996 due to increased
average borrowings outstanding during the year. Other income, net, consists
primarily of investment income on the Company's cash and investment balances and
other non-operating gains and losses. The annual variability in interest and
dividend income is primarily responsible for the fluctuations in the Company's
other income, net. In addition, Chiron recognized a $5.5 million gain on sale
of equity securities in 1997.
The provision for income taxes in 1997 consisted primarily of federal taxes and
foreign taxes on certain foreign operations of the Company. The 1997 effective
tax rate on pretax income from continuing operations was 34 percent. Excluding
the impact of the impairment loss on the Puerto Rico facility, the 1997
effective tax rate was 24 percent. The charge for the impairment loss on the
Puerto Rico facility in 1997 did not create a corresponding current income tax
benefit and, therefore, increased the effective tax rate for the year. The
effective tax rate, excluding the impact of the impairment loss, decreased from
1996 due principally to the use of federal net operating loss carryforwards, the
recognition of domestic deferred tax assets, and certain foreign sales
corporation tax benefits. The provision for income taxes in 1996 and 1995
consisted primarily of foreign taxes. The amount of foreign taxes provided
significantly increased since the acquisitions of Chiron Diagnostics, Chiron
S.p.A. and the Chiron Behring joint venture, each of which has operations in
foreign countries for which income tax is provided.
In 1997, Chiron recognized U.S. deferred tax assets related to continuing
operations of $13.8 million. Of this amount, $7.8 million reduced current tax
expense and $6.0 million reduced intangible assets on the balance sheet. It has
been Chiron's general policy to recognize deferred tax assets on an entity by
entity basis when an entity has a history of reported taxable income and the
entity anticipates taxable income in subsequent years of an amount sufficient to
realize the benefit of the deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements have been generally funded from cash and
investments on hand, debt borrowings and sales of equity. In addition to these
sources of capital, future capital requirements may be financed through a
combination of research and development funding provided by Novartis, possible
off-balance sheet financing and cash provided by operations. Chiron's cash and
investments in marketable debt securities, which totaled $258.5 million at
December 31, 1997, are invested in a diversified portfolio of investment grade
financial instruments, including money market instruments, corporate notes and
bonds, government or government agency securities, and other debt securities.
By policy, the amount of credit exposure to any one institution is limited.
These investments are generally not collateralized and primarily mature within
three years. Investments with maturities in excess of one year are presented on
the balance sheet as noncurrent investments.
SOURCES AND USES OF CASH Chiron had cash and cash equivalents of $98.5 million
and $68.1 million at December 31, 1997 and 1996, respectively. Cash provided by
operating activities was $149.5 million in 1997 as compared with $62.7 million
in 1996. Primary sources of the increase in cash provided by operating
activities were increased annual profitability and certain charges to net income
not resulting in the use of cash, including the $31.3 million impairment loss on
the Puerto Rico facility, an increase of $16.5 million in tax benefits from
employee stock plans and an increase of $13.2 million in expense recognized in
connection with the establishment of asset reserves. A decrease in accounts
receivable at December 31, 1997, relative to the increase in accounts receivable
from 1995 to 1996, also contributed to the increase in cash provided by
operating activities. These increases were partially offset by components of
net income in 1997 not providing cash from operations, including the Company's
$18.6 million gain on sale of assets, income of $17.6 million attributable to
changes in estimated liabilities, and recognition of domestic deferred tax
assets. In 1995, the Company used $24.4 million in operating activities. This
use of cash in 1995 reflects the Company's net loss for the year, partially
offset by adjustments for the write-off of purchased in-process technologies and
depreciation and amortization expense. An increase in inventories from the
prior year end also contributed to the use of cash in operating activities in
1995.
8
<PAGE>
Cash used in investing activities was $169.0 million in 1997 as compared with
$191.3 million in 1996. In 1997, the primary uses of cash in investing
activities were for the net purchase of $99.2 million of investments in
marketable debt securities and acquisitions of property and equipment
totaling $77.5 million. These uses of cash in 1997 were partially offset by
$29.9 million of cash proceeds from Chiron Diagnostics' sale of certain of
the assets of its worldwide Quality Controls business. In 1996, the primary
uses of cash in investing activities were for the purchase of Chiron's 49
percent interest in the Chiron Behring joint venture for approximately $120.0
million in cash and acquisitions of property and equipment totaling $120.2
million. These uses of cash in 1996 were partially offset by the proceeds
from sale and maturity of a net $88.9 million of investments in marketable
debt securities. In 1995, cash used in investing activities was $51.5
million. The primary uses of cash in investing activities in 1995 were for
the acquisitions of (i) Chiron Diagnostics and Novartis' interests in Chiron
Vaccines and Chiron S.p.A; (ii) Viagene; (iii) the ophthalmic surgical
product division of IOLAB, which is classified as a component of discontinued
operations; and (iv) additional property and equipment totaling $101.1
million. These uses of cash in 1995 were partially offset by the proceeds
from sale and maturity of a net $175.6 million of investments in marketable
debt securities.
On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision for approximately $300.0 million in cash. In
January 1998, $100.0 million of borrowings outstanding under the Company's U.S.
credit facilities was repaid from a portion of these proceeds.
Cash provided by financing activities was $49.8 million in 1997 as compared with
$122.3 million in 1996. In 1997, the primary sources of cash from financing
activities were the proceeds of $61.5 million from issuance of common stock
under the Company's stock option and employee stock purchase plans and $20.6
million of short-term borrowings. Partially offsetting these sources of cash
was Chiron's purchase of a previously leased manufacturing facility and related
buildings in Emeryville, California for $29.8 million in cash. In 1996, the
primary sources of cash from financing activities were $100.0 million of
short-term borrowings under the Company's U.S. credit facilities and the
proceeds of $44.6 million from issuance of common stock under the Company's
stock option and employee stock purchase plans. Cash provided by financing
activities in 1995 was $65.3 million, consisting primarily of the proceeds from
issuance of common stock under the Company's stock option and employee stock
purchase plans and a $24.8 million capital contribution from Novartis.
In January 1998, the Company's Board of Directors authorized the purchase of up
to 2.5 million shares of Chiron common stock from time to time on the open
market in order to offset the dilution associated with the operation of the
Company's stock option and employee stock purchase plans and the granting of
share rights. The Board of Directors has authorized such purchases through
January 1999. To date, no shares have been purchased.
Chiron believes that its cash and investments, funds provided by operations and
capital market transactions will be sufficient to meet its cash requirements
during the upcoming twelve months and through the foreseeable future.
AGREEMENTS WITH NOVARTIS In connection with the January 1995 agreements,
Novartis agreed to guarantee $425.0 million of new debt for Chiron and
provided Chiron with the option to issue up to $500.0 million of new equity
to Novartis. In addition, Novartis 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. In December
1997, Chiron and Novartis amended the funding arrangement to add HSV-tk and
Factor VIII gene therapy to the funded projects. Under these funding
arrangements, annual funding amounts will not exceed $62.3 million in 1998
and $50.3 million (plus any unused portion of the funding limit for 1998) in
1999. See additional discussion under COLLABORATIVE AGREEMENT REVENUES
herein. In connection with the November 1996 agreement, Novartis 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). Should
Chiron elect to replace certain existing convertible debt, Novartis also
agreed to provide additional guarantees totaling $200.0 million for such
purposes. Refer to Note 2 of Notes to Consolidated Financial Statements.
BORROWING ARRANGEMENTS Under separate revolving, committed, unsecured credit
agreements with major financial
9
<PAGE>
institutions, Chiron can borrow up to $200.0 million in the U.S. These credit
facilities are guaranteed by Novartis and provide for various borrowing rate
options, as defined in the agreements. One of these credit facilities, which
allows for borrowings of up to $100.0 million, matures in February 2003. The
other credit facilities, which allow for aggregate additional borrowings of up
to $100.0 million, were consolidated into a single credit facility maturing in
March 1999. Additionally, at December 31, 1997, Chiron had credit facilities
available outside the U.S. that allow for total borrowings of $130.2 million.
The Company's short-term borrowings totaled $154.7 million at December 31, 1997,
and consisted primarily of borrowings of $100.0 million under Chiron's U.S.
credit facilities and of $54.6 million under Chiron's credit facilities outside
the U.S. In January 1998, the $100.0 million of borrowings outstanding under
the Company's U.S. credit facilities was repaid with a portion of the proceeds
from the sale of Chiron Vision.
OTHER COMMITMENTS 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. 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 third 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.
In June 1996, Chiron S.p.A. entered into an agreement to purchase in 1998 the
Company's manufacturing and administrative facilities in Siena, Italy which are
currently under lease. The purchase price is approximately $29.6 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.
Additionally, the Company has various commitments for capital expenditures
totaling approximately $2.7 million at December 31, 1997. The majority of these
commitments are for computer system upgrades and enhancements. The Company also
has performance bonds outstanding in the amount of $3.5 million at December 31,
1997, primarily in connection with sales to public health authorities.
In future periods, Chiron expects to incur substantial capital spending. In
February 1998, Chiron gave notice to Hoechst AG that the Company intends to
exercise its option to purchase the remaining 51 percent interest in the
Chiron-Behring joint venture in the Company's second fiscal quarter of 1998
for approximately 210.7 million Deutsche marks. See additional discussion
under AGREEMENT WITH HOECHST AG herein. Chiron's liquidity may be
further affected in future periods by its decision to fund its share of
expenses in certain of its joint ventures and collaboration arrangements.
Over the next several years, Chiron anticipates funding collaborations with a
number of its research partners, and may make additional equity investments
in collaborative partners.
MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject to
fluctuations due to changes in foreign currency exchange rates and interest
rates. Through the use of various financial instruments, the Company attempts
to limit its exposure to these market risks.
To manage foreign currency exchange risks, Chiron enters into forward foreign
currency contracts ("forwards"), cross currency interest rate swaps ("swaps")
and purchases foreign currency option contracts ("options"). Chiron does not
use any of these derivative instruments for trading or speculative purposes.
The total notional amount of these derivative financial instruments at
December 31, 1997 and 1996 was $296.5 million and $208.4 million,
respectively.
The Company uses forwards to hedge the impact of currency fluctuations on
certain assets and liabilities denominated in nonfunctional currencies
("transaction exposures"). Typically, these contracts have maturities of three
months or less. Chiron's objective is to minimize the transaction gains and
losses that result from remeasuring foreign denominated assets and liabilities
based on exchange rate changes. The Company's transaction exposures are
primarily denominated in the major European currencies and the Japanese yen. At
December 31, 1997, these
10
<PAGE>
exposures amounted to $44.9 million and were offset by forwards with a notional
amount of $46.1 million. In addition to the exposures noted above, the Company
has exposures totaling approximately $20.2 million denominated in currencies
where the cost of hedging is viewed as excessive relative to the underlying
risk. These exposures, primarily related to the Mexican peso, are not hedged.
In the aggregate, a 10 percent adverse movement against the Company's portfolio
of transaction exposures would result in a loss of approximately $1.7 million.
A 10 percent movement in the value of the dollar versus the Company's portfolio
of transaction exposures has occurred in one of the last twelve quarters.
Foreign currency transaction gains and (losses) from continuing operations, net
of the impact of hedging, were a net ($2.3) million in 1997, ($3.0) million in
1996 and were not material in 1995.
In addition, Chiron also hedges certain anticipated exposures. The Company's
primary anticipated exposures are related to intercompany inventory purchases
by subsidiaries with functional currencies denominated in the major European
currencies and the Japanese yen. The Company attempts to hedge approximately
80 percent of anticipated major currency exposures by purchasing quarterly
put options. To limit hedging costs, the Company generally purchases
out-of-the-money options. As a result, Chiron effectively does not purchase
insurance for the first 2 to 5 percent of the exchange rate risk. The risk
on these hedging instruments is limited to the premium amount paid. The
total notional amount of the options at December 31, 1997 was $111.3 million.
No options were outstanding at December 31, 1996. The options outstanding
at December 31, 1997 expire quarterly over a twelve-month period, and provide
protection against increases in the value of one U.S. dollar beyond 1.82
Deutsche marks and 123 Japanese yen. The fair market value of outstanding
option contracts at December 31, 1997 was $2.9 million.
The Company has entered into a series of swaps to modify the interest and/or
currency characteristics of certain assets and liabilities denominated in
nonfunctional currencies. To date, the objective of the swaps entered into by
the Company is to fix the interest rate exposures associated with the Company's
wholly owned German and Japanese subsidiaries. The exposures are denominated in
Deutsche marks and Japanese yen. The total notional amounts of the Company's
swaps at December 31, 1997 and 1996 were $139.1 million and $137.5 million,
respectively.
Chiron manages the risk of counterparty default on its derivative financial
instruments through the use of credit standards, counterparty diversification
and monitoring of counterparty financial condition. All derivative financial
instruments are executed with financial institutions with strong credit ratings,
which minimizes risk of loss due to nonpayment. Chiron has not experienced any
losses due to counterparty default.
The Company has exposure to changes in interest rates in both its investment
portfolio and certain floating rate liabilities and real estate commitments.
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are generally classified as
available-for-sale and, consequently, are recorded on the balance sheet at
fair value with unrealized gains or losses reported as a separate component
of stockholders' equity. The Company also has short-term debt obligations
and certain real estate lease commitments with interest rates or payments
tied to LIBOR. At December 31, 1997, the net effect of a 100 basis point
increase or decrease in LIBOR over a twelve-month period would not result in
a material change in the Company's results of operations.
YEAR 2000 The Company is evaluating its computer systems in the light of the
"Year 2000" programming issues. In the past, many computer programs were written
using two digits rather than four to identify the relevant year. These programs
may not be able to distinguish between 21st and 20th century dates (for example,
"00" may be read as the year 1900 when the year 2000 is intended). This could
result in a significant system failure or miscalculations. Accordingly, many
companies' computer systems may need to be upgraded or replaced. The Company
and third parties with which the Company does business rely on numerous computer
programs. The Company may incur significant costs in identifying and resolving
Year 2000 issues, including internal staff costs as well as consulting and other
expenses. In addition, the appropriate course of action may include replacement
or an upgrade of certain systems or equipment at a substantial cost to the
Company. There can be no assurance that the Year 2000 issues will be resolved
in 1998 or 1999. If not resolved, this issue could have a significant adverse
impact on the Company's operations.
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
11
<PAGE>
consolidated results for the first quarter of 1998, and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Chiron. The statements under this caption are intended to serve as
cautionary statements within the meaning of the Private Securities Litigation
Reform Act of 1995. The following information is not intended to limit in any
way the characterization of other statements or information under other captions
as cautionary statements for such purpose:
* Delays, difficulties or failure in obtaining regulatory approval
(including approval of its systems, procedures and facilities for
production) for the Company's products. These may include, for
example, approval of the Company's Italian manufacturing facilities
and processes as satisfying regulatory requirements for production
of the Company's diphtheria, tetanus and genetically engineered
acellular pertussis and adjuvanted flu vaccines, approval for
Myotrophin-Registered Trademark- for which additional clinical
trials may be required by the FDA, approval for DepoCyt-TM-
(injectable sustained-release cytarabine), and approval for
Quantiplex-Registered Trademark- assays for HIV and follow-on bDNA
probe products, for which the FDA may require substantial
additional process and systems validation.
* Charges that may be incurred or accrued as a result of the
implementation of restructuring plans, including possible disposal of
excess manufacturing and other general facilities, or as a result of
the underutilization of manufacturing and other general facilities,
including facility expansions.
* Costs associated with restructuring or other negative short-term
impacts resulting from the possible establishment of a joint venture
or other transaction involving significant portions of Chiron's
diagnostics business.
* 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 successfully commercialize the
Company's products or to retain and expand the markets served by the
commercial collaborations; conflicts of interest, priorities and
commercial strategies which may arise between the Company and such
corporate partners, including conflicts as to the strategy for
realizing value arising from evolving opportunities.
* Delay, difficulty or inability on acceptable terms to resolve
conflicts with partners, including resolution of litigation
initiated by Chiron against Ortho seeking to compel arbitration
regarding access to hepatitis and retrovirus immunodiagnostic
tests for use on Chiron's ACS:Centaur-Registered Trademark-
immunoassay system.
* 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, manufacture and sale of
certain of the Company's products including, for example, off-label
sales of pharmaceuticals and research use only sales of diagnostic
tests and systems.
* The ability and willingness of customers to substitute competitive
products for the Company's products if 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.
12
<PAGE>
* 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-Registered Trademark- customer base in the
U.S.; the extent to which patients, once enrolled, remain compliant
with the prescribed treatment regimen and continue to regularly
receive Betaseron-Registered Trademark-; the impact of competing
products, including other beta interferon products; pricing,
promotional and marketing decisions by the Company's partner, Schering
AG.
* 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.
* The cost of acquiring in-process technology, either by license,
collaboration or purchase of another entity.
* The impact of unusual or infrequent charges resulting from Chiron's
ongoing evaluation of its business strategies and organizational
structures, including the continued costs of integration of acquired
businesses.
* Revaluation of assets, including, among others, the Company's
investments in the equity securities of other companies with whom it
collaborates, or related expenses.
* Changes to tax rates or possible future changes to conditions of
certain tax rulings obtained by the Company or its subsidiaries.
* 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.
13
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 98,483 $ 68,114
Short-term investments in marketable debt securities 84,588 38,694
----------- -----------
Total cash and short-term investments 183,071 106,808
Accounts receivable, net of allowances of $22,918 in 1997
and $20,692 in 1996:
Related parties 56,672 61,187
Unrelated parties 287,372 290,784
----------- -----------
344,044 351,971
Inventories 165,652 180,534
Other current assets:
Related parties 288 5,000
Unrelated parties 76,997 52,455
----------- -----------
77,285 57,455
----------- -----------
Total current assets 770,052 696,768
Noncurrent investments in marketable debt securities 75,401 22,027
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings 218,509 231,998
Laboratory, production and office equipment 422,278 381,421
Leasehold improvements 123,379 114,282
Construction in progress 67,355 69,120
----------- -----------
831,521 796,821
Less accumulated depreciation and amortization (277,623) (213,217)
----------- -----------
Net property, plant, equipment and leasehold improvements 553,898 583,604
Purchased technology, net of accumulated amortization of
$34,111 in 1997 and $28,089 in 1996 45,903 65,592
Other intangible assets, net of accumulated amortization of
$44,617 in 1997 and $38,382 in 1996 79,955 76,669
Investments in equity securities and affiliated companies:
Related parties 139,305 133,123
Unrelated parties 37,546 51,205
----------- -----------
176,851 184,328
Other assets:
Related parties 15,777 12,724
Unrelated parties 50,641 46,958
----------- -----------
66,418 59,682
----------- -----------
$ 1,768,478 $ 1,688,670
----------- -----------
----------- -----------
</TABLE>
(Continued)
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
14
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable $ 79,339 $ 96,157
Accrued compensation and related expenses 59,405 56,695
Short-term borrowings 154,700 137,467
Current portion of unearned revenue 13,361 19,638
Taxes payable 37,191 33,407
Other current liabilities 127,190 129,805
----------- -----------
Total current liabilities 471,186 473,169
Long-term debt:
Payable to Novartis 69,934 66,305
Unrelated parties 327,283 353,284
----------- -----------
397,217 419,589
Other noncurrent liabilities 26,130 31,057
----------- -----------
Total liabilities 894,533 923,815
----------- -----------
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;
175,659,000 outstanding (170,675,000 outstanding at
December 31, 1996) 1,757 1,707
Restricted common stock, $0.01 par value; 500,000 shares
authorized; none outstanding - -
Additional paid-in capital 1,853,591 1,774,406
Accumulated deficit (961,986) (1,032,554)
Cumulative foreign currency translation adjustment (27,804) (6,318)
Unrealized gain from investments 8,996 28,574
Notes receivable from stock sales (609) (960)
----------- -----------
Total stockholders' equity 873,945 764,855
----------- -----------
$ 1,768,478 $ 1,688,670
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
15
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales, net:
Related parties $ 40,426 $ 20,013 $ 21,483
Unrelated parties 798,915 784,896 724,419
---------- ---------- ----------
839,341 804,909 745,902
Equity in earnings of unconsolidated joint businesses 106,356 102,061 81,005
Collaborative agreement revenues:
Related parties 88,130 93,686 45,920
Unrelated parties 26,928 28,419 12,161
---------- ---------- ----------
115,058 122,105 58,081
Other revenues:
Related parties 43,624 32,387 11,156
Unrelated parties 57,679 40,378 28,127
---------- ---------- ----------
101,303 72,765 39,283
---------- ---------- ----------
Total revenues 1,162,058 1,101,840 924,271
---------- ---------- ----------
Expenses:
Cost of sales:
Related parties 25,758 18,658 20,132
Unrelated parties 328,885 323,373 308,312
---------- ---------- ----------
354,643 342,031 328,444
Research and development 375,955 352,472 327,887
Selling, general and administrative 316,822 310,664 279,892
Write-off of purchased in-process technologies - - 353,262
Costs related to Novartis transaction - - 45,254
Impairment loss on long-lived assets 31,300 - -
Restructuring and reorganization charges 3,336 - 22,108
Other operating expenses 4,795 6,410 4,742
---------- ---------- ----------
Total expenses 1,086,851 1,011,577 1,361,589
---------- ---------- ----------
Income (loss) from operations 75,207 90,263 (437,318)
Gain on sale of assets 18,597 - -
Gain on sale of interest in affiliated company - 12,226 -
Interest expense (33,257) (30,934) (30,212)
Other income, net 16,348 7,190 22,143
---------- ---------- ----------
Income (loss) from continuing operations before income taxes 76,895 78,745 (445,387)
Provision for income taxes 26,057 22,142 19,887
---------- ---------- ----------
Income (loss) from continuing operations 50,838 56,603 (465,274)
---------- ---------- ----------
Discontinued operations (Note 3):
Income (loss) from discontinued operations 5,224 (1,458) (47,189)
Gain on disposal of discontinued operations 15,157 - -
---------- ---------- ----------
Net income (loss) $ 71,219 $ 55,145 $ (512,463)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share:
Income (loss) from continuing operations $ 0.29 $ 0.33 $ (2.86)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) $ 0.41 $ 0.33 $ (3.15)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share - assuming dilution:
Income (loss) from continuing operations $ 0.29 $ 0.32 $ (2.86)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) $ 0.40 $ 0.31 $ (3.15)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
16
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE UNREALIZED NOTES
FOREIGN GAIN RECEIVABLE
COMMON STOCK ADDITIONAL CURRENCY (LOSS) FROM
----------------- PAID-IN ACCUMULATED TRANSLATION FROM STOCK
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS SALES TOTAL
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 33,379 $ 334 $1,161,942 $ (575,236) $ (1,719) $ (12,690) $ - $ 572,631
Issuance of common stock to
Novartis 6,600 66 407,484 - - - - 407,550
Capital contribution by Novartis - - 24,845 - - - - 24,845
Issuance of common stock and
stock options related to the
Viagene acquisition 916 9 91,393 - - - - 91,402
Exercise of stock options 670 6 32,009 - - - - 32,015
Tax benefits from employee
stock plans - - 912 - - - - 912
Exercise of warrants - - 97 - - - - 97
Employee stock purchase plan 173 2 9,029 - - - - 9,031
Foreign currency translation
adjustment - - - - 2,440 - - 2,440
Unrealized gain from
investments - - - - - 43,952 - 43,952
Loans to employees for
stock sales - - - - - - (351) (351)
Net loss - - - (512,463) - - - (512,463)
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
Balances at December 31, 1995 41,738 417 1,727,711 (1,087,699) 721 31,262 (351) 672,061
Exercise of stock options 2,219 22 25,083 - - - - 25,105
Tax benefits from employee
stock plans - - 1,398 - - - - 1,398
Exercise of warrants 61 - 1,570 - - - - 1,570
Employee stock purchase plan 1,443 15 19,897 - - - - 19,912
Additional shares issued in
four-for-one stock split 125,214 1,253 (1,253) - - - - -
Foreign currency translation
adjustment - - - - (7,039) - - (7,039)
Unrealized loss from
investments - - - - - (2,688) - (2,688)
Loans to employees for
stock sales - - - - - - (609) (609)
Net income - - - 55,145 - - - 55,145
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
Balances at December 31, 1996 170,675 1,707 1,774,406 (1,032,554) (6,318) 28,574 (960) 764,855
Exercise of stock options 3,632 36 41,235 - - - - 41,271
Tax benefits from employee
stock plans - - 17,923 - - - - 17,923
Employee stock purchase plan 1,352 14 20,027 - - - - 20,041
Foreign currency translation
adjustment - - - - (21,486) - - (21,486)
Unrealized loss from
investments - - - - - (19,578) - (19,578)
Collection of a loan to
employee for stock sales - - - - - - 351 351
Elimination of one-month lag in
reporting of Chiron Behring - - - (651) - - - (651)
Net income - - - 71,219 - - - 71,219
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
Balances at December 31, 1997 175,659 $1,757 $1,853,591 $ (961,986) $ (27,804) $ 8,996 $ (609) $ 873,945
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
------- ------ ---------- ----------- ----------- ----------- ---------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
17
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 71,219 $ 55,145 $(512,463)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 102,589 105,080 92,124
Impairment loss on long-lived assets 31,300 - -
Gain on sale of assets (18,597) - -
Gain on sale of equity securities and interest in affiliated company (5,541) (12,226) -
Write-off of purchased in-process technologies - - 365,286
Write-offs of property, plant, equipment and leasehold improvements 4,291 5,031 18,400
Reserves 30,046 16,895 11,321
Changes in estimated liabilities (17,596) - -
Deferred income taxes (20,556) 6,972 9,041
Tax benefits from employee stock plans 17,923 1,398 912
Undistributed earnings of affiliates (14,473) (6,841) (3,944)
Other, net 11,614 17,393 13,860
Changes, excluding effect of acquisitions, to:
Accounts receivable (12,974) (75,825) 2,000
Inventories (40,635) (48,545) (36,094)
Other current assets 8,355 (20,187) (21,462)
Accounts payable and accrued expenses (2,062) 11,427 7,719
Current portion of unearned revenue (5,907) (1,162) 5,979
Other current liabilities 5,890 1,921 21,808
Other noncurrent liabilities 4,626 6,253 1,115
--------- --------- ---------
Net cash provided by (used in) operating activities 149,512 62,729 (24,398)
--------- --------- ---------
Cash flows from investing activities:
Purchases of investments in marketable debt securities (219,522) (55,008) (158,533)
Proceeds from sale and maturity of investments in
marketable debt securities 120,306 143,922 334,117
Businesses acquired, net of cash acquired - (374) (112,633)
Capital expenditures (77,524) (120,162) (101,052)
Proceeds from sale of assets 29,928 - -
Proceeds from sale of equity securities and interest
in affiliated company 5,596 14,000 -
Purchases of investments in equity securities and affiliated companies (10,942) (130,308) (900)
Increase in other assets (16,804) (43,351) (12,494)
--------- --------- ---------
Net cash used in investing activities (168,962) (191,281) (51,495)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (payments) under line of credit arrangements - (12,606) 4,686
Proceeds from issuance of short-term debt 20,589 100,000 -
Proceeds from issuance of common stock 61,502 44,597 39,509
Proceeds from capital contribution from Novartis - - 24,845
Repayment of notes payable and capital leases (32,272) (9,643) (3,705)
--------- --------- ---------
Net cash provided by financing activities 49,819 122,348 65,335
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 30,369 (6,204) (10,558)
Cash and cash equivalents at beginning of the year 68,114 74,318 84,876
--------- --------- ---------
Cash and cash equivalents at end of the year $ 98,483 $ 68,114 $ 74,318
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of this statement.
18
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Chiron Corporation (the "Company" or "Chiron") develops, manufactures and
markets human healthcare products for the prevention, diagnosis and treatment
of disease utilizing innovations in biology and chemistry. Chiron
participates in three human healthcare markets: (i) diagnostics, including
blood screening tests, automated immunodiagnostic systems, critical blood
analyte systems and nucleic acid probe tests; (ii) therapeutics, with an
emphasis on oncology, serious infectious diseases and critical care diseases;
and (iii) adult and pediatric vaccines. Chiron also develops or acquires new
technologies, employing these technologies to discover new products for the
Company or for its partners. On December 29, 1997, Chiron completed the sale
of its ophthalmic business unit, Chiron Vision Corporation ("Chiron Vision"),
to Bausch & Lomb Incorporated (see Note 3).
PRINCIPLES OF CONSOLIDATION
The accompanying 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. Certain foreign subsidiaries and investments in affiliated companies
are accounted for either on a one-month or one-quarter lag.
FINANCIAL STATEMENT PRESENTATION
The accompanying Consolidated Statements of Operations for all periods presented
reflect the after-tax results of Chiron Vision as discontinued operations (see
Note 3). In addition, certain previously reported amounts have been
reclassified to conform with the current period presentation.
FOREIGN CURRENCY TRANSLATION
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 reflected in the
accompanying Consolidated Balance Sheets as "Cumulative foreign currency
translation adjustment," a component of stockholders' equity. The effect of
foreign currency exchange rate fluctuations on cash and cash equivalents
denominated in foreign currencies was not material.
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 1997, 1996 and 1995 fiscal years ended on
December 28, 1997, December 29, 1996 and December 31, 1995, respectively. Each
fiscal year was 52 weeks long. For presentation purposes, dates used in the
consolidated financial statements and notes refer to the fiscal month end.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the Company's consolidated financial statements
and notes. Actual results could differ materially from those estimates.
19
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments, including forward foreign currency contracts,
foreign currency option contracts and cross currency interest rate swaps, are
utilized by the Company to reduce foreign exchange and interest rate risks. 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. Chiron manages the risk of counterparty
default on its derivative financial instruments through the use of credit
standards, counterparty diversification and monitoring of counterparty financial
condition. Counterparties to these hedging agreements are major financial
institutions. Chiron has not experienced any losses due to counterparty
default. The Company's derivative financial instruments are not used for
trading or speculative purposes.
CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE DEBT SECURITIES
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 in marketable debt securities consist principally of
money market instruments which include corporate notes, corporate bonds,
commercial paper and government or government agency securities. Noncurrent
investments in marketable debt securities consist principally of corporate
notes, corporate bonds and government or government agency securities.
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 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 significant 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.
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 (see Note 3) 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>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 82,896 $ 94,875
Work in process 47,417 45,874
Raw materials 35,339 39,785
-------- --------
$165,652 $180,534
-------- --------
-------- --------
</TABLE>
20
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Depreciation on property, plant and equipment, including assets held under
capital leases, is computed using 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). Leasehold improvements are amortized on a straight-line basis over
the remaining fixed lease term or asset life, whichever is shorter.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
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 from continuing
operations for the years ended December 31, 1997, 1996 and 1995 was $8.6
million, $10.0 million and $10.8 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" in the accompanying Consolidated Statements of Operations.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), the Company reviews, as circumstances
dictate, the carrying amount of its intangible assets and manufacturing
facilities. 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. 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. 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.
REVENUE RECOGNITION
"Product sales, net" consist 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; revenue from the sale of equipment under
sales-type leases which is recognized at the inception of the lease; and revenue
from the sale of equipment under operating leases which is recognized upon
transfer of title to the equipment to a third party financing company. For
sales of Betaseron-Registered Trademark- (interferon beta-1b), the Company
recognizes a partial share of revenues upon shipment to its marketing partner
and an additional share upon the marketing partner's subsequent sale of
Betaseron-Registered Trademark-. Beginning July 1997, the contractual terms
under which Chiron recognizes Betaseron-Registered Trademark- revenue changed,
with a larger portion of revenues recognized when sales are realized by the
marketing partner, rather than upon Chiron's initial shipment.
"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 $79.5
million, $103.8 million and $51.8 million in 1997, 1996 and 1995, respectively.
"Other revenues" consist primarily of
21
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
product royalty payments under license agreements, fees for sales and
marketing services performed and grants from government agencies, and are
recognized when earned. "Other revenues" in 1997 also included $31.1 million
of revenue related to Chiron's co-promotion of Novartis AG's product
Aredia-Registered Trademark- (pamidronate disodium for injection) which was
recognized, in part, based on the percentage of effort expended.
MAJOR CUSTOMERS
As discussed in Notes 2 and 6, Novartis AG and its affiliates (collectively,
"Novartis"), successor to Ciba-Geigy Ltd. ("Ciba"), is a related party and
contributed 11 percent and 10 percent of total revenues in 1997 and 1996,
respectively. Novartis contributed less than 10 percent of total revenues in
1995. As discussed in Note 6, Johnson & Johnson ("J&J") and its affiliates are
related parties and collectively contributed 12 percent, 11 percent and 11
percent of total revenues in 1997, 1996 and 1995, respectively.
ADVERTISING
Advertising costs are expensed as incurred and totaled $9.3 million, $12.8
million and $5.8 million from continuing operations in 1997, 1996 and 1995,
respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. No provision is made for U.S. income taxes
applicable to undistributed earnings of foreign subsidiaries that are
indefinitely reinvested in foreign operations.
PER SHARE DATA
In accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), per share
data which excludes dilution is based on the weighted-average number of common
shares outstanding during the period. Per share data which assumes dilution is
based on the weighted-average number of common and dilutive potential common
shares outstanding. Dilutive potential common shares result from (i) the
assumed exercise of outstanding stock options, warrants and equivalents thereof
that have a dilutive effect when applying the treasury stock method; and (ii)
performance units (see Note 10) to the extent that dilutive shares are assumed
to be issuable if the contingency and reporting periods ended on the same date.
All prior-period per share data has been restated to conform with the provisions
of SFAS 128 subsequent to its adoption by the Company in the fourth quarter of
1997.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), the Company follows the existing accounting requirements for stock
options and other stock-based awards contained in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
However, the Company has provided in Note 10 the required pro forma disclosures
pursuant to SFAS 123.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes (including amounts attributable to
Chiron Vision) is as follows for the years ended December 31:
22
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest, net of amounts
capitalized $ 19,973 $ 19,354 $ 18,603
Income taxes $ 10,792 $ 14,505 $ 8,597
</TABLE>
Supplemental disclosure of noncash investing and financing activities, as
described in Note 2, is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisitions:
Fair value of assets
acquired $ - $ 2,143 $ 962,124
Liabilities assumed - (1,769) (289,025)
Acquisition costs - - (6,013)
Stock and options issued - - (498,952)
Carrying value of original
investment - - (14,130)
----------- ----------- -----------
Total cash paid $ - $ 374 $ 154,004
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS Nos. 130 and
131, "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), respectively
(collectively, the "Statements"). The Statements are effective for fiscal years
beginning after December 15, 1997. SFAS 130 establishes standards for reporting
of comprehensive income and its components in annual financial statements. SFAS
131 establishes standards for reporting financial and descriptive information
about an enterprise's operating segments in its annual financial statements and
selected segment information in interim financial reports. Reclassification or
restatement of comparative financial statements or financial information for
earlier periods is required upon adoption of SFAS 130 and SFAS 131,
respectively. Application of the Statements' disclosure requirements will have
no impact on the Company's consolidated financial position, results of
operations or earnings per share data as currently reported.
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 45 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 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 Chiron common shares and a
cash payment of $23.5 million.
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
23
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
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.
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 and pediatric vaccines and
insulin-like growth factor-1 ("IGF-1"). In return, Novartis will receive an
interest in a stream of royalties from future worldwide sales of certain
adult and pediatric vaccines and IGF-1. In addition, Novartis will receive
an interest in promotional rights, in countries other than in North America
and Europe, for certain adult vaccines. In December 1997, Chiron and Novartis
amended the Research Funding Agreement to add herpes simplex virus thymidine
kinase ("HSV-tk") and Factor VIII gene therapy to the funded projects. In
return, Novartis will receive a royalty stream from future worldwide sales of
certain HSV-tk and Factor VIII gene therapy products. Royalties on all
specified products will be paid for a minimum of 10 years from the later of
October 1, 2001 or the date of the first commercial sale of individual
products covered by the Research Funding Agreement, as amended. Further, such
royalty payments will continue until Novartis has received an aggregate
amount equal to the sum of all research and development funding provided by
Novartis plus interest thereon from the date of payment at a rate equal to
the London Interbank Offered Rate ("LIBOR"). Annual funding amounts will not
exceed $62.3 million in 1998 and $50.3 million (plus any unused portion of
the funding limit for 1998) in 1999.
Under the terms of the Research Funding Agreement, as amended, 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 $53.3 million, $72.0 million and $27.0 million of
funding from Novartis during 1997, 1996 and 1995, respectively, as components of
"Collaborative agreement revenues" in the accompanying Consolidated Statements
of Operations. At December 31, 1997 and 1996, $3.0 million and $20.0 million,
respectively, were due from Novartis under the Research Funding Agreement, as
amended. Chiron anticipates receiving substantial additional funding from
Novartis in future periods under this funding arrangement.
Certain guarantees stated within the Agreements were modified on November 27,
1996 in conjunction with a consent and agreement that resolved the Federal Trade
Commission's review of the Ciba and Sandoz Ltd. merger that 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 HSV-tk gene in the field of gene therapy. As partial consideration,
Novartis will pay the Company up to an aggregate of $60.0 million through 2001,
$15.0 million of which was recognized in 1997 as a component of "Collaborative
agreement revenues" in the accompanying Consolidated Statements of Operations.
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 expired in March 1997 and provided for sole promotional rights
in the U.S. with respect to Novartis' product Aredia-Registered Trademark-.
Under the
24
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
exclusive agreement which expired in March 1997, Chiron recognized
Aredia-Registered Trademark- sales fees, included as components of "Other
revenues" in the accompanying Consolidated Statements of Operations, of $12.5
million, $30.2 million and $6.7 million in 1997, 1996 and 1995, respectively.
The November 1996 agreement provided that Chiron, through a co-promotion
arrangement with Novartis, would promote Aredia-Registered Trademark- for two
years after a six-month transitional period beginning April 1997. Chiron
recognized $31.1 million of revenue in 1997, also included as a component of
"Other revenues" in the accompanying Consolidated Statements of Operations,
related to Aredia-Registered Trademark- co-promotion services provided to
Novartis. In December 1997, the co-promotion arrangement with Novartis was
modified such that Chiron will no longer promote Aredia-Registered Trademark-
after April 3, 1998. Revenue to be recognized by Chiron in the first quarter
of 1998 will approximate $9.2 million plus a percentage of Aredia-Registered
Trademark- sales in the first quarter of 1998 in excess of a specified
amount. Revenue to be recognized by Chiron in the second quarter of 1998
will approximate $0.6 million. At December 31, 1997 and 1996, $19.4 million
and $13.4 million, respectively, were due from Novartis under the
Aredia-Registered Trademark- arrangements. Amounts due from Novartis are
payable to Chiron through the first quarter of 2000.
Novartis and Chiron also agreed to extend the deadline for payment of the
repurchase amount under the Research Funding Agreement, as amended, 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).
In addition, should Chiron elect to replace certain existing convertible debt,
Novartis agreed to provide additional guarantees totaling $200.0 million for
such purposes.
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 Acquisitions, 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 which
totaled $49.4 million resulted from employee payments and related taxes, and
legal and investment advisor
25
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
fees. Novartis agreed to reimburse the Company $24.8 million for a portion of
the employee payments, and such reimbursement was recorded as a capital
contribution. Other purchased intangible assets of approximately $25.6 million,
consisting of base technology, were offset by $2.3 million, $8.8 million and
$8.1 million of charges in lieu of taxes (see Note 13) in 1997, 1996 and 1995,
respectively, with the remaining base technology being amortized over 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.
ACQUISITION OF VIAGENE, INC. ("VIAGENE")
On September 29, 1995, Chiron acquired all of the outstanding common stock of
Viagene, not previously owned by the Company, in exchange for approximately
$35.5 million in cash and 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 was 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 at September 29, 1995.
The Viagene acquisition was 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 on 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>
Chiron recognized as an expense the amount of the purchase price allocated to
purchased in-process technology, resulting 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.
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 by Chiron Vision, a discontinued
operation (see Note 3). Accordingly, IOLAB's results of operations, net of
applicable income taxes, are included as a component of "Income (loss) from
discontinued operations" in the accompanying Consolidated Statements of
Operations from the date of purchase. The purchase price was allocated to the
acquired assets and assumed liabilities based on their estimated fair value on
the acquisition date. The fair value of the net assets 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:
26
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
<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, as
well as additional charges totaling $16.9 million for IOLAB restructuring and
integration-related expenses, are included, net of applicable income taxes, as
components of "Income (loss) from discontinued operations" in the accompanying
Consolidated Statements of Operations in 1995. Other purchased intangible
assets of approximately $46.5 million, consisting of base technology, goodwill,
trade name and a customer list, are being amortized by Chiron Vision over their
estimated useful lives of 10 to 15 years using the straight-line method.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information presents the results of continuing
operations of Chiron and Viagene for the year ended December 31, 1995, with pro
forma adjustments as if the Viagene acquisition had been consummated as of
January 1, 1995. This pro forma information does not purport to be indicative
of what would have occurred had the acquisition been made as of that date or of
results which may occur in the future. In addition, the pro forma information
does not include the write-off of purchased in-process technology related to the
Viagene acquisition of $130.3 million. The unaudited pro forma information is
as follows for the year ended December 31:
<TABLE>
<CAPTION>
1995
-------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C>
Total revenues $ 931,229
Loss from continuing operations before
non-recurring charge (352,368)
Pro forma earnings per share data:
Loss from continuing operations before
non-recurring charge (2.17)
Loss from continuing operations before
non-recurring charge - assuming dilution (2.17)
</TABLE>
AGREEMENT WITH HOECHST AG, SUCCESSOR TO BEHRINGWERKE AG
Effective July 1, 1996, Chiron purchased a 49 percent interest in the human
vaccine business of Behringwerke AG. 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 is 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 Hoechst AG has the option to require Chiron to acquire the
remaining 51 percent interest in March 2001. In February 1998, Chiron gave
notice to Hoechst AG that the
27
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
Company intends to exercise its option to purchase the remaining 51 percent
interest in the joint venture in Chiron's second fiscal quarter of 1998 for
approximately 210.7 million Deutsche marks. During the period of mutual
ownership, Chiron and Hoechst AG are operating the vaccine business as a
joint venture, which has been named Chiron Behring GmbH & Co. ("Chiron
Behring"). The joint venture pays to Hoechst 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. No
annual royalty was payable to Hoechst AG in 1997.
In 1997 and 1996, Chiron recognized $13.8 million and $4.2 million,
respectively, as its share of the joint venture's results, which includes
amortization of the aforementioned intangible assets, as a component of "Equity
in earnings of unconsolidated joint businesses" in the accompanying Consolidated
Statements of Operations. Chiron Behring, which was previously reported on a
one-month lag, was brought current in December 1997. As a result, Chiron's
equity in earnings of Chiron Behring of approximately ($0.7) million for the
month of December was recorded as a component of "Accumulated deficit" at
December 31, 1997 in the accompanying Consolidated Balance Sheets.
Summarized financial information for Chiron Behring, which excludes Chiron's
amortization of intangibles, as of and for the year ended December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
SUMMARIZED BALANCE SHEET INFORMATION:
Current assets $ 110,799
Noncurrent assets 9,986
Current liabilities 26,522
Noncurrent liabilities 7,308
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
SUMMARIZED STATEMENT OF OPERATIONS
INFORMATION:
Net sales $ 173,454
Gross profit 105,827
Income from continuing operations
before extraordinary items and
cumulative effect of a change
in accounting principle 35,530
Net income 35,530
</TABLE>
NOTE 3 - DISCONTINUED OPERATIONS
On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision, a wholly owned subsidiary, to Bausch & Lomb
Incorporated ("B&L") for $300.0 million in cash, subject to certain post-closing
adjustments. The sale was completed under the terms of a Stock Purchase
Agreement (the "Agreement"), dated as of October 21, 1997, between Chiron and
B&L. In accordance with APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
Chiron Vision is reported as a discontinued operation for all periods presented
in the accompanying Consolidated Statements of Operations. Chiron Vision's cash
and cash equivalents totaling $2.7 million, certain Chiron Vision real estate
assets (the "real estate assets") with a carrying value of $25.1
28
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
million and Chiron Vision's future noncancelable operating lease costs totaling
$1.1 million were retained by the Company upon completion of the sale. For a
period of three years following the completion of the sale, Chiron Vision has
the right to use the currently occupied portion of the real estate assets on a
rent-free basis. The real estate assets, to be recorded by Chiron at their
estimated fair values less cost to sell, will be reflected in the Company's
consolidated balance sheet at March 31, 1998 as assets held for sale.
Additionally, the Company has agreed to provide customary indemnities under the
terms of the Agreement.
Chiron Vision recognized total revenues of $212.7 million, $211.0 million and
$177.0 million in 1997, 1996 and 1995, respectively. "Income (loss) from
discontinued operations" in the accompanying Consolidated Statements of
Operations is reported net of income tax provisions of $6.4 million, $2.7
million and $1.8 million in 1997, 1996 and 1995, respectively, and includes
approximately $3.8 million of net income from operations recognized by Chiron
Vision from October 21, 1997 to December 28, 1997. Direct transaction costs of
$0.3 million were deferred at December 31, 1997 and included as a component of
"Other current assets" in the accompanying Consolidated Balance Sheets.
The accompanying Consolidated Balance Sheets include the net assets of
discontinued operations, including the real estate assets, as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net $ 48,073 $ 48,268
Inventories 37,944 43,577
Property, plant, equipment and
leasehold improvements, net 47,634 48,800
Purchased technology, net 25,068 28,588
Other intangible assets, net 41,567 45,175
Accounts payable and other current
liabilities (38,343) (42,789)
Other assets and liabilities, net 5,025 7,471
----------- -----------
$ 166,968 $ 179,090
----------- -----------
----------- -----------
</TABLE>
Management's current best estimate indicates that a net gain will be realized
from the sale of Chiron Vision. In accordance with Emerging Issues Task Force
Issue No. 93-17, "Recognition of Deferred Tax Assets for a Parent Company's
Excess Tax Basis in the Stock of a Subsidiary That Is Accounted for as a
Discontinued Operation" ("EITF 93-17"), Chiron recognized a net deferred tax
asset and a corresponding deferred tax benefit of $15.2 million in the fourth
quarter of 1997, which is reflected in the accompanying Consolidated Statements
of Operations as "Gain on disposal of discontinued operations." The recognition
of this net deferred tax asset in the fourth quarter of 1997 will have the
effect of reducing the actual net gain recognized by Chiron in the first quarter
of 1998 by a corresponding amount.
Income (loss) per common share from discontinued operations was $0.12, ($0.00)
and ($0.29) for the years ended December 31, 1997, 1996 and 1995, respectively.
Income (loss) per common share from discontinued operations, assuming dilution,
was $0.11, ($0.01) and ($0.29) for the years ended December 31, 1997, 1996 and
1995, respectively.
29
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 4 - IMPAIRMENT LOSS ON LONG-LIVED ASSETS
During 1997, the cumulative impact on the Company's manufacturing needs of
recent product developments prompted management to conclude that Chiron
currently has excess manufacturing capacity relative to its projected needs.
Specifically, management concluded that the Company's need for its idle
pharmaceutical fill and finishing facility in Puerto Rico (the "Puerto Rico
facility"), originally outfitted as a second manufacturing site of
Betaseron-Registered Trademark-, was eliminated due to manufacturing process
improvements and the cumulative impact of the introduction of a competing
product in the second quarter of 1996. In September 1997, management determined
that it could not find a suitable use for the Puerto Rico facility consistent
with its previous expectations for the facility's use as a contract
manufacturing plant. As a result, the Company reviewed the carrying amount of
the Puerto Rico facility and related machinery and equipment assets for
impairment in accordance with SFAS 121. Consequently, during the third quarter
of 1997, the Company recorded a $31.3 million impairment loss to record the
Puerto Rico facility and related machinery and equipment assets at their
individual estimated fair market values, determined on the basis of independent
appraisals.
NOTE 5 - RESTRUCTURING AND REORGANIZATION CHARGES
During 1995, Chiron recorded $22.1 million in restructuring and
reorganization charges, representing write-downs of certain previously
capitalized costs. Of the total charge of $22.1 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
Puerto Rico facility (see Note 4). The majority of these facility-related
charges, as well as $3.7 million of other facility-related costs, were paid
in 1995. Employee termination costs related to the Company's 1995
restructuring were not significant.
During 1997, Chiron commenced a restructuring of certain of its operations
and recorded a restructuring and reorganization charge of $3.3 million,
consisting primarily of employee termination and other costs related to the
closure of Chiron Diagnostics' electrophoresis business and to the sale of
its Quality Controls business (see Note 14).
At December 31, 1997, the accrual for restructuring and reorganization charges
totaled $6.9 million. Liabilities associated with the 1997 restructuring and the
remaining accrual for the Puerto Rico facility are expected to be substantially
settled during 1998. The current status of the accrued restructuring charges is
summarized as follows:
30
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 5 - RESTRUCTURING AND REORGANIZATION CHARGES (CONTINUED)
<TABLE>
<CAPTION>
AMOUNT OF AMOUNT AMOUNT TO
TOTAL UTILIZED BE UTILIZED
RESTRUCTURING THROUGH IN FUTURE
CHARGE DEC. 31, 1997 PERIODS
------------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
1995 RESTRUCTURING AND REORGANIZATION CHARGES:
Puerto Rico facility $ 7,650 $ (4,009) $ 3,641
Postponement of Emeryville facility
expansion 7,990 (7,990) -
Amsterdam manufacturing facilities 1,000 (1,000) -
Other facility-related costs 3,718 (3,718) -
Other 1,750 (1,696) 54
---------- ---------- ----------
$ 22,108 $ (18,413) 3,695
---------- ---------- ----------
---------- ----------
1997 RESTRUCTURING AND REORGANIZATION CHARGES:
Employee-related costs $ 2,420 $ - 2,420
Other 916 (174) 742
---------- ---------- ----------
$ 3,336 $ (174) 3,162
---------- ---------- ----------
---------- ----------
$ 6,857
----------
----------
</TABLE>
NOTE 6 - COLLABORATIONS, JOINT BUSINESS ARRANGEMENT AND RELATED PARTY
TRANSACTIONS
COLLABORATIONS
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. 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 will
also be required to make payments under certain of these agreements upon
achievement of specified milestones. Aggregate annual funding commitments under
collaborative arrangements, inclusive of commitments to Hyseq, Inc. discussed
below, are $9.6 million in 1998, $6.0 million in 1999, $3.0 million in 2000 and
insignificant amounts thereafter. Chiron, under certain of the arrangements,
has also purchased equity securities of the collaborative partner.
HYSEQ, INC. ("HYSEQ") In May 1997, the Company entered into an agreement with
Hyseq to collaborate in the identification of genetic targets for the
development of pharmaceutical treatments for cancer. Subject to the
collaboration and in return for a license and other rights, Chiron made an
initial payment of $1.0 million, which was recorded as research and development
expense during the second quarter of 1997. In addition, the Company is
obligated to fund allowable research costs, in amounts not less than $8.5
million in the first year and $5.5 million in each of the second and third years
of the collaboration term, incurred by Hyseq in performing research requested by
Chiron. In addition to the initial payment described above, $4.3 million of
funding was recognized as research and development expense by the Company in
1997. Certain additional payments may be required by Chiron upon achievement of
specified milestones. Hyseq will also receive a royalty from any commercial
sales of products resulting from the collaboration. Pursuant to the terms of
the agreement, Chiron made an investment of $7.5 million in the
31
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6 - COLLABORATIONS, JOINT BUSINESS ARRANGEMENT AND RELATED PARTY
TRANSACTIONS (CONTINUED)
equity securities of Hyseq during 1997, which is accounted for under the cost
method and is reflected as a component of "Investments in equity securities and
affiliated companies" in the accompanying Consolidated Balance Sheets.
JOINT BUSINESS ARRANGEMENT AND RELATED PARTY TRANSACTIONS
DIAGNOSTIC JOINT BUSINESS
In 1989, Chiron entered into an agreement with Ortho Diagnostic Systems, Inc.
("Ortho"), a J&J company, 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"), Pasteur Sanofi Diagnostics, International Murex Technologies
Corporation and Genelabs Diagnostic, Inc. 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 (the "final
annual accounting"), and profit sharing distributions are payable to Chiron
within 90 days after the end of each quarter. At December 31, 1997 and 1996,
$22.8 million and $24.4 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 in 1997 was $92.9 million, which includes $0.8 million
from the final annual accounting for 1996. In 1996, Chiron recognized
$95.8 million, which includes $3.8 million from the final annual accounting for
1995 and $6.9 million from a settlement with Abbott related to prior period
sales by Abbott of human immunodeficiency virus (HIV) immunodiagnostic tests.
In 1995, Chiron recognized $76.9 million, which includes $1.8 million from the
final annual accounting for 1994. Revenues recognized under the cost
reimbursement portion of the agreement with Ortho for collaborative research
were $7.1 million, $8.6 million and $9.6 million in 1997, 1996 and 1995,
respectively. Revenues recognized under the cost reimbursement portion of the
agreement with Ortho for product sales were $20.1 million, $15.0 million and
$16.1 million in 1997, 1996 and 1995, respectively.
GENELABS TECHNOLOGIES, INC. ("GENELABS") In March 1995, the Company reached
an agreement with Genelabs whereby Chiron and Genelabs cross-licensed certain
rights to viral diagnostic tests. Under the agreement, Chiron acquired
certain rights to develop and market diagnostic products for the detection of
related viruses. In return, Genelabs acquired development and marketing
rights in Asia, except Japan, for certain products incorporating Chiron's HCV
technology. Ortho 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 $5.0 million in up front license fees, up to
$9.0 million in development milestones and a total of $10.0 million in equity
investments. Chiron paid Genelabs a total of $8.5 million during 1995 related
to the collaboration. Of this total, $2.1 million was recorded as an
investment in equity securities and $6.4 million was recorded as research and
development expense. No amounts were incurred in either 1997 or 1996 related
to this collaboration.
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
32
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 6 - COLLABORATIONS, JOINT BUSINESS ARRANGEMENT AND RELATED PARTY
TRANSACTIONS (CONTINUED)
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 connection with the agreement, Chiron recognized $10.2 million,
$9.4 million and $5.5 million of "Collaborative agreement revenues" in the
accompanying Consolidated Statements of Operations in 1997, 1996 and 1995,
respectively. At December 31, 1997, $7.5 million was due from Novartis under
this agreement.
NEW YORK UNIVERSITY ("NYU") In March 1995, the Company reached an agreement
with NYU under which Chiron agreed to support research at NYU, received an
exclusive license to commercialize a potential optical mapping instrument and,
together with its licensee, Novartis, received a non-exclusive royalty free
license to use optical mapping in connection with the development of other
products. 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 of
certain research facilities at NYU. Novartis made further research payments to
NYU. Chiron has elected to terminate the exclusive license with respect to the
optical mapping instrument, as well as support of the research program at NYU,
effective March 31, 1998. Expenses incurred by Chiron in 1997 and 1996 related
to this collaboration were not significant.
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 United States. 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 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, with principal
amounts of $5.0 million and $11.0 million, to BPC and its subsidiaries with
various maturities. Concurrent with BPC's repayment of the $5.0 million
interest-bearing loan in January 1997, Chiron advanced this same amount to BPC
as a prepayment for future distribution and promotional services. Chiron agreed
to make additional capital contributions, to be used by BPC to repay the $11.0
million interest-bearing loan, in the event BPC exceeds certain earnings
requirements. Pursuant to this agreement, a capital contribution of $5.1
million was made by Chiron in 1997, which was used by BPC to repay a portion of
the remaining loan balance.
In 1997 and 1996, Chiron recognized $0.7 million and $0.2 million,
respectively, as its share of BPC's earnings, which include amortization of
the aforementioned excess purchase price, as components of "Equity in
earnings of unconsolidated joint businesses" in the accompanying Consolidated
Statements of Operations. Chiron's share of BPC's results are reported on a
one-quarter lag.
33
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("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>
1997 1996
-------------------------------------------- ------------------------------------------
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 $ 22,606 $ 8 $ (37) $ 22,577 $ 30,179 $ 17 $(151) $ 30,045
Mortgage-backed 1,998 - (1) 1,997 7,913 22 (1) 7,934
Corporate debt 180,132 12 (132) 180,012 32,803 2 (92) 32,713
-------- ------- -------- -------- -------- ------- ----- --------
204,736 20 (170) 204,586 70,895 41 (244) 70,692
Equity 21,804 12,529 (3,383) 30,950 17,665 28,777 - 46,442
-------- ------- -------- -------- -------- ------- ----- --------
$226,540 $12,549 $ (3,553) $235,536 $ 88,560 $28,818 $(244) $117,134
-------- ------- -------- -------- -------- ------- ----- --------
-------- ------- -------- -------- -------- ------- ----- --------
</TABLE>
These securities are classified in the accompanying Consolidated Balance Sheets
as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash equivalents $ 44,597 $ 9,971
Short-term investments in marketable debt securities 84,588 38,694
Noncurrent investments in marketable debt securities 75,401 22,027
Investments in equity securities and affiliated companies 30,950 46,442
----------- ----------
$ 235,536 $ 117,134
----------- ----------
----------- ----------
</TABLE>
The cost and estimated fair value of available-for-sale debt securities by
contractual maturity consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
ADJUSTED FAIR
COST VALUE
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due within one year $ 161,753 $ 161,655
Due in one to three years 40,985 40,934
----------- ----------
202,738 202,589
Mortgage-backed securities 1,998 1,997
----------- ----------
$ 204,736 $ 204,586
----------- ----------
----------- ----------
</TABLE>
The proceeds received from the sale and maturity of securities held as
available-for-sale were $120.3 million, $143.9 million and $334.1 million
during 1997, 1996 and 1995, respectively. During 1997, the gross realized
gains on sales of securities held as available-for-sale were $5.5 million.
The gross realized losses during 1997 and 1996, and the gross realized gains
during 1996, 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. The cost of securities sold is based on the specific
identification method for debt securities and on the average cost method for
equity securities. The change
34
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
in the net unrealized holding gain (loss) on available-for-sale securities,
included as a separate component of stockholders' equity, was ($19.6) million,
($2.7) million and $44.0 million for 1997, 1996 and 1995, respectively.
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>
1997 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ON-BALANCE SHEET FINANCIAL INSTRUMENTS:
Nonmarketable equity investments
(accounted for under the cost method) $ 6,596 $ 9,694 $ 4,763 $ 9,003
Notes receivable 14,697 14,497 20,478 20,518
Deposits 4,449 3,936 3,549 3,413
Due from cross currency interest rate swaps 19,236 15,807 4,018 3,543
Due from forward foreign currency contracts 569 569 - -
Long-term debt:
Convertible subordinated debentures 327,243 334,078 319,713 325,293
Notes payable 67,062 67,062 65,964 65,964
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Foreign currency option contracts - 2,929 - -
Cross currency interest rate swaps - 16,002 - (1,090)
</TABLE>
The fair value estimates provided above are based on information available at
December 31, 1997 and 1996. Considerable judgment is required in interpreting
market data to develop the estimates of fair value. As such, these estimated
fair values are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
The fair value of nonmarketable equity investments that are accounted for
under the cost method is primarily based on estimated market prices
determined by a broker. The carrying values of variable rate notes receivable
and notes payable approximate fair value due to the market-based nature of
these instruments. The fair value of the deposits is based on the discounted
value of expected future cash flows using current rates for assets with
similar maturities. The fair value of the receivables from cross currency
interest rate swaps is based on the discounted value of expected future cash
flows using current rates. The carrying value of the receivables from forward
foreign currency contracts approximates fair value based on the short-term
nature of these contracts. 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 values of the foreign currency option
contracts and the cross currency interest rate swaps are based on estimated
market prices, determined by a broker.
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.
35
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FOREIGN CURRENCY CONTRACTS A significant portion of the Company's operations
consists 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.
Forward foreign currency contracts ("forwards"), generally with average
maturities of three months or less, are used to hedge material foreign currency
denominated receivables and payables. Forwards are generally marked to market
at the end of each quarter with gains or losses recorded as a component of
"Other income, net," in the accompanying Consolidated Statements of Operations
to offset gains or losses on foreign currency denominated receivables and
payables. Outstanding notional amounts of the Company's forwards were $46.1
million and $70.9 million at December 31, 1997 and 1996, respectively.
Foreign currency transaction gains and (losses) from continuing operations, net
of the impact of hedging, were a net ($2.3) million in 1997, ($3.0) million in
1996 and were not significant in 1995.
The Company purchases foreign currency option contracts ("options") to reduce
the exchange rate impact of a strengthening U.S. dollar on the underlying
hedged amounts. These contracts are designated and effective as hedges of a
portion of probable foreign currency exposure on anticipated intercompany
inventory purchases over the next twelve months by subsidiaries with
functional currencies other than the U.S. dollar. The cost of the options,
which is recorded as a component of "Other current assets" in the
accompanying Consolidated Balance Sheets, is deferred and amortized over the
relevant term of the period hedged. The Company's financial exposure is
limited to the amount paid for the options. Any resulting gains from these
option contracts are deferred until the designated intercompany transactions
are recorded, and are recognized as a component of "Other income, net" in the
accompanying Consolidated Statements of Operations. In the event that the
Company no longer anticipates a particular underlying exposure, the related
option contract will be terminated and the gain or loss associated with the
option contract will be recognized immediately. Outstanding notional amounts
of the Company's options were $111.3 million at December 31, 1997. No
options were outstanding at December 31, 1996.
CROSS CURRENCY INTEREST RATE SWAPS The Company selectively enters into cross
currency interest rate swaps ("swaps") with major financial institutions to
modify the interest and/or currency characteristics of certain assets and
liabilities. 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 a component of "Other income, net" in the
accompanying Consolidated Statements of Operations. The related interest
amount payable or receivable from the major financial institutions is
included as a component of other current liabilities or assets. Outstanding
notional amounts of the Company's swaps were $139.1 million and $137.5
million at December 31, 1997 and 1996, respectively, as discussed below.
In June 1997, the Company entered into a swap agreement that matures in June
2002 with a notional amount of $26.5 million. The Company effectively created a
fixed rate yen-denominated liability in order to fix the interest charges of its
wholly owned Japanese subsidiary. The agreement provides for the Company to
make quarterly interest payments based on a fixed Japanese yen rate of
approximately 2.1 percent while receiving interest based on a variable rate tied
to three-month U.S. dollar LIBOR (5.7 percent at December 31, 1997). This
agreement substantially represents the extension of a swap agreement, which
matured in June 1997, with a notional amount of $24.9 million.
36
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 created a fixed rate Deutsche mark liability to fund certain
Deutsche mark assets. The agreements provide for the Company to make quarterly
interest payments based on a fixed Deutsche mark rate of 6.2 percent while
receiving interest based on a variable rate tied to three-month U.S. dollar
LIBOR plus 0.5 percent (6.2 percent at December 31, 1997).
NOTE 8 - DEBT OBLIGATIONS AND CAPITAL LEASES
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
1.9 percent convertible subordinated debentures $236,202 $230,587
5.25 percent convertible subordinated debentures 91,041 89,126
Capital lease obligations 4,316 34,999
Note payable to Novartis 60,566 57,159
Other notes payable 9,347 10,734
-------- --------
401,472 422,605
Less current portion (4,255) (3,016)
-------- --------
$397,217 $419,589
-------- --------
-------- --------
</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 34.6 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 $9.4 million and $9.1 million were held by
Novartis at December 31, 1997 and 1996, 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 At December 31, 1997 and 1996, the gross amount of
land, buildings and equipment leased under noncancelable capital leases,
exclusive of amounts related to discontinued operations, totaled $7.1 million
and $20.0 million, respectively, and accumulated depreciation totaled $3.4
million and $7.0 million, respectively. Future payments under capital lease
obligations of continuing operations (including interest of approximately
$1.1 million) are as follows: 1998-$1.5 million, 1999-$0.7 million,
2000-$0.5 million, 2001-$0.5 million, 2002-$0.5 million and $1.2 million
thereafter.
37
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 8 - DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
In January 1997, the Company purchased, for $29.8 million, a manufacturing
facility and other related buildings located in Emeryville, California that it
had previously leased under a capital lease agreement.
NOTES PAYABLE
The note payable to Novartis for approximately $60.6 million at December 31,
1997 was assumed by the Company in its acquisition of Chiron Diagnostics. The
note bears interest at a variable rate (approximately 6.0 percent at
December 31, 1997) based on LIBOR and is due in 2000 together with accrued
interest.
At December 31, 1997, exclusive of amounts related to discontinued
operations, the Company had various other notes payable with an average
interest rate of 5.2 percent and maturities ranging from 1998 through 2014.
Future maturities of notes payable of continuing operations are as follows:
1998-$1.5 million, 1999-$1.5 million, 2000-$1.7 million, 2001-$1.7 million,
2002-$0.2 million and $1.4 million thereafter.
SHORT-TERM BORROWINGS
Short-term borrowings totaled $154.7 million at December 31, 1997, consisting of
borrowings of $100.0 million under the Company's U.S. credit facilities,
$54.6 million under the Company's credit facilities outside the U.S. and a
$0.1 million obligation to Novartis. In January 1998, the $100.0 million of
borrowings outstanding under the Company's U.S. credit facilities was repaid by
Chiron from a portion of the cash proceeds from the sale of Chiron Vision (see
Note 3).
Under 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 and provide for various
borrowing rate options, as defined in the agreements. At December 31, 1997, the
interest rate on the outstanding borrowings (approximately 5.8 percent at
December 31, 1997) was tied to U.S. dollar LIBOR. One of these credit
facilities, which allows for borrowings of up to $100.0 million, matures in
February 2003. The other credit facilities, which allow for aggregate
additional borrowings of up to $100.0 million, were consolidated into a single
credit facility maturing in March 1999.
Additionally, the Company has credit facilities available outside the U.S. that
allow for total borrowings of $130.2 million at December 31, 1997. These
revolving facilities are unsecured and are primarily maintained for Chiron
Diagnostics and Chiron S.p.A. At December 31, 1997, the average interest rate
on the outstanding borrowings was 6.2 percent.
NOTE 9 - 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 from continuing operations was $26.2 million,
$26.5 million and $23.1 million in 1997, 1996 and 1995, respectively, under
these leases.
Future minimum lease payments under these leases, exclusive of amounts
related to discontinued operations, are as follows: 1998-$23.3 million,
1999-$18.9 million, 2000-$13.8 million, 2001-$10.7 million, 2002-$9.5 million
and $29.3 million thereafter.
Additionally, in June 1996, the Company entered into a seven-year operating
lease agreement with a group of
38
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 on the total construction
costs incurred. Assuming a current interest rate of 6.0 percent and that
construction is completed on schedule, future minimum lease payments would be
$11.7 million annually, beginning in the third 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 SFAS No. 13, "Accounting for Leases." The
current portion of the net investment in sales-type leases is included as a
component of "Accounts receivable" and the long-term portion is included as a
component of "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>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Minimum rentals receivable $ 27,911 $ 36,314
Less allowance for uncollectible amounts (54) -
-------- --------
Net minimum rentals receivable 27,857 36,314
Less unearned interest income (2,496) (3,127)
-------- --------
Net investment in sales-type leases $ 25,361 $ 33,187
-------- --------
-------- --------
</TABLE>
Included in the net investment in sales-type leases are deferred service
revenues of $4.9 million and $6.3 million at December 31, 1997 and 1996,
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, 1997 are
as follows: 1998-$12.1 million, 1999-$8.3 million, 2000-$5.1 million,
2001-$1.9 million and 2002-$0.5 million.
CETUS HEALTHCARE LIMITED PARTNERSHIPS
In 1987 and 1990, Cetus and its affiliate, EuroCetus International N.V.,
exercised their options to repurchase all of the limited partnership
interests in Cetus Healthcare Limited Partnership ("CHLP") and Cetus
Healthcare Limited Partnership II ("CHLP II"). Under the CHLP purchase
agreements, which expire December 31, 2001, the Company is obligated to pay
royalties on sales of certain therapeutic products in the U.S. and certain
diagnostic products worldwide, as well as a portion of license, distribution
or other fees with respect to such products, to the former limited partners
of CHLP. Under the CHLP II purchase agreements, which expire December 31,
2005, the Company is obligated to pay royalties and a portion of other income
with respect to sales of certain products in Europe to the former limited
partners of CHLP II. Because of the inherent uncertainties as to the
likelihood of any product specified in the agreements continuing to be
commercially viable, the Company is unable to estimate future costs subject
to this obligation.
39
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER COMMITMENTS
The Company has various commitments for capital expenditures totaling
approximately $2.7 million at December 31, 1997. The majority of these
commitments are for computer system upgrades and enhancements. The Company also
has performance bonds outstanding in the amount of $3.5 million at December 31,
1997, 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 $29.6 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 10 - STOCKHOLDERS' EQUITY
STOCK SPLIT
In 1996, Chiron's Board of Directors declared a 4-for-1 stock split,
distributed on August 2, 1996, effected in the form of a dividend on the
Company's common stock 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.
STOCK COMPENSATION PLANS
At December 31, 1997, the Company has four stock-based compensation plans, which
are described below. The Company applies APB 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.
Had compensation cost for the Company's other stock-based plans been
determined based on 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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Net income (loss) - in thousands
As reported $ 71,219 $ 55,145 $ (512,463)
Pro forma $ 46,318 $ 27,579 $ (529,759)
Net income (loss) per share
As reported $ 0.41 $ 0.33 $ (3.15)
Pro forma $ 0.27 $ 0.16 $ (3.26)
Net income (loss) per share -
assuming dilution
As reported $ 0.40 $ 0.31 $ (3.15)
Pro forma $ 0.26 $ 0.16 $ (3.26)
</TABLE>
40
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
FIXED STOCK OPTION PLAN
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.
At the annual meeting of stockholders in May 1997, the stockholders approved an
amendment to the Company's stock option plan, increasing the maximum number of
shares that may be issued by 13.0 million shares to 50.3 million shares. Of the
13.0 million share increase, 5.0 million shares were registered with the
Securities and Exchange Commission in 1997. At December 31, 1997, 8.2 million
shares were available for grant.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding options at January 1, 26,298,373 23,337,652 19,787,536
Granted 6,011,061 6,582,769 10,507,616
Forfeited (3,792,954) (1,159,973) (1,207,336)
Surrendered against payment by Novartis (790,430) (363,525) (3,070,960)
Exercised (3,631,884) (2,098,550) (2,679,204)
----------- ----------- -----------
Outstanding options at December 31, 24,094,166 26,298,373 23,337,652
----------- ----------- -----------
----------- ----------- -----------
Options exercisable at December 31, 12,351,700 11,411,534 8,859,788
----------- ----------- -----------
----------- ----------- -----------
Average exercise price of:
Outstanding options at December 31, $ 18.08 $ 16.80 $ 14.76
Options granted $ 20.96 $ 22.25 $ 16.33
Options forfeited $ 19.72 $ 19.11 $ 16.89
Options exercised $ 11.76 $ 11.02 $ 10.61
Weighted-average fair value of options
granted during the year calculated
pursuant to SFAS 123 $ 9.34 $ 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 and the following
weighted-average assumptions: expected volatility of 37 percent for 1997 and 35
percent for 1996 and 1995; a risk-free interest rate of 6.2 percent for 1997 and
6.3 percent for 1996 and 1995; and an average expected life of 5 years for 1997,
1996 and 1995.
41
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Outstanding Price
----------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $14 5,911,457 5.82 $11.80 4,309,794 $11.78
14 to 19 7,970,622 7.28 17.67 4,793,634 16.97
19 to 23 8,150,056 8.63 21.47 2,235,784 21.55
Greater than 23 2,062,031 8.20 27.06 1,012,488 27.26
----------- ----------- -------- ----------- --------
24,094,166 7.48 $18.08 12,351,700 $16.83
----------- -----------
----------- -----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
Chiron has a stock purchase plan for U.S. employees in which eligible
employees may participate through payroll deductions. At the end of each
quarter, funds deducted from participating employees' salaries are used to
purchase common stock at 85 percent of 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, 1.4 million and 0.7
million in 1997, 1996 and 1995, respectively. In 1997, the stockholders
approved a new employee stock purchase plan which will effectively replace
the existing plan when it expires in March 1998. The terms and provisions of
the new plan are substantially similar to those of Chiron's existing plan.
Under the new plan, approximately 8.6 million shares have been reserved for
issuance, of which approximately 0.6 million shares represent the remaining
shares reserved for issuance under Chiron's existing plan.
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 and the following assumptions: expected volatility of 28 percent for 1997
and 35 percent for 1996 and 1995; a risk-free interest rate of 5.6 percent for
1997 and 5.7 percent for 1996 and 1995; and an average expected life of one year
for 1997, 1996 and 1995. The weighted-average fair value of the purchase rights
granted was $5.28 per share in 1997 and $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 25, compensation expense related to these awards is based on
the extent to which the performance criteria are met. In 1997, the Company
recognized $0.6 million of expense associated with the performance units awarded
in 1997 and 1996. Through December 31, 1996, no expense was recognized.
42
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
In 1997 and 1996, the Company awarded performance units on 158,738 and 64,400
shares of common stock, respectively. None of these awards were exercisable at
December 31, 1997. Pursuant to SFAS 123, the weighted-average fair value of the
awards in 1997 and 1996 was $6.71 and $7.57 per unit, respectively. The
weighted-average fair values were based on the following assumptions: expected
volatility of 37 percent for 1997 and 35 percent for 1996; a risk-free interest
rate of 6.0 percent for 1997 and 1996; and an average expected life of 3 years
for 1997 and 1996.
SHARE RIGHTS
In 1996, the stockholders also approved an amendment to the Company's stock
option plan, permitting the award of share rights to certain key individuals and
non-employee directors, allowing them the right to receive shares of the
Company's common stock.
In 1997, the Compensation Committee of the Board of Directors awarded
non-employee directors an aggregate of 12,043 share rights that vest over
five years, and also awarded certain key individuals an aggregate of 319,700
share rights that vest over four years. In 1996, the Compensation Committee
awarded non-employee directors an aggregate of 10,320 share rights that vest
over five years and a key executive 40,000 share rights that vest at the end
of five years. The value of the share rights are recognized ratably over the
related vesting periods and, in 1997 and 1996, the Company recognized $0.8
million and $0.1 million of compensation expense, respectively.
COMMON STOCK WARRANTS
As a result of the merger with Cetus, warrants to purchase 600,000 shares of
Chiron common stock were outstanding at December 31, 1997. The exercise price
of the warrants is $13.13 and the warrants expire in July 2001. The warrants
are currently exercisable.
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 6.0 percent and are primarily
collateralized by the stock issued upon the exercise of the stock options. At
December 31, 1997, the note balance was due from one individual and matures in
June 1998.
STOCK REPURCHASE PROGRAM
In January 1998, the Company's Board of Directors authorized the purchase of up
to 2.5 million shares of Chiron common stock from time to time on the open
market in order to offset the dilution associated with the operation of the
Company's stock option and employee stock purchase plans and the granting of
share rights. The Board of Directors has authorized such purchases through
January 1999.
43
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 11 - EARNINGS PER COMMON SHARE
Income (loss) from continuing operations as reported and available to common
stockholders was $50.8 million, $56.6 million and ($465.3) million in 1997,
1996 and 1995, respectively. A reconciliation of the denominators of Chiron's
earnings per common share computations is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted-average common
shares outstanding 173,524 169,347 162,442
Effect of dilutive securities:
Options and equivalents 4,219 7,450 -
Warrants 204 297 -
Performance units 41 10 -
------- ------- -------
Weighted-average common
shares outstanding plus
assumed conversions 177,988 177,104 162,442
------- ------- -------
------- ------- -------
</TABLE>
A total of 12,026,000 shares of common stock issuable upon conversion of the
Company's convertible subordinated debentures (see Note 8), having a weighted
average conversion price of $29.43 per share, have been excluded from the
computations of diluted earnings per common share for all periods presented
since their inclusion would be antidilutive.
For 1997 and 1996, options to purchase 7,832,000 shares and 2,104,000 shares,
respectively, of common stock were outstanding on a weighted-average basis
but were excluded from the computation of diluted earnings per common share
because the options' exercise prices were greater than the respective average
market price of the underlying stock of $19.93 in 1997 and $23.05 in 1996.
At December 31, 1997, 9,959,000 options which were excluded from the diluted
earnings per common share computation for 1997 remained outstanding and
expire on various dates through September 2007. In addition, an
insignificant number of performance units (see Note 10) contingently payable
in shares of common stock was excluded from the computation of diluted
earnings per common share for 1997 and 1996 based on the performance goals
which were then unmet at the respective period ends.
For 1995, approximately 5,971,000 common equivalent shares, primarily resulting
from the application of the treasury stock method to weighted-average options
outstanding, were excluded from the computation of diluted earnings per common
share as their inclusion would be antidilutive to the loss from continuing
operations. In addition, weighted-average options outstanding to purchase
2,782,000 shares of common stock had exercise prices greater than the average
market price of the underlying stock of $18.42 in 1995. Consequently, these
options were excluded from the calculation of common equivalent shares.
44
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 12 - OTHER EMPLOYEE BENEFIT PLANS
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 (exclusive of Chiron Vision) totaled $7.3
million, $5.3 million and $4.6 million in 1997, 1996 and 1995, respectively.
SEVERANCE PLAN
Effective October 1, 1997, the Company adopted the Chiron Corporation Severance
Plan (the "Plan") which supersedes all other plans or arrangements in effect for
the Company, other than Chiron Vision, that deal with the payment of severance
to employees who are involuntarily terminated as a result of a workforce
reduction or job elimination. The Plan is governed by the Employee Retirement
Income Security Act of 1974, as amended and, to the extent applicable, the laws
of the State of California.
Pursuant to the Plan, eligible employees receive eight weeks of paid advance
notice (the "advance notice period"), at least six weeks of which must be
non-working. At the end of the advance notice period, termination of
employment will occur. Payment of severance, calculated as three weeks base
pay per year of service, will generally commence at the end of the advance
notice period (the "salary continuation period"). The total of the advance
notice and salary continuation periods will be no less than three months and
no longer than two years, subject to limitations under the Plan. During the
salary continuation period, certain employee benefits will continue as
provided for under the Plan. Benefits payable under the Plan are accrued when
it is probable that employees will be entitled to benefits and the amount can
be reasonably estimated in accordance with SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" (see Note 5).
NOTE 13 - INCOME TAXES
For financial reporting purposes, "Income (loss) from continuing operations
before income taxes" included the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
United States $ 58,261 $ 86,678 $ (462,502)
Foreign 18,634 (7,933) 17,115
----------- ----------- -------------
$ 76,895 $ 78,745 $ (445,387)
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
45
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 13 - INCOME TAXES (CONTINUED)
COMPONENTS OF PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
Significant components of the provision for income taxes from continuing
operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $ 15,862 $ 1,408 $ -
State (280) 1,405 1,757
Foreign 11,580 8,792 8,149
----------- ----------- ----------
27,162 11,605 9,906
----------- ----------- ----------
Deferred:
Federal (7,613) - -
State (235) - -
Foreign 2,606 759 1,260
----------- ----------- ----------
(5,242) 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 4,137 9,778 8,721
----------- ----------- ----------
Provision for income taxes from
continuing operations $ 26,057 $ 22,142 $ 19,887
----------- ----------- ----------
----------- ----------- ----------
</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 $17.9 million, $1.4 million and $0.9 million were
realized in 1997, 1996 and 1995, respectively.
Included in the 1997 charge in lieu of taxes was a state tax refund of $2.8
million related to an acquired tax benefit. This refund amount has been netted
against the current state tax provision reported above.
RATE RECONCILIATION
The reconciliation of the provision for income taxes from continuing operations,
computed at the statutory U.S. income tax rate, to the reported amounts is as
follows for the years ended December 31:
46
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 13 - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal tax provision (benefit) at statutory rates $ 26,913 $ 27,812 $ (157,339)
Tax effect of write-off of purchased in-process technology - - 123,642
State taxes, net of federal benefit 3,008 1,543 4,845
Impact of foreign tax rates and credits 5,309 13,340 15,042
Losses of foreign subsidiaries not providing benefit in current year - 2,777 (5,990)
Write-down of Puerto Rico facility 10,955 - -
Amortization of intangible assets 757 792 601
Effect of net operating loss carryforward - - 27,295
Change in the valuation allowance for deferred tax assets
allocated to income tax expense (7,848) - -
Nondeductible expenses related to Novartis transaction - - 9,308
Utilization of deferred tax assets not previously benefited (10,518) (25,081) -
Utilization of tax credits (2,466) - -
Foreign sales corporation, net of tax (1,135) - -
Other 1,082 959 2,483
----------- ----------- -----------
Provision for income taxes from continuing operations $ 26,057 $ 22,142 $ 19,887
----------- ----------- -----------
----------- ----------- -----------
</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 purposes, and the tax
effects of net operating loss and credit carryforwards.
As they more likely than not will be realized, net deferred tax assets have been
recognized for U.S. federal and state purposes based on management's estimates
of future taxable income, including the gain on sale of Chiron Vision (see Note
3), and for certain foreign jurisdictions in which the Company's operations have
historically been profitable. Such estimates are subject to change based upon
future events and, accordingly, the amount of deferred tax assets recognized may
increase or decrease from period to period.
Significant components of the Company's deferred income tax liabilities and
assets from continuing operations are as follows at December 31:
47
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 13 - INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Basis differences--purchase accounting $ 21,826 $ 23,813
Patent costs expensed for tax purposes 11,030 8,401
Other 4,525 4,944
----------- -----------
37,381 37,158
----------- -----------
Deferred income tax assets:
Basis differences--purchase accounting and intangibles 75,990 93,493
Depreciation and purchased technologies 5,177 7,146
Reserves and expense accruals 82,101 59,565
Net operating loss carryforwards 111,138 121,926
Business credit carryforwards 48,705 36,179
Other 10,686 11,162
----------- -----------
333,797 329,471
Less valuation allowance (280,302) (287,617)
----------- -----------
53,495 41,854
----------- -----------
Net deferred income tax asset $ 16,114 $ 4,696
----------- -----------
----------- -----------
</TABLE>
The net change in the valuation allowance for the years ended December 31, 1997,
1996 and 1995 was a decrease of $7.3 million, and an increase of $18.2 million
and $125.6 million, respectively.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 1997 will be allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Income tax benefit $ 221,016
Goodwill and other noncurrent intangible assets 13,020
Additional paid-in capital 46,266
------------
$ 280,302
------------
------------
</TABLE>
TAX OPERATING LOSS AND CREDIT CARRYFORWARDS
The following presents the carryforwards from continuing operations which are
available to offset future income tax liabilities at December 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Federal net operating loss carryforwards expiring from 2003 through 2010 $ 141,470
State net operating loss carryforwards expiring from 1998 through 2009 49,006
Foreign net operating loss carryforwards principally carried forward
indefinitely 139,171
Federal tax credit carryforwards expiring from 1998 through 2011 26,421
State tax credit carryforwards expiring from 1998 through 2011 22,284
</TABLE>
48
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 14 - NON-OPERATING INCOME AND EXPENSE
In December 1997, Chiron Diagnostics completed the sale of certain of the assets
of its worldwide Quality Controls business to Bio-Rad Laboratories, Inc.
Proceeds from the sale consisted of $29.9 million of cash, resulting in an $18.6
million gain reflected as "Gain on sale of assets" in the accompanying
Consolidated Statements of Operations.
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. This sale resulted in a $12.2 million gain reflected as
"Gain on sale of interest in affiliated company" in the accompanying
Consolidated Statements of Operations.
"Interest expense" in the accompanying Consolidated Statements of Operations
consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense and related costs on
convertible debentures $ (18,384) $ (18,103) $ (17,827)
Interest expense on the debt obligation to
Novartis (3,413) (3,407) (3,543)
Other interest expense (11,460) (9,424) (8,842)
------------ ------------ ------------
$ (33,257) $ (30,934) $ (30,212)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
"Other income, net" in the accompanying Consolidated Statements of Operations
consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income $ 15,247 $ 11,801 $ 21,386
Capitalized interest - - 420
Write-downs of investments (1,206) (1,529) (200)
Gain on sale of equity securities 5,541 - -
Net realized gain (loss) on sale of
debt securities (23) 41 (3,037)
Net realized loss on foreign
exchange transactions (733) (2,254) (201)
Other (2,478) (869) 3,775
------------ ------------ ------------
$ 16,348 $ 7,190 $ 22,143
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 15 - GEOGRAPHIC AREA INFORMATION
Chiron operates in the global healthcare industry in three major markets:
diagnostics, therapeutics and vaccines. The Company is a multinational
corporation with operations in many countries including the U.S., Canada, Japan,
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
49
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 15 - GEOGRAPHIC AREA INFORMATION (CONTINUED)
subsidiaries in those countries. Domestic assets consist of all operating
assets of the Company located within the U.S.
Information about the Company's operations in different geographic areas is as
follows for the years ended December 31:
<TABLE>
<CAPTION>
DOMESTIC EUROPE ASIA/PACIFIC OTHER ELIMINATIONS CONSOLIDATED
------------ ---------- ------------ ---------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997:
Revenues from unaffiliated customers $ 666,570 $ 342,832 $ 130,793 $ 21,863 $ - $ 1,162,058
Transfers between geographic areas 213,823 43,814 250 - (257,887) -
------------ ---------- ------------ ---------- ------------ -------------
Total revenues 880,393 386,646 131,043 21,863 (257,887) 1,162,058
Income (loss) from continuing operations 53,423 7,323 (733) (3,106) (6,069) 50,838
Identifiable assets 2,406,561 375,759 56,571 23,273 (1,093,686) 1,768,478
1996:
Revenues from unaffiliated customers $ 609,294 $ 336,152 $ 135,965 $ 20,429 $ - $ 1,101,840
Transfers between geographic areas 207,812 53,205 133 - (261,150) -
------------ ---------- ------------ ---------- ------------ -------------
Total revenues 817,106 389,357 136,098 20,429 (261,150) 1,101,840
Income (loss) from continuing operations 104,947 (11,861) 1,533 97 (38,113) 56,603
Identifiable assets 2,164,792 374,552 66,230 19,311 (936,215) 1,688,670
1995:
Revenues from unaffiliated customers $ 482,098 $ 289,379 $ 132,204 $ 20,590 $ - $ 924,271
Transfers between geographic areas 160,994 34,583 480 - (196,057) -
------------ ---------- ------------ ---------- ------------ -------------
Total revenues 643,092 323,962 132,684 20,590 (196,057) 924,271
Income (loss) from continuing operations (409,641) (25,091) (1,174) (502) (28,866) (465,274)
Identifiable assets 1,900,794 292,628 87,684 12,272 (803,531) 1,489,847
</TABLE>
Revenues by customer location, including both local revenues and exports from
other locations, were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
North America $ 438,426 $ 450,068 $ 407,464
Europe 485,947 443,238 312,943
Asia and Pacific Basin 168,631 178,399 153,982
South America, Africa and Other 69,054 30,135 49,882
------------ ------------ ------------
$ 1,162,058 $ 1,101,840 $ 924,271
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 16 - 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 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.
50
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1997
-------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues $ 311,171 $ 289,904 $ 281,038 $ 279,945
Gross margin from product sales 132,280 114,034 122,364 116,020
Income (loss) from continuing operations:
Income (loss) 33,837 (14,187) 14,813 16,375
Income (loss) per share 0.19 (0.08) 0.09 0.10
Income (loss) per share - assuming dilution 0.19 (0.08) 0.08 0.09
Net income (loss):
Income (loss) 52,822 (12,681) 15,742 15,336
Income (loss) per share 0.30 (0.07) 0.09 0.09
Income (loss) per share - assuming dilution 0.29 (0.07) 0.09 0.09
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues $ 313,170 $ 271,638 $ 256,222 $ 260,810
Gross margin from product sales 125,053 109,108 114,516 114,201
Income from continuing operations:
Income 14,145 12,828 14,053 15,577
Income per share 0.08 0.08 0.08 0.09
Income per share - assuming dilution 0.08 0.07 0.08 0.09
Net income:
Income 15,269 11,778 15,355 12,744
Income per share 0.09 0.07 0.09 0.08
Income per share - assuming dilution 0.09 0.07 0.09 0.07
</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.
Quarterly total revenues and gross margin amounts exclude total revenues and
gross margin of Chiron Vision, which was classified as a discontinued
operation during the third quarter of 1997 (see Note 3). Total revenues of
Chiron Vision for the 1997 quarters ended December 31, September 30, June 30
and March 31 were $62.0 million, $47.6 million, $52.7 million and $50.4
million, respectively. Gross margin from product sales of Chiron Vision for
the 1997 quarters ended December 31, September 30, June 30 and March 31 was
$32.7 million, $24.3 million, $26.9 million and $26.8 million, respectively.
Total revenues of Chiron Vision for the 1996 quarters ended December 31,
September 30, June 30 and March 31 were $56.6 million, $49.9 million, $59.5
million and $45.0 million, respectively. Gross margin from product sales of
Chiron Vision for the 1996 quarters ended December 31, September 30, June 30
and March 31 was $31.1 million, $25.6 million, $31.7 million and $23.6
million, respectively. In addition, net income in the fourth quarter of 1997
included a deferred tax benefit from discontinued operations of $15.2
million, recognized in accordance with EITF 93-17.
51
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The results of continuing operations for the fourth quarter of 1997 included
an $18.6 million gain on the sale of assets (see Note 14). The results of
continuing operations for the third quarter of 1997 included a $31.3 million
impairment loss on long-lived assets (see Note 4). The results of continuing
operations for the second quarter of 1997 included the recognition of a $6.6
million reduction in cost of sales due to a revised estimate of royalties to
be paid on sales of certain products and a $4.7 million reduction in
operating expenses due to changes in estimated accruals created in prior
periods.
The results of continuing operations for the second and third quarters of
1996 included a gain of $12.1 million and $0.1 million, respectively, on the
sale of Chiron's interest in Ben Venue (see Note 14).
NOTE 18 - SUBSEQUENT EVENT (UNAUDITED)
In March 1998, the Company committed to plans to sell the Puerto Rico
facility and a manufacturing facility in St. Louis, Missouri. The resulting
adjustments, if any, in the first quarter of 1998 to record the assets held
for sale at the lower of their aggregate carrying amount or estimated fair
value, determined on the basis of independent appraisals, less cost to sell,
are not expected to be material. In the first quarter of 1998, the Company
expects to record certain restructuring and reorganization charges in
connection with the plans to dispose of the Puerto Rico and St. Louis
facilities.
52
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
San Francisco, California
January 30, 1998
53
<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, 1997, there were 7,609 holders
of record of Chiron common stock, 422 remaining holders of record of Cetus
common stock and 11 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 1997 and 1996 are shown below.
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First Quarter $ 21 1/4 $ 17 7/8 $ 29 1/2 $ 23 1/4
Second Quarter 21 17 1/2 26 5/8 23
Third Quarter 24 5/16 19 7/8 25 1/8 17 1/2
Fourth Quarter 23 16 5/8 23 18 1/8
</TABLE>
54
<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 B.V. The Netherlands
Cephalon/Chiron Nederlands b.v The Netherlands
Chiron GmbH Germany
Chiron France S.A.R.L. France
Chiron Italia S.r.l Italy
Chiron UK Ltd United Kingdom
Chiron Iberia SA 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 Investment Corporation California, USA
Chiron (Bermuda) Ltd. Bermuda
Chiron Redevelopment Corp. & Co. KG Germany
31. Corsa Verwaltungsgesellschaft GmbH Germany
Chiron Behring GmbH & Co (49% limited partnership interest) Germany
Chiron Behring Verwaltungsgesellschaft GmbH (49% owned) Germany
Chiron S.p.A. Italy
Istituto Vaccinogen Pozzi S.p.A. (80.15%) Italy
Biocine S.A.R.L. France
Chiron Technologies Pty. Ltd. Australia
Chiron Mimotopes U.S. California, USA
Chiron Redevelopment Corporation Missouri, USA
Chiron Foreign Sales Corporation U.S. Virgin Islands
Chiron Funding LLC Delaware, USA
Centaur Insurance Company, Inc. Hawaii, USA
Chiron Diagnostics Corporation Delaware, USA
Chiron Healthcare Holdings Pty. Ltd Australia
Chiron Healthcare Australia Pty. Ltd. Australia
Chiron Healthcare Pty. Ltd Australia
Chiron GmbH Austria
<PAGE>
<CAPTION>
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
<S> <C>
Chiron N.V./S.A. Belgium
Chiron Inc. Canada
Chiron Diagnostics Ltd. United Kingdom
Chiron Diagnostics S.A. France
Chiron Diagnostics GmbH Germany
Chiron Ltd. Hong Kong
Chiron Diagnostics S.p.A. Italy
Chiron KK Japan
Chiron, S.A. de C.V. Mexico
Chiron Ltd. Korea
Chiron Sp. zo.o. Poland
Chiron Espana, S.A. Spain
Chiron Diagnostics A.G. Switzerland
Chiron Taiwan Co., Ltd. Taiwan
Ciba Corning Diagnostics, Lda. Portugal
Chiron Brasil Ltda. Brazil
Chiron Ltd. Thailand
Chiron Norway AS Norway
Chiron A/S (currently known as PSE 38 nr. 1837) Denmark
Chiron AB Sweden
Chiron Vision, Inc. Canada
</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, 1997 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997<F5>
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997<F5>
<CASH> 98,483
<SECURITIES> 159,989<F1>
<RECEIVABLES> 366,962
<ALLOWANCES> 22,918
<INVENTORY> 165,652
<CURRENT-ASSETS> 770,052
<PP&E> 831,521
<DEPRECIATION> 277,623
<TOTAL-ASSETS> 1,768,478
<CURRENT-LIABILITIES> 471,186
<BONDS> 397,217<F2>
0
0
<COMMON> 1,757
<OTHER-SE> 872,188<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,768,478
<SALES> 839,341
<TOTAL-REVENUES> 1,162,058
<CGS> 354,643
<TOTAL-COSTS> 354,643
<OTHER-EXPENSES> 415,386<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,257
<INCOME-PRETAX> 76,895
<INCOME-TAX> 26,057
<INCOME-CONTINUING> 50,838
<DISCONTINUED> 20,381
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,219
<EPS-PRIMARY> 0.41<F6>
<EPS-DILUTED> 0.40<F6>
<FN>
<F1>CONSISTS OF BOTH SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT
SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES, CAPITAL LEASE OBLIGATIONS AND
NOTES PAYABLE, NET OF CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, CUMULATIVE FOREIGN
CURRENCY TRANSLATION ADJUSTMENT, UNREALIZED GAIN FROM INVESTMENTS AND NOTES
RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, IMPAIRMENT LOSS ON LONG-LIVED ASSETS,
RESTRUCTURING AND REORGANIZATION CHARGES AND OTHER OPERATING EXPENSES.
<F5>ACTUAL FISCAL YEAR END WAS DEC-28-1997. FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH END.
<F6>REPRESENTS NET INCOME PER SHARE.
</FN>
</TABLE>
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996<F5>
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996<F5>
<CASH> 68,114
<SECURITIES> 60,721<F1>
<RECEIVABLES> 372,663
<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> 804,909
<TOTAL-REVENUES> 1,101,840
<CGS> 342,031
<TOTAL-COSTS> 342,031
<OTHER-EXPENSES> 358,882<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,934
<INCOME-PRETAX> 78,745
<INCOME-TAX> 22,142
<INCOME-CONTINUING> 56,603
<DISCONTINUED> (1,458)<F7>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,145
<EPS-PRIMARY> 0.33<F6>
<EPS-DILUTED> 0.31<F6>
<FN>
<F1>CONSISTS OF BOTH SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT
SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES, CAPITAL LEASE OBLIGATIONS AND
NOTES PAYABLE, NET OF CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, CUMULATIVE FOREIGN
CURRENCY TRANSLATION ADJUSTMENT, UNREALIZED GAIN FROM INVESTMENTS AND NOTES
RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT AND OTHER OPERATING EXPENSES.
<F5>ACTUAL FISCAL YEAR END WAS DEC-29-1996. FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH END.
<F6>REPRESENTS NET INCOME PER SHARE.
<F7>ON DECEMBER 29, 1997, CHIRON CORPORATION COMPLETED THE SALE OF ITS OPHTHALMIC
BUSINESS UNIT, CHIRON VISION CORPORATION. THIS SCHEDULE HAS BEEN RESTATED TO
REFLECT THE RESULTS OF CHIRON VISION CORPORATION AS DISCONTINUED OPERATIONS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1995 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 74,318
<SECURITIES> 149,899<F1>
<RECEIVABLES> 304,303
<ALLOWANCES> 18,524
<INVENTORY> 165,941
<CURRENT-ASSETS> 637,003
<PP&E> 658,579
<DEPRECIATION> 140,761
<TOTAL-ASSETS> 1,489,847
<CURRENT-LIABILITIES> 368,595
<BONDS> 413,248<F2>
0
0
<COMMON> 417
<OTHER-SE> 671,644<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,489,847
<SALES> 745,902
<TOTAL-REVENUES> 924,271
<CGS> 328,444
<TOTAL-COSTS> 328,444
<OTHER-EXPENSES> 753,253<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,212
<INCOME-PRETAX> (445,387)
<INCOME-TAX> 19,887
<INCOME-CONTINUING> (465,274)
<DISCONTINUED> (47,189)<F5>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512,463)
<EPS-PRIMARY> (3.15)<F6>
<EPS-DILUTED> (3.15)<F6>
<FN>
<F1>CONSISTS OF BOTH SHORT-TERM AND NONCURRENT INVESTMENTS IN MARKETABLE DEBT
SECURITIES.
<F2>CONSISTS OF CONVERTIBLE SUBORDINATED DEBENTURES, CAPITAL LEASE OBLIGATIONS AND
NOTES PAYABLE, NET OF CURRENT MATURITIES.
<F3>CONSISTS OF ADDITIONAL PAID-IN CAPITAL, ACCUMULATED DEFICIT, CUMULATIVE FOREIGN
CURRENCY TRANSLATION ADJUSTMENT, UNREALIZED GAIN FROM INVESTMENTS AND NOTES
RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, WRITE-OFF OF PURCHASED IN-PROCESS
TECHNOLOGIES, COSTS RELATED TO NOVARTIS TRANSACTION, RESTRUCTURING AND
REORGANIZATION CHARGES AND OTHER OPERATING EXPENSES.
<F5>ON DECEMBER 29, 1997, CHIRON CORPORATION COMPLETED THE SALE OF ITS OPHTHALMIC
BUSINESS UNIT, CHIRON VISION CORPORATION. THIS SCHEDULE HAS BEEN RESTATED TO
REFLECT THE RESULTS OF CHIRON VISION CORPORATION AS DISCONTINUED OPERATIONS.
<F6>REPRESENTS NET LOSS PER SHARE.
</FN>
</TABLE>
