<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number: 0-12798
CHIRON CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 94-2754624
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4560 HORTON STREET, EMERYVILLE, CALIFORNIA 94608
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(Address of principal executive offices) (Zip code)
(510) 655-8730
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT APRIL 30, 1998
Common Stock, $0.01 par value 177,344,892
<PAGE>
CHIRON CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997......................3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1998 and 1997............4
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 1998 and 1997........5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998 and 1997............6
Notes to Condensed Consolidated Financial Statements......7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................22
SIGNATURES.........................................................24
</TABLE>
2
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 177,590 $ 98,483
Short-term investments in marketable debt
securities 149,469 84,588
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Total cash and short-term investments 327,059 183,071
Accounts receivable 295,532 344,044
Inventories 133,224 165,652
Assets held for sale (Note 4) 40,929 -
Other current assets 67,099 77,285
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Total current assets 863,843 770,052
Noncurrent investments in marketable debt securities 121,258 75,401
Property, plant, equipment and leasehold improvements,
at cost:
Land and buildings 183,394 218,509
Laboratory, production and office equipment 374,661 422,278
Leasehold improvements 108,274 123,379
Construction in progress 57,925 67,355
---------- ----------
724,254 831,521
Less accumulated depreciation and amortization (256,123) (277,623)
---------- ----------
Net property, plant, equipment and 468,131 553,898
leasehold improvements
Purchased technology, net 20,035 45,903
Other intangible assets, net 38,649 79,955
Investments in equity securities and affiliated
companies 175,642 176,851
Other assets 67,843 66,418
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$1,755,401 $1,768,478
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---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,373 $ 79,339
Accrued compensation and related expenses 37,071 59,405
Short-term borrowings 40,014 154,700
Current portion of unearned revenue 26,897 13,361
Taxes payable 51,871 37,191
Other current liabilities 144,895 127,190
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Total current liabilities 366,121 471,186
Long-term debt 400,072 397,217
Other noncurrent liabilities 23,381 26,130
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Total liabilities 789,574 894,533
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Commitments and contingencies
Stockholders' equity:
Common stock 1,771 1,757
Additional paid-in capital 1,887,795 1,853,591
Accumulated deficit (907,505) (961,986)
Accumulated other comprehensive loss (15,625) (18,808)
Notes receivable from stock sales (609) (609)
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Total stockholders' equity 965,827 873,945
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$1,755,401 $1,768,478
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</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.
3
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1998 1997
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<S> <C> <C>
Revenues:
Product sales, net $ 204,472 $ 200,791
Equity in earnings of unconsolidated joint
businesses 12,874 25,214
Collaborative agreement revenues 24,406 26,848
Other revenues 27,153 27,092
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Total revenues 268,905 279,945
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Expenses:
Cost of sales 88,981 84,771
Research and development 90,846 87,961
Selling, general and administrative 73,678 76,049
Restructuring and reorganization charges (Note 3) 24,198 -
Other operating expenses 632 1,116
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Total expenses 278,335 249,897
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Income (loss) from operations (9,430) 30,048
Interest expense (7,046) (8,505)
Other income, net 8,435 1,770
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Income (loss) from continuing operations before income
taxes (8,041) 23,313
Provision for income taxes 2,810 6,938
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Income (loss) from continuing operations (10,851) 16,375
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Discontinued operations (Note 2):
Loss from discontinued operations - (1,039)
Gain on disposal of discontinued operations 65,332 -
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Net income $ 54,481 $ 15,336
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Basic earnings per share:
Income (loss) from continuing operations $ (0.06) $ 0.10
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Net income $ 0.31 $ 0.09
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Diluted earnings per share:
Income (loss) from continuing operations $ (0.06) $ 0.09
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---------- ----------
Net income $ 0.31 $ 0.09
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</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.
4
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1998 1997
---------- ----------
<S> <C> <C>
Net income $ 54,481 $ 15,336
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Other comprehensive income (loss):
Foreign currency translation adjustment:
Change in foreign currency translation adjustment
during the period (326) (11,970)
Plus: reclassification adjustment for loss
included in discontinued operations 2,087 -
---------- ----------
Net foreign currency translation adjustment 1,761 (11,970)
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Unrealized gain from investments:
Unrealized holding gains arising during the
period, net of provision for income taxes of
$1,263 and $2,156 for the three months ended
March 31, 1998 and 1997, respectively 2,246 3,832
Less: reclassification adjustment for net gains
included in net income, net of income tax
benefit of $1,014 for the three months ended
March 31, 1998 (1,800) -
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Net unrealized gain from investments 446 3,832
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Other comprehensive income (loss) 2,207 (8,138)
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Comprehensive income $ 56,688 $ 7,198
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</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.
5
<PAGE>
CHIRON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
1998 1997
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<S> <C> <C>
Net cash provided by (used in) operating activities $ (638) $ 29,318
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Cash flows from investing activities:
Purchases of investments in marketable debt
securities (165,197) (9,418)
Proceeds from sale and maturity of investments in
marketable debt securities 54,249 28,178
Capital expenditures (10,896) (15,499)
Proceeds from disposal of discontinued operations 298,939 -
Other, net 101 4,603
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Net cash provided by investing activities 177,196 7,864
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Cash flows from financing activities:
Proceeds from issuance of short-term debt - 8,271
Repayment of short-term debt (114,483) -
Repayment of notes payable and capital leases (308) (29,698)
Proceeds from issuance of common stock 17,340 15,466
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Net cash used in financing activities (97,451) (5,961)
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Net increase in cash and cash equivalents 79,107 31,221
Cash and cash equivalents at beginning of the period 98,483 68,114
---------- ----------
Cash and cash equivalents at end of the period $ 177,590 $ 99,335
---------- ----------
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</TABLE>
THE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THIS STATEMENT.
6
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information at March 31, 1998, and for the three months ended March 31,
1998 and 1997, is unaudited, but includes all normal recurring adjustments which
the management of Chiron Corporation (the "Company" or "Chiron") believes to be
necessary for fair presentation of the periods presented. The condensed
consolidated balance sheet amounts at December 31, 1997 have been derived from
audited financial statements. Interim results are not necessarily indicative of
results for a full year. This information should be read in conjunction with
Chiron's audited consolidated financial statements for the year ended December
28, 1997, which are included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission.
In the first quarter of 1998, Chiron completed the sale of its ophthalmic
business unit, Chiron Vision Corporation ("Chiron Vision"), to Bausch & Lomb
Incorporated (see Note 2). The accompanying Condensed Consolidated Statements
of Operations for all periods presented reflect the after-tax results of Chiron
Vision, and the gain on disposal thereof, as discontinued operations. In
addition, certain previously reported amounts have been reclassified to conform
with the current period presentation.
FISCAL YEAR
The fiscal year of the Company is a 52 or 53-week year ending on the Sunday
nearest the last day in December of each year. As a result, the first quarters
of 1998 and 1997 represent the thirteen-week periods ended March 29, 1998 and
March 30, 1997, respectively. For presentation purposes, dates used in the
condensed consolidated financial statements and notes refer to the fiscal month
end.
INVENTORIES
Pharmaceutical inventories are stated at the lower of cost or market using
the average cost method or, in the case of vaccine products, using the last-in,
first-out ("LIFO") method. Diagnostic and ophthalmic (see Note 2) products are
valued at cost, using the first-in, first-out ("FIFO") method which is less than
market value. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(IN THOUSANDS)
<S> <C> <C>
Finished goods $ 54,721 $ 82,896
Work in process 45,555 47,417
Raw materials 32,948 35,339
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$ 133,224 $ 165,652
----------- -----------
----------- -----------
</TABLE>
INCOME TAXES
The 1998 estimated annual tax provision is expected to be 25 percent of
pretax income from continuing operations, excluding restructuring and
reorganization charges. The provision may be affected in future periods by
changes in management's estimates with respect to the Company's deferred tax
assets and other items affecting the overall tax rate. Restructuring and
reorganization charges recorded during the first quarter of 1998 are expected to
create a current additional income tax benefit of approximately $1.2 million in
1998, which will partially offset income tax expense attributable to pretax
income from continuing operations, exclusive of such charges. The additional
benefit is lower than the estimated annual tax rate applied to the restructuring
and reorganization charges due to the timing of the deduction of a certain
portion of the charges for income tax purposes, and because a substantial
portion of the charge offsets income of certain subsidiaries which, without
regard to such charges, is
7
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
already taxed at a low effective rate due to the use of certain net operating
loss carryforwards. Income tax expense for the three months ended March 31,
1997 was based on an estimated annual effective income tax rate on pretax income
from continuing operations of approximately 30 percent. The actual 1997 annual
effective tax rate of 24 percent, exclusive of the impact of an impairment loss
in the third quarter, reflects a change in estimate during the second half of
1997 of the mix of foreign versus domestic profits, benefits of certain tax
credits and loss carryforwards, and anticipated foreign sales corporation
benefits.
PER SHARE DATA
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" ("SFAS 128"), basic earnings per share data is based
on the weighted-average number of common shares outstanding during the period.
Diluted earnings per share data 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 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.
Income (loss) from continuing operations as reported and available to
common stockholders was ($10.9) million and $16.4 million for the three months
ended March 31, 1998 and 1997, respectively. A reconciliation of the
denominators of Chiron's earnings per common share computations is as follows
for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
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(IN THOUSANDS)
<S> <C> <C>
Weighted-average common shares outstanding 176,199 171,890
Effect of dilutive securities:
Options and equivalents - 4,526
Warrants - 194
Performance units - 16
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Weighted-average common shares outstanding plus
assumed conversions 176,199 176,626
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------- -------
</TABLE>
A total of 12,026,000 shares of common stock issuable upon conversion of
the Company's convertible subordinated debentures, having a weighted-average
conversion price of $29.43 per share, has been excluded from the computations
of diluted earnings per common share for all periods presented since its
inclusion would be antidilutive.
For the three months ended March 31, 1998, approximately 3,009,000 common
equivalent shares, resulting from the application of the treasury stock method
to weighted-average options, option equivalents and warrants 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 13,189,000 shares of
common stock had exercise prices greater than the average market price of the
underlying stock of $19.17 in the first quarter of 1998 and, consequently, were
excluded from the calculation of common equivalent shares. An insignificant
number of performance units contingently payable in shares of common stock was
also excluded from the calculation of common equivalent shares due to the
performance goals which were then unmet at March 31, 1998.
8
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For the three months ended March 31, 1997, options to purchase 7,215,000
shares 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 average market price of the
underlying stock of $19.43 in the first quarter of 1997. In addition, an
insignificant number of performance units contingently payable in shares of
common stock was excluded from the computation of diluted earnings per common
share based on the performance goals which were then unmet at March 31, 1997.
COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for reporting
and display of comprehensive income and its components. In accordance with SFAS
130, the Company has displayed the components of "Other comprehensive income
(loss)" and "Comprehensive income," net of their related tax effects, in the
accompanying Condensed Consolidated Statements of Comprehensive Income. The net
foreign currency translation adjustment and components thereof have no tax
effect as the Company makes no provision for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. All prior-period data has been reclassified to conform
with the provisions of SFAS 130.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997.
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.
Although SFAS 131 need not be applied to interim financial statements in the
initial year of application, comparative information for interim periods of
fiscal 1998 will be reported in the Company's interim financial statements in
fiscal 1999. Further, all comparative information for prior periods will be
restated to conform with the provisions of SFAS 131. Application of the
disclosure requirements of SFAS 131 will have no impact on the Company's
consolidated financial position, results of operations or earnings per share
data as currently reported.
NOTE 2--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 Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," Chiron Vision is reported as a discontinued operation for all
periods presented in the accompanying Condensed 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 million and Chiron Vision's future noncancelable
operating lease costs totaling $1.1 million were retained by the Company upon
completion of the sale. Additionally, the Company has agreed to provide
customary indemnities under the terms of the Agreement.
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 are recorded in the
accompanying Condensed Consolidated Balance Sheet at March 31, 1998 as a
component of "Assets held for sale." A $13.6 million adjustment to record the
real estate assets at their estimated fair value, determined on the basis of
independent appraisals, less cost to sell, reduced the "Gain on disposal of
discontinued operations" in the accompanying Condensed
9
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)
Consolidated Statement of Operations for the three months ended March 31, 1998
by a corresponding amount.
The accompanying Condensed Consolidated Balance Sheets include the net assets
of discontinued operations, including the real estate assets, as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net $ - $ 48,073
Inventories - 37,944
Assets held for sale 11,500 -
Property, plant, equipment and leasehold
improvements, net - 47,634
Purchased technology, net - 25,068
Other intangible assets, net - 41,567
Accounts payable and other current liabilities - (38,343)
Other assets and liabilities, net - 5,025
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$11,500 $166,968
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------- --------
</TABLE>
Chiron Vision recognized total revenues of $50.4 million for the three
months ended March 31, 1997. "Loss from discontinued operations" in the
accompanying Condensed Consolidated Statement of Operations for the three months
ended March 31, 1997 is reported net of an income tax benefit of less than $0.1
million. "Gain on disposal of discontinued operations" in the accompanying
Condensed Consolidated Statement of Operations for the three months ended March
31, 1998 is reported net of a provision for income taxes of $31.2 million.
Basic and diluted income per common share from discontinued operations was
$0.37 for the three months ended March 31, 1998. Basic and diluted loss per
common share from discontinued operations was ($0.01) and ($0.00), respectively,
for the three months ended March 31, 1997.
NOTE 3--RESTRUCTURING AND REORGANIZATION CHARGES
In the first quarter of 1998, Chiron recognized restructuring and
reorganization charges of $24.2 million. Of this amount, $21.0 million was due
to termination and other employee-related costs in connection with the planned
elimination of 403 positions in sales, marketing and other administration,
manufacturing, and research and development functions. The elimination of these
positions is due primarily to the Company's ongoing rationalization of business
operations, particularly within its diagnostics business, the planned
consolidation of blood gas instrument manufacturing and the planned closure of
the Company's St. Louis manufacturing facility. In connection with the plan of
termination, 198 employees were terminated during the first quarter of 1998 and
benefits of $2.7 million were paid and charged against the accrual. The
remaining $3.2 million of the restructuring and reorganization charges resulted
primarily from facility-related costs. Of this amount, approximately $0.9
million was charged against the liability during the first quarter of 1998. At
March 31, 1998, the liability associated with restructuring and reorganization
charges expensed during the first quarter of 1998 was $20.6 million. This
liability is expected to be substantially settled over the next twelve months.
10
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 4--ASSETS HELD FOR SALE
Assets held for sale at March 31, 1998 consist of the Company's Puerto Rico
and St. Louis facilities and the real estate assets from discontinued
operations, described in Note 2. In March 1998, the Company committed to plans
to sell its idle pharmaceutical fill and finishing facility in Puerto Rico, its
manufacturing facility in St. Louis, Missouri and its related machinery and
equipment assets. These plans were made in response to Chiron's ongoing
analysis of manufacturing capacity relative to its projected needs. The
resulting adjustment 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, was
insignificant. At March 31, 1998, the carrying amount of the Puerto Rico
facility and related machinery and equipment assets was $11.1 million.
Operating expenses of the Puerto Rico facility of $1.5 million and $2.1 million
are included in the Company's "Income (loss) from operations" in the
accompanying Condensed Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997, respectively. The carrying amount of the
St. Louis facility and related machinery and equipment assets was $18.3 million
at March 31, 1998. For the three months ended March 31, 1998 and 1997,
operating expenses of the St. Louis facility of $2.2 million and $3.3 million,
respectively, are included in "Income (loss) from operations" in the
accompanying Condensed Consolidated Statements of Operations. The sales of the
facilities are expected to be consummated in 1998.
NOTE 5--AGREEMENT WITH HOECHST AG
Effective July 1, 1996, Chiron purchased a 49 percent interest in the human
vaccine business of Behringwerke AG, which subsequently merged into its parent
company, Hoechst AG. 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"). Chiron accounts for its interest
under the equity method and recognized $2.4 million and $0.1 million for the
three months ended March 31, 1998 and 1997, respectively, as components of
"Equity in earnings of unconsolidated joint businesses" in the accompanying
Condensed Consolidated Statements of Operations.
Summarized statement of operations information for Chiron Behring, which
excludes Chiron's amortization of intangible assets recorded in the July 1996
acquisition, is as follows for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Net sales $ 36,356 $ 42,125
Gross profit $ 21,075 $ 27,611
Income from continuing operations
before extraordinary items and
cumulative effect of a change
in accounting principle $ 6,213 $ 9,851
Net income $ 6,213 $ 9,851
</TABLE>
Prior to December 1997, Chiron's share of the joint venture's results were
reported on a one-month lag. As a result, Chiron's equity in earnings of Chiron
Behring for the first quarter of 1997 was calculated based, in part, on the
joint venture's net income for the three months ended February 28, 1997 of $0.6
million, rather than the net income of $9.9 million for the three months ended
March 31, 1997, reflected above.
In the second quarter of 1998, Chiron acquired Hoechst AG's 51 percent
interest in Chiron Behring. The total purchase price, which was paid in
cash, was approximately $112.0 million, including costs directly related to the
acquisition. The acquisition of the remaining 51 percent interest in Chiron
Behring will be accounted for by the Company under the purchase method of
accounting. The amount of the total purchase price allocated to purchased
in-process technology of an estimated $1.6 million will result in a noncash
charge against earnings in Chiron's second quarter of 1998. The results of
operations of Chiron Behring will be consolidated with those of the
11
<PAGE>
CHIRON CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
NOTE 5--AGREEMENT WITH HOECHST AG (CONTINUED)
Company from March 31, 1998 forward.
The following unaudited pro forma information presents the results of continuing
operations of Chiron and Chiron Behring for the three months ended March 31,
1998 and 1997, with pro forma adjustments as if Chiron's acquisition of the
remaining 51 percent interest in Chiron Behring had been consummated as of
January 1, 1998 and 1997, respectively. This pro forma information is based on
preliminary estimates of purchase price allocation and does not purport to be
indicative of what would have occurred had the acquisition been made as of those
dates or of results which may occur in the future. In addition, the pro forma
information does not include the write-off of purchased in-process technology of
an estimated $1.6 million related to the acquisition of the remaining 51 percent
interest in Chiron Behring. The unaudited pro forma information is as follows
for the three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total revenues $ 302,866 $ 321,957
Income (loss) from continuing
operations before non-recurring
charge $ (9,740) $ 21,540
Pro forma income (loss) per share
from continuing operations before
non-recurring charge:
Basic $ (0.06) $ 0.13
Diluted $ (0.06) $ 0.12
</TABLE>
NOTE 6--CONTINGENCIES
The Company is party to various claims, investigations and legal
proceedings arising out of the normal course of its business. These claims,
investigations and legal proceedings relate to intellectual property rights,
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.
12
<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.
THE DISCUSSION BELOW SHOULD BE READ IN CONJUNCTION WITH PART I, ITEM 1,
"FINANCIAL STATEMENTS," OF THIS QUARTERLY REPORT ON FORM 10-Q AND PART II, ITEMS
7, 7A AND 8, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK" AND "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA," RESPECTIVELY, OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 28, 1997.
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) adult
and pediatric vaccines; and (iii) therapeutics, with an emphasis on oncology,
serious infectious diseases and critical care diseases. 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 condensed
consolidated statements of operations reflect the after-tax results of Chiron
Vision, and the gain on disposal thereof, 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 three months ended March 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Diagnostic products $ 139,702 $ 149,022
Vaccine products 14,468 18,519
Therapeutic products 50,302 33,250
------------ ------------
$ 204,472 $ 200,791
------------ ------------
------------ ------------
</TABLE>
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. As a result, Chiron's results in any one quarter
are not necessarily indicative of results to be expected for a full year.
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 $107.1
million and $111.5 million in the first quarters of 1998 and 1997, respectively.
The overall decrease in foreign
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<PAGE>
product sales between periods was primarily due to decreased international sales
of diagnostic products and pediatric vaccines in Italy. For the first quarters
of 1998 and 1997, approximately 52 percent and 56 percent, respectively, of
Chiron's product sales were denominated in foreign currencies. Product sales
would have been $8.4 million higher in the first quarter of 1998 if currency
exchange rates had remained constant with those in the first quarter of 1997.
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 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 in the first quarter decreased from $149.0
million in 1997 to $139.7 million in 1998. The overall decrease in diagnostic
product sales was due principally to the December 1997 sale of the worldwide
Quality Controls business, which contributed $5.3 million to diagnostic product
sales in the first quarter of 1997, and to unfavorable changes in foreign
currency exchange rates between years. Had exchange rates in the first quarters
of 1998 and 1997 remained constant, particularly in Germany, France and Japan,
diagnostic product sales in the first quarter of 1998 would have been higher by
$6.7 million. The closure of the electrophoresis line of business in the fourth
quarter of 1997 contributed an additional $1.1 million to the overall decrease
in diagnostic product sales between years. Additionally, sales of blood gas
instruments in the Japanese market were higher by $1.8 million in the first
quarter of 1997 in anticipation of a consumption tax initiated in April 1997.
The overall decrease in diagnostic product sales in the first quarter of 1998 as
compared with the first quarter of 1997 was partially offset by increased sales
of ACS:180-Registered Trademark- immunodiagnostic products and bDNA probe
systems and kits, despite competitive pricing pressure on certain assays and
nucleic acid diagnostic products. The increase in sales of ACS:180-Registered
Trademark- immunodiagnostic products reflects increased sales volume of reagents
resulting from the compounding effect of increased ACS:180-Registered Trademark-
system placements as compared with the prior year. Increased sales of bDNA
probe systems and kits reflect the continued overall growth in viral load
testing for disease.
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 product sales in the first quarter decreased
from $18.5 million in 1997 to $14.5 million in 1998, largely as a result of
(i) decreased international tender sales of measles, mumps, rubella vaccine
and measles vaccine, and (ii) supply constraints relating to the Company's
oral polio vaccine. In addition, had the U.S. dollar and Italian lira exchange
rate remained constant between years, vaccine product sales would have been
higher in the first quarter of 1998 by $0.6 million.
THERAPEUTIC PRODUCTS Sales of Proleukin-Registered Trademark-
(aldesleukin, interleukin-2) increased in the first quarter from $17.9 million
in 1997 to $20.9 million in 1998, due primarily to domestic sales price
increases in April 1997 and January 1998 and a 36 percent increase in vials sold
in European markets. The impact of the sales price increases was partially
offset by a greater number of vials sold in the domestic market in the first
quarter of 1997 in anticipation of the April 1997 price increase.
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 in the first quarter increased
slightly, from $13.8 million in 1997 to $14.1 million in 1998. A significant
increase in the first quarter of 1998 in vials shipped to Berlex and Schering AG
was substantially offset by the decrease in contracted initial price per vial.
Secondary revenues earned by Chiron increased slightly in the first quarter of
1998 as compared with the first quarter of 1997 and represent only part of the
total revenues derived from Betaseron-Registered Trademark- sales by Berlex and
Schering AG. The timing of future shipments to Berlex and the related revenue
may vary based upon the level of inventories carried by Berlex.
14
<PAGE>
Revenues derived from platelet-derived growth factor ("PDGF"), which were
first recognized in the third quarter of 1997, contributed $13.3 million to
Chiron's net product sales in the first quarter of 1998. PDGF is the active
ingredient in Johnson & Johnson's Regranex-Registered Trademark- (becaplermin)
Gel (recombinant human platelet-derived growth factor -rhPDGF-BB), a treatment
for diabetic foot ulcers. Of the total PDGF revenues recognized in the first
quarter of 1998, $8.0 million resulted from a contractual price adjustment to
Chiron's 1997 sales and approximately $5.3 million was attributable to shipments
made in the first quarter of 1998. Chiron's PDGF revenues will likely fluctuate
in future periods depending upon sales of Regranex-Registered Trademark-, the
level of inventories carried by Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson ("J&J") company, and the timing of future PDGF shipments. In December
1997, a binding agreement for supply of PDGF was executed by Chiron and J&J.
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,
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 Part I, Item 3, "Legal
Proceedings--Ortho Diagnostic Systems, Inc." of Chiron's Annual Report on Form
10-K for the year ended December 28, 1997.
Chiron's share of the pretax operating earnings of the joint business is
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 $25.1
million in the first quarter of 1997 to $11.4 million in the first quarter of
1998. This decrease was due, in part, to a $4.1 million charge during the first
quarter of 1998, as compared with $0.8 million of income during the first
quarter of 1997, recorded in connection with the final annual accounting. In
addition, certain other items recorded by Chiron in the first quarter of 1998
related to (i) foreign profits of the joint business, (ii) certain one-time
contract termination fees, and (iii) joint business asset write-offs contributed
$6.9 million to the decrease in joint business revenues as compared with 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. The joint venture is operated under the name Chiron Behring
GmbH & Co. ("Chiron Behring"). Chiron's share of earnings of the joint venture,
including amortization of intangibles, was $2.4 million and $0.1 million in the
first quarters of 1998 and 1997, respectively. Net sales recognized by the
joint venture were $36.4 million in the first quarter of 1998 and $42.1 million
in the first quarter of 1997. The decrease in the joint venture's net sales
resulted primarily from adverse changes in foreign currency exchange rates
between years and decreased sales of tick-borne encephalitis vaccines in the
German market. The increase in Chiron's share of earnings of the joint venture
in the first quarter of 1998 is primarily attributable to the impact of the
Company's one-month lag in reporting of the joint venture which existed prior to
December 1997. Refer to Note 5 of NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS. In addition, equity in earnings of the joint venture in the first
quarter of 1997 reflects Chiron's share of a $2.0 million up-front license fee
expensed by the joint venture in the first quarter of 1997.
In the second quarter of 1998, Chiron acquired Hoechst AG's 51 percent
interest in Chiron Behring. The total purchase price, which was paid in
cash, was approximately $112.0 million, including costs directly related to the
acquisition. The acquisition of the remaining 51 percent interest in Chiron
Behring will be accounted for by the Company under the purchase method of
accounting. The amount of the total purchase price allocated to purchased
in-process technology of an estimated $1.6 million will result in a noncash
charge against earnings in Chiron's second quarter of 1998. The results of
operations of Chiron Behring will be consolidated with those of the Company from
March 31, 1998 forward.
15
<PAGE>
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 for the first quarter decreased from $26.8 million in 1997 to
$24.4 million in 1998, due primarily to a $1.5 million decrease in revenues
recognized under a collaborative agreement with Green Cross of Japan for HIV
gene therapy research and clinical development. In 1998, management does not
expect collaborative agreement revenues to be at a level commensurate with that
in 1997.
Collaborative agreement revenues also include amounts from Novartis AG
("Novartis"). Under a December 1995 limited liability company agreement, as
amended, Novartis agreed to provide $250.0 million (which may be increased to
$300.0 million subject to certain conditions) through 1999 in support of
research and development at Chiron, subject to certain aggregate annual funding
limitations. In connection with this funding arrangement, Chiron recognized
collaborative agreement revenues of $16.0 million and $15.8 million from
Novartis during the first quarters of 1998 and 1997, respectively. Chiron
anticipates receiving substantial additional funding from Novartis in future
periods under this funding arrangement. 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.
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 Chiron in the first
quarters of 1998 and 1997 were $27.2 million and $27.1 million, respectively.
Royalty revenues resulting from Schering AG's European sales of
Betaferon-Registered Trademark- increased $2.1 million in the first quarter,
from $4.2 million in 1997 to $6.3 million in 1998. Decreased royalties in the
first quarter of 1998 related to sales by Merck & Co., Inc. of HBV vaccines and
in royalties from Novo Nordisk related to insulin and glucagon resulted in an
aggregate $4.4 million decrease in other revenues between years. A significant
contractual decrease in royalties related to insulin will occur in January 1999.
A November 1996 agreement with Novartis, executed primarily in connection
with a consent and agreement that resolved the Federal Trade Commission's review
of the Ciba-Geigy Ltd. and Sandoz Ltd. merger that created Novartis, 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. 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. Chiron recognized $9.2 million of other
revenues related to Aredia-Registered Trademark- co-promotion services in the
first quarter of 1998. 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 in the first
quarter of 1997.
In January 1998, Chiron recognized $5.0 million of other revenues from a
one-time license fee under an exclusive collaboration with Pharmacia & Upjohn
Company to research, develop, manufacture and commercialize therapeutic and
prophylactic products for the treatment of HCV in humans. Subject to certain
limitations and cancellation clauses, Chiron and Pharmacia & Upjohn will share
equally in the funding of research activities performed under the collaboration
agreement. The term of the collaboration is three years, subject to extension
by mutual consent.
COSTS AND EXPENSES
GROSS PROFIT Gross profit as a percentage of net product sales was 56
percent and 58 percent in the first quarters of 1998 and 1997, respectively.
The overall decrease in gross profit margin percentage resulted primarily from
unusually high fixed manufacturing costs related to the launch of the
ACS:Centaur-TM-, a more powerful immunodiagnostic system designed to markedly
increase laboratory productivity; certain nucleic acid diagnostic ("NAD")
inventory adjustments; lower average selling prices of NAD products,
particularly in international markets; and the contractual decrease in initial
price per vial of Betaseron-Registered Trademark-. The overall decrease in
gross profit margin percentage in the first quarter of 1998 as compared with the
first quarter of 1997 was partially offset by
16
<PAGE>
improvements in gross profit margin resulting from sales of PDGF, a favorable
sales mix of vaccine products and the impact of charges recorded in the first
quarter of 1997 related to vaccine 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 $90.8 million and $88.0 million in the first quarters of 1998 and
1997, respectively. Generally, the Company'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. The increase in research and
development expense in the first quarter of 1998 as compared with the first
quarter of 1997 resulted primarily from funding of allowable research costs and
associated research efforts in connection with a May 1997 agreement with Hyseq,
Inc. to collaborate in the identification of genetic targets for the development
of pharmaceutical treatments for cancer. Under this 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
the Company. Additional amounts related to research involving HCV inhibitors
and clinical studies of meningococcus C vaccines in the first quarter of 1998
also contributed to the overall increase in research and development expense
between years. Partially offsetting the overall increase in research and
development expense from the first quarter of 1997 were decreased expenditures
in the first quarter of 1998 related to Myotrophin-Registered Trademark-
(mecasermin) Injection, PDGF and HBV and other vaccines. Myotrophin-Registered
Trademark- Injection is being developed by the Company in collaboration with
Cephalon, Inc. ("Cephalon") as a treatment for amyotrophic lateral sclerosis
("ALS" or Lou Gehrig's disease). On May 8, 1997, a Food and Drug Administration
("FDA") advisory committee found that there was not sufficient evidence of
efficacy in the use of Myotrophin-Registered Trademark- Injection for the
treatment of ALS to warrant FDA approval. In November 1997, Chiron and Cephalon
withdrew and resubmitted their application to the FDA. The meeting scheduled by
the FDA on April 9, 1998 for the advisory committee's further consideration of
the application was canceled. The Company expects that the FDA will act on the
application in May 1998.
OTHER OPERATING EXPENSES Selling, general and administrative ("SG&A")
expenses as a percentage of net product sales were 36 percent and 38 percent in
the first quarters of 1998 and 1997, respectively. 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. The overall decrease in SG&A expenses
from the first quarter of 1997 was partially offset by an aggregate $4.9 million
of expenses attributable to SAP planning and design, and other business process
re-engineering efforts, recorded in the first quarter of 1998. Total SG&A
expenses in the first quarter of 1997 included an aggregate $2.2 million of
operating expenses incurred by Chiron's diagnostic Quality Controls and
electrophoresis businesses, which were sold and closed, respectively, in the
fourth quarter of 1997.
In the first quarter of 1998, Chiron recognized restructuring and
reorganization charges of $24.2 million. Of this amount, $21.0 million was due
to termination and other employee-related costs in connection with the planned
elimination of 403 positions in sales, marketing and other administration,
manufacturing, and research and development functions. The elimination of these
positions is due primarily to the Company's ongoing rationalization of business
operations, particularly within its diagnostics business, the planned
consolidation of blood gas instrument manufacturing and the planned closure of
the Company's St. Louis manufacturing facility. In connection with the plan of
termination, 198 employees were terminated during the first quarter of 1998 and
benefits of $2.7 million were paid and charged against the accrual. The
remaining $3.2 million of the restructuring and reorganization charges resulted
primarily from facility-related costs. Of this amount, approximately $0.9
million was charged against the liability during the first quarter of 1998. At
March 31, 1998, the liability associated with restructuring and reorganization
charges expensed during the first quarter of 1998 was $20.6 million. This
liability is expected to be substantially settled over the next twelve months.
NON-OPERATING INCOME AND EXPENSE
Interest expense in the first quarter of 1998 decreased $1.5 million as
compared with the first quarter of 1997. This decrease was due primarily to the
repayment in January 1998 of $100.0 million of borrowings outstanding
17
<PAGE>
under the Company's U.S. credit facilities from a portion of the proceeds from
the sale of Chiron Vision. Other income, net consists primarily of investment
income on the Company's cash and investment balances and other non-operating
gains and losses. Interest income increased in the first quarter of 1998 by
$4.6 million as compared with the first quarter of 1997 due to increased average
cash and investment balances attributable to net cash proceeds from the sale of
Chiron Vision. In addition, during the first quarter of 1998, Chiron recognized
a $3.6 million gain and a $3.0 million loss attributable to the sale and
other-than-temporary impairment, respectively, of certain equity securities.
The 1998 estimated annual tax provision is expected to be 25 percent of
pretax income from continuing operations, excluding restructuring and
reorganization charges. The provision may be affected in future periods by
changes in management's estimates with respect to the Company's deferred tax
assets and other items affecting the overall tax rate. Restructuring and
reorganization charges recorded during the first quarter of 1998 are expected to
create a current additional income tax benefit of approximately $1.2 million in
1998, which will partially offset income tax expense attributable to pretax
income from continuing operations, exclusive of such charges. The additional
benefit is lower than the estimated annual tax rate applied to the restructuring
and reorganization charges due to the timing of the deduction of a certain
portion of the charges for income tax purposes, and because a substantial
portion of the charge offsets income of certain subsidiaries which, without
regard to such charges, is already taxed at a low effective rate due to the use
of certain net operating loss carryforwards. Income tax expense for the three
months ended March 31, 1997 was based on an estimated annual effective income
tax rate on pretax income from continuing operations of approximately 30
percent. The actual 1997 annual effective tax rate of 24 percent, exclusive of
the impact of an impairment loss in the third quarter, reflects a change in
estimate during the second half of 1997 of the mix of foreign versus domestic
profits, benefits of certain tax credits and loss carryforwards, and anticipated
foreign sales corporation benefits.
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 $448.3 million at March
31, 1998, 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 $177.6
million and $98.5 million at March 31, 1998 and 1997, respectively. Cash
provided by (used in) operating activities was ($0.6) million in the first
quarter of 1998 as compared with $29.3 million in the first quarter of 1997.
Primary sources of the decrease in cash from operating activities were the loss
from continuing operations of $10.9 million in the first quarter of 1998 (as
compared with net income of $15.3 million in the first quarter of 1997), and a
greater decrease in accounts receivable in the first quarter of 1997 than in
the first quarter of 1998, excluding the decrease in accounts receivable from
the sale of Chiron Vision. These decreases in cash from operating activities
were partially offset by an increase in other current liabilities in the first
quarter of 1998 due to the accrual of direct transaction costs related to the
sale of Chiron Vision and restructuring and reorganization charges recorded
during the first quarter of 1998.
Cash provided by investing activities was $177.2 million in the first
quarter of 1998 as compared with $7.9 million in the first quarter of 1997. In
the first quarter of 1998, the primary sources of cash from investing activities
were proceeds of $298.9 million from the sale of Chiron Vision and $54.2 million
from the sale and maturity of investments in marketable debt securities. These
sources of cash in the first quarter of 1998 were partially offset by the
purchase of $165.2 million of investments in marketable debt securities and
acquisitions of property and equipment totaling $10.9 million. In the first
quarter of 1997, the primary source of cash from investing activities was $28.2
million of proceeds from the sale and maturity of investments in marketable debt
securities. This source of cash in the first quarter of 1997 was partially
offset by acquisitions of property and equipment totaling $15.5 million and the
purchase of $9.4 million of investments in marketable debt securities.
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<PAGE>
Cash used in financing activities was $97.5 million in the first quarter of
1998 as compared with $6.0 million in the first quarter of 1997. In the first
quarter of 1998, the primary use of cash was the repayment of $114.5 million of
short-term debt, $100.0 million of which was outstanding under the Company's
U.S. credit facilities and was repaid from a portion of the proceeds from the
sale of Chiron Vision. In the first quarter of 1997, the primary use of cash
was Chiron's purchase of a previously leased manufacturing facility and related
buildings in Emeryville, California for $29.8 million. These uses of cash were
partially offset by proceeds of $17.3 million and $15.5 million in the first
quarters of 1998 and 1997, respectively, from issuance of common stock under the
Company's stock option and employee stock purchase plans.
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.
BORROWING ARRANGEMENTS Under two separate revolving, committed, unsecured
credit agreements with major financial institutions, Chiron can borrow up to
$200.0 million in the U.S. These agreements, which allow for borrowings of up
to $100.0 million each, mature in March 1999 and February 2003. No borrowings
were outstanding under these credit agreements at March 31, 1998. Under
Chiron's credit arrangements outside the U.S., borrowings of $40.0 million were
outstanding at March 31, 1998.
OTHER COMMITMENTS In future periods, Chiron expects to incur substantial
capital spending. In the second quarter of 1998, Chiron acquired Hoechst AG's
51 percent interest in Chiron Behring. The total purchase price, which was
paid in cash, was approximately $112.0 million, including costs directly related
to the acquisition. 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 investments in collaborative partners.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Chiron wishes to caution stockholders and investors that the following
important factors, among others, in some cases have affected, and in the future
could affect, Chiron's actual results and could cause Chiron's actual
consolidated results for the second quarter of 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.
19
<PAGE>
- - 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-TM-
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.
- - 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.
20
<PAGE>
- - 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.
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to certain lawsuits and legal proceedings,
which are described in Part I, Item 3, "Legal Proceedings," of the
Company's Annual Report on Form 10-K for the year ended December 28,
1997. The following is a description of material developments during
the period covered by this Quarterly Report:
F. HOFFMANN-LAROCHE
On January 27, 1998, Chiron initiated an action against F.
Hoffmann-LaRoche Ltd., several of its affiliated companies
(collectively, "Roche"), and Daniel Bradley in the United States
District Court for the Northern District of California. The Company
asserts that Roche's manufacture and sale of Amplicor HCV-TM- Test and
Amplicor HCV Monitor-TM- 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, that Roche has wrongfully induced this breach,
and that Bradley committed 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.
On February 3, 1998, Chiron filed an action in The District Court
of The Hague, The Netherlands against F. Hoffmann-LaRoche AG, several
of its affiliated companies (collectively, "Roche AG"), and one of
Roche AG's Dutch customers asserting Roche AG's infringement of the
Company's European Patent 0 318 216 (the "'216 patent") relating to
HCV technology. Chiron seeks a cross-border injunction with effect in
a number of European countries, prohibiting the sale of Roche AG's
Amplicor HCV-TM- Test and Amplicor HCV Monitor-TM- Test. Trial of this
matter is set for October 1998. Roche AG and Chiron are appealing the
EPO's Technical Board of Appeals decision upholding the '216 patent in
amended form. It is not known when nor on what basis this matter will
be concluded.
On April 16, 1998, Chiron filed suit against Nippon Roche K.K. in
the Tokyo District Court in Japan for infringement of Japanese patent
number 2,656,995 (the "'995 patent"), relating to HCV technology. The
suit seeks injunctive relief preventing further infringement by Nippon
Roche and damages.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit
Number Exhibit
------ -------
3.01 Restated Certificate of Incorporation of the
Registrant, as filed with the Office of the Secretary
of State of Delaware on August 17, 1987, incorporated
by reference to Exhibit 3.01 of the Registrant's Form
10-K report for fiscal year 1996.
3.02 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on
December 12, 1991, incorporated by reference to
Exhibit 3.02 of the Registrant's Form 10-K report
for fiscal year 1996.
3.03 Bylaws of the Registrant, as amended, incorporated by
reference to Exhibit 3.03 of the Registrant's Form 10-K
report for fiscal year 1994.
3.04 Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on May 22,
1996, incorporated by reference to Exhibit 3.04 of the
Registrant's Form 10-Q report for the period ended June
30, 1996.
4.01 Indenture, dated as of May 21, 1987, between Cetus
Corporation and Bankers Trust Company, Trustee,
incorporated by reference to Exhibit 4.01 of the
Registrant's Form 10-Q report for the period ended
September 30, 1994.
4.02 First Supplemental Indenture, dated as of December 12,
1991, by and among Registrant, Cetus Corporation, and
Bankers Trust Company, incorporated by reference to
Exhibit 4.02 of Registrant's Form 10-K report for
fiscal year 1997.
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
22
<PAGE>
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).
11 Statement of Computation of Earnings (Loss) per Share.
27.1 Financial Data Schedule for Three Months ended March
29, 1998.
27.2 Financial Data Schedule for Three Months ended March
30, 1997, Six Months ended June 29, 1997, Nine Months
ended September 28, 1997 and Fiscal Year ended December
28, 1997 (Restated).
27.3 Financial Data Schedule for Three Months ended March
31, 1996, Six Months ended June 30, 1996, Nine Months
ended September 29, 1996 and Fiscal Year ended December
29, 1996 (Restated).
27.4 Financial Data Schedule for Fiscal Year ended December
31, 1995 (Restated).
(b) REPORTS ON FORM 8-K.
On January 13, 1998, Chiron Corporation ("Chiron") 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, Chiron 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. On April 9, 1998, Chiron filed a
Current Report on Form 8-K reporting under Item 2 that it had acquired
Hoechst AG's 51 percent interest in Chiron Behring GmbH & Co for 210.7
million Deutsche Marks ($115.5 million) in cash.
23
<PAGE>
CHIRON CORPORATION
March 29, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHIRON CORPORATION
DATE: May 7, 1998 BY: /s/ SEAN P. LANCE
------------- ------------------
Sean P. Lance
President and Chief Executive Officer
DATE: May 7, 1998 BY: /s/ JAMES R. SULAT
------------- -------------------
James R. Sulat
Chief Financial Officer
24
<PAGE>
EXHIBIT 11
CHIRON CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Earnings (loss) per share:
Income (loss) from continuing operations available to
common stockholders $(10,851,000) $ 16,375,000
------------ ------------
------------ ------------
Basic income (loss) per share $ (0.06) $ 0.10
------------ ------------
------------ ------------
Diluted income (loss) per share $ (0.06) $ 0.09
------------ ------------
------------ ------------
Net income available to common stockholders $ 54,481,000 $ 15,336,000
------------ ------------
------------ ------------
Basic income per share $ 0.31 $ 0.09
------------ ------------
------------ ------------
Diluted income per share $ 0.31 $ 0.09
------------ ------------
------------ ------------
Shares used in earnings (loss) per share computations:
Weighted-average common shares outstanding 176,199,000 171,890,000
Effect of dilutive securities:
Options and equivalents - 4,526,000
Warrants - 194,000
Performance units - 16,000
------------ ------------
Weighted-average common shares outstanding
plus assumed conversions 176,199,000 176,626,000
------------ ------------
------------ ------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET DATED MARCH 31,
1998 AND UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998<F5>
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998<F5>
<CASH> 177,590
<SECURITIES> 270,727<F1>
<RECEIVABLES> 295,532
<ALLOWANCES> 0
<INVENTORY> 133,224
<CURRENT-ASSETS> 863,843
<PP&E> 724,254
<DEPRECIATION> 256,123
<TOTAL-ASSETS> 1,755,401
<CURRENT-LIABILITIES> 366,121
<BONDS> 400,072<F2>
0
0
<COMMON> 1,771
<OTHER-SE> 964,056<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,755,401
<SALES> 204,472
<TOTAL-REVENUES> 268,905
<CGS> 88,981
<TOTAL-COSTS> 88,981
<OTHER-EXPENSES> 115,676<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,046
<INCOME-PRETAX> (8,041)
<INCOME-TAX> 2,810
<INCOME-CONTINUING> (10,851)
<DISCONTINUED> 65,332
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,481
<EPS-PRIMARY> 0.31<F6>
<EPS-DILUTED> 0.31<F7>
<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, ACCUMULATED
OTHER COMPREHENSIVE LOSS AND NOTES RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, RESTRUCTURING AND REORGANIZATION
CHARGES AND OTHER OPERATING EXPENSES.
<F5>ACTUAL FISCAL YEAR END WILL BE, AND PERIOD END WAS, JAN-03-1999 AND
MAR-29-1998, RESPECTIVELY. FOR PRESENTATION PURPOSES, DATES USED IN THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH END.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC LOSS PER SHARE FROM CONTINUING
OPERATIONS AND BASIC INCOME PER SHARE FROM DISCONTINUED OPERATIONS WERE ($0.06)
AND $0.37, RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED LOSS PER SHARE FROM
CONTINUING OPERATIONS AND DILUTED INCOME PER SHARE FROM DISCONTINUED OPERATIONS
WERE ($0.06) AND $0.37, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997<F5> DEC-31-1997<F5> DEC-31-1997<F5> DEC-31-1997<F5>
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997<F5> JUN-30-1997<F5> SEP-30-1997<F5> DEC-31-1997<F5>
<CASH> 99,335 111,927 103,537 98,483
<SECURITIES> 41,945<F1> 48,872<F1> 74,641<F1> 159,989<F1>
<RECEIVABLES> 327,306 315,675 324,185 366,962
<ALLOWANCES> 0 0 0 22,918
<INVENTORY> 181,286 188,249 185,355 165,652
<CURRENT-ASSETS> 699,319 716,433 725,711 770,052
<PP&E> 809,681 836,512 807,549 831,521
<DEPRECIATION> 227,795 249,260 257,059 277,623
<TOTAL-ASSETS> 1,678,415 1,694,017 1,701,762 1,768,478
<CURRENT-LIABILITIES> 467,573 463,581 466,424 471,186
<BONDS> 391,688<F2> 393,396<F2> 395,640<F2> 397,217<F2>
0 0 0 0
0 0 0 0
<COMMON> 1,724 1,735 1,750 1,757
<OTHER-SE> 788,010<F3> 807,031<F3> 812,667<F3> 872,188<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,678,415 1,694,017 1,701,762 1,768,478
<SALES> 200,791 404,436 609,762 839,341
<TOTAL-REVENUES> 279,945 560,983 850,887 1,162,058
<CGS> 84,771 166,052 257,344 354,643
<TOTAL-COSTS> 84,771 166,052 257,344 354,643
<OTHER-EXPENSES> 89,077<F4> 184,587<F4> 314,551<F4> 415,386<F4>
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 8,505 16,278 24,823 33,257
<INCOME-PRETAX> 23,313 44,402 34,394 76,895
<INCOME-TAX> 6,938 13,214 17,393 26,057
<INCOME-CONTINUING> 16,375 31,188 17,001 50,838
<DISCONTINUED> (1,039)<F8> (110)<F8> 1,396 20,381
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 15,336 31,078 18,397 71,219
<EPS-PRIMARY> 0.09<F6> 0.18<F6> 0.11<F6> 0.41<F6>
<EPS-DILUTED> 0.09<F7> 0.18<F7> 0.10<F7> 0.40<F7>
<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 FOR THE
THREE MONTHS ENDED MAR-31-1997 AND SIX MONTHS ENDED JUN-30-1997. CONSISTS
OF RESEARCH AND DEVELOPMENT, IMPAIRMENT LOSS ON LONG-LIVED ASSETS AND OTHER
OPERATING EXPENSES FOR THE NINE MONTHS ENDED SEP-30-1997. CONSISTS OF RESEARCH
AND DEVELOPMENT, IMPAIRMENT LOSS ON LONG-LIVED ASSETS, RESTRUCTURING AND
REORGANIZATION CHARGES AND OTHER OPERATING EXPENSES FOR THE YEAR ENDED
DEC-31-1997.
<F5>ACTUAL FISCAL YEAR END WAS DEC-28-1997. ACTUAL INTERIM PERIOD END DATES WERE
MAR-30-1997, JUN-29-1997 AND SEP-28-1997. FOR PRESENTATION PURPOSES, DATES
USED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL
MONTH END.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM
CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1997, SIX MONTHS ENDED
JUN-30-1997, NINE MONTHS ENDED SEP-30-1997 AND YEAR ENDED DEC-31-1997 WERE
$0.10, $0.18, $0.10 AND $0.29, RESPECTIVELY. BASIC INCOME/(LOSS) PER SHARE FROM
DISCONTINUED OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1997, SIX MONTHS
ENDED JUN-30-1997, NINE MONTHS ENDED SEP-30-1997 AND YEAR ENDED DEC-31-1997
WERE ($0.01), ($0.00), $0.01 AND $0.12, RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1997, SIX MONTHS ENDED
JUN-30-1997, NINE MONTHS ENDED SEP-30-1997 AND YEAR ENDED DEC-31-1997 WERE
$0.09, $0.18, $0.10 AND $0.29, RESPECTIVELY. DILUTED INCOME/(LOSS) PER SHARE
FROM DISCONTINUED OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1997, SIX MONTHS
ENDED JUN-30-1997, NINE MONTHS ENDED SEP-30-1997 AND YEAR ENDED DEC-31-1997
WERE ($0.00), ($0.00), $0.00 AND $0.11, RESPECTIVELY.
<F8>ON DECEMBER 29, 1997, CHIRON CORPORATION COMPLETED THE SALE OF ITS
OPHTHALMIC BUSINESS UNIT, CHIRON VISION CORPORATION. THIS SCHEDULE FOR THE
THREE MONTHS ENDED MAR-31-1997 AND SIX MONTHS ENDED JUN-30-1997 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 UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS AND AUDITED
CONSOLIDATED FINANCIAL STATEMENTS 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> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996<F5> DEC-31-1996<F5> DEC-31-1996<F5> DEC-31-1996<F5>
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996<F5> JUN-30-1996<F5> SEP-30-1996<F5> DEC-31-1996<F5>
<CASH> 84,809 54,345 53,967 68,114
<SECURITIES> 134,527<F1> 115,655<F1> 75,832<F1> 60,721<F1>
<RECEIVABLES> 295,577 323,008 340,358 372,663
<ALLOWANCES> 0 0 0 20,692
<INVENTORY> 170,139 181,454 186,786 180,534
<CURRENT-ASSETS> 670,434 681,954 680,686 696,768
<PP&E> 692,227 722,151 744,358 796,821
<DEPRECIATION> 157,120 174,616 193,612 213,217
<TOTAL-ASSETS> 1,511,375 1,540,201 1,668,256 1,688,670
<CURRENT-LIABILITIES> 364,281 367,000 463,297 473,169
<BONDS> 416,924<F2> 417,162<F2> 420,044<F2> 419,589<F2>
0 0 0 0
0 0 0 0
<COMMON> 422 424 1,700 1,707
<OTHER-SE> 693,646<F3> 721,822<F3> 745,737<F3> 763,148<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,511,375 1,540,201 1,668,256 1,688,670
<SALES> 194,881 389,524 582,904 804,909
<TOTAL-REVENUES> 260,810 517,032 788,670 1,101,840
<CGS> 80,680 160,807 245,079 342,031
<TOTAL-COSTS> 80,680 160,807 245,079 342,031
<OTHER-EXPENSES> 80,970<F4> 168,364<F4> 254,646<F4> 358,882<F4>
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 7,005 13,966 22,713 30,934
<INCOME-PRETAX> 21,672 41,221 59,066 78,745
<INCOME-TAX> 6,095 11,591 16,608 22,142
<INCOME-CONTINUING> 15,577 29,630 42,458 56,603
<DISCONTINUED> (2,833)<F8> (1,532)<F8> (2,582)<F8> (1,458)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 12,744 28,098 39,876 55,145
<EPS-PRIMARY> .08<F6> 0.17<F6> 0.24<F6> 0.33<F6>
<EPS-DILUTED> .07<F7> 0.16<F7> 0.22<F7> 0.31<F7>
<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 AND UNREALIZED GAIN FROM INVESTMENTS. BALANCE
FOR THE YEAR ENDED DEC-31-1996 ALSO CONSISTS OF NOTES RECEIVABLE FROM STOCK
SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT AND OTHER OPERATING EXPENSES.
<F5>ACTUAL FISCAL YEAR END WAS DEC-29-1996. ACTUAL INTERIM PERIOD END DATES WERE
MAR-31-1996, JUN-30-1996 AND SEP-29-1996. FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH
END.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM CONTINUING
OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1996, SIX MONTHS ENDED JUN-30-1996,
NINE MONTHS ENDED SEP-30-1996 AND YEAR ENDED DEC-31-1996 WERE $0.09, $0.18,
$0.25 AND $0.33, RESPECTIVELY. BASIC LOSS PER SHARE FROM DISCONTINUED OPERATIONS
FOR THE THREE MONTHS ENDED MAR-31-1996, SIX MONTHS ENDED JUN-30-1996,
NINE MONTHS ENDED SEP-30-1996 AND YEAR ENDED DEC-31-1996 WERE ($0.01), ($0.01),
($0.01) AND ($0.00), RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1996, SIX MONTHS ENDED
JUN-30-1996, NINE MONTHS ENDED SEP-30-1996 AND YEAR ENDED DEC-31-1996 WERE
$0.09, $0.17, $0.24 AND $0.32, RESPECTIVELY. DILUTED LOSS PER SHARE FROM
DISCONTINUED OPERATIONS FOR THE THREE MONTHS ENDED MAR-31-1996, SIX MONTHS
ENDED JUN-30-1996, NINE MONTHS ENDED SEP-30-1996 AND YEAR ENDED DEC-31-1996
WERE ($0.02), ($0.01), ($0.02) AND ($0.01), RESPECTIVELY.
<F8>ON DECEMBER 29, 1997, CHIRON CORPORATION COMPLETED THE SALE OF ITS OPHTHALMIC
BUSINESS UNIT, CHIRON VISION CORPORATION. THIS SCHEDULE FOR THE THREE MONTHS
ENDED MAR-31-1996, SIX MONTHS ENDED JUN-30-1996 AND NINE MONTHS ENDED
SEP-30-1996 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)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512,463)
<EPS-PRIMARY> (3.15)<F5>
<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>REPRESENTS BASIC NET LOSS PER SHARE. BASIC LOSS PER SHARE FROM CONTINUING
OPERATIONS AND BASIC LOSS PER SHARE FROM DISCONTINUED OPERATIONS WERE ($2.86)
AND ($0.29), RESPECTIVELY.
<F6>REPRESENTS DILUTED NET LOSS PER SHARE. DILUTED LOSS PER SHARE FROM CONTINUING
OPERATIONS AND DILUTED LOSS PER SHARE FROM DISCONTINUED OPERATIONS WERE ($2.86)
AND ($0.29), RESPECTIVELY.
</FN>
</TABLE>
