<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
COMMISSION FILE NO. 0-12798
------------------------
CHIRON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2754624
(State of Incorporation) (IRS Employer Identification No.)
------------------------
4560 HORTON STREET
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip Code)
------------------------
Registrant's telephone number, including area code: (510) 655-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: /X/ No: / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 28, 1999, was $2.1 billion.
The number of shares outstanding of each of the Registrant's classes of
common stock as of February 28, 1999:
<TABLE>
<S> <C>
TITLE OF CLASS NUMBER OF SHARES
Common Stock, $0.01 par value 180,897,487
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be filed in connection with the
solicitation of proxies for the Annual Meeting of Stockholders to be held on May
13, 1999 are incorporated by reference into Part III of this Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS. THESE
INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE
EVENTS OR PERFORMANCE AND ALL OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS
OF HISTORICAL FACT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS
SUCH AS "BELIEVES", "ANTICIPATES", "EXPECTS", "ESTIMATES", "PROJECTS", "WILL",
"MAY", "MIGHT", AND WORDS OF A SIMILAR NATURE. THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT REFLECT MANAGEMENT'S CURRENT BELIEFS AND EXPECTATIONS
ON THE DATE OF THIS REPORT. ACTUAL RESULTS, PERFORMANCE OR OUTCOMES MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. SOME OF THE
IMPORTANT FACTORS WHICH, IN THE VIEW OF CHIRON CORPORATION ("CHIRON" OR THE
"COMPANY"), COULD CAUSE ACTUAL RESULTS TO DIFFER FROM THOSE EXPRESSED IN THE
FORWARD-LOOKING STATEMENTS ARE DISCUSSED IN ITEM 7 OF THIS REPORT, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", UNDER
THE CAPTION "FACTORS THAT MAY AFFECT FUTURE RESULTS." THE COMPANY UNDERTAKES NO
OBLIGATION TO PUBLICLY ANNOUNCE ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS TO REFLECT FACTS OR CIRCUMSTANCES OF WHICH MANAGEMENT BECOMES AWARE
AFTER THE DATE HEREOF.
OVERVIEW AND CERTAIN RECENT DEVELOPMENTS
Chiron is a biotechnology company that participates in three global
healthcare businesses: biopharmaceuticals, blood testing and vaccines.
The Company's products include Proleukin(R) (aldesleukin), a recombinant
form of interleukin-2, which the Company markets as a treatment for metastatic
renal cell carcinoma and metastatic melanoma. The Company manufactures
recombinant human platelet-derived growth factor, the active ingredient in
Regranex(R) (becaplermin), which is marketed by Ortho-McNeil Pharmaceutical,
Inc. ("Ortho-McNeil"), a Johnson & Johnson ("J&J") company, as a treatment for
foot ulcers related to diabetes. Chiron also manufactures Betaseron(R)
(interferon beta-1b) for Berlex Laboratories, Inc. and its parent company,
Schering AG, which is marketed by Berlex and Schering as a treatment for relapse
remitting multiple sclerosis. In addition, the Company sells a line of
traditional pediatric and adult vaccines. The Company has an interest in a
number of other products through collaborations and joint businesses, including
a joint immunodiagnostics business with Ortho-Clinical Diagnostics, Inc., a J&J
company, which sells a full line of tests required to screen blood for hepatitis
viruses and retroviruses, and a separate collaboration with Gen-Probe
Incorporated, which is developing products using nucleic acid testing technology
to screen blood in blood banks and plasma in the plasma industry for infection
by viruses.
Chiron has a strong commitment to research as an essential component of its
product development effort. The Company focuses its research and development
activities primarily on areas in which it has particular strengths, including
infectious diseases, cancer and cardiovascular diseases. An important part of
the Company's research and development effort is undertaken through
collaborations with third parties who are able to contribute significant
enabling technologies and other resources to the development and
commercialization of the product, including in some cases marketing and sales
expertise.
In January 1995 the Company established an alliance with Novartis AG
("Novartis"), a life sciences company headquartered in Basel, Switzerland. As of
February 28, 1999, Novartis held shares representing approximately 44% of the
outstanding common stock of the Company. For more on the Novartis alliance, see
"Relationship With Novartis", below.
2
<PAGE>
The Company recently sold certain businesses as it continued to focus on its
core activities. On November 30, 1998, the Company completed the sale of its IN
VITRO diagnostics business to Bayer Corporation ("Bayer") for approximately
$1,013.8 million in cash, subject to certain adjustments. Chiron retained its
blood testing business, including its joint business with Ortho-Clinical
Diagnostics, Inc. and its collaboration with Gen-Probe Incorporated. On December
31, 1998, the Company completed the sale of its interest in General Injectables
& Vaccines, Inc. ("GIV"), a distribution business, to Henry Schein, Inc. and
received payment in full of certain advances made by the Company to GIV, for a
total of $31.7 million in cash. On December 29, 1997, the Company completed the
sale of its ophthalmics business to Bausch & Lomb Incorporated ("Bausch & Lomb")
for approximately $300.0 million in cash.
The Company was incorporated in California in 1981 and was merged into a
Delaware corporation in November 1986. The Company's principal executive offices
are located at 4560 Horton Street, Emeryville, California 94608, and its
telephone number at that address is (510) 655-8730.
PRODUCTS
BIOPHARMACEUTICALS
The Company's leading therapeutic product is Proleukin(R) (aldesleukin), a
recombinant form of interleukin-2 ("IL-2"). IL-2 is a protein produced naturally
in the body in very small quantities. IL-2 stimulates the immune system to
increase the production of lymphocytes (white blood cells) that help fight
certain cancers and may help fight viral infections. While the precise mechanism
of anti-tumor action of Proleukin(R) is unknown, research has demonstrated that
it induces the proliferation of immune cells, natural killer and cytotoxic T
cells that can recognize and mobilize against tumor-specific antigens on the
surface of malignant cells. Proleukin(R) is marketed by the Company directly or
through distributors in the United States and over 40 other countries in North
America, Europe, and South America, for the treatment of metastatic renal cell
carcinoma (a type of kidney cancer) and, in the United States and Canada, for
the treatment of metastatic melanoma (a form of skin cancer).
Chiron manufactures recombinant human platelet-derived growth factor
(rhPDGF-BB), the active ingredient in Regranex(R) (becaplermin) Gel, developed
with Ortho-McNeil through a collaboration in growth factor research that began
in 1984. Ortho-McNeil markets Regranex(R) in the United States as a treatment
for foot ulcers related to diabetes. Regranex(R) works by enhancing the body's
natural wound healing processes. It stimulates the migration of cells to the
site of the ulcer, encouraging the patient's body to grow new tissue that helps
heal these open wounds. Regranex(R) is the first product demonstrated to assist
in the healing of diabetic foot ulcers. Regranex(R) also has been approved for
marketing in Canada, and has been recommended by the European Union regulatory
authority, the Committee for Proprietary Medicinal Products (the "CPMP"), for
approval for marketing in Europe.
Chiron manufactures Betaseron(R) (interferon beta-1b) for Berlex
Laboratories, Inc. ("Berlex") and its parent company, Schering AG of Germany.
Berlex markets Betaseron(R) primarily in the United States and Canada to treat
patients with relapsing remitting multiple sclerosis. Multiple sclerosis is an
autoimmune disease in which the patient's immune system attacks and destroys an
element of the patient's own central nervous system. The Company also receives
royalties from the sale of a similar product in Europe, Betaferon(R), which is
manufactured by Boehringer Ingelheim and marketed by Schering AG for the
treatment of patients with relapsing remitting or secondary progressive multiple
sclerosis.
3
<PAGE>
Sales of Proleukin(R) (IL-2) accounted for approximately 13%, 12% and 11% of
consolidated total revenues in 1998, 1997 and 1996, respectively, and sales of
Betaseron(R) (interferon beta-1b) accounted for approximately 13% of total
revenues in 1996. No other single therapeutic product or class of therapeutic
products accounted for 10% or more of consolidated total revenues of the Company
in any of the last three fiscal years.
VACCINES
Through its subsidiary Chiron S.p.A., based in Siena, Italy, the Company
manufactures and markets in Italy vaccines for diphtheria, tetanus, pertussis,
meningococcus, haemophilus influenzae, flu, measles, mumps, rubella, hepatitis A
and an oral polio vaccine and, under license, markets a vaccine for typhoid
fever. Through its subsidiary Chiron Behring GmbH & Co ("Chiron Behring"), based
in Marburg, Germany, the Company manufactures and markets in Germany vaccines
for diphtheria, tetanus, pertussis, flu, rabies, tick-borne encephalitis,
tuberculosis, cholera and an oral polio vaccine and, under distribution
agreements with other manufacturers, markets vaccines for hepatitis A, measles,
mumps, rubella, typhoid fever, pneumococcal disease, haemophilus influenzae type
b, an inactivated polio vaccine, an acellular pertussis vaccine and a
recombinant vaccine for hepatitis B. Certain of these vaccines are marketed in
other European countries and in the Middle East, the Far East, Africa and South
America, and to international health agencies such as the World Health
Organization. The Company markets its rabies vaccine in the United States.
The Company also has developed an adjuvanted flu vaccine, which it markets
in Italy. The Company currently is considering its regulatory approval strategy
for this vaccine in other European countries and elsewhere.
The Company has developed a genetically engineered acellular vaccine for
pertussis (whooping cough), which currently is marketed in Italy both as a
monovalent vaccine and in combination with diphtheria and tetanus ("DTaP"). In
February 1999, the Company announced that it had received approval from the
European Medicines Evaluation Agency to market its DTaP vaccine for infants and
toddlers in Europe, and also announced that it had withdrawn its application to
market the DTaP vaccine in the United States. Several business factors
influenced the Company's decision to withdraw the application, including the
U.S. competitive landscape and the Company's continued effort to review and
refocus its product development portfolio.
In addition to revenues from the sale of the vaccine products described
above, the Company receives royalties from the sale of vaccines against
hepatitis B developed, manufactured and marketed by Merck & Co., Inc. ("Merck")
and SmithKline Beecham Biologics ("SmithKline") using technology developed by
Chiron. Merck's hepatitis B vaccine was the first vaccine produced using genetic
engineering licensed by the Food and Drug Administration ("FDA") for human use.
BLOOD TESTING
Chiron's blood testing business comprises two separate collaborations: an
alliance with Gen-Probe Incorporated ("Gen-Probe") and a separate joint business
with Ortho-Clinical Diagnostics, Inc. ("Ortho"), an affiliate of Johnson &
Johnson.
4
<PAGE>
Chiron's joint business with Ortho was formed in 1989, based largely on the
screening of blood in blood banks and other similar settings for the potential
presence of human immunodeficiency virus ("HIV") and hepatitis viruses using
immunodiagnostics technology. 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. Chiron performs certain research and antigen
manufacturing functions, while Ortho manufactures and sells assays and
instrument systems. Chiron and Ortho share equally in the pretax operating
earnings generated by the joint business. The joint business holds the
immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and
receives royalties from the sale of hepatitis C virus ("HCV") and HIV tests by
Abbott Laboratories ("Abbott"), and from sales of HCV tests by Pasteur Sanofi
Diagnostics and Genelabs Diagnostic, Inc.
Chiron's collaboration with Gen-Probe is focused on developing and
commercializing products using nucleic acid testing technology to screen blood
in blood banks and plasma in the plasma industry for infection by viruses.
Compared to immunodiagnostic testing, testing directly for the presence of viral
nucleic acid both improves the sensitivity of detection and enables infection to
be detected earlier in the viral lifecycle. Under the terms of the collaboration
agreement, Gen-Probe performs certain product development and assay and
instrument manufacturing functions while Chiron and Gen-Probe jointly
participate in new assay research and development and Chiron will sell the
collaboration's products. Gen-Probe will receive a fixed percentage of Chiron's
sales revenues. The commercial market for nucleic acid testing products in the
blood banking and plasma industries is developing very rapidly as regulatory
agencies begin in 1999 to require that blood banks and plasma centers implement
nucleic acid testing. The Chiron/Gen-Probe collaboration's first product, a
combined test for HIV-1 and HCV using a multiplexed assay and a semi-automated
instrument system is being used to screen blood under an Investigative New Drug
("IND") pretrial in the United States. See "Research and Development--Blood
Testing".
No single blood testing product or class of blood testing products accounted
for 10% or more of consolidated total revenues of the Company in any of the last
three fiscal years.
RESEARCH AND DEVELOPMENT
Chiron has a strong commitment to research as an essential component of its
product development effort. Technologies developed in collaborations with third
parties, as well as technologies licensed from outside parties, also are sources
of potential products.
BIOPHARMACEUTICALS
FUNCTIONAL GENOMICS. Genomics and other technologies are used to discover
new genes and to determine their role and the role of the encoded proteins in a
target disease. With this information, the Company then identifies and develops
potential products utilizing a variety of approaches, including recombinant
proteins, gene therapy and small molecule drug discovery for treatment of the
disease and vaccines with recombinant antigens for prevention of the disease.
RECOMBINANT PROTEINS. Proteins produced naturally by the human body play a
variety of roles in controlling disease. When administered as therapeutic
agents, certain proteins can enhance the patient's natural ability to fight
disease. However, traditional methods of isolating
5
<PAGE>
or producing proteins can be cost-prohibitive, particularly in the quantities
needed for pharmaceutical use. Through genetic engineering, certain proteins
which might not otherwise be available can be produced in relatively large
quantities at reasonable cost.
The Company and its collaborators have a number of recombinant proteins in
clinical development. Proleukin(R) (IL-2), already approved for marketing as a
treatment for certain forms of kidney and skin cancer, is being clinically
evaluated for other indications, including treatment of patients with HIV
infection, treatment of acute myelogenous leukemia and as a treatment for
non-Hodgkins lymphoma in patients with AIDS. Fibroblast Growth Factor ("FGF"), a
growth factor which can stimulate the formation of new blood vessels, is in
clinical studies for use as a treatment for coronary artery disease. Tissue
Factor Pathway Inhibitor ("TFPI"), a coagulation inhibitor, is being developed
in collaboration with G.D. Searle & Co. ("Searle"), a subsidiary of the Monsanto
Company; the Company and Searle are conducting clinical studies on the use of
TFPI as a treatment for patients with sepsis. Myotrophin(R) (mecasermin), a
recombinant form of Insulin-Like Growth Factor-I (IGF-I), is being developed by
the Company in collaboration with Cephalon, Inc. ("Cephalon") as a treatment for
amyotrophic lateral sclerosis (also known as ALS or Lou Gehrig's disease) and is
being developed by Chiron for other indications. In 1997, an FDA advisory
committee found that there was not sufficient evidence of efficacy as a
treatment for ALS to warrant approval. In May 1998, Chiron and Cephalon received
a letter from the FDA indicating that Myotrophin(R) (IGF-I) is potentially
approvable, contingent upon additional evidence of efficacy and safety. It is
uncertain whether additional evidence satisfactory to the FDA can be delivered.
Chiron and Cephalon are continuing to work with the FDA on outstanding issues.
In September 1998, Chiron and Cephalon withdrew their application to market
Myotrophin(R) (IGF-I) in Europe.
GENE THERAPY. Traditional recombinant protein therapeutics are produced
outside the patient's body and administered to the patient, typically through
injection. Gene therapy enables the patient's own body to produce a desired
protein by inserting the gene for that protein into the patient's cells.
Currently there are no gene therapy products on the market; many studies suggest
that the technology is promising but considerable further study is required to
determine whether this technology can be safely and effectively utilized to
treat disease. An example of a potential application of gene therapy currently
in preclinical development at the Company is Factor VIII. Factor VIII is a
protein that causes blood to clot. Hemophiliacs, as a result of a hereditary
defect, are born with faulty copies of the gene that produces Factor VIII.
Through gene therapy, it may be possible to insert into a hemophiliac's cells
the normal Factor VIII gene, so that the patient's own cells can produce the
blood clotting protein.
A key component of any gene therapy treatment will be the mechanism for
"inserting" the gene into the patient's cells. The Company is developing several
gene transfer systems, including retroviral and other viral vectors as well as
the Company's proprietary ELVS-TM- DNA vector system. Each gene transfer system
has different properties, including cell specificity (the type of cells it can
enter) as well as durability of expression (how long it will continue to make
the therapeutic protein). Different gene transfer systems are likely to be
required to meet different therapeutic needs. Viral vectors are derived from
viruses. The vectors have the "coat" of the original virus, which allows them to
enter the targeted cell. Certain viral genes are removed and therapeutic genes
are added so that the vector can no longer cause the disease characteristic of
the original virus and instead expresses the desired therapeutic protein. DNA
vectors include only the therapeutic gene and the control elements required to
express that
6
<PAGE>
gene. Studies have shown that certain types of cells, including muscle cells,
will take up the DNA and express the gene contained on the DNA.
The Company also is investigating whether gene therapy may be used as part
of a two-step treatment which combines gene therapy with more traditional
therapeutics. For example, HSV-tk is a gene encoding thymidine kinase derived
from herpes simplex virus. It may be possible to use a gene transfer system to
insert the HSV-tk gene into targeted cells (such as cancer cells), and then kill
the cells that have taken up the HSV-tk gene by treating the patient with
Gancyclovir, an antiviral for herpes. The Company is conducting clinical studies
on the use of HSV-tk gene therapy for the treatment of melanoma (a form of skin
cancer) and, in collaboration with Baxter Healthcare Corporation, for the
treatment of graft-versus-host disease.
SMALL MOLECULE DRUG DISCOVERY. Chiron's small molecule drug discovery
program combines multiple disciplines, including combinatorial and computational
chemistry, robotic screening and selection, and molecular biology, to screen,
identify and refine compounds which may be used as drugs for treating medical
conditions or disorders. In addition to drug discovery against specific disease
targets of interest to the Company, from time to time the Company enters into
collaboration agreements with third parties under which the Company utilizes its
proprietary technologies to identify drug candidates directed at specific
disease targets of interest to the partner. Certain compounds which may be of
interest have been identified and are being further optimized and tested prior
to moving into clinical development.
OTHER. The Company has other products under development directly and in
collaboration with other companies, including a collaboration with DepoTech
Corporation ("DepoTech") to develop DepoCyt-TM- sustained-release
chemotherapeutic formulation. DepoCyt-TM- consists of cytarabine (a generic
chemotherapy product) encapsulated in a novel delivery system, called
Depofoam-TM-. In December 1997, an FDA advisory committee declined to recommend
approval of DepoCyt-TM- for neoplastic meningitis associated with solid tumors.
Chiron and DepoTech subsequently reached agreement with the FDA to amend the
application with additional clinical trial data from lymphomatous meningitis
patients and seek approval for this indication. In November 1998, an FDA
advisory committee recommended that DepoCyt-TM- be approved for treatment of
lymphomatous meningitis. Final FDA approval for this indication is expected in
1999 and will require a post-approval (phase IV) clinical study commitment.
VACCINES
PROPHYLACTIC VACCINES. Chiron is developing a new generation of vaccines
for the prevention of disease utilizing genetic engineering and other techniques
of modern biotechnology, including vaccines based on recombinant antigens as
well as DNA-based vaccines. The Company currently is conducting clinical studies
of a number of vaccine candidates, including vaccines for HCV, HIV and
meningococcus C, and is conducting preclinical studies on vaccines for a number
of other targets. The Company also is developing novel adjuvants. Adjuvants are
compounds that amplify the immune response generated by vaccine antigens. One of
Chiron's adjuvants, MF-59, is a component of Chiron's new flu vaccine, which
currently is marketed in Italy, and is also a component of a number of other
candidate vaccines currently in clinical development by Chiron. In addition,
Chiron is conducting preclinical investigations of alternative delivery systems
for vaccines that may be used in lieu of injection, such as nasally or orally
delivered vaccines.
7
<PAGE>
THERAPEUTIC VACCINES. The Company is investigating the potential use of
vaccines for therapeutic purposes, in which antigens are used to stimulate an
immune response against established infections and cancer. The Company is
collaborating with Biomira, Inc. in the development of Theratope(R) vaccine for
breast cancer. This vaccine, which is in clinical trials, consists of a
synthetic mimic of a breast cancer-associated antigen conjugated to a carrier
protein.
BLOOD TESTING
The Chiron/Gen-Probe collaboration has two instrument systems in
development, both of which will test blood and plasma for HIV-1 and HCV nucleic
acid in a single multiplexed assay. The semi-automated component system is
currently operating under IND in the United States while the fully automated
Tigris-TM- system is under development. Gen-Probe is widening the menu from
HIV-1/HCV to include other transfusion transmitted agents and continuing
development of the fully automated Tigris-TM- instrument.
Ortho is developing a range of hepatitis and retrovirus assays for IN-VITRO
clinical diagnostics use on its immunodiagnostics instrument system.
RESEARCH REVENUES AND EXPENSES
Collaborative arrangements with third parties are also a source of revenue
for the Company. In general, collaboration revenues include fees for research
services as they are performed or completed and milestone payments upon
attainment of specified benchmarks.
Novartis and the Company have entered into an agreement under which Novartis
has agreed to provide research funding for certain projects. The funded projects
currently consist of certain adult and pediatric vaccines, Insulin-Like Growth
Factor-I, Factor VIII and HSV-tk. Novartis has agreed to fund, at Chiron's
request and subject to certain annual and aggregate limits, 100% of the
development costs of these projects incurred between January 1, 1995 and
December 31, 1999. In exchange for providing this funding, Novartis has certain
co-promotion rights for certain vaccines as well as an interest in certain
royalties on sales of certain products resulting from the funded research.
Research and development expense for the years ended December 31, 1998, 1997
and 1996 for Company-sponsored research, including payments to collaboration
partners, was $294.2 million, $259.4 million and $248.8 million, respectively.
Of that, $61.9 million, $79.5 million and $103.8 million in 1998, 1997 and 1996,
respectively, was reimbursed by third parties.
COMMERCIALIZATION
Technologies arising out of the Company's research and development efforts
are commercialized in a variety of ways. Certain products are marketed and
distributed by the Company, either directly or through distributors. See
"Distribution", below. Other technologies are developed by the Company in
collaboration with third parties, and under the collaboration agreement
marketing rights may be allocated to the Company or to the collaborator or
shared by both parties. In the event marketing rights are allocated to the
collaborator, the Company generally retains the right to manufacture and supply
key raw materials to the collaborator. Still other technologies are licensed by
the Company to third parties, with the licensee assuming responsibility for
further development and the Company receiving royalties on sales of the
resulting product. Agreements under which the Company currently derives revenues
for
8
<PAGE>
technologies licensed to third parties include an agreement with Bayer relating
to, among other things, use of the Company's HCV and HIV technologies for IN
VITRO diagnostics; an agreement with F. Hoffman La-Roche Limited and Hoffman
La-Roche, Inc. ("Roche"), relating to polymerase chain reaction ("PCR")
technology; agreements with Merck and SmithKline relating to technology used in
their respective hepatitis B vaccines and an agreement with Novo Nordisk A/S
relating to technology used in the manufacture of recombinant human insulin.
DISTRIBUTION
To remain competitive in an intensely competitive environment, Chiron
maintains several specialized marketing and sales forces that concentrate on
individual classes of customers.
The Company's vaccine marketing organization is based in Siena, Italy and
Marburg, Germany. Direct sales efforts are focused on pediatricians and general
practitioners. Products are also sold to the public sector through tenders and
to private sector pharmacies through wholesalers and distributors.
Chiron's biopharmaceuticals marketing, sales and distribution organization
for the U.S. is based in Emeryville, California and for Europe is headquartered
in Amsterdam, The Netherlands. Sales efforts are focused on specialist
physicians, principally oncologists, who are based in hospitals and large
clinics. In general, products are sold to wholesalers, distributors, and
hospital pharmacies.
RAW MATERIALS
Raw materials and other supplies used in the manufacture of the Company's
products (both commercial and investigational) generally are available from
multiple commercial sources. Certain processes, however, use materials that are
available from sole sources or that are in short supply or that are difficult
for the supplier to produce and certify in accordance with the Company's
specifications. The Company's biopharmaceutical products are biologics; from
time to time concerns are raised with respect to potential contamination of
biological materials that are supplied to the Company for use in various
production processes. These concerns can further tighten market conditions for
materials that may be in short supply or available from limited sources.
Moreover, regulatory approvals to market the Company's products may be
conditioned upon obtaining certain materials from specified sources; the
Company's ability to substitute material from an alternate source may be subject
to delay pending regulatory approval of such alternate source. Although the
Company monitors the ability of certain suppliers to meet the Company's needs
and the market conditions for these materials, there is a risk that material
shortages could impact production.
PATENTS
Patents are very important to the business of the Company. Chiron has a
policy of seeking patents on inventions arising from its extensive research and
development activities. The time and expense required to develop and obtain
regulatory approval to market human healthcare products is significant. Without
the protection of patents or trade secrets, competitors may be able to use the
Company's inventions to manufacture and market competing products without being
required to undertake the lengthy and expensive development efforts made by
Chiron. Chiron has a substantial number of granted patents and pending patent
applications in the United States and other important markets, and a number of
patents and patent applications owned by third parties have been licensed to
Chiron.
9
<PAGE>
There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the United States and
other important markets. It is not known how many of the Company's pending
patent applications will be granted, nor the effective coverage of those that
grant. In the United States and other important markets, the issuance of a
patent is not conclusive as to its validity or the enforceable scope of its
claims. The Company has engaged in significant litigation to determine the scope
and validity of certain of its patents, and expects to continue to do so in the
future.
Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection.
Third parties may be able to design around the patents and develop competitive
products that do not use the inventions covered by the patents. Many countries,
including certain countries in Europe, have compulsory licensing laws under
which a patent owner may be compelled to grant licenses to third parties (for
example, the third party's product is needed to meet a threat to public health
or safety in that country, or the patent owner has failed to "work" the
invention in that country, or the third party has patented improvements), and
most countries limit the enforceability of patents against government agencies
or government contractors. In these countries, the patent owner may be limited
to monetary relief and may be unable to enjoin infringement, which could
materially diminish the value of the patent. Furthermore, most countries do not
provide discovery so the Company may not be able to meet its burden of proving
infringement; nor can it be guaranteed that the Company will even become aware
of infringement of its patents.
To a lesser extent, trade secrets and confidential information are important
to Chiron's commercial success. Although the Company seeks to protect trade
secrets and confidential information, there can be no assurance that others will
not obtain access to such information or develop the same or similar information
independently, or that third parties will not obtain patent protection that
precludes Chiron from using its trade secrets or confidential information.
Chiron is aware that third parties, including competitors, educational
institutions and governmental organizations, have patents and patent
applications in the United States and other significant markets that may be
useful or necessary for the manufacture, use or sale of certain of the Company's
products (commercial and investigational). There may be other such patents and
patent applications of which the Company is not currently aware. It is likely
that third parties will obtain other such patents in the future. Certain of
these patents may be sufficiently broad to prevent or delay Chiron from
practicing necessary technology, including manufacturing or marketing products
important to the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which Chiron may wish
or need to obtain licenses to such patents, and the cost and availability of
such licenses cannot be accurately predicted. If Chiron does not obtain such
licenses, products may be withdrawn from the market or delays could be
encountered in market introduction while an attempt is made to design around
such patents. Alternatively, Chiron could find that the development, manufacture
or sale of such products is foreclosed. Chiron could also incur substantial
costs in challenging the validity and scope of such patents.
TRADEMARKS
Proleukin(R) is a registered trademark of the Company and its subsidiaries.
ELVS-TM-, Polioral-TM- and Triacelluvax-TM- are trademarks of the Company and
its subsidiaries. DepoCyt-TM- is a
10
<PAGE>
trademark owned by Chiron and DepoTech. The following registered trademarks are
owned by the indicated companies: Betaseron(R) and Betaferon(R) (Schering AG),
Myotrophin(R) (Cephalon), Regranex(R) (J&J), Theratope(R) (Biomira, Inc.),
Apligraf(R) (Novartis), Dermagraf(R) (Advanced Tissue Sciences, Inc.),
Copaxone(R) (Teva Pharmaceutical Industries, Ltd.), Avonex(R) (Biogen, Inc.),
Aredia(R) (Novartis), and Amplicor(R) (Roche). Tigris-TM- is a trademark owned
by Gen-Probe.
SEASONALITY
Sales of certain of the Company's vaccine products, in particular flu
vaccine, are seasonal, with higher sales in the third and fourth quarters of the
year.
The Company receives royalties on sales of PCR products by Roche. Under the
terms of the Company's agreement with Roche, royalties are payable after Roche's
annual net sales of PCR products exceed $200 million. This $200 million
threshold resets at the beginning of each year. Accordingly, the Company does
not expect to receive any royalties on Roche's PCR sales until the last half of
each year.
MAJOR CUSTOMERS
The Company has a strategic alliance with Novartis and in connection
therewith has entered into a series of arrangements with Novartis. See
"Relationship With Novartis", below. These arrangements contributed 12%, 21% and
21% of total revenues in 1998, 1997 and 1996, respectively. The Company has a
joint immunodiagnostics business with Ortho. See "Products-Blood Testing",
above. The Ortho joint business, together with certain other arrangements with
J&J and its affiliates, contributed 18%, 24%, and 23% of total revenues in 1998,
1997 and 1996, respectively. The Company has a supply agreement with Berlex and
its parent company, Schering AG of Germany. Revenues recognized under this
agreement contributed 13%, 14% and 15% to total revenues in 1998, 1997 and 1996,
respectively.
COMPETITION
Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
blood testing companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and blood testing companies, have
greater resources than the Company. The technologies applied by the Company and
its competitors are rapidly evolving, and new developments frequently result in
price competition and product obsolescence. Substantial consolidation is
underway in the global healthcare industry, and is expected to produce greater
efficiencies and even more intense competition.
To compete effectively, Chiron invests heavily in research and development,
maintains specialized sales forces that concentrate on individual classes of
customers, and spends significant amounts on advertising, promotion and selling.
11
<PAGE>
Important biotechnology research is performed in universities and nonprofit
research organizations. These entities are becoming more active in seeking
patent protection and licensing revenues for their discoveries. The competition
among large pharmaceutical companies and smaller biotechnology companies to
acquire technologies from these entities also is intensifying. While Chiron
actively collaborates with such entities in research, and has and will continue
to license their technologies for further development, these institutions also
compete with Chiron to recruit scientific personnel and to establish proprietary
positions in technology.
BIOPHARMACEUTICALS
Proleukin(R) competes with alpha interferon sold by Schering Plough
Corporation and by Roche as a treatment for metastatic kidney cancer and
metastatic melanoma, although many patients are treated with both products. The
Company estimates that Proleukin(R) has approximately a 50% market share for
these indications. The principal method of competition is product performance.
Several other companies are developing immune-system-based therapies for cancers
and infectious diseases, including Roche, Genentech, Inc., Amgen, Inc., Immunex
and Immune Response/Agouron.
Regranex(R) was the first product approved by the FDA for treatment of
diabetic foot ulcers. It competes with Dermagraft(R), a product from Advanced
Tissue Sciences & Smith and Nephew, and with Apligraf(R), a product from
Novartis which has been approved by the FDA for treatment of venous leg ulcers
and is in clinical trials for treatment of diabetic foot ulcers. Several other
companies, including Genzyme and Novartis, are developing transforming growth
factor-beta (TGF-Beta), which may compete with Regranex(R) in the future.
Betaseron(R), as a treatment for multiple sclerosis, competes with
Avonex(R), a recombinant interferon beta sold by Biogen, Inc., and with
Copaxone(R) from Teva Pharmaceuticals. In certain European countries, Schering
AG's product, Betaferon(R), faces competition from Ares Serono, which sells an
extracted form of beta interferon that is used for, among other purposes,
treatment of multiple sclerosis. Other companies have treatments for multiple
sclerosis in clinical development.
VACCINES
Four large companies hold the greatest share of the worldwide vaccine
market: Merck, SmithKline, Wyeth Lederle Vaccines & Pediatrics, a division of
American Home Products Corporation ("Lederle"), and Pasteur Merieux Connaught
("PMC"). PMC separately has a strategic alliance with Merck. All four of these
companies, as well as other biotechnology companies, have substantial research
and development programs. The Company estimates that it has approximately a 38%
and 37% market share in Germany and Italy, respectively, and an aggregate market
share of approximately 8% outside of the United States, Europe and Japan. The
principal methods of competition in vaccines are price and introduction of new
products, including vaccines against diseases for which no vaccine was
previously available as well as new combination vaccines that combine existing
vaccines for several diseases into a single product. Combination vaccines
frequently are favored by public health authorities, medical practitioners and
patients, particularly in the case of pediatric vaccines, because they eliminate
the need for multiple injections and may increase overall compliance with
recommended vaccination schedules. As new combination vaccines are introduced,
older combinations and single products often become obsolete. The Company may be
limited in its ability to develop and market
12
<PAGE>
certain combination vaccines if one of the vaccines which would otherwise be
included in the combination is covered by valid and enforceable patent or other
proprietary rights held by third parties.
BLOOD TESTING
Chiron is the sole manufacturer of HCV antigens for use in immunodiagnostic
assays of both Abbott and the Chiron-Ortho joint businesses. In the immunoassay
blood testing market, the Chiron-Ortho joint business competes with Abbott with
each having, in total, approximately 45% market share of the major world
markets. The joint business anticipates increased competitive pressures from
Abbott with the introduction of the Abbott Prism(R) instrument system. The joint
business is also developing immunodiagnostic instruments and assays to detect
hepatitis, retrovirus and other agents in clinical diagnostic applications. Many
other companies, including Roche, Abbott and Bayer have substantial positions in
the market segment.
Currently, there are no approved, probe-based tests for commercial use in
blood testing. Chiron/Gen-Probe nucleic acid testing products are expected to
compete primarily with PCR-based products supplied by Roche or developed
in-house by customers (homebrew). The commercial market for nucleic acid testing
products in the blood banking and plasma industries is developing very rapidly
as regulatory agencies begin in 1999 to require that customers implement this
new technology.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
important markets is a significant factor in the manufacture and sale of the
Company's products and in its research and development activities.
BIOPHARMACEUTICALS AND VACCINES. In the United States, Chiron's therapeutic
and vaccine products (both commercial and investigational) are regulated
primarily under federal law and are subject to rigorous FDA approval procedures.
No product can be marketed in the United States until an appropriate application
is approved by the FDA. The approval procedures are applied on a
product-by-product basis and require, among other things, an extensive three-
phase human clinical testing program. In phase 1, studies are conducted with a
relatively small number of subjects to assess the safety of the product. In
phase 2, the product is evaluated in a larger group of subjects to begin to
assess efficacy. Phase 3 studies are conducted in the target population with a
number of subjects that is large enough to provide sufficient data to establish
statistically the safety and efficacy of the product. FDA approval of a product
is limited to treatment for specified medical conditions or disorders, and
further studies would be required to market the product for other indications.
All facilities used to manufacture, fill, test and distribute biologic products
are required to be inspected and approved by the FDA. If any change is made in
manufacturing facilities or processes after FDA approval is obtained, additional
regulatory review and possibly additional clinical studies may be required.
Licensing procedures in Europe are comparable to those in the United States.
In 1995, the European Union ("EU") established a centralized procedure for
licensing of products derived from the use of high technology/biotechnology
processes. This procedure leads to the grant of a single license for the entire
EU. Effective January 1, 1998, the EU has also adopted a
13
<PAGE>
decentralized procedure under which a license granted in one member state is
mutually recognized by the other member states, leading to a grant of licenses
in member states recognizing the original license. This procedure is expected to
replace independent national licensing of products in the EU. In addition, each
product must receive individual country pricing approvals before it can be
marketed in that country.
BLOOD TESTING. Blood testing products, whether based upon immunodiagnostics
or nucleic acid testing technologies, may only be used pursuant to the terms of
approval of specific license applications in which the product's safety and
effectiveness must be demonstrated based upon well controlled studies. Upon
approval of the license application, the product may be marketed for the
specific indications of use, which were identified in the approval. Facilities,
processes and operations used for the manufacture, testing, storage and
distribution of Chiron's blood testing products in the U.S. are subject to FDA
approval and periodic inspection.
For both biopharmaceutical and blood testing products, the time and expense
needed to complete the required clinical studies, prepare and submit the
required applications and supporting documentation, and respond to inquiries
generated by regulatory review can far exceed the time and expense of the
research and development initially required to create the product. These factors
largely determine the speed with which a successful research program is
translated into a marketed product.
ENVIRONMENT
Expenses for compliance with environmental laws have not had and are not
expected to have a material impact upon the Company's capital expenditures,
earnings or competitive position.
EMPLOYEES
On December 31, 1998, Chiron and its subsidiaries had 3,247 employees.
RELATIONSHIP WITH NOVARTIS
As noted above, the Company has an alliance with Novartis. Novartis is a
life sciences company headquartered in Basel, Switzerland which was formed as a
result of the December 1996 merger between Ciba-Geigy Limited ("Ciba") and
Sandoz Limited. Through a series of transactions that became effective in
January 1995, Ciba acquired shares of the Company's common stock which, when
combined with shares already held by Ciba, represented 49.9% of the
then-outstanding common stock of the Company. As a result of dilution stemming
primarily from the issuance of common stock under the Company's employee stock
option and stock purchase plans and in connection with certain acquisitions, as
of February 28, 1999, Novartis held shares representing approximately 44% of the
Company's outstanding common stock.
In connection with these transactions, Chiron and Novartis entered into a
series of agreements which provide, among other things and subject to certain
conditions and exceptions, that Novartis will not increase its ownership
interest in the Company above 49.9% before January 5, 2000 and thereafter will
not increase its ownership interest above 55% unless it acquires all of the
outstanding capital stock of the Company in a "buy-out" transaction; that
Novartis may not propose or consummate a "buy-out transaction" before January 5,
2001; that Novartis may exceed these standstill amounts and increase its
ownership interest up to 79.9% if
14
<PAGE>
the transaction is approved by a majority of the independent members of the
Company's Board of Directors; that Novartis has the right to nominate three
members to Chiron's eleven member Board of Directors; that Novartis will provide
certain funding to the Company for research services (see "Research and
Development--Research Revenues and Expenses" above) and will guarantee certain
bank lines of credit on behalf of the Company; that Chiron may require Novartis
to purchase shares of the Company's common stock directly from the Company at
fair market value, up to a maximum subscription amount (initially $500 million,
subject to adjustment); that Novartis has an option to purchase newly issued
shares of the Company's common stock directly from the Company at fair market
value, subject to the standstill restrictions described above; and that Chiron
and Novartis will cooperate in research, development, manufacturing and
marketing of biotechnology products on an arm's-length basis while remaining
independent to pursue other opportunities.
ITEM 2. PROPERTIES
EMERYVILLE CAMPUS. Chiron's principal executive offices are located in
Emeryville, California. The campus consists of 26 buildings, of which 14 are
leased and 12 are owned. In 1998, the Company completed development of a new
research and development facility in Emeryville under an operating lease
arrangement. The Emeryville facilities include research and development,
manufacturing and administrative facilities for the Company's biopharmaceutical,
vaccine and blood testing businesses.
OTHER R&D AND MANUFACTURING FACILITIES. The Company also owns manufacturing
facilities in Vacaville, California and Amsterdam, The Netherlands used
principally in connection with the Company's biopharmaceutical and vaccines
businesses. Certain of these facilities have available capacity due to lower
than expected demand for certain of the Company's products and improved
production yields from other facilities. In January 1999, the Company announced
its intention to discontinue manufacturing in the Amsterdam facility after 1999.
The Amsterdam facility currently is being marketed for sale.
The Company has research and development, manufacturing and administrative
facilities in Siena, Italy and Marburg, Germany and manufacturing facilities in
Rosia, Italy relating to its vaccine operations. The Siena and Rosia facilities
are owned and the Marburg facility is leased.
The Company leases research and development facilities in San Diego,
California in connection with its gene therapy activities.
The Company owns research and development, manufacturing and administrative
facilities in Claremont, California. The facilities were used principally in
connection with the Company's former ophthalmic products business, which was
sold to Bausch & Lomb in December 1997. Bausch & Lomb occupies a significant
portion of the facilities under a three-year lease which expires in December
2000. The Claremont campus currently is being marketed for sale.
The Company leases a number of other facilities in North America, Europe,
Asia and Australia, primarily for sales and service offices.
The Company believes that its facilities are in good operating condition and
are adequate for its current needs. The Company continually evaluates future
requirements for its facilities.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
CONNAUGHT LABORATORIES, LIMITED
Chiron is involved in litigation in Italy, Germany and The Netherlands with
Connaught Laboratories, Limited ("Connaught") relating to TriAcelluvax-TM-, the
Company's diphtheria/ tetanus/acellular pertussis vaccine.
Chiron manufactures and sells TriAcelluvax-TM- in Italy. Connaught alleges
that TriAcelluvax-TM- infringes the Italian counterpart of its European Patent 0
527 753 (the "'753 patent"). The '753 patent contains claims which relate to the
pertactin protein of BORDETELLA PERTUSSIS. In June 1997, Chiron S.p.A. filed an
action against Connaught in the Tribunale di Milano, Italy, challenging the
validity of the Italian counterpart of the '753 patent. Connaught subsequently
filed a claim for infringement in the Milan court and sought injunctive relief,
which was denied. The Milan court has appointed a technical expert and briefing
is ongoing.
The Company does not sell TriAcelluvax-TM- in Germany. However, in July
1997, Connaught filed suit against Chiron Behring and Chiron S.p.A. in the
Landgericht Dusseldorf, Germany, asserting imminent infringement of its European
Patent 0 322 115 (the "'115 patent"). The '115 patent contains claims which
relate to pertussis toxin mutants. The '115 patent was opposed by Chiron in the
European Patent Office. In November 1998 the EPO Opposition Division upheld the
'115 patent in an amended form. In the German action, Connaught seeks damages
and an order enjoining Chiron S.p.A. from manufacturing and selling
TriAcelluvax-TM- in both Germany and Italy. A hearing on this matter took place
in August 1998 but a ruling has not yet issued. A decision is expected in the
first half of 1999.
In December 1997, Chiron filed an action in the District Court of The Hague,
The Netherlands, against Connaught to revoke the Dutch counterpart of the '115
patent on grounds of invalidity. Connaught filed a motion to stay proceedings
which was denied in November 1998.
It is not known when nor on what bases these matters will be resolved.
F. HOFFMANN LA-ROCHE A.G.
Chiron is involved in certain litigation in the United States, The
Netherlands, Japan, Germany, and other countries with F. Hoffmann-LaRoche AG and
several of its affiliated companies concerning infringement and/or validity of
certain patents related to HCV technology.
In January 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(R)
HCV Test and Amplicor(R) HCV Monitor Test constitutes infringement of Chiron's
U.S. Patent Nos. 5,712,088 (the "'088 patent") and 5,714,596 (the "'596
patent"). The action also asserts that Bradley breached a settlement agreement,
that Roche 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. Roche filed a counterclaim requesting a
declaratory judgment of non-infringement and invalidity and also alleging
infringement of U.S. Patent No. 5,580,718 (the "'718 patent"), owned by
Hoffmann-
16
<PAGE>
LaRoche, Inc., which allegedly relates to nucleic acid-based assays for the
detection of HCV. The counterclaim of infringement seeks damages and injunctive
relief. Chiron is defending on the basis of invalidity and non-infringement of
the '718 patent, and seeks a declaration of invalidity of U.S. Patent No.
5,527,669 (the "'669 patent"), a related patent also owned by Hoffmann-LaRoche.
Trial in this matter is expected to be scheduled in 2000.
In April 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 nucleic acid technology. The suit seeks
injunctive relief preventing the sale of Roche AG's Amplicor(R) HCV Test and
Amplicor(R) HCV Monitor Test by Nippon Roche and damages. Roche has also
challenged the validity of the '995 patent in the Japanese Patent Office.
In February 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 nucleic acid technology. Chiron seeks a
cross-border injunction with effect in a number of European countries,
prohibiting the sale of Roche AG's Amplicor(R) HCV Test and Amplicor(R) HCV
Monitor Test. Roche AG has asserted certain defenses and counterclaims in this
matter. Following a trial in October 1998, with respect to certain of these
issues, the Court declined to exercise jurisdiction outside The Netherlands and
therefore dismissed certain defendants from the case. For procedural reasons,
the Court limited its consideration to the Amplicor(R) HCV Monitor Test. Also,
the Court requested expert advice from the Het International Jurisch Instituut
regarding interpretation under U.S. law of certain contractual issues raised as
an affirmative defense by Roche AG. Those issues relate to Roche AG's 1991
purchase of certain Cetus Corporation assets. In December 1998, the Company
filed a parallel, new action before the Dutch Court concerning the Amplicor(R)
HCV Test. In a separate proceeding, Roche AG and Chiron are appealing the
European Patent Office's Opposition Division's decision upholding the '216
patent in amended form.
In January 1997, Chiron, together with Ortho-Clinical Diagnostics, Inc.
(formerly known as "Ortho Diagnostics Systems, Inc."), filed suit against F.
Hoffmann-LaRoche AG ("Roche Germany") in the Regional Court, 4(th) Civil
Division, Dusseldorf, Germany, for infringement of immunoassay technology under
the '216 patent. The suit seeks damages and injunctive relief preventing further
manufacture or sale of infringing HCV immunoassay kits by Roche Germany. Roche
Germany has asserted certain claims and defenses in this matter. Trial was held
in March 1999; a decision is forthcoming.
Roche also filed suit against Chiron in Munich seeking a pan-European
declaration of non-infringement of Chiron's European Patent number 0 181 10
relating to HIV probes technology. That suit has been dismissed by the Munich
court. Chiron had filed a countersuit in Dusseldorf for infringement and the
matter is expected to go forward during 1999.
It is not known when nor on what bases any of these litigation matters will
be concluded.
ORTHO-CLINICAL DIAGNOSTICS, INC.
On February 17, 1998, Chiron filed a lawsuit against Ortho-Clinical
Diagnostics, Inc. (formerly known as "Ortho Diagnostics Systems, Inc.") in the
United States District Court for the Northern District of California. The suit
concerns certain issues relating to the conduct of the parties' joint business
and seeks to compel arbitration of those issues. Chiron's motion to
17
<PAGE>
compel arbitration was granted by the Court in December 1998 and the matter is
expected to proceed, pending appointment of an arbitrator, during 1999. It is
not known when nor on what basis this matter will be concluded.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of Chiron's stockholders in the quarter
ended January 3, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who serve at the discretion of the
Board of Directors, are as follows, in alphabetical order:
<TABLE>
<CAPTION>
NAME AGE TITLE
- -------------------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Richard W. Barker, Ph.D........................... 50 Senior Vice President, Corporate Development
Rajen K. Dalal.................................... 45 Vice President; President, Chiron Blood Testing
Renato P. Fuchs, Ph.D............................. 56 Senior Vice President, Manufacturing and Process
Development
William G. Green, Esq............................. 54 Senior Vice President, General Counsel and
Secretary
David T. Kingsbury, Ph.D.......................... 58 Vice President, Chief Information Officer
Sean P. Lance..................................... 51 President and Chief Executive Officer
Philip K. Moody................................... 47 Vice President, Financial Operations
Edward E. Penhoet, Ph.D........................... 58 Vice Chairman
Heino von Prondzynski............................. 49 President, Chiron Vaccines
William J. Rutter, Ph.D........................... 70 Chairman
Linda W. Short.................................... 53 Vice President, Human Resources
David V. Smith.................................... 39 Vice President, Controller
James R. Sulat.................................... 48 Vice President, Chief Financial Officer
Lewis T. Williams, M.D., Ph.D..................... 49 Chief Scientific Officer; President, Chiron
Technologies
</TABLE>
DR. BARKER joined the Company in May 1996, as Senior Vice President, and
President of Chiron Diagnostics Corporation, a wholly-owned subsidiary of the
Company ("Diagnostics"). He served as the President of Diagnostics until
November 1998, when Diagnostics was sold to Bayer. From 1994 to 1996, he was
General Manager of IBM Worldwide Healthcare Solutions. From 1980 to 1993, Dr.
Barker served as a consultant with McKinsey & Company, leading the European
Healthcare Practice also serving healthcare clients in North America and Asia,
on issues of corporate strategy and alliances, organizational change and
international marketing. He has a Ph.D. in biophysics. Dr. Barker joined the
Board of Sunquest Information Systems in August 1996.
MR. DALAL joined the Company in December 1991 as Vice President, Corporate
Development. In 1998, he was appointed President of Chiron's Blood Testing
Division. From 1983 until joining the Company, he was employed by the
international consulting firm of McKinsey & Company, where he performed general
management consulting in the firm's pharmaceuticals, medical devices and
diagnostics industries practice.
18
<PAGE>
DR. FUCHS joined the Company in 1993 as Senior Vice President, Manufacturing
and Development Operations, and is responsible for international operations of
the Company's manufacturing, process development, materials management, quality
control, validation and engineering activities. Such operations include
development and manufacturing of therapeutic rDNA proteins, vaccines and
antigens for diagnostics. Prior to joining Chiron, Dr. Fuchs worked for over
twenty years in the pharmaceutical industry, and served as the Vice President of
Process Development of Centocor from 1988 to 1993, where he was responsible for
development of large-scale processes for production of antibodies in cell
culture. Dr. Fuchs has a Ph.D. in biochemical engineering.
MR. GREEN joined the Company as Vice President and General Counsel in
October 1990, having served as Secretary or Assistant Secretary since the
Company's inception in 1981. In February 1992, he became Senior Vice President,
General Counsel and Secretary. From 1981 to 1990, he was a partner in the San
Francisco law firm of Brobeck, Phleger & Harrison.
DR. KINGSBURY joined the Company as Vice President and Chief Information
Officer in January 1997. Prior to joining Chiron, he was on the faculty at The
Johns Hopkins School of Medicine where he was the Director of the Division of
Biomedical Information Sciences, the Genome Data Base, and the Welch Biomedical
Library. Dr. Kingsbury joined Johns Hopkins University in 1993, and from 1995
until his resignation, also served as its Chief Information Officer.
MR. LANCE joined the Company as President and Chief Executive Officer in May
1998. During the previous thirteen years, Mr. Lance held various executive
positions with Glaxo Holdings plc, London, England. In October 1996 he was
appointed Managing Director of Glaxo Wellcome plc and in January 1997 he was
appointed Chief Operating Officer and Chief Executive Designate of Glaxo
Wellcome plc. From 1993 to 1996, Mr. Lance was Executive Director of Glaxo
Holdings, responsible for commercial operations in the Middle East, Africa,
Europe and Latin America. Mr. Lance was also President of the International
Federation of Pharmaceutical Manufacturers Associations from October 1996 to
February 1998, an Executive Member of the International Committee of
Pharmaceutical Research and Manufacturers of America, and a director of the
British Pharma Group. He also served on the Steering Committee of Healthcare
2000.
MR. MOODY joined the Company in February 1995, as Corporate Director,
Financial Planning. He was appointed Vice President, Financial Operations, in
December 1997, and served as the principal financial accounting officer of the
Company from February 1998 to February 1999, until he was appointed Divisional
Vice President, Finance and Operations. Prior to joining the Company, Mr. Moody
was the Director of Corporate Planning of APL, Ltd., from May 1988 to February
1995.
DR. PENHOET, a co-founder of Chiron and a Director since its inception in
1981, served as the Chief Executive Officer of the Company from 1981 to May
1998, and became Vice Chairman, effective May 1, 1998, upon the appointment of
Sean P. Lance as President and CEO of the Company. He has been a faculty member
at the Biochemistry Department at the University of California, Berkeley for 26
years, and currently serves as the Dean of the School of Public Health at the
University of California at Berkeley. From March 1997 to January 1999, Dr.
Penhoet served as the Chairman of California Healthcare Institute, a public
policy research and advocacy organization located in La Jolla, California. He is
a member of the Board of Directors of Onyx Pharmaceuticals, Inc.
19
<PAGE>
MR. VON PRONDZYNSKI joined the Company as Chief Executive Officer of Chiron
Behring GmbH & Co in October 1996. He is also the Chief Executive Officer of
Chiron S.p.A., the Italian vaccine subsidiary of the Company. Prior to joining
the Company, Mr. von Prondzynski held various positions with Bayer AG from 1976
to 1996. From 1991 to 1996, he was the General Manager of Bayer Diagnostics GmbH
in Munich, Germany, responsible for Germany and Eastern Europe; from 1988 to
1991, he was Head of Healthcare Business in Brazil (Scope Manufacturing,
Marketing & Sales, Development); and from 1985 to 1988, he was the General
Manager in Austria. Since October 1998, Mr. von Prondzynski has served as a
member of the Regional Advisory Board of Commerzbank.
DR. RUTTER, a co-founder of the Company, has served as its Chairman since
the Company's inception in 1981. He was Director of the Hormone Research
Institute at the University of California, San Francisco Medical Center
("UCSF"), from 1983 to May 1989, and has been on the faculty at UCSF since 1969,
becoming a Professor Emeritus in 1991. Dr. Rutter was appointed to the board of
Novartis AG in 1995, and having reached the statutory age of retirement, will
step down at Novartis AG's annual shareholders meeting in April 1999. Since
1992, Dr. Rutter has served on the Board of Overseers, Harvard University. He
has also served on the Board of Trustees, Carnegie Institution of Washington
since 1995.
MS. SHORT joined the Company in November 1997, as Vice President, Human
Resources. Prior to that she was the Director of Human Resources of Industrial
Indemnity from 1994 to 1997. From 1989 to 1994, Ms. Short held various
managerial positions with the Bank of America, most recently in 1994, as Project
Manager in charge of the merger of Continental Bank into Bank of America, and as
Director of Human Resources for Wholesale Banking from 1993 to 1994, and
Director of Human Resources of the Asia Division from 1989 to 1993.
MR. SMITH joined the Company as Vice President, Controller in February 1999,
and was designated the Company's principal financial accounting officer. Mr.
Smith served as the Vice President, Finance and Chief Financial Officer of
Anergen, Inc. from 1997 until he joined the Company. From 1988 to 1997, Mr.
Smith held various financial management positions with Genentech, Inc., in both
the United States and Europe, most recently as Director of Accounting.
MR. SULAT joined the Company as Vice President, Chief Financial Officer in
April 1998. He was the Chief Financial Officer of Stanford Health Services, the
clinical healthcare delivery arm of the Stanford University Medical Center, from
1993 to October 1997. In November 1997, Stanford Health Services merged with the
hospital facilities of the University of California, San Francisco, and Mr.
Sulat served as the Treasurer of the merged entity, UCSF Stanford Health Care,
until joining the Company. From 1990 to 1993, Mr. Sulat was the Chief Financial
Officer and Vice President, Operations, of Esprit de Corp, a privately-owned
apparel manufacturer. Mr. Sulat is also a director of Vans, Inc., a shoe
manufacturer, and General Surgical Innovations, Inc., a medical device
manufacturer.
DR. WILLIAMS joined the Company in August 1994 as Senior Vice President and
President of Chiron Technologies. In 1998, he was promoted to Chief Scientific
Officer of the Company. From 1988 until joining the Company, he was a professor
of medicine at the University of California, San Francisco. Prior to joining
UCSF, he was on the faculty of Harvard Medical School. In addition, he was a
co-founder and director of COR Therapeutics, Inc. from 1988 until joining the
Company. From 1992 to 1994, Dr. Williams served on the Scientific Advisory Board
of Geron Corporation.
20
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Chiron Corporation is traded in the NASDAQ National
Market System under the symbol CHIR. As of December 31, 1998, there were 6,513
holders of record of Chiron common stock, 63 remaining holders of record of
Cetus Corporation common stock and 6 remaining holders of Viagene Inc. common
stock. The Company has declared no cash dividends since its inception and does
not expect to pay any dividends in the foreseeable future. The quarterly high
and low closing sales price of Chiron common stock for 1998 and 1997 are shown
below.
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter..................................................... $22 $16 9/16 $21 1/4 $17 7/8
Second Quarter.................................................... 22 15 11/16 21 17 1/2
Third Quarter..................................................... 21 1/16 13 3/4 24 5/16 19 7/8
Fourth Quarter.................................................... 26 5/8 18 1/16 23 16 5/8
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The Company has not paid cash dividends on its common stock and does not
expect to do so in the foreseeable future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total revenues................. $ 736,673 $ 574,599 $ 537,149 $ 393,566 $ 345,211
Income (loss) from continuing
operations................... 75,998 25,782 45,658 (469,802) 18,613
Basic income (loss) from
continuing operations........ 0.43 0.15 0.27 (2.89) 0.14
Diluted income (loss) from
continuing operations........ 0.42 0.14 0.26 (2.89) 0.14
Total assets................... 2,524,255 1,768,478 1,688,670 1,489,847 1,049,742
Long-term debt................. 338,158 397,217 419,589 413,248 338,061
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Chiron is a biotechnology company that participates in three global
healthcare businesses: biopharmaceuticals, blood testing and vaccines. The
Company is applying a broad and integrated scientific approach to the
development of innovative products for preventing and treating cancer,
infectious diseases, and cardiovascular diseases. This approach is supported by
research strengths in recombinant proteins, genomics, small molecules, gene
therapy and vaccines. Chiron Biopharmaceuticals consists of products and
services related to therapeutics,
21
<PAGE>
with an emphasis on oncology, serious infectious diseases and cardiovascular
diseases as well as the development and acquisition of technologies related to
recombinant technology, gene therapy, small molecule therapeutics and genomics.
Chiron's blood testing revenues primarily relate to Chiron's one-half interest
in the pretax operating earnings of its joint business with Ortho-Clinical
Diagnostics, Inc., which 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. Chiron Vaccines consists principally of adult and pediatric vaccines
sold primarily in Germany, Italy, certain other international markets and in the
U.S.
On December 29, 1997, Chiron completed the sale of its ophthalmics business
unit, Chiron Vision Corporation ("Chiron Vision"), to Bausch & Lomb Incorporated
("B&L") and on November 30, 1998, Chiron completed the sale of its IN VITRO
diagnostics business to Bayer Corporation ("Bayer"). As a result of these
transactions, the Company's Consolidated Statements of Operations reflect the
after-tax results of Chiron Vision and Chiron Diagnostics, and the related gains
on disposals thereof, as discontinued operations for all periods presented.
RESULTS OF OPERATIONS
REVENUES
BIOPHARMACEUTICAL PRODUCT SALES Product sales from Chiron
Biopharmaceuticals were $201.9 million, $150.6 million and $135.7 million in
1998, 1997 and 1996, respectively. In 1998 and 1997, product sales consisted
principally of Proleukin(R) (aldesleukin, interleukin-2), Betaseron(R)
(interferon beta-1b) and PDGF (recombinant human platelet-derived growth factor
- -rhPDGF-BB). In 1996, biopharmaceutical product sales consisted primarily of
Proleukin(R) and Betaseron(R).
PROLEUKIN(R) Chiron sells Proleukin(R) directly in the U.S. and certain
international markets. Sales of Proleukin(R) were $93.2 million, $70.5 million
and $60.9 million in 1998, 1997 and 1996, respectively. The overall increase in
sales from year-to-year is primarily due to (i) continued volume growth in
existing indications; (ii) higher prices; and (iii) in 1998, the geographic
expansion into other countries and the expanded use of Proleukin(R) for the new
indication of metastatic melanoma. The Company continues to pursue additional
indications related to human immunodeficiency virus ("HIV"), acute myelogenous
leukemia and HIV related non-Hodgkin's lymphoma. The Company also anticipates
further geographic expansion of Proleukin(R) into additional countries.
BETASERON(R) Chiron manufactures Betaseron(R) for Berlex Laboratories, Inc.
("Berlex") and its parent company Schering AG of Germany. Chiron earns a partial
payment for Betaseron(R) upon shipment to Berlex and Schering AG (the "initial
revenues") and a subsequent secondary payment upon sales by Berlex and Schering
AG (the "secondary revenues"). Accordingly, Chiron's revenues from Betaseron(R)
tend to fluctuate based upon the inventory management practices of Berlex and
Schering AG. In addition, in July 1997, the terms of payment changed whereby the
initial payment received upon shipment decreased and the secondary payment due
upon sales to patients increased equivalently. Although total revenues did not
change, the revised payment terms resulted in a timing difference whereby Chiron
recognized a decrease in initial revenues in 1997 and an increase in secondary
revenues in 1998.
22
<PAGE>
In 1998, 1997 and 1996, revenues from Betaseron(R) were $63.4 million, $54.8
million and $67.2 million, respectively. In 1998, Chiron's shipments of
Betaseron(R) to Berlex and Schering AG increased significantly over shipments in
1997. The actual number of vials sold by Berlex and Schering AG to patients in
1998 remained relatively constant with the number of vials sold in 1997. As a
result, the increase in revenues in 1998 as compared with 1997 is primarily due
to replenishing inventories at Berlex and Schering AG and to the change in
payment terms discussed above. In October 1998, the contractual rate upon which
Chiron recognizes revenues decreased by 2.5% of Berlex's sales. The impact of
this decrease did not impact revenues until December 1998 when Chiron began
recognizing the subsequent secondary revenues. In 1997, the decrease in revenues
as compared with 1996 is primarily due to the change in payment terms discussed
above and the introduction of a competing product in the second quarter of 1996.
PDGF Chiron manufactures PDGF for Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson ("J&J") company. PDGF is the active ingredient in Regranex(R)
(becaplermin) Gel, a treatment for diabetic foot ulcers. Regranex(R) Gel was
approved by the Food and Drug Administration ("FDA") in December 1997 and was
launched commercially in early 1998. Sales of PDGF were $36.4 million and $18.3
million, in 1998 and 1997, respectively. As Chiron's shipments of PDGF remained
fairly constant in 1998 and 1997, the increase in revenues between 1998 and 1997
is primarily due to retroactive price increases recognized in 1998 for shipments
made in 1997. The Company does not expect future price adjustments, if any, to
be commensurate with those in 1998.
As PDGF is the first product of its kind, the Company believes it will take
time for the market to fully develop. In addition, Chiron's sales of PDGF will
tend to fluctuate based upon the inventory management practices of J&J.
Regranex(R) Gel was recently approved for use in the treatment of diabetic foot
ulcers in Canada and the Company expects European approval for the same
indication during the first half of 1999. However, even with these approvals,
Chiron's sales to date have largely filled J&J's inventory requirements, and as
a result, no sales of PDGF to J&J are expected during the first three quarters
of 1999.
VACCINE PRODUCT SALES Chiron sells pediatric and adult vaccines in Germany,
Italy, other international markets and in the U.S. Certain of the Company's
vaccine products, particularly its flu vaccine, are seasonal and have higher
sales in the third and fourth quarters of the year. In 1998, 1997 and 1996,
vaccine product sales were $176.8 million, $82.0 million and $91.9 million,
respectively. The increase in sales in 1998 as compared with 1997 is primarily
due to Chiron's acquisition of the remaining 51% interest in, and consolidation
of, Chiron Behring GmbH & Co ("Chiron Behring") in the second quarter of 1998
(see CHIRON BEHRING below). In 1997, the decrease in product sales as compared
with 1996 reflects the supply constraints related to Polioral-TM-, the Company's
pediatric oral polio vaccine, which were resolved during 1998. The Company
expects the competitive pressures related to many of its vaccine products to
continue into the foreseeable future, as a result of the introduction of
competing products into the market, including new combination vaccines.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES In 1998, 1997 and
1996, Chiron recognized equity in earnings of unconsolidated joint businesses of
$74.0 million, $106.4 million and $102.1 million, respectively. In each of these
years, equity in earnings of unconsolidated joint businesses consisted
substantially of revenues generated by Chiron's joint businesses with
23
<PAGE>
Ortho-Clinical Diagnostics, Inc. ("Ortho"), a Johnson & Johnson company
("Chiron-Ortho joint business") and Hoechst AG ("Chiron Behring").
CHIRON-ORTHO JOINT BUSINESS In 1998, 1997 and 1996, Chiron's 50% share of
the pretax operating earnings of the Chiron-Ortho joint business was $73.5
million, $92.9 million and $95.8 million, respectively. At the end of each year,
the joint business records an annual inventory adjustment. As Chiron recognizes
revenues from the joint business on a lag basis, this adjustment is typically
made during the first quarter of each year. In 1998, the annual inventory
adjustment for 1997 resulted in a $4.1 million charge as compared with $0.8
million of income in 1997 and $3.8 million of income in 1996. Other items
contributing to the decrease in earnings in 1998 as compared with 1997 were (i)
lower foreign profits of the joint business due to the adverse impact of changes
in foreign currency exchange rates between years and higher manufacturing costs;
(ii) certain one-time contract termination fees; and (iii) certain joint
business asset write-offs related to the implementation of certain processes to
comply with stricter FDA guidelines mandated throughout the industry.
CHIRON BEHRING On July 1, 1996, Chiron acquired a 49% interest in Chiron
Behring. On March 31, 1998, Chiron acquired the remaining 51% interest in Chiron
Behring (refer to Note 5 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). From
July 1, 1996 through the first quarter of 1998, equity in earnings of
unconsolidated joint businesses included Chiron's 49% share of the after-tax
operating results of Chiron Behring. Chiron's share of earnings of the joint
venture, including amortization of intangibles, was $2.4 million for the three
months ended March 31, 1998, $13.8 million for the year ended December 31, 1997
and $4.2 million for the six months ended December 31, 1996. Beginning March 31,
1998, Chiron Behring's results were consolidated with those of the Company.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received for research services as they are performed and fees
received upon attainment of specified milestones. Collaborative agreement
revenues tend to fluctuate based on the amount of research services performed,
the status of projects under collaboration and the achievement of milestones.
Due to the nature of the Company's collaborative agreement revenue, results in
any one year are not necessarily indicative of results to be achieved in the
future. The Company's ability to generate additional collaborative agreement
revenues may depend, in part, on its ability to initiate and maintain
relationships with potential and current collaborative partners. There can be no
assurance that such relationships will be established or that current
collaborative agreement revenues will not decline. Significant fluctuations in
collaborative agreement revenues from year-to-year are discussed below.
NOVARTIS AG Chiron and Novartis AG ("Novartis") entered into an agreement
under which Novartis agreed to provide research funding for certain projects.
The funded projects currently consist of adult and pediatric vaccines,
Insulin-Like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine
kinase ("HSV-tk"). Novartis has agreed to fund, at Chiron's request and subject
to certain annual and aggregate limits, up to 100% of the development costs of
these projects incurred between January 1, 1995 and December 31, 1999. Under
this agreement, in 1998, 1997 and 1996, Chiron recognized collaborative
agreement revenues of $54.4 million, $53.3 million and $72.0 million,
respectively.
Under the terms of a November 1995 agreement with Novartis, Chiron granted
Novartis a license to utilize Chiron's combinatorial chemistry techniques. In
exchange for this license,
24
<PAGE>
Novartis agreed to pay Chiron $26.0 million over a five-year period, subject to
certain adjustments. In addition, this agreement provides for research funding
by Novartis, and certain upfront, milestone and royalty payments, as well as
product commercialization rights for both parties. In connection with this
agreement, Chiron recognized collaborative agreement revenues of $6.0 million,
$10.2 million and $9.4 million, in 1998, 1997 and 1996, respectively.
In November 1996, Chiron and Novartis entered into a consent order with the
Federal Trade Commission pursuant to which Chiron agreed to grant a
royalty-bearing license to Rhone-Poulenc Rorer, Inc. under certain Chiron
patents related to the HSV-tk gene in the field of gene therapy. Chiron and
Novartis entered into a separate agreement which provided, among other things,
for certain cross licenses between Chiron and Novartis, and under which,
Novartis agreed to pay Chiron up to $60.0 million over five years. In connection
with this agreement, Chiron recognized collaborative agreement revenues of $15.0
million in both 1998 and 1997.
JAPAN TOBACCO In 1996, Japan Tobacco licensed Chiron's combinatorial
chemistry technologies for use in its research and development programs. The
agreement, which was terminated in 1998, included certain funding for Chiron's
effort in transferring the technology. Revenues recognized under this agreement
were $1.0 million, $7.8 million and $7.7 million in 1998, 1997 and 1996,
respectively.
GREEN CROSS OF JAPAN In 1995, Green Cross of Japan agreed to reimburse
Chiron for certain HIV research, product development and clinical trials. In
1998, the clinical trials related to this collaboration were discontinued. In
1998, 1997 and 1996, Chiron recognized revenues related to this agreement of
$1.2 million, $5.4 million and $9.2 million, respectively.
ROYALTY AND LICENSE FEE REVENUES The Company receives royalties and license
fees for products or technologies that are marketed, distributed or used by
third parties. In 1998, 1997 and 1996, Chiron recognized royalty and license fee
revenues of $125.3 million, $50.4 million and $36.6 million, respectively.
Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. Results in any one
year are not necessarily indicative of results to be achieved in the future. In
addition, the Company's ability to generate additional royalty and license fee
revenues may depend, in part, on its ability to market and capitalize on its
technologies. There can be no assurance that the Company will be able to do so
or that future royalty and license fee revenues will not decline. Significant
fluctuations in royalty and license fee revenue from year-to-year are discussed
below.
ROCHE PCR AGREEMENT In accordance with a July 1991 agreement with F.
Hoffman-LaRoche Ltd. and its affiliates ("Roche"), the Company receives
royalties on sales of polymerase chain reaction ("PCR") products sold by Roche.
In 1998, Chiron recognized $15.2 million of royalty and license fee revenues
related to this agreement. Based on the terms of the agreement, Chiron does not
earn royalties on PCR products until Roche's annual net sales of PCR products
and services exceed $200.0 million (the "threshold amount"). As the threshold
amount resets at the beginning of each year, Roche's annual net sales must
exceed $200.0 million before Chiron will earn any royalties. As a result, the
Company does not expect to recognize royalties under this agreement until the
last half of each year. This agreement expires upon the earlier of December 31,
2000 or Chiron's recognition of an aggregate net present value of $30.0 million
as of the date of the agreement (discounted at 14.0%).
25
<PAGE>
BAYER CROSS-LICENSE AGREEMENT In connection with the sale of Chiron
Diagnostics to Bayer, Chiron granted to Chiron Diagnostics rights under certain
Chiron patents, including patents relating to HIV and hepatitis C virus. In
exchange for these rights, Chiron Diagnostics paid to Chiron a license fee of
$100.0 million which is refundable in decreasing amounts over a period of three
years. In 1998, Chiron recognized revenues of $13.3 million which represents the
portion of the $100.0 million payment which became non-refundable during 1998.
The Company anticipates recognizing the remaining revenue over a period of three
years as follows: $39.2 million in 1999, $29.2 million in 2000, and $18.3
million in 2001.
LICENSE FEE REVENUES In January 1998, Chiron recognized $5.0 million of
revenues from a license fee related to an exclusive collaboration to research,
develop, manufacture and commercialize therapeutic and prophylactic products for
the treatment of hepatitis C in humans. In August 1998, Chiron recognized a
$24.0 million license fee under an agreement related to certain technologies
used in human vaccine products, including hepatitis B vaccine. Chiron will
receive future royalties related to this agreement and recognized $3.7 million
of such royalties in 1998.
OTHER In 1998, Chiron recognized $9.4 million of royalty and license fee
revenues due to the acquisition and consolidation of Chiron Behring in the
second quarter of 1998. In addition, royalties earned on Schering AG's European
sales of Betaferon(R) (interferon beta-1b) increased $4.5 million in 1998 as
compared with royalties earned in 1997 due to continued market expansion. The
increase in royalty and license fee revenues in 1997 as compared with 1996 is
primarily due to (i) an increase of $10.5 million related to royalties earned on
Schering AG's European sales of Betaferon(R), which sales began in the second
quarter of 1996; and (ii) an increase of $5.7 million from royalties received
from Merck & Co., Inc. for sales of hepatitis B recombinant vaccines.
OTHER REVENUES In 1998, 1997 and 1996, Chiron recognized other revenues of
$48.3 million, $50.1 million and $33.9 million, respectively. The Company's
other revenues may fluctuate due to the nature of the revenues recognized and
the timing of events giving rise to these revenues. There can be no guarantee
that the Company will be successful in obtaining additional revenues or that
other revenues will not decline. Significant fluctuations in other revenues from
year-to-year are discussed below.
COMMISSION REVENUES In 1998, other revenues included $18.0 million of
commission revenues generated by Chiron Behring, whose operations were
consolidated with those of the Company beginning in the second quarter of 1998.
These revenues consist of commissions received on sales made by Chiron Behring
of Pasteur Merieux Merck's hepatitis B product and of Centeon Pharma GmbH's
immunoglobulines products.
INFORMATICS TECHNOLOGY In connection with the sale of Chiron Diagnostics to
Bayer, Chiron recognized net revenues of $12.5 million in exchange for granting
Bayer a license to use, reproduce and sell certain technology developed by
Chiron's informatics business. The Company does not anticipate future revenues
from this technology, if any, to be commensurate with that achieved in 1998.
AREDIA(R) (PAMIDRONATE DISODIUM FOR INJECTION) From 1994 through April
1998, Chiron promoted Aredia(R) on behalf of Novartis. In April 1998, this
arrangement was terminated. In
26
<PAGE>
connection with this arrangement, Chiron recognized other revenues of $9.8
million, $43.6 million and $30.2 million in 1998, 1997 and 1996, respectively.
COSTS AND EXPENSES
GROSS PROFIT Gross profit as a percentage of net product sales was 55.4%,
55.1% and 51.8%, in 1998, 1997 and 1996, respectively. Although 1998 gross
profit as a percentage of net product sales remained relatively constant with
that in 1997, the Company's 1998 gross profit percentage was impacted by (i) a
reduction in cost of sales of $6.0 million due to a change in estimated property
tax accruals created in prior periods; and (ii) an unfavorable mix of vaccine
products which, beginning in the second quarter of 1998, includes low margin
products manufactured and sold by Chiron Behring. In 1997, improvements in gross
profit as compared with 1996 primarily related to the mix of products sold,
which reflects the Company's first sales of PDGF. The increase in gross profit
percentage was partially offset, however, by charges recorded in 1996 related to
inventory reserves and temporarily idled manufacturing facilities in Italy. The
Company's gross profit percentages may fluctuate significantly in future periods
as the Company's product mix continues to evolve.
RESEARCH AND DEVELOPMENT In 1998, 1997 and 1996, Chiron recognized research
and development expenses of $294.2 million, $259.4 million and $248.8 million,
respectively. The Company's research and development expenses may fluctuate from
year-to-year depending upon the level of clinical trial-related activities. In
1998, the increase in research and development spending as compared with 1997
was primarily related to several of the Company's projects entering into later
stage clinical development. In addition, included in research and development
expense in 1998 was $14.1 million of expense generated by Chiron Behring, which
was acquired and consolidated during the second quarter of 1998. These increases
were partially offset by decreased spending related to Myotrophin(R) (rhIGF-I or
mecasermin [recombinant DNA origin]) due to the uncertainty surrounding the
FDA's approval of this product (refer to Item 1. Business).
In 1997, the Company incurred an aggregate increase of $10.6 million in
research and development expenses, as compared with 1996, related to
collaborative agreements regarding Myotrophin(R) and certain genetic targets for
the treatment of cancer. In addition, in 1997, the Company incurred increased
spending related to genomics and gene therapies research as compared with 1996.
These increases in research and development expenses in 1997 were partially
offset by decreased spending related to Tissue Factor Pathway Inhibitor (TFPI)
which was in a phase 1 clinical trial in 1996.
OTHER OPERATING EXPENSES In 1998, 1997 and 1996, Chiron recognized selling,
general and administrative ("SG&A") expenses of $140.4 million, $106.9 million
and $103.5 million, respectively. The increase in SG&A expenses in 1998 as
compared with 1997 is primarily due to the acquisition and consolidation of
Chiron Behring, which contributed $34.3 million to SG&A expenses in 1998.
As circumstances dictate, the Company reviews the carrying amount of its
manufacturing facilities by comparing the facilities' projected undiscounted net
cash flows against their respective carrying values. In 1997, the Company
recognized a $31.3 million impairment loss to record the Puerto Rico facility
and related machinery and equipment assets at their individual estimated fair
market values, determined on the basis of independent appraisals. There can be
27
<PAGE>
no assurances that future impairment losses will not be incurred as the Company
continues to assess its operational efficiencies.
During 1998, Chiron incurred net restructuring and reorganization charges of
$26.8 million related to (i) the integration of the Company's worldwide vaccines
operations; (ii) the closure of the Puerto Rico and St. Louis, Missouri
facilities; and (iii) the Company's ongoing rationalization of its U.S. business
operations. The restructuring and reorganization charges consisted of $23.3
million of employee-related costs to eliminate 400 positions in sales, marketing
and other administrative, manufacturing and research and development functions
and $7.1 million of facility-related costs. These charges were partially offset
by a benefit of $3.7 million due to a revised estimate of property and other
tax-related accruals recorded in 1995 in connection with the idling of the
Puerto Rico facility. The Company anticipates that it will record additional
restructuring and reorganization liabilities in future periods as it continues
to create a simpler, more efficient operating structure for the organization.
The liabilities related to the restructuring and reorganization expenses are
expected to be substantially settled within one year of accruing the related
charges.
NON-OPERATING INCOME AND EXPENSE
In August 1998, Chiron completed the sale of its manufacturing facility in
St. Louis, Missouri, resulting in a gain on sale of assets of $1.5 million. In
addition, in June 1998, the Company sold its fill and finishing facility in
Puerto Rico, resulting in a gain of $6.2 million.
In 1998, 1997 and 1996, Chiron recognized interest expense of $24.7 million,
$31.6 million and $29.5 million, respectively. The decrease in interest expense
in 1998 as compared with 1997 is primarily due to the repayment of $100.0
million on the Company's lines of credit in January 1998. The borrowings were
outstanding under the Company's U.S. credit facilities and were repaid with a
portion of the proceeds received 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. In 1998,
1997 and 1996, Chiron recognized interest income of $29.6 million, $12.0 million
and $5.9 million, respectively. The increase in interest income in 1998 as
compared with 1997 is primarily due to higher average cash and investment
balances attributable to the net cash proceeds received from the sale of Chiron
Vision in the first quarter of 1998 and Chiron Diagnostics in the fourth quarter
of 1998.
In connection with its research and development collaborations, the Company
may invest in equity securities of its collaborative partners. The price of
these securities is subject to significant volatility. In 1998, 1997 and 1996,
Chiron recognized a loss attributable to the other-than-temporary impairment of
certain of these equity securities of $8.4 million, $1.2 million and $1.5
million, respectively.
In 1998 and 1997, Chiron recognized gains of $4.5 million and $5.5 million
related to the sale of certain equity securities. No significant gains related
to equity securities were recognized in 1996.
On December 31, 1998, Chiron completed the sale of its 30% interest in
General Injectibles & Vaccines, Inc. ("GIV"), a distribution business, to Henry
Schein, Inc. and received payment in full of certain advances made by the
Company to GIV, for a total of $31.7 million in cash. The sale resulted in a net
gain of $1.8 million. In 1996, Chiron sold its 50% interest in a
28
<PAGE>
generic cancer chemotherapeutics business to Ben Venue Laboratories, Inc. for
$14.0 million in cash, resulting in a gain of $12.2 million.
In 1998, the annual tax provision was 25.8% of pretax income from continuing
operations, excluding restructuring and reorganization charges, a financial
reporting gain on sale of the Puerto Rico facility, and $6.0 million of
financial reporting income recognized in 1998 due to a change in estimated
property tax accruals. The reported effective tax rate for 1998 was 20.0% of
pretax income from continuing operations, including the impact of certain
prepaid income subject to tax in the current year ($31.5 million), the tax
effect of the reversal of certain accruals and the tax loss on the sale of the
Puerto Rico facility ($6.0 million) and the recognition of additional domestic
deferred tax benefits ($39.7 million). The Company has utilized substantially
all of its net operating loss and tax credit carryforwards for federal income
tax purposes as a result of the sales of Chiron Vision and Chiron Diagnostics.
The actual 1997 annual effective tax rate was 20.2%, exclusive of the impact of
the impairment loss which did not create a corresponding income tax benefit. The
increase in the effective tax rate of 5.6% in 1998 as compared with 1997, as
adjusted above, is primarily due to the tax effect of certain prepaid income,
partially offset by a higher proportion of non-U.S. income subject to tax at
lower rates and additional recognition of deferred tax assets. In 1996, the
provision for income taxes consisted primarily of foreign taxes related to the
Company's vaccines operations and U.S. alternative minimum taxes.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for all
quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In accordance with SFAS 133, an entity is required to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. The Company is currently evaluating the effect that implementation
of SFAS 133 will have on its results of operations and financial position and
anticipates that it will implement SFAS 133 during the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings, issuance of common stock and
off-balance sheet financing. Chiron's cash and investments in marketable debt
securities, which totaled $1.6 billion at December 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, however, these investments are generally not
collateralized and primarily mature within three years.
29
<PAGE>
SOURCES AND USES OF CASH Chiron had cash and cash equivalents of $513.3
million and $98.5 million at December 31, 1998 and 1997, respectively. In 1998,
net cash provided by operating activities was $231.7 million as compared with
$149.5 million in 1997. The increase in cash provided by operating activities
was largely due to increased profitability in 1998 as compared with 1997.
In 1998, net cash provided by investing activities consisted of proceeds of
$1.3 billion from the sale of Chiron Vision and Chiron Diagnostics, $282.7
million from the sale and maturity of investments in marketable debt securities
and an aggregate $62.7 million from the sale of assets, equity securities and
interest in an affiliated company. These inflows of cash were partially offset
by the purchase of Chiron Behring of $54.8 million (net of cash acquired),
capital expenditures of $126.3 million and purchases of investments in
marketable debt securities of $1.2 billion. In 1997, the Company sold its
interest in its worldwide Quality Controls business for $29.9 million and had
proceeds of $120.3 million from the sale and maturity of investments in
marketable debt securities. These inflows of cash were offset by purchases of
investments in marketable debt securities of $219.5 million and capital
expenditures of $77.5 million.
In 1998, net cash used in financing activities primarily consisted of the
repayment of $137.5 million of short-term borrowings offset, in part, by $66.6
million from the issuance of common stock. In 1997, net cash provided by
financing activities consisted of $61.5 million from the issuance of common
stock and $20.6 million from the issuance of short-term debt, offset, in part,
by the repayment of $32.3 million on the Company's notes payable and capital
leases.
The Company is currently evaluating a number of business development
opportunities. To the extent that the Company is successful in reaching
agreements with third parties, these transactions may involve the expenditure of
a significant amount of the Company's current investment portfolio.
BORROWING ARRANGEMENTS Under a revolving, committed, unsecured credit
agreement with a major financial institution, Chiron can borrow up to $100.0
million in the U.S. This credit facility is guaranteed by Novartis and provides
various borrowing rate options, as defined in the agreement. This credit
facility matures in February 2003. There were no borrowings outstanding under
this credit facility at December 31, 1998. The Company had an additional credit
agreement which expired unused in March 1999. Chiron also has credit facilities
outside the U.S. which allow for total borrowings of $64.2 million. Under these
credit facilities, $17.6 million of borrowings were outstanding at December 31,
1998.
LEASES Chiron leases laboratory, office and manufacturing facilities, land
and equipment under noncancelable operating leases, which expire through 2037.
Future minimum lease payments are estimated to be approximately $115.7 million
in the aggregate, excluding a residual value guarantee of $172.6 million due
upon termination of an operating lease in 2003. As of December 31, 1998,
Novartis had guaranteed $152.9 million of the Company's operating lease
commitments (refer to Note 8 of the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS).
OTHER COMMITMENTS Effective July 1, 1998, Chiron and International Business
Machines Corporation ("IBM") entered into a ten-year information technology
services agreement under which IBM will provide Chiron with a full range of
information services. Chiron can terminate this agreement beginning July 1,
1999, subject to certain termination charges. If Chiron does not terminate this
agreement prior to its expiration, payments to IBM are expected to be
30
<PAGE>
approximately $138.8 million in the aggregate. Through July 1, 1999, Chiron's
payments to IBM will total $19.3 million. Payments to IBM are subject to
adjustment depending upon the level of services and infrastructure equipment
provided by IBM.
In future periods, the Company expects to incur substantial capital
spending. At December 31, 1998, the Company had various firm purchase
commitments totaling approximately $3.4 million. Contingent liabilities, both
individually and in the aggregate, were insignificant at December 31, 1998.
MARKET RISK MANAGEMENT The Company's cash flow and earnings are subject to
fluctuations due to changes in foreign currency exchange rates, interest rates,
and fair value of equity securities held. The Company attempts to limit its
exposure to some or all of these market risks through the use of various
financial instruments. These activities are discussed in further detail in Item
7A., "Quantitative and Qualitative Disclosures About Market Risk."
YEAR 2000 Chiron is dependent on a number of computer systems and
applications to conduct its business. In the past, many computer programs were
written using two digits rather than four to identify the relevant year. These
programs may not be able to distinguish between 21(st) and 20(th) century dates
(for example, "00" may be read as the year 1900 when the year 2000 is intended).
This could result in significant system failures or miscalculations.
Accordingly, the Company has developed a comprehensive risk-based plan designed
to make its computer hardware and communication systems, software applications,
and facilities and other non-information technology-related functions Year 2000
compliant. The plan covers three phases including (i) planning, (ii) assessment,
and (iii) implementation. The Company has completed the planning and assessment
phases, and expects to complete the implementation phase by mid-1999. With
regard to the Company's computer hardware and communication systems, Chiron is
in the process of implementing a technology refresh program which was developed
in conjunction with IBM to update and standardize the Company's computer
hardware and communication systems. As a result of this program, the Company
expects its computer hardware and communication systems to be Year 2000
compliant by mid-1999. With regard to the Company's software applications, the
Company has identified critical and non-critical software applications and is in
the process of updating and/or developing software applications or certifying,
in a test environment, that the software applications are Year 2000 compliant. A
major component of remediating non-compliant software applications is the design
and implementation of an integrated information system. The Company anticipates
that implementation of this integrated information system will be completed by
mid-1999. With regard to the Company's facilities and other non-information
technology-related functions, including research, manufacturing, and inventory
management practices, the Company has performed an assessment and has begun
remediation which is intended to make its facilities and other non-information
technology-related functions Year 2000 compliant by mid-1999.
The Company is currently utilizing both internal and external resources to
prepare for the year 2000. The Company believes that it should be able to
substantially complete the implementation of critical internal aspects of its
Year 2000 plan prior to the commencement of the year 2000. However, even with
substantial completion of internal remediation plans, the Company's customers,
suppliers and distributors also present risk of their own Year 2000 compliance
over which the Company has no control. The Company has initiated communications
with its critical suppliers and other external relationships to determine the
extent to which the Company may
31
<PAGE>
be vulnerable to such parties' failure to resolve their own Year 2000 issues.
Where practicable, the Company is assessing and attempting to mitigate its risks
with respect to the failure of these entities to be Year 2000 compliant. The
effect, if any, on the Company's results of operations from the failure of such
parties to be Year 2000 compliant, cannot be reasonably estimated.
The Company is also implementing contingency plans to address any Year 2000
issues that do arise. As part of the Company's contingency plans, the Company is
implementing specific plans for each critical system to ensure that the
necessary precautions are taken to prevent and/or address an unexpected system
failure. Many of these contingency plans are already in place as they are based
on existing plans that are required for the safe and proper operation of the
Company's business, including its research and manufacturing facilities.
The SEC has requested that companies disclose the most likely worst case
scenario that could occur as a result of the Year 2000. The Company believes
that its most likely worst case scenario would be delays in product shipments
due to a complete or partial manufacturing shutdown and/or the delayed
implementation of the Company's integrated information system. To address the
manufacturing shutdown scenario, the Company plans, among other things, to
increase its inventory and re-prioritize staff assignments, as needed, and does
not believe that such a scenario is likely to occur. With regard to the delayed
implementation of the Company's integrated information system, the Company has
established a contingency plan to remediate its non-compliant business systems
if scheduled milestones are not met. To date, all significant milestones have
been met, and as a result, the Company has not implemented its contingency plan.
Although the Company is maintaining its ability to implement this contingency
plan, based on the Company's progress to date, and in consideration of the
amount of resources allocated to this project, the Company believes that
implementation of its integrated information system will occur substantially as
scheduled.
The Company may incur significant costs in identifying and resolving Year
2000 issues, including internal staffing costs as well as consulting and other
expenses. In addition, in certain instances, the appropriate course of action
includes replacing or upgrading systems or equipment at a substantial cost to
the Company. Failure of the Company to successfully complete its implementation
of an integrated information system, which is a key element in the Company's
Year 2000 remediation program, may have a material adverse impact on the
Company's operations. The Company currently estimates that the costs associated
with preparing for the year 2000 will approximate $7.5 million. The costs
associated with the technology refresh program and the integrated information
system are not included in the above estimates as Year 2000 compliance is
incidental to the operational benefits expected to be derived from these
programs. Costs incurred through December 31, 1998 have been funded through
operations and approximate $1.0 million. The Company anticipates that most of
its Year 2000 costs will be incurred during the first half of 1999. These costs
are anticipated to be funded with cash on hand and cash generated through
operations.
EURO CONVERSION On January 1, 1999, eleven European Union member countries
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency, the Euro. The Euro is currently traded on
currency exchanges and can be used in business transactions. The Company's
financial systems are Euro ready as of December 31, 1998. However, the Company
is still in the process of evaluating the effect, if any, of the Euro on the
Company's product pricing and gross profit percentages.
32
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS
As a biotechnology company, Chiron is engaged in a rapidly evolving and
often unpredictable business. The forward-looking statements contained in this
Report and in other periodic reports, press releases and other statements issued
by the Company from time to time reflect management's current beliefs and
expectations concerning objectives, plans, strategies, future performance and
other future events. The following discussion highlights some of the factors,
many of which are beyond the Company's control, that could cause actual results
to differ.
PROMISING TECHNOLOGIES ULTIMATELY MAY NOT PROVE SUCCESSFUL
The Company focuses its research and development activities on areas in
which it has particular strengths, and on technologies which appear promising.
These technologies are on the "cutting edge" of modern science. As a result, the
outcome of any research or development program is highly uncertain. Only a very
small fraction of such programs ultimately result in commercial products or even
product candidates. Product candidates which initially appear promising often
fail to yield successful products. In many cases, preclinical or clinical
studies will show that a product candidate is not efficacious (that is, it does
not have the intended therapeutic effect), or that it raises safety concerns or
has other side effects which outweigh the intended benefit. Success in
preclinical or early clinical trials (which generally focus on safety issues)
may not translate into success in large scale clinical trials (which are
designed to show efficacy), often for reasons that are not fully understood. And
even after a product is approved and launched, general usage or post-marketing
studies may identify safety or other previously unknown problems with the
product which may result in regulatory approvals being suspended, limited to
narrow indications or revoked or which otherwise prevent successful
commercialization.
REGULATORY APPROVALS
The Company is required to obtain and maintain regulatory approval in order
to market most of its products. Generally, these approvals are on a
product-by-product and country-by-country basis and, in the case of therapeutic
products, a separate approval is required for each therapeutic indication. See
Item 1, "Business--Government Regulation". Product candidates which appear
promising based on early, and even large scale, clinical trials may not receive
regulatory approval. The results of clinical trials often are susceptible to
varying interpretations which may delay, limit or prevent approval or result in
the need for post-marketing studies.
MANUFACTURING
Most of the Company's products are biologics. Manufacturing biologic
products is complex. Unlike chemical pharmaceuticals, a biologic product
generally cannot be sufficiently characterized (in terms of its physical and
chemical properties) to rely on assaying of the finished product alone to ensure
that the product will perform in the intended manner. Accordingly, it is
essential to be able to both validate and control the manufacturing process:
that is, to show that the process works, and that the product is made strictly
and consistently in compliance with that process. Slight deviations in the
manufacturing process may result in unacceptable changes in the products which
may result in lot failures. Manufacturing processes which are used to produce
the (smaller) quantities of material needed for research and
33
<PAGE>
development purposes may not be successfully scaled up to allow production of
commercial quantities at reasonable cost or at all. All of these difficulties
are compounded when dealing with novel biologic products which require novel
manufacturing processes. Accordingly, manufacturing is subject to extensive
government regulation. Even minor changes in the manufacturing process require
regulatory approval which, in turn, may require further clinical studies.
PATENTS HELD BY THIRD PARTIES MAY DELAY OR PREVENT COMMERCIALIZATION
Third parties, including competitors, have patents and patent applications
in the United States and other significant markets that may be useful or
necessary for the manufacture, use or sale of certain of the Company's products
and products in development. It is likely that third parties will obtain other
such patents in the future. Certain of these patents may be sufficiently broad
to prevent or delay Chiron from manufacturing or marketing products important to
the Company's current and future business. The scope, validity and
enforceability of such patents, if granted, the extent to which Chiron may wish
or need to obtain licenses to such patents, and the cost and availability of
such licenses cannot be accurately predicted. If Chiron does not obtain such
licenses, products may be withdrawn from the market or delays could be
encountered in market introduction while an attempt is made to design around
such patents. Alternatively, Chiron could find that the development, manufacture
or sale of such products is foreclosed. Chiron could also incur substantial
costs in challenging the validity and scope of such patents.
PRODUCT ACCEPTANCE
The Company may experience difficulties in launching new products, many of
which are novel products based on technologies which are unfamiliar to the
healthcare community. There can be no assurance that such products will be
accepted by healthcare providers and patients. In addition, government agencies
as well as private organizations involved in healthcare from time to time
publish guidelines or recommendations to healthcare providers and patients. Such
guidelines or recommendations can be very influential, and may adversely affect
the usage of the Company's products directly (for example, by recommending a
decreased dosage of the Company's product in conjunction with a concomitant
therapy) or indirectly (for example, by recommending a competitive product over
the Company's product).
COMPETITION
Chiron operates in a highly competitive environment, and the competition is
expected to increase. Competitors include large pharmaceutical, chemical and
blood testing companies, as well as biotechnology companies. Some of these
competitors, particularly large pharmaceutical and blood testing companies, have
greater resources than the Company. Accordingly, even if the Company is
successful in launching a product, it may find that a competitive product
dominates the market for any number of reasons, including the possibility that
the competitor may have launched its product first; the competitor may have
greater marketing capabilities; or the competitive product may have therapeutic
or other advantages. The technologies applied by the Company and its competitors
are rapidly evolving, and new developments frequently result in price
competition and product obsolescence.
34
<PAGE>
CHIRON'S PATENTS MAY NOT PREVENT COMPETITION OR GENERATE REVENUES
Chiron seeks to obtain patents on its inventions. Without the protection of
patents, competitors may be able to use the Company's inventions to manufacture
and market competing products without being required to undertake the lengthy
and expensive development efforts made by Chiron and without having to pay
royalties or otherwise compensate Chiron for the use of the invention.
There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the United States and
other important markets. It is not known how many of the Company's pending
patent applications will be granted, nor the effective coverage of those that
are granted. In the United States and other important markets, the issuance of a
patent is not conclusive as to its validity or the enforceable scope of its
claims. The Company has engaged in significant litigation to determine the scope
and validity of certain of its patents, and expects to continue to do so in the
future.
Even if the Company is successful in obtaining and defending patents, there
can be no assurance that these patents will provide substantial protection. The
length of time necessary to successfully resolve patent litigation may allow
infringers to gain significant market advantage. Third parties may be able to
design around the patents and develop competitive products that do not use the
inventions covered by the patents. Many countries, including certain countries
in Europe, have compulsory licensing laws under which a patent owner may be
compelled to grant licenses to third parties (for example, the third party's
product is needed to meet a threat to public health or safety in that country,
or the patent owner has failed to "work" the invention in that country, or the
third party has patented improvements.) And most countries limit the
enforceability of patents against government agencies or government contractors.
In these countries, the patent owner may be limited to monetary relief and may
be unable to enjoin infringement, which could materially diminish the value of
the patent.
AVAILABILITY OF REIMBURSEMENT; GOVERNMENT AND OTHER PRESSURES ON PRICING
In the United States and other significant markets, sales of the Company's
products may be affected by the availability of reimbursement from the
government or other third parties, such as insurance companies. It is difficult
to predict the reimbursement status of newly approved, novel biotechnology
products. And current reimbursement policies for existing products may change.
In certain foreign markets, governments have issued regulations relating to the
pricing and profitability of pharmaceutical companies. There have been proposals
in the United States (at both the federal and state level) to implement such
controls. The growth of managed care in the United States also has placed
pressure on the pricing of healthcare products. These pressures can be expected
to continue.
COSTS ASSOCIATED WITH REFOCUSING AND EXPANDING THE BUSINESS
The Company is refocusing its efforts on its core businesses and also is
focused on improving operational efficiencies. In addition, management expects
to grow the business in areas in which the Company can be most competitive,
either through in-licensing, collaborations or acquisitions of products or
companies. In connection with these efforts, the Company
35
<PAGE>
may incur significant charges, costs and expenses which could impact the
Company's profitability, including impairment losses, restructuring charges, the
write off of in-process technology, transaction-related expenses, costs
associated with integrating new businesses, and the cost of amortizing goodwill
and other intangibles.
OTHER NEW PRODUCTS AND SOURCES OF REVENUE
Many products in the Company's current pipeline are in relatively early
stages of research or development. The Company's ability to grow earnings in the
near- to medium- term may depend, in part, on its ability to initiate and
maintain other revenue generating relationships with third parties, such as
licenses to certain of the Company's technologies, and on its ability to
identify and successfully acquire rights to later-stage products from third
parties. There can be no assurance that such other sources of revenue will be
established.
INTEREST RATE AND FOREIGN CURRENCY EXCHANGE RATE FLUCTUATIONS
In 1998, the Company sold certain businesses for cash, including its IN
VITRO clinical diagnostics and ophthalmic surgical products businesses, and as a
result has significant cash balances and short-term investments. The Company's
financial results therefore are sensitive to interest rate fluctuations in the
United States. In addition, the Company sells products in many countries
throughout the world, and its financial results could be significantly affected
by fluctuations in foreign currency exchange rates or by weak economic
conditions in foreign markets.
COLLABORATION PARTNERS
An important part of the Company's research and development effort is
undertaken in collaborations with third parties. As circumstances change, the
Company and its corporate partner may develop conflicting priorities or other
conflicts of interest. The Company may experience significant delays and incur
significant expenses in resolving these conflicts and may not be able to resolve
these matters on acceptable terms. Even without conflicts of interest, the
parties may differ in their views as to how best to realize the value associated
with a current product or a product in development. In some cases, the corporate
partner may have responsibility for formulating and implementing key strategic
or operational plans. Decisions by corporate partners on key clinical,
regulatory, marketing (including pricing), inventory management and other issues
may prevent successful commercialization of the product or otherwise impact the
Company's profitability.
STOCK PRICE VOLATILITY
The price of the Company's stock, like that of other biotechnology
companies, is subject to significant volatility. The stock price may be affected
by any number of events, both internal and external to the Company. These
include, without limitation, results of clinical trials conducted by the Company
or by its competitors; announcements by the Company or its competitors regarding
product development efforts, including the status of regulatory approval
applications; the outcome of legal proceedings, including claims filed by the
Company against third parties to enforce its patents and claims filed by third
parties against the Company relating to patents held by the third parties; the
launch of competing products; the resolution of (or failure to resolve) disputes
with collaboration partners; corporate restructuring by the
36
<PAGE>
Company; licensing activities by the Company; and the acquisition or sale by the
Company of products, products in development, or businesses.
In connection with its research and development collaborations, from time to
time the Company invests in equity securities of its corporate partners. The
price of these securities also is subject to significant volatility, and may be
affected by, among other things, the types of events which affect the Company's
stock. Changes in the market price of these securities may impact the Company's
profitability.
TAX
The Company is taxable principally in the United States, Germany, Italy and
The Netherlands. All of these jurisdictions have in the past and may in the
future make changes to their corporate tax rates and other tax laws which could
increase the Company's tax provision in the future. The Company has negotiated a
number of rulings regarding income and other taxes which are subject to periodic
review and renewal. If such rulings are not renewed or are substantially
modified, taxes payable in particular jurisdictions could increase. While the
Company believes that all material tax liabilities are properly reflected in its
balance sheet, the Company is presently under audit in several jurisdictions and
there can be no assurance that Chiron will prevail in all cases in the event the
taxing authorities disagree with its interpretations of the tax law. In
addition, the Company has assumed liabilities for all income taxes incurred
prior to the sales of its former subsidiaries, Chiron Vision Corporation
(subject to certain limitations) and Chiron Diagnostics Corporation. Future
levels of research and development spending, capital investment and export sales
will impact the Company's entitlement to related tax credits and benefits which
have the effect of lowering its effective tax rate.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK A significant portion of the Company's operations
consists of manufacturing and sales activities in foreign countries exposing the
Company to the effects of changes in foreign currency rates. To manage foreign
currency exchange risks, Chiron enters into forward foreign currency contracts
("forwards") and cross currency interest rate swaps ("swaps") and purchases
foreign currency option contracts ("options"). Chiron does not use any of these
derivative instruments for trading or speculative purposes. The total notional
amount of these derivative financial instruments at December 31, 1998 and 1997
was $297.1 million and $296.5 million, respectively.
The Company uses forwards to hedge the impact of currency fluctuations on
certain assets and liabilities denominated in nonfunctional currencies
("transaction exposures"). Typically, these contracts have maturities of three
months or less. Chiron's objective is to minimize the transaction gains and
losses recorded in current earnings that result from remeasuring foreign
denominated assets and liabilities based on exchange rate fluctuations. The
Company's transaction exposures are primarily denominated in major European
currencies. At December 31, 1998, these exposures amounted to $13.3 million and
were offset by forwards with a notional amount of $14.7 million. Based on
exposures as of December 31, 1998, a 10% adverse movement against the Company's
portfolio of transaction exposures and hedge contracts would result in a loss of
approximately $0.2 million. A 10% movement in the value of the dollar versus the
Company's portfolio of transaction exposures has occurred in one of the last
twelve
37
<PAGE>
quarters. Foreign currency transaction gains and losses from continuing
operations, including the impact of hedging, were not significant in 1998, 1997
or 1996.
In addition, Chiron also hedges certain anticipated exposures. The Company's
primary anticipated exposures are related to intercompany inventory purchases by
subsidiaries with functional currencies denominated in major European
currencies. The Company attempts to hedge approximately 80% of anticipated
currency exposures by purchasing quarterly put options. To limit hedging costs,
the Company generally purchases out-of-the-money options. As a result, Chiron
effectively does not purchase insurance for the first 2% to 5% of the exchange
rate risk. The total notional amount of the options at December 31, 1998 and
1997 was $55.6 million and $111.3 million, respectively. The options outstanding
at December 31, 1998 expire quarterly over a six-month period, and provide
protection against decreases in the value of the Euro beyond $1.05 per Euro. The
fair market value of option contracts outstanding at December 31, 1998 was $0.3
million. The risk associated with these hedging instruments is limited to their
fair market value.
The Company has entered into a series of swaps to modify the interest and/or
currency characteristics of certain assets and liabilities denominated in
nonfunctional currencies. The objective of the swaps entered into by the Company
is to fix the interest and currency rate exposures associated with the Company's
wholly owned German subsidiary. The exposures are denominated in Deutsche marks.
The notional amounts of the Company's swaps at December 31, 1998 and 1997 were
$226.8 million and $139.1 million, respectively. If the Deutsche mark
strengthened or weakened by 10%, the value of the underlying exposure would
increase or decrease, respectively, by $22.7 million. After considering the
impact of hedging with swaps, the net increase or decrease from such currency
rate fluctuation would be reduced to $7.7 million. A 10% movement in the value
of the Deutsche mark versus the U.S. dollar has occurred in 3 of the last 10
years. The fair market value of the swaps is $1.8 million as of December 31,
1998. Currency fluctuations in the value of the German subsidiary's assets and
liabilities, as well as changes in the value of related swaps, are reflected as
a component of other comprehensive income or loss.
INTEREST RATE RISK The Company has exposure to changes in interest rates in
both its investment portfolio and certain floating rate liabilities and lease
commitments. The Company maintains investment portfolio holdings of various
issuers, types and maturities. The Company also has short-term debt obligations
with interest rates tied to LIBOR.
Chiron's investment portfolio amounted to approximately $1.6 billion at
December 31, 1998. As of that date, the Company also had $234.4 million of
floating rate debt tied to LIBOR. The Company has a "natural hedge" against this
exposure as a result of its portfolio holdings in floating rate fixed income
securities tied to LIBOR. The analysis below focuses on the impact of changes in
interest rates to Chiron, and is based on a net unhedged portfolio balance of
$1.4 billion.
The analysis assumes an immediate parallel increase or decrease in interest
rates of 150-basis points and examines the impact to Chiron over the next twelve
months. An immediate increase in interest rates of 150-basis points results in
higher interest income over the 12-month period, partially offset by an
immediate decline in the market value of securities held. The net impact of this
scenario is an estimated increase in total return to the portfolio of $1.2
million over the 12-month period. Similarly, a 150-basis point decrease results
in a decrease in total
38
<PAGE>
return to the portfolio of $0.9 million. The impact on reported earnings will be
greater given that unrealized changes in the value of the portfolio are reported
in other comprehensive income or loss. Chiron currently does not hedge these
exposures. The effect of these changes in interest rates on the Company's
portfolio, as measured over a 12-month period, are mitigated by the relatively
short duration of Chiron's portfolio.
A 150-basis point movement in the Federal Funds rate has occurred in 4 of
the last 10 years, a 100-basis point movement has occurred in 6 of the last 10
years, and a 50-basis point movement has occurred in 9 of the last 10 years.
EQUITY SECURITIES RISK The Company has exposure to equity price risk
because of its investments in equity securities. Typically, the Company obtains
these securities through its collaboration agreements with other pharmaceutical
and biotechnology partners. These securities are generally classified as
available-for-sale and consequently, are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a component of other
comprehensive income or loss. Other-than-temporary losses are recorded against
earnings in the same period the loss was deemed to have occurred. The Company
does not currently hedge this exposure and there can be no assurance that
other-than-temporary losses will not have a material adverse impact on the
Company's results of operations in the future. The Company recorded charges of
$8.4 million, $1.2 million and $1.5 million in 1998, 1997 and 1996,
respectively, to write down certain available-for-sale equity securities for
which the decline in fair value was deemed to be other-than-temporary. Changes
in share prices or in the volatility of share prices affect the value of
Chiron's equity portfolio. As of December 31, 1998, if the market price of
Chiron's equity investments decreased by 10%, the market value of the equity
portfolio would decrease by $2.4 million.
COUNTERPARTY RISK Chiron manages the risk of counterparty default on its
derivative financial instruments through the use of credit standards,
counterparty diversification and monitoring of counterparty financial condition.
All derivative financial instruments are executed with financial institutions
with strong credit ratings, which minimizes risk of loss due to nonpayment.
Chiron has not experienced any losses due to counterparty default.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to the
financial statements listed in Item 14(a) of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
incorporated by reference to the sections entitled "Election of Directors" and
"Section 16 (a) Beneficial Ownership Reporting Compliance" in the Company's
definitive Proxy Statement with respect to Chiron's 1999 Annual Meeting to be
filed with the Securities and Exchange Commission within 120 days of January 3,
1999 (the "Proxy Statement"). Information as to the Company's executive officers
appears at the end of Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information in the section entitled "Compensation of Directors and
Executive Officers" in the Proxy Statement is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections entitled "Certain Beneficial Owners" and
"Security Ownership of Directors and Executive Officers" in the Proxy Statement
is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement is incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
The following Financial Statements are included herein:
<TABLE>
<CAPTION>
PAGE NUMBER
------------
<S> <C>
Report of KPMG LLP, Independent Auditors................................................ F-1
Consent of KPMG LLP, Independent Auditors............................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997............................... F-3-F-4
Consolidated Statements of Operations for each of the three years ended December 31,
1998, 1997 and 1996................................................................... F-5-F-6
Consolidated Statements of Comprehensive Income for each of the three years ended
December 31, 1998, 1997 and 1996...................................................... F-7
Consolidated Statements of Stockholders' Equity for each of the three years ended
December 31, 1998, 1997 and 1996...................................................... F-8
Consolidated Statements of Cash Flows for each of the three years ended December 31,
1998, 1997 and 1996................................................................... F-9
Notes to Consolidated Financial Statements.............................................. F-10-F-47
</TABLE>
40
<PAGE>
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following Schedule is filed as part of this Form 10-K Annual Report:
<TABLE>
<CAPTION>
PAGE
NUMBER
----------
<S> <C>
II Valuation and Qualifying Accounts and Reserves....................................... F-48
</TABLE>
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
On December 15, 1998, the Company filed a Current Report on Form 8-K,
reporting under Item 2 the completion of the sale of its IN VITRO
diagnostics business to Bayer Corporation on November 30, 1998, and also
reporting under Item 5 that in connection with that sale it had entered into
a Cross-License Agreement with Chiron Diagnostics Corporation pursuant to
which, among other things, Chiron granted to Chiron Diagnostics Corporation
certain rights under certain Chiron patents, including patents relating to
hepatitis C virus and human immunodeficiency virus.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
3.01 Restated Certificate of Incorporation of the Registrant, as filed with the
Office of the Secretary of State of Delaware on August 17, 1987,
incorporated by reference to Exhibit 3.01 of the Registrant's Form 10-K
report for fiscal year 1996.
3.02 Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant, as filed with the Office of the Secretary of State of
Delaware on December 12, 1991, incorporated by reference to Exhibit 3.02
of the Registrant's Form 10-K report for fiscal year 1996.
3.03 Certificate of Amendment of Restated Certificate of Incorporation of the
Registrant, as filed with the Office of the Secretary of State of
Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of
the Registrant's Form 10-Q report for the period ended June 30, 1996.
3.04 Bylaws of the Registrant, as amended, incorporated by reference to Exhibit
3.03 of the Registrant's Form 10-Q report for the period ended June 28,
1998.
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
the Registrant, Cetus Corporation, and Bankers Trust Company,
incorporated by reference to Exhibit 4.02 of the Registrant's Form 10-K
for fiscal year 1997.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
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 the Registrant and The
First National Bank of Boston, as Trustee.
10.001 Purchase Agreement between BNP Leasing Corporation and the Registrant,
dated June 28, 1996, incorporated by reference to Exhibit 10.90 of the
Registrant's Form 10-Q report for the period ended June 30, 1996.
10.002 Lease Agreement between BNP Leasing Corporation and the Registrant, dated
June 28, 1996, incorporated by reference to Exhibit 10.91 of the
Registrant's Form 10-Q report for the period ended June 30, 1996.
10.003 Ground Lease between BNP Leasing Corporation and the Registrant, dated
June 28, 1996, incorporated by reference to Exhibit 10.92 of the
Registrant's Form 10-Q report for the period ended June 30, 1996.
10.004 through 10.099 Reserved
10.101 Revolving Credit Agreement, dated as of February 27, 1998, between the
Registrant and Bank of America National Trust and Savings Association,
incorporated by reference to Exhibit 10.101 of Registrant's Form 10-K
for fiscal year 1997.
10.102 Guaranty, dated as of September 29, 1994, made by Registrant, in favor of
Bankers Trust Company, as trustee, incorporated by reference to Exhibit
10.52 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
10.103 Guaranty, dated as of September 29, 1994, made by Cetus Corporation, in
favor of The First National Bank of Boston, as trustee, incorporated by
reference to Exhibit 10.53 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.
10.104 Stock Purchase and Warrant Agreement dated May 9, 1989, between Cetus
Corporation and Hoffmann-La Roche Inc., incorporated by reference to
Exhibit 10.36 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
10.105 Letter Agreement, dated as of December 12, 1991, relating to Stock
Purchase and Warrant Agreement between Registrant and Hoffmann-La Roche
Inc., incorporated by reference to Exhibit 10.51 of Registrant's Form
10-K report for fiscal year 1996.
10.106 through 10.199 Reserved
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.201 Agreement between the Registrant and Ortho Diagnostic Systems, Inc., a New
Jersey corporation, dated August 17, 1989, and Amendment to
Collaboration Agreement between Ortho Diagnostic Systems, Inc. and
Registrant, dated December 22, 1989 (with certain confidential
information deleted), incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-Q report for the period ended September 30, 1994.
10.202 License and Supply Agreement between Ortho Diagnostic Systems, Inc., a New
Jersey corporation, the Registrant and Abbott Laboratories, an Illinois
corporation, dated August 17, 1989 (with certain confidential
information deleted), incorporated by reference to Exhibit 10.15 of the
Registrant's Form 10-Q report for the quarter ended June 30, 1994.
10.203 Regulatory Filing, Development and Supply Agreement between the
Registrant, Cetus Oncology Corporation, a wholly-owned subsidiary of the
Registrant, and Schering AG, a German company, dated as of May 10, 1993.
(Certain information has been omitted from the Agreement and filed
separately with the Securities and Exchange Commission pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.
The omitted confidential information has been identified by the
following statement: "Confidential portions of material have been
omitted and filed separately with the Securities and Exchange
Commission".)
10.204 Letter Agreement dated December 30, 1993 by and between Registrant and
Schering AG, a German company. (Certain information has been omitted
from the Agreement and filed separately with the Securities and Exchange
Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential portions
of material have been omitted and filed separately with the Securities
and Exchange Commission".)
10.205 Amendment Agreement (HDS Fees and Deeply Discounted Vials) dated as of
September 23, 1997 between Registrant and Schering Aktiengesellschaft,
incorporated by reference to Exhibit 10.205 of the Registrant's Form
10-K report for fiscal year 1997. (Certain information has been omitted
from the Agreement and filed separately with the Securities and Exchange
Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential Treatment
Requested".)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.206 Agreement between the Registrant and Cephalon, Inc. dated as of January 7,
1994, and Letter Agreements between the Registrant and Cephalon dated
January 13, 1995 and May 23, 1995, incorporated by reference to Exhibit
10.85 of the Registrant's Form 10-K report for fiscal year 1995.
(Certain information has been omitted from the Agreements and filed
separately with the Securities and Exchange Commission pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.
The omitted confidential information has been identified by the
following statement: "Confidential Treatment Requested".)
10.207 Letter Agreement dated as of December 4, 1997, between the Registrant and
Ortho Pharmaceutical Corporation and Ortho Biotech, Inc., incorporated
by reference to Exhibit 10.207 of the Registrant's Form 10-K report for
fiscal year 1997. (Certain information has been omitted from the
Agreement and filed separately with the Securities and Exchange
Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential Treatment
Requested".)
10.208 through 10.299 Reserved
10.301 Settlement Agreement on Purified IL-2, made as of April 14, 1995, by and
between Cetus Oncology Corporation, dba Chiron Therapeutics, a Delaware
corporation, and Takeda Chemical Industries, Ltd., a Japanese
corporation, incorporated by reference to Exhibit 10.74 of the
Registrant's Form 10-Q report for the period ended July 2, 1995.
(Certain information has been omitted from the Agreement pursuant to a
request by Registrant for confidential treatment pursuant to Rule
24b-2.)
10.302 Agreement, effective as of December 21, 1988, by and between Hoffmann-La
Roche Inc., a New Jersey corporation, and Cetus Corporation,
incorporated by reference to Exhibit 10.70 of the Registrant's Form 10-Q
report for the period ended April 2, 1995. (Certain information has been
omitted from the Agreement pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2.)
10.303 Agreement, effective as of December 21, 1988, by and among F. Hoffmann-La
Roche Ltd., a Swiss corporation, Cetus Corporation, and EuroCetus
International, B.V., a Netherlands Antilles corporation, incorporated by
reference to Exhibit 10.71 of the Registrant's Form 10-Q report for the
period ended April 2, 1995. (Certain information has been omitted from
the Agreement pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2.)
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.304 License Agreement made and entered into December 1, 1987, by and between
Sloan Kettering Institute for Cancer Research, a not-for-profit New York
corporation, and Cetus Corporation, incorporated by reference to Exhibit
10.75 of the Registrant's Form 10-Q report for the period ended July 2,
1995. (Certain information has been omitted from the Agreement pursuant
to a request by Registrant for confidential treatment pursuant to Rule
24b-2.)
10.305 Cross-License Agreement dated as of November 30, 1998, between the
Registrant and Chiron Diagnostics Corporation, incorporated by reference
to Exhibit 10.311 of the Registrant's current report on Form 8-K dated
November 30, 1998. (Certain information has been omitted from the
Agreement and filed separately with the Securities and Exchange
Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement "Confidential Treatment
Requested".)
10.306 through 10.399 Reserved
10.401 Stock Purchase Agreement, dated as of October 21, 1997, between Bausch &
Lomb Incorporated and Registrant, incorporated by reference to Exhibit
99.1 of the Registrant's current report on Form 8-K dated January 12,
1998.
10.402 Stock Purchase Agreement, dated as of September 17, 1998, among Bayer
Corporation, the Registrant and Chiron Diagnostics Corporation, and
Exhibits thereto, incorporated by reference to Exhibit 10.402 of the
Registrant's Form 10-Q for the period ended September 27, 1998. (Certain
information has been omitted from the Agreement and filed separately
with the Securities and Exchange Commission pursuant to a request by
Registrant for confidential treatment pursuant to Rule 24b-2. The
omitted confidential information has been identified by the following
statement "Confidential Treatment Requested".)
10.403 Asset Transfer Agreement dated November 30, 1998, among the Registrant,
Chiron Diagnostics Corporation and Bayer Corporation, incorporated by
reference to Exhibit 10.403 of the Registrant's current report on Form
8-K dated November 30, 1998.
10.404 Through 10.499 Reserved
10.501 Chiron 1991 Stock Option Plan, as amended, incorporated by reference to
Annex 2 of the Registrant's Proxy Statement dated April 11, 1997.*
10.502 Form of Stock Option Agreement, Chiron 1991 Stock Option Plan, as amended,
for Employees of the Registrant, incorporated by reference to Exhibit
10.510 of the Registrant's Form 10-Q report for the period ended
September 27, 1998.*
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.503 Form of Stock Option Agreement, Chiron 1991 Stock Option Plan, as amended,
for Non-Employee Directors of the Registrant, incorporated by reference
to Exhibit 10.511 of the Registrant's Form 10-Q report for the period
ended September 27, 1998.*
10.504 Form of Automatic Share Right Agreement, Chiron 1991 Stock Option Plan, as
amended, incorporated by reference to Exhibit 10.19 of Registrant's Form
10-Q report for the period ended September 29, 1996.*
10.505 Forms of Option Agreements, Cetus Corporation Amended and Restated Common
Stock Option Plan, incorporated by reference to Exhibit 10.27 of
Registrant's Form 10-Q report for the period ended March 30, 1997.*
10.506 Forms of Supplemental Letter concerning the assumption of Cetus
Corporation options by the Registrant, incorporated by reference to
Exhibit 10.27 of Registrant's Form 10-K report for fiscal year 1996.*
10.507 Form of Option Agreement (with Purchase Agreements attached thereto)
between Cetus Corporation and each former limited partner of Cetus
Healthcare Limited Partnership, a California limited partnership,
incorporated by reference to Exhibit 10.31 of the Registrant's Form 10-Q
report for the period ended September 30, 1994.
10.508 Form of Option Agreement (with forms of Purchase Agreements attached
thereto), dated December 30, 1986, between Cetus Corporation and each
former limited partner of Cetus Healthcare Limited Partnership II, a
California limited partnership, incorporated by reference to Exhibit
10.32 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.
10.509 Description of Chiron Corporation's 1998 Executive Officers Variable
Compensation Program.*
10.510 Form of Performance Unit Agreement, Chiron 1991 Stock Option Plan, as
amended, incorporated by reference to Exhibit 10.94 of the Registrant's
Form 10-K report for fiscal year 1996.*
10.511 through 10.599 Reserved
10.601 Indemnification Agreement between the Registrant and Dr. William J.
Rutter, dated as of February 12, 1987 (which Form of agreement is used
for each member of Registrant's Board of Directors), incorporated by
reference to Exhibit 10.21 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.
10.602 Supplemental Benefits Agreement, dated July 21, 1989, between the
Registrant and Dr. William J. Rutter, incorporated by reference to
Exhibit 10.27 of the Registrant's Form 10-Q report for the period ended
September 30, 1994.*
10.603 Letter Agreement dated September 26, 1990 between the Registrant and
William G. Green.*
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.604 Letter Agreements dated September 11, 1992, July 15, 1994 and September
14, 1994 between the Registrant and Lewis T. Williams, incorporated by
reference to Exhibit 10.54 of the Registrant's Form 10-Q report for the
period ended September 30, 1994.*
10.605 Letter Agreement dated January 27, 1998, between the Registrant and Lewis
T. Williams, incorporated by reference to Exhibit 10.605 of the
Registrant's Form 10-K for fiscal year 1997.*
10.606 Letters dated May 6, 1996 and May 25, 1996 to Magnus Lundberg,
incorporated by reference to Exhibit 10.61 of the Registrant's Form 10-Q
report for the period ended September 29, 1996.*
10.607 Letter dated January 8, 1997 to Magnus Lundberg, incorporated by reference
to Exhibit 10.65 of the Registrant's Form 10-K report for fiscal year
1996.*
10.608 Letter dated March 17, 1998 to Magnus Lundberg, incorporated by reference
to Exhibit 10.608 of the Registrant's Form 10-K for fiscal year 1997.*
10.609 Letter Agreement between the Registrant and Dr. Richard W. Barker, dated
May 1, 1996, incorporated by reference to Exhibit 10.88 of the
Registrant's Form 10-Q report for the period ended June 30, 1996.*
10.610 Letter Agreement dated July 8, 1998, between the Registrant and Richard W.
Barker, Ph.D., incorporated by reference to Exhibit 10.613 of the
Registrant's Form 10-Q report for the period ended September 27, 1998.*
(Certain information has been omitted from the Agreement and filed
separately with the Securities and Exchange Commission pursuant to a
request by Registrant for confidential treatment pursuant to Rule 24b-2.
The omitted confidential information has been identified by the
following statement "Confidential Treatment Requested".)
10.611 Letter Agreement dated March 18, 1998 between Registrant and Sean P.
Lance, incorporated by reference to Exhibit 10.611 of the Registrant's
Form 10-K for fiscal year 1997.*
10.612 Amended and Restated Promissory Note dated as of August 7, 1998, executed
by Sean P. Lance for the benefit of Registrant.*
10.613 Letter Agreement dated March 19, 1998 between Registrant and James R.
Sulat, incorporated by reference to Exhibit 10.612 of the Registrant's
Form 10-K for fiscal year 1997.*
10.614 through 10.699 Reserved
10.701 Investment Agreement dated as of November 20, 1994 among Ciba-Geigy
Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and
Chiron Corporation, incorporated by reference to Exhibit 10.54 of the
Registrant's current report on Form 8-K dated November 20, 1994.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.702 Governance Agreement dated as of November 20, 1994 among Ciba-Geigy
Limited, Ciba-Geigy Corporation and Chiron Corporation, incorporated by
reference to Exhibit 10.55 of the Registrant's current report on Form
8-K dated November 20, 1994.
10.703 Subscription Agreement dated as of November 20, 1994 among Ciba-Geigy
Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and
Chiron Corporation, incorporated by reference to Exhibit 10.56 of the
Registrant's current report on Form 8-K dated November 20, 1994.
10.704 Cooperation and Collaboration Agreement dated as of November 20, 1994,
between Ciba-Geigy Limited and Chiron Corporation, incorporated by
reference to Exhibit 10.57 of the Registrant's current report on Form
8-K dated November 20, 1994.
10.705 Registration Rights Agreement dated as of November 20, 1994 between Ciba
Biotech Partnership, Inc. and Chiron Corporation, incorporated by
reference to Exhibit 10.58 of the Registrant's current report on Form
8-K dated November 20, 1994.
10.706 Market Price Option Agreement dated as of November 20, 1994 among Ciba-
Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc.
and Chiron Corporation, incorporated by reference to Exhibit 10.59 of
the Registrant's current report on Form 8-K dated November 20, 1994.
10.707 Amendment dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy
Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation,
incorporated by reference to Exhibit 10.60 of the Registrant's current
report on Form 8-K dated January 4, 1995.
10.708 Supplemental Agreement dated as of January 3, 1995 among Ciba-Geigy
Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and
Chiron Corporation, incorporated by reference to Exhibit 10.61 of the
Registrant's current report on Form 8-K dated January 4, 1995.
10.709 Amendment with Respect to Employee Stock Option Arrangements dated as of
January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba
Biotech Partnership, Inc. and Chiron Corporation, incorporated by
reference to Exhibit 10.62 of the Registrant's current report on Form
8-K dated January 4, 1995.*
10.710 Agreement, dated November 27, 1996, between Ciba-Geigy Limited and the
Registrant, incorporated by reference to Exhibit 10.92 of the
Registrant's Form 8-K report filed with the Commission on December 17,
1996.
10.711 Amendment dated March 26, 1997, to Agreement dated November 27, 1996,
between Novartis Pharma AG and the Registrant, incorporated by reference
to Exhibit 10.44 of the Registrant's Form 10-Q report for the period
ended March 30, 1997.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.712 Letter Agreement dated December 19, 1997, between Novartis Pharma AG and
the Registrant, incorporated by reference to Exhibit 10.712 of the
Registrant's Form 10-K for fiscal year 1997.
10.713 Letter Agreement dated December 24, 1997, between Novartis Corporation and
the Registrant, incorporated by reference to Exhibit 10.713 of the
Registrant's Form 10-K for fiscal year 1997. (Certain information has
been omitted from the Agreement and filed separately with the Securities
and Exchange Commission pursuant to a request by Registrant for
confidential treatment pursuant to Rule 24b-2. The omitted confidential
information has been identified by the following statement:
"Confidential Treatment Requested".)
10.714 Letter Agreement, dated May 6, 1996, as to consent to assignment of
contracts to Novartis Limited, among the Registrant, Ciba-Geigy Limited,
Ciba-Geigy Corporation and Ciba Biotech Partnership, Inc., incorporated
by reference to Exhibit 10.43 of the Registrant's Form 10-K report for
fiscal year 1996.
10.715 Letter Agreement, dated December 19, 1996, regarding compensation paid by
the Registrant for director services performed by employees of
Ciba-Geigy Limited, incorporated by reference to Exhibit 10.44 of the
Registrant's Form 10-K report for fiscal year 1996.*
10.716 [Reserved.]
10.717 Chiron Funding L.L.C. Limited Liability Company Agreement, entered into
and effective as of December 28, 1995, among the Registrant, Chiron
Biocine Company and Biocine S.p.A. and Ciba-Geigy Corporation,
incorporated by reference to Exhibit 10.80 of the Registrant's Form 10-K
report for fiscal year 1995. (Certain information has been omitted from
the Agreement and filed separately with the Securities and Exchange
Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential Treatment
Requested".)
10.718 Agreement between Ciba-Geigy Limited and the Registrant made November 15,
1995, incorporated by reference to Exhibit 10.81 of the Registrant's
Form 10-K report for fiscal year 1995. (Certain information has been
omitted from the Agreement and filed separately with the Securities and
Exchange Commission pursuant to a request by Registrant for confidential
treatment pursuant to Rule 24b-2. The omitted confidential information
has been identified by the following statement: "Confidential Treatment
Requested".)
10.719 Reimbursement Agreement dated as of March 24, 1995, between Ciba-Geigy
Limited, a Swiss corporation, and the Registrant, incorporated by
reference to Exhibit 10.76 of the Registrant's Form 10-Q report for the
period ended July 2, 1995.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ --------------------------------------------------------------------------
<C> <S>
10.720 Reimbursement Agreement, dated as of June 28, 1996, between Ciba-Geigy
Limited, a Swiss corporation, and the Registrant, incorporated by
reference to Exhibit 10.94 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
10.721 Reimbursement Agreement, dated as of July 12, 1996, between Ciba-Geigy
Limited, a Swiss corporation, and the Registrant, incorporated by
reference to Exhibit 10.93 of the Registrant's Form 10-Q report for the
period ended June 30, 1996.
10.722 Royalty Projects Agreement by and between Ciba Corning Diagnostics Corp.,
a Delaware corporation, and Ciba-Geigy Limited, a Swiss corporation,
incorporated by reference to Exhibit 10.87 of the Registrant's Form 10-Q
report for the period ended September 29, 1996. (Certain confidential
information has been omitted from the Agreement and filed separately
with the Securities and Exchange Commission pursuant to a request by
Registrant for confidential treatment pursuant to Rule 24b-2.)
10.723 Form of Debenture Purchase Agreement between the Registrant and Ciba-
Geigy, Limited, a Swiss corporation, dated June 22, 1990.
10.724 Chiron Corporation 1.90% Convertible Subordinated Note due 2000, Series B.
10.725 Promissory Note, as amended and restated, dated January 1, 1995 by Ciba
Corning Diagnostics Corp., incorporated by reference to Exhibit 10.83 of
the Registrant's Form 10-K report for fiscal year 1995.
10.726 through 10.799 Reserved
10.801 through 10.899 Reserved
21 List of Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors. The consent set forth on page
F-2 is incorporated herein by reference.
24 Power of Attorney. The Power of Attorney set forth on pages 51 and 52 is
incorporated herein by reference.
27.1 Financial Data Schedule for Fiscal Year ended January 3, 1999.
27.2 Financial Data Schedule for Fiscal Year ended December 28, 1997.
27.3 Financial Data Schedule for Fiscal Year ended December 29, 1996.
</TABLE>
- ------------------------
* Management contract, compensatory plan or arrangement.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 1999
<TABLE>
<S> <C> <C>
CHIRON CORPORATION
By /s/ SEAN P. LANCE
----------------------------------
Sean P. Lance
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned officers and directors of Chiron Corporation, a
Delaware corporation, do hereby constitute and appoint Sean P. Lance and William
J. Rutter, Ph.D., and each of them, the lawful attorney and agent or attorneys
and agents, with full power and authority to do any and all acts and things and
to execute any and all instruments which said attorneys and agents, and any one
of them, determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Form 10-K Report. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned officers and directors
in the capacities indicated below to this Form 10-K report or amendments or
supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents or either of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his name.
51
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President and Chief
/s/ SEAN P. LANCE Executive Officer;
- ------------------------------ Director (Principal March 15, 1999
Sean P. Lance Executive Officer)
Vice President, Chief
/s/ JAMES R. SULAT Financial Officer
- ------------------------------ (Principal Financial March 15, 1999
James R. Sulat Officer)
/s/ DAVID V. SMITH Vice President, Controller
- ------------------------------ (Principal Accounting March 15, 1999
David V. Smith Officer)
/s/ WILLIAM J. RUTTER
- ------------------------------ Chairman of the Board of March 15, 1999
William J. Rutter, Ph.D. Directors
/s/ VAUGHN D. BRYSON
- ------------------------------ Director March 15, 1999
Vaughn D. Bryson
/s/ LEWIS W. COLEMAN
- ------------------------------ Director March 15, 1999
Lewis W. Coleman
/s/ PIERRE E. DOUAZE
- ------------------------------ Director March 15, 1999
Pierre E. Douaze
/s/ DONALD A. GLASER
- ------------------------------ Director March 15, 1999
Donald A. Glaser, Ph.D.
/s/ PAUL L. HERRLING
- ------------------------------ Director March 15, 1999
Paul L. Herrling, Ph.D.
/s/ ALEX KRAUER
- ------------------------------ Director March 15, 1999
Alex Krauer, Ph.D.
/s/ EDWARD E. PENHOET
- ------------------------------ Director March 15, 1999
Edward E. Penhoet, Ph.D.
/s/ JACK W. SCHULER
- ------------------------------ Director March 15, 1999
Jack W. Schuler
/s/ PIETER J. STRIJKERT
- ------------------------------ Director March 15, 1999
Pieter J. Strijkert, Ph.D.
</TABLE>
52
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Chiron Corporation:
We have audited the accompanying consolidated balance sheets of Chiron
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chiron
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
San Francisco, California
February 4, 1999
F-1
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(File Numbers 33-20181, 33-35182, 2-90595, 33-23899, 33-58305, 33-44477,
33-65024, 33-65177, 333-10419, 333-28257, 333-42469, 33-45822 and 33-63297 on
Form S-8 and File Number 33-43574 on Form S-3) of Chiron Corporation of our
reports dated February 4, 1999, relating to the consolidated balance sheets of
Chiron Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998 and the related schedule, which reports appear in
the December 31, 1998 annual report on Form 10-K of Chiron Corporation.
/s/ KPMG LLP
San Francisco, California
March 15, 1999
F-2
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 513,315 $ 98,483
Short-term investments in marketable debt securities..................... 716,630 84,588
----------- -----------
Total cash and short-term investments.................................. 1,229,945 183,071
Accounts receivable, net of allowances of $16,190 in 1998 and $22,918 in
1997:
Related parties........................................................ 49,256 56,672
Unrelated parties...................................................... 119,842 287,372
----------- -----------
169,098 344,044
Inventories................................................................ 79,869 165,652
Other current assets:
Related parties.......................................................... 245 288
Unrelated parties........................................................ 152,482 76,997
----------- -----------
152,727 77,285
----------- -----------
Total current assets................................................... 1,631,639 770,052
Noncurrent investments in marketable debt securities....................... 360,069 75,401
Property, plant, equipment and leasehold improvements, at cost:
Land and buildings....................................................... 141,452 218,509
Laboratory, production and office equipment.............................. 236,803 422,278
Leasehold improvements................................................... 84,607 123,379
Construction in progress................................................. 38,328 67,355
----------- -----------
501,190 831,521
Less accumulated depreciation and amortization........................... (197,812) (277,623)
----------- -----------
Net property, plant, equipment and leasehold improvements................ 303,378 553,898
Purchased technology, net of accumulated amortization of $20,500 in 1998
and $34,111 in 1997...................................................... 14,753 45,903
Other intangible assets, net of accumulated amortization of $69,285 in 1998
and $44,617 in 1997...................................................... 166,699 79,955
Investments in equity securities and affiliated companies:
Related parties.......................................................... -- 139,305
Unrelated parties........................................................ 27,456 37,546
----------- -----------
27,456 176,851
Other assets:
Related parties.......................................................... 3,134 15,777
Unrelated parties........................................................ 17,127 50,641
----------- -----------
20,261 66,418
----------- -----------
$ 2,524,255 $ 1,768,478
----------- -----------
----------- -----------
</TABLE>
(Continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-3
<PAGE>
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Accounts payable......................................................... $ 44,999 $ 79,339
Accrued compensation and related expenses................................ 40,034 59,405
Short-term borrowings.................................................... 17,554 154,700
Note payable to Novartis................................................. 63,945 --
Current portion of unearned revenue...................................... 41,893 13,361
Taxes payable............................................................ 180,088 37,191
Other current liabilities................................................ 168,905 127,190
----------- -----------
Total current liabilities.............................................. 557,418 471,186
Long-term debt:
Related parties.......................................................... 9,601 69,934
Unrelated parties........................................................ 328,557 327,283
----------- -----------
338,158 397,217
Other noncurrent liabilities............................................... 82,877 26,130
----------- -----------
Total liabilities...................................................... 978,453 894,533
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none
outstanding............................................................ -- --
Common stock, $0.01 par value; 499,500,000 shares authorized; 179,925,000
outstanding (175,659,000 outstanding at December 31, 1997)............. 1,799 1,757
Restricted common stock, $0.01 par value; 500,000 shares authorized; none
outstanding............................................................ -- --
Additional paid-in capital................................................. 1,979,615 1,853,591
Accumulated deficit........................................................ (437,873) (961,986)
Accumulated other comprehensive income (loss).............................. 2,261 (18,808)
Notes receivable for stock purchases....................................... -- (609)
----------- -----------
Total stockholders' equity............................................. 1,545,802 873,945
----------- -----------
$ 2,524,255 $ 1,768,478
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-4
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Product sales, net:
Related parties.............................................. $ 1,086 $ -- $ --
Unrelated parties............................................ 398,165 252,729 242,640
---------- ---------- ----------
399,251 252,729 242,640
Equity in earnings of unconsolidated joint businesses.......... 73,969 106,356 102,061
Collaborative agreement revenues:
Related parties.............................................. 75,352 78,770 81,440
Unrelated parties............................................ 14,506 36,284 40,527
---------- ---------- ----------
89,858 115,054 121,967
Royalty and license fee revenues............................... 125,263 50,368 36,606
Other revenues:
Related parties.............................................. 10,103 43,624 32,387
Unrelated parties............................................ 38,229 6,468 1,488
---------- ---------- ----------
48,332 50,092 33,875
---------- ---------- ----------
Total revenues............................................. 736,673 574,599 537,149
---------- ---------- ----------
Expenses:
Cost of sales:
Related parties.............................................. 485 -- --
Unrelated parties............................................ 177,578 113,612 116,899
---------- ---------- ----------
178,063 113,612 116,899
Research and development....................................... 294,249 259,370 248,847
Selling, general and administrative............................ 140,436 106,947 103,470
Write-off of purchased in-process technologies................. 1,645 -- --
Impairment loss on long-lived assets........................... -- 31,300 --
Restructuring and reorganization charges....................... 26,754 -- --
Other operating expenses....................................... 10,631 4,275 5,222
---------- ---------- ----------
Total expenses............................................. 651,778 515,504 474,438
---------- ---------- ----------
Income from operations......................................... 84,895 59,095 62,711
</TABLE>
(Continued)
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-5
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income from operations........................................... 84,895 59,095 62,711
Gain on sale of assets........................................... 7,751 -- --
Interest expense................................................. (24,673) (31,610) (29,486)
Other income, net................................................ 27,010 12,721 18,640
---------- ---------- ----------
Income from continuing operations before income taxes............ 94,983 40,206 51,865
Provision for income taxes....................................... 18,985 14,424 6,207
---------- ---------- ----------
Income from continuing operations................................ 75,998 25,782 45,658
---------- ---------- ----------
Discontinued operations:
Income from discontinued operations............................ 7,121 30,280 9,487
Gain on disposals of discontinued operations................... 440,994 15,157 --
---------- ---------- ----------
Net income....................................................... $ 524,113 $ 71,219 $ 55,145
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per common share:
Income from continuing operations.............................. $ 0.43 $ 0.15 $ 0.27
---------- ---------- ----------
---------- ---------- ----------
Net income..................................................... $ 2.95 $ 0.41 $ 0.33
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per common share:
Income from continuing operations.............................. $ 0.42 $ 0.14 $ 0.26
---------- ---------- ----------
---------- ---------- ----------
Net income..................................................... $ 2.90 $ 0.40 $ 0.31
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-6
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income....................................................... $ 524,113 $ 71,219 $ 55,145
Other comprehensive income (loss):
Foreign currency translation adjustment:
Change in foreign currency translation adjustment during the
period..................................................... 33,830 (21,486) (7,039)
Reclassification adjustment for net gain included in
discontinued operations.................................... (7,819) -- --
---------- ---------- ----------
Net foreign currency translation adjustment.................. 26,011 (21,486) (7,039)
---------- ---------- ----------
Unrealized loss from investments:
Unrealized holding loss arising during the period............ (6,715) (16,818) (3,641)
Reclassification adjustment for net loss (gain) included in
net income (net of tax provision (benefit) of $1,400,
($1,553) and $536, in 1998, 1997 and 1996, respectively)... 2,490 (2,760) 953
---------- ---------- ----------
Net unrealized loss from investments......................... (4,225) (19,578) (2,688)
---------- ---------- ----------
Minimum pension liability adjustment (net of tax benefit of
$136 in 1998).............................................. (717) -- --
---------- ---------- ----------
Other comprehensive income (loss).............................. 21,069 (41,064) (9,727)
---------- ---------- ----------
Comprehensive income............................................. $ 545,182 $ 30,155 $ 45,418
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-7
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL OTHER RECEIVABLE
---------------------- PAID-IN ACCUMULATED COMPREHENSIVE FOR STOCK
SHARES AMOUNT CAPITAL DEFICIT INCOME (LOSS) PURCHASES TOTAL
--------- ----------- ----------- ------------ --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995......................... 41,738 $ 417 $1,727,711 $(1,087,699) $ 31,983 $ (351) $ 672,061
Exercise of stock options...... 2,219 22 25,083 -- -- -- 25,105
Tax benefits from employee
stock plans.................. -- -- 1,398 -- -- -- 1,398
Exercise of warrants........... 61 -- 1,570 -- -- -- 1,570
Employee stock purchase plan... 1,443 15 19,897 -- -- -- 19,912
Additional shares issued in
four-for-one stock split..... 125,214 1,253 (1,253) -- -- -- --
Foreign currency translation
adjustment................... -- -- -- -- (7,039) -- (7,039)
Unrealized loss from
investments.................. -- -- -- -- (2,688) -- (2,688)
Loans to employees for stock
purchases.................... -- -- -- -- -- (609) (609)
Net income..................... -- -- -- 55,145 -- -- 55,145
--------- ----------- ----------- ------------ --------------- ----- ---------
Balances at December 31,
1996......................... 170,675 1,707 1,774,406 (1,032,554) 22,256 (960) 764,855
Exercise of stock options...... 3,632 36 41,235 -- -- -- 41,271
Tax benefits from employee
stock plans.................. -- -- 17,923 -- -- -- 17,923
Employee stock purchase plan... 1,352 14 20,027 -- -- -- 20,041
Foreign currency translation
adjustment................... -- -- -- -- (21,486) -- (21,486)
Unrealized loss from
investments.................. -- -- -- -- (19,578) -- (19,578)
Collection of a loan to
employee for stock
purchases.................... -- -- -- -- -- 351 351
Elimination of one-month lag in
reporting of Chiron
Behring...................... -- -- -- (651) -- -- (651)
Net income..................... -- -- -- 71,219 -- -- 71,219
--------- ----------- ----------- ------------ --------------- ----- ---------
Balances at December 31,
1997......................... 175,659 1,757 1,853,591 (961,986) (18,808) (609) 873,945
Exercise of stock options...... 3,308 33 51,341 -- -- -- 51,374
Tax benefits from employee
stock plans.................. -- -- 60,119 -- -- -- 60,119
Employee stock purchase plan... 958 9 14,564 -- -- -- 14,573
Foreign currency translation
adjustment................... -- -- -- -- 26,011 -- 26,011
Unrealized loss from
investments.................. -- -- -- -- (4,225) -- (4,225)
Minimum pension liability
adjustment................... -- -- -- -- (717) -- (717)
Collection of a loan to
employee for stock
purchases.................... -- -- -- -- -- 609 609
Net income..................... -- -- -- 524,113 -- -- 524,113
--------- ----------- ----------- ------------ --------------- ----- ---------
Balances at December 31,
1998......................... 179,925 $ 1,799 $1,979,615 $ (437,873) $ 2,261 $ -- $1,545,802
--------- ----------- ----------- ------------ --------------- ----- ---------
--------- ----------- ----------- ------------ --------------- ----- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-8
<PAGE>
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 524,113 $ 71,219 $ 55,145
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 107,861 102,589 105,080
Impairment loss on long-lived assets......................... -- 31,300 --
Gain on sale of assets....................................... (7,751) (18,597) --
Gain on disposals of discontinued operations................. (440,994) -- --
Gain on sale of equity securities............................ (4,475) (5,541) --
Gain on sale of interests in affiliated companies............ (1,815) -- (12,226)
Write-off of purchased in-process technologies............... 1,645 -- --
Write-off of property, plant, equipment and leasehold
improvements............................................... 5,141 4,291 5,031
Write-down of investments.................................... 8,365 1,206 1,529
Changes in reserves.......................................... 18,412 30,046 16,895
Changes in estimated liabilities............................. (5,666) (17,596) --
Deferred income taxes........................................ (43,180) (20,556) 6,972
Tax benefits from employee stock plans....................... 60,119 17,923 1,398
Undistributed earnings of affiliates......................... (263) (14,473) (6,841)
Other, net................................................... 8,910 10,408 15,864
Changes, excluding effect of acquisitions and dispositions, to:
Accounts receivable.......................................... (10,540) (12,974) (75,825)
Inventories.................................................. (17,985) (40,635) (48,545)
Other current assets......................................... (48,826) 8,355 (20,187)
Accounts payable and accrued expenses........................ (29,998) (2,062) 11,427
Current portion of unearned revenue.......................... 38,527 (5,907) (1,162)
Other current liabilities.................................... 14,273 5,890 1,921
Other noncurrent liabilities................................. 55,796 4,626 6,253
---------- ---------- ----------
Net cash provided by operating activities.................. 231,669 149,512 62,729
---------- ---------- ----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities......... (1,206,797) (219,522) (55,008)
Proceeds from sale and maturity of investments in marketable
debt securities.............................................. 282,658 120,306 143,922
Businesses acquired, net of cash acquired...................... (54,770) -- (374)
Capital expenditures........................................... (126,303) (77,524) (120,162)
Proceeds from sale of assets................................... 38,570 29,928 --
Proceeds from disposals of discontinued operations............. 1,292,164 -- --
Proceeds from sale of equity securities and interests in
affiliated companies......................................... 24,161 5,596 14,000
Purchases of investments in equity securities and affiliated
companies.................................................... (1,284) (10,942) (130,308)
Decrease (increase) in other assets............................ 6,410 (16,804) (43,351)
---------- ---------- ----------
Net cash provided by (used in) investing activities........ 254,809 (168,962) (191,281)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of short-term debt...................... 8,368 20,589 100,000
Proceeds from issuance of common stock......................... 66,556 61,502 44,597
Repayment of short-term borrowings............................. (137,501) -- (12,606)
Repayment of notes payable and capital leases.................. (9,069) (32,272) (9,643)
---------- ---------- ----------
Net cash (used in) provided by financing activities........ (71,646) 49,819 122,348
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....... 414,832 30,369 (6,204)
Cash and cash equivalents at beginning of the year............... 98,483 68,114 74,318
---------- ---------- ----------
Cash and cash equivalents at end of the year..................... $ 513,315 $ 98,483 $ 68,114
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
F-9
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY AND BASIS OF PRESENTATION
Chiron Corporation ("Chiron" or the "Company") is a biotechnology company
that develops, manufactures and markets human healthcare products for the
prevention and treatment of disease utilizing innovations in biology and
chemistry. Chiron participates in three human healthcare businesses: (i)
biopharmaceuticals, with an emphasis on oncology, serious infectious diseases
and cardiovascular diseases; (ii) blood testing; and (iii) adult and pediatric
vaccines. The Company is applying a broad and integrated scientific approach to
the development of innovative products for preventing and treating cancer,
infectious diseases and cardiovascular diseases. This approach is supported by
research strengths in recombinant proteins, genomics, small molecules, gene
therapy and vaccines.
On December 29, 1997, Chiron completed the sale of its ophthalmic business
unit, Chiron Vision Corporation ("Chiron Vision"), to Bausch & Lomb Incorporated
("B&L") and on November 30, 1998, Chiron completed the sale of its IN VITRO
diagnostics business ("Chiron Diagnostics") to Bayer Corporation ("Bayer"). As a
result of these transactions, the Company's consolidated statements of
operations reflect the after-tax results of Chiron Vision and Chiron
Diagnostics, and the related gains on disposals thereof, as discontinued
operations for all periods presented.
On March 31, 1998, in an acquisition accounted for under the purchase method
of accounting, Chiron acquired the remaining 51% interest in Chiron Behring GmbH
& Co ("Chiron Behring") from Hoechst AG. Beginning in the second quarter of
1998, the results of Chiron Behring were consolidated with those of the Company.
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 1998, 1997 and
1996 fiscal years ended on January 3, 1999, December 28, 1997 and December 29,
1996, respectively. In 1998, the fiscal year was 53 weeks long as compared with
1997 and 1996, where the fiscal years were 52 weeks long. For presentation
purposes, dates used in the consolidated financial statements and notes thereto
refer to the fiscal year end. Effective with fiscal year 1999, the Company will
change its year end to coincide with a calendar year ending on December 31.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Investments in
joint ventures, partnerships and interests in which Chiron has an equity
interest of 50% or less are accounted for using either the equity
F-10
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or cost method. Certain foreign subsidiaries and investments in affiliated
companies are accounted for either on a one-month or one-quarter lag.
USE OF ESTIMATES AND RECLASSIFICATIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the Company's consolidated
financial statements and notes thereto. Actual results could differ materially
from those estimates. The accompanying Consolidated Financial Statements for
1997 and 1996 have been reclassified to separately identify the results of
Chiron's discontinued operations. In addition, certain other amounts which were
previously reported have been reclassified to conform with the current period
presentation.
CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE DEBT SECURITIES
All highly liquid investments with a maturity of three months or less from
the date of purchase are considered to be cash equivalents. Cash equivalents and
short-term investments in marketable debt securities consist principally of
money market instruments including corporate notes and bonds, commercial paper
and government agency securities. Noncurrent investments in marketable debt
securities consist principally of corporate notes and bonds and government
agency securities. The cost of securities sold is based on the specific
identification method for debt securities and on the average cost method for
equity securities.
INVENTORIES
Pharmaceutical inventories are stated at the lower of cost or market using
the average cost method or, in the case of certain vaccine products, using the
last-in, first-out ("LIFO") method. Diagnostic and ophthalmic (see Note 4), and
certain other vaccine products are valued at cost, using the first-in, first-out
("FIFO") method, which is less than market value. Inventories consist of the
following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............................................ $ 12,301 $ 82,896
Work in process........................................... 54,333 47,417
Raw materials............................................. 13,235 35,339
---------- ----------
$ 79,869 $ 165,652
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, plant, equipment and leasehold improvements are recorded at cost
less accumulated depreciation. Depreciation on property, plant and equipment,
including assets held under capital leases, is computed using the straight-line
method over the estimated useful lives of the assets, ranging from 3 to 20 years
for equipment and 15 to 40 years for buildings. Leasehold improvements are
amortized on a straight-line basis over the shorter of the asset's useful life
or remaining lease term.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
Intangible assets consist principally of purchased technologies, goodwill
and patents and are amortized on a straight-line basis over their estimated
useful lives, ranging from 3 to 20 years. Amortization expense for the years
ended December 31, 1998, 1997 and 1996 was $15.7 million, $7.0 million and $8.3
million, respectively. Amortization of purchased technologies and goodwill is
primarily included in "Other operating expenses" and amortization of patents is
primarily included in "Research and development" in the accompanying
Consolidated Statements of Operations.
As circumstances dictate, the Company assesses the recoverability of its
intangible and other long-lived assets by comparing the projected undiscounted
net cash flows associated with such assets against their respective carrying
values. Impairment, if any, is based on the excess of the carrying value over
the fair value.
REVENUE RECOGNITION
"Product sales, net" primarily consists of revenues from product shipments.
For sales of Betaseron(R) (interferon beta-1b), the Company recognizes a partial
share of revenues upon shipment to its marketing partner and an additional share
upon the marketing partner's subsequent sale of Betaseron(R) to patients.
Beginning in July 1997, the contractual terms under which Chiron recognizes
Betaseron(R) revenues changed, with a larger portion of revenues recognized when
the marketing partner realizes sales, rather than upon Chiron's initial
shipment.
"Equity in earnings of unconsolidated joint businesses" represents the
Company's share of the operating results generated by its commercial joint
businesses. "Collaborative agreement revenues" are earned and recognized based
upon work performed or upon the attainment of specified milestones. Under
contracts where reimbursement is based upon work performed, the related research
and development expenses were $61.9 million, $79.5 million and $103.8 million in
1998, 1997 and 1996, respectively. "Royalty and license fee revenues" consist of
product royalty payments and fees under license agreements and are recognized
when earned. "Other revenues" consist primarily of fees for sales and marketing
services performed, commission fees
F-12
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and grants from government agencies, and are recognized when earned. In 1997,
"Other revenues" also included revenue related to Chiron's co-promotion of
Novartis AG's product Aredia(R) which was recognized, in part, based on the
percentage of effort expended.
ADVERTISING EXPENSES
The Company expenses the costs of advertising, which also includes
promotional expenses, as incurred. Advertising expenses for the years ended
December 31, 1998, 1997 and 1996 were $12.2 million, $7.1 million and $11.0
million, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. No provision is made for U.S. income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations.
STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company
measures compensation expense for its stock-based employee compensation plans
using the intrinsic method prescribed by Accounting Principles Board ("APB") No.
25, "Accounting for Stock Issued to Employees" ("APB 25"). In accordance with
SFAS 123, the Company has provided in Note 12 the pro forma disclosures of the
effect on net income and earnings per share as if SFAS 123 had been applied in
measuring compensation expense for all periods presented.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries and equity
investments are generally measured using the local currency as the functional
currency. Accordingly, the assets and liabilities of the Company's foreign
subsidiaries and equity investments are translated into U.S. dollars using the
exchange rates in effect at the end of the period. Revenues and expenses are
translated using the average exchange rates for the period. Adjustments
resulting from currency translations are included in "Other comprehensive income
(loss)." Gains and losses resulting from currency transactions are recognized in
current operations.
F-13
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes derivative financial instruments, including forward
foreign currency contracts, foreign currency option contracts and cross currency
interest rate swaps, to reduce foreign exchange and interest rate risks.
Derivative financial instruments are not used for trading or speculative
purposes. The Company's control environment includes policies and procedures for
risk assessment and the approval, reporting and monitoring of foreign currency
hedging activities. Counterparties to the Company's hedging agreements are major
financial institutions. The Company manages the risk of counterparty default on
its derivative financial instruments through the use of credit standards,
counterparty diversification and monitoring of counterparty financial
conditions. Chiron has not experienced any losses due to counterparty default.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash investments and trade
accounts receivable. The Company invests cash, which is not required for
immediate operating needs, in a diversified portfolio of financial instruments
issued by institutions with investment-grade credit ratings. By policy, the
amount of credit exposure to any one institution is limited. These investments
are generally not collateralized and primarily mature within three years. The
Company has not realized any significant losses on these investments.
The Company has not experienced any significant credit losses from its
accounts receivable from joint business partners or collaborative research
agreements, and none are currently expected. Other accounts receivable arise
from product sales to customers. The Company performs ongoing credit evaluations
of these customers and generally does not require collateral. The Company
maintains reserves for potential trade receivable credit losses, and such losses
have been within management's expectations.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
130"), the Company has displayed the components of "Other comprehensive income
(loss)" and "Comprehensive income," in the accompanying Consolidated Statements
of Comprehensive Income. Unless otherwise noted, the components of the Company's
"Other comprehensive income (loss)" and "Comprehensive income" 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.
F-14
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 2--EARNINGS PER COMMON SHARE
Basic earnings per share is based upon the weighted-average number of common
shares outstanding. Diluted earnings per share is based upon the
weighted-average number of common shares and dilutive potential common shares
outstanding. Dilutive potential common shares result from (i) the assumed
exercise of outstanding stock options, warrants and equivalents which are
included under the treasury-stock method; and (ii) performance units (see Note
12) to the extent that dilutive shares are assumed issuable.
The following table sets forth the computation for basic and diluted
earnings per share for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted-average common shares outstanding........................... 177,587 173,524 169,347
Effect of dilutive securities:
Options and equivalents............................................ 2,956 4,219 7,450
Warrants........................................................... 190 204 297
Performance units.................................................. -- 41 10
--------- --------- ---------
Weighted-average common shares outstanding plus assumed
conversions........................................................ 180,733 177,988 177,104
--------- --------- ---------
--------- --------- ---------
</TABLE>
Options to purchase 10.1 million shares, 7.8 million shares and 2.1 million
shares with exercise prices greater than the average market prices of common
stock were outstanding during the years ended December 31, 1998, 1997 and 1996,
respectively. These options were excluded from the respective computations of
diluted earnings per share as their inclusion would be antidilutive.
Also excluded from the computations of diluted earnings per share were 12.0
million shares of common stock issuable upon conversion of the Company's
convertible subordinated debentures (see Note 10) as the average conversion
price was greater than the average market price for all periods presented.
F-15
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid.................................................. $ 14,322 $ 19,973 $ 19,354
Income taxes paid.............................................. $ 18,350 $ 10,792 $ 14,505
Noncash investing and financing activities:
Acquisitions:
Cash acquired.............................................. $ 57,119 $ -- $ --
Fair value of all other assets acquired.................... 206,922 -- 2,143
Liabilities assumed........................................ (33,815) -- (1,769)
Acquisition costs.......................................... (1,180) -- --
Carrying value of original investment...................... (117,157) -- --
----------- ----------- -----------
Total cash paid.............................................. $ 111,889 $ -- $ 374
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 4--DISCONTINUED OPERATIONS
On November 30, 1998, Chiron completed the sale of Chiron Diagnostics to
Bayer for $1,013.8 million in cash, subject to certain post-closing adjustments.
The sale was completed under the terms of a Stock Purchase Agreement (the
"Agreement"), dated September 17, 1998, among Chiron, Chiron Diagnostics and
Bayer. In accordance with APB 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 Diagnostics is reported as a discontinued operation for all periods
presented in the accompanying Consolidated Statements of Operations. Chiron has
agreed to provide customary indemnities under the terms of the Agreement.
In connection with the sale of Chiron Diagnostics, Chiron granted to Chiron
Diagnostics rights under certain Chiron patents, including non-exclusive rights
to patents relating to human immunodeficiency virus ("HIV") and hepatitis C
virus. In exchange for these rights, Chiron Diagnostics paid to Chiron $100.0
million which is refundable in decreasing amounts over a period of three years.
In 1998, Chiron recognized revenues of $13.3 million which represents the
portion of the $100.0 million payment which became non-refundable during 1998.
The Company anticipates recognizing the remaining revenue over a period of three
years as follows: $39.2 million in 1999, $29.2 million in 2000 and $18.3 million
in 2001. Also in connection with the sale of Chiron Diagnostics, Chiron
recognized net revenues of $12.5 million in exchange for granting Bayer a
license to use, reproduce and sell certain technology developed by Chiron's
informatics business.
As a result of the sale of Chiron Diagnostics, certain technology rights,
which the Company had utilized in its blood testing and diagnostics businesses,
were no longer being utilized across
F-16
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
a broad base of technology. These rights, which had been capitalized as
intangible assets, were expensed against the gain on disposal of discontinued
operations as the impairment of the rights was a direct result of the sale of
Chiron Diagnostics. At the time of sale, these rights had a net book value of
$9.5 million. Under the terms of the Agreement, Chiron and Bayer agreed to share
certain future milestone payments related to this technology. Chiron's portion
of these future milestone payments will be expensed as incurred.
In connection with the sale of Chiron Diagnostics, the Company recorded
deferred tax assets of $20.0 million. The Company also recorded a corresponding
valuation allowance of $20.0 million to offset these deferred tax assets. The
future recognition of these deferred tax assets will be reported as a component
of "Income (loss) from discontinued operations." Chiron reduced its valuation
allowance related to Chiron Diagnostics' domestic and foreign deferred tax
assets by $45.5 million in the third quarter of 1998, as the sale to Bayer made
it more likely than not that the deferred tax assets would be realized. Included
in the $45.5 million was $3.7 million of foreign deferred tax assets recognized
in accordance with Emerging Issues Task Force ("EITF") Issue No. 93-17,
"Recognition of Deferred Tax Assets for a Parent Company's Excess Tax Basis in
the Stock of a Subsidiary That Is Accounted for as a Discontinued Operation"
("EITF 93-17").
On December 29, 1997, Chiron completed the sale of all of the outstanding
capital stock of Chiron Vision to B&L for approximately $300.0 million in cash,
subject to certain post-closing adjustments. The sale was completed under the
terms of a Stock Purchase Agreement, dated October 21, 1997, between Chiron and
B&L. 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 the completion of
the sale. Additionally, the Company 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 a portion of the real estate assets which were
occupied at closing on a rent-free basis. As of December 31, 1998, the real
estate assets are recorded in the accompanying Consolidated Balance Sheets as
"Other current assets." In the first quarter of 1998, the Company recorded a
$13.6 million adjustment to record the real estate assets at their estimated
fair value, determined on the basis of independent appraisals, less costs to
sell. This adjustment was recorded as a reduction to the "Gain on disposals of
discontinued operations" in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1998.
In 1998, Chiron Diagnostics recognized total revenues of $527.7 million. In
1997 and 1996, Chiron Diagnostics and Chiron Vision, collectively, recognized
total revenues of $800.2 million and $775.7 million, respectively. "Income from
discontinued operations" in the accompanying Consolidated Statements of
Operations is reported net of income tax provisions of $0.1 million, $2.9
million and $18.6 million in 1998, 1997 and 1996, respectively. In addition,
included in
F-17
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
"Income from discontinued operations" is approximately $16.4 million of net
income recognized by Chiron Diagnostics from September 17, 1998 to November 30,
1998 and $3.8 million of net income recognized by Chiron Vision from October 21,
1997 to December 28, 1997. "Gain on disposals of discontinued operations" in the
accompanying Consolidated Statements of Operations for the year ended December
31, 1998 is reported net of a provision for income taxes of $200.7 million on
the disposals of Chiron Vision and Chiron Diagnostics. "Gain on disposals of
discontinued operations" in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1997 represents deferred tax benefits
of $15.2 million related to the disposal of Chiron Vision. The accompanying
Consolidated Balance Sheets include the net assets of discontinued operations,
including the Chiron Vision real estate assets, as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable, net.................................................... $ -- $ 191,701
Inventories................................................................. -- 122,160
Other current assets (assets held for sale)................................. 11,500 --
Property, plant, equipment and leasehold improvements, net.................. -- 254,001
Purchased technology, net................................................... -- 25,068
Other intangible assets, net................................................ -- 53,925
Accounts payable and other current liabilities.............................. -- (113,518)
Other assets and liabilities, net........................................... -- (71,157)
----------- -----------
$ 11,500 $ 462,180
----------- -----------
----------- -----------
</TABLE>
Basic income per common share from discontinued operations was $2.52, $0.26
and $0.06 for the years ended December 31, 1998, 1997 and 1996, respectively.
Diluted income per common share from discontinued operations was $2.48, $0.26
and $0.05 for the years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 5--ACQUISITION OF CHIRON BEHRING
Effective July 1, 1996, Chiron purchased a 49% interest in the human vaccine
business of Behringwerke AG, which subsequently merged into its parent company,
Hoechst AG. The total acquisition price, which was paid in cash, was
approximately $120.0 million, including costs directly related to the
acquisition. This amount was reflected as a component of "Investments in equity
securities and affiliated companies" in the accompanying Consolidated Balance
Sheet as of December 31, 1997. Of the total acquisition price, approximately
$97.0 million was allocated to various intangible assets such as goodwill,
trademarks and patents, and is being amortized on a straight-line basis over
lives ranging from 5 to 20 years.
F-18
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 5--ACQUISITION OF CHIRON BEHRING (CONTINUED)
From July 1, 1996 through March 31, 1998 (period of mutual ownership),
Chiron and Hoechst AG operated the vaccine business as a joint venture under the
name Chiron Behring GmbH & Co. Chiron accounted for its 49% interest under the
equity method and recognized revenue of $2.4 million, $13.8 million and $4.2
million as components of "Equity in earnings of unconsolidated joint businesses"
in the accompanying Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996, respectively.
On March 31, 1998, in an acquisition accounted for under the purchase method
of accounting, Chiron acquired the remaining 51% interest in Chiron Behring from
Hoechst AG. The purchase price of approximately $113.1 million, including
acquisition costs, was allocated to the acquired assets and liabilities assumed
based upon their estimated fair value on the date of acquisition. In connection
with the acquisition, liabilities assumed were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Cash acquired..................................................... $ 57,119
Fair value of all other assets acquired........................... 206,922
Carrying value of original investment in Chiron Behring........... (117,157)
Cash paid......................................................... (111,889)
Acquisition costs................................................. (1,180)
--------------
Liabilities assumed............................................... $ 33,815
--------------
--------------
</TABLE>
At the time of acquisition, Chiron expensed $1.6 million of purchased
in-process technologies (the "non-recurring charge"). Other purchased intangible
assets of approximately $135.0 million, including goodwill, trademarks, patents
and customer list, are being amortized over their estimated useful lives of 4 to
17 years on a straight-line basis. Chiron Behring's operating results were
included in Chiron's consolidated operating results beginning in the second
quarter of 1998.
The following unaudited pro forma information presents the results of
continuing operations of Chiron and Chiron Behring for the years ended December
31, 1998 and 1997, respectively, with pro forma adjustments as if Chiron's
acquisition of the remaining 51% interest in Chiron Behring had been consummated
as of January 1, 1997. The pro forma information does not purport to be
indicative of what would have occurred had the acquisition
F-19
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 5--ACQUISITION OF CHIRON BEHRING (CONTINUED)
been made as of those dates or of results which may occur in the future. The
unaudited pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Total revenues............................................................ $ 770,634 $ 733,855
Income from continuing operations before the non-recurring charge......... $ 78,128 $ 34,282
Pro forma income per share from continuing operations before the
non-recurring charge:
Basic................................................................... $ 0.44 $ 0.20
Diluted................................................................. $ 0.43 $ 0.19
</TABLE>
NOTE 6--RESTRUCTURING AND REORGANIZATION CHARGES
During 1998, Chiron incurred restructuring and reorganization charges
related to the integration of the Company's worldwide vaccines operations, the
closure of the Company's Puerto Rico and St. Louis, Missouri facilities, as well
as the Company's ongoing rationalization of its business operations. As a result
of these initiatives, Chiron recognized net restructuring and reorganization
expenses from continuing operations of $26.8 million, consisting primarily of
termination and other employee-related costs related to the elimination of 400
positions in sales, marketing and other administrative, manufacturing, research
and development functions and facility-related costs. Employee termination costs
include wage continuation, advance notice pay and medical and other benefits. As
of December 31, 1998, 167 employees had been terminated. Facility-related costs
include losses on disposal of property, plant and equipment, lease payments and
other related costs. In addition, the Company recognized a $3.7 million benefit
due to a revised estimate of property and other tax-related accruals recorded in
1995 in connection with the idling of the Puerto Rico facility. There were no
other significant non-cash adjustments to the Company's restructuring and
reorganization liabilities during 1998.
Included in "Income from discontinued operations" in the accompanying
Consolidated Statements of Operations were restructuring and reorganization
charges of $19.1 million and $3.3 million in 1998 and 1997, respectively. These
charges related to the rationalization of the Company's IN VITRO diagnostics
business operations and primarily consisted of employee termination costs
related to the termination of 331 employees, all of which were terminated as of
December 31, 1998. The Company retained $4.5 million of accrued restructuring
charges upon the completion of the sale of Chiron Diagnostics to Bayer.
F-20
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 6--RESTRUCTURING AND REORGANIZATION CHARGES (CONTINUED)
The current status of the accrued restructuring charges is summarized as
follows:
<TABLE>
<CAPTION>
AMOUNT
AMOUNT OF UTILIZED AMOUNT TO
RESTRUCTURING TOTAL THROUGH BE UTILIZED
ACCRUAL RESTRUCTURING DEC. 31, IN FUTURE
DEC. 31, 1997 CHARGE 1998 PERIODS
------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
Employee-related costs....................... $ -- $ 23,334 $ 7,944 $ 15,390
Puerto Rico facility......................... 3,695 (3,695) -- --
Other facility-related costs................. -- 7,115 3,184 3,931
------------- ------------- ------------ -----------
3,695 26,754 11,128 19,321
Discontinued operations...................... 3,162 19,068 17,755 4,475
------------- ------------- ------------ -----------
$ 6,857 $ 45,822 $ 28,883 $ 23,796
------------- ------------- ------------ -----------
------------- ------------- ------------ -----------
</TABLE>
The Company's restructuring and reorganization accruals, which are included
as a component of "Other current liabilities" in the accompanying Consolidated
Balance Sheets, are expected to be substantially settled within twelve months of
accruing the related charges. The Company anticipates that it will record
additional restructuring and reorganization liabilities in future periods as it
continues to create a simpler, more efficient operating structure for the
organization.
NOTE 7--RESEARCH AND DEVELOPMENT ARRANGEMENTS
Chiron participates in a number of research and development arrangements
with other pharmaceutical and biotechnology companies to develop and market
certain technologies and products. Chiron and its collaborative partners
generally contribute certain technologies and research efforts, and commit,
subject to certain limitations and cancellation clauses, to share costs related
to certain research and development activities, including those related to
clinical trials. Chiron may also be required to make payments to certain
collaborative partners upon their achievement of specified milestones. Aggregate
annual funding commitments under collaborative arrangements are $9.2 million in
1999, $5.0 million in 2000 and an insignificant amount thereafter.
In connection with certain research and development arrangements, the
Company may invest in equity securities of its collaborative partners. The price
of these securities is subject to significant volatility. In 1998, 1997 and
1996, Chiron recognized losses of $8.4 million, $1.2 million and $1.5 million,
respectively, attributable to the other-than-temporary impairment of certain of
these equity securities.
F-21
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8--RELATED PARTY TRANSACTIONS AND JOINT BUSINESS ARRANGEMENT
NOVARTIS AG
The Company has an alliance with Novartis AG ("Novartis"), a life sciences
company headquartered in Basel, Switzerland. Novartis was formed as a result of
a December 1996 merger between Ciba-Geigy Limited ("Ciba") and Sandoz Limited.
Under a series of agreements between Chiron and Novartis, effective January
1995, Novartis increased its ownership interest in the Company to 49.9%. As a
result of subsequent stock issuances by the Company, Novartis' ownership
interest in Chiron has been reduced to approximately 44% as of December 31,
1998.
In January 1995, Chiron and Novartis entered into a Governance Agreement
whereby Novartis agreed not to increase its ownership interest in the Company
above 49.9% before January 15, 2000. Thereafter, Novartis agreed not to increase
its ownership interest in the Company above 55% unless it acquires all of
Chiron's outstanding capital stock in a "buy-out transaction"; such buy-out
transaction cannot occur before January 5, 2001. Novartis may exceed these
standstill amounts and increase its ownership interest up to 79.9% if the
transaction is approved by a majority of the independent members of Chiron's
Board of Directors. Under the terms of the Governance Agreement, Novartis is
permitted to designate three members of Chiron's Board of Directors.
In December 1995, Chiron and Novartis entered into a Limited Liability
Company agreement (the "R&D Funding Agreement"). Under the terms of this
agreement, Novartis agreed to fund certain research and development projects
including certain adult and pediatric vaccines and Insulin-Like Growth Factor-I
("IGF-I"). In December 1997, this agreement was amended to include research and
development activities related to Factor VIII gene therapy and Herpes Simplex
Virus-thymidine kinase ("HSV-tk"). Under this agreement, in 1998, 1997 and 1996,
Chiron recognized collaborative agreement revenues of $54.4 million, $53.3
million and $72.0 million, respectively.
In accordance with the terms of the R&D Funding Agreement, the amount of
funding provided by Novartis is subject to annual limits, not to exceed an
aggregate $250.0 million. At Chiron's option, this aggregate limit may be
increased to $300.0 million, in exchange for a reduction in the maximum
borrowing amount under the credit facilities that are guaranteed by Novartis. In
1999, the amount of R&D funding provided by Novartis is limited to $43.3
million.
In consideration of the funding provided by Novartis under the R&D Funding
Agreement, Novartis has an interest in a stream of variable royalties in future
worldwide sales from certain adult and pediatric vaccines, IGF-I, Factor VIII
and HSV-tk (the "Products"), if any, which are successfully developed. Novartis
also has co-promotional rights, in countries other than in North America and
Europe, for certain adult vaccines. Royalties on all specified products will be
paid for a minimum of 10 years from the later of October 1, 2001 or the date of
the first commercial sale of individual products covered by the R&D Funding
Agreement, as amended.
F-22
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8--RELATED PARTY TRANSACTIONS AND JOINT BUSINESS ARRANGEMENT (CONTINUED)
Chiron has the right, but not the obligation, to buy-out Novartis' interests in
the Products for a price equal to the aggregate amount of R&D funding provided
by Novartis, less any payments to or profits earned by Novartis in connection
with the Products, plus interest at the London Interbank Offered Rate ("LIBOR").
Chiron must notify Novartis by January 1, 2002 as to whether it will exercise
its buy-out right and will have until January 1, 2005 to tender the purchase
price for the buy-out.
Under the terms of an Investment Agreement, Novartis agreed to guarantee
certain obligations of the Company under one or more revolving credit facilities
through January 1, 2008. The principal amount of indebtedness under the
guaranteed credit facilities may not exceed $425.0 million and may be reduced by
$1.50 for each $1.00 of additional R&D funding requested by Chiron (up to $50.0
million of additional funding under the R&D Funding Agreement discussed above).
In November 1996, Chiron and Novartis agreed that Chiron could increase the
maximum borrowing amount under the guaranteed credit facilities by up to $300.0
million. In exchange for this increase, the amount of Chiron's common stock
required to be purchased by a Novartis affiliate (at Chiron's request) would be
reduced by an equal amount. Under the Investment Agreement, Novartis had
guaranteed $152.9 million of Chiron's operating lease commitments as of December
31, 1998.
In connection with the sale of Chiron Diagnostics to Bayer, a promissory
note originated between Chiron Diagnostics and Novartis was transferred to and
assumed by the Company. The note payable to Novartis bears interest at a
variable rate based on LIBOR (approximately 5.6% and 6.0% at December 31, 1998
and 1997, respectively) and is due on January 1, 2000. As of December 31, 1998
and 1997, the outstanding amount was $63.9 million and $60.6 million,
respectively, including accrued interest.
Under the terms of a November 1995 agreement with Novartis, Novartis agreed
to pay $26.0 million over a five-year period, subject to certain adjustments, in
exchange for a non-exclusive license to utilize Chiron's combinatorial chemistry
techniques. In addition, the parties agreed to collaborate to utilize
combinatorial chemistry technology to identify potential products in selected
target areas. The agreement provides for research funding by Novartis, and
certain upfront milestone and royalty payments, as well as product
commercialization rights for both parties. In connection with this agreement,
Chiron recognized collaborative agreement revenues of $6.0 million, $10.2
million and $9.4 million, in 1998, 1997 and 1996, respectively.
In November 1996, in connection with the U.S. Federal Trade Commission's
review of the merger between Ciba and Sandoz Limited, which created Novartis,
Chiron and Novartis entered into a consent order pursuant to which Chiron agreed
to grant a royalty-bearing license to Rhone-Poulenc Rorer, Inc. under certain
Chiron patents relating to the HSV-tk gene in the field of gene therapy. Chiron
and Novartis entered into a separate agreement which provides, among other
things, for certain cross licenses between Chiron and Novartis, and under which,
beginning in 1997, Novartis agreed to pay Chiron up to $60.0 million over five
years. In
F-23
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 8--RELATED PARTY TRANSACTIONS AND JOINT BUSINESS ARRANGEMENT (CONTINUED)
connection with the agreement, Chiron recognized collaborative agreement
revenues of $15.0 million in both 1998 and 1997.
From 1994 through April 1998, Chiron promoted Aredia(R) (pamidronate
disodium for injection) on behalf of Novartis. In April 1998, the arrangement
was terminated. In connection with the arrangement, in 1998, 1997 and 1996,
Chiron recognized other revenues of $9.8 million, $43.6 million and $30.2
million, respectively.
LOAN TO EXECUTIVE OFFICER
In June 1998, the Company provided a loan of $1.0 million to a senior
executive officer. The loan, which is non-interest bearing, is secured by a
primary deed of trust on real estate. Principal is payable in annual
installments of $0.05 million over a period of ten years, with the outstanding
principal balance due in full on June 22, 2008. As of December 31, 1998, the
amount outstanding on the loan was $1.0 million.
ORTHO-CLINICAL DIAGNOSTICS, INC.
In 1989, Chiron entered into an agreement with Ortho-Clinical Diagnostics,
Inc. ("Ortho"), a Johnson & Johnson ("J&J") company, to jointly develop,
manufacture and market certain immunoassay diagnostic products. Under the terms
of the agreement, Chiron receives 50% of the pretax operating profits of the
joint business and is reimbursed for its continuing research, development and
manufacturing costs. 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 and
Genelabs Diagnostic, Inc., for their sales of certain tests.
Chiron records its share of profits from the Chiron-Ortho joint business on
a one-month lag using estimates provided by Ortho. At the end of each year, the
joint business records an annual inventory adjustment. Included in Chiron's
share of the profits in 1998, 1997 and 1996, were annual inventory adjustments
of ($4.1) million, $0.8 million and $3.8 million, respectively. Profit sharing
distributions are payable to Chiron within 90 days after the end of each
quarter. At December 31, 1998 and 1997, $22.1 million and $22.8 million,
respectively, were due from Ortho for profit sharing and reimbursement of costs.
In 1998, 1997 and 1996, Chiron's 50% share of the profits from the joint
business, which is recorded as a component of "Equity in earnings of
unconsolidated joint businesses," was $73.5 million, $92.9 million and $95.8
million, respectively. Revenues recognized under the cost reimbursement portion
of the agreement in 1998, 1997 and 1996 for product sales were $20.6 million,
$20.1 million and $15.0 million, respectively, and for collaborative research
were $5.0 million, $7.1 million and $8.6 million, respectively.
F-24
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS 115"), the Company has classified its investments
in certain debt and equity securities as "available-for-sale." Such investments
are recorded at fair value based upon year-end quoted market prices, with
unrealized gains and losses, deemed by the Company as temporary in nature,
reported as a separate component of other comprehensive income or loss.
Available-for-sale securities consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------ --------------------------------------------
ADJUSTED UNREALIZED UNREALIZED FAIR ADJUSTED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------- -------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government............... $ 184,992 $ 61 $ (213) $ 184,840 $ 22,606 $ 8 $ (37) $ 22,577
Mortgage-backed............... -- -- -- -- 1,998 -- (1) 1,997
Corporate debt................ 1,311,446 416 (847) 1,311,015 180,132 12 (132) 180,012
---------- ---------- ---------- ---------- -------- ---------- ---------- --------
1,496,438 477 (1,060) 1,495,855 204,736 20 (170) 204,586
Equity........................ 13,973 6,358 (1,004) 19,327 21,804 12,529 (3,383) 30,950
---------- ---------- ---------- ---------- -------- ---------- ---------- --------
$1,510,411 $6,835 $(2,064) $1,515,182 $226,540 $12,549 $(3,553) $235,536
---------- ---------- ---------- ---------- -------- ---------- ---------- --------
---------- ---------- ---------- ---------- -------- ---------- ---------- --------
</TABLE>
These securities are classified in the accompanying Consolidated Balance
Sheets as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Cash equivalents...................................... $ 419,156 $ 44,597
Short-term investments in marketable debt
securities.......................................... 716,630 84,588
Noncurrent investments in marketable debt
securities.......................................... 360,069 75,401
Investments in equity securities...................... 19,327 30,950
------------ ------------
$ 1,515,182 $ 235,536
------------ ------------
------------ ------------
</TABLE>
F-25
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The cost and estimated fair value of available-for-sale debt securities by
contractual maturity consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
ADJUSTED FAIR
COST VALUE
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Due in one year or less............................... $ 1,135,950 $ 1,135,786
Due in one to five years.............................. 360,488 360,069
------------ ------------
$ 1,496,438 $ 1,495,855
------------ ------------
------------ ------------
</TABLE>
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments,
other than those accounted for in accordance with SFAS 115, are as follows at
December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ON-BALANCE SHEET FINANCIAL INSTRUMENTS:
Nonmarketable equity investments
(accounted for under the cost method)... $ 8,129 $ 12,916 $ 6,596 $ 9,694
Notes receivable........................ 2,317 2,317 14,697 14,497
Deposits................................ 2,633 2,209 4,449 3,936
Foreign currency option contracts....... 260 260 2,929 2,929
Due from cross currency interest rate
swaps................................. 8,506 7,440 19,236 15,807
Long-term debt:
Convertible subordinated debentures... 335,070 354,206 327,243 334,078
Notes payable......................... 68,541 68,541 67,062 67,062
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Cross currency interest rate swaps...... -- 1,808 -- 16,002
Due from forward foreign currency
contracts............................. -- -- -- 569
</TABLE>
The fair value estimates provided above are based on information available
at December 31, 1998 and 1997. Considerable judgment is required in interpreting
market data to develop the estimates of fair value. As such, these estimated
fair values are not necessarily indicative of the amounts that the Company could
realize in a current market exchange.
The fair value of nonmarketable equity investments that are accounted for
under the cost method is primarily based on estimated market prices determined
by a broker. The carrying
F-26
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
values of variable rate notes receivable and notes payable approximate fair
value due to the market-based nature of these instruments. The fair value of the
deposits is based on the discounted value of expected future cash flows using
current rates for assets with similar maturities. The fair value of the
receivables from cross currency interest rate swaps is based on the discounted
value of expected future cash flows using current rates. The fair value of
convertible subordinated debentures is based on the market price at the close of
business on the last day of the fiscal year. The fair values of the foreign
currency option contracts and the cross currency interest rate swaps are based
on estimated market prices, determined by a broker. The carrying value of the
receivables from forward foreign currency contracts approximates fair value
based on the short-term nature of these contracts. Included in current assets
and current liabilities are certain other financial instruments whose carrying
values approximate fair value due to the short-term nature of such instruments.
FOREIGN CURRENCY CONTRACTS
A significant portion of the Company's operations consists of manufacturing
and sales activities in western European countries. As a result, the Company's
financial results may be affected by changes in the foreign currency exchange
rates of those related countries.
Forward foreign currency contracts ("forwards"), generally having average
maturities of three months or less, are used to hedge material foreign currency
denominated receivables and payables. Forwards are generally marked-to-market at
the end of each quarter with gains or losses recorded as a component of "Other
income, net," in the accompanying Consolidated Statements of Operations to
offset gains or losses on foreign currency denominated receivables and payables.
Outstanding notional amounts of the Company's forwards were $14.7 million and
$46.1 million at December 31, 1998 and 1997, respectively.
Foreign currency transaction gains and losses from continuing operations,
net of the impact of hedging, were not significant in 1998, 1997 or 1996.
The Company purchases foreign currency option contracts ("options") to
reduce the exchange rate impact of a strengthening U.S. dollar on the underlying
hedged amounts. These options are designated and effective as hedges of a
portion of probable foreign currency exposure on anticipated intercompany
inventory purchases over the next six months by subsidiaries with functional
currencies other than the U.S. dollar. The cost of the options, which is
recorded as a component of "Other current assets" in the accompanying
Consolidated Balance Sheets, is deferred and amortized over the relevant term of
the period hedged. The Company's financial exposure is limited to the amount
paid for the options. Any resulting gains from these option contracts are
deferred until the designated intercompany transactions are recorded, and are
recognized as a component of "Other income, net," in the accompanying
Consolidated Statements of Operations. Outstanding notional amounts of the
Company's options were $55.6 million and $111.3 million at December 31, 1998 and
1997, respectively.
F-27
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 9--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
CROSS CURRENCY INTEREST RATE SWAPS
The Company selectively enters into cross currency interest rate swaps
("swaps") with major financial institutions to modify the interest and/or
currency characteristics of certain assets and liabilities. These swap
agreements involve the exchange of interest payments denominated in different
currencies, based upon the terms described in the swap agreements. The net
difference between the interest amounts paid and received is recognized as a
component of "Other income, net," in the accompanying Consolidated Statements of
Operations. The related interest amount payable or receivable from the major
financial institutions is included as a component of other current liabilities
or assets. Currency translation fluctuations in the underlying assets and
liabilities, as well as changes in the value of the related swaps are reflected
in other comprehensive income or loss. Outstanding notional amounts of the
Company's swaps were $226.8 million and $139.1 million at December 31, 1998 and
1997, respectively, as described below.
In April 1998, the Company entered into a series of swap agreements to fix
the interest and currency exchange rate exposures associated with the Company's
wholly owned German subsidiary. The swaps mature in April 2003 and are based on
an aggregate notional amount of $114.2 million. There is no exchange of
principal amounts upon maturity. The agreements provide for quarterly interest
payments based on a fixed Deutsche mark rate of 4.7% while receiving quarterly
interest payments based on a fixed U.S. dollar rate of 4.8%.
In November 1998, in connection with the sale of Chiron Diagnostics, the
Company terminated a swap agreement that was entered into in June 1997. The
agreement originally had a maturity date of June 2002 with a notional amount of
$26.5 million.
In July 1996, the Company also entered into swap agreements that mature in
July 2001 with an aggregate notional amount of $112.6 million. There is an
exchange of principal amounts upon maturity. The Company effectively created a
fixed rate Deutsche mark liability to fund certain Deutsche mark assets. The
agreements provide for the Company to make quarterly interest payments based on
a fixed Deutsche mark rate of 6.2% while receiving interest based on a variable
rate tied to three-month U.S. dollar LIBOR plus 0.5% (5.8% and 6.2% at December
31, 1998 and 1997, respectively).
F-28
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 10--DEBT OBLIGATIONS AND CAPITAL LEASES
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
1.9% convertible subordinated debentures.................. $ 242,074 $ 236,202
5.25% convertible subordinated debentures................. 92,996 91,041
Capital lease obligations................................. 144 4,316
Note payable to Novartis.................................. 63,945 60,566
Other notes payable....................................... 4,596 9,347
---------- ----------
403,755 401,472
Less current portion...................................... (65,597) (4,255)
---------- ----------
$ 338,158 $ 397,217
---------- ----------
---------- ----------
</TABLE>
CONVERTIBLE SUBORDINATED DEBENTURES
In 1993, Chiron issued 1.9% convertible subordinated debentures with a face
value of $253.9 million and a yield to maturity of 4.5%. The notes are
convertible, at the holders' option, into common stock at 34.6 shares per $1,000
principal amount and are due in November 2000. Interest is paid semi-annually.
The Company may redeem the debentures at any time, at a redemption price
starting at $905.78 per $1,000 principal amount increasing to a redemption price
equal to 100% of the principal amount at maturity. The debentures are carried
net of an initial issue discount of $39.3 million, which is being accreted over
the life of the debentures using the interest method. At December 31, 1998 and
1997, Novartis held debentures with a carrying value of $9.6 million and $9.4
million, respectively.
As a result of the 1991 acquisition of Cetus Corporation ("Cetus"), the
Company has outstanding 5.25% convertible subordinated debentures with a face
value of $100.0 million. The notes are convertible at the holder's option at any
time into common stock at 32.4 shares per $1,000 principal amount and are due in
2002. Interest is paid annually. At the option of the Company, the debentures
may be redeemed at any time at face value. In 1991, these debentures were
recorded at their then fair market value which resulted in a discount of $20.0
million. This discount is being accreted over the life of the debentures using
the interest method.
CAPITAL LEASE OBLIGATIONS
At December 31, 1998 and 1997, the gross book value of land, buildings and
equipment leased under noncancelable capital leases, exclusive of amounts
related to discontinued operations, totaled $3.3 million. As of December 31,
1998 and 1997, accumulated depreciation totaled $2.8 million and $2.3 million,
respectively.
F-29
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 10--DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
NOTES PAYABLE
The note payable to Novartis bears interest at a variable rate based on
LIBOR (approximately 5.6% and 6.0% at December 31, 1998 and 1997, respectively)
and is due with accrued interest on January 1, 2000.
The Company has various other notes payable with an average interest rate of
4.2% and 5.0% at December 31, 1998 and 1997, respectively. Maturities range from
2001 to 2003. Future maturities of other notes payable are as follows:
1999--$1.5 million, 2000--$1.5 million, 2001-- $1.5 million and $0.1 million
thereafter.
SHORT-TERM BORROWINGS
Under a revolving, committed, unsecured credit agreement with a major
financial institution, Chiron can borrow up to $100.0 million in the U.S. This
credit facility is guaranteed by Novartis (refer to Note 8) and provides various
borrowing rate options, as defined in the agreement. This credit facility
matures in February 2003. There were no borrowings outstanding under this credit
facility at December 31, 1998. The Company had an additional credit agreement
which expired unused, in March 1999.
Additionally, the Company has credit facilities available outside the U.S.
that allow for total borrowings of $64.2 million as of December 31, 1998. These
revolving facilities are unsecured and are primarily maintained for Chiron's
Italian subsidiary. At December 31, 1998, $17.6 million was outstanding under
these credit facilities. In 1998 and 1997, the average interest rates on the
outstanding borrowings related to continuing operations were approximately 4.4%
and 6.5%, respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LEASES
Chiron leases laboratory, office and manufacturing facilities, land and
equipment under noncancelable operating leases which expire through 2037. Rent
expense from continuing operations was $22.3 million, $12.3 million and $12.0 in
1998, 1997 and 1996, respectively. Future minimum lease payments under these
leases are as follows: 1999--$26.6 million, 2000-- $27.0 million, 2001--$21.4
million, 2002--$15.5 million, 2003--$10.8 million and thereafter-- $14.4
million. Total future minimum rentals to be received under noncancelable
subleases approximate $6.3 million as of December 31, 1998.
In addition, in June 1996, the Company entered into a seven-year lease
agreement with a group of financial institutions to rent a research and
development facility. The total cost of the facility covered by this lease is
estimated to be $172.6 million of which $152.9 million had been incurred as of
December 31, 1998. The lease provides for a substantial residual value guarantee
F-30
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
in the event of market value declines which is due upon termination of the lease
in 2003. At the end of the lease, the Company can either exercise its purchase
option or cause the facility to be sold to a third party. This lease is
accounted for as an operating lease. The future minimum lease payments stated
above exclude any payment related to this guarantee. As of December 31, 1998,
Novartis had guaranteed $152.9 million of this lease commitment (refer to Note
8).
CETUS HEALTHCARE LIMITED PARTNERSHIPS
In 1987 and 1990, Cetus and its affiliate, EuroCetus International N.V.,
exercised their options to repurchase all of the limited partnership interests
in Cetus Healthcare Limited Partnership ("CHLP") and Cetus Healthcare Limited
Partnership II ("CHLP II"). Under the CHLP purchase agreements, which expire on
December 31, 2001, the Company is obligated to pay royalties on sales of certain
therapeutic products in the U.S. and certain diagnostic products worldwide, as
well as a portion of license, distribution or other fees with respect to such
products, to the former limited partners of CHLP. Under the CHLP II purchase
agreements, which expire on December 31, 2005, the Company is obligated to pay
royalties and a portion of other income with respect to sales of certain
products in Europe to the former limited partners of CHLP II. The Company is
unable to estimate future costs subject to this obligation due to the inherent
uncertainties as to the likelihood of any product specified in the agreements
continuing to be commercially viable.
OTHER COMMITMENTS
Effective July 1, 1998, Chiron and International Business Machines
Corporation ("IBM") executed a ten-year information technology services
agreement. Under this agreement, IBM agreed to provide Chiron with a full range
of information services. Chiron can terminate this agreement beginning July 1,
1999 subject to certain termination charges. If Chiron does not terminate this
agreement prior to expiration, payments to IBM are expected to be approximately
$138.8 million in the aggregate. Through July 1, 1999, Chiron's payments to IBM
will total $19.3 million. Payments to IBM are subject to adjustment depending
upon the levels of services and infrastructure equipment provided by IBM.
The Company has various firm purchase commitments totaling approximately
$3.4 million at December 31, 1998. Contingent liabilities, both individually and
in the aggregate, are insignificant at December 31, 1998.
F-31
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY
STOCK SPLIT
In 1996, Chiron's Board of Directors declared a 4-for-1 stock split effected
in the form of a dividend on the Company's common stock that was distributed on
August 2, 1996, to stockholders of record on July 19, 1996. As a result, the
Company increased its common stock balance by $1.3 million for the par value of
the common stock issued to effect the stock split and correspondingly reduced
additional paid-in capital. The exercise prices for all warrants and stock
options and the convertible bond conversion rates were adjusted for the effect
of the split.
STOCK COMPENSATION PLANS
At December 31, 1998, the Company has two stock-based compensation plans,
which are described below. The Company applies APB 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans other than
for performance-based awards and share rights.
Had compensation cost for the Company's stock-based plans been determined
based upon the fair value method prescribed under SFAS 123, the Company's net
income and related net income per share would have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported....................................... $ 524,113 $ 71,219 $ 55,145
Pro forma......................................... $ 500,681 $ 46,318 $ 27,579
Basic net income per share:
As reported....................................... $ 2.95 $ 0.41 $ 0.33
Pro forma......................................... $ 2.82 $ 0.27 $ 0.16
Diluted net income per share:
As reported....................................... $ 2.90 $ 0.40 $ 0.31
Pro forma......................................... $ 2.77 $ 0.26 $ 0.16
</TABLE>
FIXED STOCK OPTION PLAN
The Company's fixed stock option plan provides for the grant to employees of
either nonqualified or incentive options and provides for the grant to
directors, consultants and contractors of nonqualified options. Incentive
options are to be granted at not less than the fair market value of common stock
at the date of grant and nonqualified options at not less than 85% of such fair
market value. Options are exercisable based on vesting terms determined by
Chiron's Board of Directors (generally 4 years) and option terms cannot exceed
ten years.
F-32
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
At the annual meeting of stockholders in May 1997, the stockholders approved
an amendment to the Company's stock option plan, increasing the maximum number
of shares that may be issued by 13.0 million shares to 50.3 million shares. Of
the 13.0 million share increase, 5.0 million shares were registered with the
Securities and Exchange Commission in 1997. At December 31, 1998, 7.9 million
shares were available for grant.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Outstanding options at January 1,....................... 24,094,166 26,298,373 23,337,652
Granted............................................... 4,688,253 6,011,061 6,582,769
Forfeited............................................. (4,785,345) (3,792,954) (1,159,973)
Surrendered against payment by Novartis............... (564,337) (790,430) (363,525)
Exercised............................................. (3,307,756) (3,631,884) (2,098,550)
------------- ------------- -------------
Outstanding options at December 31,..................... 20,124,981 24,094,166 26,298,373
------------- ------------- -------------
------------- ------------- -------------
Options exercisable at December 31,..................... 12,159,676 12,351,700 11,411,534
------------- ------------- -------------
------------- ------------- -------------
Average exercise price of:
Outstanding options at December 31,................... $ 17.68 $ 18.08 $ 16.80
Options granted....................................... $ 17.54 $ 20.96 $ 22.25
Options forfeited..................................... $ 20.35 $ 19.72 $ 19.11
Options exercised..................................... $ 15.29 $ 11.76 $ 11.02
Weighted-average grant-date fair value of options
granted during the year calculated pursuant to SFAS
123................................................. $ 7.66 $ 9.34 $ 8.90
</TABLE>
The weighted-average grant-date fair value of each option grant is estimated
using the Black-Scholes option-pricing model and the following weighted-average
assumptions: expected volatility of 37% for 1998 and 1997 and 35% for 1996;
risk-free interest rates of 5.2%, 6.2% and 6.3% for 1998, 1997 and 1996,
respectively; and an average expected life of 5 years for 1998, 1997 and 1996.
No dividends were factored into the calculation in 1998, 1997 or 1996.
F-33
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- -------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ------------------------------------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Less than $15........................ 6,214,533 6.39 $ 12.95 3,591,204 $ 11.92
$15 to $19........................... 5,470,994 6.40 $ 17.51 4,206,561 $ 17.20
$19 to $21........................... 5,197,995 8.34 $ 20.75 1,827,118 $ 20.70
Greater than $21..................... 3,241,459 7.05 $ 24.57 2,534,793 $ 24.52
------------ --- ----------- ------------ -----------
20,124,981 7.03 $ 17.68 12,159,676 $ 17.69
------------ ------------
------------ ------------
</TABLE>
In 1996, the stockholders approved an amendment to the Company's stock
option plan, allowing certain executives to receive performance units.
Performance units are stock awards for which vesting is contingent upon the
attainment of certain pre-established performance goals over a specified period,
as established by the Compensation Committee of the Board of Directors
("Compensation Committee"). Currently, the performance units are based on total
shareholder return over a three-year period as measured against certain
published benchmark indices that are representative of the Company's peer group.
In order to qualify for a payout, Chiron's shareholder return must be within
15% of the three-year rolling weighted-average of the benchmark indices. In
accordance with APB 25, compensation expense related to these awards is based on
the extent to which the performance criteria are met. In 1997, the Company
recognized $0.6 million of expense related to these performance units. No such
expense was recognized in 1998 or 1996.
There were no performance units awarded in 1998. In 1997 and 1996, the
Company awarded performance units of 158,738 and 64,400 shares of common stock,
respectively. No awards were exercisable at December 31, 1998. Pursuant to SFAS
123, the weighted-average fair value of the awards in 1997 and 1996 was $6.71
and $7.57 per unit, respectively. The weighted-average fair values were based on
the following assumptions: expected volatility of 37% and 35% for 1997 and 1996,
respectively; a risk-free interest rate of 6.0% for 1997 and 1996; and an
average expected life of 3 years for 1997 and 1996. No dividends were factored
into the calculation in 1997 or 1996.
In 1996, the stockholders also approved an amendment to the Company's stock
option plan, permitting the award of share rights to certain key individuals and
non-employee
F-34
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
directors, allowing them the right to receive shares of the Company's common
stock, subject to certain vesting terms.
In 1998, the Compensation Committee awarded non-employee directors an
aggregate of 9,840 share rights that vest over five years, and also awarded
certain key individuals an aggregate of 271,300 share rights that vest over four
years. In 1997, the Compensation Committee awarded non-employee directors an
aggregate of 12,043 share rights that vest over five years, and also awarded
certain key individuals an aggregate of 319,700 share rights that vest over four
years. In 1996, the Compensation Committee awarded non-employee directors an
aggregate of 10,320 share rights that vest over five years and a key executive
40,000 share rights that vest at the end of five years. The value of the share
rights are recognized ratably over the related vesting periods and, in 1998,
1997 and 1996, the Company recognized $2.4 million, $0.8 million and $0.1
million of compensation expense, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Chiron has a stock purchase plan for U.S. employees in which eligible
employees may participate through payroll deductions. At the end of each
quarter, funds deducted from participating employees' salaries are used to
purchase common stock at 85% of the lower of market value at the quarterly
purchase date or the employees' eligibility date for participation. Purchases of
shares made under the plan were 0.8 million, 1.4 million and 1.4 million in
1998, 1997 and 1996, respectively. In 1997, the stockholders approved a new
employee stock purchase plan which effectively replaced the existing plan which
was to expire in March 1998. The terms and provisions of the new plan are
substantially similar to those of Chiron's previous plan. Under the new plan,
8.6 million shares have been reserved for issuance, of which 0.6 million shares
represent the remaining shares reserved for issuance under Chiron's previous
plan.
Under SFAS 123, pro forma compensation cost is recognized for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model and the following assumptions: expected volatility of 35%, 28% and 35% for
1998, 1997 and 1996, respectively; risk-free interest rates of 5.1%, 5.6% and
5.7% for 1998, 1997 and 1996, respectively; and an average expected life of one
year for 1998, 1997 and 1996. No dividends were factored into the calculation in
1998, 1997 or 1996. The weighted-average fair value of the purchase rights
granted was $5.71, $5.28 and $4.78 per share, in 1998, 1997 and 1996,
respectively.
COMMON STOCK WARRANTS
As a result of the acquisition of Cetus, warrants to purchase 600,000 shares
of Chiron common stock were outstanding at December 31, 1998. The exercise price
of the warrants is $13.13 and the warrants expire in July 2001. The warrants are
currently exercisable.
F-35
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE FOR STOCK PURCHASES
The notes receivable for stock purchases were due from certain key employees
and resulted from the exercise of stock options. The notes were full-recourse
promissory notes, bearing interest at a rate of approximately 6.0% and were
primarily collateralized by the stock issued upon the exercise of the stock
options. As of December 31, 1998, there were no amounts outstanding relating to
notes receivable for stock purchases.
STOCK REPURCHASE PROGRAM
In February 1999, 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 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 March 2000.
NOTE 13--OTHER EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLAN
The Company sponsors a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code covering substantially all full-time U.S.
employees. Participating employees may contribute up to 15% of their eligible
compensation up to the annual Internal Revenue Service contribution limit. The
Company matches employee contributions according to a specified formula and
contributed $4.2 million, $3.7 million and $2.7 million in 1998, 1997 and 1996,
respectively.
PENSION PLAN
The Company has a non-contributory retirement program (the "program")
covering substantially all employees of its wholly owned German subsidiary. The
benefits for this program are based primarily on years of service and employee
compensation. The program is considered to be a defined-benefit pension plan for
accounting purposes and is not externally funded. The total pension cost was
approximately $2.4 million for the year ended December 31, 1998. The assumptions
used to measure the projected benefit obligation are a discount rate of 5.5% and
increased compensation levels of 2.5%. Adjustments recorded to recognize the
excess minimum liability resulted in a charge to other comprehensive income of
$0.7 million, net of
F-36
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 13--OTHER EMPLOYEE BENEFIT PLANS (CONTINUED)
income taxes of $0.1 million. Changes in the projected benefit obligation are as
follows (in thousands):
<TABLE>
<S> <C>
Projected benefit obligation at March 31, 1998 (date of
acquisition)............................................ $ 5,722
Service cost of benefits earned during the period......... 436
Interest cost of projected benefit obligation............. 431
Amortization of prior service cost........................ 24
Benefits paid............................................. (21)
Additional minimum pension liability...................... 853
Other pension-related costs............................... 298
Foreign currency translation.............................. 347
---------
Projected benefit obligation at December 31, 1998......... $ 8,090
---------
---------
</TABLE>
The components of net periodic pension cost for the year ended December 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
Service cost of benefits earned during the period........... $ 436
Interest cost of projected benefit obligation............... 431
Amortization of prior service cost.......................... 24
---------
$ 891
---------
---------
</TABLE>
POSTEMPLOYMENT BENEFITS OTHER THAN TO RETIREES
Effective October 1, 1997, the Company adopted the Chiron Corporation
Severance Plan (the "plan") which provides certain postemployment salary and
employee benefits to employees who are involuntarily terminated as a result of a
workforce reduction or job elimination.
Benefits payable under the plan are accrued when it is probable that
employees will be entitled to benefits and the amount can be reasonably
estimated in accordance with SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (see Note 6).
NOTE 14--NON-OPERATING INCOME AND EXPENSE
In August 1998, the Company sold its St. Louis, Missouri facility and
related machinery and equipment assets to Genetics Institute, Inc. for $19.8
million in cash. The sale of the St. Louis facility resulted in a net gain of
$1.5 million, which was included in "Gain on sale of assets" in the Consolidated
Statements of Operations for the year ended December 31, 1998. At the time of
the sale, the carrying amount of the St. Louis facility was $18.3 million. In
1998,
F-37
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 14--NON-OPERATING INCOME AND EXPENSE (CONTINUED)
1997 and 1996, Chiron recognized operating expenses related to the St. Louis
facility of $3.2 million, $11.4 million and $11.7 million, respectively.
In December 1998, the Company completed the sale of its 30% interest in
General Injectables & Vaccines, Inc. ("GIV"), to Henry Schein, Inc. and received
payment in full of certain advances made by the Company to GIV, for a total of
$31.7 million in cash. The sale resulted in a net gain of $1.8 million, which
was included in "Other income, net" in the Consolidated Statements of Operations
for the year ended December 31, 1998.
In September 1997, management determined that it could not find a suitable
use for the Puerto Rico facility consistent with its previous expectations for
the facility's use as a contract manufacturing plant. As a result, the Company
reviewed the carrying amount of the Puerto Rico facility and related machinery
and equipment assets for recoverability and in accordance with SFAS 121 recorded
a $31.3 million impairment loss to record the facility and related machinery at
their individual estimated fair market values, determined on the basis of
independent appraisals. In June 1998, the Company sold the facility and related
machinery and equipment assets to IPR Pharmaceuticals, Inc. for $18.5 million in
cash. The sale of the Puerto Rico facility resulted in a net gain of $6.2
million, which was included in "Gain on sale of assets" in the accompanying
Consolidated Statements of Operations. At the time of the sale, the carrying
amount of the Puerto Rico facility was $11.1 million. In 1998, 1997 and 1996,
Chiron recognized operating expenses related to the Puerto Rico facility of $2.1
million, $7.9 million and $8.1 million, respectively.
Effective May 1, 1996, Chiron sold its 50% interest in a generic cancer
chemotherapeutics business to Ben Venue Laboratories, Inc. for $14.0 million in
cash. This sale resulted in a $12.2 million gain, which was included in "Other
income, net" in the Consolidated Statements of Operations for the year ended
December 31, 1996.
"Interest expense" in the accompanying Consolidated Statements of Operations
consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense and related costs on
convertible debentures...................... $ (18,682) $ (18,384) $ (18,103)
Interest expense on the note payable to
Novartis.................................... (3,379) (3,413) (3,407)
Other interest expense........................ (2,612) (9,813) (7,976)
---------- ---------- ----------
$ (24,673) $ (31,610) $ (29,486)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-38
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 14--NON-OPERATING INCOME AND EXPENSE (CONTINUED)
"Other income, net" in the accompanying Consolidated Statements of
Operations consists of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest and dividend income..................... $ 29,586 $ 11,960 $ 5,954
Write-down of investments........................ (8,365) (1,206) (1,529)
Gain on sale of investments...................... 4,475 5,541 --
Gain on sale of interests in affiliated
companies...................................... 1,815 -- 12,226
Net realized gain (loss) on foreign exchange
transactions................................... 203 (58) 2,797
Other............................................ (704) (3,516) (808)
--------- --------- ---------
$ 27,010 $ 12,721 $ 18,640
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 15--SEGMENT INFORMATION
In 1998, Chiron implemented SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for reporting financial and descriptive information about an enterprise's
operating segments. Application of the disclosure requirements of SFAS 131 did
not impact the Company's consolidated financial position, results of operations
or earnings per share data.
Chiron is organized based on the products and services that it offers. Under
this organizational structure, the Company has the following three reportable
segments: (i) biopharmaceuticals, (ii) blood testing and (iii) vaccines. The
biopharmaceuticals segment consists of products and services related to
therapeutics, with an emphasis on oncology, serious infectious diseases and
cardiovascular diseases as well as the development and acquisition of
technologies related to recombinant technology, gene therapy, small molecule
therapeutics and genomics. The blood testing segment consists primarily of
Chiron's one-half interest in the pretax operating earnings of its joint
business with Ortho which 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 vaccines segment consists principally of products and services
related to adult and pediatric vaccines sold primarily in Germany, Italy,
certain other international markets and in the U.S. Certain revenues and
expenses, particularly Novartis R&D funding, certain royalty revenues and
unallocated corporate expenses, are not viewed by management as belonging to any
one reportable segment. As a result, these items have been aggregated into an
"Other" segment, as permitted by SFAS 131.
F-39
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 15--SEGMENT INFORMATION (CONTINUED)
The accounting policies of the Company's reportable segments are the same as
those described in Note 1--The Company and Summary of Significant Accounting
Policies. Chiron evaluates the performance of its segments based on each
segment's income (loss) from operations, excluding certain special items, such
as restructuring and reorganization charges, impairment losses on long-lived
assets, and the write-off of purchased in-process technologies, which are shown
as reconciling items in the table below. The following segment information
excludes all significant intersegment transactions as these transactions are
eliminated for management reporting purposes:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Biopharmaceuticals, includes ($1,039) and $1,925 of equity in
earnings of unconsolidated joint businesses in 1997 and 1996,
respectively................................................. $ 305,435 $ 302,456 $ 246,739
Blood testing, includes $73,527, $92,923 and $95,815 of equity
in earnings of unconsolidated joint businesses in 1998, 1997
and 1996, respectively....................................... 98,878 120,140 119,475
Vaccines, includes $442, $14,472 and $4,321 of equity in
earnings of unconsolidated joint businesses in 1998, 1997 and
1996, respectively........................................... 236,877 98,703 98,935
Other.......................................................... 95,483 53,300 72,000
---------- ---------- ----------
Total revenues............................................. $ 736,673 $ 574,599 $ 537,149
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals............................................. $ 17,504 $ 46,034 $ 8,598
Blood testing.................................................. 68,419 88,002 79,576
Vaccines....................................................... (24,681) (58,518) (75,924)
Other.......................................................... 52,052 14,877 50,461
---------- ---------- ----------
Segment income from operations................................. 113,294 90,395 62,711
Reconciling items:
Write-off of purchased in-process technologies............... (1,645) -- --
Impairment loss on long-lived assets......................... -- (31,300) --
Restructuring and reorganization charges..................... (26,754) -- --
---------- ---------- ----------
Income from operations......................................... 84,895 59,095 62,711
Gain on sale of assets....................................... 7,751 -- --
Interest expense............................................. (24,673) (31,610) (29,486)
Other income, net............................................ 27,010 12,721 18,640
---------- ---------- ----------
Income from continuing operations before income taxes...... $ 94,983 $ 40,206 $ 51,865
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-40
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 15--SEGMENT INFORMATION (CONTINUED)
SEGMENT ASSETS AND DEPRECIATION AND AMORTIZATION EXPENSES
The Company does not specifically identify or allocate assets among its
reportable segments. However, for management reporting purposes, depreciation
and amortization expenses for property, plant, equipment and leasehold
improvements and intangible assets, respectively, are included with other
operating expenses and allocated to each segment based upon each segment's
utilization of employees. Depreciation and amortization expenses for each
reportable segment are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
DEPRECIATION AND AMORTIZATION EXPENSES
Biopharmaceuticals................................... $ 30,544 $ 27,496 $ 28,509
Blood testing........................................ 887 1,179 3,187
Vaccines............................................. 31,200 19,559 26,508
Other (including discontinued operations)............ 45,230 54,355 46,876
---------- ---------- ----------
Total depreciation and amortization expenses..... $ 107,861 $ 102,589 $ 105,080
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES
Biopharmaceuticals................................... $ 9,636 $ 7,529 $ 22,221
Blood testing........................................ 946 -- --
Vaccines............................................. 38,877 -- 31,165
Other (including discontinued operations)............ 76,844 69,995 66,776
---------- ---------- ----------
Total capital expenditures....................... $ 126,303 $ 77,524 $ 120,162
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-41
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 15--SEGMENT INFORMATION (CONTINUED)
REVENUES BY GEOGRAPHIC AREA
Revenues by geographic area are based on the customers' country of domicile
rather than the customers' shipping locations.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Domestic................................... $ 331,863 $ 246,330 $ 229,344
Switzerland................................ 98,050 121,256 110,655
Germany.................................... 144,234 60,263 37,973
Italy...................................... 47,616 47,776 53,131
Other...................................... 114,910 98,974 106,046
---------- ---------- ----------
Total revenues......................... $ 736,673 $ 574,599 $ 537,149
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
LONG-LIVED ASSETS
Domestic................................... $ 249,496 $ 297,303 $ 333,531
Germany.................................... 152,863 -- --
Italy...................................... 62,633 43,394 46,295
Other (including discontinued
operations).............................. 19,838 339,059 346,039
---------- ---------- ----------
Total long-lived assets................ $ 484,830 $ 679,756 $ 725,865
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
MAJOR CUSTOMERS
Three significant customers accounted for 18.4%, 11.6% and 12.9% of total
revenues in 1998, 24.4%, 21.3% and 14.2% of total revenues in 1997 and 22.6%,
20.9% and 15.2% of total revenues in 1996. Revenues from the Company's
biopharmaceuticals segment consisted of 53.1%, 55.9% and 49.5% of revenues from
major customers in 1998, 1997 and 1996, respectively. Revenues from the
Company's blood testing segment consisted entirely of revenues from major
customers in 1998, 1997 and 1996. Revenues from the Company's other segment
consisted of 57.0% of revenues from major customers in 1998, and 100.0% in both
1997 and 1996.
F-42
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 16--INCOME TAXES
For financial reporting purposes, "Income from continuing operations before
income taxes" included the following components for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic...................................... $ 80,706 $ 35,624 $ 72,840
Foreign....................................... 14,277 4,582 (20,975)
---------- ---------- ----------
$ 94,983 $ 40,206 $ 51,865
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
COMPONENTS OF PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
Significant components of the provision for income taxes from continuing
operations are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Domestic.................................... $ 57,747 $ 15,140 $ 2,520
Foreign..................................... 4,418 6,972 2,668
---------- ---------- ----------
62,165 22,112 5,188
---------- ---------- ----------
Deferred:
Domestic.................................... (39,696) (6,708) --
Foreign..................................... (3,484) -- --
---------- ---------- ----------
(43,180) (6,708) --
---------- ---------- ----------
Charge in lieu of taxes resulting from
recognition of acquired tax benefits that
are allocated to (increase) reduce
noncurrent intangible assets related to the
acquired entity............................. -- (980) 1,019
---------- ---------- ----------
Provision for income taxes from continuing
operations.................................. $ 18,985 $ 14,424 $ 6,207
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The benefit related to tax deductions for the Company's stock option plans
is recorded as an increase to additional paid-in capital when realized. In 1998,
1997 and 1996, the Company realized tax benefits of approximately $60.1 million,
$17.9 million and $1.4 million, respectively.
F-43
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 16--INCOME TAXES (CONTINUED)
RATE RECONCILIATION
The reconciliation of the provision for income taxes, computed at the
statutory U.S. income tax rate, to the reported amounts, is as follows for
continuing operations for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal tax provision at statutory rates.................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit......................... 2.3% 7.1% 2.4%
Net impact of foreign tax rates and credits................. (4.3%) 5.4% 21.3%
Disposition and write-down of Puerto Rico facility.......... (6.3%) 27.2% --
Amortization of intangible assets........................... 0.7% 1.9% 1.5%
Change in the valuation allowance for deferred tax assets
allocated to income tax expense........................... (41.8%) (16.7%) --
Increase in (utilization of) deferred tax assets and
corresponding valuation allowance not previously
benefited:
Prepaid income............................................ 33.2% -- --
Other temporary differences............................... 1.1% (21.0%) (50.1%)
Utilization of tax credits.................................. -- (6.1%) --
Foreign sales corporation, net of tax....................... (0.8%) (0.5%) --
Other....................................................... 0.9% 3.6% 1.9%
----- ----- -----
Provision for income taxes from continuing operations....... 20.0% 35.9% 12.0%
----- ----- -----
----- ----- -----
</TABLE>
SUMMARY OF DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and the tax effects of net
operating loss and credit carryforwards.
As they more likely than not will be realized, net deferred tax assets have
been recognized for U.S. federal and state purposes based on management's
estimates of future taxable income and for certain foreign jurisdictions in
which the Company's operations have historically been profitable. Such estimates
are subject to change based upon future events and accordingly, the amount of
deferred tax assets recognized may increase or decrease from period to period.
F-44
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 16--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax liabilities and
assets from continuing operations are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Basis differences--purchase accounting................ $ 9,631 $ 10,298
Patent costs expensed for tax purposes................ 12,358 10,491
Depreciation and purchased technologies............... 9,539 5,217
Other................................................. 1,527 2,399
----------- -----------
33,055 28,405
Deferred income tax assets:
Basis differences--purchase accounting and
intangibles......................................... 72,672 75,989
Prepaid income........................................ 37,800 --
Reserves and expense accruals......................... 63,866 71,823
Net operating loss carryforwards...................... 46,762 82,192
Business credit carryforwards......................... 9,034 35,146
Other................................................. 2,360 3,053
----------- -----------
232,494 268,203
Less valuation allowance.............................. (144,338) (231,914)
----------- -----------
88,156 36,289
----------- -----------
Net deferred income tax asset......................... $ 55,101 $ 7,884
----------- -----------
----------- -----------
</TABLE>
The net (decrease) increase in the valuation allowance for the years ended
December 31, 1998, 1997 and 1996, was ($87.6) million, ($1.7) million and $11.0
million, respectively.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 1998 will be allocated as follows (in
thousands):
<TABLE>
<S> <C>
Income tax benefit...................................... $ 134,745
Goodwill and other noncurrent intangible assets......... 9,593
---------
$ 144,338
---------
---------
</TABLE>
F-45
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 16--INCOME TAXES (CONTINUED)
TAX OPERATING LOSS AND CREDIT CARRYFORWARDS
At December 31, 1998, the Company had foreign net operating loss
carryforwards of approximately $118.0 million, principally available to offset
future taxable income indefinitely and state tax credit carryforwards of $9.0
million, expiring in 2012.
NOTE 17--LEGAL PROCEEDINGS
The Company is party to various claims, investigations and legal proceedings
arising out of the normal course of its business. These claims, investigations
and legal proceedings relate to intellectual property rights, contractual rights
and obligations, employment matters, shareholder derivative claims, claims of
product liability, and other issues. While there can be no assurance that an
adverse determination of any such matters could not have a material adverse
impact in any future period, management does not believe, based upon information
known to it, that the final resolution of any of these matters will have a
material adverse effect upon the Company's consolidated financial position and
annual results of operations and cash flows.
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998
----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues....................................... $ 224,526 $ 215,970 $ 162,890 $ 133,287
Gross margin from net product sales.................. 64,014 63,206 52,825 41,143
Income from continuing operations:
Income............................................. 14,440 33,914 20,102 7,542
Basic income per share............................. 0.08 0.19 0.11 0.04
Diluted income per share........................... 0.08 0.19 0.11 0.04
Net income:
Income............................................. 359,810 84,435 25,387 54,481
Basic income per share............................. 2.01 0.47 0.14 0.31
Diluted income per share........................... 1.96 0.47 0.14 0.31
Revenue from discontinued operations................. 114,843 134,570 142,642 135,618
Gross margin from discontinued operations............ 60,102 74,038 82,308 74,348
</TABLE>
F-46
<PAGE>
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues....................................... $ 161,031 $ 146,425 $ 132,133 $ 135,010
Gross margin from net product sales.................. 47,996 32,060 29,584 29,477
Income (loss) from continuing operations:
Income (loss)...................................... 24,486 (19,454) 8,402 12,348
Basic income (loss) per share...................... 0.14 (0.11) 0.05 0.07
Diluted income (loss) per share.................... 0.14 (0.11) 0.05 0.07
Net income (loss):
Income (loss)...................................... 52,822 (12,681) 15,742 15,336
Basic income (loss) per share...................... 0.30 (0.07) 0.09 0.09
Diluted income (loss) per share.................... 0.29 (0.07) 0.09 0.09
Revenue from discontinued operations................. 212,171 191,108 201,630 195,273
Gross margin from discontinued operations............ 116,944 106,275 119,672 113,320
</TABLE>
Historically, the contribution to total revenues generated by Chiron's
operating activities have varied considerably from period to period due to the
nature of Chiron's collaborative, royalty and licensing arrangements and to the
seasonality of the Company's vaccine products. In addition, the mix of products
sold and the introduction of new products will affect the comparability of gross
margins from quarter to quarter. As a consequence, Chiron's results in any one
quarter are not necessarily indicative of results to be expected for a full
year. Accordingly, the Company should be evaluated on the basis of annual
financial information.
Net income in the third quarter of 1998 and the fourth quarter of 1997
included deferred tax benefits resulting from the gains on disposals of
discontinued operations of $45.5 million and $15.2 million, respectively.
The results of continuing operations for the third quarter of 1998 included
a gain on the sale of assets of $1.5 million (refer to Note 14) and a $3.3
million reduction in cost of sales resulting from a change in estimated accruals
created in prior periods. The results of continuing operations for the second
quarter of 1998 included a gain on the sale of assets of $6.2 million, a $6.0
million reduction in cost of sales due to a change in estimated property tax
accruals created in prior periods and a $3.7 million reduction in restructuring
and reorganization charges due to a revised estimate of property and other
tax-related accruals recorded in 1995 in connection with the idling of the
Puerto Rico facility. The results of continuing operations for the third quarter
of 1997 included a $31.3 million impairment loss on long-lived assets. The
results of continuing operations for the second quarter of 1997 included a $3.2
million reduction in operating expenses due to changes in estimated accruals
created in prior periods.
F-47
<PAGE>
SCHEDULE II
CHIRON CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES(2) ACCOUNTS DEDUCTIONS RECLASSIFICATIONS YEAR
- ---------------------------------------------- ---------- ----------- ----------- ---------- ----------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998:
Accounts receivable........................... $22,918 $14,370 $(13,322)(1) $ (7,776) $-- $16,190
Restructuring reserve......................... 6,857 45,822 -- (28,883) -- 23,796
1997:
Accounts receivable........................... 20,692 10,227 -- (8,001) -- 22,918
Restructuring reserve......................... 7,357 3,336 -- (3,836) -- 6,857
1996:
Accounts receivable........................... 18,524 8,848 -- (6,680) -- 20,692
Restructuring reserve......................... 13,618 -- -- (6,261) -- 7,357
</TABLE>
- ------------------------
(1) Represents accounts receivable allowances as of the disposal date related to
disposed businesses.
(2) Includes amounts charged to discontinued operations.
F-48
<PAGE>
Conformed Copy
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CHIRON CORPORATION
and
THE FIRST NATIONAL BANK OF BOSTON
Trustee
---------
INDENTURE
Dated as of November 15, 1993
---------
1.90% Convertible Subordinated Notes
due 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
Page
----
<S> <C>
PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Purpose of Indenture . . . . . . . . . . . . . . . . . . . . . . . 1
Form of Face of Note . . . . . . . . . . . . . . . . . . . . . . . 1
Form of Trustee's Certificate of
Authentication . . . . . . . . . . . . . . . . . . . . . . . . . 5
Form of Reverse of Note. . . . . . . . . . . . . . . . . . . . . . 6
Form of Conversion Notice. . . . . . . . . . . . . . . . . . . . . 12
Form of Assignment . . . . . . . . . . . . . . . . . . . . . . . . 14
Form of Option to Elect Redemption Upon
a Fundamental Change. . . . . . . . . . . . . . . . . . . . . . 16
Compliance with Legal Requirements . . . . . . . . . . . . . . . . 18
ARTICLE ONE
DEFINITIONS
SECTION 1.01 Definitions . . . . . . . . . . . . . . . . . . . . . 18
Affiliate . . . . . . . . . . . . . . . . . . . . . 18
Applicable Price . . . . . . . . . . . . . . . . . . 18
Board of Directors . . . . . . . . . . . . . . . . . 19
Common Stock . . . . . . . . . . . . . . . . . . . . 19
Company . . . . . . . . . . . . . . . . . . . . . . 19
Conversion Rate . . . . . . . . . . . . . . . . . . 19
Depositary . . . . . . . . . . . . . . . . . . . . . 19
Event of Default . . . . . . . . . . . . . . . . . . 20
Fundamental Change . . . . . . . . . . . . . . . . . 20
Fundamental Change Redemption Date . . . . . . . . . 20
Indenture . . . . . . . . . . . . . . . . . . . . . 20
Issue Price .. . . . . . . . . . . . . . . . . . . 20
NASDAQ System . . . . . . . . . . . . . . . . . . . 20
Note or Notes . . . . . . . . . . . . . . . . . . . 20
Noteholder . . . . . . . . . . . . . . . . . . . . . 20
Officers' Certificate . . . . . . . . . . . . . . . 20
Opinion of Counsel . . . . . . . . . . . . . . . . . 21
Original Issue Discount . . . . . . . . . . . . . . 21
Outstanding . . . . . . . . . . . . . . . . . . . . 21
Person . . . . . . . . . . . . . . . . . . . . . . . 22
PORTAL Market . . . . . . . . . . . . . . . . . . . 22
Predecessor Note . . . . . . . . . . . . . . . . . . 22
Principal Office of the Trustee . . . . . . . . . . 22
QIB . . . . . . . . . . . . . . . . . . . . . . . . 22
Redemption Price . . . . . . . . . . . . . . . . . . 22
Reference Market Price . . . . . . . . . . . . . . . 22
- ----------------------
* This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
i
<PAGE>
Responsible Officer . . . . . . . . . . . . . . . . 22
Restricted Note . . . . . . . . . . . . . . . . . . 23
Rule 144A . . . . . . . . . .. . . . . . . . . . . 23
Senior Indebtedness . . . . . . . . . . . . . . . . 23
Trigger Event . . . . . . . . . . . . . . . . . . . 24
Trustee . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF NOTES
SECTION 2.01 Designation, Amount and Issue of
Notes . . . . . . . . . . . . . . . . . . . . . . . 24
2.02 Form of Notes. . . . . . . . . . . . . . . . . . . . 24
2.03 Date and Denomination of Notes;
Payments of Interest. . . . . . . . . . . . . . . . 25
2.04 Execution of Notes. . . . . . . . . . . . . . . . . . 26
2.05 Exchange and Registration of Transfer
of Notes; Restrictions on Transfers; Depositary . . 27
2.06 Mutilated, Destroyed, Lost or
Stolen Notes . . . . . . . . . . . . . . . . . . . 34
2.07 Temporary Notes . . . . . . . . . . . . . . . . . . . 35
2.08 Cancellation of Notes Paid, etc . . . . . . . . . . . 36
ARTICLE THREE
REDEMPTION OF NOTES
SECTION 3.01 Redemption Prices . . . . . . . . . . . . . . . . . . 36
3.02 Notice of Redemption; Selection of
Notes . . . . . . . . . . . . . . . . . . . . . . . 37
3.03 Payment of Notes Called for Redemption. . . . . . . . 38
3.04 No Sinking Fund . . . . . . . . . . . . . . . . . . . 39
3.05 Conversion Arrangement on Call
for Redemption . . . . . . . . . . . . . . . . . . 39
ARTICLE FOUR
SUBORDINATION OF NOTES
SECTION 4.01 Agreement of Subordination . . . . . . . . . . . . . 40
4.02 Payments to Noteholders . . . . . . . . . . . . . . . 41
4.03 Subrogation of Notes . . . . . . . . . . . . . . . . 43
4.04 Authorization by Noteholders . . . . . . . . . . . . 44
4.05 Notice to Trustee . . . . . . . . . . . . . . . . . . 45
4.06 Trustee's Relation to Senior Indebtedness . . . . . . 46
4.07 No Impairment of Subordination. . . . . . . . . . . . 46
ii
<PAGE>
Page
----
ARTICLE FIVE
PARTICULAR COVENANTS OF THE COMPANY
SECTION 5.01 Payment of Principal and Interest . . . . . . . . . . 47
5.02 Offices for Notices and Payments, etc . . . . . . . . 47
5.03 Appointments to Fill Vacancies in Trustee's Office. . 47
5.04 Provision as to Paying Agent . . . . . . . . . . . . 48
ARTICLE SIX
NOTEHOLDERS' LISTS AND REPORTS
BY THE COMPANY AND THE TRUSTEE
SECTION 6.01 Noteholders' Lists . . . . . . . . . . . . . . . . . 49
6.02 Preservation of Lists . . . . . . . . . . . . . . . 49
6.03 Reports by the Trustee . . . . . . . . . . . . . . . 50
ARTICLE SEVEN
REMEDIES OF THE TRUSTEE AND
NOTEHOLDERS ON THE EVENT OF DEFAULT
SECTION 7.01 Events of Default . . . . . . . . . . . . . . . . . . 50
7.02 Payment of Notes on Default; Suit Therefor . . . . . 53
7.03 Application of Monies Collected by Trustee. . . . . . 55
7.04 Proceedings by Noteholder . . . . . . . . . . . . . . 56
7.05 Proceedings by Trustee . . . . . . . . . . . . . . . 57
7.06 Remedies Cumulative and Continuing . . . . . . . . . 57
7.07 Direction of Proceedings and Waiver
of Defaults by Majority Noteholders . . . . . . . . 58
7.08 Notice of Defaults . . . . . . . . . . . . . . . . . 59
7.09 Undertaking to Pay Costs . . . . . . . . . . . . . . 59
iii
<PAGE>
Page
----
ARTICLE EIGHT
CONCERNING THE TRUSTEE
SECTION 8.01 Duties and Responsibilities of Trustee. . . . . . . . 60
8.02 Reliance on Documents, Opinions, etc. . . . . . . . . 61
8.03 No Responsibility for Recitals, etc. . . . . . . . . 62
8.04 Trustee, Paying Agents, Conversion
Agents or Registrar May Own Notes . . . . . . . . . 63
8.05 Monies to be Held in Trust . . . . . . . . . . . . . 63
8.06 Compensation and Expenses of Trustee . . . . . . . . 63
8.07 Officers' Certificate as Evidence . . . . . . . . . . 64
8.08 Eligibility of Trustee . . . . . . . . . . . . . . . 64
8.09 Resignation or Removal of Trustee . . . . . . . . . . 64
8.10 Acceptance by Successor Trustee . . . . . . . . . . . 66
8.11 Succession by Merger, etc . . . . . . . . . . . . . . 66
ARTICLE NINE
CONCERNING THE NOTEHOLDERS
SECTION 9.01 Action by Noteholders . . . . . . . . . . . . . . . . 67
9.02 Proof of Execution by Noteholders.. . . . . . . . . . 67
9.03 Who Are Deemed Absolute Owners. . . . . . . . . . . . 68
9.04 Company-Owned Notes Disregarded . . . . . . . . . . . 68
9.05 Revocation of Consents; Future Holders Bound. . . . . 69
ARTICLE TEN
NOTEHOLDERS' MEETINGS
SECTION 10.01 Purposes of Meetings. . . . . . . . . . . . . . . . . 69
10.02 Call of Meetings by Trustee . . . . . . . . . . . . . 70
10.03 Call of Meetings by Company or Noteholders . . . . . . 70
10.04 Qualifications for Voting. . . . . . . . . . . . . . . 70
10.05 Regulations. . . . . . . . . . . . . . . . . . . . . . 71
10.06 Voting . . . . . . . . . . . . . . . . . . . . . . . . 71
10.07 No Delay of Rights by Meeting. . . . . . . . . . . . . 72
iv
<PAGE>
Page
----
ARTICLE ELEVEN
SUPPLEMENTAL INDENTURES
SECTION 11.01 Supplemental Indentures without Consent of
Noteholders . . . . . . . . . . . . . . . . . . . . 72
11.02 Supplemental Indentures with Consent of Noteholder. . 74
11.03 Effect of Supplemental Indentures . . . . . . . . . . 75
11.04 Notation on Notes . . . . . . . . . . . . . . . . . . 75
11.05 Evidence of Compliance of Supplemental Indenture to
be Furnished to the Trustee . . . . . . . . . . . . 75
ARTICLE TWELVE
CONSOLIDATION, MERGER,
SALE, CONVEYANCE AND LEASE
SECTION 12.01 Company May Consolidate, etc., on Certain Terms . . . 75
12.02 Successor Corporation to be Substituted . . . . . . . 76
12.03 Opinion of Counsel to be Given Trustee. . . . . . . . 77
ARTICLE THIRTEEN
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 13.01 Discharge of Indenture. . . . . . . . . . . . . . . . 77
13.O2 Deposited Monies to be Held in Trust by Trustee . . . 78
13.03 Paying Agent to Repay Monies Held . . . . . . . . . . 78
13.04 Return of Unclaimed Monies. . . . . . . . . . . . . . 78
ARTICLE FOURTEEN
IMMUNITY OF INCORPORATORS,
STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 14.01 Indenture and Notes Solely Corporate Obligations. . . 79
v
<PAGE>
Page
----
ARTICLE FIFTEEN
CONVERSION OF NOTES
SECTION 15.01 Right to Convert. . . . . . . . . . . . . . . . . . . 79
15.02 Exercise of Conversion Privilege; Issuance of
Common Stock on Conversion; No Adjustment for
Interest or Dividends . . . . . . . . . . . . . . . 80
15.03 Cash Payments in Lieu of Fractional Shares. . . . . . 82
15.04 Conversion Rate . . . . . . . . . . . . . . . . . . . 82
15.05 Adjustment of Conversion Rate . . . . . . . . . . . . 82
15.06 Effect of Reclassification, Consolidation, Merger
or Sale . . . . . . . . . . . . . . . . . . . . . . 88
15.07 Taxes on Shares Issued. . . . . . . . . . . . . . . . 89
15.08 Reservation of Shares; Shares to be Fully Paid;
Compliance with Governmental Requirements;
Listing of Common Stock . . . . . . . . . . . . . . 89
15.09 Responsibility of Trustee . . . . . . . . . . . . . . 90
15.10 Notice to Holders Prior to Certain Actions. . . . . . 91
ARTICLE SIXTEEN
REDEMPTION OF NOTES
AT OPTION OF HOLDERS
SECTION 16.01 Option to Elect Redemption Upon a Fundamental
Change. . . . . . . . . . . . . . . . . . . . . . . 92
16.02 Deposit of Funds for Redemption . . . . . . . . . . . 93
ARTICLE SEVENTEEN
MISCELLANEOUS PROVISIONS
SECTION 17.01 Provisions Binding on Company's Successors. . . . . . 93
17.02 Official Acts by Successor Corporation. . . . . . . . 93
17.03 Addresses for Notices, etc. . . . . . . . . . . . . . 94
17.04 Governing Law . . . . . . . . . . . . . . . . . . . . 94
17.05 Evidence of Compliance with Conditions Precedent;
Certificates to Trustee . . . . . . . . . . . . . . 94
17.06 Legal Holidays. . . . . . . . . . . . . . . . . . . . 95
17.07 No Security Interest Created. . . . . . . . . . . . . 95
17.08 Benefits of Indenture . . . . . . . . . . . . . . . . 95
17.09 Table of Contents, Headings, etc. . . . . . . . . . . 95
17.10 Execution in Counterparts . . . . . . . . . . . . . . 95
vi
<PAGE>
Page
----
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
vii
<PAGE>
INDENTURE dated as of November 15, 1993 between CHIRON CORPORATION,
a Delaware corporation (hereinafter sometimes called the "Company"), and The
First National Bank of Boston, a national banking association organized and
existing under the laws of the United States of America, as trustee hereunder
(hereinafter sometimes called the "Trustee").
W I T N E S S E T H:
WHEREAS, for its lawful corporate purposes, the Company has duly
authorized the issue of its 1.90% Convertible Subordinated Notes due 2000
(hereinafter sometimes called the "Notes"), in an aggregate principal amount at
maturity not to exceed $243,800,000 and, to provide the terms and conditions
upon which the Notes are to be authenticated, issued and delivered, the Company
has duly authorized the execution and delivery of this Indenture; and
WHEREAS, the Notes, the certificate of authentication to be borne by
the Notes and a form of conversion notice are to be substantially in the
following forms, respectively:
[FORM OF LEGEND FOR GLOBAL NOTE:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
[FORM OF FACE OF NOTE]
FOR UNITED STATES FEDERAL INCOME TAX PURPOSES, THIS NOTE BEARS ORIGINAL
ISSUE DISCOUNT. THE ISSUE PRICE WITH RESPECT TO EACH $1,000 OF PRINCIPAL
AMOUNT AT MATURITY OF THIS NOTE IS $845.35, THE AMOUNT OF ORIGINAL ISSUE
DISCOUNT WITH RESPECT TO EACH $1,000 OF PRINCIPAL AMOUNT AT MATURITY OF
THIS NOTE IS $154.65, THE ISSUE DATE IS NOVEMBER 17, 1993 AND THE YIELD TO
MATURITY BASED ON SEMIANNUAL COMPOUNDING IS 4.50%.
<PAGE>
THE NOTE EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR
FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS
THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A
U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN OFFSHORE
TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE
ORIGINAL ISSUANCE OF THE NOTE EVIDENCED HEREBY RESELL OR OTHERWISE TRANSFER
THE NOTE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF
SUCH NOTE EXCEPT (A) TO CHIRON CORPORATION OR ANY SUBSIDIARY THEREOF, (B)
INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHED
TO THE FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE, A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH
LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE), AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM
THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE NOTE
EVIDENCED HEREBY WITHIN THREE YEARS AFTER THE ORIGINAL ISSUANCE OF SUCH
NOTE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE
HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE
TO THE FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE. IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER WHO IS
NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE, SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT
SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THIS LEGEND WILL BE REMOVED AFTER
2
<PAGE>
THE EXPIRATION OF THREE YEARS FROM THE ORIGINAL ISSUANCE OF THE NOTE
EVIDENCED HEREBY. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED
STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S
UNDER THE SECURITIES ACT.
CHIRON CORPORATION
1.90% CONVERTIBLE SUBORDINATED NOTES DUE 2000
No. $_____________
CUSIP 170040 AB 5
CHIRON CORPORATION, a corporation duly organized and validly existing
under the laws of the State of Delaware (the "Company", which term includes any
successor corporation under the Indenture referred to on the reverse hereof),
for value received hereby promises to pay to ______________, or registered
assigns, the principal sum of ____________ Dollars on November 17, 2000 at the
office or agency of the Company maintained for that purpose in New York, New
York, in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts, and
to pay interest, semi-annually on May 17 and November 17 of each year,
commencing May 17, 1994 on said principal sum at said office or agency, in like
coin or currency, at the rate per annum of 1.90% from the May 17 or the November
17, as the case may be, next preceding the date of this Note to which interest
has been paid or duly provided for, unless the date hereof is a date to which
interest has been paid or duly provided for, in which case from the date of this
Note, or unless no interest has been paid or duly provided for on the Notes, in
which case from November 17, 1993 until payment of said principal sum has been
made or duly provided for. Notwithstanding the foregoing, if the date hereof is
after any May 1 or November 1, as the case may be, and before the following May
17 or November 17, this Note shall bear interest from such May 17 or November
17; PROVIDED, HOWEVER, that if the Company shall default in the payment of
interest due on such May 17 or November 17, then this Note shall bear interest
from the next preceding May 17 or November 17 to which interest has been paid or
duly provided for or, if no interest has been paid or duly provided for on the
Notes, from November 17, 1993. The interest so payable on any May 17 or November
17 will be paid to the person in whose name this Note (or one or more
Predecessor Notes) is registered at the close of business on the record date,
which shall be the May 1 or November 1 (whether or not a business day) next
preceding such May 17 or November 17, provided that any such interest not
punctually paid or duly provided for shall be payable as provided in the
Indenture.
3
<PAGE>
Interest may, at the option of the Company, be paid by check mailed to the
registered address of such person.
Reference is made to the further provisions of this Note set forth on
the reverse hereof, including, without limitation, provisions subordinating the
payment of principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and interest, if
any, in respect of the Notes to the prior payment in full of all Senior
Indebtedness as defined in the Indenture and provisions giving the holder of
this Note the right to convert this Note into Common Stock of the Company on the
terms and subject to the limitations referred to on the reverse hereof and as
more fully specified in the Indenture. Such further provisions shall for all
purposes have the same effect as though fully set forth at this place.
This Note shall be deemed to be a contract made under the laws of the
State of New York, and for all purposes shall be construed in accordance with
and governed by the laws of said State.
This Note shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been manually signed
by the Trustee under the Indenture.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
CHIRON CORPORATION
Dated: By:
---------------------------------
Title:
[Seal]
Attest:
- ------------------------------
Secretary
4
<PAGE>
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Notes described in the within-mentioned Indenture.
THE FIRST NATIONAL BANK OF BOSTON,
as Trustee
By:
-----------------------------
Authorized Signatory
5
<PAGE>
[FORM OF REVERSE OF NOTE]
CHIRON CORPORATION
1.90% CONVERTIBLE SUBORDINATED NOTES
DUE 2000
This Note is one of a duly authorized issue of Notes of the Company,
designated as its 1.90% Convertible Subordinated Notes due 2000 (herein called
the "Notes"), limited to the aggregate principal amount at maturity of
$243,800,000 all issued under and pursuant to an Indenture dated as of November
15, 1993 (herein called the "Indenture"), between the Company and The First
National Bank of Boston (herein called the "Trustee"), to which Indenture and
all indentures supplemental thereto reference is hereby made for a description
of the rights, limitations of rights, obligations, duties and immunities
thereunder of the Trustee, the Company and the holders of the Notes.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of and accrued interest on all Notes
may be declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than 66 2/3% in aggregate
principal amount at maturity of the Notes at the time outstanding, evidenced as
in the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the holders of the Notes; PROVIDED, HOWEVER, that no such supplemental
indenture shall (i) extend the fixed maturity of any Note, reduce the rate or
extend the time of payment of interest thereon, change the rate of accrual or
extend the time of payment in connection with Original Issue Discount, reduce
the principal amount at maturity thereof, reduce any amount payable on
redemption thereof, change the obligation of the Company to make redemption of
any Note upon the happening of any Fundamental Change as referred to below,
impair or affect the right of any Noteholder to institute suit for the payment
thereof, change the currency in which the Notes and other amounts in respect
thereof are payable, modify the provisions of the Indenture with respect to the
subordination of the Notes in a manner adverse to the Noteholders, or impair the
right to convert the Notes into Common Stock subject to the terms set forth in
the Indenture, including Section 15.06,
6
<PAGE>
without the consent of the holder of each Note so affected or (ii) reduce the
aforesaid percentage of Notes, the holders of which are required to consent
to any such supplemental indenture, without the consent of the holders of all
Notes then outstanding. It is also provided in the Indenture that, prior to
any declaration accelerating the maturity of the Notes, the holders of a
majority in aggregate principal amount at maturity of the Notes at the time
outstanding may on behalf of the holders of all of the Notes waive any past
default or Event of Default under the Indenture and its consequences except a
default in the payment of principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price or interest, if any, in respect of any of the Notes or a failure by the
Company to convert any Notes into Common Stock of the Company. Any such
consent or waiver by the holder of this Note (unless revoked as provided in
the Indenture) shall be conclusive and binding upon such holder and upon all
future holders and owners of this Note and any Notes which may be issued in
exchange or substitution herefor, irrespective of whether or not any notation
thereof is made upon this Note or Notes.
The indebtedness evidenced by the Notes is, to the extent and in the
manner provided in the Indenture, expressly subordinate and subject in right of
payment to the prior payment in full of all Senior Indebtedness of the Company
as defined in the Indenture, whether outstanding at the date of the Indenture or
thereafter incurred, and this Note is issued subject to the provisions of the
Indenture with respect to such subordination. Each holder of this Note, by
accepting the same, agrees to and shall be bound by such provisions and
authorizes the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided and appoints the Trustee
his attorney in fact for such purpose.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, Fundamental Change
Redemption Price and interest, if any, in respect of this Note at the place, at
the respective times, at the rate and in the coin or currency herein prescribed.
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months. Accrual of Original Issue Discount shall be calculated
on the basis of a 360-day year of twelve 30-day months, compounded semiannually.
7
<PAGE>
The Notes are issuable in registered form without coupons in
denominations of $1,000 principal amount at maturity and any multiple thereof.
At the office or agency of the Company referred to on the face hereof, and in
the manner and subject to the limitations provided in the Indenture, but without
payment of any service charge, Notes may be exchanged for a like aggregate
principal amount at maturity of Notes of other authorized denominations.
The Company may not redeem the Notes prior to November 17, 1996. On or
after that date, the Company may, at its option, redeem the Notes as a whole, or
from time to time in part, on any date prior to maturity, upon mailing a notice
of such redemption not less than thirty nor more than sixty days before the date
fixed for redemption to the holders of Notes at their last registered addresses,
all as provided in the Indenture, at the following optional Redemption Prices
per $1,000 principal amount at maturity (which prices reflect accrued Original
Issue Discount calculated to each such date), together in each case with accrued
interest to the date fixed for redemption. The Redemption Price of a Note
redeemed between such dates would include an additional amount reflecting the
additional Original Issue Discount accrued since the next preceding date in the
table to the actual Redemption Date.
<TABLE>
<CAPTION>
(1) (2) (3)
Accrued
Original Redemption
Note Issue Price
Redemption Date Issue Price Discount (1) + (2)
- --------------- ----------- -------- ----------
<S> <C> <C> <C>
November 17, 1996 $ 845.35 $ 60.43 $905.78
November 17, 1997 845.35 82.44 927.79
November 17, 1998 845.35 105.45 950.80
November 17, 1999 845.35 129.50 974.85
At maturity 845.35 154.65 1,000.00
</TABLE>
Notwithstanding the foregoing, if the date fixed for redemption is a May 17 or
November 17, then the interest payable on such date shall be paid to the holder
of record on the next preceding May 1 or November 1.
The Notes are not subject to redemption through the operation of any
sinking fund.
If a Fundamental Change (as defined in the Indenture) occurs at any
time prior to November 17, 2000, each holder of Notes shall have the right,
at such holder's option, to require the Company to redeem all or any part of
such
8
<PAGE>
holder's Notes on the date (the "Fundamental Change Redemption Date") (or if
such date is not a business day, the next succeeding business day) that is 30
days after the date of the Company's notice of such Fundamental Change. Such
redemption shall be made at a price (the "Fundamental Change Redemption Price")
equal to the Issue Price plus accrued Original Issue Discount to the Fundamental
Change Redemption Date; provided that, with respect to a Fundamental Change, if
the Applicable Price (as defined in the Indenture) is less than the Reference
Market Price (as defined in the Indenture), the Company shall redeem such Notes
at a price equal to the foregoing redemption price multiplied by the fraction
obtained by dividing the Applicable Price by the Reference Market Price. In each
case, the Company shall also pay accrued interest, if any, on such Notes to the
Fundamental Change Redemption Date; provided that if such Fundamental Change
Redemption Date is a May 17 or November 17, then the interest payable on such
date shall be paid to the holder of record of the Note on the next preceding
May 1 or November 1. The Company shall mail to all holders of record of the
Notes a notice of the occurrence of a Fundamental Change and of the
redemption right arising as a result thereof on or before the tenth day after
the occurrence of such Fundamental Change. For a Note to be so repaid at the
option of the holder, the Company must receive at the office or agency of the
Company maintained for that purpose in New York, New York such Note with the
form entitled "Option to Elect Redemption Upon a Fundamental Change" on the
reverse thereof duly completed, together with such Notes duly endorsed for
transfer, on or before the 30th day after the date of such notice (or if such
30th day is not a business day, the immediately preceding business day). All
questions as to the validity, eligibility (including time of receipt) and
acceptance of any Note for redemption shall be determined by the Company,
whose determination shall be final and binding.
Subject to the provisions of the Indenture, the holder hereof has the
right, at his option, at any time after 60 days following the latest date of
original issuance of the Notes through the close of business on November 17,
2000, or, as to all or any portion hereof called for redemption, prior to the
close of business on the business day immediately preceding the date fixed for
redemption (unless the Company shall default in payment due upon redemption
thereof), to convert the principal hereof or any portion of such principal which
is $1,000 principal amount at maturity or a multiple thereof, into that number
of fully paid and nonassessable shares of the Company's Common Stock, as said
shares shall be constituted at the date of conversion, obtained by dividing the
principal amount at maturity of this Note or portion thereof to be converted by
$1,000 and multiplying the result so obtained by 8.6481 (the "Conversion Rate")
or such Conversion Rate as adjusted from time to time as provided in the
Indenture, upon surrender of this Note, together with a
9
<PAGE>
conversion notice as provided in the Indenture, to the Company at the office or
agency of the Company maintained for that purpose in New York, New York, and,
unless the shares issuable on conversion are to be issued in the same name as
this Note, duly endorsed by, or accompanied by instruments of transfer in form
satisfactory to the Company duly executed by, the holder or by his duly
authorized attorney. No adjustments in respect of accrued Original Issue
Discount, interest or dividends will be made upon any conversion; PROVIDED,
HOWEVER, that if this Note shall be surrendered for conversion during the period
from the close of business on any record date for the payment of interest to the
opening of business on the following interest payment date, this Note (unless it
or the portion being converted shall have been called for redemption on a date
in such period) must be accompanied by an amount, in New York Clearing House
funds, equal to the interest payable on such interest payment date on the
principal amount at maturity being converted; PROVIDED FURTHER, HOWEVER, that no
such payment shall be required if the Company exercises its right to redeem the
Notes on November 17, 1996. No fractional shares will be issued upon any
conversion, but an adjustment in cash will be made, as provided in the
Indenture, in respect of any fraction of a share which would otherwise be
issuable upon the surrender of any Note or Notes for conversion.
Any Notes called for redemption, unless surrendered for conversion on
or before the close of business on the business day immediately preceding the
date fixed for redemption, may be deemed to be purchased from the holder of such
Notes at an amount equal to the applicable Redemption Price, together with
accrued interest to the date fixed for redemption, by one or more investment
bankers or other purchasers who may agree with the Company to purchase such
Notes from the holders thereof and convert them into Common Stock of the Company
and to make payment for such Notes as aforesaid to the Trustee in trust for such
holders.
Upon due presentment for registration of transfer of this Note at the
office or agency of the Company in New York, New York, a new Note or Notes of
authorized denominations for an equal aggregate principal amount at maturity
will be issued to the transferee in exchange herefor, subject to the limitations
provided in the Indenture, without charge except for any tax or other
governmental charge imposed in connection therewith.
The Company, the Trustee, any paying agent, any conversion agent and
any Note registrar may deem and treat the registered holder hereof as the
absolute owner of this Note (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon made by anyone
other than the Company or any Note registrar), for the purpose of receiving
payment hereof, or on account hereof, for
10
<PAGE>
the conversion hereof and for all other purposes, and neither the Company nor
the Trustee nor any other paying agent nor any other conversion agent nor any
Note registrar shall be affected by any notice to the contrary. All payments
made to or upon the order of such registered holder shall, to the extent of the
sum or sums paid, satisfy and discharge liability for monies payable on this
Note.
No recourse for the payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, Fundamental Change
Redemption Price or interest, if any, in respect of this Note, or for any claim
based hereon or otherwise in respect hereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture or any
indenture supplemental thereto or in any Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or through the Company
or any successor corporation, whether by virtue of any constitution, statute or
rule of law or by the enforcement of any assessment or penalty or otherwise, all
such liability being, by the acceptance hereof and as part of the consideration
for the issue hereof, expressly waived and released.
11
<PAGE>
[FORM OF CONVERSION NOTICE]
CONVERSION NOTICE
To: Chiron Corporation
The undersigned registered holder of this Note hereby irrevocably
exercises the option to convert this Note, or portion hereof (which is $1,000
principal amount at maturity or a multiple thereof) below designated, into
shares of Common Stock of Chiron Corporation in accordance with the terms of the
Indenture referred to in this Note, and directs that the shares issuable and
deliverable upon the conversion, together with any check in payment for
fractional shares and any Notes representing any unconverted principal amount at
maturity hereof, be issued and delivered to the registered holder hereof unless
a different name has been indicated below. If shares or any portion of this Note
not converted are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto. Any amount required to be paid by the undersigned on account of
interest accompanies this Note.
Dated:
-----------------------------
-----------------------------
Signature(s)
12
<PAGE>
Fill in for registration of shares
if to be delivered, and Notes
if to be issued other than to
and in the name of the
registered holder:
- -----------------------------------
(Name)
- -----------------------------------
(Street Address)
- -----------------------------------
(City, State and zip code)
Please print name and address
Principal amount at maturity to be
converted (if less than all):
$______,000
--------------------------------------
Social Security or Other
Taxpayer Identification Number
13
<PAGE>
[FORM OF ASSIGNMENT]
For value received _______________________ hereby sell(s), assign(s)
and transfer(s) unto _______________________________
(Please insert social security or other
taxpayer identification number of assignee.)
the within Note and hereby irrevocably constitutes and appoints ______________
attorney to transfer the said Note on the books of the Company, with full power
of substitution in the premises.
In connection with any transfer of the within Note occurring within three years
of the original issuance of such Note, the undersigned confirms that such Note
is being transferred:
/ / To Chiron Corporation or a subsidiary thereof; or
/ / Pursuant to and in compliance with Rule 144A under the Securities Act
of 1933, as amended; or
/ / To an Institutional Accredited Investor pursuant to and in compliance
with the Securities Act of 1933, as amended; or
/ / Pursuant to and in compliance with Regulation S under the Securities
Act of 1933, as amended; or
/ / Pursuant to and in compliance with Rule 144 under the Securities Act
of 1933, as amended.
and unless the box below is checked, the undersigned confirms that such Note is
not being transferred to an "affiliate" of the Company as defined in Rule 144
under the Securities Act of 1933, as amended (an "Affiliate"):
14
<PAGE>
/ / The transferee is an Affiliate of the Company.
Dated:
---------------------------
----------------------------------
Signature(s)
Signatures must be guaranteed by
a commercial bank or trust company
or a member firm of a major stock
exchange.
- -----------------------------------
Signature Guarantee
15
<PAGE>
[FORM OF OPTION TO ELECT REDEMPTION
UPON A FUNDAMENTAL CHANGE]
To: Chiron Corporation
The undersigned registered holder of this Note hereby acknowledges
receipt of a notice from Chiron Corporation (the "Company") as to the
occurrence of a Fundamental Change with respect to the Company and requests
and instructs the Company to redeem this Note, or portion hereof (which is
$1,000 principal amount at maturity or a multiple thereof) below designated,
in accordance with the terms of the Indenture referred to in this Note,
together with accrued interest to such date, to the registered holder hereof.
Principal amount at maturity to be
converted (if less than all):
$______,000
Dated:
----------------------------
---------------------------------
Signature(s)
---------------------------------
Social Security or Other
Taxpayer Identification Number
NOTICE: The above signatures of the holder(s) hereof must correspond with the
name as written upon the face of the Note in every particular without
alteration or enlargement or any change whatever.
16
<PAGE>
[FORM OF SCHEDULE FOR ENDORSEMENTS ON GLOBAL SECURITY
TO REFLECT CHANGES IN PRINCIPAL AMOUNT]
Schedule A
Changes to Principal Amount of Global Security
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Principal Amount of
Securities by which
this Global Security
Is To Be Reduced or
Increased, and Remaining Principal
Reason for Reduction Amount of this Notation
Date or Increase Global Security Made by
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
- -------- -------------------- ------------------- ---------------
- -------------------------------------------------------------------------------
17
<PAGE>
AND WHEREAS, all acts and things necessary to make the Notes, when
executed by the Company and authenticated and delivered by the Trustee, as in
this Indenture provided, the valid, binding and legal obligations of the
Company, and to constitute these presents a valid agreement according to its
terms, have been done and performed, and the execution of this Indenture and the
issue hereunder of the Notes have in all respects been duly authorized;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Notes
are, and are to be, authenticated, issued and delivered, and in consideration of
the premises and of the purchase and acceptance of the Notes by the holders
thereof, the Company covenants and agrees with the Trustee for the equal and
proportionate benefit of the respective holders from time to time of the Notes
(except as otherwise provided below), as follows:
ARTICLE ONE
DEFINITIONS
SECTION 1.01. DEFINITIONS. The terms defined in this Section 1.01
(except as herein otherwise expressly provided or unless the context otherwise
requires) for all purposes of this Indenture and of any indenture supplemental
hereto shall have the respective meanings specified in this Section 1.01. The
words "HEREIN", "HEREOF" and "HEREUNDER" and words of similar import refer to
this Indenture as a whole and not to any particular Article, Section or other
Subdivision. The terms defined in this Article include the plural as well as the
singular.
AFFILIATE: The term "Affiliate" with respect to any specified Person
means any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person. For the
purposes of this definition, "control," when used with respect to any specified
Person means the power to direct or cause the direction of the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
APPLICABLE PRICE: The term "Applicable Price" shall mean (i) in the
event of a Fundamental Change in which the holders of the Common Stock
receive only cash, the amount of cash received by the holder of one share of
Common Stock and
18
<PAGE>
(ii) in the event of any other Fundamental Change, the average of the last
reported sale price for the Common Stock (determined as set forth in subsection
(f) of Section 15.05) during the ten Trading Days (as defined in subsection (f)
of Section 15.05) prior to the record date for the determination of the holders
of Common Stock entitled to receive cash, securities, property or other assets
in connection with such Fundamental Change, or, if there is no such record date,
the date upon which the holders of Common Stock shall have the right to receive
such cash, securities, property or other assets in connection with the
Fundamental Change.
BOARD OF DIRECTORS: The term "Board of Directors" shall mean the Board
of Directors of the Company or a committee of such Board duly authorized to act
for it hereunder.
COMMON STOCK: The term "Common Stock" shall mean any stock of any
class of the Company which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which is not subject to
redemption by the Company. Subject to the provisions of Section 15.06,
however, shares issuable on conversion of Notes shall include only shares of
Common Stock, $.01 par value per share (which is the class designated as
Common Stock of the Company at the date of this Indenture), or shares of any
class or classes resulting from any reclassification or reclassifications
thereof and which have no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company and which are not subject to redemption by the
Company; PROVIDED that if at any time there shall be more than one such
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion to which the total number of shares of such
class resulting from all such reclassifications bears to the total number of
shares of all such classes resulting from all such reclassifications.
COMPANY: The term "Company" shall mean Chiron Corporation, a Delaware
corporation, and subject to the provisions of Article Twelve shall include its
successors and assigns.
CONVERSION RATE: The term "Conversion Rate" shall have the meaning
specified in Section 15.04.
DEPOSITARY: The term "Depositary" means, with respect to the Notes
issuable or issued in whole or in part in global form, the person specified
in Section 2.05 as the Depositary with respect to the Notes, until a
successor shall have been appointed and become such pursuant to the applicable
19
<PAGE>
provisions of this Indenture, and thereafter, "Depositary" shall mean or include
such successor.
EVENT OF DEFAULT: The term "Event of Default" shall mean any event
specified in Section 7.01, continued for the period of time, if any, and after
the giving of the notice, if any, therein designated.
FUNDAMENTAL CHANGE: The term "Fundamental Change" means the occurrence
of any transaction or event in connection with which all or substantially all
the Common Stock shall be exchanged for, converted into, acquired for or
constitute the right to receive consideration which is not all or substantially
all common stock listed (or, upon consummation of such transaction or event,
which will be listed) on a United States national securities exchange or
approved for quotation in the NASDAQ System or any similar United States system
of automated dissemination of quotations of securities prices (whether by means
of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise).
FUNDAMENTAL CHANGE REDEMPTION DATE: The term "Fundamental Change
Redemption Date" has the meaning ascribed to it in Section 16.01(a).
INDENTURE: The term "Indenture" shall mean this instrument as
originally executed or, if amended or supplemented as herein provided, as so
amended or supplemented.
ISSUE PRICE: The term "Issue Price" shall mean, in connection with
the original issuance of such Note (including any Predecessor Note), the initial
issue price at which the Note is sold as set forth on the face of the Note.
NASDAQ SYSTEM: The term "NASDAQ System" shall mean the electronic
inter-dealer quotation system operated by NASDAQ, Inc., a subsidiary of the
National Association of Securities Dealers, Inc.
NOTE OR NOTES: The terms "Note" or "Notes" shall mean any Note or
Notes, as the case may be, authenticated and delivered under this Indenture.
NOTEHOLDER: The terms "Noteholder" or "holder of Notes", or other
similar terms, shall mean any person in whose name at the time a particular Note
is registered on the books of the Company kept for that purpose in accordance
with the terms hereof.
OFFICERS' CERTIFICATE: The term "Officers' Certificate", when used
with respect to the Company, shall
20
<PAGE>
mean a certificate signed both (a) by its Chairman of the Board of Directors, or
any Vice-Chairman of the Board of Directors, or its President or any Vice
President (whether or not designated by a number or numbers or a word or words
added before or after the title "Vice President") and (b) by its Treasurer, or
Controller, or Secretary or any Assistant Secretary.
OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an
opinion in writing signed by legal counsel, who may be an employee of or counsel
to the Company or other counsel acceptable to the Trustee.
ORIGINAL ISSUE DISCOUNT: The term "Original Issue Discount" of any
Note means the difference between the Issue Price and the principal amount at
maturity of the Note as set forth on the face of the Note. For purposes of
this Indenture and the Notes, accrual of Original Issue Discount shall be
calculated on the basis of a 360-day year of twelve 30-day months, compounded
semi-annually.
OUTSTANDING: The term "outstanding", when used with reference to
Notes, shall, subject to the provisions of Section 9.04, mean, as of any
particular time, all Notes authenticated and delivered by the Trustee under this
Indenture, except
(a) Notes theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(b) Notes, or portions thereof, for the payment or redemption of
which monies in the necessary amount shall have been deposited in trust
with the Trustee or with any paying agent (other than the Company) or shall
have been set aside and segregated in trust by the Company (if the Company
shall act as its own paying agent), PROVIDED that if such Notes are to be
redeemed prior to the maturity thereof, notice of such redemption shall
have been given as in Article Three provided, or provision satisfactory to
the Trustee shall have been made for giving such notice;
(c) Notes paid or Notes in lieu of or in substitution for which other
Notes shall have been authenticated and delivered pursuant to the terms of
Section 2.06 unless proof satisfactory to the Trustee is presented that any
such Notes are held by bona fide holders in due course; and
(d) Notes converted into Common Stock pursuant to Article Fifteen
hereof and Notes not deemed outstanding pursuant to Section 3.02.
21
<PAGE>
PERSON: The term "Person" shall mean a corporation, an association, a
partnership, an organization, an individual, a government or a political
subdivision thereof or a governmental agency, and shall include any successor
(by merger or otherwise) of such entity.
PORTAL MARKET: The term "PORTAL" Market shall mean the Private
Offerings, Resales and Trading through Automated Linkages Market operated by the
National Association of Securities Dealers Inc. or any successor thereto.
PREDECESSOR NOTE: The term "Predecessor Note" of any particular Note
shall mean every previous Note evidencing all or a portion of the same debt as
that evidenced by such particular Note; and, for the purposes of this
definition, any Note authenticated and delivered under Section 2.06 in lieu of a
lost, destroyed or stolen Note shall be deemed to evidence the same debt as the
lost, destroyed or stolen Note.
PRINCIPAL OFFICE OF THE TRUSTEE: The term "principal office of the
Trustee", or other similar term, shall mean the principal office of the Trustee
at which at any particular time its corporate trust business shall be
administered, which office is, at the date as of which this Indenture is dated,
located at The First National Bank of Boston, Blue Hills Office Park, 150 Royall
Street, Canton, Massachusetts 02021; Attn: Corporate Trust Division.
QIB: The term "QIB" shall mean a "qualified institutional buyer as
defined in Rule 144A.
REDEMPTION PRICE: The term "Redemption Price" means the applicable
Redemption Price as set forth in the notice, including any applicable additional
Original Issue Discount referred to therein.
REFERENCE MARKET PRICE: The term "Reference Market Price" shall
initially mean $51.50 and in the event of any adjustment to the Conversion Rate
pursuant to subsection (a), (b) or (c) of Section 15.05, the Reference Market
Price shall also be adjusted so that the Reference Market Price after giving
effect to any such adjustment shall equal the Reference Market Price immediately
prior to such adjustment multiplied by a fraction, the numerator of which is the
Conversion Rate immediately prior to such adjustment and the denominator of
which is the Conversion Rate after such adjustment.
RESPONSIBLE OFFICER: The term "Responsible Officer", when used with
respect to the Trustee, shall mean any officer assigned by the Trustee to
administer its corporate trust matters.
22
<PAGE>
RESTRICTED NOTE: The term "Restricted Note" means any Note that bears
or is required to bear the legend set forth in Section 2.05(d).
RULE 144A: The term "Rule 144A" shall mean Rule 144A as promulgated
under the Securities Act.
SENIOR INDEBTEDNESS: The term "Senior Indebtedness" shall mean the
principal of, premium, if any, interest on, and any other payment due pursuant
to any of the following, whether outstanding at the date hereof or hereafter
incurred or created:
(a) all indebtedness of the Company for money borrowed (including any
indebtedness secured by a mortgage, conditional sales contract or other
lien which is (i) given to secure all or part of the purchase price of
property subject thereto, whether given to the vendor of such property or
to another or (ii) existing on property at the time of acquisition
thereof);
(b) all indebtedness of the Company evidenced by notes, debentures,
bonds or other securities;
(c) all indebtedness or other obligations of the Company with respect
to interest rate and currency swap agreements, cap, floor and collar
agreements, currency spot and forward contracts and other similar
agreements and arrangements;
(d) all lease obligations of the Company which are capitalized on the
books of the Company in accordance with generally accepted accounting
principles;
(e) all indebtedness of others of the kinds described in any of the
preceding clauses (a), (b) or (c) and all lease obligations of others of
the kind described in the preceding clause (d) assumed by or guaranteed in
any manner by the Company or in effect guaranteed by the Company through an
agreement to purchase, contingent or otherwise; and
(f) all renewals, extensions or refundings of indebtedness of the
kinds described in any of the preceding clauses (a), (b), (c) or (e) and
all renewals or extensions of lease obligations of the kinds described in
any of the preceding clauses (c), (d) or (e);
unless, in the case of any particular indebtedness, lease, renewal, extension or
refunding, the instrument or lease creating or evidencing the same or the
assumption or guarantee of the same expressly provides that such indebtedness,
lease, renewal, extension or refunding is subordinate to any other
23
<PAGE>
indebtedness of the Company or is not superior in right of payment to, or is
PARI PASSU with, the Notes. Notwithstanding the foregoing, Senior Indebtedness
shall not include (i) any indebtedness or lease obligation of any kind of the
Company to any subsidiary of the Company, a majority of the voting stock of
which is owned by the Company and (ii) indebtedness for trade payables or
constituting the deferred purchase price of assets or services incurred in the
ordinary course of business.
TRIGGER EVENT: The term "Trigger Event" is defined in Section
15.05(g).
TRUSTEE: The term "Trustee" shall mean The First National Bank of
Boston and, subject to the provisions of Article Eight hereof, shall also
include its successors and assigns as Trustee hereunder.
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION,
REGISTRATION AND EXCHANGE OF NOTES
SECTION 2.01. DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall
be designated as "1.90% Convertible Subordinated Notes due 2000". Notes not to
exceed the aggregate principal amount at maturity of $243,800,000 (except
pursuant to Sections 2.05, 2.06, 3.03, 15.02 and 16.01) upon the execution of
this Indenture, or from time to time thereafter, may be executed by the Company
and delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said Notes to or upon the written order of the Company,
signed both (a) by its Chairman of the Board of Directors, or any Vice-Chairman
of the Board of Directors, or its President or any Vice President (whether or
not designated by a number or numbers or a word or words added before or after
the title "Vice President") and (b) by its Treasurer, or Controller, or
Secretary or any Assistant Secretary without any further action by the Company
hereunder.
SECTION 2.02. FORM OF NOTES. The Notes and the Trustee's
certificate of authentication to be borne by the Notes shall be substantially
in the form as in this Indenture above recited. Any of the Notes may have
imprinted thereon such legends or endorsements as the officers executing the
same may approve (execution thereof to be conclusive evidence of such
approval) and as are not inconsistent with the provisions of this Indenture,
or as may be required to comply with any law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange on
which the Notes may be listed or any trading system in which the Notes may be
admitted, or to conform to usage.
24
<PAGE>
SECTION 2.03. DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST.
The Notes shall be issuable in registered form without coupons in denominations
of $1,000 principal amount at maturity and any multiple thereof. Every Note
shall be dated the date of its authentication, shall bear interest from the
applicable date and shall be payable on the dates specified on the face of the
form of Note recited above.
The person in whose name any Note (or its Predecessor Note) is
registered at the close of business on any record date with respect to any
interest payment date shall be entitled to receive the interest payable on such
interest payment date notwithstanding the cancellation of such Note upon any
transfer or exchange subsequent to the record date and prior to such interest
payment date. As provided in Section 15.02, and subject to the exception
contained therein, interest shall not be payable to such person in the case of
any Note or Notes, or portion thereof, which have been called for redemption and
which are converted on a date subsequent to such record date and prior to such
interest payment date. Interest may, at the option of the Company, be paid by
check mailed to the address of such person on the registry kept for such
purposes; PROVIDED that with respect to any holder of Notes with an aggregate
principal amount at maturity equal to or in excess of $10 million, at the
request of such holder in writing the Company shall pay interest on such
holder's Notes by wire transfer in immediately available funds. The term "record
date" with respect to any interest payment date shall mean the May 1 or November
1 preceding said May 17 or November 17. Interest on the Notes shall be computed
on the basis of a 360-day year of twelve 30-day months. Accrual of Original
Issue Discount shall be calculated on the basis of a 360-day year of twelve
30-day months, compounded semiannually.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any said May 17 or November 17 (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Noteholder on
the relevant record date by virtue of his having been such Noteholder; and such
Defaulted Interest shall be paid by the Company, at its election in each case,
as provided in clause (1) below:
(1) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a special record date for
the payment of such Defaulted Interest, which date shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Note and the date
of the proposed payment (which shall be not less
25
<PAGE>
than 25 days after the receipt by the Trustee of such notice, unless the
Trustee shall consent to an earlier date), and at the same time the Company
shall deposit with the Trustee an amount of money equal to the aggregate
amount proposed to be paid in respect of such Defaulted Interest or shall
make arrangements satisfactory to the Trustee for such deposit prior to the
date of the proposed payment, such money when deposited to be held in trust
for the benefit of the Persons entitled to such Defaulted Interest as in
this clause provided. Thereupon the Trustee shall fix a special record date
for the payment of such Defaulted Interest which shall be not more than 15
days and not less than 10 days prior to the date of the proposed payment
and not less than 10 days after the receipt by the Trustee of the notice of
the proposed payment. The Trustee shall promptly notify the Company of such
special record date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the special record date therefor to be mailed, first-class postage prepaid
to each Noteholder at his address as it appears in the Note register, not
less than 10 days prior to such special record date. Notice of the proposed
payment of such Defaulted Interest and the special record date therefor
having been so mailed, such Defaulted Interest shall be paid to the Persons
in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on such special record date and shall
no longer be payable.
SECTION 2.04. EXECUTION OF NOTES. The Notes shall be signed in the
name and on behalf of the Company by the facsimile signature of its President or
its Chief Executive Officer and attested by the facsimile signature of its
Secretary or its Chief Financial Officer (which may be printed, engraved or
otherwise reproduced thereon, by facsimile or otherwise). Only such Notes as
shall bear thereon a certificate of authentication substantially in the form
hereinbefore recited, manually executed by the Trustee, shall be entitled to the
benefits of this Indenture or be valid or obligatory for any purpose. Such
certificate by the Trustee upon any Note executed by the Company shall be
conclusive evidence that the Note so authenticated has been duly authenticated
and delivered hereunder and that the holder is entitled to the benefits of this
Indenture.
In case any officer of the Company who shall have signed any of the
Notes shall cease to be such officer before the Notes so signed shall have been
authenticated and delivered by the Trustee, or disposed of by the Company, such
Notes nevertheless may be authenticated and delivered or disposed of as though
the person who signed such Notes had not ceased to be such officer of the
Company; and any Note may be
26
<PAGE>
signed on behalf of the Company by such persons as, at the actual date of the
execution of such Note, shall be the proper officers of the Company, although at
the date of the execution of this Indenture any such person was not such an
officer.
SECTION 2.05. EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES;
RESTRICTIONS ON TRANSFERS; DEPOSITARY. (a) The Company shall keep at its
principal office, or shall cause to be kept, at one of the offices or agencies
maintained pursuant to Section 5.02, a register (the "Register") in which,
subject to such reasonable regulations as it may prescribe, Notes shall be
registered and the transfer of Notes shall be registered as in this Article Two
provided. Such Register shall be in written form or in any other form capable of
being converted into written form within a reasonable time. At all reasonable
times such Register shall be open for inspection by the Trustee. Upon due
presentment for registration of transfer of any Note at any office or agency
maintained by the Company pursuant to Section 5.02, the Company shall execute
and register and the Trustee shall authenticate and deliver in the name of the
transferee or transferees a new Note or Notes for an equal aggregate principal
amount at maturity.
Upon surrender for registration of transfer of any Note to the Trustee
and satisfaction of the requirements for such transfer set forth in this Section
2.05, the Company shall execute, and the Trustee shall authenticate and deliver,
in the name of the designated transferee or transferees, one or more new Notes
of any authorized denominations and of a like aggregate principal amount at
maturity and bearing such restrictive legends as may be required by this
Indenture.
Notes may be exchanged for a like aggregate principal amount at
maturity of Notes of other authorized denominations. Notes to be exchanged shall
be surrendered at any office or agency to be maintained by the Company pursuant
to Section 5.02 and the Company shall execute and register and the Trustee shall
authenticate and deliver in exchange therefor the Note or Notes which the
Noteholder making the exchange shall be entitled to receive, bearing
registration numbers not contemporaneously outstanding.
All Notes presented for registration of transfer or for exchange,
redemption, conversion or payment shall (if so required by the Company or the
Trustee) be duly endorsed by, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Company and the Trustee duly
executed by, the holder or his attorney duly authorized in writing.
No service charge shall be charged to the Noteholder for any exchange
or registration of transfer of Notes, but the Company may require payment of a
sum sufficient to cover any
27
<PAGE>
tax or other governmental charge that may be imposed in connection therewith.
Neither the Company nor the Trustee shall be required to exchange or
register a transfer of (a) any Notes for a period of 15 days next preceding any
selection of Notes to be redeemed or (b) any Notes or portions thereof selected
or called for redemption or (c) any Notes or portion thereof surrendered for
conversion or (d) any Notes or portion thereof surrendered for redemption
pursuant to Article Sixteen.
All Notes issued upon any transfer or exchange of Notes shall be valid
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture as the Notes surrendered upon such exchange or
transfer.
(b) So long as the Notes are eligible for book-entry settlement with
the Depositary (as defined below), or unless otherwise required by law, all
Notes to be traded on the PORTAL Market may be represented by a Note in global
form registered in the name of the Depositary or the nominee of the Depositary.
The transfer and exchange of beneficial interests in such Note in global form
shall be effected through the Depositary, in accordance with this Indenture
(including the restrictions on transfer set forth herein) and the procedures of
the Depositary therefor.
At any time at the request of the beneficial holder of an interest in
a Note in global form, such beneficial holder shall be entitled to obtain a
definitive Note upon written request to the Trustee in accordance with the
procedures of the Depositary for the issuance thereof. Upon receipt of any such
request, the Trustee will cause, in accordance with the standing instructions
and procedures of the Depositary, the aggregate principal amount at maturity of
the Note in global form to be reduced and, following such reduction, the Company
will execute and the Trustee will authenticate and deliver to such beneficial
holder (or its nominee) a Note or Notes in the appropriate aggregate principal
amount at maturity of the name of such beneficial holder (or its nominee) and
bearing such restrictive legends as may be required by this Indenture.
Any transfer of a beneficial interest in a Note in global form which
cannot be effected through book-entry settlement must be effected by the
delivery to the transferee (or its nominee) of a definitive Note or Notes
registered in the name of the transferee (or its nominee) on the books
maintained by the Trustee. With respect to any such transfer, the Trustee will
cause, in accordance with the standing instructions and procedures of the
Depositary, the aggregate principal amount at maturity of the Note in global
form to be
28
<PAGE>
reduced and, following such reduction, the Company will execute and the Trustee
will authenticate and deliver to the transferee (or such transferee's nominee,
as the case may be), a Note or Notes in the appropriate aggregate principal
amount at maturity in the name of such transferee (or its nominee) and bearing
such restrictive legends as may be required by this Indenture.
(c) So long as the Notes are eligible for book entry settlement, or
unless otherwise required by law, upon any transfer of a definitive Note to a
QIB in accordance with Rule 144A, unless otherwise requested by the transferor,
and upon receipt of the definitive Note or Notes being so transferred, together
with a certification from the transferor that the transferee is a QIB (or other
evidence satisfactory to the Trustee), the Trustee shall make an endorsement on
the Note in global form to reflect an increase in the aggregate principal amount
at maturity of the Notes represented by the Note in global form, the Trustee
shall cancel such definitive Note or Notes in accordance with the standing
instructions and procedures of the Depositary, the aggregate principal amount at
maturity of Notes represented by the Note in global form to be increased
accordingly; PROVIDED that no definitive Note, or portion thereof, in respect of
which the Company or an Affiliate of the Company held any beneficial interest
shall be included in such Note in global form until such definitive Note is
freely tradable in accordance with Rule 144(k); PROVIDED FURTHER that the
Trustee shall issue Notes in definitive form upon any transfer of a beneficial
interest in the Note in global form to the Company or any Affiliate of the
Company.
Any Note in global form may be endorsed with or have incorporated in
the text thereof such legends or recitals or changes not inconsistent with the
provisions of this Indenture as may be required by the Depositary or by the
National Association of Securities Dealers, Inc. in order for the Notes to be
tradeable on the PORTAL Market or as may be required for the Notes to be
tradeable on any other market developed for trading of securities pursuant to
Rule 144A or required to comply with any applicable law or any regulation
thereunder or with the rules and regulations of any securities exchange upon
which the Notes may be listed or traded or to conform with any usage with
respect thereto, or to indicate any special limitations or restrictions to which
any particular Notes are subject.
(d) Every Restricted Note shall be subject to the restrictions on
transfer provided in the legend required to be borne by each Restricted Note
pursuant to this Section 2.05, unless such restrictions on transfer shall be
waived by the written consent of the Company, and the holder of each Restricted
Note, by such Noteholder's acceptance thereof,
29
<PAGE>
agrees to be bound by such restrictions on transfer. As used in this section
2.05(d) and in Section 2.05(e), the terms "transfer" encompasses any sale,
pledge, transfer or other disposition of any Restricted Note.
Until three years after the original issuance date of any Note, any
certificate evidencing such Note (and all securities issued in exchange or
substitution therefor, other than Common Stock, if any, issued upon conversion
thereof that shall bear the legend set forth in Section 2.05(e), if applicable)
shall bear a legend in substantially the following form, unless otherwise agreed
by the Company (with written notice thereof to the Trustee):
THE NOTE EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR
FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE
FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS
THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A
UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT) ("INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A
U.S. PERSON AND IS ACQUIRING THE NOTE EVIDENCED HEREBY IN AN OFFSHORE
TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN THREE YEARS AFTER THE
ORIGINAL ISSUANCE OF THE NOTE EVIDENCED HEREBY RESELL OR OTHERWISE TRANSFER
THE NOTE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE UPON CONVERSION OF
SUCH NOTE EXCEPT (A) TO CHIRON CORPORATION OR ANY SUBSIDIARY THEREOF, (B)
INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE
WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHED
TO THE FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE, A SIGNED LETTER
CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE
RESTRICTIONS ON TRANSFER OF THE NOTE EVIDENCED HEREBY (THE FORM OF WHICH
LETTER CAN BE OBTAINED FROM SUCH TRUSTEE), (D) OUTSIDE THE UNITED STATES IN
COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE), AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM
THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THE NOTE
EVIDENCED HEREBY WITHIN THREE YEARS AFTER THE ORIGINAL
30
<PAGE>
ISSUANCE OF SUCH NOTE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH
ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT
THIS CERTIFICATE TO THE FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE. IF THE
PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR OR A PURCHASER
WHO IS NOT A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH
TO THE FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE, SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM
THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THIS LEGEND WILL BE REMOVED AFTER THE EXPIRATION OF THREE YEARS FROM
THE ORIGINAL ISSUANCE OF THE NOTE EVIDENCED HEREBY. AS USED HEREIN, THE
TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
Any Note (or security issued in exchange or substitution therefor) as
to which such restrictions on transfer shall have expired in accordance with
their terms, may upon surrender of such Note for exchange to the Note registrar
in accordance with the provisions of this Section 2.05, be exchanged for a new
Note or Notes, of like tenor and aggregate principal amount at maturity, which
shall not bear the restrictive legend required by this Section 2.05(d).
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in this Section 2.05(d)), a Note in global form may not be
transferred as a whole except by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee to a
successor Depositary or a nominee of such successor Depositary.
The Depositary shall be a clearing agency registered under the
Exchange Act. The Company initially appoints The Depository Trust Company to act
as Depositary with respect to the Notes in global form. Initially, the global
Note shall be issued to the Depositary, registered in the name of Cede & Co., as
the nominee of the Depositary, and deposited with the custodian for Cede & Co.
If at any time the Depositary for the Note in global form notifies
the Company that it is unwilling or unable to continue as Depositary for such
Note, the Company may appoint a successor Depositary with respect to such Note.
If a successor Depositary for the Note is not appointed by the Company within
90 days after the Company receives such notice, the Company will execute, and
the Trustee, upon receipt of an Officers Certificate for authentication and
delivery of
31
<PAGE>
Notes, will authenticate and deliver Notes in definitive form, in an aggregate
principal amount at maturity equal to the principal amount at maturity of the
Note in global form, in exchange for the such Note in the global form.
If a definitive Note is issued in exchange for any portion of a Note
in global form after the close of business at the office or agency where such
exchange occurs on any record date and before the opening of business at such
office or agency on the next succeeding interest payment date, interest will not
be payable on such interest payment date in respect of such Note, but will be
payable on such interest payment date only to the person to whom interest in
respect of such portion of such Note in global form is payable in accordance
with the provisions of this Indenture.
Definitive Notes issued in exchange for all or a part of a Note in
global form pursuant to this Section 2.05 shall be registered in such names and
in such authorized denominations as the Depositary, pursuant to instructions
from its direct or indirect participants or otherwise, shall instruct the
Trustee. Upon execution and authentication, the Trustee shall deliver such
definitive Notes to the person in whose names such definitive Notes are so
registered.
At such time as all interests in a Note in global form have been
redeemed, converted, repurchased or canceled, such Note in global form shall be
canceled by the Trustee in accordance with standing procedures and instructions
of the Depositary. At any time prior to such cancellation, if any interest in a
global Note is exchanged for definitive Notes, redeemed, converted, canceled, or
transferred to a transferee who receives definitive Notes therefor or any
definitive Note is exchanged or transferred for part of a Note in global form,
the principal amount at maturity of such Note in global form shall, in
accordance with the standing procedures and instructions of the Depositary be
reduced or increased, as the case may be, and an endorsement shall be made on
such Note in global form by the Trustee to reflect such reduction or increase.
(e) Until three years after the original issuance date of any Note,
any stock certificate representing Common Stock issued upon conversion of such
Note shall bear a legend in substantially the following form, unless otherwise
agreed by the Company (with written notice thereof to the Trustee):
THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS EXCEPT
AS SET FORTH IN THE FOLLOWING
32
<PAGE>
SENTENCE. THE HOLDER HEREOF AGREES THAT UNTIL THE EXPIRATION OF THREE YEARS
AFTER THE ORIGINAL ISSUANCE OF THE NOTE UPON THE CONVERSION OF WHICH THE
COMMON STOCK EVIDENCED HEREBY WAS ISSUED, (1) IT WILL NOT RESELL OR
OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY EXCEPT (A) TO CHIRON
CORPORATION OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN COMPLIANCE WITH RULE 144A, (C) INSIDE THE UNITED STATES
TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT) THAT, PRIOR TO SUCH TRANSFER,
FURNISHES TO CHEMICAL TRUST COMPANY OF CALIFORNIA, AS TRANSFER AGENT, A
SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO
THE RESTRICTIONS ON TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY (THE FORM
OF WHICH LETTER CAN BE OBTAINED FROM SUCH TRANSFER AGENT), (D) OUTSIDE THE
UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT OR (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE), (2) PRIOR TO SUCH TRANSFER, IT WILL FURNISH
TO CHEMICAL TRUST COMPANY OF CALIFORNIA, AS TRANSFER AGENT, SUCH
CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) IT WILL DELIVER TO EACH PERSON
TO WHOM THE COMMON STOCK EVIDENCED HEREBY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED
AFTER THE EXPIRATION OF THREE YEARS FROM THE ORIGINAL ISSUANCE OF THE NOTE
UPON THE CONVERSION OF WHICH THE COMMON STOCK EVIDENCED HEREBY WAS ISSUED
OR UPON THE EARLIER SATISFACTION OF CHEMICAL TRUST COMPANY OF CALIFORNIA,
AS TRANSFER AGENT, THAT THE COMMON STOCK HAS BEEN OR IS BEING OFFERED AND
SOLD IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT. AS USED HEREIN,
THE TERMS "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM
BY REGULATION S UNDER THE SECURITIES ACT.
(f) Any certificate evidencing a Note that has been transferred to an
Affiliate of the Company within three years after the original issuance date of
the Note, as evidenced by a notation on the Assignment Form for such transfer or
in the representation letter delivered in respect thereof, shall, until three
years after the last date on which the Company or any Affiliate of the Company
was an owner of such Note, bear a legend in substantially the following form,
unless otherwise
33
<PAGE>
agreed by the Company (with written notice thereof to the Trustee);
THE NOTE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY
ITS ACQUISITION HEREOF, THE HOLDER AGREES (1) THAT IT WILL NOT RESELL OR
OTHERWISE TRANSFER THE NOTE EVIDENCED HEREBY OR THE COMMON STOCK ISSUABLE
UPON CONVERSION OF SUCH NOTE EXCEPT (A) TO CHIRON CORPORATION OR ANY
SUBSIDIARY THEREOF, (B) IN A TRANSACTION REGISTERED UNDER THE SECURITIES
ACT OR (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144
UNDER THE SECURITIES ACT (IF AVAILABLE) AND (2) THAT IT WILL DELIVER TO
EACH PERSON TO WHOM THE NOTE EVIDENCED HEREBY IS TRANSFERRED A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFER IS
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
FIRST NATIONAL BANK OF BOSTON, AS TRUSTEE, SUCH CERTIFICATIONS, LEGAL
OPINIONS OR OTHER INFORMATION AS THE COMPANY MAY REASONABLY REQUIRE TO
CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR
IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. AS USED HEREIN, THE TERMS "UNITED STATES" AND "U.S. PERSON"
HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
Any stock certificate representing Common Stock issued upon conversion of such
Note shall also bear a legend in substantially the form indicated above, unless
otherwise agreed by the Company (with written notice thereof to the Trustee).
SECTION 2.06. MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any
temporary or definitive Note shall become mutilated or be apparently destroyed,
lost or stolen, the Company in its discretion may execute, and upon its request
the Trustee shall authenticate and deliver, a new Note, bearing a number not
contemporaneously outstanding, in exchange and substitution for the mutilated
Note, or in lieu of and in substitution for the Note so apparently destroyed,
lost or stolen. In every case the applicant for a substituted Note shall furnish
to the Company and to the Trustee such security or indemnity as may be required
by them to save each of them harmless, and, in every case of destruction, loss
or
34
<PAGE>
theft, the applicant shall also furnish to the Company and to the Trustee
evidence to their satisfaction of the destruction, loss or theft of such Note
and of the ownership thereof.
The Trustee may authenticate any such substituted Note and deliver the
same upon the receipt of such security or indemnity as the Trustee and the
Company may require. Upon the issuance of any substituted Note, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses connected
therewith. In case any Note which has matured or is about to mature or has been
called for redemption or is about to be converted into Common Stock shall become
mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a
substitute Note, pay or authorize the payment of or convert or authorize the
conversion of the same (without surrender thereof except in the case of a
mutilated Note) if the applicant for such payment or conversion shall furnish to
the Company and to the Trustee such security or indemnity as may be required by
them to save each of them harmless and, in case of destruction, loss or theft,
evidence satisfactory to the Company and the Trustee of the destruction, loss or
theft of such Note and of the ownership thereof.
Every substituted Note issued pursuant to the provisions of this
Section 2.06 by virtue of the fact that any Note is destroyed, lost or stolen
shall constitute an additional contractual obligation of the Company, whether or
not the apparently destroyed, lost or stolen Note shall be found at any time,
and shall be entitled to all the benefits of (but shall be subject to all the
limitations set forth in) this Indenture equally and proportionately with any
and all other Notes duly issued hereunder. To the extent permitted by law, all
Notes shall be held and owned upon the express condition that the foregoing
provisions are exclusive with respect to the replacement or payment or
conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any
and all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment or
conversion of negotiable instruments or other securities without their
surrender.
SECTION 2.07. TEMPORARY NOTES. Pending the preparation of definitive
Notes, the Company may execute and the Trustee shall authenticate and deliver
temporary Notes (printed or lithographed). Temporary Notes shall be issuable in
any authorized denomination, and substantially in the form of the definitive
Notes but with such omissions, insertions and variations as may be appropriate
for temporary Notes, all as may be determined by the Company. Every such
temporary Note shall be executed by the Company and authenticated by the
35
<PAGE>
Trustee upon the same conditions and in substantially the same manner, and with
the same effect, as the definitive Notes. Without unreasonable delay the Company
will execute and deliver to the Trustee definitive Notes and thereupon any or
all temporary Notes may be surrendered in exchange therefor, at each office or
agency maintained by the Company pursuant to Section 5.02 and the Trustee shall
authenticate and deliver in exchange for such temporary Notes an equal aggregate
principal amount at maturity of definitive Notes. Such exchange shall be made by
the Company at its own expense and without any charge therefor. Until so
exchanged, the temporary Notes shall in all respects be entitled to the same
benefits under this Indenture as definitive Notes authenticated and delivered
hereunder.
SECTION 2.08. CANCELLATION OF NOTES PAID, ETC. All Notes surrendered
for the purpose of payment, redemption, conversion, exchange or registration of
transfer, shall, if surrendered to the Company or any paying agent or any Note
registrar or any conversion agent, be surrendered to the Trustee and promptly
canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by
it, and no Notes shall be issued in lieu thereof except as expressly permitted
by any of the provisions of this Indenture. The Trustee shall destroy canceled
Notes (unless the Company directs it to do otherwise) and shall deliver a
certificate of such destruction to the Company. If the Company shall acquire any
of the Notes, such acquisition shall not operate as a redemption or satisfaction
of the indebtedness represented by such Notes unless and until the same are
delivered to the Trustee for cancellation.
ARTICLE THREE
REDEMPTION OF NOTES
SECTION 3.01. REDEMPTION PRICES. The Company may not redeem the Notes
prior to November 17, 1996. On or after that date, the Company may, at its
option, redeem all or from time to time any part of the Notes on any date prior
to maturity, upon notice as set forth in Section 3.02, and at the optional
Redemption Prices set forth in the form of Note hereinabove recited, together
with interest, if any, to the date fixed for redemption.
36
<PAGE>
SECTION 3.02. NOTICE OF REDEMPTION; SELECTION OF NOTES. In case the
Company shall desire to exercise the right to redeem all or, as the case may
be, any part of the Notes pursuant to Section 3.01 for redemption and, it or,
at its request, the Trustee in the name of and at the expense of the Company,
shall mail or cause to be mailed a notice of such redemption at least 30 and
not more than 60 days prior to the date fixed for redemption to the holders
of Notes so to be redeemed as a whole or in part at their last addresses as
the same appear on the registry books of the Company. Such mailing shall be
by first class mail. The notice if mailed in the manner herein provided shall
be conclusively presumed to have been duly given, whether or not the holder
receives such notice. In any case, failure to give such notice by mail or any
defect in the notice to the holder of any Note designated for redemption as a
whole or in part shall not affect the validity of the proceedings for the
redemption of any other Note.
Each such notice of redemption shall specify the principal amount at
maturity of each Note to be redeemed, the date fixed for redemption, the
Redemption Price at which Notes are to be redeemed, the place or places of
payment, that payment will be made upon presentation and surrender of such
Notes, that interest and Original Issue Discount accrued to the date fixed for
redemption will be paid as specified in said notice, and that on and after said
date interest and Original Issue Discount thereon or on the portions thereof to
be redeemed will cease to accrue. Such notice shall also state the current
Conversion Rate and the date on which the right to convert such Notes or
portions thereof into Common Stock will expire. If fewer than all the Notes are
to be redeemed, the notice of redemption shall identify the Notes to be
redeemed. In case any Note is to be redeemed in part only, the notice of
redemption shall state the portion of the principal amount at maturity thereof
to be redeemed and shall state that on and after the date fixed for redemption,
upon surrender of such Note, a new Note or Notes in principal amount at maturity
equal to the unredeemed portion thereof will be issued.
No later than the business day prior to the redemption date specified
in the notice of redemption given as provided in this Section, the Company will
deposit with the Trustee or with one or more paying agents (or, if the Company
is acting as its own paying agent, set aside, segregate and hold in trust as
provided in Section 5.04) an amount of money sufficient to redeem on the
redemption date all the Notes so called for redemption (other than those
theretofore surrendered for conversion into Common Stock) at the appropriate
Redemption Price, together with accrued interest to the date fixed for
redemption. If any Note called for redemption is converted pursuant hereto, any
money deposited
37
<PAGE>
with the Trustee or any paying agent or so segregated and held in trust for the
redemption of such Note shall be paid to the Company upon its request, or, if
then held by the Company shall be discharged from such trust. If fewer than all
the Notes are to be redeemed, the Company will give the Trustee written notice
not less than 45 days prior to the redemption date as to the aggregate principal
amount at maturity of Notes to be redeemed.
If fewer than all the Notes are to be redeemed, the Trustee shall
select, in such manner as the Trustee shall deem equitable and fair, the Notes
or portions thereof (in multiples of $1,000 principal amount at maturity) to be
redeemed. If any Note selected for partial redemption is converted in part after
such selection, the converted portion of such Note shall be deemed (so far as
may be) to be the portion to be selected for redemption. The Notes (or portions
thereof) so selected shall be deemed duly selected for redemption for all
purposes hereof, notwithstanding that any such Note is converted as a whole or
in part before the mailing of the notice of redemption.
Upon any redemption of less than all Notes, the Company and the
Trustee may treat as outstanding any Notes surrendered for conversion during the
period of 15 days next preceding the mailing of a notice of redemption and need
not treat as outstanding any Note authenticated and delivered during such period
in exchange for the unconverted portion of any Note converted in part during
such period.
SECTION 3.03. PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of
redemption has been given as above provided, the Notes or portions of Notes with
respect to which such notice has been given shall, unless theretofore converted
into Common Stock pursuant to the terms hereof, become due and payable on the
date and at the place or places stated in such notice at the applicable
Redemption Price, together with interest accrued to the date fixed for
redemption, and on and after said date (unless the Company shall default in the
payment of such Notes at the Redemption Price, together with interest accrued to
said date) Original Issue Discount and interest on the Notes or portions of
Notes so called for redemption shall cease to accrue and such Notes shall cease
after the date fixed for redemption to be convertible into Common Stock and,
except as provided in Sections 8.05 and 13.04, to be entitled to any benefit or
security under this Indenture, and the holders thereof shall have no right in
respect of such Notes except the right to receive the Redemption Price thereof
and unpaid interest to the date fixed for redemption. On presentation and
surrender of such Notes at a place of payment in said notice specified, the said
Notes or the specified portions thereof shall be paid and redeemed by the
Company at the applicable Redemption Price, together
38
<PAGE>
with interest accrued thereon to the date fixed for redemption; PROVIDED that
any semi-annual payment of interest becoming due on the date fixed for
redemption shall be payable to the holders of such Notes registered as such on
the relevant record date subject to the terms and provisions of Section 2.03
hereof.
Upon presentation of any Note redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the holder thereof, at
the expense of the Company, a new Note or Notes, of authorized denominations, in
principal amount at maturity equal to the unredeemed portion of the Note so
presented.
Notwithstanding the foregoing, the Trustee shall not redeem any Notes
or mail any notice of optional redemption during the continuance of a default in
payment of principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price or interest, if
any, in respect of the Notes or of any Event of Default. If any Note called for
redemption shall not be so paid upon surrender thereof for redemption, the
Redemption Price and, to the extent legally permitted, interest, if any, in
respect thereof shall, until paid or duly provided for, bear interest from the
date fixed for redemption at the rate borne by the Note (giving effect to
accrual of Original Issue Discount) and such Note shall remain convertible into
Common Stock until the Redemption Price shall have been paid or duly provided
for.
SECTION 3.04. NO SINKING FUND. The Notes shall not be entitled to the
benefit of any sinking fund.
SECTION 3.05. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In
connection with any redemption of Notes, the Company may arrange for the
purchase and conversion of any Notes by an agreement with one or more investment
bankers or other purchasers to purchase such Notes by paying to the Trustee in
trust for the Noteholders, on or before the close of business on the date fixed
for redemption, an amount not less than the applicable Redemption Price,
together with interest accrued to the date fixed for redemption, of such Notes.
Notwithstanding anything to the contrary contained in this Article Three, the
obligation of the Company to pay the Redemption Price of such Notes, together
with interest accrued to the date fixed for redemption, shall be deemed to be
satisfied and discharged to the extent such amount is so paid by such
purchasers. If such an agreement is entered into, a copy of which will be filed
with the Trustee prior to the date fixed for redemption, any Notes not duly
surrendered for conversion by the holders thereof may, at the option of the
Company, be deemed, to the fullest extent permitted by law, acquired by such
purchasers from such holders and
39
<PAGE>
(notwithstanding anything to the contrary contained in Article Fifteen)
surrendered by such purchasers for conversion, all as of immediately prior to
the close of business on the date fixed for redemption, subject to payment of
the above amount as aforesaid. At the direction of the Company, the Trustee
shall hold and dispose of any such amount paid to it in the same manner as it
would monies deposited with it by the Company for the redemption of Notes.
Without the Trustee's prior written consent, no arrangement between the Company
and such purchasers for the purchase and conversion of any Notes shall increase
or otherwise affect any of the powers, duties, responsibilities or obligations
of the Trustee as set forth in this Indenture, and the Company agrees to
indemnify the Trustee from, and hold it harmless against, any loss, liability or
expense arising out of or in connection with any such arrangement for the
purchase and conversion of any Notes between the Company and such purchasers to
which the Trustee has not consented in writing, including the costs and expenses
incurred by the Trustee in the defense of any claim or liability arising out of
or in connection with the exercise or performance of any of its powers, duties,
responsibilities or obligations under this Indenture.
ARTICLE FOUR
SUBORDINATION OF NOTES
SECTION 4.01. AGREEMENT OF SUBORDINATION. The Company covenants and
agrees, and each holder of Notes issued hereunder by his acceptance thereof
likewise covenants and agrees, that all Notes shall be issued subject to the
provisions of this Article Four; and each Person holding any Note, whether upon
original issue or upon transfer or assignment thereof, accepts and agrees to be
bound by such provisions.
The payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption Price
and interest, if any, in respect of all Notes issued hereunder shall, to the
extent and in the manner hereinafter set forth, be subordinated and subject in
right of payment to the prior payment in full of all Senior Indebtedness,
whether outstanding at the date of this Indenture or thereafter incurred.
No provision of this Article Four shall prevent the occurrence of any
default or Event of Default hereunder.
40
<PAGE>
SECTION 4.02. PAYMENTS TO NOTEHOLDERS. In the event and during the
continuation of any default in the payment of principal, premium, interest or
any other payment due on any Senior Indebtedness continuing beyond the period of
grace, if any, specified in the instrument or lease evidencing such Senior
Indebtedness, then, unless and until such default shall have been cured or
waived or shall have ceased to exist, no payment shall be made by the Company
with respect to the principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price, Fundamental Change Redemption Price or
interest, if any, in respect of the Notes, except payments made pursuant to
Article Thirteen hereof from monies deposited with the Trustee pursuant thereto
prior to the happening of such default.
Upon any payment by the Company, or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness shall first be paid in full, or payment thereof provided for
in money in accordance with its terms, before any payment is made on account of
the principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price or interest, if any, in
respect of the Notes (except payments made pursuant to Article Thirteen hereof
from monies deposited with the Trustee pursuant thereto prior to the happening
of such dissolution, winding-up, liquidation or reorganization); and upon any
such dissolution or winding-up or liquidation or reorganization any payment by
the Company, or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to which the holders of the Notes or
the Trustee would be entitled, except for the provisions of this Article Four,
shall (except as aforesaid) be paid by the Company or by any receiver, trustee
in bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the holders of the Notes or by the Trustee under this
Indenture if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders, as calculated by the Company) or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
necessary to pay all Senior Indebtedness in full, in money or money's worth,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness, before any payment or distribution is made to
the holders of the Notes or to the Trustee.
41
<PAGE>
If, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, prohibited by the foregoing, shall be received by the Trustee or
the holders of the Notes before all Senior Indebtedness is paid in full, or
provision is made for such payment in money in accordance with its terms,
such payment or distribution shall be held in trust for the benefit of and
shall be paid over or delivered to the holders of Senior Indebtedness or
their representative or representatives, or to the trustee or trustees under
any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, as calculated by the Company, for application to the payment of all
Senior Indebtedness remaining unpaid to the extent necessary to pay all
Senior Indebtedness in full in money in accordance with its terms, after
giving effect to any concurrent payment or distribution to or for the holders
of such Senior Indebtedness.
For purposes of this Article Four, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this Article Four with
respect to the Notes to the payment of all Senior Indebtedness which may at the
time be outstanding; PROVIDED that (i) the Senior Indebtedness is assumed by the
new corporation, if any, resulting from any such reorganization or readjustment,
and (ii) the rights of the holders of the Senior Indebtedness (other than
leases) and of leases which are assumed are not, without the consent of such
holders, altered by such reorganization or readjustment. The consolidation of
the Company with, or the merger of the Company into, another corporation or the
liquidation or dissolution of the Company following the conveyance or transfer
of its property as an entirety, or substantially as an entirety, to another
corporation upon the terms and conditions provided for in Article Twelve hereof
shall not be deemed a dissolution, winding-up, liquidation or reorganization for
the purposes of this Section 4.02 if such other corporation shall, as a part of
such consolidation, merger, conveyance or transfer, comply with the conditions
stated in Article Twelve hereof. Nothing in this Section 4.02 shall apply to
claims of, or payments to, the Trustee under or pursuant to Section 8.06.
42
<PAGE>
Notwithstanding anything in this Indenture to the contrary, neither
the issuance and delivery of junior securities upon conversion of the Notes in
accordance with Article Fifteen nor the payment of cash in lieu of fractional
shares of Common Stock in accordance with Section 15.03 shall be deemed to
constitute a payment or distribution on account of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price or
Fundamental Change Purchase Price or interest, if any, in respect of the Notes.
For the purposes of this paragraph, the term "junior securities" means (a)
shares of any stock of any class of the Company, (b) securities of the Company
which are subordinated in right of payment to all Senior Indebtedness which may
be outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Notes are so
subordinated as provided in this Article, and (c) any securities into which the
Notes become convertible pursuant to Section 15.06 which are securities of a
Person required to enter into a supplemental indenture pursuant to such section
(or Article Twelve) and are either (x) shares of any stock of any class of such
Person, or (y) securities of such Person which are subordinated in right of
payment to all Senior Indebtedness which may be outstanding at the time of
issuance or delivery of such securities to substantially the same extent as, or
to a greater extent than, the Notes are so subordinated as provided in this
Article. Nothing contained in this Article or elsewhere in this Indenture or in
the Notes is intended to or shall impair, as among the Company, its creditors
other than the holders of Senior Indebtedness, and the holders of the Notes, the
right, which is absolute and unconditional, of the holder of any Note to convert
such Note in accordance with Article Fifteen.
SECTION 4.03. SUBROGATION OF NOTES. Subject to the payment in full of
all Senior Indebtedness, the rights of the holders of the Notes shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Company
applicable to the Senior Indebtedness until the principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Fundamental
Change Redemption Price and interest, if any, in respect of the Notes shall be
paid in full; and, for the purposes of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness of any cash, property or
securities to which the holders of the Notes or the Trustee would be entitled
except for the provisions of this Article Four, and no payment over pursuant to
the provisions of this Article Four, to or for the benefit of the holders of
Senior Indebtedness by holders of the Notes or the Trustee, shall, as between
the Company, its creditors other than holders of Senior Indebtedness, and the
holders of the Notes, be deemed to be a payment by the Company to or on account
of the Senior Indebtedness. It is understood
43
<PAGE>
that the provisions of this Article Four are and are intended solely for the
purpose of defining the relative rights of the holders of the Notes, on the one
hand, and the holders of the Senior Indebtedness, on the other hand.
Nothing contained in this Article Four or elsewhere in this Indenture
or in the Notes is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Indebtedness, and the holders of the
Notes, the obligation of the Company, which is absolute and unconditional, to
pay to the holders of the Notes the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price and interest, if any, in respect of the Notes as and when the same shall
become due and payable in accordance with their terms, or is intended to or
shall affect the relative rights of the holders of the Notes and creditors of
the Company other than the holders of the Senior Indebtedness, nor shall
anything herein or therein prevent the Trustee or the holder of any Note from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article Four of the
holders of Senior Indebtedness in respect of cash, property or securities of the
Company received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to
in this Article Four, the Trustee, subject to the provisions of Section 8.01,
and the holders of the Notes shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making such payment or distribution, delivered to the Trustee or
to the holders of the Notes, for the purpose of ascertaining the Persons
entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article Four.
SECTION 4.04. AUTHORIZATION BY NOTEHOLDERS. Each holder of a Note by
his acceptance thereof authorizes and directs the Trustee in his behalf to take
such action as may be necessary or appropriate to effectuate the subordination
provided in this Article Four and appoints the Trustee his attorney-in-fact for
any and all such purposes.
44
<PAGE>
SECTION 4.05. NOTICE TO TRUSTEE. The Company shall give prompt
written notice to a Responsible Officer of the Trustee of any fact known to
the Company which would prohibit the making of any payment of monies to or by
the Trustee in respect of the Notes pursuant to the provisions of this
Article Four. Notwithstanding the provisions of this Article Four or any
other provision of this Indenture, the Trustee shall not be charged with
knowledge of the existence of any facts which would prohibit the making of
any payment of monies to or by the Trustee in respect of the Notes pursuant
to the provisions of this Article Four, unless and until a Responsible
Officer of the Trustee shall have received written notice thereof at the
Principal Office of the Trustee from the Company or a holder or holders of
Senior Indebtedness or from any trustee therefor; and before the receipt of
any such written notice, the Trustee, subject to the provisions of Section
8.01, shall be entitled in all respects to assume that no such facts exist;
PROVIDED that if on a date not fewer than three business days prior to the
date upon which by the terms hereof any such monies may become payable for
any purpose (including, without limitation, the payment of the principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Redemption Price or interest, if any, in respect of
any Note) the Trustee shall not have received, with respect to such monies,
the notice provided for in this Section 4.05, then, anything herein contained
to the contrary notwithstanding, the Trustee shall have full power and
authority to receive such monies and to apply the same to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such prior date.
Notwithstanding anything to the contrary herein set forth, nothing
shall prevent any payment by the Company or the Trustee to the Noteholders of
monies (A) in connection with a redemption of Notes if (i) notice of such
redemption has been given pursuant to Article Three or Section 13.01 hereof
prior to the receipt by the Trustee of written notice as aforesaid, and (ii)
such notice of redemption is given not earlier than 60 days before the
redemption date; and (B) in connection with a redemption of a Note pursuant to
Article Sixteen if, prior to the receipt by the Trustee of written notice as
aforesaid, the Company has given notice of a Fundamental Change.
The Trustee, subject to the provisions of Section 8.01, shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee on
behalf of such holder) to establish that such notice has been given by a holder
of Senior Indebtedness or a trustee on behalf of any such holder or holders. If
the Trustee determines in good faith that further evidence is required with
respect to the right of any Person as a holder of Senior Indebtedness to
participate in
45
<PAGE>
any payment or distribution pursuant to this Article Four, the Trustee may
request such Person to furnish evidence to the reasonable satisfaction of the
Trustee as to the amount of Senior Indebtedness held by such Person, the extent
to which such Person is entitled to participate in such payment or distribution
and any other facts pertinent to the rights of such Person under this Article
Four, and if such evidence is not furnished the Trustee may defer any payment to
such Person pending judicial determination as to the right of such Person to
receive such payment.
SECTION 4.06. TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee
in its individual capacity shall be entitled to all the rights set forth in this
Article Four in respect of any Senior Indebtedness at any time held by it, to
the same extent as any other holder of Senior Indebtedness, and nothing in this
Section or elsewhere in this Indenture shall deprive the Trustee of any of its
rights as such holder.
With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article Four, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe
any fiduciary duty to the holders of Senior Indebtedness and, subject to the
provisions of Section 8.01, the Trustee shall not be liable to any holder of
Senior Indebtedness if it shall pay over or deliver to holders of Notes, the
Company or any other Person money or assets to which any holder of Senior
Indebtedness shall be entitled by virtue of this Article Four or otherwise.
SECTION 4.07. NO IMPAIRMENT OF SUBORDINATION. No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Company or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Indenture, regardless of any knowledge
thereof which any such holder may have or otherwise be charged with.
46
<PAGE>
ARTICLE FIVE
PARTICULAR COVENANTS OF THE COMPANY
SECTION 5.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company
covenants and agrees that it will duly and punctually pay or cause to be paid
the principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price and interest, if any, in
respect of each of the Notes at the places, at the respective times and in the
manner provided herein and in the Notes. Each installment of interest on the
Notes may be paid by mailing checks for the interest payable to or upon the
written order of the holders of Notes entitled thereto as they shall appear on
the registry books of the Company; PROVIDED that with respect to any holder of
Notes with an aggregate principal amount at maturity equal to or in excess of
$10 million, at the request of such holder in writing the Company shall pay
interest on such holder's Notes by wire transfer in immediately available funds.
SECTION 5.02. OFFICES FOR NOTICES AND PAYMENTS. ETC. So long as any
of the Notes remain outstanding, the Company will maintain in the Borough of
Manhattan, The City of New York, an office or agency where the Notes may be
presented for payment, and an office or agency where the Notes may be
presented for registration of transfer and for exchange and conversion as
provided for in this Indenture and an office or agency where notices and
demands to or upon the Company in respect of the Notes or of this Indenture
may be served. The Company will give to the Trustee written notice of the
location of each such office or agency and of any change of location thereof.
If the Company shall fail to maintain any such office or agency or shall fail
to give such notice of the location or of any change in the location thereof,
presentations and demands may be made and notices may be served at the
principal office of the Trustee and the Company hereby appoints the Trustee
at the principal office of the Trustee as its agent to receive all such
presentations, demands and notices.
SECTION 5.03. APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The
Company, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 8.09, a Trustee, so that there
shall at all times be a Trustee hereunder.
47
<PAGE>
SECTION 5.04. PROVISION AS TO PAYING AGENT. (a) If the Company shall
appoint a paying agent other than the Trustee, it will cause such paying agent
to execute and deliver to the Trustee an instrument in which such agent shall
agree with the Trustee, subject to the provisions of this Section 5.04:
(1) that it will hold all sums held by it as such agent for the
payment of the principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price, Fundamental Change Redemption Price or
interest, if any, in respect of the Notes (whether such sums have been paid
to it by the Company or by any other obligor on the Notes) in trust for the
benefit of the holders of the Notes;
(2) that it will give the Trustee notice of any failure by the
Company (or by any other obligor on the Notes) to make any payment of the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price or interest, if any,
in respect of the Notes when the same shall be due and payable; and
(3) that at any time during the continuance of an Event of Default,
upon request of the Trustee, it will forthwith pay to the Trustee all sums
so held in trust.
The Company shall, before each due date of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Redemption Price or interest, if any, in respect of the
Notes, deposit with the paying agent a sum sufficient to pay such amounts so
becoming due, and (unless such paying agent is the Trustee) the Company will
promptly notify the Trustee of any failure to take such action.
(b) If the Company shall act as its own paying agent, it will, on or
before each due date of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption Price
or interest, if any, in respect of the Notes, set aside, segregate and hold in
trust for the benefit of the holders of the Notes a sum sufficient to pay such
amounts so becoming due and will notify the Trustee of any failure to take such
action and of any failure by the Company (or by any other obligor under the
Notes) to make any payment of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price or interest, if any, in respect of the Notes when the same shall become
due and payable.
48
<PAGE>
(c) Anything in this Section 5.04 to the contrary notwithstanding,
the Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of this Indenture, or for any other reason, pay or cause to be paid to
the Trustee all sums held in trust by the Company or any paying agent hereunder
as required by this Section 5.04, such sums to be held by the Trustee upon the
trusts herein contained and upon such payment by the Company or any paying agent
to the Trustee, the Company or such paying agent shall be released from all
further liability with respect to such money.
(d) Anything in this Section 5.04 to the contrary notwithstanding,
the agreement to hold sums in trust as provided in this Section 5.04 is subject
to Sections 13.03 and 13.04.
ARTICLE SIX
NOTEHOLDERS' LISTS AND
REPORTS BY THE COMPANY AND THE TRUSTEE
SECTION 6.01. NOTEHOLDERS' LISTS. The Company covenants and agrees
that it will furnish or cause to be furnished to the Trustee, semiannually, not
more than 15 days after each May 1 and November 1 in each year beginning with
May 1, 1994, and at such other times as the Trustee may request in writing,
within thirty days after receipt by the Company of any such request, a list in
such form as the Trustee may reasonably require of the names and addresses of
the holders of Notes as of a date not more than fifteen days prior to the time
such information is furnished, except that no such list need be furnished so
long as the Trustee is acting as Note registrar.
SECTION 6.02. PRESERVATION OF LISTS. The Trustee shall preserve, in as
current a form as is reasonably practicable, all information as to the names and
addresses of the holders of Notes contained in the most recent list furnished to
it as provided in Section 6.01 or maintained by the Trustee in its capacity as
Note registrar, if so acting. The Trustee may destroy any list furnished to it
as provided in Section 6.01 upon receipt of a new list so furnished.
If the Trustee shall be required by law to disclose any information
contained in any list of Noteholders maintained by it, then each and every
holder of the Notes, by receiving and holding the same, agrees with the Company
and the Trustee that neither the Company nor the Trustee nor any paying agent
nor the Note registrar shall be held accountable by reason of the disclosure of
any such information, regardless of the source from which such information was
derived.
49
<PAGE>
SECTION 6.03. REPORTS BY THE TRUSTEE. (a) On July 15, 1994, and on or
before July 15 in every year thereafter, so long as any Notes are outstanding
hereunder, the Trustee shall transmit to the Noteholders and the Company, as
hereinafter in this Section 6.03 provided, a brief report dated as of the
preceding May 15 with respect to:
(1) its eligibility under Section 8.08, or in lieu thereof, if to the
best of its knowledge it has continued to be eligible under such Section, a
written statement to such effect; and
(2) any action taken by the Trustee in the performance of its duties
under this Indenture which it has not previously reported and which in its
opinion materially affects the Notes, except action in respect of a
default, notice of which has been or is to be withheld by it in accordance
with the provisions of Section 7.08.
(b) Reports pursuant to this Section 6.03 shall be transmitted by
mail to all holders of Notes as the names and addresses of such holders appear
upon the registry books of the Company.
ARTICLE SEVEN
REMEDIES OF THE TRUSTEE AND
NOTEHOLDERS IN THE EVENT OF DEFAULT
SECTION 7.01. EVENTS OF DEFAULT. In case one or more of the following
Events of Default (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body) shall have occurred and be
continuing:
(a) default in the payment of any installment of interest upon any of
the Notes as and when the same shall become due and payable, and
continuance of such default for a period of thirty days; or
(b) default in the payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, or Fundamental
Change Redemption Price in respect of any of the Notes as and when the same
shall become due and payable either at maturity, in connection with any
redemption pursuant to Article Sixteen or in connection with any
redemption, by declaration or otherwise; or
50
<PAGE>
(c) failure on the part of the Company duly to observe or perform any
of the covenants or agreements on the part of the Company in the Notes or
in this Indenture (other than a covenant or agreement a default in whose
performance or whose breach is elsewhere in this Section specifically dealt
with) continued for a period of forty-five days after the date on which
written notice of such failure, requiring the Company to remedy the same,
shall have been given to the Company by the Trustee, or to the Company and
the Trustee by the holders of at least twenty-five percent in aggregate
principal amount at maturity of the Notes at the time outstanding; or
(d) the Company shall have commenced a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian, or other similar official of it or any
substantial part of its property, or shall have consented to any such
relief or to the appointment of or taking possession by any such official
in an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due; or
(e) an involuntary case or other proceeding shall be commenced
against the Company seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of ninety
consecutive days;
then and in each and every such case, unless the principal of all of the Notes
shall have already become due and payable, either the Trustee or the holders of
not less than twenty-five percent in aggregate principal amount at maturity of
the Notes then outstanding hereunder, by notice in writing to the Company (and
to the Trustee if given by Noteholders), may declare due and immediately payable
the sum of the Issue Price plus accrued Original Issue Discount from the date of
issue of the Notes to the date of declaration and the interest accrued thereon,
and upon any such declaration the same shall become and shall be immediately due
and payable, anything in this Indenture or in the Notes contained to the
contrary notwithstanding. This provision, however, is subject to the condition
that if, at any time after the Notes shall have been so declared due and
payable, and before any judgment or decree
51
<PAGE>
for the payment of the monies due shall have been obtained or entered as
hereinafter provided, the Company shall pay or shall deposit with the Trustee a
sum sufficient to pay all matured installments of interest upon all the Notes
and principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, and Fundamental Change Redemption Price in respect of any and
all Notes which shall have become due otherwise than by acceleration (with
interest on overdue installments of interest (to the extent that payment of such
interest is enforceable under applicable law) and on such principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price and
Fundamental Change Redemption Price at the rate borne by the Notes (giving
effect to accrual of Original Issue Discount), to the date of such payment or
deposit) and amounts due to the Trustee pursuant to Section 8.06, and if any and
all defaults under this Indenture, other than the nonpayment of principal amount
at maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Redemption Price and interest, if any, in respect of the
Notes which shall have become due by acceleration, shall have been cured or
waived pursuant to Section 7.07 -- then and in every such case the holders of a
majority in aggregate principal amount at maturity of the Notes then
outstanding, by written notice to the Company and to the Trustee, may waive all
defaults and rescind and annul such declaration and its consequences; but no
such waiver or rescission and annulment shall extend to or shall affect any
subsequent default, or shall impair any right consequent thereon. The Trustee
shall not be charged with knowledge and shall not be deemed to have notice of
any default or Event of Default, except an Event of Default under Section
7.01(a) or (b) in cases where the Trustee is acting as paying agent, unless
written notice thereof stating that such notice is a "Notice of Default" shall
have been given to a Responsible Officer by the Company or a Noteholder or any
agent of a Noteholder; and, in the absence of such written notice, the Trustee
may conclusively assume that there is no default or Event of Default.
In case the Trustee shall have proceeded to enforce any right under
this Indenture and such proceedings shall have been discontinued or abandoned
because of such rescission or annulment or for any other reason or shall have
been determined adversely to the Trustee, then and in every such case the
Company, the holders of Notes, and the Trustee shall be restored respectively to
their several positions and rights hereunder, and all rights, remedies and
powers of the Company, the holders of Notes, and the Trustee shall continue as
though no such proceeding had been taken.
52
<PAGE>
SECTION 7.02. PAYMENT OF NOTES ON DEFAULT; SUIT THEREFOR. The Company
covenants that (a) in case default shall be made in the payment of any
installment of interest upon any of the Notes as and when the same shall become
due and payable, and such default shall have continued for a period of thirty
days, or (b) in case default shall be made in the payment of the principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, or Fundamental Change Redemption Price in respect of any of the Notes as
and when the same shall have become due and payable, whether at maturity of the
Notes, in connection with any redemption of a Note pursuant to Article Sixteen,
or in connection with any redemption, by declaration or otherwise--then, upon
demand of the Trustee, the Company will pay to the Trustee, for the benefit of
the holders of the Notes, the whole amount that then shall have become due and
payable on all such Notes for principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption Price,
or interest, or both, as the case may be, with interest upon the overdue
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price and Fundamental Change Redemption Price and (to the extent that
payment of such interest is enforceable under applicable law) upon the overdue
installments of interest at the rate borne by the Notes (giving effect to the
accrual of Original Issue Discount); and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including a reasonable compensation to the Trustee, its agents, attorneys and
counsel, and any expenses or liabilities incurred by the Trustee hereunder other
than through its negligence or bad faith. Until such demand by the Trustee, the
Company may pay principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price, Fundamental Change Redemption Price and
interest, if any, in respect of the Notes to the registered holders, whether or
not the Notes are overdue.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the Notes
and collect in the manner provided by law out of the property of the Company or
any other obligor on the Notes wherever situated the monies adjudged or decreed
to be payable.
In case there shall be pending proceedings for the bankruptcy or
for the reorganization of the Company or any other obligor on the Notes under
Title 11 of the United States
53
<PAGE>
Code, or any other applicable law, or in case a receiver, assignee or trustee in
bankruptcy or reorganization, liquidator, sequestrator or similar official shall
have been appointed for or taken possession of the Company, the property of the
Company or such other obligor, or in the case of any other similar judicial
proceedings relative to the Company or other obligor upon the Notes, or to the
creditors or property of the Company or such other obligor, the Trustee,
irrespective of whether the principal of the Notes shall then be due and payable
as therein expressed or by declaration or otherwise and irrespective of whether
the Trustee shall have made any demand pursuant to the provisions of this
Section 7.02, shall be entitled and empowered, by intervention in such
proceedings or otherwise, to file and prove a claim or claims for the whole
amount of principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and interest, if
any, owing and unpaid in respect of the Notes, and, in case of any judicial
proceedings, to file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee and of the
Noteholders allowed in such judicial proceedings relative to the Company or any
other obligor on the Notes, its or their creditors, or its or their property,
and to collect and receive any monies or other property payable or deliverable
on any such claims, and to distribute the same after the deduction of any
amounts due the Trustee under Section 8.06; and any receiver, assignee or
trustee in bankruptcy or reorganization liquidator, custodian or similar
official is hereby authorized by each of the Noteholders to make such payments
to the Trustee, and, if the Trustee shall consent to the making of such payments
directly to the Noteholders, to pay to the Trustee any amount due it for
compensation, expenses, advances and disbursements including counsel fees and
expenses incurred by it up to the date of such distribution. To the extent that
such payment of reasonable compensation, expenses, advances and disbursements
out of the estate in any such proceedings shall be denied for any reason,
payment of the same shall be secured by a lien on, and shall be paid out of, any
and all distributions, dividends, monies, securities and other property which
the holders of the Notes may be entitled to receive in such proceedings, whether
in liquidation or under any plan of reorganization or arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or adopt on behalf of any Noteholder any plan of
reorganization or arrangement, affecting the Notes or the rights of any
Noteholder, or to authorize the Trustee to vote in respect of the claim of any
Noteholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or
under any of the Notes, may be enforced by
54
<PAGE>
the Trustee without the possession of any of the Notes, or the production
thereof on any trial or other proceeding relative thereto, and any such suit or
proceeding instituted by the Trustee shall be brought in its own name as trustee
of an express trust, and any recovery of judgment shall, after provision for the
payment of the compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, be for the ratable benefit of the holders of
the Notes.
In any proceedings brought by the Trustee (and in any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the holders
of the Notes, and it shall not be necessary to make any holders of the Notes
parties to any such proceedings.
SECTION 7.03. APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies
collected by the Trustee pursuant to this Article Seven shall be applied in the
order following, at the date or dates fixed by the Trustee for the distribution
of such monies, upon presentation of the several Notes, and stamping thereon the
payment, if only partially paid, and upon surrender thereof if fully paid:
First: To the payment of costs and expenses of collection and
reasonable compensation to the Trustee, its agents, attorneys and counsel,
and of all other expenses and liabilities incurred, and all advances made,
by the Trustee except as a result of its negligence or bad faith;
Second: Subject to the provisions of Article Four, in case the
principal of the outstanding Notes shall not have become due and be unpaid,
to the payment of interest on the Notes in default in the order of the
maturity of the installments of such interest, with interest (to the extent
that such interest has been collected by the Trustee) upon the overdue
installments of interest at the rate borne by the Notes (giving effect to
the accrual of Original Issue Discount), such payments to be made ratably
to the persons entitled thereto;
Third: Subject to the provisions of Article Four, in case the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price or Fundamental Change Redemption Price in respect of the
outstanding Notes shall have become due, by declaration or otherwise, and
be unpaid to the payment of the whole amount then owing and unpaid upon the
Notes for principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and
interest, if any, with interest on the overdue
55
<PAGE>
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price and Fundamental Change Redemption Price, and (to the
extent that such interest has been collected by the Trustee) upon overdue
installments of interest at the rate borne by the Notes (giving effect to
the accrual of Original Issue Discount); and in case such monies shall be
insufficient to pay in full the whole amounts so due and unpaid upon the
Notes, then to the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price and interest, if any, without preference or priority of principal
amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price or Fundamental Change Redemption Price over interest, or
of interest over principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price or Fundamental Change Redemption
Price or of any installment of interest over any other installment of
interest, or of any Note over any other Note, ratably to the aggregate of
such principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and accrued
and unpaid interest;
Fourth: Subject to the provisions of Article Four, to the payment of
the remainder, if any, to the Company or any other person lawfully entitled
thereto.
SECTION 7.04. PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall have
any right by virtue of or by availing of any provision of this Indenture to
institute any suit, action or proceeding in equity or at law upon or under or
with respect to this Indenture, or for the appointment of a receiver, trustee,
liquidator, custodian or other similar official, or for any other remedy
hereunder, unless such holder previously shall have given to the Trustee written
notice of default and of the continuance thereof, as hereinbefore provided, and
unless also the holders of not less than twenty-five percent in aggregate
principal amount at maturity of the Notes then outstanding shall have made
written request upon the Trustee to institute such action, suit or proceeding in
its own name as Trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee for sixty days
after its receipt of such notice, request and offer of indemnity, shall have
neglected or refused to institute any such action, suit or proceeding and no
direction inconsistent with such written request shall have been given to the
Trustee pursuant to Section 7.07; it being understood and intended, and being
expressly covenanted by the taker and holder of every Note with every other
taker and holder and the Trustee, that no one or more holders of Notes shall
have any right in
56
<PAGE>
any manner whatever by virtue of or by availing of any provision of this
Indenture to affect, disturb or prejudice the rights of any other holder of
Notes, or to obtain or seek to obtain priority over or preference to any other
such holder, or to enforce any right under this Indenture, except in the manner
herein provided and for the equal, ratable and common benefit of all holders of
Notes (except as otherwise provided herein). For the protection and enforcement
of this Section 7.04, each and every Noteholder and the Trustee shall be
entitled to such relief as can be given either at law or in equity.
Notwithstanding any other provisions of this Indenture and any
provision of any Note, however, the right of any holder of any Note to receive
payment of the principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price such Note, on or
after the respective due dates expressed in such Note, or to institute suit for
the enforcement of any such payment on or after such respective dates against
the Company shall not be impaired or affected without the consent of such
holder.
Anything in this Indenture or the Notes to the contrary
notwithstanding, the holder of any Note, without the consent of either the
Trustee or the holder of any other Note, in his own behalf and for his own
benefit may enforce, and may institute and maintain any proceeding suitable to
enforce, his rights of conversion as provided herein.
SECTION 7.05. PROCEEDINGS BY TRUSTEE. In case of an Event of Default
hereunder the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any of such
rights, either by suit in equity or by action at law or by proceeding in
bankruptcy or otherwise, whether for the specific enforcement of any covenant or
agreement contained in this Indenture or in aid of the exercise of any power
granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
SECTION 7.06. REMEDIES CUMULATIVE AND CONTINUING. Except as provided
in Section 2.06, all powers and remedies given by this Article Seven to the
Trustee or to the Noteholders shall, to the extent permitted by law, be deemed
cumulative and not exclusive of any thereof or of any other powers and remedies
available to the Trustee or the holders of the Notes, by judicial proceedings or
otherwise, to enforce the performance or observance of the covenants and
agreements contained in this Indenture, and no delay or omission of the Trustee
or of any holder of any of the Notes to exercise any
57
<PAGE>
right or power accruing upon any default occurring and continuing as aforesaid
shall impair any such right or power, or shall be construed to be a waiver of
any such default or an acquiescence therein; and, subject to the provisions of
Section 7.04, every power and remedy given by this Article Seven or by law to
the Trustee or to the Noteholders may be exercised from time to time, and as
often as shall be deemed expedient, by the Trustee or by the Noteholders.
SECTION 7.07. DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY
MAJORITY NOTEHOLDERS. The holders of a majority in aggregate principal
amount at maturity of the Notes at the time outstanding determined in
accordance with Section 9.04 shall have the right to direct the time, method,
and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee; PROVIDED,
HOWEVER, that (subject to the provisions of Section 8.01) the Trustee shall
have the right to decline to follow any such direction if the Trustee shall
be advised by counsel that the action or proceeding so directed may not
lawfully be taken or if the Trustee in good faith by its board of directors
or executive committee, or a trust committee of directors and/or Responsible
Officers shall determine that the action or proceedings so directed could
involve the Trustee in personal liability. Prior to any declaration
accelerating the maturity of the Notes, the holders of a majority in
aggregate principal amount at maturity of the Notes at the time outstanding
may on behalf of the holders of all of the Notes waive any past default or
Event of Default hereunder and its consequences except (i) a default in the
payment of principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and interest,
if any, in respect of the Notes, (ii) a failure by the Company to convert any
Notes into Common Stock or (iii) a default in respect of a covenant or
provision hereof which under Article 11 cannot be modified or amended without
the consent of the holders of all Notes then outstanding. Upon any such
waiver the Company, the Trustee and the holders of the Notes shall be
restored to their former positions and rights hereunder, respectively; but no
such waiver shall extend to any subsequent or other default or Event of
Default or impair any right consequent thereon. Whenever any default or Event
of Default hereunder shall have been waived as permitted by this Section
7.07, said default or Event of Default shall for all purposes of the Notes
and this Indenture be deemed to have been cured and to be not continuing; but
no such waiver shall extend to any subsequent or other default or Event of
Default or impair any right consequent thereon.
58
<PAGE>
SECTION 7.08. NOTICE OF DEFAULTS. The Trustee shall, within ninety
days after the occurrence of a default, mail to all Noteholders, as the names
and addresses of such holders appear upon the registry books of the Company,
notice of all defaults known to the Trustee, unless such defaults shall have
been cured or waived before the giving of such notice (the term "defaults" for
the purpose of this Section 7.08 being hereby defined to be the events specified
in clauses (a), (b), (c), (d) and (e) of Section 7.01, not including periods of
grace, if any, or the giving of any notice, or both provided for therein); and
PROVIDED that, except in the case of default in the payment of the principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Redemption Price and interest, if any, in respect of
any of the Notes, the Trustee shall be protected in withholding such notice if
and so long as the board of directors, the executive committee, or a trust
committee of directors and/or Responsible Officers of the Trustee in good faith
determine that the withholding of such notice is in the interests of the
Noteholders.
SECTION 7.09. UNDERTAKING TO PAY COSTS. All parties to this Indenture
agree, and each holder of any Note by his acceptance thereof shall be deemed to
have agreed, that any court may in its discretion require, in any suit for the
enforcement of any right or remedy under this Indenture, or in any suit against
the Trustee for any action taken or omitted by it as Trustee, the filing by any
party litigant in such suit of an undertaking to pay the costs of such suit and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having due
regard to the merits and good faith of the claims or defenses made by such party
litigant; PROVIDED, that the provisions of this Section 7.09 shall not apply to
any suit instituted by the Trustee, to any suit instituted by any Noteholder, or
group of Noteholders, holding in the aggregate more than ten percent in
principal amount at maturity of the Notes outstanding, or to any suit instituted
by any Noteholder for the enforcement of the payment of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Redemption Price and interest, if any, in respect of any Note
on or after the due date expressed in such Note or to any suit for the
enforcement of the right to convert any Note in accordance with the provisions
of Article Fifteen.
59
<PAGE>
ARTICLE EIGHT
CONCERNING THE TRUSTEE
SECTION 8.01. DUTIES AND RESPONSIBILITIES OF TRUSTEE. The Trustee,
prior to the occurrence of an Event of Default and after the curing of all
Events of Default which may have occurred, undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture. In case an
Event of Default has occurred (which has not been cured or waived) the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Indenture, and
the Trustee shall not be liable except for the performance of such
duties and obligations as are specifically set forth in this Indenture
and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and
the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee and conforming to
the requirements of this Indenture; but, in the case of any such
certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee
shall be under a duty to examine the same to determine whether or not
they conform to the requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Officers of the Trustee, unless it
shall be proved that the Trustee was negligent in ascertaining the
pertinent facts;
60
<PAGE>
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the holders of not less than a majority in principal amount at maturity
of the Notes at the time outstanding determined as provided in Section 9.04
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture; and
(d) whether or not therein provided, every provision of this
Indenture relating to the conduct or affecting the liability of, or
affording protection to, the Trustee shall be subject to the provisions of
this Section.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there is reasonable ground for believing that the
redemption of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
SECTION 8.02. RELIANCE ON DOCUMENTS, OPINIONS, ETC. Except as
otherwise provided in section 8.01,
(a) the Trustee may rely and shall be protected in acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture, coupon or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request, direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless
other evidence in respect thereof be herein specifically prescribed); and
any resolution of the Board of Directors may be evidenced to the Trustee by
a copy thereof certified by the Secretary or an Assistant Secretary of the
Company;
(c) the Trustee may consult with counsel and any advice or Opinion of
Counsel shall be full and complete authorization and protection in respect
of any action taken or omitted by it hereunder in good faith and in
accordance with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of
61
<PAGE>
the Noteholders pursuant to the provisions of this Indenture, unless such
Noteholders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within the
discretion or rights or powers conferred upon it by this Indenture;
(f) prior to the occurrence of an Event of Default hereunder and
after the curing or waiving of all Events of Default, the Trustee shall not
be bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, approval, bond, debenture, coupon or other paper
or document unless requested in writing to do so by the holders of not less
than a majority in principal amount at maturity of the Notes then
outstanding; PROVIDED, HOWEVER, that if the payment within a reasonable
time to the Trustee of the costs, expenses or liabilities likely to be
incurred by it in the making of such investigation is, in the opinion of
the Trustee, not reasonably assured to the Trustee by the security afforded
to it by the terms of this Indenture, the Trustee may require reasonable
indemnity against such expense or liability as a condition to so
proceeding; the reasonable expenses of every such examination shall be paid
by the Company or, if paid by the Trustee or any predecessor Trustee, shall
be repaid by the Company upon demand; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed by it with due
care hereunder.
SECTION 8.03. NO RESPONSIBILITY FOR RECITALS, ETC. The recitals
contained herein and in the Notes (except in the Trustee's certificate of
authentication) shall be taken as the statements of the Company, and the Trustee
assumes no responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Notes. The Trustee shall not be accountable for the use or application by the
Company of any Notes or the proceeds of any Notes authenticated and delivered by
the Trustee in conformity with the provisions of this Indenture.
62
<PAGE>
SECTION 8.04. TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR
MAY OWN NOTES. The Trustee, any paying agent, any conversion agent or Note
registrar, in its individual or any other capacity, may become the owner or
pledgee of Notes with the same rights it would have if it were not Trustee,
paying agent, conversion agent or Note registrar.
SECTION 8.05. MONIES TO BE HELD IN TRUST. Subject to the provisions of
Section 13.04, all monies received by the Trustee shall, until used or applied
as herein provided, be held in trust for the purposes for which they were
received. Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except to
the extent otherwise agreed in writing by the Company and the Trustee.
SECTION 8.06. COMPENSATION AND EXPENSES OF TRUSTEE. The Company
covenants and agrees to pay to the Trustee from time to time, and the Trustee
shall be entitled to, reasonable compensation for all services rendered by it
hereunder in any capacity (which shall not be limited by any provision of law
in regard to the compensation of a trustee of an express trust), and the
Company will pay or reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and
of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence or bad faith. The
Company also covenants to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or bad
faith on the part of the Trustee and arising out of or in connection with the
acceptance or administration of this trust, including the costs and expenses
of defending itself against any claim of liability in the premises. The
obligations of the Company under this Section 8.06 to compensate or indemnify
the Trustee and to pay or reimburse the Trustee for expenses, disbursements
and advances shall be secured by a lien prior to that of the Notes upon all
property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the holders of particular Notes. The
obligation of the Company under this Section shall survive the satisfaction
and discharge of this Indenture.
63
<PAGE>
SECTION 8.07. OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise
provided in Section 8.01, whenever in the administration of the provisions of
this Indenture the Trustee shall deem it necessary or desirable that a matter be
proved or established prior to taking or omitting any action hereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of negligence or bad faith on the part of the
Trustee, be deemed to be conclusively proved and established by an Officers'
Certificate delivered to the Trustee, and such Certificate, in the absence of
negligence or bad faith on the part of the Trustee, shall be full warrant to the
Trustee for any action taken or omitted by it under the provisions of this
Indenture upon the faith thereof.
SECTION 8.08. ELIGIBILITY OF TRUSTEE. The Trustee hereunder shall
at all times be a corporation organized and doing business under the laws of
the United States or any State or Territory thereof or of the District of
Columbia authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least five million dollars,
subject to supervision or examination by Federal, State, Territorial or
District of Columbia authority. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section 8.08, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. In case at any time the Trustee shall cease
to be eligible in accordance with the provisions of this Section 8.08, the
Trustee shall resign immediately in the manner and with the effect specified
in Section 8.09.
SECTION 8.09. RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee
may at any time resign by giving written notice of such resignation to the
Company and by mailing notice thereof to the holders of Notes at their
addresses as they shall appear on the registry books of the Company. Upon
receiving such notice of resignation, the Company shall promptly appoint a
successor trustee by written instrument, in duplicate, executed by order of
the Board of Directors, one copy of which instrument shall be delivered to
the resigning Trustee and one copy to the successor trustee. If no successor
trustee shall have been so appointed and have accepted appointment within
sixty days after the mailing of such notice of resignation to the
Noteholders, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee, or any Noteholder
who has been a bona fide holder of a Note or Notes for at least six months
may, subject to the provisions of Section 7.09, on behalf of himself and all
others similarly situated, petition any such court for the appointment of a
successor trustee.
64
<PAGE>
Such court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall cease to be eligible in accordance with the
provisions of Section 8.08 and shall fail to resign after written request
therefor by the Company or by any such Noteholder, or
(2) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed, or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case the Company may remove the Trustee and appoint a
successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the
Trustee so removed and one copy to the successor trustee, or, subject to the
provisions of Section 7.09, any Noteholder who has been a bona fide holder of a
Note or Notes for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor trustee.
(c) The holders of a majority in aggregate principal amount at
maturity of the Notes at the time outstanding may at any time remove the Trustee
and nominate a successor trustee which shall be deemed appointed as successor
trustee unless within ten days after notice to the Company of such nomination
the Company objects thereto, in which case the Trustee so removed or any
Noteholder, upon the terms and conditions and otherwise as in subsection (a) of
this Section 8.09 provided, may petition any court of competent jurisdiction for
an appointment of a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee to any of the provisions of this Section 8.09 shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 8.10.
65
<PAGE>
SECTION 8.10. ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee
appointed as provided in Section 8.09 shall execute, acknowledge and deliver to
the Company and to its predecessor trustee an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, duties and obligations of its predecessor hereunder, with like effect as
if originally named as trustee herein; but, nevertheless, on the written request
of the Company or of the successor trustee, the trustee ceasing to act shall,
upon payment of any amounts then due it pursuant to the provisions of Section
8.06, execute and deliver an instrument transferring to such successor trustee
all the rights and powers of the trustee so ceasing to act. Upon request of any
such successor trustee, the Company shall execute any and all instruments in
writing for more fully and certainly vesting in and confirming to such successor
trustee all such rights and powers. Any trustee ceasing to act shall,
nevertheless, retain a lien upon all property or funds held or collected by such
trustee to secure any amounts then due it pursuant to the provisions of Section
8.06.
No successor trustee shall accept appointment as provided in this
Section 8.10 unless at the time of such acceptance such successor trustee shall
be eligible under the provisions of Section 8.08.
Upon acceptance of appointment by a successor trustee as provided in
this Section 8.10, the Company and the former trustee shall mail notice of the
succession of such trustee hereunder to the holders of Notes at their addresses
as they shall appear on the registry books of the Company. If the Company fails
to mail such notice within ten days after acceptance of appointment by the
successor trustee, the successor trustee shall cause such notice to be mailed at
the expense of the Company.
SECTION 8.11. SUCCESSION BY MERGER, ETC. Any corporation into which
the Trustee may be merged or converted or with which it may be consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the trust business of the Trustee, shall be the successor
to the Trustee hereunder, provided such corporation shall be eligible under the
provisions of Section 8.08 without the execution or filing of any paper or any
further act on the part of any of the parties hereto.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of
66
<PAGE>
the Notes shall have been authenticated but not delivered, any such successor to
the Trustee may adopt the certificate of authentication of any predecessor
trustee, and deliver such Notes so authenticated; and in case at that time any
of the Notes shall not have been authenticated, any successor to the Trustee
appointed by such successor trustee may authenticate such Notes either in the
name of any predecessor hereunder or in the name of the successor trustee; and
in all such cases such certificates shall have the full force which it is
anywhere in the Notes or in this Indenture provided that the certificate of the
Trustee shall have; PROVIDED, HOWEVER, that the right to adopt the certificate
of authentication of any predecessor Trustee or authenticate Notes in the name
of any predecessor Trustee shall apply only to its successor or successors by
merger, conversion or consolidation.
ARTICLE NINE
CONCERNING THE NOTEHOLDERS
SECTION 9.01. ACTION BY NOTEHOLDERS. Whenever in this Indenture it is
provided that the holders of a specified percentage in aggregate principal
amount at maturity of the Notes may take any action (including the making of any
demand or request, the giving of any notice, consent or waiver or the taking of
any other action), the fact that at the time of taking any such action the
holders of such specified percentage have joined therein may be evidenced (a) by
any instrument or any number of instruments of similar tenor executed by
Noteholders in person or by agent or proxy appointed in writing, or (b) by the
record of the holders of Notes voting in favor thereof at any meeting of
Noteholders duly called and held in accordance with the provisions of Article
Ten, or (c) by a combination of such instrument or instruments and any such
record of such a meeting of Noteholders. Whenever the Company or the Trustee
solicits the taking of any action by the holders of the Notes, the Company or
the Trustee may fix in advance of such solicitation, a date as the record date
for determining holders entitled to take such action. The record date shall be
not more than 15 days prior to the date of commencement of solicitation of such
action.
SECTION 9.02. PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the
provisions of Sections 8.01, 8.02 and 10.05, proof of the execution of any
instrument by a Noteholder or his agent or proxy shall be sufficient if made in
accordance with such reasonable rules and regulations as may be prescribed by
the Trustee or in such manner as shall be satisfactory to the Trustee. The
holding of Notes shall be proved by the registry of such Notes or by a
certificate of the Note registrar.
67
<PAGE>
The record of any Noteholders' meeting shall be proved in the manner
provided in Section 10.06.
SECTION 9.03. WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the
Trustee, any paying agent, any conversion agent and any Note registrar may deem
the person in whose name such Note shall be registered upon the books of the
Company to be, and may treat him as, the absolute owner of such Note (whether or
not such Note shall be overdue and notwithstanding any notation of ownership or
other writing thereon) for the purpose of receiving payment of or on account of
the principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price and interest, if any, in
respect of such Note, for conversion of such Note and for all other purposes;
and neither the Company nor the Trustee nor any paying agent nor any conversion
agent nor any Note registrar shall be affected by any notice to the contrary.
All such payments so made to any holder for the time being, or upon his order,
shall be valid, and, to the extent of the sum or sums so paid, effectual to
satisfy and discharge the liability for monies payable upon any such Note.
SECTION 9.04. COMPANY-OWNED NOTES DISREGARDED. In determining whether
the holders of the requisite aggregate principal amount at maturity of Notes
have concurred in any direction, consent, waiver or other action under this
Indenture, Notes which are owned by the Company or any other obligor on the
Notes or by any person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company or any other obligor on
the Notes shall be disregarded and deemed not to be outstanding for the purpose
of any such determination; PROVIDED that for the purposes of determining whether
the Trustee shall be protected in relying on any such direction, consent, waiver
or other action only Notes which a Responsible Officer knows are so owned shall
be so disregarded. Notes so owned which have been pledged in good faith may be
regarded as outstanding for the purposes of this Section 9.04 if the pledgee
shall establish to the satisfaction of the Trustee the pledgee's right to vote
such Notes and that the pledgee is not the Company, any other obligor on the
Notes or a person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company or any such other obligor. In
the case of a dispute as to such right, any decision by the Trustee taken upon
the advice of counsel shall be full protection to the Trustee. Upon request of
the Trustee, the Company shall furnish to the Trustee promptly an Officers'
Certificate listing and identifying all Notes, if any, known by the Company to
be owned or held by or for the account of any of the above described persons;
and, subject to Section 8.01, the Trustee shall be entitled to accept such
Officers' Certificate as conclusive evidence of the facts
68
<PAGE>
therein set forth and of the fact that all Notes not listed therein are
outstanding for the purpose of any such determinations.
SECTION 9.05. REVOCATION OF CONSENTS; FUTURE HOLDERS BOUND. At any
time prior to (but not after) the evidencing to the Trustee, as provided in
Section 9.01, of the taking of any action by the holders of the percentage in
aggregate principal amount at maturity of the Notes specified in this Indenture
in connection with such action, any holder of a Note which is shown by the
evidence to be included in the Notes the holders of which have consented to such
action may, by filing written notice with the Trustee at its Principal Office
and upon proof of holding as provided in Section 9.02, revoke such action so far
as concerns such Note. Except as aforesaid any such action taken by the holder
of any Note shall be conclusive and binding upon such holder and upon all future
holders and owners of such Note and of any Notes issued in exchange or
substitution therefor, irrespective of whether any notation in regard thereto is
made upon such Note or any Note issued in exchange or substitution therefor.
ARTICLE TEN
NOTEHOLDERS` MEETINGS
SECTION 10.01. PURPOSES OF MEETINGS. A meeting of Noteholders may be
called at any time and from time to time pursuant to the provisions of this
Article Ten for any of the following purposes:
(1) to give any notice to the Company or to the Trustee or to give
any directions to the Trustee, or to consent to the waiving of any default
hereunder and its consequences, or to take any other action authorized to
be taken by Noteholders pursuant to any of the provisions of Article Seven;
(2) to remove the Trustee and nominate a successor trustee pursuant
to the provisions of Article Eight;
(3) to consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Section 11.02; or
(4) to take any other action authorized to be taken by or on behalf
of the holders of any specified aggregate principal amount at maturity of
the Notes under any other provision of this Indenture or under applicable
law.
69
<PAGE>
SECTION 10.02. CALL OF MEETINGS BY TRUSTEE. The Trustee may at any
time call a meeting of Noteholders to take any action specified in Section
10.01, to be held at such time and at such place as the Trustee shall determine.
Notice of every meeting of the Noteholders, setting forth the time and the place
of such meeting and in general terms the action proposed to be taken at such
meeting and the establishment of any record date pursuant to Section 9.01, shall
be mailed to holders of Notes at their addresses as they shall appear on the
registry books of the Company. Such notice shall also be mailed to the Company.
Such notices shall be mailed not less than twenty nor more than ninety days
prior to the date fixed for the meeting.
Any meeting of Noteholders shall be valid without notice if the
holders of all Notes then outstanding are present in person or by proxy or if
notice is waived before or after the meeting by the holders of all Notes
outstanding, and if the Company and the Trustee are either present by duly
authorized representatives or have, before or after the meeting, waived notice.
SECTION 10.03. CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS. In case at
any time the Company, pursuant to a resolution of its Board of Directors, or the
holders of at least ten percent in aggregate principal amount at maturity of the
Notes then outstanding, shall have requested the Trustee to call a meeting of
Noteholders, by written request setting forth in reasonable detail the action
proposed to be taken at the meeting, and the Trustee shall not have mailed the
notice of such meeting within twenty days after receipt of such request, then
the Company or such Noteholders may determine the time and the place for such
meeting and may call such meeting to take any action authorized in Section
10.01, by mailing notice thereof as provided in Section 10.02.
SECTION 10.04. QUALIFICATIONS FOR VOTING. To be entitled to vote at
any meeting of Noteholders a person shall (a) be a holder of one or more Notes
or (b) be a person appointed by an instrument in writing as proxy by a holder of
one or more Notes. The only persons who shall be entitled to be present or to
speak at any meeting of Noteholders shall be the persons entitled to vote at
such meeting and their counsel and any representatives of the Trustee and its
counsel and any representatives of the Company and its counsel.
70
<PAGE>
SECTION 10.05. REGULATIONS. Notwithstanding any other provisions of
this Indenture, the Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Noteholders, in regard to proof of the holding of
Notes and of the appointment of proxies, and in regard to the appointment and
duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters
concerning the conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Noteholders as provided in Section 10.03, in which case the
Company or the Noteholders calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the holders of a majority
in principal amount at maturity of the Notes represented at the meeting and
entitled to vote at the meeting.
Subject to the provisions of Section 9.04, at any meeting each
Noteholder or proxy shall be entitled to one vote for each $1,000 principal
amount at maturity of Notes held or represented by him; PROVIDED, HOWEVER, that
no vote shall be cast or counted at any meeting in respect of any Note
challenged as not outstanding and ruled by the chairman of the meeting to be not
outstanding. The chairman of the meeting shall have no right to vote other than
by virtue of Notes held by him or instruments in writing as aforesaid duly
designating him as the person to vote on behalf of other Noteholders. Any
meeting of Noteholders duly called pursuant to the provisions of Section 10.02
or 10.03 may be adjourned from time to time by a majority of those present,
whether or not constituting a quorum, and the meeting may be held as so
adjourned without further notice.
SECTION 10.06. VOTING. The vote upon any resolution submitted to any
meeting of Noteholders shall be by written ballot on which shall be subscribed
the signatures of the holders of Notes or of their representatives by proxy and
the principal amount at maturity of the Notes held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record in duplicate of
the proceedings of each meeting of Noteholders shall be prepared by the
secretary of the meeting and there shall be attached to said record the original
reports of the inspectors of votes on any vote by ballot taken thereat and
affidavits by one or more persons having knowledge of the facts setting forth a
copy of the
71
<PAGE>
notice of the meeting and showing that said notice was mailed as provided in
Section 10.02. The record shall show the principal amount at maturity of the
Notes voting in favor of or against any resolution. The record shall be signed
and verified by the affidavits of the permanent chairman and secretary of the
meeting and one of the duplicates shall be delivered to the Company and the
other to the Trustee to be preserved by the Trustee, the latter to have attached
thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of
the matters therein stated.
SECTION 10.07. NO DELAY OF RIGHTS BY MEETING. Nothing in this Article
Ten contained shall be deemed or construed to authorize or permit, by reason of
any call of a meeting of Noteholders or any rights expressly or impliedly
conferred hereunder to make such call, any hindrance or delay in the exercise of
any right or rights conferred upon or reserved to the Trustee or to the
Noteholders under any of the provisions of this Indenture or of the Notes.
ARTICLE ELEVEN
SUPPLEMENTAL INDENTURES
SECTION 11.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS.
The Company, when authorized by the resolutions of the Board of Directors, and
the Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto for one or more of the following purposes:
(a) to make provision with respect to the conversion rights of the
holders of Notes pursuant to the requirements of Section 15.06;
(b) subject to Article Four, to convey, transfer, assign, mortgage or
pledge to the Trustee as security for the Notes, any property or assets;
(c) to evidence the succession of another corporation to the Company,
or successive successions, and the assumption by the successor corporation
of the covenants, agreements and obligations of the Company pursuant to
Article Twelve hereof;
(d) to add to the covenants of the Company such further covenants,
restrictions or conditions as the Board of Directors and the Trustee shall
consider to be for the benefit of the holders of Notes, and to make the
occurrence, or the occurrence and continuance, of a
72
<PAGE>
default in any such additional covenants, restrictions or conditions a
default or an Event of Default permitting the enforcement of all or any of
the several remedies provided in this Indenture as herein set forth;
PROVIDED, HOWEVER, that in respect of any such additional covenant,
restriction or condition such supplemental indenture may provide for a
particular period of grace after default (which period may be shorter or
longer than that allowed in the case of other defaults) or may provide for
an immediate enforcement upon such default or may limit the remedies
available to the Trustee upon such default;
(e) to provide for the issuance under this Indenture of Notes in
coupon form (including Notes registrable as to principal only) and to
provide for exchangeability of such Notes with the Notes issued hereunder
in fully registered form and to make all appropriate changes for such
purpose;
(f) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be defective or
inconsistent with any other provision contained herein or in any
supplemental indenture, or to make such other provisions in regard to
matters or questions arising under this Indenture which shall not adversely
affect the interests of the holders of the Notes in any material respect;
(g) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Notes; or
(h) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to effect the qualification of this
Indenture under the Trust Indenture Act, or under any similar federal
statute hereafter enacted.
The Trustee is hereby authorized to join with the Company in the
execution of any such supplemental indenture, to make any further appropriate
agreements and stipulations which may be therein contained and to accept the
conveyance, transfer and assignment of any property thereunder, but the Trustee
shall not be obligated to, but may in its discretion, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this
section 11.01 may be executed by the Company and the Trustee without the consent
of the holders of
73
<PAGE>
any of the Notes at the time outstanding, notwithstanding any of the provisions
of Section 11.02.
SECTION 11.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS.
With the consent (evidenced as provided in Article Nine) of the holders of not
less than 66 2/3% in aggregate principal amount at maturity of the Notes at the
time outstanding, the Company, when authorized by the resolutions of the Board
of Directors, and the Trustee may from time to time and at any time enter into
an indenture or indentures supplemental hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of any supplemental indenture or of modifying in any manner
the rights of the holders of the Notes; PROVIDED, HOWEVER, that no such
supplemental indenture shall (i) extend the fixed maturity of any Note, or
reduce the rate or extend the time of payment of interest thereon, change the
rate of accrual or extend the time of payment in connection with Original Issue
Discount, or reduce the principal amount at maturity thereof, or reduce any
amount payable on redemption thereof or change the obligation of the Company to
make redemption of any Note pursuant to Article Sixteen, or impair or affect the
right of any Noteholder to institute suit for the payment thereof, or make the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price or interest, if any, in
respect thereof payable in any coin or currency other than that provided in the
Notes, or modify the provisions of this Indenture with respect to the
subordination of the Notes in a manner adverse to the Noteholders, or impair the
right to convert the Notes into Common Stock subject to the terms set forth
herein, including Section 15.06, without the consent of the holder of each Note
so affected, or (ii) reduce the aforesaid percentage of Notes, the holders of
which are required to consent to any such supplemental indenture, without the
consent of the holders of all Notes then outstanding.
Upon the request of the Company, accompanied by a copy of the
resolutions of the Board of Directors certified by its Secretary or Assistant
Secretary authorizing the execution of any such supplemental indenture, and upon
the filing with the Trustee of evidence of the consent of Noteholders as
aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustee's
own rights, duties or immunities under this Indenture or otherwise, in which
case the Trustee may in its discretion, but shall not be obligated to, enter
into such supplemental indenture.
It shall not be necessary for the consent of the Noteholders under
this Section 11.02 to approve the particular form of any proposed supplemental
indenture, but it shall be
74
<PAGE>
sufficient if such consent shall approve the substance thereof.
SECTION 11.03. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution
of any supplemental indenture pursuant to the provisions of this Article Eleven,
this Indenture shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitation of rights, obligations, duties
and immunities under this Indenture of the Trustee, the Company and the holders
of Notes shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.
SECTION 11.04. NOTATION ON NOTES. Notes authenticated and delivered
after the execution of any supplemental indenture pursuant to the provisions of
this Article Eleven may bear a notation in form approved by the Trustee as to
any matter provided for in such supplemental indenture. If the Company or the
Trustee shall so determine, new Notes so modified as to conform, in the opinion
of the Trustee and the Board of Directors, to any modification of this Indenture
contained in any such supplemental indenture may be prepared and executed by the
Company, authenticated by the Trustee and delivered in exchange for the Notes
then outstanding, upon surrender of such Notes then outstanding.
SECTION 11.05. EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO
BE FURNISHED TO THE TRUSTEE. The Trustee, subject to the provisions of
Sections 8.01 and 8.02, may receive an Officers' Certificate and an Opinion
of Counsel as conclusive evidence that any supplemental indenture executed
pursuant hereto complies with the requirements of this Article Eleven.
ARTICLE TWELVE
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
SECTION 12.01. COMPANY MAY CONSOLIDATE, ETC., ON CERTAIN TERMS.
Subject to the provisions of Section 12.02, nothing contained in this Indenture
or in any of the Notes shall prevent any consolidation or merger of the Company
with or into any other corporation or corporations (whether or not affiliated
with the Company), or successive consolidations or mergers in which the Company
or its successor or successors shall be a party or parties, or shall prevent any
sale, conveyance or lease (or successive sales, conveyances or leases) of all or
substantially all of the property of the Company, to any other corporation
(whether or not affiliated
75
<PAGE>
with the Company) authorized to acquire and operate the same and which shall be
organized under the laws of a State of the United States or the District of
Columbia; PROVIDED, HOWEVER, and the Company hereby covenants and agrees, that
upon any such consolidation, merger, sale, conveyance or lease, the due and
punctual payment of the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption Price
and interest, if any, in respect of all of the Notes, according to their tenor,
and the due and punctual performance and observance of all of the covenants and
conditions of this Indenture to be performed by the Company, shall be expressly
assumed, by supplemental indenture satisfactory in form to the Trustee, executed
and delivered to the Trustee by the corporation (if other than the Company)
formed by such consolidation, or into which the Company shall have been merged,
or by the corporation which shall have acquired or leased such property, and
such supplemental indenture shall provide for the applicable conversion rights
set forth in Section 15.06.
SECTION 12.02. SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any
such consolidation, merger, sale, conveyance or lease and upon the assumption by
the successor corporation, by supplemental indenture, executed and delivered to
the Trustee and satisfactory in form to the Trustee, of the due and punctual
payment of the principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price and interest, if
any, in respect of all of the Notes and the due and punctual performance of all
of the covenants and conditions of this Indenture to be performed by the
Company, such successor corporation shall succeed to and be substituted for the
Company, with the same effect as if it had been named herein as the party of the
first part. Such successor corporation thereupon may cause to be signed, and may
issue either in its own name or in the name of Chiron Corporation any or all of
the Notes issuable hereunder which theretofore shall not have been signed by the
Company and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Company and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver any Notes which previously shall have been signed and delivered by
the officers of the Company to the Trustee for authentication, and any Notes
which such successor corporation thereafter shall cause to be signed and
delivered to the Trustee for that purpose. All the Notes so issued shall in all
respects have the same legal rank and benefit under this Indenture as the Notes
theretofore or thereafter issued in accordance with the terms of this Indenture
as though all of such Notes had been issued at the date of the execution hereof.
In the event of any such consolidation, merger, sale, conveyance or lease, the
person named as the "Company" in the first paragraph of this
76
<PAGE>
Indenture or any successor which shall thereafter have become such in the manner
prescribed in this Article Twelve may be dissolved, wound up and liquidated at
any time thereafter and such person shall be released from its liabilities as
obligor and maker of the Notes and from its obligations under this Indenture.
In case of any such consolidation, merger, sale, conveyance or lease,
such changes in phraseology and form (but not in substance) may be made in the
Notes thereafter to be issued as may be appropriate.
SECTION 12.03. OPINION OF COUNSEL TO BE GIVEN TRUSTEE. The Trustee,
subject to Sections 8.01 and 8.02, shall receive an Officers' Certificate and an
Opinion of Counsel as conclusive evidence that any such consolidation, merger,
sale, conveyance or lease and any such assumption complies with the provisions
of this Article Twelve.
ARTICLE THIRTEEN
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 13.01. DISCHARGE OF INDENTURE. When (a) the Company shall
deliver to the Trustee for cancellation all Notes theretofore authenticated
(other than any Notes which shall have been destroyed, lost or stolen and in
lieu of or in substitution for which other Notes shall have been authenticated
and delivered) and not theretofore canceled, or (b) all the Notes not
theretofore canceled or delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit with the Trustee, in trust, funds sufficient to pay at
maturity or upon redemption all of the Notes (other than any Notes which shall
have been mutilated, destroyed, lost or stolen and in lieu of or in substitution
for which other Notes shall have been authenticated and delivered) not
theretofore canceled or delivered to the Trustee for cancellation, including
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price and interest, if any, due
or to become due to such date of maturity or redemption date, as the case may
be, and if in either case the Company shall also pay or cause to be paid all
other sums payable hereunder by the Company, then this Indenture shall cease to
be of further effect (except as to (i) remaining rights of registration of
transfer, substitution and exchange and conversion of Notes, (ii) rights
hereunder of Noteholders to receive payments of principal amount at maturity,
Issue Price, accrued Original Issue Discount,
77
<PAGE>
Redemption Price, Fundamental Change Redemption Price and interest, if any, in
respect of the Notes and the other rights, duties and obligations of
Noteholders, as beneficiaries hereof with respect to the amounts, if any, so
deposited with the Trustee and (iii) the rights, obligations and immunities of
the Trustee hereunder), and the Trustee, on demand of the Company accompanied by
an Officers' Certificate and an Opinion of Counsel as required by Section 17.05
and at the cost and expense of the Company, shall execute proper instruments
acknowledging satisfaction of and discharging this Indenture; the Company,
however, hereby agreeing to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred by the Trustee and to compensate the
Trustee for any services thereafter reasonably and properly rendered by the
Trustee in connection with this Indenture or the Notes.
SECTION 13.02. DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE.
Subject to Article Four and Section 13.04, all monies deposited with the Trustee
pursuant to Section 13.01 shall be held in trust and applied by it to the
payment, either directly or through any paying agent (including the Company if
acting as its own paying agent), to the holders of the particular Notes for the
payment or redemption of which such monies have been deposited with the Trustee,
of all sums due and to become due thereon for principal amount at maturity,
Issue Price, accrued Original Issue Discount, Redemption Price, Fundamental
Change Redemption Price and interest, if any.
SECTION 13.03. PAYING AGENT TO REPAY MONIES HELD. Upon the
satisfaction and discharge of this Indenture, all monies then held by any paying
agent of the Notes (other than the Trustee) shall, upon demand of the Company,
be repaid to it or paid to the Trustee, and thereupon such paying agent shall be
released from all further liability with respect to such monies.
SECTION 13.04. RETURN OF UNCLAIMED MONIES. Any monies deposited with
or paid to the Trustee for payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, Fundamental Change
Redemption Price or interest, if any, in respect of Notes and not applied but
remaining unclaimed by the holders of Notes for two years after the date upon
which such amounts shall have become due and payable, shall be repaid to the
Company by the Trustee on demand and all liability of the Trustee shall
thereupon cease with respect to such monies; and the holder of any of the Notes
shall thereafter look only to the Company for any payment which such holder may
be entitled to collect.
78
<PAGE>
ARTICLE FOURTEEN
IMMUNITY OF INCORPORATORS,
STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 14.01. INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No
recourse for the payment of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price and interest, if any, in respect of any Note, or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in this Indenture or in any
supplemental indenture, or in any Note, or because of the creation of any
indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor corporation, either directly or through the Company
or any successor corporation, whether by virtue of any constitution, statute or
rule of law, or by the enforcement of any assessment or penalty or otherwise; it
being expressly understood that all such liability is hereby expressly waived
and released as a condition of, and as a consideration for, the execution of
this Indenture and the issue of the Notes.
ARTICLE FIFTEEN
CONVERSION OF NOTES
SECTION 15.01. RIGHT TO CONVERT. Subject to and upon compliance with
the provisions of this Article, the holder of any Note shall have the right, at
his option, at any time after 60 days following the latest date of original
issuance and prior to the close of business on November 17, 2000 (except that,
with respect to any Note or portion of a Note which shall be called for
redemption such right shall terminate, except as provided in the third paragraph
of Section 15.02, at the close of business on the business day next preceding
the date fixed for redemption of such Note or portion of a Note and such right
shall terminate with respect to any Note or portion thereof subject to a duly
completed and delivered election for redemption pursuant to Article Sixteen,
unless in each case the Company shall default in payment due upon redemption or
redemption thereof) to convert the principal amount at maturity of any such
Note, or any portion of such principal amount at maturity which is $1,000 or a
multiple thereof, into that number of fully paid and non-assessable shares of
Common Stock (as such shares shall then be constituted) obtained by dividing the
principal amount at maturity of the Note or portion thereof surrendered for
conversion by $1,000 and multiplying the result so obtained by the Conversion
Rate in effect at such time, by surrender of
79
<PAGE>
the Note so to be converted in whole or in part in the manner provided in
Section 15.02. A holder of Notes is not entitled to any rights of a holder of
Common Stock until such holder has converted his Notes.
SECTION 15.02. EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON
STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to
exercise the conversion privilege, the holder of any Note to be converted in
whole or in part shall surrender such Note at an office or agency maintained by
the Company pursuant to Section 5.02, accompanied by the funds, if any, required
by the last paragraph of this Section, and shall give written notice of
conversion in the form provided on the Notes (or such other notice which is
acceptable to the Company) to the Company at such office or agency that the
holder elects to convert such Note or the portion thereof specified in said
notice. Such notice shall also state the name or names (with address) in which
the certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued, and shall be accompanied by
transfer taxes, if required pursuant to Section 15.07. Each Note surrendered for
conversion shall, unless the shares issuable on conversion are to be issued in
the same name as the registration of such Note, be duly endorsed by, or be
accompanied by instruments of transfer in form satisfactory to the Company duly
executed by, the holder or his duly authorized attorney.
As promptly as practicable after the surrender of such Note and the
receipt of such notice and funds, if any, as aforesaid, the Company shall issue
and shall deliver at such office or agency to such holder, or on his written
order, a certificate or certificates for the number of full shares issuable upon
the conversion of such Note or portion thereof in accordance with the provisions
of this Article and a check or cash in respect of any fractional interest in
respect of a share of Common Stock arising upon such conversion, as provided in
Section 15.03. In case any Note of a denomination greater than $1,000 principal
amount at maturity shall be surrendered for partial conversion, and subject to
Section 2.03, the Company shall execute and the Trustee shall authenticate and
deliver to or upon the written order of the holder of the Note so surrendered,
without charge to him, a new Note or Notes in authorized denominations in an
aggregate principal amount at maturity equal to the unconverted portion of the
surrendered Note.
Each conversion shall be deemed to have been effected on the date on
which such Note shall have been surrendered (accompanied by the funds, if any,
required by the last paragraph of this Section) and such notice shall have been
received by the Company, as aforesaid, and the person in whose name any
certificate or certificates for shares of
80
<PAGE>
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder of record of the shares represented thereby;
PROVIDED, HOWEVER, that any such surrender on any date when the stock transfer
books of the Company shall be closed shall constitute the person in whose name
the certificates are to be issued as the record holder thereof for all purposes
on the next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Rate in effect on the date upon which such
Note shall have been surrendered.
Except as described in this Section, holders of the Notes will not be
entitled to any payment or adjustment on account of accrued Original Issue
Discount or accrued and unpaid interest upon conversion of the Notes. The
Company's delivery of the fixed number of shares of Common Stock into which the
Notes are convertible will be deemed to satisfy the Company's obligation to pay
the principal amount at maturity of the Notes and all accrued interest and
Original Issue Discount that has not previously been (or is not simultaneously
being) paid. The Common Stock is treated as issued first in payment of accrued
interest and Original Issue Discount and then in payment or principal.
Any Note or portion thereof surrendered for conversion during the
period from the close of business on the record date for any interest payment
date to the opening of business on such interest payment date shall (unless such
Note or portion thereof being converted shall have been called for redemption on
a date in such period) be accompanied by payment, in New York Clearing House
funds of an amount equal to the interest otherwise payable on such interest
payment date on the principal amount at maturity being converted; PROVIDED,
HOWEVER, that no such payment need be made if there shall exist at the time of
conversion a default in the payment of interest on the Notes; PROVIDED FURTHER,
HOWEVER, that no such payment shall be required in respect of any Note or
portion thereof being called for redemption by the Company on November 17, 1996.
An amount equal to such payment (or, in the case of a redemption by the Company
on November 17, 1996, equal to the interest otherwise payable on such date)
shall be paid by the Company on such interest payment date to the holder of such
Note at the close of business on such record date; PROVIDED, HOWEVER, that if
the Company shall default in the payment of interest on such interest payment
date, such amount shall be paid to the person who made such required payment or,
in the case of a redemption by the Company on November 17, 1996, to the person
who converted such Note. Except as provided above in this Section, no adjustment
shall be made for Original Issue Discount or interest accrued on any Note
converted or for dividends on any shares issued upon the conversion of such Note
as provided in this Article.
81
<PAGE>
SECTION 15.03. CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No
fractional shares of Common Stock or scrip representing fractional shares shall
be issued upon conversion of Notes. If more than one Note shall be surrendered
for conversion at one time by the same holder, the number of full shares which
shall be issuable upon conversion shall be computed on the basis of the
aggregate principal amount at maturity of the Notes (or specified portions
thereof to the extent permitted hereby) so surrendered. If any fractional share
of stock would be issuable upon the conversion of any Note or Notes, the Company
shall make an adjustment therefor in cash at the current market value thereof.
For these purposes, the current market value of a share of Common Stock shall be
the last reported sale price on the first day (which is not a Legal Holiday as
defined in Section 17.06) immediately preceding the day on which the Notes (or
specified portions thereof) are deemed to have been converted and such last
reported sale price shall be determined as provided in subsection (f) of Section
15.05.
SECTION 15.04. CONVERSION RATE. The Conversion Rate shall be as
specified in the form of Note hereinabove set forth, subject to adjustment as
provided in this Article.
SECTION 15.05. ADJUSTMENT OF CONVERSION RATE. The Conversion Rate
shall be adjusted from time to time by the Company as follows:
(a) In case the Company shall (i) pay a dividend, or make a
distribution, in shares of its Common Stock, on its Common Stock, (ii)
subdivide its outstanding Common Stock into a greater number of shares, or
(iii) combine its outstanding Common Stock into a smaller number of shares,
the Conversion Rate in effect immediately prior thereto shall be adjusted
so that the holder of any Note thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock of the Company
which he would have owned or have been entitled to receive after the
happening of any of the events described above had such Note been converted
immediately prior to the happening of such event. An adjustment made
pursuant to this subsection (a) shall become effective immediately after
the record date in the case of a dividend and shall become effective
immediately after the effective date in the case of subdivision or
combination.
(b) In case the Company shall issue rights or warrants to all holders
of its Common Stock entitling them (for a period expiring within 45 days
after the record date mentioned below) to subscribe for or purchase Common
Stock at a price per share less than the Current Market Price per share of
Common Stock (as defined in subsection (f) below) at the record date for
the
82
<PAGE>
determination of stockholders entitled to receive such rights or warrants,
the Conversion Rate in effect immediately prior thereto shall be adjusted
so that the same shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to the date of issuance of such
rights or warrants by a fraction of which the denominator shall be the
number of shares of Common Stock outstanding on the date of issuance of
such rights or warrants plus the number of shares which the aggregate
offering price of the total number of shares so offered would purchase at
such Current Market Price, and of which the numerator shall be the number
of shares of Common Stock outstanding on the date of issuance of such
rights or warrants plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall be made
successively whenever any such rights or warrants are issued, and shall
become effective immediately after such record date. In determining whether
any rights or warrants entitle the holders to subscribe for or purchase
shares of Common Stock at less than such Current Market Price, and in
determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received by the Company
for such rights or warrants, the value of such consideration, if other than
cash, to be determined by the Board of Directors.
(c) In case the Company shall distribute to all holders of its Common
Stock any shares of any class of capital stock of the Company (other than
Common Stock) or evidences of its indebtedness or assets (excluding cash
dividends or other distributions to the extent paid from retained earnings
of the Company) or rights or warrants to subscribe for or purchase any of
its securities (excluding those referred to in subsection (b) above), then
in each such case the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by multiplying the Conversion Rate in
effect immediately prior to the date of such distribution by a fraction of
which the denominator shall be the Current Market Price per share (as
defined in subsection (f) below) of the Common Stock on the record date
mentioned below less the fair market value on such record date (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive, and described in a certificate filed with the Trustee)
of the portion of the capital stock or assets or evidences of indebtedness
so distributed or of such rights or warrants applicable to one share of
Common Stock, and the numerator shall be the Current Market Price per share
(as defined in subsection (f) below) of the Common Stock on such record
date. Such adjustment shall become effective immediately after the
83
<PAGE>
record date for the determination of shareholders entitled to receive such
distribution.
(d) In case the Company shall, by dividend or otherwise, distribute
to all holders of its Common Stock cash (excluding (x) any quarterly cash
dividend on the Common Stock to the extent the aggregate cash dividend per
share of Common Stock in any fiscal quarter does not exceed the greater of
(A) the amount per share of Common Stock of the next preceding quarterly
cash dividend on the Common Stock to the extent such preceding quarterly
dividend did not require any adjustment of the Conversion Rate pursuant to
this Section 15.05(d) (as adjusted to reflect subdivisions or combinations
of the Common Stock), and (B) 3.75% of the average of the last reported
sales price of the Common Stock (determined as provided in Section
15.05(f)) during the ten Trading Days (as defined in Section 15.05(f)) next
preceding the date of declaration of such dividend and (y) any dividend or
distribution in connection with the liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary), then, in such case,
unless the Company elects to reserve such cash for distribution to the
holders of the Notes upon the conversion of the Notes so that any such
holder converting Notes will receive upon such conversion, in addition to
the shares of Common Stock to which such holder is entitled, the amount of
cash which such holder would have received if such holder had, immediately
prior to the record date for such distribution of cash, converted its Notes
into Common Stock, the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by multiplying the Conversion Rate in
effect immediately prior to the record date by a fraction of which the
denominator shall be the Current Market Price of the Common Stock on the
record date less the amount of cash so distributed (and not excluded as
provided above) applicable to one share of Common Stock and the numerator
shall be such Current Market Price of the Common Stock, such adjusted to be
effective immediately prior to the opening of business on the day following
the record date; PROVIDED, HOWEVER, that in the event the portion of the
cash so distributed applicable to one share of Common Stock is equal to or
greater than the Current Market Price of the Common Stock on the record
date, in lieu of the foregoing adjustment, adequate provision shall be made
so that each Noteholder shall have the right to receive upon conversion the
amount of cash such holder would have received had such holder converted
each Note on the record date. If such dividend or distribution is not so
paid or made, the Conversion Rate shall again be adjusted to be the
Conversion Rate which would then be in effect if such dividend or
distribution had not been declared.
84
<PAGE>
(e) In case a tender or exchange offer made by the Company or any
subsidiary of the Company for all or any portion of the Common Stock shall
expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per share of Common Stock
having a fair market value (as determined by the Board of Directors or, to
the extent permitted by applicable law, a duly authorized committee
thereof, whose determination shall be conclusive, and described in a
resolution of the Board of Directors or such duly authorized committee
thereof, as the case may be, at the last time (the "Expiration Time")
tenders or exchanges may be made pursuant to such tender or exchange offer
(as it shall have been amended) that exceeds the Current Market Price of
the Common Stock on the Trading Day next succeeding the Expiration Time,
the Conversion Rate shall be adjusted so that the same shall equal the rate
determined by multiplying the Conversion Rate in effect immediately prior
to the Expiration Time by a fraction of which the denominator shall be the
number of shares of Common Stock outstanding (including any tendered or
exchanged shares) on the Expiration Time multiplied by the Current Market
Price of the Common Stock on the Trading Day next succeeding the Expiration
Time and the numerator shall be sum of (x) the fair market value
(determined as aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed so
accepted up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on Expiration Time and the Current
Market Price of the Common Stock on the Trading Day next succeeding the
Expiration Time, such reduction to become effective immediately prior to
the opening of business on the day following the Expiration Time. If the
Company is obligated to purchase shares pursuant to any such tender or
exchange offer, but the Company is permanently prevented by applicable law
from effecting any such purchases or all such purchases are rescinded, the
Conversion Rate shall again be adjusted to be the Conversion Rate which
would then be effect if such tender or exchange offer had not been made.
(f) For the purpose of any computation under subsections (b), (c),
(d) and (e) above, the Current Market Price per share of Common Stock at
any date shall be deemed to be the average of the last reported sale prices
for the ten consecutive Trading Days (as defined below) preceding the day
before the record date with respect to any distribution, issuance or other
event
85
<PAGE>
requiring such computation. The last reported sale price for each day shall
be (i) the last reported sale price of Common Stock on the National Market
of the NASDAQ System, or any similar system of automated dissemination of
quotations of securities prices then in common use, if so quoted, or (ii)
if not quoted as described in clause (i), the mean between the high bid and
low asked quotations for Common Stock as reported by the National Quotation
Bureau Incorporated if at least two securities dealers have inserted both
bid and asked quotations for such class of stock on at least 5 of the 10
preceding days, or (iii) if the Common Stock is listed or admitted for
trading on any national securities exchange, the last sale price, or the
closing bid price if no sale occurred, of such class of stock on the
principal securities exchange on which such class of stock is listed. If
the Common Stock is quoted on a national securities or central market
system, in lieu of a market or quotation system described above, the last
reported sale price shall be determined in the manner set forth in clause
(ii) of the preceding sentence if bid and asked quotations are reported but
actual transactions are not, and in the manner set forth in clause (iii) of
the preceding sentence if actual transactions are reported. If none of the
conditions set forth above is met, the last reported sale price of Common
Stock on any day or the average of such last reported sale prices for any
period shall be the fair market value of such class of stock as determined
by a member firm of the New York Stock Exchange, Inc. selected by the
Company. As used herein the term "Trading Days" with respect to Common
Stock means (i) if the Common Stock is quoted on the National Market of the
NASDAQ System or any similar system of automated dissemination of
quotations of securities prices, days on which trades may be made on such
system or (ii) if the Common Stock is listed or admitted for trading on any
national securities exchange, days on which such national securities
exchange is open for business.
(g) Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase
shares of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"):
(i) are deemed to be transferred with such shares of Common
Stock,
(ii) are not exercisable, and
86
<PAGE>
(iii) are also issued in respect of future issuances of Common
Stock,
shall not be deemed distributed for purposes of Section 15.05(a) until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect
thereto, that shall have resulted in an adjustment to the Conversion Rate
under Section 15.05(a), (1) in the case of any such rights or warrants
which shall all have been redeemed or repurchased without exercise by any
holders thereof, the Conversion Rate shall be readjusted upon such final
redemption or repurchase to give effect to such distribution or Trigger
Event, as the case may be, as though it were a cash distribution, equal to
the per share redemption or repurchase price received by a holder of Common
Stock with respect to such rights or warrants (assuming such holder had
retained such rights or warrants), made to all holders of Common Stock as
of the date of such redemption or repurchase, and (2) in the case of any
such rights or warrants all of which shall have expired without exercise by
any holder thereof, the Conversion Rate shall be readjusted as if such
issuance had not occurred.
(h) No adjustment in the Conversion Rate shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such rate; PROVIDED, HOWEVER, that any adjustments which by reason of this
subsection (h) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this Article Fifteen shall be made by the Company and shall be made to the
nearest cent or to the nearest one hundredth of a share, as the case may
be. Anything in this Section 15.05 to the contrary notwithstanding, the
Company shall be entitled to make such increases in the Conversion Rate, in
addition to those required by this Section 15.05, as it in its discretion
shall determine to be advisable in order that any stock dividends,
subdivision of shares, distribution of rights to purchase stock or
securities, or a distribution of securities convertible into or
exchangeable for stock hereafter made by the Company to its stockholders
shall not be taxable. To the extent permitted by applicable law, the
Company from time to time may increase the Conversion Rate by any amount
for any period of time if the period is at least 20 days, the increase is
irrevocable during the period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the
Company, which determination shall be conclusive. Whenever the Conversion
Rate is so increased, the Company shall mail to Noteholders and file with
the Trustee and the
87
<PAGE>
Conversion Agent a notice of the increase. The Company shall mail the
notice at least 15 days before the date the increased Conversion Rate takes
effect. The notice shall state the increased Conversion Rate and the period
it will be in effect.
(i) Whenever the Conversion Rate is adjusted, as herein provided, the
Company shall promptly file with the Trustee and any conversion agent other
than the Trustee an Officers' Certificate setting forth the Conversion Rate
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment. Promptly after delivery of such certificate, the
Company shall prepare a notice of such adjustment of the Conversion Rate
setting forth the adjusted Conversion Rate and the date on which such
adjustment becomes effective and shall mail such notice of such adjustment
of the Conversion Rate to the holder of each Note at his last address
appearing on the Note register provided for in Section 2.05 of this
Indenture.
(j) In any case in which this Section 15.05 provides that an
adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event (i) issuing
to the holder of any Note converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable
upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash
in lieu of any fraction pursuant to Section 15.03.
SECTION 15.06. EFFECT OF RECLASSIFICATION, CONSOLIDATION. MERGER
OR SALE. If any of the following events occur, namely (i) any reclassification
or change of outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
or (iii) any sale or conveyance of the properties and assets of the Company as,
or substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, then the Company or the successor or purchasing corporation, as
the case may be, shall execute with the Trustee a supplemental indenture
providing that each Note
88
<PAGE>
shall be convertible into the kind and amount of shares of stock and other
securities or property or assets (including cash) receivable upon such
reclassification, change, consolidation, merger, combination, sale or conveyance
by a holder of a number of shares of Common Stock issuable upon conversion of
such Notes immediately prior to such reclassification, change, consolidation,
merger, combination, sale or conveyance. Such supplemental indenture shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article.
The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each holder of Notes, at his address appearing on the
Note register provided for in Section 2.05 of this Indenture.
The above provisions of this Section shall similarly apply to
successive reclassifications, consolidations, mergers, combinations, and sales.
SECTION 15.07. TAXES ON SHARES ISSUED. The issue of stock certificates
on conversions of Notes shall be made without charge to the converting
Noteholder for any U.S. tax in respect of the issue thereof. The Company shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of stock in any name other than that
of the holder of any Note converted, and the Company shall not be required to
issue or deliver any such stock certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
SECTION 15.08. RESERVATION OF SHARES; SHARES TO BE FULLY PAID;
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK. The Company
shall provide, free from preemptive rights, out of its authorized but unissued
shares, sufficient shares to provide for the conversion of the Notes from time
to time as such Notes are presented for conversion.
Before taking any action which would cause an adjustment increasing
the Conversion Rate so that the shares of Common Stock issuable upon conversion
of the Notes would be issued for less than the par value of such Common Stock,
the Company will take all corporate action which may be necessary in order that
the Company may validly and legally issue fully paid and nonassessable shares of
such Common Stock at such adjusted Conversion Rate.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Notes will upon issue be fully paid and nonassessable
by the Company and free
89
<PAGE>
from all taxes, liens and charges with respect to the issue thereof.
The Company covenants that if any shares of Common Stock to be
provided for the purpose of conversion of Notes hereunder require registration
with or approval of any governmental authority under any Federal or State law
before such shares may be validly issued upon conversion, the Company will in
good faith and as expeditiously as possible endeavor to secure such registration
or approval, as the case may be.
The Company further covenants that if at any time the Common Stock
shall be listed on the New York Stock Exchange or any other national securities
exchange the Company will, if permitted by the rules of such exchange, list and
keep listed so long as the Common Stock shall be so listed on such exchange, all
Common Stock issuable upon conversion of the Notes.
SECTION 15.09. RESPONSIBILITY OF TRUSTEE. The Trustee and any other
conversion agent shall not at any time be under any duty or responsibility to
any holder of Notes to determine whether any facts exist which may require any
adjustment of the Conversion Rate or with respect to the nature or extent or
calculation of any such adjustment when made, or with respect to the method
employed, or herein or in any supplemental indenture provided to be employed, in
making the same. The Trustee and any other conversion agent shall not be
accountable with respect to the validity or value (or the kind or amount) of any
shares of Common Stock, or of any securities or property, which may at any time
be issued or delivered upon the conversion of any Note; and the Trustee and any
other conversion agent make no representations with respect thereto. Subject to
the provisions of Section 8.01, neither the Trustee nor any conversion agent
shall be responsible for any failure of the Company to issue, transfer or
deliver any shares of Common Stock or stock certificates or other securities or
property or cash upon the surrender of any Note for the purpose of conversion or
to comply with any of the duties, responsibilities or covenants of the Company
contained in this Article. Without limiting the generality of the foregoing,
neither the Trustee nor any conversion agent shall be under any responsibility
to determine the correctness of any provisions contained in any supplemental
indenture entered into pursuant to Section 15.06 relating either to the kind or
amount of shares of stock or securities or property (including cash) receivable
by Noteholders upon the conversion of their Notes after any event referred to in
such Section 15.06 or to any adjustment to be made with respect thereto, but,
subject to the provisions of Section 8.01 may accept as conclusive evidence of
the correctness of any such provisions, and shall be protected in relying upon,
the Officers' Certificate (which the Company shall be obligated to file with
90
<PAGE>
the Trustee prior to the execution of any such supplemental indenture) with
respect thereto.
SECTION 15.10. NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case:
(a) the Company shall declare a dividend (or any other distribution)
on its Common Stock (other than in cash out of retained earnings); or
(b) the Company shall authorize the granting to the holders of its
Common Stock of rights or warrants to subscribe for or purchase any share
of any class or any other rights or warrants; or
(c) of any reclassification of the Common Stock of the Company (other
than a subdivision or combination of its outstanding Common Stock, or a
change in par value, or from par value to no par value, or from no par
value to par value), or of any consolidation or merger to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
the Company shall cause to be filed with the Trustee and to be mailed to each
holder of Notes at his address appearing on the Note register, provided for in
Section 2.05 of this Indenture, as promptly as possible but in any event at
least fifteen days prior to the applicable date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution or rights are to be determined, or (y) the date
on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become effective or occur,
and the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of such
dividend, distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up.
91
<PAGE>
ARTICLE SIXTEEN
REDEMPTION OF NOTES AT OPTION OF HOLDERS
SECTION 16.01. OPTION TO ELECT REDEMPTION UPON A FUNDAMENTAL CHANGE.
(a) If a Fundamental Change shall occur at any time prior to November 17, 2000,
each holder of Notes shall have the right, at such holder's option, to require
the Company to redeem any or all of such holder's Notes on the date (the
"Fundamental Change Redemption Date") (or if such date is not a business day,
the next succeeding business day) that is 30 days after the date of the
Company's notice of such Fundamental Change. Any redemption of such holder's
Notes in part shall be in the amount of $1,000 principal amount at maturity or
any multiple thereof. Such redemption shall be made at the applicable
Redemption Price set forth in the form of Note; provided that, with respect to a
Fundamental Change, if the Applicable Price is less than the Reference Market
Price, the Company shall redeem such Notes at a price equal to the foregoing
Redemption Price multiplied by the fraction obtained by dividing the Applicable
Price by the Reference Market Price. In each case, the Company shall also pay
accrued interest, if any, on such Notes to the Fundamental Change Redemption
Date; provided that if such Fundamental Change Redemption Date is between a May
1 and the next succeeding May 17 or between a November 1 and the next succeeding
November 17, then the interest payable on such date shall be paid to the holder
of record of the Note on the next preceding May 1 or November 1. The Company
shall mail to all holders of record of the Notes a notice of the occurrence of a
Fundamental Change and of the redemption right arising as a result thereof on or
before the 10th day after the occurrence of such Fundamental Change. The Company
shall promptly furnish the Trustee a copy of such notice.
(b) For a Note to be so redeemed at the option of the holder, the
Company must receive at the office or agency of the Company maintained for that
purpose in New York, New York such Note with the form entitled "Option to Elect
Redemption Upon a Fundamental Change" on the reverse thereof (a "Fundamental
Change Redemption Notice") duly completed, together with such Notes duly
endorsed for transfer, on or before the 30th day after the date of such notice
(or if such 30th day is not a business day, the immediately preceding business
day). All questions as to the validity, eligibility (including time of receipt),
withdrawal and acceptance of any Note for redemption shall be determined by the
Company, whose determination shall be final and binding.
92
<PAGE>
A Fundamental Change Redemption Notice may be withdrawn by means of a
written notice of withdrawal delivered to the office of the Trustee at any time
prior to the close of business on the Fundamental Change Redemption Date to
which it relates specifying:
(1) the certificate number of the Note in respect of which such
notice of withdrawal is being submitted,
(2) the principal amount at maturity of the Note with respect to
which such notice of withdrawal is being submitted, and
(3) the principal amount at maturity, if any, of such Note which
remains subject to the original Fundamental Change Redemption Notice and
which has been or will be delivered for redemption by the Company.
SECTION 16.02. DEPOSIT OF FUNDS FOR REDEMPTION. On or prior to the
date any Note is required to be paid pursuant to Section 16.02, the Company will
deposit with the Trustee or with one or more paying agents (or, if the Company
is acting as its own paying agent, set aside, segregate and hold in trust as
provided in Section 5.04) an amount of money sufficient to redeem on the
applicable Fundamental Change Redemption Date all the Notes to be repaid on such
date at the appropriate Redemption Price, together with accrued interest to the
date fixed for redemption.
ARTICLE SEVENTEEN
MISCELLANEOUS PROVISIONS
SECTION 17.01. PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the
covenants, stipulations, promises and agreements in this Indenture contained by
the Company shall bind its successors and assigns whether so expressed or not.
SECTION 17.02. OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any act or
proceeding by any provision of this Indenture authorized or required to be done
or performed by any board, committee or officer of the Company shall and may be
done and performed with like force and effect by the like board, committee or
officer of any corporation that shall at the time be the lawful sole successor
of the Company.
93
<PAGE>
SECTION 17.03. ADDRESSES FOR NOTICES, ETC. Any notice or demand which
by any provision of this Indenture is required or permitted to be given or
served by the Trustee or by the holders of Notes on the Company may be given or
served by being deposited postage prepaid by registered or certified mail in a
post office letter box addressed (until another address is filed by the Company
with the Trustee) to:
Chiron Corporation
4560 Horton Street
Emeryville, California 94608
Attention: Chief Financial Officer
Telephone Number: (510) 655-8730
Any notice, direction, request or demand hereunder to or upon the Trustee shall
be deemed to have been sufficiently given or made, for all purposes, if given or
made in writing at the Principal Office of the Trustee, which office is, at the
date as of which this Indenture is dated, located at:
The First National Bank of Boston
Blue Hills Office Park
150 Royall Street
Canton, Massachusetts 02021
Attention: Corporate Trust Division
Mail Stop 45-02-15
(Chiron Corporation, 1.90% Convertible
Subordinated Notes due 2000)
Telephone Number: (617) 575-2000
Facsimile Number: (617) 575-2078
SECTION 17.04. GOVERNING LAW. This Indenture and each Note shall be
deemed to be a contract made under the laws of New York, and for all purposes
shall be construed in accordance with the laws of New York.
SECTION 17.05. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT;
CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the
Trustee to take any action under any of the provisions of this Indenture, the
Company shall furnish to the Trustee an Officers' Certificate stating that all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been complied with and an Opinion of Counsel stating that,
in the opinion of such counsel, all such conditions precedent have been complied
with.
94
<PAGE>
SECTION 17.06. LEGAL HOLIDAYS. In any case where the date of maturity
of interest on or principal of the Notes or the date fixed for redemption or
repayment of any Note will be a legal holiday or a day on which banking
institutions in New York, New York are authorized by law or executive order to
close ("Legal Holidays"), then payment of such interest on or principal of the
Notes need not be made on such date but may be made on the next succeeding day
not a Legal Holiday with the same force and effect as if made on the date of
maturity or the date fixed for redemption or repayment and no interest shall
accrue for the period from and after such date.
SECTION 17.07. NO SECURITY INTEREST CREATED. Nothing in this Indenture
or in the Notes, expressed or implied, shall be construed to constitute a
security interest under the Uniform Commercial Code or similar legislation, as
now or hereafter enacted and in effect, in any jurisdiction where property of
the Company or its subsidiaries is located.
SECTION 17.08. BENEFITS OF INDENTURE. Nothing in this Indenture or in
the Notes, express or implied, shall give to any person, other than the parties
hereto, any paying agent, any Note registrar and their successors hereunder, the
holders of Notes and the holders of Senior Indebtedness, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
SECTION 17.09. TABLE OF CONTENTS, HEADINGS, ETC. The table of
contents and the titles and headings of the articles and sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
SECTION 17.10. EXECUTION IN COUNTERPARTS. This Indenture may be
executed in any number of counterparts, each of which shall be an original, but
such counterparts shall together constitute but one and the same instrument.
The First National Bank of Boston hereby accepts the trusts in this
Indenture declared and provided, upon the terms and conditions hereinabove set
forth.
95
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly signed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first written above.
CHIRON CORPORATION
By: /s/ [ILLEGIBLE]
------------------------------
Chief Financial Officer
Attest:
/s/ [ILLEGIBLE]
- ------------------------------
Title: Secretary
[Seal]
THE FIRST NATIONAL BANK OF BOSTON
By:
------------------------------
Attest:
- ------------------------------
Title:
<PAGE>
State of California
SS.
County of Alameda
On November 16, 1993 before me, Kay E. Robertson, Notary Public, personally
appeared Dennis L. Winger, known to me to be the person whose name is subscribed
to the within instrument and acknowledged that he executed the same in his
authorized capacity and that by his signature on the instrument the person or
the entity upon behalf of which the person acted, executed the instrument.
OFFICIAL SEAL
[SEAL] KAY E. ROBERTSON
NOTARY PUBLIC - CALIFORNIA
WITNESS my hand and official seal ALAMEDA COUNTY
My Comm. Expires: Feb. 19, 1994
/s/ K. E. Robertson
- ---------------------------------- L.S.
Notary's signature
My Commission Expires: 2/19/94
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly signed, and their respective corporate seals to be hereunto affixed and
attested, all as of the date first written above.
CHIRON CORPORATION
By:
-----------------------------------
Chief Financial Officer
Attest:
- -----------------------------------
Title:
[Seal]
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ K. Caldwell
-----------------------------------
Senior Account Administrator
Attest:
/s/ [ILLEGIBLE]
- -----------------------------------
Title: ASSISTANT CASHIER
<PAGE>
COMMONWEALTH OF MASSACHUSETTS )
) ss.:
COUNTY OF )
On the ___ day of November, 1993 before me personally came Kelly
Caldwell, to me known, who, being by me duly sworn did depose and say that she
resides at 150 Royall St Canton Ma that she is a Sr. Acct. Administrator of The
First National Bank of Boston, one of the corporations described in and which
executed the above instrument; that he knows the corporate seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by the authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
/s/ [ILLEGIBLE]
------------------------------
Notary Public
My Commission Expires 9/27/96
[Seal]
<PAGE>
EXHIBIT 10.203
CONFIDENTIAL TREATMENT
REGULATORY FILING,
DEVELOPMENT AND SUPPLY AGREEMENT
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
<PAGE>
TABLE OF CONTENTS
PARTIES 1
BACKGROUND 1
ARTICLE I-DEFINITIONS 1
ARTICLE II-PRODUCT DEVELOPMENT COMMITTEE 7
ARTICLE III-NEW DEVELOPMENTS 9
ARTICLE IV-EXPANSION OF PRODUCTION CAPACITY 11
ARTICLE V-NON-CHIRON SUPPLY OF BETASERON 12
ARTICLE VI-CLINICAL AND REGULATORY DEVELOPMENT 12
ARTICLE VII-SUPPLY OF PRODUCT 14
ARTICLE VIII-PROCESSING AND MANUFACTURING 21
ARTICLE IX-PAYMENTS 25
ARTICLE X-REPORTS AND BOOKS 30
ARTICLE XI-RIGHTS IN PRODUCT TECHNOLOGY 31
ARTICLE XII-THIRD-PARTY PATENTS 33
ARTICLE XIII-INDEMNIFICATION AND WARRANTIES 35
ARTICLE XIV-TERM, TERMINATION, AND EXPIRATION 38
ARTICLE XV-PRODUCT RECALL 42
ARTICLE XVI-CONFIDENTIALITY 43
ARTICLE XVII-MISCELLANEOUS 44
EXHIBIT 4.1-TARGET CAPACITIES AND
DEVELOPMENT AND MARKETING PLAN 49
EXHIBIT 7.10-NON-BINDING FORECAST 51
EXHIBIT 7.11-INITIAL PURCHASE ORDER 52
EXHIBIT 10.4-CHIRON COST OF GOODS 53
EXHIBIT 1.7.3-RELEASE SPECIFICATIONS (Attachment)
<PAGE>
THIS AGREEMENT is made and entered into as of the 10th day of May, 1993
(hereinafter the "Effective Date") by and between the below-named Parties.
PARTIES
A. Chiron Corporation ("Chiron") is a Delaware corporation having a
principal place of business at 4560 Horton Street, Emeryville, California 94608.
Cetus Oncology Corporation ("Cetus") is a Delaware corporation wholly owned by
Chiron. Prior to its acquisition by Chiron, Cetus Oncology Corporation was named
Cetus Corporation.
B. Schering AG ("Schering") is a German company having a principal place
of business at Mullerstrasse 170-178, W-1000 Berlin 65, Germany.
C. Each of Chiron and Cetus, on the one hand, and Schering, on the other
hand, is referred to herein as a "Party", and collectively as the "Parties".
BACKGROUND
A. Pursuant to that certain Technology Ownership and Royalty Agreement
between Cetus and Berlex Laboratories, Inc. ("Berlex"), a Delaware corporation
and a wholly-owned subsidiary of Schering, dated as of August 9, 1991, as
amended (the "Ownership Agreement"), Cetus conveyed Technology and Patents and
certain other assets and rights of the former Tritus Partnership to Berlex and
granted licenses to Berlex concerning Mixed Patents and Mixed Technology.
B. Pursuant to that certain Betaseron Regulatory Filing, Supply
Agreement and Lease (the "Old Supply Agreement") between Cetus and Berlex
dated August 9, 1991, Cetus and Berlex agreed, among other things, that Cetus
would supply quantities of Betaseron exclusively to Berlex in order for
Berlex to sponsor the clinical testing and commercialization of Betaseron.
C. Based upon the mutual expectation of Chiron and Schering as to the
expanded market demand for Betaseron, Cetus and Berlex have agreed to terminate
the Old Supply Agreement as of the date hereof, and Chiron, Cetus and Schering
have agreed to enter into this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual promises
contained herein, the Parties hereby agree as follows:
ARTICLE I - DEFINITIONS
The following capitalized terms shall have the following meanings. The
definitions set out in the Ownership Agreement are incorporated herein by
reference and shall apply to capitalized terms not elsewhere defined herein
unless the context clearly requires otherwise.
1.1 "Acid Paste" shall mean IFN Acid Precipitate, as further defined in and
produced according to the Beta Specifications.
Page 1
<PAGE>
1.2 "Acts" shall mean the Federal Food, Drug and Cosmetic Act (21 U.S.C.
301-392) and the Public Health Service Act (42 U.S.C. 262-263) and the
regulations and policies developed by the FDA pursuant thereto and, to the
extent applicable, any equivalent foreign laws.
1.3 "Affiliate" shall mean any person or entity which directly or indirectly
controls, is controlled by or is under common control with a specified
person. Control shall be deemed present where an entity owns at least fifty
percent (or such lesser percentage which is the maximum allowed to be owned
by an entity in a particular jurisdiction) of the voting stock or equity
interest in another entity.
1.4 "Allocated Supply Cost" shall mean the amount paid by Schering for
Betaseron supplied to Schering by BI pursuant to the BI Agreement or by
other parties (including Schering but excluding Chiron, its Affiliates,
and their subcontractors) pursuant to this Agreement, and shall only
include bona fide payments for supply of Betaseron; provided that to the
extent that Schering manufactures Betaseron, performs any Major Processing
Step or provides any materials or services relating thereto, the
"Allocated Supply Cost" shall mean Schering's costs for such activities,
which shall be calculated in a manner consistent with Chiron's accounting
methodology (to the extent it is consistent with Schering's operations
and accounting practices). Where payments have been made in lump sum
amounts (rather than as transfer or royalty payments based on delivery or
sales of Betaseron), such as retainer or execution fees directly related
to the supply of Betaseron (including up-front payments for establishing
processes or capacity) such amounts shall be included in Allocated Supply
Cost and shall be amortized, based on a straight-line amortization
beginning with the first commercial sale over the remaining term of the
BI Agreement or other supply agreement.
1.5 "Beta Molecule" shall mean Betaseron, IFN-B *
1.6 "Betaseron" shall mean interferon beta 1-b in a pharmaceutical formulation
defined in the ELA/PLA and described in U.S. Patent No. 4,588,585 or
4,737,462.
1.7 "Beta Specifications" shall mean the ELA/PLA Specifications, the
Manufacturing Specifications, and the Release Specifications, and any
specifications set forth in Section 1.7.4, as each of them may be amended
from time to time.
.1 "ELA/PLA Specifications" shall mean the written product specifications
in the ELA/PLA.
.2 "Manufacturing Specifications" shall mean the manufacturing processes
and in-process specifications stated in the IND and the ELA/PLA.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 2
<PAGE>
.3 "Release Specifications" shall mean the written release
specifications dated March 8, 1993, and attached as Exhibit 1.7.3
and which shall in no event be inconsistent with the ELA/PLA
Specifications or Manufacturing Specifications.
.4 With respect to jurisdictions other than the United States, the
Beta Specifications shall be deemed to be the product
specifications and manufacturing processes and in-process
specifications established under applicable licenses or
regulations in such jurisdictions, together with the release
specifications for such jurisdictions as are reasonably agreed to
by the Parties.
1.8 "BI" shall mean Boehringer Ingelheim GmbH, Ingelheim, a company formed
under the laws of Germany, and each of its Affiliates, including without
limitation Bender & Co. Ges.mbH, Wien and Dr. Karl Thomae GmbH,
Biberbach, and any successor company.
1.9 "BI Agreement" shall mean that proposed agreement between BI and
Schering, as further described in Article V expected to provide for BI to
supply Schering with quantities of Betaseron through Phase I.
1.10 "Biologic Master File" shall mean the documents filed pursuant to 21 CFR
601 by Cetus with the FDA on April 15, 1983, and as they may be amended
from time to time.
1.11 "Capacity" shall mean the volume of Betaseron capable of being
manufactured at the Chiron Sites, as measured by relevant factors
including (i) actual yields based on batch production records, (ii) the
size and capacity of equipment in place, (iii) projected yields from
equipment and processes in place, (iv) availability of staff and
equipment, and (v) throughput volumes of raw materials.
1.12 "Chiron Cost of Goods" is defined in Section 10.4.
1.13 "Chiron Credits" shall mean the total amount of Schering Credits that
Schering has applied against payments otherwise due Chiron hereunder
pursuant to Section 9.4.2, as such Chiron Credits may be reduced pursuant
to the provisions of Section 9.4.3.
1.14 "Chiron Site" shall mean any location at which Chiron, or its Affiliates
or subcontractors, produces or manufactures Betaseron.
1.15 "CMF" shall mean the Chiron manufacturing facility located at Chiron's
campus at 4560 Horton Street, Building CMF, Emeryville, CA 94608.
1.16 "Development Committee" is defined in Section 2.1
1.17 "Diluent" shall mean sterile saline solution, or such other diluent as
may be agreed upon by the Parties in writing, produced according to the
Beta Specifications.
Page 3
<PAGE>
1.18 "ELA/PLA" shall mean establishment license application number ELA92-0494
("ELA") and product license application number PLA92-0495 ("PLA"), which
were filed with the FDA on July 17, 1992 and June 16, 1992, respectively,
pursuant to 21 CFR 601.2, and any correspondence filed with the FDA
relating thereto, for approval to manufacture and sell Betaseron.
1.19 "FDA" shall mean the United States Food and Drug Administration of the
Department of Health and Human Services, and any successor entity.
1.20 "FDA Licensing" shall mean the grant of a license pursuant to the ELA/PLA
by the FDA for the manufacture and sale of Betaseron in the treatment of
relapsing/remitting multiple sclerosis.
1.21 "First Commercial Sale" shall mean the date Schering first sells
commercially as a pharmaceutical, pursuant to regulatory approval,
Betaseron in the United States, Germany, France, Great Britain or Italy.
1.22 "First European Commercial Sale" shall mean the date Schering first sells
commercially as a pharmaceutical, pursuant to regulatory approval,
Betaseron in Germany, France, Great Britain or Italy.
1.23 "Foreign Filing" shall mean any application or regulatory filing filed
hereunder with any foreign counterpart of the FDA or other similar
foreign health agency or authority for approval to manufacture or sell
Products to be sold outside the U.S., and any correspondence and/or
approvals or licenses relating thereto.
1.24 "G-75" shall mean purified protein IFN G-75, as defined in and produced
according to the Beta Specifications.
1.25 "GMP" shall refer to the current Good Manufacturing Practice Regulations
and General Biological Products Standards promulgated by the FDA and
published at 21 CFR 210 and 610, as such regulations may be amended, and
such equivalent foreign regulations or standards as may be applicable in
respect of Products manufactured or sold outside the United States.
1.26 "IFN-B" shall mean any protein having a substantially similar amino acid
structure and/or immunological identity to human interferon-beta (often
referred to as "fibroblast interferon") or derivatives. For the purpose
of this definition. *
1.27 "IND" shall mean the documents filed pursuant to 21 CFR 312 by Cetus with
the FDA on April 15, 1983 and identified by the Number * including
any amendments thereto.
1.28 "Initial Sales Period" shall mean the period commencing with the First
Commercial Sale and ending on the * , thereof.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 4
<PAGE>
1.29 "Know-how" shall mean all inventions, discoveries, trade secrets,
information, experience, data, formulas, procedures and results, and
improvements thereon, whether or not patentable, which are created or
obtained by any Party or its Affiliates during the term of the Old Supply
Agreement or during the term of this Agreement in connection with its
activities relating to Beta Molecules, and which may be necessary or
useful in the manufacture, use or sale of any Beta Molecule.
1.30 "LIBOR" shall mean the London Interbank Offering Rate for six-month
deposits.
1.31 "Lot" shall mean the number of Vials which the Parties agree shall
constitute a lot, consistent with GMP, the ELA/PLA and any Foreign
Filing.
1.32 "Major Processing Step" shall mean each of the process steps of
fermentation, recovery, purification, and fill-finish involved in the
manufacture of Betaseron hereunder.
1.33 "Net Sales" shall mean the gross sales by any of Schering or its
Affiliates or their sublicensees of Product hereunder as reflected in
invoices to independent third parties, less any applicable taxes or
duties, and any reasonable rebates or allowances (including but not
limited to rebates to public assistance programs, but not including
allowances for bad debts), chargebacks, shipping or freight charges
prepaid or allowed, and less the value of returned trade goods and
reasonable trade cash discounts actually given.
1.34 "Original Term" shall mean the period commencing on the Effective Date
and ending on the * anniversary of the First Commercial Sale.
1.35 "PDU" shall mean the Chiron pilot development unit located at Chiron's
campus at 4650 Horton Street, Emeryville, CA 94608, building PDU.
1.36 "Phase I" shall be the period commencing on the Effective Date and ending
on the commencement of Phase II or at such time as written notice shall
have been delivered pursuant to Section 7.3.4.
1.37 "Phase II" shall mean the period commencing as defined in Section 7.3 and
ending on the expiration of this Agreement.
1.38 "Product" shall mean Betaseron, or any other pharmaceutical product
containing any Beta Molecule, that is sold, distributed or promoted by or
for Schering or its Affiliates or licensees.
1.39 "Program Patents" shall mean all patent applications and inventions
made or obtained by any Party or its Affiliates during the term of the
Old Supply Agreement or during the term of this Agreement in connection
with its activities relating to Beta Molecules and which may be
necessary or useful in the manufacture, use or sale of any Beta
Molecules, including any continuation or division or any substitute
application, any patent issued with
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 5
<PAGE>
respect to such patent application, any reissue, reexamination, renewal
or extension of any such patent, and any confirmation patent or
registration patent or patent of addition based on any such patent, and
all foreign counterparts or any of the foregoing.
1.40 "Sales" Definitions:
.1 "Chiron Sales" are Net Sales based on sales of Product which was
manufactured by Chiron or its Affiliates or subcontractors
hereunder.
.1 "Domestic Chiron Sales" are Chiron Sales in the United
States and Canada.
.2 "Foreign Chiron Sales" are Chiron Sales outside the United
States and Canada.
.2 "Non-Chiron Sales" are Net Sales based on sales of Product which
was manufactured by a party other than Chiron or its Affiliates
or subcontractors hereunder.
.1 "Domestic Non-Chiron Sales" are Non-Chiron Sales in the
United States and Canada.
.2 "Foreign Non-Chiron Sales" are Non-Chiron Sales outside the
United States and Canada.
1.41 "Schering Credits" is defined in Section 9.4.1
1.42 "Supplier Site" shall mean any site at which a subcontractor of Chiron
hereunder provides raw materials or services used in the manufacture of
Betaseron.
1.43 "United States" or "U.S." shall mean the United States of America, its
territories and possessions, including the District of Columbia, the
Commonwealth of Puerto Rico, the United States Virgin Islands, Guam and
all other places under the jurisdiction of the United States.
1.44 "Vial" shall mean a unit of the final packaged form of Betaseron as
defined in the ELA/PLA or any Foreign Filing, in a condition for sale to
end users * or such other amount and size vial as may be agreed
upon by the Parties in writing. Vial includes Betaseron, Diluent,
labels, labeling and package inserts packed or shipped with the Vials,
primary and secondary packaging, and trade shippers.
1.45 "Vial-Equivalent" shall mean the quantity of Acid Paste or G-75 which,
under expected manufacturing techniques, will provide the active
ingredient for one Vial.
1.46 "Worldwide Target" is defined in Section 7.6.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 6
<PAGE>
ARTICLE II - PRODUCT DEVELOPMENT COMMITTEE
2.1 ESTABLISHMENT. The Parties will form a joint product development
committee (the "Development Committee") to coordinate certain activities
under this Agreement as set forth below. Each Party shall appoint a
delegation of two (or three if the Parties so agree) senior
representatives to serve on the Development Committee, each of which
shall be authorized by its principal to transact the business of the
Development Committee. The Development Committee shall meet at least
quarterly.
2.2 GENERAL FUNCTIONS. The functions of the Development Committee shall be:
.1 To prepare for and coordinate the efficient introduction of
Betaseron in the periods prior to and after FDA Licensing
including but not limited to coordinating supply requirements with
marketing programs;
.2 To coordinate manufacturing and supply activities under this
Agreement, including the activities of suppliers of Products other
than Chiron;
.3 To provide for and optimize the exchange of information concerning
the respective development activities relating to manufacturing
processes, preclinical and clinical development, and further
indications for Betaseron and other Beta Molecules;
.4 To coordinate and monitor such development activity;
.5 To review and coordinate marketing and manufacturing strategies of
each Party hereto; and
.6 To engage in such further exchanges of information and joint
planning activities, and to appoint task forces or subcommittees,
as the Parties shall find convenient.
2.3 COORDINATION OF MANUFACTURING PROCESSES. Chiron shall have the primary
responsibility for manufacturing Products and developing, proposing, and
evaluating process improvements for the manufacture of Products under
this Agreement as coordinated through the Development Committee. The
Parties recognize that over time, various improvements to the process for
making Products will be put in place which will enable Chiron to produce
them less expensively or in greater quantities, even though such
improvements may have no direct benefit for Schering. The Parties expect
that, to timely meet the targets set forth in Exhibit 4.1, Chiron will
need to put into place the improvements set forth in such Exhibit. The
Parties further intend to coordinate the development of Betaseron so
that each form marketed, sold or distributed by Schering or its
Affiliates will be produced using substantially identical processes on a
worldwide basis. Process changes shall be put in place in accordance with
the terms of this Agreement, and Schering shall provide assistance and
cooperation to Chiron in connection with such changes.
2.4 MARKETING AND SALES. Schering shall have responsibility for marketing
and selling Products under this Agreement and primary responsibility for
developing, proposing and evaluating Beta Molecules and new indications
for Betaseron as coordinated through the Development Committee. Through
the
Page 7
<PAGE>
Development Committee (or through such other channels as the Parties may
designate) Chiron and Schering will consult on the progress of such
marketing and sales efforts as well as any progress with respect to new
indications or improvements to any Beta Molecule.
2.5 OTHER DEVELOPMENT PROPOSALS. Chiron and Schering shall have an
obligation to disclose to each other through the Development Committee
each plan for research and development relating to any Beta Molecule, or
an improvement or new indication therefor, that either of them desires to
investigate or implement. Either Party may, but is not obligated to,
propose for joint development or commercialization any such plan to the
Development Committee and the Development Committee shall consider what
assets and resources each Party should apply to such plan and shall
coordinate the efforts of the Parties in that respect. Neither Party
shall engage in research and development of, or manufacture, market, sell
or otherwise commercialize, any Beta Molecule except with the approval of
the Development Committee and in accordance withe the terms of this
Agreement; PROVIDED that (a) Chiron shall not be prohibited by a lack of
approval by the Development Committee from engaging in research relating
to any Beta Molecule, including animal pharmacokinetic and animal
pharmacodynamic studies; and (b) except as provided in Section 14.6,
Chiron shall not, without the approval of the Development Committee, (i)
commence any human clinical trial or any animal toxicity study regarding
such Beta Molecule, or (ii) perform animal research regarding any Product
(including Betaseron) or any Beta Molecule as to which the Development
Committee has decided to file an IND if the results of such animal
research must be reported to the FDA; and PROVIDED FURTHER that Schering
shall not be prohibited by a lack of approval by the Development
Committee from researching and developing any Beta Molecule it chooses to
research and develop.
2.6 DECISIONS. All decisions regarding the ELA/PLA, any Foreign Filing,
Betaseron and any other Beta Molecules (including but not limited to
those matters which are expressly stated to be the responsibility of the
Development Committee under Article II but excluding those matters which
are expressly stated to be made other than the Development Committee
hereunder) will be made by unanimous agreement of the Development
Committee, and if the Development Committee cannot reach such agreement
on any matter it shall be referred to the * , or their designees;
PROVIDED, however, that if they cannot resolve the matter referred to
them (a) * hereunder regarding * , including but not limited
to the ELA/PLA and any Foreign Filing and the development, marketing and
sale of Betaseron and any Beta Molecule, except as expressly set forth in
subsection (b) below; and (b) * shall not, without Schering's
consent not to be unreasonably withheld, institute material manufacturing
process changes which in Schering's reasonable
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 8
<PAGE>
judgment would require an amendment to the ELA/PLA or any Foreign
Filing, result in infringement of a third-party patent or materially harm
the marketing and sale of any Product. The decisions made pursuant to
the forgoing sentence shall be deemed to be decisions of, and approved
by, the Development Committee. No decision or agreement made pursuant to
this Section 2.6 shall be inconsistent with the express terms of this
Agreement unless set forth in a written amendment pursuant to Section
17.2.
2.7 FUTURE DISCUSSIONS. The Parties may discuss at appropriate times during
the term of this Agreement the possibility of broadening their
relationship in the areas of Beta Molecules and/or treatments for
multiple sclerosis. If the Parties should have substantial differences
of opinion as to the activities of the Parties under this Agreement, or
if a Party should find that continued performance under this Agreement
imposes substantial unforeseen burdens, the Parties shall meet and in
good faith confer as to the desirability of revising or terminating this
Agreement, giving due regard to each Party's expected rights and
obligations hereunder. This Section 2.7 shall not be deemed to require
either Party to revise or terminate this Agreement.
ARTICLE III - NEW DEVELOPMENTS
3.1 PRELIMINARY DECISION. On the presentation of animal data reasonably
predictive of human safety and efficacy of a Beta Molecule (other than
Betaseron), Schering may, by written notice, require Chiron to
participate in the development of such Beta Molecule or forfeit its right
to manufacture such Beta Molecule set forth in Section 3.2. Chiron shall
be entitled to review all data relating to such Beta Molecule and may
perform additional animal studies or assays as it reasonably requires to
evaluate the opportunity; PROVIDED that Chiron must notify Schering of
its decision within three months after receipt of such notice and data
from Schering. If Chiron agrees to participate in such development, then
Chiron shall collaborate with Schering in process development and in
obtaining regulatory approval to commence human clinical trials, with the
costs and expenses of the Parties to be shared as agreed by the Parties.
If Chiron does not agree to participate in the development activities,
then Chiron shall be deemed to have forfeited its right pursuant to
Section 3.2.
3.2 RIGHT TO MANUFACTURE. During the term of this Agreement, Chiron shall,
subject to the terms of this Agreement, have a right to manufacture all
of the requirements of Schering or its Affiliates of any Beta Molecule
(other than Betaseron, which is provided for elsewhere in this Agreement)
which has been approved for commercialization by the Development
Committee. If Chiron does not elect to manufacture such Beta Molecule,
then (a) Chiron's sole compensation in respect of such Beta Molecule
shall be the Substituted Payment set forth in Section 3.5, and (b)
Schering shall have the right to manufacture or have any third party
manufacture such Beta Molecule, subject to Section 11.3.3.
Page 9
<PAGE>
3.3 EXERCISE OF RIGHT. As soon as practicable and unless Chiron has elected
not to exercise (or has forfeited) its right to manufacture a Beta
Molecule pursuant to Section 3.2, Schering shall (in addition to keeping
Chiron informed as to its marketing and development plans regarding such
Beta Molecule) notify Chiron of the proposed term during which Chiron
would manufacture such Beta Molecule; PROVIDED that such term shall be no
less than * nor more than * years, calculated from the first
commercial sale of such Beta Molecule, and shall not expire prior * .
After such notification, the Parties shall in good faith negotiate
reasonable terms for Chiron's commercial manufacture of such Beta
Molecule consistent with Section 3.4. Chiron must exercise its right to
manufacture, if at all, prior to the later of: (a) * after receipt
of notice of the proposed term; or (b) the earlier of (i) * and
(ii) * before the end of the Original Term.
3.4 TERMS OF MANUFACTURE. If Chiron elects to manufacture such Beta
Molecule, then the Parties shall enter into a new supply agreement (the
"New Agreement") for the term which was specified by Schering pursuant to
Section 3.3, and (a) the provisions of this Agreement as to Betaseron
shall, to the extent applicable and except as they may need to be amended
in order to achieve the intent of Chiron and Schering, govern the
relationship of the Parties under the New Agreement with respect to such
Beta Molecule and (b) the New Agreement will provide that (i) prior to
the end of the Original Term, Schering will pay to Chiron for Net Sales
of such Beta Molecule, the Effective Percentage Rate then in effect
pursuant to Section 9.6, as it may decrease measured from the First
Commercial Sale of Betaseron, and (ii) after the Original Term, the
Effective Percentage Rate shall be * .
3.5 SUBSTITUTED PAYMENT FOR BETA MOLECULE. If, during the Original Term and
to the extent permitted under this Agreement, Schering or its Affiliates
or their licensees make, have made, use, or sell Beta Molecules (other
than Betaseron), which are not manufactured or supplied by Chiron in a
particular jurisdiction, Chiron shall receive, as a "Substituted Payment"
(in lieu of any other payment to be made by Schering for such Beta
Molecule under this Agreement), payment under one of the following
provisions:
.1 For a Beta Molecule (other than Betaseron) which Chiron, at the
time of Chiron's election not to exercise its right to manufacture
hereunder, is not Legally Blocked from making, Chiron shall
receive * of Net Sales in the applicable jurisdiction
occurring prior to the end of the Original Term as its sole
compensation in respect of such Beta Molecule, subject to Section
11.3.3; or
.2 For a Beta Molecule (other than Betaseron) as to which, at the
time of Chiron's election not to exercise its right to manufacture
hereunder, Chiron was Legally Blocked, Chiron shall receive a fair
and reasonable royalty on Net Sales occurring prior to the end of
the Original Term in each jurisdiction in which Chiron is Legally
Blocked. The rate of the royalty shall be based on at least the
following factors: the revenue
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 10
<PAGE>
Chiron would have received had Chiron not been so Legally Blocked
(less Chiron Cost of Goods), the costs to Schering to obtain such
Beta Molecule from an alternate source, the relative size of the
markets from which Chiron is Legally Blocked and such other factors
as may reasonably compensate Chiron for its inability to supply
such Beta Molecule, without unfairly impacting Schering. If
Chiron's manufacture of a Beta Molecule (other than Betaseron)
would reasonably appear to infringe a patent or a substantially
equivalent right of a third party in any jurisdiction and Schering
declines to accept Sole Responsibility as to such rights in the
manner set forth in Section 12.4.4, Chiron shall be deemed "Legally
Blocked" from manufacturing such Beta Molecule in such
jurisdiction; or
.3 If the national law of any jurisdiction would prohibit Schering
from selling in such jurisdiction a Beta Molecule (other than
Betaseron) manufactured by Chiron based on Chiron's status as a
foreign corporation or foreign manufacturer in respect of such
jurisdiction, and Chiron has used its best efforts to prevent such
prohibition, then Chiron shall receive * of the Net Sales of
such Beta Molecule in such jurisdiction occurring prior to the end
of the Original Term as its sole compensation in respect of the
sales in such jurisdiction of such Beta Molecule, subject to
Section 11.3.3.
3.6 JOINT PATENTS. If, pursuant to the terms hereof, Schering commercializes
a Beta Molecule which is covered by a patent jointly owned by Chiron and
Schering (or their Affiliates), and Chiron does not manufacture such
Beta Molecule, then Chiron and Schering shall meet and confer as to
whether, and on what terms, Chiron and Schering may desire to transfer
exclusive rights to make, use, and sell such Beta Molecule under such
patent to Schering.
ARTICLE IV -- EXPANSION OF PRODUCTION CAPACITY
4.1 EXPANSION OF CAPACITY. Chiron shall invest in the expansion of its
manufacturing capacity and in making process improvements to increase
its ability to supply Betaseron in such amounts and in such manner as
Chiron believes appropriate, and consistent with Chiron's obligations
under this Agreement. Chiron will use its best efforts to expand its
Capacity for the manufacture of Betaseron consistent with the targets
set forth in Exhibit 4.1. Except for those items Schering has expressly
agreed to pay for under Section 4.2, Chiron will make such investments
in an expanded capacity at its own cost and expense.
4.2 QUALIFICATION CLINICAL TRIALS. Schering shall, at Chiron's reasonable
request, perform such human clinical trials as are needed to obtain FDA
Licensing to manufacture Betaseron at each Chiron Site. Chiron shall,
without charge, provide the Betaseron and/or Vials as required for use
in such trials and, for sites other than the PDU and CMF, shall pay
* of Schering's costs according to budgets agreed upon in advance
with Chiron.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 11
<PAGE>
4.3 PROCESS IMPROVEMENTS. Chiron shall perform feasibility studies on all
process improvements reasonably proposed by Chiron or by Schering and
which it deems desirable, and shall coordinate all development efforts
among the Parties and BI. Chiron shall bear the cost of all process
development work performed by its employees. Chiron and Schering shall
exchange process technology with each other and with certain third
parties pursuant to Section 11.4 for the purpose of ensuring consistent
manufacturing processes.
ARTICLE V -- NON-CHIRON SUPPLY OF BETASERON
5.1 BI. Schering may negotiate and conclude an agreement with BI for the
supply of Betaseron in Europe during Phase I (the "BI Agreement"). In
negotiating the BI Agreement and in implementing and performing such
agreement, Schering shall use its best efforts to: (i) minimize the
amount of any Allocated Supply Cost; (ii) provide maximum opportunity
for Chiron to supply Betaseron for sale outside the United States as
Chiron creates capacity; (iii) except as provided in Section 7.14, limit
BIs right to supply Betaseron to the lesser of the amount necessary to
satisfy European demand or * per year; and (iv) maximize the
sharing of technical and other related information between BI and Chiron
concerning the manufacture of Betaseron. In connection with such best
efforts obligation, Schering shall keep Chiron reasonably informed as to
the status of such negotiations relevant to Chiron's interests. If and
when the BI Agreement is executed, Schering shall fully disclose to
Chiron the BF Agreement and the terms of any other agreement or agreements
that result from those discussions or which relate in any way to the
supply of Betaseron. Schering has separately provided Chiron with a letter
accurately setting forth the status of the proposed BI Agreement.
5.2 PRODUCTION TECHNOLOGY. Schering shall use its best efforts to cause BI
to disclose promptly to Chiron any process improvements which BI
proposes to implement in its manufacture of Betaseron, and the Parties
may invite BI to participate in the discussion of process improvements
if they so desire.
ARTICLE VI -- CLINICAL AND REGULATORY DEVELOPMENT
6.1 CLINICAL AND COMMERCIAL DEVELOPMENT. Schering shall be responsible for
maximizing the commercial opportunities for Betaseron as follows:
Schering shall use its best efforts to (i) continue the development of
Betaseron for the treatment of multiple sclerosis; (ii) obtain
regulatory approval of Betaseron for multiple sclerosis in a timely
manner in the United States, Canada and Germany, Italy, France and Great
Britain and in any other countries where Schering reasonably proposes to
sell Betaseron; and (iii) promote, sell, distribute and otherwise
maximize the Net Sales of Betaseron for multiple sclerosis in those
countries in which regulatory approval has been received. Schering shall
also use reasonable efforts to evaluate additional indications for
Betaseron and will develop such indications if Schering believes, in its
judgment, that such indications are commercially viable applications of
Betaseron.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 12
<PAGE>
6.2 ELA/PLA FILING. Pursuant to the Acts, the FDA has required that
the ELA/PLA be filed by and in the names of Chiron and Cetus. The
Parties agree that Schering owns the PLA, to the full extent permitted
by the law, and Schering owns the ELA to the extent that it relates
specifically to the manufacture of Betaseron.
6.3 COORDINATION OF INFORMATION. The Development Committee shall
coordinate the exchange of information relating to the ELA/PLA and any
other Foreign Filings. If at all practical, Schering shall have the
right of prior review and participation in all communications with the
FDA and any other regulatory authority concerning Betaseron. If either
Party in good faith disagrees with the content of any proposed
communications with the FDA or such other regulatory authority, then the
Parties shall discuss that disagreement with each other. Chiron and
Schering shall then meet to settle their disagreement, which shall not
be subject to Section 2.6.
6.4 CLINICAL DATA. Schering acknowledges that Chiron does not have
first-hand knowledge of the Betaseron clinical trials and acknowledges
that, in the case of Betaseron, Chiron is not expected to assist in the
preparation of information relating to the clinical sections of the
ELA/PLA; PROVIDED HOWEVER, if Chiron in its good faith opinion believes
it must audit and obtain first hand knowledge of such Betaseron clinical
trials, Schering shall cooperate with Chiron in such audit.
6.5 RESPONSES TO FDA. Chiron shall continue to use its best efforts,
in cooperation with Schering, in the preparation of responses to the FDA
concerning the ELA/PLA. Schering shall pay the reasonable costs of
Chiron, pursuant to budgets agreed in advance, which have been or shall
be incurred in connection with the preparation and filing of the
ELA/PLA, obtaining the approval thereof, and in maintaining the ELA/PLA.
6.6 REGULATORY COSTS. Any costs associated with preparing, filing,
prosecuting and maintaining Foreign Filings and with responding to any
requests of regulatory agencies shall be borne by Schering, including
costs incurred by Chiron pursuant to budgets agreed in advance, PROVIDED
THAT (a) Schering, upon receipt of Chiron's cost budget, may elect to
have its own personnel perform the activities necessary to respond to
such regulatory requests; (b) Chiron shall bear its own costs, including
costs of regulatory filings, to the extent such costs arise from
activities initiated by Chiron beyond the initial approval of Betaseron
pursuant to the ELA/PLA, including (by way of example) implementation of
process improvements; and (c) except as provided in Section 4.2, Chiron
shall pay for all regulatory costs associated with any Chiron Site
(other than the PDU and CMF) being approved or validated by any
regulatory agency for manufacture of Betaseron within or without the
United States.
6.7 NON-U.S. REGULATORY FILINGS. Chiron shall cooperate with Schering
in making all Foreign Filings which, if permitted, shall be in
Schering's name. If it is required or appropriate as to any jurisdiction
to make such filings in the name of Chiron, the Parties shall
accommodate such need in a manner
Page 13
<PAGE>
consistent with the handling of the ELA/PLA, or as otherwise mutually
agreed. Schering shall cooperate with respect to each such Foreign
Filing to qualify the appropriate Chiron Sites to supply Product in each
jurisdiction. Chiron shall use its best efforts to obtain, by the *
anniversary of the First European Commercial Sale, foreign regulatory
approvals or licenses necessary for the manufacture of Betaseron for
foreign sales as contemplated in Section 7.3.1(b)(iv), and to obtain in
a timely manner such approvals and licenses in such other jurisdictions
in which Schering reasonably proposes to sell Betaseron and so notifies
Chiron.
ARTICLE VII - SUPPLY OF PRODUCT
7.1 NON-COMMERCIAL CLINICAL SUPPLY. Prior to the First Commercial
Sale, Chiron will continue to manufacture the requirements of Schering
for clinical supplies of Betaseron as ordered by Schering at a price
equal to the Chiron Cost of Goods, but in no event greater than *
per Vial ("Clinical Price"). The Clinical Price shall be deemed to
include Betaseron, Diluent, other raw material, direct labor, overhead,
quality control testing, stability testing, labels, package inserts,
cartons, labeling which accompanies the Vials, and primary and secondary
packaging, directly attributable to the Betaseron, and the Betaseron
shall be in finished form and final container as described in the IND.
7.2 PHASE I COMMERCIAL SUPPLY. Subject to the terms and conditions of
this Agreement (including Section 7.13), during Phase I, Chiron shall
supply to Schering, and Schering shall purchase from Chiron, all of the
worldwide requirements for Betaseron of Schering and its Affiliates and
licensees, except to the extent that Schering is required to purchase
Betaseron from BI for sale in Europe pursuant to the BI Agreement, and
except that if at any time Chiron is unable or otherwise fails to
provide Betaseron in the quantities ordered pursuant to Section 7.11,
Schering shall be entitled to obtain that shortfall amount of Betaseron
from any other supplier or manufacturer as set forth in Section 7.14.
7.3 TRANSITION TO PHASE II. If the conditions set forth in this
Section 7.3 have been satisfied, Phase II shall commence and Phase I
shall end as of the * of the First European Commercial Sale. The
conditions precedent to the commencement of Phase II hereunder are as
follows:
.1 As of the * of the First European Commercial Sale:
(a) Chiron shall not be in breach of this Agreement in any material
respect (or if it is in breach it shall cure such breach within
sixty days of notice thereof);
(b) Chiron shall have established production facilities which: (i)
in the aggregate shall be reasonably capable of meeting the
Worldwide Target as of the commencement of Phase II; (ii) shall
comprise at least *
), and in determining whether
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 14
<PAGE>
Chiron's Capacity meets the Worldwide Target, the Capacity
to perform no more than * of the Worldwide Target (or
* if the Worldwide Target is less than * ) of any
of the Major Processing Steps shall be attributed to any one
such facility; (iii) are mechanically complete and (iv) are
in the process of being validated for the purpose of being
licensed by the FDA, or by one or more regulatory agencies
or authorities in Canada, Germany, Italy, France and Great
Britain such that approval to make Betaseron will be
obtained for one or more Chiron Site(s) with respect to each
such jurisdiction.
(c) Each Chiron Site used to supply Betaseron during Phase I
shall have been validated and licensed by the FDA or other
applicable regulatory agency or authority as required for
such Phase I supply.
(d) Chiron shall have, (i) during the previous four calendar
quarters, timely delivered substantially all amounts of
Betaseron for commercial sale as to which orders timely
placed pursuant hereto were accepted, and (ii) substantially
achieved the delivery targets recited in Exhibit 4.1 for the
* , and after * such lesser or greater volume as
is reasonably required to meet orders for Betaseron to be
sold in the U.S. and Canada that have been placed pursuant
to Section 7.11.
.2 By the * anniversary of the First European Commercial Sale,
the conditions set forth in Section 7.3.1 shall all be fully
satisfied and Chiron, with the assistance of Schering as
contemplated herein, shall have filed applications and commenced
the process of obtaining FDA Licensing and such other regulatory
approvals set forth in Section 7.3.1(b)(iv) for the facilities
necessary to meet the Worldwide Target.
.3 By the * anniversary of the First European Commercial Sale,
the conditions set forth in Sections 7.3.1 and 7.3.2 shall all be
fully satisfied and the regulatory approvals shall have been
obtained as set forth in Section 7.3.1(b)(iv) for the facilities
necessary to meet the Worldwide Target. If, by such *
anniversary, such approvals have not been obtained, but the
applicable agencies have neither rejected such application for
such approval nor indicated that approval will not be granted,
then Phase I shall continue and the start of Phase II shall be
delayed for up to * until such approval is obtained. If
approval is not obtained within * or at such earlier date if
the application for approval is rejected, Phase II shall not
commence and this condition shall not have been satisfied.
.4 If any of the foregoing conditions has not been satisfied, then,
upon written notice from Schering, (a) Phase II shall not
commence; (b) for the remainder of the term of this Agreement
Chiron shall supply to Schering, and Schering shall purchase from
Chiron, Betaseron for the
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 15
<PAGE>
United States and Canada in an amount equal to the Capacity of
Chiron for Betaseron as of the date of such notice; PROVIDED that
if as of the * anniversary of the First European Commercial
Sale Chiron has satisfied the conditions set forth in Sections
7.3.1(a), (c) and (d) with respect to supplying Schering's
requirements for Betaseron in the U.S. and Canada, Chiron can
elect for the remainder of the term of this Agreement to supply to
Schering, and require that Schering purchase from Chiron, all of
the United States and Canadian requirements for Betaseron of
Schering and its Affiliates and licensees, subject to Section 7.14
and to Chiron's obligation to use its best efforts to have and
keep in place Capacity to supply such requirements for Betaseron
in the U.S. and Canada; (c) Schering will thereafter be entitled
to have all of its other requirements for Betaseron supplied by
any other supplier or manufacturer, including Schering or BI (and
without regard to Section 5.1), and notwithstanding any other term
of this Agreement (including Sections 9.4 and 9.5), Chiron shall
receive as sole compensation on account of such Non-Chiron Sales
an amount equal to * thereof during the term of this
Agreement and shall not be entitled to any payment under Section
9.4.1 or Section 9.5; and (d) the application of Schering Credits
and the creation of Chiron Credits under Section 9.4 shall cease
to take place and all Chiron Credits and Schering Credits shall be
extinguished.
.5 Chiron shall advise Schering as soon as practicable (a) if it is
unable or does not elect to satisfy the conditions to Phase II set
forth in Section 7.3, and (b) of the occurrence of any of the
events set forth in Section 7.3.3.
7.4 USE OF SUBCONTRACTORS TO MEET PHASE II CONDITIONS. Chiron may include
the manufacturing capacity of subcontractors (other than BI) in meeting
no more than * of the Worldwide Target with respect to any Major
Processing Step, but only to the extent that such subcontractors: (a)
have satisfied the conditions of Section 8.2, including having been
approved by Schering pursuant thereto; (b) have been performing their
duties pursuant to their respective subcontracting agreements to the
reasonable satisfaction of each of Chiron and Schering; and (c) were
supplying goods and services for the production of Betaseron as of the
Fixing Date (defined below).
7.5 PHASE IN TO PHASE II. Subject to the terms of this Agreement (including
Section 8.2), Chiron may enter into a subcontracting agreement with BI
for the supply of Betaseron during Phase II and Schering shall cooperate
with Chiron's efforts with respect to entering into such an agreement.
Schering and Chiron shall consult as to whether and to what extent BI's
supply obligations to Schering should continue into or through Phase II
so as to promote a more economical, smooth, and rapid transition to Phase
II worldwide supply of the market by Chiron.
7.6 WORLDWIDE TARGET DEFINED. The "Worldwide Target" shall be agreed to
between the Parties as of the * anniversary of the First European
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 16
<PAGE>
Commercial Sale (the "Fixing Date"). The Worldwide Target shall represent a
reasonable estimate, based on information available to the Parties as of
the Fixing Date, of the total expected worldwide demand for Betaseron as of
the seventh anniversary of the First European Commercial Sale at expected
prices. Such estimate shall be based upon prior sales history, market
demand in excess of current capacity, the size of the potential patient
population for approved indications (or indications which are in the final
stages of receiving approval) and expected rates of use by such patients,
prior and current forecasts under Section 7.10 (which shall be considered
in light of the accuracy of prior forecasts), and such other factors as are
reasonably considered in forecasting demand on a long-range basis. The
establishment of a Worldwide Target shall not relieve Chiron of any best
efforts obligation to meet demand in excess of that amount. The calculation
of the Worldwide Target shall not include potential sales arising from
as-yet unapproved indications, nor shall it be reduced by the mere
possibility of restricted sales due to factors such as the actions of a
competitor not yet in the market or contemplated governmental actions.
.1 Commencing three months prior to the Fixing Date, the Parties shall
exchange all information reasonably relevant to anticipated future
demand for Betaseron, and they shall commence discussions of an
appropriate figure for the Worldwide Target. If the Parties cannot
agree on a Worldwide Target within three months after the Fixing Date,
then either Party may demand in writing (the "Demand") that the
Worldwide Target be set by a third party (the "Referee"). On the tenth
business day following the Demand, the parties shall simultaneously
exchange in writing their proposed values for the Worldwide Target,
which proposed values shall be binding as set forth below. Such
proposed values need not reflect any prior negotiation, and previously
suggested values shall not be admissible or disclosed to the Referee.
Within thirty (30) days after the Demand, the Parties shall confer in
order to select a mutually agreeable individual, who shall be
independent of the Parties, to serve as the Referee. If the parties
have not selected a Referee willing to serve within sixty (60) days of
the Demand, then either Party may request that one be appointed by the
American Arbitration Association ("AAA"). If the AAA is unwilling to
appoint a Referee, then one shall be appointed by the Alameda County
Superior Court. In any case, the parties shall use their best efforts
to have a Referee appointed as promptly as practicable.
.2 The Referee shall select the Worldwide Target, based on the above-
referenced factors, from one of the two values proposed by the Parties
under Section 7.6.1, and shall make all reasonable efforts to complete
the process within thirty days of being appointed as Referee. The
Parties shall each have equal opportunity to present their positions
to the Referee. Where not inconsistent with the terms hereof, the
Commercial Arbitration Rules of the AAA shall determine the actions of
the Referee and the Parties hereunder. The Referee
Page 17
<PAGE>
shall have no authority to decide any matter other than the Worldwide
Target.
7.7 PHASE II SUPPLY. During Phase II, Chiron shall supply to Schering,
and Schering shall purchase from Chiron, all of the worldwide
requirements for Betaseron of Schering and its Affiliates and
licensees, subject to Sections 7.13 and 7.14. Chiron shall use its
best efforts to have and keep in place capacity to supply worldwide
demand for Betaseron in Phase II (which may be greater or less than
the Worldwide Target) and to maintain each Chiron Site intended for
the manufacture of Betaseron in operation and consistent with the
requirements of Section 7.3.1(b)(ii) unless and until such Chiron Site
may be replaced by one or more other Chiron Sites adequate for the
manufacture of Betaseron hereunder.
7.8 ORDERING GENERALLY. As set forth specifically below, the Parties
shall cooperate in the forecasting of demand for Product and in
providing for worldwide capacity for the manufacture thereof.
7.9 APPROVAL. Upon notification of FDA Licensing, Schering shall confirm
its then-current rolling forecast, and the Parties shall confer as to
the possibility of increasing Schering's order in accordance with
Chiron's manufacturing capacity. The Parties recognize that during the
first year after First Commercial Sale there may exist some
uncertainties concerning demand for Betaseron and agree to meet to
confer about these uncertainties on a regular basis, but any modification
to the terms hereof shall be only as agreed in writing by the Parties.
7.10 ROLLING FORECASTS. On execution hereof (attached as Exhibit 7.10),
and thereafter on the first business day of each calendar quarter
during the term of this Agreement, Schering shall deliver to Chiron a
non-binding written forecast of the quantities of Vials (or of Acid
Paste or G-75) that Schering expects in good faith to order in each of
the three consecutive calendar quarters following the quarter for
which the most recent order has been placed pursuant to Section 7.11.
Such forecasts shall represent Schering's best estimate of its
anticipated orders. At Chiron's request Schering shall confer with
Chiron during meetings of the Development Committee or otherwise as to
the basis for such forecasts and shall disclose to Chiron any
underlying data for such forecasts.
7.11 QUARTERLY ORDERS. Attached hereto as Exhibit 7.11 is Schering's
Purchase Order for the entire calendar year 1993, which order Chiron
hereby accepts. Beginning with the purchase order for the first
calendar quarter of 1994, Schering shall place written purchase orders
for Vials (and any Acid Paste or G-75 it may require) on a quarterly
basis, not less than one hundred eighty (180) days prior to the
commencement of the calendar quarter for which the Vials (or Acid
Paste or G-75) are desired. Each purchase order shall specify
requested delivery dates (and shall indicate whether Schering will
provide the packaging and labels for any of the Vials pursuant to
Section 8.9) and, if appropriate, divide the Vials intended for U.S.
and non-U.S. markets, and shall be net of (although it shall identify)
any Vials to be supplied by BI (or
Page 18
<PAGE>
other supplier) as permitted hereunder. Unless otherwise agreed by the
Parties in writing, such purchase orders shall specify delivery dates
that ratably distribute the delivery of Vials among each of the months
included in such calendar quarter. No less than 150 days before the
commencement of the quarter in which the product is to be delivered,
Chiron shall, in writing, advise Schering, in good faith, of the number
of Vials which it accepts for delivery during that period, and Schering
shall be entitled to rely on such advice for purposes of obtaining
alternate supplies of Betaseron to make up any shortfall in such
supplies. Any orders placed hereunder shall be rounded upward, if
necessary, to a reasonably whole Lot. Chiron shall use its best efforts
to accept purchase orders consistent with its Capacity and to deliver the
number of Vials that it has accepted for delivery. To the extent
Schering places orders other than such regular quarterly orders, or to
the extent that any orders accelerate the estimated delivery schedule,
Chiron shall use reasonably diligent efforts to supply such quantities so
ordered. At the request of either Party, the Parties shall meet and
confer in good faith regarding the establishment of a different ordering
schedule to take account of market conditions, regulatory approval lag
times, or manufacturing time. If, after the Initial Sales Period,
Chiron, having accepted an order, fails timely to deliver the full amount
of such order, then Schering shall (without limiting any other rights
hereunder) be reimbursed for the additional costs and expenses reasonably
incurred by Schering and directly arising from such failure, including
costs associated with the resumption of a drug allocation program, if
such a step is required, and excluding consequential damages and the
costs of obtaining alternative supplies of Betaseron which are provided
for in Section 7.14.2.
7.12 REPORTS. Chiron will report weekly to Schering its progress in the
manufacture of Vials and Vial Equivalents hereunder until Chiron reaches
the target Capacity of * per year set forth in Exhibit 4.1, and
thereafter Chiron need only report monthly. Chiron shall promptly
notify Schering if it appears that Chiron will be unable timely to
deliver any amounts accepted for delivery pursuant to Section 7.11.
7.13 LIMITATIONS. Chiron's obligations to supply Betaseron to Schering
hereunder shall be subject to the limitations of Chiron's production
capacity, except that such limitations shall not act to limit or excuse
Chiron's obligations to use its best efforts hereunder.
7.14 SUPPLY SHORTFALLS; CAPACITY PLANNING.
.1 At any time during the term of this Agreement Schering shall be
entitled to qualify or license any reasonable supplier or
manufacturer (including BI and Schering) to manufacture Betaseron
or any other Beta Molecule in any jurisdiction, and shall be
entitled to enter into an agreement with such supplier or
manufacturer to act as an alternate source of supply of Betaseron
or any Beta Molecule to Schering in any jurisdiction; provided
that Schering shall not order or purchase Betseron from such
supplier (other than non-commercial quantities of Betaseron used
solely for regulatory licensing of such supplier) except under
circumstances permitted under this Agreement.
* Confidential portions of material have been omitted and filed separately with
the Securities and Exchange Commission.
Page 19
<PAGE>
.2 If at any time Chiron is unable or otherwise fails to supply (or
notifies Schering that it cannot supply) Schering with the
Betaseron for a particular calendar quarter ordered pursuant to
Section 7.11, Schering shall be entitled, upon notice to Chiron,
to obtain the shortage in its requirements for such calendar
quarter from any other licensed supplier or manufacturer
(including BI or Schering). Chiron's sole compensation for
Betaseron manufactured by such supplier (or Schering) pursuant to
this Section shall be the payments set forth in Section 9.4.1 or
9.5, as applicable; provided that if pursuant to Section 7.3.4(b)
Chiron has not elected to be Schering's exclusive U.S. and
Canadian supplier and any shortage of Betaseron is a result of a
purchase order in respect of the U.S. and Canada being in excess
of Chiron's Capacity, then the provisions of Section 7.3.4(c)
shall apply in respect of payments to be made on Non-Chiron Sales
to cover such shortages, and any other payments to be made for
shortage requirements that are subject to Section 7.3.4 shall be
made pursuant to the payment provisions of Section 9.4.1 or 9.5.
Schering shall use its best efforts to minimize the Allocated
Supply Cost of such Betaseron. Schering shall be fully
responsible for the supply of quantities of Betaseron for which it
exercises its rights hereunder.
.3 The Parties will meet and confer at least annually, through the
Development Committee or otherwise, to discuss projections for
anticipated worldwide demand for Betaseron and to mutually
determine in good faith a reasonable plan for Chiron's provision
of appropriate levels of manufacturing capacity beyond * to
meet such demand. In the event of any differences of opinion
regarding the amount of or rate at which capacity should be put in
place by Chiron, or regarding the anticipated demand, or if the
demand for Betaseron is substantially different than anticipated,
the Parties shall resolve such matters by good faith negotiation
in a timely manner, taking into account the principles that Chiron
has rights and obligations to manufacture and supply the worldwide
demand for Betaseron (subject to the exceptions set forth in this
Agreement), that Schering needs to have a reliable source of
Betaseron to satisfy such demand, that substantial lead-time may
be required to qualify and establish additional capacity at Chiron
Sites or with any other supplier, that Schering needs to continue
to supply patients being treated with Betaseron, and that the
timely supply of worldwide demand is in the best interests of both
Parties. To the extent Chiron reasonably appears to be unable, or
in fact is unable, to supply quantities of Betaseron to Schering
for any material period of time, the Parties will discuss how to
enable Schering to satisfy such demand, which may include
Schering and/or Chiron entering into a supply agreement with a
third party (or Schering supplying itself) for a commercially
reasonable period of time. The Parties in reaching such
resolution shall take into account the levels of risk associated
with various options, the equitable allocation of such risk and
the appropriate return for the necessary investment by Chiron or
any alternate supplier.
* Confidential portions of material have been omitted and filed separately with
the Securities and Exchange Commission.
Page 20
<PAGE>
ARTICLE VIII - PROCESSING AND MANUFACTURING
8.1 FACILITIES. Pending completion of expanded production capacity as
contemplated under Section 4.1, Chiron will manufacture Betaseron in the
same facilities as described in the IND and the Biologic Master File,
that is, fermentation, recovery, purification, and a portion of the
fill-finish will be done in the PDU and additional fill-finish will be
done in the CMF. Upon completion or acquisition of facilities for
expanded production capacity by Chiron, the Parties shall, as set forth
in Articles II and VI, cooperate and use best efforts to prepare, file
and amend, as appropriate, applicable regulatory filings to achieve full
utilization of such capacity in a timely manner. Chiron will provide
qualified manufacturing and quality control personnel and will
manufacture Products according to applicable international, national,
federal, state and local laws and regulations (including GMP) governing
the manufacture of a drug or biological.
8.2 SUBCONTRACTORS. Subject to Section 7.4 and to the consent of Schering
(which may not be unreasonably withheld), Chiron may subcontract with one
or more third parties for the performance of one or more Major Processing
Steps PROVIDED that each subcontracting agreement for any Major
Processing Steps shall contain the following provisions: (a) in the
event of a change of control of Chiron as defined in Section 17.7.2,
Schering shall be permitted to assume all of Chiron's rights and
obligations under such subcontracting agreement; (b) the manufacture of
Betaseron by each subcontractor shall be approved by the FDA or other
appropriate governmental agency; (c) the Betaseron or services to be
supplied by each subcontractor and the manufacturing process therefor
shall comply with all Beta Specifications and warranties under this
Agreement; and (d) Betaseron will be required to be supplied on
reasonable commercial terms, including an obligation on the part of each
subcontractor to pay damages for breach of its supply obligations, which
damages shall include at least the cost of securing alternate supplies.
In addition, without Schering's consent, Chiron may not use
subcontractors to satisfy its obligations pursuant to Section 4.1 and may
not have more than * of Chiron's Capacity in respect of any Major
Processing Step performed by a subcontractor. Notwithstanding any such
subcontracting agreement, Chiron shall remain fully responsible for all
of its obligations under this Agreement.
8.3 MANUFACTURING PROCEDURES. In the manufacturing of the Vials, Chiron
shall adhere to the Beta Specifications and shall utilize such additional
or modified procedures, facilities, equipment and labeling which may from
time to time be agreed upon in advance and in writing by the Development
Committee and/or as required by the FDA or other appropriate governmental
regulatory authority. Any amendment to the Release Specifications shall
be by agreement of the Parties not to be unreasonably withheld. Chiron,
at its sole cost, shall maintain and retain samples required by GMP or
any other applicable regulations. In addition, Chiron will, at its sole
cost, select and retain samples of each Lot of Betaseron and conduct an
ongoing stability program as mutually agreed to by the Parties, will
maintain all stability records for such period as is required by the FDA
or other regulatory agency
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 21
<PAGE>
and furnish Schering with copies of all such records at Schering's
request and will undertake any Lot-by-Lot testing required by the FDA or
other regulatory agency, or as requested and paid for by Schering
pursuant to budgets agreed in advance.
8.4 COMPLETION OF VIAL EQUIVALENTS. Vial Equivalents of Acid Paste or G-75
shall be deemed complete upon compliance with Chiron's quality assurance
testing procedures (including those contained in the ELA/PLA or
applicable Foreign Filing) and release therefrom.
8.5 DELIVERY. Promptly upon completion of quality assurance testing by
Chiron of each Lot ordered hereunder, Chiron shall notify Schering of the
completion thereof and shall provide Schering with appropriate
Certificates of Analysis for such Lot. The Vials shall comply with all
of Chiron's warranties under this Agreement. Schering shall have final
authority to accept the Vials from Chiron on a Lot-by-Lot basis, based on
whether the Lot complies with all of Chiron's warranties under this
Agreement, and Schering shall have the right to review batch records as
well as quality assurance results. If Chiron and Schering disagree as to
whether a Lot has been rightfully rejected then the Parties shall submit
the matter to a mutually acceptable third party, such as a testing
laboratory in the case of a dispute over analysis of the Vials. The
costs and fees of such third party shall be shared equally by the
Parties. Within five business days of notification of completion and
provision of the Certificates of Analysis, unless Schering has properly
rejected such Lot, Schering shall cause such Lot to be removed at
Schering's own cost (subject to Section 9.2.2) from the premises where
such Lot was finished. If Schering requires longer than such five-day
period to arrange for removal due to special circumstances, including the
reasonable need to review batch records prior to acceptance, Schering
shall so notify Chiron and the Parties shall discuss in good faith a
reasonable extension of such five-day period. Prior to delivery, Chiron
shall store Betaseron, Acid Paste and G-75 at its own expense. Except
for Vials intended for distribution in the United States, title to and
risk of loss for all Vials shall pass to Schering upon delivery to a
carrier at the Chiron Site. Title to and risk of loss for Vials intended
for distribution in the United States shall pass to Schering's United
States Affiliate upon delivery to a carrier at the Chiron Site.
8.6 INSPECTION. Schering may inspect each Lot shipped by Chiron and shall
notify Chiron of any non-conformance to Beta Specifications (or other
proper reason for rejection) within thirty (30) days after receipt of the
shipment and the relevant batch records being made available to Schering.
Any delivery not rejected by Schering within such thirty (30) days shall
be deemed accepted unless Schering informs Chiron that Schering's testing
or investigation is still under way, in which case the time shall be
extended for a reasonable period to allow completion of the testing or
investigation; provided however, if a Lot is subsequently rejected by the
FDA or other applicable regulatory agency (or by Schering in the event
the quality control testing of the Products necessarily requires more
than 30 days), payment for that Lot by Schering shall be suspended by
Schering, or, if already paid, the
Page 22
<PAGE>
next payment to Chiron by Schering under Section 9.1 shall be reduced by
crediting the amount Schering had advanced for the non-conforming Lot.
If such Lot is subsequently accepted by the FDA, or other agency, with
at least six months remaining prior to the expiration date of such Lot,
then Schering will, upon Schering's acceptance of such Lot, pay Chiron
according to this Agreement.
8.7 ADDITIONAL TESTING. Schering shall have the right to request any
additional testing of the Vials (in addition to testing necessary to
determine whether to accept the Vials) that Schering reasonably believes
necessary and, if requested, Chiron shall use best efforts to promptly
perform such testing and inform Schering of the results; PROVIDED
HOWEVER, that all such additional testing shall be at Schering's sole
cost and expense, and Schering shall reimburse Chiron for its costs
(according to agreed budgets) incurred in performing such additional
testing within thirty (30) days after Chiron submits an invoice for such
costs; and provided further, that such additional testing shall not be a
basis for Schering delaying payment for any Vials and any such payment
shall be subsequently refunded or credited against payment to be made to
Chiron pursuant to Section 9.1, if non-conformity with the Beta
Specifications or warranties is discovered.
8.8 RIGHT TO REVIEW PROCESSES. Chiron shall maintain all quality
assurance manufacturing records and batch production records directly
related to the manufacture of Betaseron, or copies thereof, as required
by FDA or other applicable regulations. Schering shall own all quality
assurance manufacturing records and batch production records directly
related to the manufacture of Betaseron. Schering's personnel have the
right to review and audit compliance with Manufacturing Specifications
during regular business hours at reasonable intervals, and shall have
the right to visit and inspect each Chiron Site at such times as
required for the purpose of review of batch records and manufacturing
and quality assurance procedures with respect to Betaseron, provided
that such review or audit does not impede Chiron's manufacture and
release processes. Schering personnel shall not have access to any
records, information, or data concerning other Chiron products (other
than Products hereunder), and Schering personnel having access to any
Chiron Site shall execute reasonable confidentiality agreements to
prevent disclosure of such information that may be discovered
inadvertently. Schering's personnel may make general inquiries the
answers to which will be held in confidence by them, concerning such
matters as manufacturing scheduling, and equipment cleaning in the
shared areas of the PDU and CMF or of any other Chiron Site to insure
that Betaseron is being manufactured under GMP.
8.9 LABELING. Chiron shall produce all Vials in a finished and
packaged form, using labels, cartons, package inserts and trade pack
shippers in accordance with the format prepared by Schering. Unless the
Parties agree otherwise and the Acts so permit, Chiron or Cetus (as
appropriate) shall be identified as the manufacturer on the labels.
Schering shall give reasonable advance notice of any label, labeling, or
packaging change to enable Chiron to switch labels, labeling, or
packaging without interrupting Chiron's production
Page 23
<PAGE>
schedule or incurring unreasonable expense, and unless required by the
FDA or other regulatory agency, such changes shall not significantly
increase the Chiron Cost of Goods without Chiron's approval, unless
Schering agrees to pay for such significant increase. To the extent
consistent with FDA or other applicable regulations, Schering or its
Affiliate shall have its name placed as prominently as possible on the
label of the final product. The cost of packaging and labels shall be
borne by Chiron, PROVIDED that if Schering provides packaging or labels
for any Vials, the actual reduction in the Chiron Cost of Goods shall be
credited to Schering with respect to such Vials against payment to be
made upon delivery pursuant to Section 9.1.
8.10 INVESTIGATIONS OF COMPLAINTS. Schering shall have the primary
right and responsibility to investigate and answer all complaints
concerning Products. If permitted by the Acts, Schering shall have the
primary right and responsibility to report to the FDA or other
applicable regulatory agency all complaints and corrective actions with
respect to Products, but if so required by the Acts, Chiron shall
perform such reporting. In this regard, Schering will supply Chiron with
a copy of any completed investigation report as required by GMP, as well
as any other report needed by Chiron to comply with the Acts. Chiron
will promptly notify Schering of any adverse events, complaints or
problems, or any inquiries made by healthcare providers, or any actual
or threatened legal or regulatory action of the FDA or other regulatory
agency relating to Products hereunder of which Chiron has notice.
8.11 FDA REGULATION OF "OWNERSHIP".
.1 If and to the extent permitted under the Acts, (a) Schering
shall make all decisions and have regulatory responsibility in respect
of the ELA/PLA and (b) the ELA/PLA shall be amended so that Schering or
its Affiliate is named in the ELA/PLA as the "Responsible Head" thereof.
The Parties shall use their best efforts to amend the ELA/PLA in this
manner, including cooperating in presenting this goal and the business
agreement of the parties to the FDA.
.2 If permitted under the Acts, Schering may have sign-off
authority with respect to all batch records (including in-process batch
records) at Schering's sole cost, risk and expense, provided that
Schering exercises such authority without interfering with Chiron's
manufacture and release processes.
.3 If, in the reasonable opinion of Schering based on issued or
proposed regulations, or correspondence or statements of the FDA which
have been made available to Chiron or to which Chiron has been a party,
it appears that transferring certain responsibilities for Betaseron
quality control or approval to Schering personnel, including final
authority for approval of Betaseron, would materially enhance the
ability of Schering to be named in the ELA/PLA as the "Responsible
Head", then Chiron shall allow Schering, at its sole cost, risk, and
expense, to test and release for sale Betaseron manufactured at the
Chiron Site(s), and, if it reasonably appears necessary, to place such
Page 24
<PAGE>
personnel with such final authority for approval of Betaseron in
the Chiron Site(s) to the extent permitted by the Acts. Chiron shall not
be liable for any error or omission of such personnel or in such
testing, including the erroneous approval of Betaseron for release.
ARTICLE IX - PAYMENTS
In consideration of the obligations of Chiron hereunder, Schering shall pay
Chiron as follows:
9.1 PAYMENT ON DELIVERY OR COMPLETION. Within 30 days after the later
of the delivery of each shipment of Betaseron to Schering by Chiron
pursuant to Section 7.11 or receipt of the related invoice, or written
notification of completion of Vial-Equivalents, unless any of them is
subsequently not accepted pursuant to Section 8.6, Schering shall pay
Chiron an amount equal to the number of Vials shipped or
Vial-Equivalents completed multiplied by the amount set forth herein
applicable to the period in which such Vials were ordered. For orders
placed in the Initial Sales Period, the payment pursuant to this Section
9.1 shall be * per Vial, * per Vial-Equivalent of Acid
Paste, and * per Vial-Equivalent of G-75; for orders placed after
the Initial Sales Period, the payment shall be * per Vial, *
per Vial-Equivalent of Acid Paste, and * per Vial-Equivalent of
G-75. No payment shall be due hereunder for Betaseron and/or Vials
delivered pursuant to Section 4.2. Any payment which has been made
pursuant to this Section 9.1 for a Vial-Equivalent which is incorporated
into a Vial delivered hereunder shall be credited against the payment
otherwise due on account of such Vial. After 1993, payment for
Vial-Equivalents ordered by Schering shall only be made to the extent
Chiron has completed the manufacture of Vial-Equivalents in excess of
Chiron's reasonable need for inventory on hand in view of Schering's
order history, good-faith forecasts, and then-pending orders.
9.2 PAYMENT FOR CHIRON SALES, GENERALLY. Within 60 days after the end
of each calendar quarter, Schering shall pay Chiron an amount equal to
the applicable Effective Percentage Rate multiplied by the Chiron Sales
in such quarter, less the following adjustments (which adjustments shall
be carried forward from quarter to quarter to the extent they exceed the
amount otherwise to be paid in any quarter pursuant to this Section):
.1 a credit of any amounts paid under Section 9.1, plus a
credit of any amounts credited to Schering pursuant to Section 8.9,
to the extent such amounts have not previously been credited against
payments under this Section 9.2.1 and were paid for delivery of
those Vials which account for the Chiron Sales in such calendar
quarter;
.2 during Phase I only, a credit equal to the additional
shipping costs (including insurance) which were incurred by Schering
or its Affiliates as a result of Schering taking delivery of
Betaseron used for Foreign Chiron Sales at the Chiron Site as
compared to taking delivery at BI's German facility, assuming use of
reasonable and appropriate carriers and comparable delivery terms;
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 25
<PAGE>
.3 the application of any Schering Credits under Section 9.4.2;
.4 any amounts credited under Sections 9.3 and/or 9.7.
9.3 INDIGENT AND REBATE VIALS. To the extent, if any, that Vials are
provided without charge by Schering pursuant to an "indigent program" or
as a non-cash rebate with respect to certain purchases of Betaseron,
Schering shall be entitled to credit, pursuant to Section 9.2.4, any
payments for such Vials made pursuant to Section 9.1. Schering shall act
reasonably in determining the number of such Vials to be distributed,
which shall not exceed 10% of the then-current Capacity of Chiron without
the consent of Chiron, which shall not be unreasonably withheld.
9.4 PAYMENT FOR FOREIGN NON-CHIRON SALES AND CREDITS.
.1 FOREIGN NON-CHIRON SALES PAYMENTS. Subject to Sections
7.3.4 and 9.4.2, within 60 days after the end of each calendar
quarter, Schering shall pay Chiron an amount equal to the greater of
(a) Foreign Non-Chiron Sales for such quarter multiplied by the
applicable Effective Percentage Rate, less the Allocated Supply
Cost attributable to such sales; or
(b) * multiplied by such Foreign Non-Chiron Sales.
To the extent, if any, that the amount payable pursuant
to the preceding sentence, plus the Allocated Supply Cost
attributable to such Foreign Non-Chiron Sales, exceeds *
multiplied by such Foreign Non-Chiron Sales, such excess amounts
shall be deemed to be "Schering Credits" and shall be applied by
Schering against certain amounts otherwise due to Chiron or carried
forward, as set forth in Section 9.4.2.
.2 APPLICATION OF SCHERING CREDITS. Schering shall be entitled to
apply any outstanding Schering Credits in any calendar quarter
against payments otherwise due Chiron under either subsection (a) or
(b) below (but not both):
(a) pursuant to Section 9.2 (in respect of Domestic
Chiron Sales in such quarter), until such time, if at all, that
Section 9.4.2(b) is applicable or
(b) pursuant to both Section 9.2 (in respect of Foreign Chiron
Sales in such quarter) and Section 9.4.1 (in respect of
Foreign Non-Chiron Sales in such quarter), at such time as
Chiron demonstrates that it has the Capacity (not including
the Capacity derived from subcontracting Major Processing
Steps to third parties, and only if Chiron has the Capacity
to fully supply Schering's orders reasonably necessary to
meet demand for Betaseron in the United States and Canada
pursuant to Section 7.11 and has fully satisfied those
orders) to deliver to Schering for sale in Europe * or
more in the immediately succeeding four calendar quarters;
PROVIDED, HOWEVER, that such Schering Credits shall not be applied
(but shall be carried forward from quarter to quarter) to the extent
they would result in Chiron receiving payment:
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 26
<PAGE>
(c) (if Section 9.4.2(a) applies) for such Domestic Chiron Sales,
in an amount less than the sum of * of such Domestic
Chiron Sales, plus the Chiron Cost of Goods for such Chiron
Sales, or
(d) (if Section 9.4.2(b) applies) for such Foreign Non-Chiron
Sales, in an amount less than * of such Foreign
Non-Chiron Sales, and for such Foreign Chiron Sales, in an
amount less than the sum of * of such Foreign Chiron
Sales plus the Chiron Cost of Goods (which shall include any
credit applied under Section 9.2.2) for such Foreign Chiron
Sales.
The Schering Credits shall be decreased to the extent they have been
applied by Schering against payments otherwise due to Chiron.
.3 REDUCTION OF CHIRON CREDITS. In each calendar quarter in which there
are no outstanding Schering Credits and are outstanding Chiron
Credits, the Chiron Credits shall, solely for purposes of Section
9.4.4, be reduced by an amount equal to the sum of:
(a) the amount by which the payments received by Chiron in
respect of Foreign Chiron Sales in such calendar quarter
* of such Foreign Chiron Sales, plus the Chiron
Cost of Goods (which shall include any credit applied under
Section 9.2.2) for such Foreign Chiron Sales; plus
(b) the amount by which payments received by Chiron in respect of
Foreign Non-Chiron Sales * of such Foreign Non-Chiron
sales.
.4 FOREIGN EFFECTIVE PERCENTAGE RATE BEFORE FULL REDUCTION. In any
calendar quarter, after the * anniversary of the First
European Commercial Sale, in which there are Chiron Credits to
be reduced pursuant to Section 9.4.3, the Effective Percentage
Rate for Foreign Chiron Sales and Foreign Non-Chiron Sales
shall be * . In any other quarter, the Effective
Percentage Rate for such Foreign Chiron Sales and Foreign
Non-Chiron Sales shall be the Effective Percentage Rate then
in effect under Section 9.6 for Domestic Chiron Sales, instead
of * , and the provisions of Sections 9.2 and 9.4.1 will
not otherwise be affected.
.5 INTEREST. Any unapplied Schering Credits or unreduced Chiron
Credits shall be denominated in U.S. dollars and shall accrue
interest at LIBOR, calculated from the date accrued until the date
applied or reduced. All Schering Credits and Chiron Credits will
be extinguished at the end of the term of this Agreement. Schering
Credits and Chiron Credits are only to be used for the purposes
expressly set forth in Section 9.4 and neither Party shall have any
right or obligation (during the term of this Agreement or upon
expiration or earlier termination thereof) with respect to
such Credits except as set forth in Section 9.4.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 27
<PAGE>
.6 EXTENSION OF THE TERM OF THIS AGREEMENT. The term of this
Agreement may be extended for up to * successive
* periods beyond the Original Term in order to allow a
Party to apply or reduce its Credits, as the case may be. If
* before the expiration of the Original Term a Party has a
Credit and at the rate such Credit has been applied or reduced
over the prior * such Credit would not be fully applied
or reduced by such expiration of the Original Term, then such
Party may give notice at such time to the other Party that
this Agreement will be extended * beyond the Original
Term, and this Agreement shall be so extended. Assuming a
Party has exercised its right as to the previous *
period, this right to extend this Agreement may be exercised
as to the * and * * periods if (a) two
years before the then-scheduled expiration of this Agreement a
Party has a Credit and at the rate such Credit has been
applied or reduced over the prior two years such Credit would
not be fully applied or reduced by such expiration of this
Agreement, and (b) such Party provides notice at such time
that it will extend the term of this Agreement for such *
period. If Chiron exercises this right as to any *
period, Schering shall have the option (by providing notice to
Chiron within 60 days after Schering is notified that Chiron
has exercised its right as to any * period) of paying
Chiron on the then-scheduled expiration of this Agreement an
amount in U.S. dollars equal to the "value" of the Chiron
Credits as of such then-scheduled expiration date, in which
case this Agreement will expire on its then-scheduled
expiration date. If Schering exercises this right as to any
* period. Chiron shall have the option (by providing notice
to Schering within 60 days after Chiron is notified that
Schering has exercised its right as to any * period) of
paying Schering on the then-scheduled expiration of this
Agreement an amount in U.S. dollars equal to the "value" of
the Schering Credits as of such then-scheduled expiration
date, in which case this Agreement will expire on its
then-scheduled expiration date.
9.5 PAYMENT FOR DOMESTIC NON-CHIRON SALES. Except as set forth in Section
7.3.4, if there should be any Domestic Non-Chiron Sales in any calendar
quarter, Schering shall pay Chiron, within 60 days after the end of such
quarter, the Effective Percentage Rate multiplied by the amount of such
Domestic Non-Chiron Sales, less the Allocated Supply Cost attributable to
such sales.
9.6 EFFECTIVE PERCENTAGE RATE. Subject to Section 9.4.4, the "Effective
Percentage Rate" shall mean the percentage rate set forth below during the
time period specified; which shall be measured starting with the First
Commercial Sale:
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 28
<PAGE>
FULL YEARS COMMENCING FROM FIRST COMMERCIAL SALE: *
EFFECTIVE PERCENTAGE RATE *
9.7 NON-REVENUE VIALS. After the First Commercial Sale, any Vial which is
delivered and accepted, but disposed of in other than a revenue-bearing
transaction (e.g., sample Vials, and clinical trial supplies, other than
those supplied under Section 4.2) shall be deemed a "Non-Revenue Vial," and
Chiron shall have as sole compensation for such Non-Revenue Vial *
* per Vial, and to the extent that, pursuant to section 9.1, a
greater amount may have been paid for such Vial, the difference shall be
credited against the payment set forth in section 9.2. During the Initial
Sales Period, there shall be no more than * Non-Revenue Vials per
year, and thereafter such number as the Parties may reasonably agree. If
Schering desires to order more than the applicable maximum number of
Non-Revenue Vials for any year, the price of such Vials and the quantity to
be supplied shall be negotiated by the Parties. This Section shall not
apply to Vials supplied pursuant to Section 4.2 or 9.3.
9.8 FDA DELAY. Prior to FDA Licensing, Chiron shall not be required to
perform fill-finish operations on G-75 so as to make Vials unless and
until Chiron elects to do so in view of the progress of the ELA/PLA
at the FDA.
9.9 UNUSABLE VIALS. Without further charge to Schering under Section 9.1,
Chiron will replace as soon as practicable after FDA Licensing and on
Schering's request, Vials which were delivered to Schering prior to
FDA Licensing and which, at the time of FDA Licensing, have less than six
months remaining prior to the expiration date of such Vials. Such Vials
shall be destroyed by Schering, returned to Chiron, or otherwise
disposed of in accordance with the agreement of the Parties.
9.10 FORM OF PAYMENT. All payments due Chiron hereunder shall be made in
United States dollars, for Chiron's account, by wire transfer to a bank
in the United States designated in writing by Chiron; PROVIDED
that where payments in respect of Net Sales are based on Net Sales
in non-U.S. currencies, the amount of Net Sales and any deductions used
used to calculate Net Sales, if any, accrued and expressed in the
currency of each country shall be converted into Deutsche Marks and then
into U.S. dollars, with each conversion at the average of the average
daily "bid" and "ask" exchange rates as provided by Reuters prevailing
in Frankfurt at 1:00 p.m. for the applicable calendar quarter.
9.11 OTHER CONSIDERATION. If Schering or its Affiliates or licensees receive
any form of consideration other than money for supplying Betaseron,
including (by way of example) obtaining more favorable pricing for
Schering on other products, Chiron shall be entitled to payments
hereunder based on the
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 29
<PAGE>
reasonable value of such consideration as if it were payment in cash for
sales of Betaseron.
ARTICLE X - REPORTS AND BOOKS
10.1 REPORTS. Within 60 days after the end of each calendar quarter, Schering
shall provide Chiron with a written report setting forth in reasonable
detail the number, description and aggregate Net Sales for such quarter,
itemizing Net Sales of Product supplied by each of Chiron and BI (and
any other supplier), any credits which may be applicable under Section
9.2, the amount of any Schering Credits or Chiron Credits, and the
Allocated Supply Cost applicable for such quarter, and the calculation of
the amounts to be paid to Chiron pursuant to this Agreement, including
Article IX above; together with data in reasonable detail in support of
the calculations of such amounts. Where Schering has been required to
withhold an income or other similar tax from amounts otherwise due
Chiron, Schering shall provide Chiron with satisfactory evidence of
such tax in order to permit Chiron to claim a credit therefor. Any
amount due Chiron in respect of such quarter and which has not been
previously paid shall accompany such report.
10.2 EXAMINATION OF BOOKS.
.1 Each of the Parties shall keep and maintain complete and accurate
books of account in respect of its activities under this Agreement
for which payment may be required, in accordance with applicable
accounting principles consistently applied (including GAAP for U.S.
entities) and in accordance with local law. The Parties shall
retain such records for so long as the Parties shall mutually
determine but unless agreed otherwise for five years after the
period to which such records relate.
.2 In addition to any other inspection rights, Chiron shall have the
right, for any period during which Schering or its Affiliates shall
be marketing or distributing Product and for three years thereafter
and through an independent certified public accountant reasonably
acceptable to Schering, to examine the relevant books and records
of account of Schering and its Affiliates engaged in activities
under this Agreement at normal business hours, upon reasonable
demand, to determine whether appropriate accounting and payment
have been made by Schering hereunder. Any expenses incurred by
Chiron in connection with any such examination shall be borne by
Chiron.
.3 In addition to any other inspection rights, Schering shall have the
right for any period during which Chiron shall be engaged in
activities at Schering's expense and for three years thereafter and
through an independent certified public accountant reasonably
acceptable to Chiron, to examine the relevant books and records of
account of Chiron at normal business hours, upon reasonable demand,
to determine whether appropriate accounting has been made by Chiron
Page 30
<PAGE>
hereunder. Any expenses incurred by Schering in connection with any
such examination shall be borne by Schering.
10.3 COSTS. Where a Party hereunder is to be paid or credited with its costs,
such costs shall be fully burdened and shall be calculated according to
such Party's standard and established internal project costing
methodology, which methodology shall be calculated in compliance with
applicable accounting principles, including GAAP in the case of Chiron
and any U.S. Affiliate of Schering, and shall include a reasonable
allocation of corporate overhead, all in accordance with such
established method. Each Party shall use its best efforts to perform
activities to be charged to the other Party in a cost-effective manner.
10.4 "CHIRON COST OF GOODS" shall mean Chiron's cost of supplying Betaseron (or
subcontracting the supply thereof) hereunder, calculated in accordance
with Chiron's accounting method as specified in Section 10.3 and set out
in Exhibit 10.4; PROVIDED that in calculating "Chiron Cost of Goods",
Chiron shall only be entitled to include idle capacity to the extent
that the portion of the facility or equipment which is idle is completed
and licensed by the appropriate authority for the production of
Betaseron, "in use" (according to GAAP) and dedicated to the production
of Betaseron; and PROVIDED FURTHER that such accounting method shall be
reasonable in the context of the pharmaceutical industry. Schering shall
have the right to audit both the method and content of the calculation
of the Chiron Cost of Goods, including in particular the appropriateness
of any idle capacity allocation, and any unusual or unreasonable expense
included in Chiron's calculation shall be stricken at Schering's
reasonable request.
10.5 INTEREST ON OVERDUE PAYMENTS. If any sum due hereunder is not paid in
full on the due date, interest at LIBOR or the maximum rate permitted by
law, whichever is lower, shall accrue upon any unpaid balance from the
date on which such sum first became due until such time as payment is
made in full.
ARTICLE XI - RIGHTS IN PRODUCT TECHNOLOGY
11.1 OWNERSHIP. Subject to the rights and obligations herein, each Party
shall own the entire right, title and interest in and to all Program
Patents and Know-how invented or acquired solely by such Party, and the
Parties shall jointly own any Program Patents or Know-how invented or
acquired jointly by such Parties, all according to applicable law.
11.2 PATENT PROSECUTION. Each Party ("the filing Party") may, at its sole
discretion, file, prosecute, maintain and defend against opposition
proceedings the Program Patents it owns in such countries as the filing
Party shall determine. During the term of this Agreement, the filing
Party shall, at the reasonable request and expense of the other Party,
file for such Program Patents in such countries as the other Party deems
necessary to protect its rights under this Agreement, but the rights
under such Program Patents shall continue to be owned by the originally
filing Party. With respect to jointly-owned Program Patents or Know-how,
the owners shall
Page 31
<PAGE>
cooperate to file, prosecute, maintain, abandon (where the Parties agree
it would be necessary and appropriate to protect trade secret rights),
and defend against opposition proceedings such Program Patents jointly
and share or bear the cost thereof as they may agree.
The filing Party shall keep the other Party apprised of the status of
each Program Patent and shall give reasonable consideration to any
suggestions or recommendations of the other Party concerning the
preparation, filing, prosecution, maintenance and defense thereof. If,
during the term of this Agreement, the filing Party intends to allow any
Program Patent to lapse or become abandoned without having first filed a
substitute, the filing Party shall, whenever practicable, notify the
other Party of such intention at least sixty (60) days prior to the date
upon which such Program Patent shall lapse or become abandoned, and the
other Party shall thereupon be entitled to assume responsibility for the
prosecution, maintenance and defense thereof in a particular
jurisdiction (unless the filing Party reasonably determines to abandon
the Program Patent in order to protect its trade secrets), but such
actions shall not act to transfer any rights beyond those expressly set
out herein, except that if the other Party assumes such responsibility
it shall be entitled to a non-exclusive, royalty-free license only to
such Program Patent and only in such jurisdiction.
11.3 LICENSE GRANTS.
.1 SCHERING GRANT. Schering agrees that neither Schering nor its
Affiliates shall assert against Chiron or its Affiliates *
Schering or its Affiliates hereunder; PROVIDED, HOWEVER, that such
*
.2 CHIRON GRANTS. Chiron agrees that neither Chiron nor its Affiliates
shall assert against Schering or its Affiliates * without first
obtaining the consent of Chiron, which shall not be withheld
unreasonably. Subject to the rights of Chiron to supply Beta
Molecules to Schering pursuant to this Agreement, and without
further obligation hereunder, Chiron hereby grants Schering *
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 32
<PAGE>
* for the purpose of * under the terms and conditions of this
Agreement; PROVIDED that with respect to * Chiron will grant Schering
*
.3 NEW TECHNOLOGY. During the term of this Agreement, neither Party
shall be required to license or permit the use by the other Party
of any of its Program Patents or Know-how in the manufacture, use
or sale of any Product hereunder except as provided in Section
11.3.1 and 11.3.2, without its consent or the grant of any
necessary license, which consent or license may be conditioned on
receipt of some consideration from the other Party.
11.4 PROVISION OF ACCESS. Chiron and Schering shall provide designated
representatives of each other with copies of each patent application and
written embodiments of know-how relevant to the licenses granted in
Section 11.3, as well as process improvements which Chiron proposes to
implement in its manufacture of any Product. At any time during the
term of this Agreement that BI or any other supplier (including
Schering) is to supply or be qualified to supply Product to Schering
pursuant to this Agreement, Chiron shall, at Schering's request and
expense and to the full extent of Chiron's license grant hereunder,
provide BI and such other suppliers in confidence with such copies and
teach their personnel the use of such technology.
11.5 LICENSES TO THIRD PARTIES. Except as expressly provided herein, during
the term of this Agreement, * Schering shall not grant *
ARTICLE XII - THIRD-PARTY PATENTS
12.1 NO WARRANTY. Except as expressly set out herein, no Party makes any
warranty with respect to the validity, perfection or dominance of any
patent
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 33
<PAGE>
or other proprietary right included in its Know-how or any
Program Patents or with respect to the absence or rights in third
parties which may be infringed by the manufacture, use, or sale of any
Product.
12.2 NOTICE OF OTHER PATENTS. Each Party shall bring to the attention of the
other Party any patent or patent application it discovers, or has
discovered, and which relates to the subject matter of this Agreement,
and shall cooperate with each other so that each Party can determine
whether valid rights of a third party may be infringed.
12.3 NOTIFICATION OF PATENT LITIGATION. In the event that either Chiron or
Schering is sued by a third party charging infringement of a patent
resulting from the manufacture, use or sale of Products by the Parties
or any of their Affiliates, or is otherwise charged with infringement or
threatened with suit for infringement, the Party sued or receiving such
charge or threat shall promptly notify the other Party. Thereafter, the
Parties shall jointly attempt to formulate a mutually agreeable strategy
to address such event, including possible licenses, joint litigation, or
other strategies.
12.4 RESPONSIBILITY. Unless the Parties expressly agree otherwise,
responsibilities for potential liabilities arising from alleged
infringement of third party patents by the activities of the Parties
regarding Betaseron shall be governed by the following provisions:
.1 Chiron will have Sole Responsibility with respect to Betaseron
provided by Chiron to Schering hereunder for every third-party
patent claim that is infringed or alleged to be infringed by *
, and that:
(a) is a *
.2 Schering will have Sole Responsibility for every claim in any
third-party patent, which is infringed or alleged to be infringed
by the * other than a claim for which Chiron has Sole
Responsibility, as defined in Section 12.4.1.
.3 Third-party patent claims which are the Sole Responsibility of
either Chiron or Schering shall include only those *
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 34
<PAGE>
.4 "Sole Responsibility" means that the responsible Party shall
have (a) the sole right to settle any dispute based on such
third-party patent claims so long as the settlement maintains
the existing rights of the other Party to make, use and/or sell
Betaseron; PROVIDED that the responsible Party shall obtain
the prior written approval of the other Party, which shall not
be unreasonably withheld, before entering into any settlement
of a claim, if as a result, injunctive or other relief (other
than monetary damages to be paid by the responsible Party) would
be imposed against the other Party, (b) the obligation to bear
all costs and expenses of any such settlement and of any
license obtained under the relevant patent rights, (c) the
obligation to bear, and to indemnify the other Party against,
the costs of any royalties, damages for past infringement or
other monetary damages awarded by a non-appealable judgment or
decision of a court or other competent tribunal to any third
party against either Party, and (d) the sole right to control,
and obligation to pay all costs in connection with, any such
litigation, subject to a right of the other Party to
participate in such litigation at its own expense and to the
extent permitted by applicable law. Where both Parties have
Sole Responsibility for claims in the same litigation, the
Parties shall cooperate in good faith and, to the extent
possible, the responsible Party will retain its
responsibilities as defined in the preceding sentence as to
those claims for which it is the responsible Party. Each Party
shall notify the other promptly upon notice of any such third
party patent claim or lawsuit subject to this Section 12.4.
.5 A party having Sole Responsibility shall not be liable to the
other Party for any costs or damages not provided for in
Section 12.4.4 which are incurred by the other Party as a
result of any settlement or decision of any court or other
tribunal, including any lost profits or other business losses
resulting from any injunction or decision prohibiting either
Party from buying, making, using or selling Betaseron, and
such costs or damages shall not include any lost profits,
incidental or consequential damages, or any damages resulting
from the loss of capital investments and similar losses.
12.5 TRADEMARKS. Schering warrants and represents that it has the right
to use the trademarks and tradenames that will be used in
connection with the marketing of Betaseron, including the mark
BETASERON -R- in the United States. Chiron shall obtain no rights in
the mark BETASERON, but shall continue to own its own marks
including CHIRON and CETUS and its centaur and whale designs.
ARTICLE XIII - INDEMNIFICATION AND WARRANTIES
13.1 ENVIRONMENTAL INDEMNIFICATIONS: PERMITS. Notwithstanding any other
indemnification obligation in this Agreement, and in addition to
any rights the Parties may have under relevant federal, state, or
local statutory and common laws, Chiron shall indemnify and hold
harmless Schering and its Affiliates from and against any and all
claims, actions, investigation costs,
Page 35
<PAGE>
response costs, losses, damages, and other costs and expenses
(including attorney and consulting fees) incurred thereby as a
result of Environmental Matters; PROVIDED HOWEVER, this
indemnification does not apply to the extent it results from the acts
or omissions of personnel of Schering or its Affiliates which occur at
any Chiron Site or Supplier Site.
13.2 "ENVIRONMENTAL MATTERS" are:
(a) The operation by Chiron or its Affiliates, or any entity
which produces or manufactures Betaseron or any raw material used
therefor or provides services relating thereto under a
subcontracting arrangement with Chiron or its Affiliates, of any
Chiron Site or Supplier Site or other site or facility in a manner
that is not in compliance with and in violation of any
Environmental Law as defined herein. "Environmental Law" means any
treaty, law, ordinance, regulation or order of any jurisdiction,
relating to environmental matters, including, but not limited to,
matters governing air pollution; water pollution; the use,
handling, reporting, release, storage, transport, or disposal of
Hazardous Materials as defined herein; exposure to or discharge of
Hazardous Materials; occupational safety and health; and public
health. "Hazardous Materials" includes, but is not limited to, air
contaminant, water pollutant, hazardous material, hazardous
waste, hazardous substance, toxic and hazardous substance, medical
waste, infectious waste, "chemicals known to the State of
California to cause cancer or reproductive toxicity", asbestos and
PCB's, as such substances are defined under any applicable federal,
state or local statute, regulation, rule or ordinance.
(b) Any action where (i) there has been a release of Hazardous
Materials into the environment; or (ii) Hazardous Materials have
been Disposed of at a site as the term "Disposed" is defined in
applicable Environmental Laws.
(c) Any failure to (i) obtain or maintain all permits, or (ii)
provide all notices, required by Environmental Laws for the lawful
operation of any Chiron Site or Supplier Site or other facilities
or sites.
(d) Any failure during the term of this Agreement to obtain
and/or maintain in full force and effect all permits required under
the Environmental Laws, in the form required by permitting
authorities in light of this Agreement, for any operation or
disposal at any Chiron Site or Supplier Site or other facility or
site.
(e) Any other actual or alleged act or omission relating to
the handling or disposal of Hazardous Materials at any Chiron Site
or Supplier Site or other facility or site.
13.3 WARRANTIES AND LIMITATION OF DAMAGES. Chiron warrants that the
Vials made by or for Chiron hereunder shall be manufactured in
accordance with GMPs, and shall conform to the Beta Specifications
and shall be in compliance with all applicable international,
national, state and federal laws and regulations,
Page 36
<PAGE>
PROVIDED that the foregoing warranty shall not apply to any Vials to
the extent that Schering has exercised authority for the approval of
such Vials, or has assumed responsibility for quality control
thereof, pursuant to Section 8.11, and Schering's acts or omissions
thereunder result in the failure of such Vials to comply with such
warranties. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN CHIRON
MAKES NO WARRANTIES EXPRESS OR IMPLIED AND EXPRESSLY DISCLAIMS
WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE OR MERCHANTABILITY,
AND CHIRON SHALL NOT BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL
DAMAGES IN ANY CASE OF NONCONFORMITY. NEITHER PARTY SHALL BE LIABLE
TO THE OTHER PARTY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING
FROM ANY ALLEGED OR ACTUAL BREACH OF THIS AGREEMENT.
13.4 INDEMNIFICATIONS BY CHIRON. Chiron will indemnify and hold Schering
and its Affiliates harmless against any loss, damage, action, suit,
claim, demand, liability or expense, including Costs of Recall (a
"Loss"), that may be brought, instituted or arise against or be
incurred by Schering or its Affiliates to the extent such Loss is
based on or arises out of: *
; PROVIDED that the foregoing
indemnification shall not apply to any Loss to the extent such Loss
is based on or arises out of the matters described in Section
13.5(a), (b) or (c).
13.5 INDEMNIFICATION BY SCHERING. Schering will indemnify and hold
Chiron and its Affiliates harmless against any Loss that may be
brought, instituted or arise against or be incurred by Chiron or its
Affiliates to the extent such Loss is based on or arises out of: *
; PROVIDED that the foregoing
indemnification shall not apply to any Loss to the extent such Loss
is based on or arises out of the matters described in Section
13.4(a), (b) or (c).
13.6 INDEMNIFICATION RE VISITING EMPLOYEES. Each Party shall indemnify
and hold the other Party harmless against any and all liability,
damage, loss, cost or expense arising from any claim made or suit
brought by such Party's own employees or agents against the other
Party, which claims arise in whole or in part from injuries or harm
allegedly suffered by such employees or agents while present at the
premises of the other Party, except for such injury or harm caused
by the gross negligence or willful misconduct of such other Party.
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 37
<PAGE>
13.7 CLAIMS PROCEDURES. Each Party will give the other prompt written
notice of any injury or claim alleged to have occurred as a result
of the use or application of Betaseron or any final dosage form
manufactured using Betaseron supplied under this Agreement,
specifying the time, place and circumstances thereof and the names
and addresses of the persons involved. Each Party will also furnish
promptly to the other copies of all papers or official documents
received in respect of any actions arising out of any such alleged
injury. If an event occurs which either Party believes is an
indemnifiable event pursuant to this Article, that Party shall
notify the indemnifying Party promptly. If such event involves a
claim of any third party, or any employee of either Chiron or
Schering, the indemnifying Party shall have sole control over, and
shall assume all expense with respect to the defense, settlement,
adjustment or compromise of any claim as to which this Section
requires it to indemnify the other Party, provided that the
indemnifying Party shall obtain the prior written approval of the
indemnified Party, which shall not be unreasonably withheld, before
entering into any settlement, adjustment or compromise of any claim,
or before ceasing to defend any claim, if pursuant thereto or as a
result thereof there would be imposed injunctive or other relief
(other than monetary damages to be paid by the indemnifying Party)
against the indemnified Party. The indemnified Party may employ
counsel at its own expense to assist in the handling of such claims.
The indemnified Party must provide reasonable assistance to the
indemnifying Party in defense against the claim, including without
limitation, providing all relevant facts known to it, assisting in
discovery proceedings, and providing witnesses.
13.8 INSURANCE. Each Party shall obtain and maintain in effect with
financially sound and reputable insurers an appropriate insurance
policy with respect to its obligations under this Article, to the
extent such policy can be obtained and maintained on reasonable
commercial terms and if such a policy cannot be so obtained and
maintained, the Parties shall meet and confer regarding appropriate
alternatives, which may include appropriate reserves in respect of
such obligations. At the request of a Party, the other Party will
supply a Certificate of Insurance or evidence of such reserve,
reasonably satisfactory to the requesting Party, indicating the
terms of coverage.
13.9 COMPLIANCE. The parties shall comply fully with all applicable laws
and regulations in connection with their respective activities under
this Agreement.
ARTICLE XIV - TERM, TERMINATION, AND EXPIRATION
14.1 TERM. Unless earlier terminated pursuant to the terms of Section
14.3 or extended pursuant to Section 9.4.6 or 14.2, this Agreement
shall continue in effect until the end of the Original Term,
whereupon it shall expire.
14.2 RENEWAL. The Parties may, by mutual written agreement, renew this
Agreement for successive terms of * Three years prior to the
expiration date of this Agreement, the Parties shall confer as to the
mutual desirability of such renewal and each party shall disclose
to the other its
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 38
<PAGE>
intentions regarding renewal. Unless the Parties agree to renew prior to
two years before expiration, this Agreement will expire pursuant to
Section 14.1.
14.3 TERMINATION.
.1 If either Party defaults in the performance of, or fails to be in
compliance with, any material warranty, representation, agreement
or covenant of this Agreement, and such default or noncompliance
shall not have been substantially remedied, or steps initiated to
substantially remedy the same to the other Party's reasonable
satisfaction, within 60 days after receipt by the defaulting Party
of a written notice thereof and demand to cure such default from
the other Party, the Party not in default may terminate this
Agreement, at the option of such Party and by written notice to the
defaulting Party.
.2 Either Party may terminate this Agreement if, at any time, the
other Party shall file in any court pursuant to any statute, a
petition in bankruptcy or insolvency or for reorganization in
bankruptcy or for an arrangement or for the appointment of a
receiver or trustee of such Party or of its assets, or if such
Party proposes a written agreement of composition or extension of
its debts, or if such Party shall be served with an involuntary
petition against it, filed in any insolvency proceeding, and such
petition shall not be dismissed within sixty (60) days after the
filing thereof, or if such Party shall propose or be a party to any
dissolution, or if such Party shall make an assignment for the
benefit of creditors.
.3 Except as otherwise expressly provided herein, termination by
either Party pursuant to this Article XIV shall not prejudice any
other remedy that a Party might have in law or equity, except that
neither Party may claim compensation for lost opportunity or like
consequential damages arising out of the fact of such termination.
14.4 SURVIVAL. Unless expressly provided to the contrary, the provisions of
Articles XII, XIII, XIV, XV and XVI shall survive the expiration or
termination of this Agreement.
14.5 PREPARATORY ACTIVITIES OF SCHERING. Chiron acknowledges that Schering
shall, after expiration or termination of this Agreement, be free to
make, have made, use and sell any Beta Molecule to the extent it can do
so without infringing on Chiron's intellectual property or other
proprietary rights. In order to provide for an orderly transition,
Schering shall notify Chiron at least one year prior to the expiration
of this Agreement of Schering's plan for the transfer of manufacturing
upon expiration. Chiron shall, at Schering's expense and upon such
notice, cooperate reasonably with Schering or its designee in disclosing
thereto the technology used for the manufacture of Products hereunder.
14.6 PREPARATORY ACTIVITIES OF CHIRON. Schering acknowledges that, unless the
Parties otherwise agree in writing to extend the term of this Agreement
Page 39
<PAGE>
beyond the Original Term, Chiron may desire to utilize its capacity for
the manufacture of Beta Molecules after expiration or termination of
this Agreement to the extent it can do so without infringing on
Schering's intellectual property or other proprietary rights. Schering
further acknowledges and agrees that Chiron may commence making
preparations for the post-termination manufacture and commercial sale of
such Beta Molecules beginning two years before the expiration or
termination of this Agreement. Such preparations may include the steps
necessary to obtain FDA approval for Chiron to sell any Beta Molecule,
including human clinical trials and the filing of a product license
application, and Chiron shall have the right to cross-reference the
ELA, and the corresponding portions of any Foreign Filings but Chiron
shall not be entitled to begin commercial sale of any Beta Molecule
prior to the expiration or termination of this Agreement. Chiron shall not
be prohibited from making such preparations during the two years prior
to the expiration or termination of this Agreement or from
manufacturing, using or selling any Beta Molecule after expiration or
termination of this Agreement, provided such activities do not infringe
Schering's intellectual property or other proprietary rights and are not
inconsistent with Section 11.5. Schering agrees that it will not assert
against Chiron any claim based on trade secrets or confidentiality
obligations under this Agreement to the extent Chiron, in making
preparations during the two years prior to the expiration or termination
of this Agreement or in making, using or selling any Beta Molecule after
expiration or termination hereof, uses processes, materials or
procedures that were developed by Cetus or Chiron and provide no
potential or actual independent economic value over processes, materials
or procedures that are generally known in the industry.
14.7 INTELLECTUAL PROPERTY RIGHTS ON TERMINATION OR EXPIRATION. Upon
expiration or earlier termination of this Agreement:
.1 Schering shall have an * in order to * solely to the
extent that during the term of this Agreement * ; PROVIDED
that Schering shall not be entitled to the foregoing license if
Chiron shall have *
.2 Chiron shall have an * solely to the extent that during the
term of this Agreement * PROVIDED that Chiron shall not be
entitled to the
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 40
<PAGE>
foregoing license if *
14.8 REFERENCE TO ELA. After the term of this Agreement, Chiron shall have
a non-exclusive right to use and refer to the ELA and Items 1.1, 1.2,
1.3, 1.4, 1.5, 2.2, and 3 "Chemistry and Manufacturing Controls" and
Appendices I-1, I-2.1, I-2.2, I-3 and I-4 of the PLA, and any
corresponding portions of any Foreign Filings.
14.9 ACCOUNTING. Upon any termination of this Agreement, the Parties shall,
within 90 days after termination, prepare reports and make payments in
a manner substantially the same as provided for in Article X hereof, to
account for unaccounted Net Sales.
14.10 PHASE IN/PHASE OUT OPTION. In order to provide for an efficient and
orderly transition in the event (a) this Agreement expires on the
Original Term or (b) this Agreement expires at such later date
pursuant to Section 9.4.6 or 14.2, the Parties agree as follows:
.1 Subject to the terms and conditions set out herein, Schering
shall have the option to supply and/or order Products in the
following amounts and during the following periods: (a) for the
one-year period commencing two years before the expiration of
this Agreement ("Year A"), Schering may supply itself with (or
arrange for the supply of) up to * of the average total
annual quantity of Products which had been provided by Chiron in
the previous two years (the "Baseline Supply"), in lieu of
Chiron supplying that quantity in such period; (b) for the
one-year period commencing one year before expiration of this
Agreement, ("Year B"), Schering may supply up to * of the
Baseline Supply, in lieu of Chiron supplying that quantity in
such period; (c) for the one-year period immediately following
the expiration of this Agreement ("Year C"), Schering may
require Chiron to supply Schering with up to * of the
Baseline Supply in such period, and (d) for the one-year period
commencing one year after the expiration of this Agreement
("Year D"), Schering may require Chiron to supply Schering with
up to * of the Baseline Supply in such period.
.2 As to any Product which Schering supplies in Year A or Year B,
Chiron will be entitled to receive, in lieu of any other
payment under this Agreement, the *
.3 As to any Product which Chiron supplies in Years C or D, Chiron
will receive, in lieu of any other payment under this Agreement,
an amount per Vial equal to *
.4 Schering may exercise the option set forth herein in respect of
none, any or all of the periods referred to in subsections
14.10.1(a) through
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 41
<PAGE>
(d) above, PROVIDED that notice as to each period must be
delivered to Chiron no later than one year prior to the
commencement of such period specifying the percentage of the
Baseline Supply (in reasonable whole Lots) which is to be supplied
by Schering and Chiron, as the case may be, for such period, and
FURTHER PROVIDED that under Section 14.10.1 the percentage of the
Baseline Supply which Schering elects to manufacture (or have
manufactured) may not be less in Year B than in Year A; and the
percentage of such Baseline Supply which Schering elects to
require Chiron to provide may not be greater in Year D than in
Year C, without Chiron's consent.
.5 If Schering exercises its right to have Chiron supply Products
during Year C or D, this Agreement will expire pursuant to
Section 14.1, except that the following Articles and Sections
shall survive such termination and shall continue to be in effect
during the period that Chiron supplies Products to Schering
pursuant to this Section 14.10 (except as such Articles and
Sections may be in conflict with this Section 14.10 and except
that such survival shall not be deemed to extend the date of
expiration or termination of this Agreement as referred to in
such Articles and Sections):
NUMBER HEADINGS
7.11 Quarterly Orders
7.12 Reports
7.13 Limitations
VIII Processing and Manufacturing, excluding Section 8.11.3
9.10 Form of Payment
X Reports and Books
XI Rights in Product Technology, excluding Sections 11.2 and
11.5
XII Third-Party Patents (as to Betaseron only)
XIII Indemnification and Warranties
14.3 Termination
14.4 Survival
14.5 Preparatory Activities of Schering
14.6 Preparatory Activities of Chiron
14.7 Intellectual Property Rights on Termination or Expiration
14.8 Reference to ELA
14.9 Accounting
14.10 Phase In/Phase Out Option
XV Product Recall
XVI Confidentiality
XVII Miscellaneous, excluding Section 17.7.2
ARTICLE XV - PRODUCT RECALL
15.1 "COSTS OF RECALL" shall be deemed to include all costs arising from a
recall of Product, including but not limited to notifying purchasers
of the fact of the
Page 42
<PAGE>
recall, arranging for the return of Product from the purchasers,
storage, destruction, or remediation of returned Product, and
replacement of Product. "Costs of Recall" shall not include cash
refunds, lost profits, damage to goodwill, or other consequential
injury to either Party. Any cash refund made by Schering hereunder
on account of a recall will, for the purpose of calculating Net Sales
under Section 9.2, be subtracted from the amount calculated as Net
Sales in the calendar quarter immediately following such recall. All
recalls shall be performed pursuant to the guidelines set forth in 21
CFR 7.40 ET SEQ.
15.2 DECISION TO RECALL. Where a recall is requested by the FDA or by
another agency or authority having regulatory jurisdiction over the
Product, Schering shall perform the recall and shall be responsible for
preparing all necessary paperwork and handling all interactions with the
FDA or such other agency or authority to the extent permitted by law.
Where a recall is not requested by a regulatory body, but a Party feels
such a recall may be advisable, such recall shall be discussed by the
Development Committee, with final authority for deciding such recall
residing with Schering. In the event that Chiron advises that there
should be a recall of Product based on a specific, identifiable event
or circumstance, and Schering declines to so recall the Product, then
Chiron shall be indemnified and held harmless against any liability to
a third party which results from the event or circumstance upon which
Chiron advised such recall and which arises after the earliest date on
which such recall could have been accomplished. Chiron's advice and
Schering's decision to recall a Product shall be made only in good
faith and with due regard for the commercial interests of the Parties
and the strong public interest in access to Product, and in public
health and safety, and in accordance with the standards of conduct
prevailing in the industry.
ARTICLE XVI - CONFIDENTIALITY
16.1 CONFIDENTIALITY. The confidential technical and business information of
either Party or both Parties shall hereafter be called collectively the
"Information", and shall include Technology and Mixed Technology and other
information which was required to be held in confidence pursuant to the
Ownership Agreement. The Parties acknowledge that the Information
designated as confidential by the providing Party shall be considered to
be confidential by the receiving Party, and the receiving Party shall not
disclose to others, (including to any Affiliates of the receiving Party
not bound by like conditions of confidentiality), nor make any use of the
Information received from the providing Party for any purpose other than
as contemplated in this Agreement, without the prior written consent of
the providing Party prior to the later of: the termination or expiration
of this Agreement (other than for breach by the receiving Party) or ten
(10) years after first disclosure thereof, except to the extent any of the
Information (i) was known to the receiving Party prior to the disclosure
hereunder or developed independent of the disclosure; (ii) is or becomes
publicly known through no fault or omission attributable to the receiving
Party, (iii) is rightfully given to the receiving Party from sources
independent of the providing Party, which sources
Page 43
<PAGE>
rightfully possess such information, or (iv) is licensed to the
receiving Party to use for its own activities outside of this Agreement.
Upon notice to the other Party, a Party may also disclose Information to
government health authorities necessary to meet applicable regulations.
16.2 SURVIVAL. Upon the termination for any reason of this Agreement, each
Party shall return any and all documents of the other Party which contain
Information (other than Information related to Technology or to Mixed
Technology, as defined in the Ownership Agreement, which is owned by or
licensed to such Party) and shall destroy any copies thereof, except that
the Parties may retain one copy of all documents for legal record-keeping
purposes or as required by applicable regulations.
ARTICLE XVII - MISCELLANEOUS
17.1 NOTICES. Any notice or other communication required or permitted to be
given by either Party under this Agreement shall be effective when
delivered, if delivered by hand or by electronic facsimile or five days
after mailing if mailed by registered or certified mail, postage prepaid
and return receipt requested, and shall be addressed to each Party at the
following addresses or such other address as may be designated by notice
pursuant to this Section:
If to Cetus or Chiron: If to Schering:
Chiron Corporation Schering A.G.
4560 Horton Street Mullerstrasse 170-178
Emeryville, CA 94608 W-1000 Berlin 65
Attn: President Germany
Facsimile: 510-655-3282 Attn: Head of SBU CNS; with a
copy to Legal Department
with copy to: with copies to:
General Counsel Schering Berlin, Inc.
110 East Hanover Avenue
Facsimile: (510) 654-5360 Cedar Knolls, NJ 07927
Attn: Vice President, Law &
Secretary
Facsimile: (201) 267-7721
Berlex Laboratories, Inc.
15049 San Pablo Avenue
Richmond, California 94804
Attn: Vice President, General
Manager
Facsimile: (510) 262-7095
17.2 AMENDMENTS. No amendment, modification or addition hereto shall be
effective or binding on either Party unless set forth in writing and
executed by duly authorized representatives of both Parties.
Page 44
<PAGE>
17.3 WAIVER. No waiver of any rights under this Agreement shall be
deemed effective unless contained in writing signed by the
Party charged with such waiver, and no waiver of any breach or
failure to perform shall be deemed a waiver of any future breach or
failure to perform or any other right arising under this Agreement.
17.4 HEADINGS. The section headings contained in this Agreement are
included for convenience only and form no part of the agreement
between the Parties.
17.5 APPLICABLE LAW. This Agreement shall be governed by, subject to and
construed in accordance with the laws of the State of California and
the Parties consent to the jurisdiction of the courts in that state.
Except as set forth expressly herein, no dispute arising out of this
Agreement or the Ownership Agreement, or any other matter shall be
submitted to arbitration without the advance written consent of both
Parties.
17.6 SEVERABILITY. If any provision of this Agreement is held to be
invalid, void or unenforceable for any reason, it shall be adjusted,
if possible, rather than voided in order to achieve the intent of
the Parties to the maximum extent possible. In any event, all other
provisions of this Agreement shall be deemed valid and enforceable
to the fullest extent possible.
17.17 ASSIGNMENT BINDING EFFECT
.1 Neither this Agreement, nor any rights granted hereunder, shall
be assignable by any Party hereto without the prior written
consent of the other Party, in such other Party's discretion;
PROVIDED HOWEVER, that either Party may assign this Agreement
without the consent of the other Party (i) to its Affiliates, if the
assigning Party guarantees the full performance of its Affiliates'
obligations hereunder or (ii) subject to Section 17.7.2, to a third
party purchasing substantially all the assets of the company
provided such third party agrees to be bound by this Agreement. Any
purported assignment in contravention of this Section shall, at the
option of the non-assigning Party, be null and void and of no
effect.
.2 If any unaffiliated third party shall purchase Chiron (or Cetus,
if Cetus owns any IFN Property), or substantially all of the
assets of Chiron (or Cetus, if Cetus owns any IFN Property), or
the property or facilities of Chiron or Cetus used in the
manufacture of Products under this Agreement ("change of
control"), Schering shall have the option to purchase or lease
from Chiron, Cetus or such third-party purchaser, as the case may
be, all the property, contracts (including this Agreement),
facilities and equipment of Chiron and Cetus used (or
substantially completed and intended for use) in the manufacture
of Products under this Agreement (the "IFN Property"), at the
aggregate fair market value (or, in the case of a lease, the
lease value) of the IFN Property. Where the IFN Property is used
solely or primarily for the manufacture of Products, Schering
shall have the right to buy such IFN Property, and if the IFN
Property is also used for the manufacture
Page 45
<PAGE>
of other substances, Chiron shall retain a leasehold interest in
such IFN Property to continue to make such other substances for
seven years. Where the IFN Property is used primarily for the
manufacture of substances other than Products, Schering shall
have the right to a leasehold interest in such IFN Property to
make Product for the remainder of the term of this Agreement.
Such fair market value shall be evaluated taking into account the
going concern value of the IFN Property, including the value of
the supply provisions of this Agreement and shall be determined
by an independent third party mutually agreed upon by the
Parties. Such option must be exercised, if at all, by notifying
Chiron in writing of such exercise within 90 days after Chiron
notifies Schering that it proposes to enter into a sale agreement
or that a change of control may occur that would meet the
conditions set forth in the first sentence of this Section 17.7.2.
17.8 BEST EFFORTS. In each case in this Agreement in which a Party is
required to use best efforts to perform a specified action, the
degree of effort required shall be deemed limited to what is
commercially reasonable under the applicable facts and
circumstances, without taking into account alternative commercial
opportunities available to such Party.
17.9 FURTHER ASSURANCES. Each Party hereto agrees to execute,
acknowledge and deliver such further instruments, and to do all
such other acts as may be necessary or appropriate in order to
carry out the purposes and intent of this Agreement.
17.10 FORCE MAJEURE. No Party shall be liable for any failure or delay
in performance under this Agreement to the extent such failure or
delay arises from any cause of any nature beyond the reasonable
control of such Party, and which would render performance
hereunder impossible including, without in any way limiting the
generality of the foregoing, fire, explosion, earthquake, storm,
flood, strike, labor difficulties, war, insurrection, riot, act
of God or the public enemy, or any law, act, order, export or
import control regulations, proclamation, decree, regulation,
ordinance, or instructions of local, state, federal or foreign
governmental or other public authorities, or judgment or decree of
a court of competent jurisdiction (but excluding a court injunction
against a Party's performance) and not otherwise arising out of breach
by such Party of this Agreement ("Force Majeure"). In the event of
the occurrence of such a cause or the reasonable likelihood of
such occurrence, the Party so affected shall give prompt written
notice to the other Party, stating the period of time the same is
expected to continue and shall use best efforts to end the
failure or delay and ensure that the effects of such case of
Force Majeure are minimized.
17.11 NEGATION OF AGENCY. Nothing herein contained shall be deemed to
create an agency, joint venture, amalgamation, partnership, or
similar relationship between Schering and Chiron.
17.12 PUBLICITY. No public announcement concerning the existence or the
terms of this Agreement shall be made, either directly or indirectly,
by Chiron or
Page 46
<PAGE>
Schering, except as may be legally required by applicable laws,
regulations, or judicial order, without first obtaining the approval
of the other Party and agreement upon the nature, text, and timing of
such announcement, which approval and agreement shall not be
unreasonably withheld. The Party desiring to make any such
public announcement shall provide the other Party with a written
copy of the proposed announcement in sufficient time prior to public
release to allow such other Party to comment upon such announcement,
prior to public release. Chiron shall not issue any press release
or make any public announcement which includes or otherwise uses
the name "Schering" in any public statement or document except
with the prior written consent of Schering.
17.13 REGISTRATION AND FILING OF THE AGREEMENT. To the extent, if any,
that a Party concludes in good faith that it is required to file or
register this Agreement or a notification thereof with any
governmental authority, including without limitation the U.S.
Securities and Exchange Commission and the Competition Directorate of
the Commission of the European Communities in accordance with
applicable laws and regulations, such Party may do so, and the other
Party shall cooperate in such filing or notification and shall
execute all documents reasonably required in connection therewith.
The Parties shall promptly inform each other as to the activities
or inquiries of any such governmental authority relating to this
Agreement, and shall cooperate to respond to any request for
further information therefrom.
17.14 ENTIRE AGREEMENT. This Agreement (together with the Exhibits hereto
as such exhibits may be amended from time to time in accordance
with this Agreement) contains the entire agreement between the
Parties with respect to the subject matter hereof. Any prior
agreement, arrangement or undertaking, whether oral or in
writing, other than the Ownership Agreement is hereby superseded.
17.15 CONSTRUCTION. This Agreement is the product of mutual negotiation
and is not to be construed strictly against either Party.
17.16 BENEFICIARIES. No person, other than Schering, Chiron or Cetus and
their permitted assignees hereunder, shall be deemed an intended
beneficiary hereunder or have any right to enforce any obligation
of this Agreement.
17.17 AFFILIATES OF PARTIES. Each Party may perform its obligations
hereunder personally or through one or more Affiliates. Neither
Party shall permit any of its Affiliates to commit any act
(including any act of omission) which such Party is prohibited
hereunder from committing directly.
17.18 SPECIFIC ENFORCEMENT. Each Party hereto shall be entitled to an
injunction or injunctions to prevent material breaches of this
Agreement and to specifically enforce the provisions of this
Agreement, in addition to any other remedy to which such Party
may be entitled, at law or in equity.
Page 47
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
SCHERING AG CHIRON CORPORATION
By: /s/ Erlen By: /s/ William J. Rutter
---------------------- -----------------------
Title: Vorstandsmitgl Title: Chairman
------------------- -------------------
CETUS ONCOLOGY CORPORATION
By: ppa. [illegible] By: /s/ William J. Rutter
---------------------- -----------------------
Title: Head, SBU CNS Title: Chairman
------------------- --------------------
Page 48
<PAGE>
EXHIBIT 4.1 - TARGET CAPACITIES AND
DEVELOPMENT AND MARKETING PLAN
TARGET CAPACITIES
The following target capacities are based on the Parties' understanding of
expected demand for Betaseron and Chiron's Capacity for Betaseron in the
United States and Canada, and on expectation of FDA Licensing by Mid-1993:
On the order of * Million Vials delivered to Schering in 1993;
On the order of * Million Vials delivered to Schering in 1994;
On the order of * Million Vials delivered to Schering in 1995;
On the order of * Million Vials delivered to Schering in 1996 and in
each calendar year thereafter during Phase I.
CHIRON DEVELOPMENT PLAN
As presently contemplated, Chiron's development plan consists of the
following: *
SCHERING MARKET PLAN
As presently contemplated, Schering's marketing plan includes: *
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 49
<PAGE>
*
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 50
<PAGE>
EXHIBIT 7.10 - NON-BINDING FORECAST
In accordance with the provisions of Section 7.10 of the Agreement, Schering
forecasts as follows:
<TABLE>
<CAPTION>
WORLDWIDE
DATE OF ORDER FOR DELIVERY ORDERS CHIRON ORDERS
<S> <C> <C> <C>
July 1, 1993 1Q1994 * Vials * V
October 1, 1993 2Q1994 * V * V
January 1, 1994 3Q1994 * V * V
</TABLE>
Schering expects no third-party supply of Betaseron during the period covered
by this non-binding forecast
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 51
<PAGE>
EXHIBIT 7.11 - INITIAL PURCHASE ORDER
Schering hereby places the following orders with Chiron, which orders Chiron
hereby accepts. This Order is subject to all terms of the Agreement:
Paste *
G-75 *
Vials *
Second Quarter, 1993
Third Quarter, 1993 *
Fourth Quarter, 1993
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 52
<PAGE>
EXHIBIT 10.4
CHIRON COST OF GOODS
Expenses included in, but not limited to, the fully absorbed manufacturing
cost:
1. Direct materials (which includes the cost of Diluent).
2. Salaries, wages and benefits of personnel directly engaged in
manufacturing the product.
3. Overhead associated with direct production, including, but not limited to:
a. Depreciation, leasehold improvements and equipment leases
b. Repair and maintenance
c. Manufacturing supplies
4. General manufacturing overhead, including, but not limited to:
a. Manufacturing Administration
b. Materials Management
c. Validation and Calibration
d. Documentation and Compliance
e. Quality Assurance/Quality Control
f. Technical Services
g. Regulatory Compliance
5. General facilities overhead, including, but not limited to:
a. Rent, utilities, property tax, insurance and other assigned general
facilities' costs
b. Purchasing
c. Environmental Health and Safety
d. Management Information Systems
e. Engineering
6. Corporate Overhead
Page 53
<PAGE>
*
Exhibit 1.7.3
THERE ARE 14 PAGES INCLUDED WITHIN THIS REDACTED PORTION.
*
*
* Confidential portions of material have been omitted and filed separately
with the Securities and Exchange Commission.
Page 54
<PAGE>
CONFIDENTIAL TREATMENT
[LETTERHEAD]
* = Confidential portions of material have
been omitted and filed separately with
the Securities and Exchange Commission.
December 30, 1993
VIA FACSIMILE 011-49-30-468-1381
Schering A.G.
Mullerstrausse 170-178
W-1000
Berlin 65
GERMANY
Attention: Mr. Hendrik Ruschke, Manager
Commercial Coordination Japan/USA
Re: REGULATORY FILING, DEVELOPMENT AND SUPPLY AGREEMENT
Dear Sirs:
This letter is to confirm our understanding as to certain matters relating to
the operation and administration of the Regulatory Filing, Development and
Supply Agreement by and among Chiron and Schering A.G. dated as of May 10, 1993
(the "Supply Agreement"). Unless otherwise defined herein, capitalized terms
used herein shall have the same meanings as in the Supply Agreement. We agree
on the following points:
1. COSTS OF ELA/PLA
(a) Chiron has provided to Schering invoices and estimates of amounts
incurred by Chiron, pursuant to Section 6.5 of the Supply Agreement, for the
preparation of responses to the FDA concerning the ELA/PLA, for obtaining the
approval thereof, and for maintaining the ELA/PLA during the second, third and
fourth calendar quarters of 1993, that is April 1, 1993 through December 31,
1993 (the "Cost Period"). The parties have disagreed as to the amount of such
costs that are subject to reimbursement to Chiron under the Supply Agreement,
and now agree to a compromise amount to be reimbursed for the Cost Period. The
amount agreed upon to be reimbursed for the total Cost Period is * (the "Final
Cost"), which consists of the following: * for the second calendar quarter; *
for the third calendar quarter; and * for the fourth calendar quarter.
Schering shall pay the amount of the Final Cost within 15 days after the
execution of this Letter Agreement.
<PAGE>
* = Confidential portions of material have
been omitted and filed separately with
the Securities and Exchange Commission.
Mr. Hendrik Ruschke, Schering A.G.
December 30, 1993
Page 2
(b) Schering and Chiron agree that this compromise is a final settlement
of cost reimbursements relating to the ELA/PLA for any and all periods during or
prior to the Cost Period, including periods prior to the effective date of the
Supply Agreement, and each party waives any rights such party may have with
respect to the determination of such amounts, including without limitation any
rights to claim additional costs, or to audit such costs, for any period prior
to the end of the Cost Period. Neither the compromise reached hereunder, nor
any communications or calculations used to determine such compromise amount
shall be deemed to be an admission by either party, or to create any precedent,
with respect to the reimbursement of similar costs as to any period subsequent
to the Cost Period. For any ELA/PLA costs incurred after the Cost Period,
reimbursement shall be determined by the Supply Agreement, and the parties shall
mutually agree upon mechanisms for promptly determining budgets for such costs.
2. ACCELERATION OF PAYMENTS
(a) Chiron shall have the option, which it hereby exercises, to accelerate
the payment of amounts contemplated under Section 9.2 of the Supply Agreement,
with respect to Vials shipped (other than "Non-Revenue Vials" shipped pursuant
to Section 9.7 of the Supply Agreement) during the Option Period (as defined
below) for sale in the United States. The Option Period shall be deemed to
commence with the shipments of Vials commencing after September 30, 1993 (I.E.
with the * Vials shipped in the fourth quarter), and terminates effective on
the earlier of (i) October 1, 1995 or (ii) the beginning of the first calendar
quarter in which Chiron ships to Schering or its Affiliates a total of * or
more Vials during such quarter pursuant to the Supply Agreement. Accordingly,
for each shipment of Vials by Chiron during the Option Period, Schering shall
pay to Chiron on a non-refundable basis (except as provided for herein or in the
Supply Agreement) an amount, determined as set forth below, which represents an
estimate of the amount that would otherwise be payable based on sales of such
Vials pursuant to Section 9.2 (the "Payment"). Such Payment shall be made
within 90 days after receipt of the related invoice.
(b) The amount of each Payment shall be determined by multiplying the
number of Vials shipped by * percent of the Estimated Sales Price per Vial.
The initial Estimated Sales Price per Vial is * and the Payment is the number
of Vials
<PAGE>
* = Confidential portions of material have
been omitted and filed separately with
the Securities and Exchange Commission.
Mr. Hendrik Ruschke, Schering A.G.
December 30, 1993
Page 3
shipped multiplied by * Such Estimated Sales Price per Vial shall be
adjusted for each quarter during the first two weeks of such quarter based on
the reasonable, good faith judgment of Schering using the most current sales
information available for each shipment of Vials for which a Payment is made.
After reviewing the actual sales history of a quarter, Schering may make
further adjustments to the Payment amount within 7 business days after the
end of such quarter, in Schering's sole judgment. Any such adjustments made
within 7 business days after the end of the quarter shall be effective for
that entire quarter, and amounts previously invoiced for such quarter shall
be reinvoiced to reflect such adjustment. Schering shall not be obligated to
make an additional per Vial payment (i.e. * per Vial) on the shipment of
Vials under Section 9.1, it being understood and agreed that such a payment
would be included in the Payment and that the Payment will not, in any event,
be less than the amount that would be payable under the Supply Agreement in
the absence of this Letter Agreement. The provisions of Section 9.1
respecting payments for Vial Equivalents shall not be affected by this Letter
Agreement.
(c) Within 60 days after the end of each calendar quarter during which
Vials are sold for which a Payment was made hereunder, Schering shall report,
pursuant to Section 10.1 of the Supply Agreement, the actual Net Sales
respecting such Vials and the difference between (i) * percent of such
actual Net Sales and (ii) the Payment that was made for such Vials. With
such report Schering shall pay Chiron the difference if the amount in clause
(i) is greater than the amount in clause (ii). If the amount in clause (ii)
is greater than the amount in clause (i), then Schering shall be entitled to
a credit equal to the difference, which shall be applied as follows:
(1) Such credit shall be calculated on an average per Vial basis, by
dividing the difference calculated as described above by the number of
Vials sold during the calendar quarter for which a Payment was made
hereunder. In no event shall the per Vial credit exceed * percent of the
Estimated Sales Price per Vial used to determine the applicable Payment,
pursuant to subparagraph (b) above.
(2) Schering shall be entitled to apply the per Vial credit so
calculated only against Vials transferred to Schering in calendar quarters
after the quarter for which the Payment was made; provided, however, that
if such credit is not fully applied during the two calendar quarters after
the quarter
<PAGE>
* = Confidential portions of material have
been omitted and filed separately with
the Securities and Exchange Commission.
Mr. Hendrik Ruschke, Schering A.G.
December 30, 1993
Page 4
for which the Payment was made, such credit shall be refunded in cash.
(d) Chiron shall have the right to terminate the provisions of this
Paragraph 2 at any time by written notice to Schering, and/or to cancel any
Payment. After a termination of the provisions of this Paragraph 2, no further
Payments shall be made under the terms of this Letter Agreement, and payment
shall be made for Vials as originally set forth in the Supply Agreement. If the
Option Period terminates effective as of the beginning of a quarter pursuant to
clause (ii) in the second sentence of Paragraph 2(a) and Chiron has submitted
invoices for Payments under this Letter Agreement for shipments made during that
quarter (I.E., before determining that shipments will exceed * Vials), Chiron
will reissue invoices in the amounts payable under the Supply Agreement.
(e) Except as set forth herein, the terms of the Supply Agreement relating
to payment for Vials shall remain in force and effect during the Option Period,
including but not limited to those provisions relating to Non-Revenue Vials
(Section 9.7) and Indigent and Rebate Vials (Section 9.3).
3. INVOICE
Prior to December 31, 1993, Chiron will submit an invoice for approximately *
Vials which have recently been shipped to Berlex, indicating the Payment as the
purchase price. Schering will pay such invoice in accordance with Paragraph 2
above.
4. OTHER PROVISIONS
Except as otherwise set forth herein the terms of the Supply Agreement shall
continue in full force and effect.
<PAGE>
Mr. Hendrik Ruschke, Schering A.G.
December 30, 1993
Page 5
If the foregoing provisions accurately reflect your understanding of our
agreement, please sign both copies of this letter in the place indicated below
and return one copy to my attention for the records of Chiron.
Very truly yours, AGREED AND ACCEPTED:
Chiron Corporation Schering A.G.
/s/ Dennis L. Winger By: /s/ Klaus Pohle
- ------------------------------ ------------------------------
Dennis L. Winger
Senior Vice President, Print Name: Prof. Dr. Klaus Pohle
Finance and Administration ----------------------
Title: Vorstandsmitglied
---------------------------
Date:
----------------------------
By: /s/ Hubertus Erlen
------------------------------
Print Name: Dr. Hubertus Erlen
----------------------
Title: Vorstandsmitglied
---------------------------
Date:
----------------------------
<PAGE>
EXHIBIT 10.509
DESCRIPTION OF CHIRON CORPORATION'S
1998 EXECUTIVE OFFICERS VARIABLE COMPENSATION PROGRAM
Decisions on compensation (base salary and variable compensation) of Chiron
Corporation's ("Chiron" or the "Company") executive officers are made by the
five-member Compensation Committee of the Board of Directors.
For 1998, the Compensation Committee continued the Company's approach that
base salaries for executive officers should be measured by reference to the
median (50th percentile) of salaries for benchmark positions in comparator
companies. Further, the Compensation Committee provided that a significant
portion of total cash compensation (salary plus variable compensation) in the
form of annual variable cash compensation potential should be "at risk,"
dependent upon individual, business unit and overall Company performance.
Variable cash compensation for executive officers overall was targeted to
yield total cash compensation at the 50% percentile, but with the opportunity
to significantly exceed the 50% percentile of total cash compensation as
shown by comparative data, in the case of outstanding Company, business unit,
and individual performance.
The Compensation Committee based its decisions regarding variable
compensation for executive officers upon its evaluation of performance
against pre-established performance metrics developed at the Company,
business unit and functional or corporate unit level.
Variable compensation for the Chairman and Chief Executive Officer is based
on the performance of the Company as measured against the pre-established
Company metrics composed of financial objectives and business innovation
milestones.
Executive officers responsible for business units or major functional or
corporate units are eligible for variable compensation based on the
pre-established Company metrics and on the achievement of their respective
business, functional, or corporate unit metrics.
<PAGE>
[LOGO]
September 26, 1990
[LETTERHEAD]
William G. Green, Esq.
8 Sunnyside Court
Orinda, California 94563
Dear Bill:
This letter confirms the terms under which you will be employed by Chiron
Corporation as a Vice President, General Counsel and Secretary, effective
October 1, 1990.
Attached as Exhibit A is a listing of the functions and responsibilities
you will assume. Attached as Exhibit B is a summary of your compensation. Your
salary will be $270,000 per annum for 1990. Your salary thereafter will be
adjusted annually with other officers, commencing January 1, 1991. The "target"
for your bonus compensation will be 22% of your salary from time to time. For
1990, this amount will be prorated from October 1. As a result, the target bonus
for 1990 will be $15,000. It is our expectation that the "likely" bonus for 1990
would be two-thirds of this amount or $10,000. In addition, you will be paid a
hiring bonus of $100,000 in cash upon commencement of employment.
<PAGE>
William G. Green, Esq. Page 2
September 26, 1990
The deferred compensation/retirement terms in Exhibit B will be evidenced
in a separate supplemental agreement satisfactory to Chiron and to you in form
and substance. In addition to Chiron's standard health, dental and AD&D
insurance, Chiron will acquire and pay the premiums for $500,000 in life
insurance, subject to your obtaining a qualifying physical examination. This
insurance will remain in effect throughout the term of your employment. The
beneficiaries may be designated by you from time to time. You will not be
obligated to pay more than $4,500 per annum in premiums or employee
contributions under these insurance programs.
The stock option will be evidenced by a standard form of Stock Option
Agreement, consistent with Chiron's Stock Option Plan and with the provisions of
Exhibit B, unless otherwise approved by Chiron and yourself.
Very truly yours,
CHIRON CORPORATION
By /s/ Edward E. Penhoet
Edward E. Penhoet
Vice Chairman and
Chief Executive Officer
<PAGE>
FUNCTIONS AND RESPONSIBILITIES
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
CHIRON CORPORATION
All internal and external legal affairs for parent and subsidiaries (including
retention, termination and review and approval of compensation)
Allocate and assign all legal tasks:
Corporate governance
Securities compliance
Contracts
Administration/compliance
Negotiation
Support Business Development
Litigation
Patent
Strategy
Prosecution
Litigation
Corporate structure/M&A
International law compliance
Regulatory compliance
Support Scientific Affairs
Legal affairs of subsidiaries, human resources, facilities, etc.
Legislative and Governmental Affairs
Corporate Business Strategy and Policy
Participate in formulation with Executive Officers
Monitor legal aspects of joint ventures and oversee/support collaborative
relationships as assigned
Legal aspects of industrial/trade associations
Corporate Secretary
Ex officio participant in Board of Directors and Senior
Management Committees (including Executive and Operating
Committees)
Risk Management
Supervision by Chairman/CEO/Board
<PAGE>
COMPENSATION
SALARY: $270,000/year for 1990,
adjusted annually w/other officers
commencing 1/1/91
BONUS TARGET: 22% of salary - $60,000 for 1990
(pro rated from 10/1/90 - $15,000
"LIKELY" 2/3 of 22% = $40,000 for 1990
(pro rated from 10/1/90 - $10,000)
HIRING BONUS: $100,000 (intended to supplement salary
for 5 years) paid in cash on hire.
DEFERRED/RETIREMENT: Unfunded, unsecured obligation to pay
joint survivorship benefit commencing at
age 60 equal to actuarial future value
of sum of:
(1) $41,000 (which is net present value
of forfeited retirement benefits); plus
(2) $90,000 (which is forfeited 1990
projected income (pro-rated for period
January through September 1990) less all
amounts, if any, paid by Brobeck
following 9/30/90 regular distribution
other than return of capital; plus,
(3) An annual additional amount which,
when added to 401k plan maximum employee
and matching contribution and any future
retirement benefit, will total $20,000
per year of service. (Estimated to be
$8,000 per year under current plan).
To be funded and secured with annuity
contract(s) upon request.
INSURANCE: $500,000 life insurance;
Equivalent to current AD&D insurance;
Health, Dental, etc. pursuant to Company
policy;
Employee contribution/premium not to
exceed $4,500.
OTHER: Standard.
<PAGE>
William G. Green, Esq. Page 3
September 26, 1990
INITIAL OPTION GRANT:
Shares: 90,000 granted on date of
hire.
Type: Maximum I.S.O., remainder
unqualified.
Exercisability: 10 years
Vesting: 18,334 on 12/31/90; 14,333 per
year for 4 years thereafter
and 14,334 on 12/31/95
All vest on death, disability or
termination by Company without cause.
Price: Fair market value (FMV) on date of grant
for I.S.O., remainder as follows:
6 month trailing average
weekly closing price or $35
whichever is lower, but in no
event less than 85% of FMV or
more than FMV on date of
grant.
Subsequent Equity Participation: Commencing in calendar 1994, eligible
for consideration for participation in
additional option/equity, if appropriate
in relation to any revision/increases in
option/equity programs applicable to
other senior officers.
<PAGE>
EXHIBIT 10.612
AMENDED AND RESTATED
PROMISSORY NOTE
(AS AMENDED AND RESTATED AS OF AUGUST 7, 1998)
$1,000,000 JUNE, 21, 1998
EMERYVILLE, CALIFORNIA
The PROMISSORY NOTE dated June 21, 1998 in the principal sum of ONE
MILLION DOLLARS AND NO/100THS CENTS ($1,000,000), and executed by SEAN P.
LANCE, as Borrower, in favor of CHIRON CORPORATION, a Delaware corporation or
order, as Lender, is HEREBY AMENDED AND RESTATED IN ITS ENTIRETY TO READ, AS
FOLLOWS:
FOR VALUE RECEIVED, the undersigned, SEAN P. LANCE (hereinafter
called the "Borrower"), hereby promises to pay CHIRON CORPORATION, a Delaware
corporation or order ("Lender"), the principal sum of ONE MILLION DOLLARS AND
NO/100THS CENTS ($1,000,000), in lawful money of the United States of
America, with interest equal to zero percent (0%) per annum to purchase that
certain improved real property located at 2580 Greenwich Street, San
Francisco, San Francisco County, California (the "Property") constituting
Borrower's principal residence in California (the "Loan").
1. All payments of principal and any other amounts payable on or in
respect of this Note or the indebtedness evidenced hereby shall be made to
the account of Lender at its principal office located at 4560 Horton Street,
Emeryville, California 94608, or to such other place as Lender may from time
to time designate by written notice to Borrower. All payments shall be in
lawful money of the United States of America.
2. The principal amount of One Million Dollars ($1,000,000) hereunder
shall be used by Borrower to purchase the Property and shall become due and
payable on the earlier to occur of the following: (i) June 22, 2008, which is
ten years from the date hereof (the "Maturity Date"), or (ii) such earlier
date as described in Paragraph 4 below (the "Repayment Date").
3. Borrower shall make annual payments of principal in the amount of
$47,293.20 to reduce the outstanding principal balance hereunder over a
ten-year term, commencing on June 22, 1999, and on or before each successive
June 22 thereafter, through and including the Maturity Date, with the
outstanding principal balance due in full on the Repayment Date, in
accordance with the schedule of payments listed on SCHEDULE 1 attached hereto
and incorporated herein by this reference.
<PAGE>
4. Notwithstanding the foregoing provisions, in the event that Chiron
Corporation or an affiliate thereof terminates Borrower's services, or Borrower
voluntarily leaves Chiron Corporation or an affiliate thereof, prior to the
Maturity Date of the Loan, the outstanding principal balance of the Loan owing
through the Repayment Date shall become immediately due and payable and be
repaid by Borrower within a reasonable period not to exceed 90 days from the
date of Borrower's leaving the full-time employ of Chiron Corporation or an
affiliate thereof.
5. Borrower and Lender agree that the indebtedness evidenced by this Note
shall be Borrower's sole and personal liability, and shall be secured by a
Deed of Trust executed by Borrower in favor of Lender and recorded against
the Property. Borrower agrees to use his best efforts to enable Lender to
record its Deed of Trust in favor of Lender for the total amount of this Loan
simultaneously with Borrower's close of escrow on the purchase of the
Property. Borrower reasonably expects to, and will, itemize deductions on
his income tax return reflecting the annual repayments of principal hereunder
for the duration of the Loan.
6. Nothing herein shall be deemed to create any obligation of continued
employment on the part of the Borrower or Chiron Corporation.
7. Borrower and Lender agree that upon recordation of the Lender's Deed
of Trust covering the Property in substantially the form attached hereto as
EXHIBIT A, the obligations of Borrower under this Note shall become subject
to the terms of that Deed of Trust which contains the following provision:
"In the event the herein described property or any part thereof, or any
interest therein is sold, agreed to be sold, conveyed or alienated by the
Trustor (Borrower), or by the operation of law or otherwise, all obligations
secured by this instrument, irrespective of the maturity dates expressed
therein, at the option of the holder hereof and without demand or notice
shall immediately become due and payable."
8. In the event that Borrower intends to, sell, agree to sell, transfer
or convey his interest in the Property or any part thereof or any interest
therein, Lender and Borrower agree that they shall execute in writing an
agreement as to a substitution of security for the indebtedness covered
hereunder, or Lender will repay this Note in full.
9. Should the indebtedness evidenced by this Note be collected by action
at law, or in bankruptcy, receivership or other court proceeding, or should
this Note be placed in the hands of attorneys for collection after default,
Borrower agrees to pay, upon demand of Lender, in addition to principal and
interest, and other sums, if any, due and payable hereunder, court costs and
reasonable attorneys' fees and other reasonable collection charges, whether
suit be brought or not, unless prohibited by law. Borrower hereby waives
diligence, presentment, protest and demand of every kind and (to the full
extent permitted by law) the right to plead any statute of limitations as a
defense to any demand or action hereunder or in connection with any security
herefor, and hereby agrees that no failure on the part of Lender to exercise
any power, right or privilege hereunder, or to insist upon prompt compliance
with the terms hereof, shall constitute a waiver thereof.
2
<PAGE>
10. In the event of any failure on the part of Borrower to make any
payment when due, Borrower hereby agrees to pay, upon demand of Lender, in
addition to principal and any other sums, if any, due and payable hereunder,
court costs and reasonable attorneys' fees and other reasonable collection
charges that Lender shall be entitled to recover from Borrower, whether suit
be brought or not.
11. Any notice to either party hereto may be given by delivering the same
in writing to such party in person, or by sending the same by registered or
certified mail, postage prepaid, to the following mailing addresses or to any
other mailing addresses within the State of California of which the parties
notify each other:
Borrower: Sean P. Lance
2580 Greenwich Street
San Francisco, California 94123
Lender Chiron Corporation
4560 Horton Street
Emeryville, California 94608
Attn: Office of the General Counsel
12. In the event that any one or more of the provisions contained in this
Note shall for any reason be held to be invalid, illegal or unenforceable in
any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Note, but this Note shall be construed as if such
invalid, illegal or unenforceable provisions had never been contained herein
or therein.
13. Any failure of the Lender to exercise or enforce any right hereunder
shall not constitute a waiver of such right. All rights of the Lender
hereunder shall be cumulative and not alternative and shall be in addition to
any other rights and remedies granted to the Lender pursuant to any other
agreement, by statute, or by law.
14. Borrower shall not assign, convey, transfer, delegate, subordinate or
otherwise, mortgage, hypothecate or encumber, any of his interest, rights or
obligations hereunder to any other party.
15. This Note may not be changed orally, but only by an agreement in
writing signed by the parties against whom enforcement of any waiver, change,
modification or discharge is sought.
3
<PAGE>
16. This Note shall be construed and enforced in accordance with, and
governed by, the laws of the State of California and shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
heirs, executors, administrators, legal representatives, successors and
assigns.
WITNESS the due execution hereof with the intent of being legally bound,
effective as of the date first set forth above.
BORROWER:
/s/ SEAN P. LANCE 8 AUGUST 1998
- -------------------------------- ---------------------------
SEAN P. LANCE Date
4
<PAGE>
SCHEDULE 1
Revised Repayment Schedule
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
BEGINNING BEGINNING PAYMENT DUE ENDING
DATE BALANCE AMOUNT DATE BALANCE
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
06/21/98 1,000,000.00 (47,293.20) 06/22/99 952,706.80
06/22/99 952,706.80 (47,293.20) 06/22/00 905,413.60
06/22/00 905,413.60 (47,293.20) 06/22/01 858,120.40
06/22/01 858,120.40 (47,293.20) 06/22/02 810,827.20
06/22/02 810,827.20 (47,293.20) 06/22/03 763,534.00
06/22/03 763,534.00 (47,293.20) 06/22/04 716,240.80
06/22/04 716,240.80 (47,293.20) 06/22/05 668,947.60
06/22/05 668,947.60 (47,293.20) 06/22/06 621,654.40
06/22/06 621,654.40 (47,293.20) 06/22/07 574,361.20
06/22/07 574,361.20 (47,293.20) 06/22/08 527,068.00
</TABLE>
5
<PAGE>
EXHIBIT 10.723
DEBENTURE PURCHASE AGREEMENT
DEBENTURE PURCHASE AGREEMENT dated as of June 22, 1990 by and between CHIRON
CORPORATION, a corporation organized and existing under the laws of the State of
Delaware ("Seller"), and CIBA-GEIGY, LIMITED, a corporation organized and
existing under the laws of Switzerland ("Purchaser").
WITNESSETH:
WHEREAS, Seller has filed a Registration Statement on Form S-3 (File No.
33-34918) with the Securities and Exchange Commission to register $121,500,000
aggregate principal amount of convertible subordinated debentures due 2015 (as
amended at the time it becomes effective, including any information deemed to be
a part thereof pursuant to Rule 430A, the "Registration Statement");
WHEREAS, Seller has entered into an Underwriting Agreement of even date
herewith (the "Underwriting Agreement") with Morgan Stanley & Co. Incorporated,
Robertson, Stephens & Company and Montgomery Securities (collectively, the
"Underwriters") providing for an underwritten public offering of $100,000,000
aggregate principal amount of convertible subordinated debentures due 2015
($115,000,000 if the Underwriters' overallotment option is exercised in full);
and
WHEREAS, Purchaser wishes to purchase, and Seller wishes to sell, $6,500,000
aggregate principal amount of debentures covered by the Registration Statement
(the "Debentures"), subject to the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and of other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Purchaser and Seller hereby agree as follows:
I. SALE OF DEBENTURES
1.1 DEBENTURES TO BE SOLD. Subject to the terms and conditions of this
Agreement, at the Closing (as hereinafter defined), Seller will sell, issue and
deliver the Debentures to Purchaser.
1.2 CONSIDERATION. Subject to the terms and conditions of this Agreement,
at the Closing Purchaser will deliver to Seller the aggregate purchase price for
the Debentures of $6,500,000 (the "Purchase Price") which price represents 100%
of the price at which the debentures to be sold concurrently by the Seller to
the Underwriters pursuant to the Underwriting Agreement will be sold to the
public. The Purchase Price will be paid by wire transfer to an account
designated by Seller.
1.3 CLOSING. The Closing of the transactions contemplated by this
Agreement (the "Closing") will be contingent upon and will take place at the
same time and the same place as the closing referred to in Section III of the
Underwriting Agreement. At the Closing:
(a) Purchaser shall deliver to Seller the following:
(i) the Purchase Price; and
(ii) the certificate(s) described in Paragraph 6.4.
(b) Seller shall deliver to Purchaser the following:
(i) a debenture certificate representing the Debentures;
(ii) a copy of the prospectus in the form first used to confirm sales of
the debentures by the Underwriters (the "Prospectus");
(iii) the certificates described in Paragraph 5.4;
(iv) the opinions of counsel described in Paragraph 5.5; and
(v) the accountant's comfort letter described in Paragraph 5.6.
<PAGE>
II. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents, covenants and warrants to Seller as follows:
2.1 AUTHORIZATION. Purchaser has taken all action required by law to
authorize the execution and delivery of this Agreement and the transactions
contemplated hereby. Upon execution, this Agreement is a valid and binding
obligation of Purchaser enforceable in accordance with its terms, except that
(i) such enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights, and (ii) the remedies of specific performance and injunctive
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding may be brought.
2.2 NO VIOLATION. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate or
conflict with, or constitute a default under, or cause the acceleration of the
maturity of any debt obligation pursuant to, any agreement or commitment to
which Purchaser is a party or by which Purchaser is bound.
2.3 INFORMATION. Purchaser acknowledges that Purchaser (i) received a copy
of Seller's prospectus (subject to completion) issued May 16, 1990, and (ii) has
had the opportunity to obtain any additional information necessary to verify the
information received. Purchaser understands the speculative nature of the
Debentures and the financial risks with respect thereto.
2.4 LITIGATION. There is no action, suit, inquiry, proceeding or
investigation by or before any court or governmental or other regulatory or
administrative agency or commission pending or, to the best of Purchaser's
knowledge, threatened against Purchaser, that questions or challenges the
validity of this Agreement.
2.5 CONSENTS AND GOVERNMENTAL APPROVALS. No consent, approval, or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority is required in connection with Purchaser's execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby.
2.6 INVESTMENT INTENT. Purchaser is acquiring the Debentures for its own
account for investment and not with a present view to, or for sale in connection
with, any distribution of the Debentures or of the Common Stock issuable upon
conversion thereof.
III. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents, covenants and warrants to Purchaser as follows:
3.1 AUTHORIZATION. Seller has taken all action required by law to
authorize the execution and delivery of this Agreement and consummation of the
transactions contemplated hereby. Upon execution, this Agreement will be a valid
and binding obligation of Seller enforceable in accordance with its terms,
except that (i) such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights, and (ii) the remedies of specific performance and
injunctive relief may be subject to equitable defenses and to the discretion of
the court before which any proceeding may be brought.
3.2 NO VIOLATION. Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated hereby will violate or
conflict with, or constitute a default under, or cause the acceleration of the
maturity of any debt obligation pursuant to, any agreement or commitment to
which Seller is a party or by which Seller is bound.
2
<PAGE>
3.3 DEBENTURES. Upon issuance the Debentures will be entitled to the
benefits of the Indenture dated as of July 2, 1990 between Seller and
Manufacturers Hanover Trust Company of California. Except for this Agreement,
there are no outstanding options, rights, or agreements of any kind relating to
the issuance, sale or transfer of the Debentures.
3.4 LITIGATION. There is no action, suit, inquiry, proceeding or
investigation by or before any court or governmental or other regulatory or
administrative agency or commission pending or, to the best of Seller's
knowledge, threatened against Seller that questions or challenges the validity
of this Agreement.
3.5 CONSENTS AND GOVERNMENTAL APPROVALS. No consent, approval, or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority is required in connection with Seller's execution and
delivery of this Agreement and consummation of the transactions contemplated
hereby.
IV. COVENANTS
4.1 COVENANTS OF PURCHASER. Purchaser hereby covenants and agrees with
Seller that it will use its best efforts to insure that the conditions set forth
in Article VI hereof are satisfied prior to the Closing insofar as such matters
are within Purchaser's control.
4.2 COVENANTS OF SELLER. Seller hereby covenants and agrees with Purchaser
that (i) it will use its best efforts to insure that the conditions set forth in
Article V hereof are satisfied insofar as such matters are within Seller's
control, and (ii) after the Closing, Seller shall from time to time, at the
request of Purchaser, execute and deliver such other instruments and documents
and take such other actions as Purchaser may reasonably request to more
effectively consummate the transactions contemplated by this Agreement.
V. CONDITIONS TO PURCHASER'S OBLIGATIONS
Each and every obligation of Purchaser under this Agreement on or before the
Closing shall be subject to the satisfaction, on or before the Closing, of each
of the following conditions, unless waived in writing by Purchaser:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Seller contained herein shall be true and accurate in all material respects at
and as of the date when made and at and as of the Closing as though such
representations and warranties were made at and as of such date.
5.2 PERFORMANCE. Seller shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with on or prior to the Closing.
5.3 PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry,
appeal or other proceeding by any governmental body or other person or legal or
administrative proceeding shall have been instituted or threatened that
questions the validity or legality of the transactions contemplated hereby.
5.4 CERTIFICATES. Seller shall have furnished Purchaser with such
certificates of officers of Seller dated the Closing date (i) evidencing
compliance with the conditions set forth in this Article V as may be reasonably
requested by Purchaser, and (ii) stating that no stop order suspending the
effectiveness of the Registration Statement is in effect, and no proceedings for
such purpose are pending before or threatened by the Securities and Exchange
Commission, and that there has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
3
<PAGE>
condition, financial or otherwise, or in the earnings, business or operations,
of the Seller and its subsidiaries, taken as a whole, from that set forth in the
Registration Statement and the Prospectus, as amended or supplemented.
The officer signing and delivering such certificates may rely upon the best
of his knowledge as to proceedings threatened.
5.5 OPINIONS OF COUNSEL.
(a) Seller shall have furnished Purchaser with an opinion of Brobeck,
Phleger & Harrison dated the date of the Closing to the effect set forth in
Section IV(b) (i)-(vii) and (x)-(xiv) of the Underwriting Agreement. In
addition, such opinion will state:
(i) that this Agreement has been duly authorized, executed and delivered
by Seller and is a valid and binding agreement of Seller; and
(ii) that the execution and delivery by Seller of, and the performance
of its obligations under, this Agreement, the Debentures and the Indenture
will not contravene any provision of applicable law or the certificate of
incorporation or by-laws of Seller, or, to the best knowledge of such
counsel, any material agreement or other instrument binding upon Seller or
any of its subsidiaries or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over Seller or any of its property
or any of its subsidiaries or any of their property, and no consent,
approval, authorization or order of or qualification with any governmental
body or agency is required for the performance by Seller of its obligations
under this Agreement, the Debentures and the Indenture, except such as are
specified and have been obtained.
(b) Seller shall have furnished Purchaser with an opinion of Robert
Blackburn, Esq., counsel to the Company, and an opinion of Jane L. Stratton,
Esq., counsel to the Company, each dated the date of Closing, to the effect set
forth in Section IV(d) and Section IV(e), respectively, of the Underwriting
Agreement.
5.6 COMFORT LETTER. Seller shall have furnished Purchaser with a letter
dated the date of Closing from Ernst & Young, independent public accountants,
containing the same statements and information with respect to the financial
statements and certain financial information contained in or incorporated by
reference into the Prospectus as are contained in the letter delivered by Ernst
& Young to the Underwriters pursuant to Section IV(f) of the Underwriting
Agreement.
VI. CONDITIONS TO SELLER'S OBLIGATIONS
Each and every obligation of Seller under this Agreement on or before the
Closing shall be subject to the satisfaction, on or before the Closing, of each
of the following conditions, unless waived in writing by Seller:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Purchaser contained herein shall be true and accurate in all material respects
at and as of the date when made at and as of the Closing as though such
representations and warranties were made at and as of such date.
6.2 PERFORMANCE. Purchaser shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with on or prior to the Closing.
6.3 PROCEEDING OR LITIGATION. No suit, action, investigation, inquiry,
appeal or other proceeding by any governmental body or other person or legal or
administrative proceedings shall have been instituted or threatened that
questions the validity or legality of the transactions contemplated hereby.
4
<PAGE>
6.4 CERTIFICATES. Purchaser shall have furnished Seller with such
certificates of officers of Purchaser dated the Closing date evidencing
compliance with the conditions set forth in this Article VI as may be reasonably
requested by Seller.
VII. HOLDBACK
7.1 RESTRICTIONS ON PUBLIC SALE BY THE PURCHASER. In connection with any
public offering by Seller of its securities, Purchaser agrees not to effect any
public sale of the Debentures or shares of Common Stock issued upon conversion
of the Debentures during the ten (10) business days prior to, and during the
90-day period beginning on (i) the effective date of the registration statement
filed in connection with such public offering, or (ii) if applicable, the
commencement of public distribution of the securities of Seller pursuant to such
registration statement, whichever is later, if and to the extent requested by
Seller in the case of a nonunderwritten public offering or if and to the extent
requested by Seller's underwriter in the case of an underwritten public
offering.
VIII. MISCELLANEOUS
8.1 ENTIRE AGREEMENT; AMENDMENT. This Agreement sets forth the entire
understanding of the parties with respect to the transactions contemplated
hereby. This Agreement may be amended, modified and supplemented only by the
written agreement of Purchaser and Seller.
8.2 WAIVER OF COMPLIANCE. Any failure of Purchaser on the one hand, or
Seller, on the other hand, to comply with any obligation, covenant, agreement or
condition herein may be expressly waived in writing by Seller or Purchaser, but
such waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
8.3 NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if (i) delivered by hand, (ii) sent by certified or registered
mail, return receipt requested, with postage prepaid, or (iii) transmitted by
telefax:
(a) If to Purchaser, to:
CIBA-GEIGY, Limited
CH 4002
Basel, Switzerland
Attn: Head of Pharma Division
Telefax: 41-61-696-7487
with a copy to:
CIBA-GEIGY, Limited
Legal Department
Pharma Counsel CH 4002
Basel, Switzerland
Telefax: 41-61-696-5419
or to such other person or address as Purchaser shall furnish to Seller in
writing.
5
<PAGE>
(b) If to Seller, to:
Chiron Corporation
4560 Horton Street
Emeryville, CA 94608
Attn: Chief Financial Officer
Telefax: (415) 655-3282
with a copy to:
William G. Green, Esq.
Brobeck, Phleger & Harrison
One Market Plaza, Spear Street Tower
San Francisco, CA 94105
Telefax: (415) 442-1010
or to such other person or address as Seller shall furnish to Purchaser in
writing.
8.4 ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by either of the
parties hereto without the prior written consent of the other party.
8.5 GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware.
8.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.7 HEADINGS. The headings of the articles and paragraphs of this
Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
Purchaser:
CIBA-GEIGY, LIMITED
By /s/ F. R. BOCHUD
-----------------------------------
Name: Dr. F. Bochud
Title: DEPUTY DIRECTOR
By /s/ H. GUT
-----------------------------------
Name: Dr. H. Gut
Title: VICE DIRECTOR
Seller:
CHIRON CORPORATION
By
-----------------------------------
Name:
Title:
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
Purchaser:
CIBA-GEIGY, LIMITED
By
-----------------------------------
Name:
Title:
By
-----------------------------------
Name:
Title:
Seller:
CHIRON CORPORATION
By /s/ DENNIS L. WINGER
-----------------------------------
Name: Dennis L. Winger
Title: VICE PRESIDENT, FINANCE AND
ADMINISTRATION
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
Purchaser:
CIBA-GEIGY, LIMITED
By /s/ F. R. BOCHUD
-----------------------------------
Name: Dr. F. Bochud
Title: DEPUTY DIRECTOR
By /s/ H. GUT
-----------------------------------
Name: Dr. H. Gut
Title: VICE DIRECTOR
Seller:
CHIRON CORPORATION
By
-----------------------------------
Name:
Title:
9
<PAGE>
FOR THE UNITED STATES FEDERAL INCOME TAX PURPOSES, THIS NOTE BEARS ORIGINAL
ISSUE DISCOUNT. THE ISSUE PRICE WITH RESPECT TO EACH $1,000 OF PRINCIPAL AMOUNT
AT MATURITY OF THIS NOTE IS $845.35, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT WITH
RESPECT TO EACH $1,000 OF PRINCIPAL AMOUNT AT MATURITY OF THIS NOTE IS $154.65,
THE ISSUE DATE IS NOVEMBER 17, 1993, AND THE YIELD TO MATURITY BASED ON
SEMIANNUAL COMPOUNDING IS 4.50%.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT
IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH
OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
CHIRON CORPORATION
1.90% Convertible Subordinated Note due 2000, Series B
CHIRON CORPORATION, a corporation duly organized and existing under
the laws of the State of Delaware (the "Company", which term includes any
successor corporation), for value received, hereby promises to pay to
CIBA-GEIGY, LIMITED, or registered assigns, the principal sum of Ten Million
Sixty-Nine Thousand Dollars ($10,069,000) on November 17, 2000, at the office or
agency of the Company maintained for that purpose in Emeryville, California, in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts, and to pay
interest, semi-annually on May 17 and November 17 of each year, commencing May
17, 1994, on said principal sum at said office or agency, in like coin or
currency, at the rate per annum of 1.90% from the May 17 or November 17, as the
case may be, next preceding the date of this Note to which interest has been
paid or duly provided for, unless the date hereof is a date to which interest
has been paid or duly provided for, in which case from the date of this Note, or
unless no interest has been paid or duly provided for on the Note, in which case
from November 17, 1993, until payment of said principal sum has been made or
duly provided for. Notwithstanding the foregoing, if the date hereof is after
any May 1 or November 1, as the case may be, and before the following May 17 or
November 17, this Note shall bear interest from such May 17 or November 17;
PROVIDED, HOWEVER, that if the Company shall default in the payment of interest
due on such May 17 or November 17, this Note shall bear interest from the next
preceding May 17 or November 17 to which interest has
<PAGE>
been paid or duly provided for or, if no interest has been paid or duly provided
for on the Notes, from November 17, 1993. The interest so payable on any May 17
or November 17 will be paid to the person in whose name this Note (or one or
more Predecessor Notes) is registered at the close of business on the record
date, which shall be the May 17 or November 17 (whether or not a business day)
next preceding such May 17 or November 17. Interest may, at the option of the
Company, be paid by check mailed to the address of such person reflected in the
records of the Company.
Interest on the Note shall be computed on the basis of a 360-day year
of twelve 30-day months. Accrual of Original Issue Discount shall be calculated
on the basis of a 360-day year of twelve 30-day months, compounded semiannually.
This Note is issuable and may be subdivided only in fully registered
form, without coupons, in denominations of $1,000,000 and any integral multiple
of $1,000,000 or such other amounts to which the Company may from time to time
agree.
EVENTS OF DEFAULT
In case one or more of the following events of default (each an "Event
of Default") (whatever the reason for such Event of Default and whether it shall
be voluntary or involuntary or be effected by operation of law or pursuant to
any judgment, decree or order of any court or any order, rule or regulation of
any administrative or governmental body) shall have occurred and be continuing:
(a) default in the payment of any installment of interest upon the
Note as and when the same shall become due and payable, and continuance of
such default for a period of thirty days; or
(b) default in the payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, or Fundamental
Change Redemption Price in respect of the Note as and when the same shall
become due and payable either at maturity, in connection with any
redemption, by declaration or otherwise; or
(c) failure on the part of the Company duly to observe or perform any
of the covenants or agreements on the part of the Company in this Note
(other than a covenant or agreement a default in whose performance or whose
breach is elsewhere in this section specifically dealt with) continued for
a period of forty-five days after the date on which written notice of such
failure, requiring the Company to remedy the same, shall have been given to
the Company by the holder of this Note; or
(d) the Company shall have commenced a voluntary case or other
proceeding seeking liquidation, reorganization or
2
<PAGE>
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian, or other similar
official of it or any substantial part of its property, or shall have
consented to any such relief or to the appointment of or taking possession
by any such official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they become due; or
(e) an involuntary case or other proceeding shall be commenced
against the Company seeking liquidation, reorganization or other relief
with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of ninety
consecutive days;
then and in each and every such case, unless the principal of the Note shall
have already become due and payable, the holder of the Note, by notice in
writing to the Company may declare due and immediately payable the sum of the
Issue Price plus accrued Original Issue Discount from the date of issue of
the Notes to the date of declaration and the interest accrued thereon, and
upon any such declaration the same shall become and shall be immediately due
and payable, anything in this Note to the contrary notwithstanding. This
provision, however, is subject to the condition that if, at any time after
the Note shall have been so declared due and payable, and before any judgment
or decree for the payment of the monies due shall have been obtained or
entered as hereinafter provided, the Company shall pay a sum sufficient to
pay all matured installments of interest upon all the Note and principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, and Fundamental Change Redemption Price in respect of the Note which
shall have become due otherwise than by acceleration (with interest on
overdue installments of interest (to the extent that payment of such interest
is enforceable under applicable law) and on such principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price and
Fundamental Change Redemption Price at the rate borne by the Notes (giving
effect to accrual of Original Issue Discount), to the date of such payment or
deposit) and if any and all defaults under this Note, other than the
nonpayment of principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price, Fundamental Change Redemption Price and
interest, if any, in respect of the Note which shall have become due by
acceleration, shall have been cured or waived--then and in every such case
the holder of the Note, by written notice to the Company may waive all
defaults and rescind and annul such declaration and its consequences; but no
such waiver or rescission and annulment shall extend to or shall
3
<PAGE>
affect any subsequent default, or shall impair any right consequent thereon.
The Company covenants that (a) in case default shall be made in the
payment of any installment of interest upon the Note as and when the same shall
become due and payable, and such default shall have continued for a period of
thirty days, or (b) in case default shall be made in the payment of the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, or Fundamental Change Redemption Price in respect of the Note
as and when the same shall have become due and payable, whether at maturity of
the Note, in connection with any redemption of a Note by declaration or
otherwise -- then, upon demand of the holder the Company will pay the whole
amount that then shall have become due and payable on the Note for principal
amount at maturity, Issue Price, accrued Original Issue Discount, Redemption
Price, Fundamental Change Redemption Price, or interest, or both, as the case
may be, with interest upon the overdue principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price and Fundamental Change
Redemption Price and (to the extent that payment of such interest is enforceable
under applicable law) upon the overdue installments of interest at the rate
borne by the Note (giving effect to the accrual of Original Issue Discount);
and, in addition thereto, such further amount as shall be sufficient to cover
the reasonable costs and expenses of collection. Until such demand by the
holder, the Company may pay principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption Price
and interest, if any, in respect of the Note to the holder, whether or not the
Notes are overdue.
In case there shall be pending proceedings for the bankruptcy or for
the reorganization of the Company or any other obligor on the Notes under Title
11 of the United States Code, or any other applicable law, or in case a
receiver, assignee or trustee in bankruptcy or reorganization, liquidator,
sequestrator or similar official shall have been appointed for or taken
possession of the Company, the property of the Company or such other obligor, or
in the case of any other similar judicial proceedings relative to the Company or
other obligor upon the Note, or to the creditors or property of the Company or
such other obligor, the holder, irrespective of whether the principal of the
Notes shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the holder shall have made any demand
pursuant to the provisions of this section, shall be entitled and empowered, to
file and prove a claim or claims for the whole amount of principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Redemption Price and interest, if any, owing and unpaid in
respect of the Note, and, in case of any judicial proceedings, to file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the holder allowed in such judicial
4
<PAGE>
proceedings relative to the Company or any other obligor on the Note, its or
their creditors, or its or their property, and to collect and receive any monies
or other property payable or deliverable on any such claims.
SUBORDINATION OF NOTE
The indebtedness evidenced by the Note is, to the extent and in the
manner provided herein, expressly subordinate and subject in right of payment
to the prior payment in full of all Senior Indebtedness of the Company (as
defined herein), whether outstanding at the date hereof or hereafter incurred,
and this Note is issued subject to the provisions with respect to such
subordination. The payment of the principal amount at maturity, Issue Price,
accrued Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price and interest, if any, in respect of all Notes issued hereunder shall, to
the extent and in the manner hereinafter set forth, be subordinated and subject
in right of payment to the prior payment in full of all Senior Indebtedness. The
holder of this Note, by accepting the same, covenants and agrees, expressly for
the benefit of the present and future holders of Senior Indebtedness, to and
shall be bound by such provisions. The indebtedness evidenced by this Note shall
be PARI PASSU with that series of Notes of the Company designated 1.90%
Convertible Subordinated Notes due 2000.
In the event and during the continuation of any default in the payment
of principal, premium, interest or any other payment due on any Senior
Indebtedness continuing beyond the period of grace, if any, specified in the
instrument or lease evidencing such Senior Indebtedness, then, unless and until
such default shall have been cured or waived or shall have ceased to exist, no
payment shall be made by the Company with respect to the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Fundamental Change Redemption Price or interest, if any, in respect of the
Notes.
Upon any payment by the Company, or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due upon all
Senior Indebtedness shall first be paid in full, or payment thereof provided
for in money in accordance with its terms, before any payment is made on account
of the principal amount at maturity, Issue Price, accrued Original Issue
Discount, Redemption Price, Fundamental Change Redemption Price or interest, if
any, in respect of the Note; and upon any such dissolution or winding-up or
liquidation or reorganization any payment by the Company, or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, to which the holder of the Note would be entitled, except for the
provisions of this section, shall (except as
5
<PAGE>
aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy,
liquidating trustee, agent or other Person making such payment or distribution,
or by the holder of the Note if received by it, directly to the holders of
Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders, as calculated by the
Company) or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
Senior Indebtedness may have been issued, as their respective interests may
appear, to the extent necessary to pay all Senior Indebtedness in full, in money
or money's worth, after giving effect to any concurrent payment or distribution
to or for the holders of Senior Indebtedness, before any payment or distribution
is made to the holder of the Note.
If, notwithstanding the foregoing, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, prohibited by the foregoing, shall be received by the holder of the
Note before all Senior Indebtedness is paid in full, or provision is made for
such payment in money in accordance with its terms, such payment or distribution
shall be held in trust for the benefit of and shall be paid over or delivered to
the holders of Senior Indebtedness or their representative or representatives,
or to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any Senior Indebtedness may have been issued, as their
respective interests may appear, as calculated by the Company, for application
to the payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all Senior Indebtedness in full in money in accordance with its
terms, after giving effect to any concurrent payment or distribution to or for
the holders of such Senior Indebtedness.
For purposes of this section, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this section with respect to
the Note to the payment of all Senior Indebtedness which may at the time be
outstanding; PROVIDED that (i) the Senior Indebtedness is assumed by the new
corporation, if any, resulting from any such reorganization or readjustment, and
(ii) the rights of the holders of the Senior Indebtedness (other than leases)
and of leases which are assumed are not, without the consent of such holders,
altered by such reorganization or readjustment. The consolidation of the Company
with, or the merger of the Company into, another corporation or the liquidation
or dissolution of the Company following the conveyance or transfer of its
property as an entirety, or substantially as an entirety, to another corporation
shall not be deemed a dissolution, winding-up, liquidation or reorganization for
the purposes of this section if such other corporation shall, as a part of such
consolidation, merger, conveyance or transfer, comply with the conditions stated
in this section.
6
<PAGE>
Notwithstanding anything in this Note to the contrary, neither the
issuance and delivery of junior securities upon conversion of the Note in
accordance with the terms and conditions herein nor the payment of cash in
lieu of fractional shares of Common Stock in accordance with the terms and
conditions herein shall be deemed to constitute a payment or distribution on
account of the principal amount at maturity, Issue Price, accrued Original
Issue Discount, Redemption Price or Fundamental Change Purchase Price or
interest, if any, in respect of the Notes. For the purposes of this
paragraph, the term "junior securities" means (a) shares of any stock of any
class of the Company, (b) securities of the Company which are subordinated in
right of payment to all Senior Indebtedness which may be outstanding at the
time of issuance or delivery of such securities to substantially the same
extent as, or to a greater extent than, the Note is so subordinated as
provided in this section, and (c) any securities into which the Note becomes
convertible which are securities of a Person required to enter into an
indenture and are either (x) shares of any stock of any class of such Person,
or (y) securities of such Person which are subordinated in right of payment
to all Senior Indebtedness which may be outstanding at the time of issuance
or delivery of such securities to substantially the same extent as, or to a
greater extent than, the Notes are so subordinated as provided in this
section. Nothing contained in this section or elsewhere in this Note is
intended to or shall impair, as among the Company, its creditors other than
the holders of Senior Indebtedness, and the holder of the Note, the right,
which is absolute and unconditional, of the holder of the Note to convert
such Note in accordance with the terms and conditions herein.
SUBROGATION OF NOTE
Subject to the payment in full of all Senior Indebtedness, the rights
of the holder of the Note shall be subrogated to the rights of the holders of
Senior Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Fundamental Change Redemption Price and interest, if any, in
respect of the Note shall be paid in full; and, for the purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the holder of the Note
would be entitled except for the provisions of this Note relating to
subordination, and no payment over pursuant to the provisions of such section,
to or for the benefit of the holders of Senior Indebtedness by holder of the
Note shall, as between the Company, its creditors other than holders of Senior
Indebtedness, and the holder of the Note, be deemed to be a payment by the
Company to or on account of the Senior Indebtedness. It is understood that the
provisions of this section are and are intended solely for the purpose of
defining the relative rights of the holder of the Note, on the one hand, and the
holders of the Senior Indebtedness, on the other hand.
7
<PAGE>
Nothing contained in this section or elsewhere in this Note is
intended to or shall impair, as between the Company, its creditors other than
the holders of Senior Indebtedness, and the holder of the Note, the
obligation of the Company, which is absolute and unconditional, to pay to the
holder of the Note the principal amount at maturity, Issue Price, accrued
Original Issue Discount, Redemption Price, Fundamental Change Redemption
Price and interest, if any, in respect of the Notes as and when the same
shall become due and payable in accordance with its terms, or is intended to
or shall affect the relative rights of the holder of the Note and creditors
of the Company other than the holders of the Senior Indebtedness, nor shall
anything herein or therein prevent the holder of this Note from exercising
all remedies otherwise permitted by applicable law upon default under this
Note, subject to the rights, if any, under this section of the holders of
Senior Indebtedness in respect of cash, property or securities of the Company
received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to
in this section, the holder of the Note shall be entitled to rely upon any order
or decree made by any court of competent jurisdiction in which such dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent
or other Person making such payment or distribution, delivered to the holder of
the Note, for the purpose of ascertaining the Persons entitled to participate in
such distribution, the holders of the Senior Indebtedness and other indebtedness
of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
section.
REDEMPTION
The Company may not redeem the Note prior to November 17, 1996. On or after
that date, the Company may, at its option, redeem the Note as a whole, or from
time to time in part, on any date prior to maturity, upon mailing a notice by
first class mail of such redemption not less than thirty nor more than sixty
days before the date fixed for redemption to the holder of the Notes at its last
address entered on the books of the Company, at the following optional
Redemption Prices per $1,000 principal amount at maturity (which prices reflect
accrued Original Issue Discount calculated to each such date), together in each
case with accrued interest to the date fixed for redemption. The Redemption
Price of a Note redeemed between such dates would include an additional amount
reflecting the additional Original Issue Discount accrued since the next
preceding date in the table to the actual Redemption Date. The notice of
redemption shall specify the principal amount at maturity of the Note to be
redeemed, the date fixed for redemption, the Redemption Price at which the Note
is to be redeemed, the place or places of payment, that payment will be made
upon presentation and surrender of the Note, that interest
8
<PAGE>
and Original Issue Discount accrued to the date fixed for redemption will be
paid as specified in said notice, and that on and after said date interest and
Original Issue Discount thereon or on the portions thereof to be redeemed will
cease to accrue. Such notice shall also state the current Conversion Rate and
the date on which the right to convert such Notes or portions thereof into
Common Stock will expire. In case the Note is to be redeemed in part only, the
notice of redemption shall state the portion of the principal amount at maturity
thereof to be redeemed and shall state that on and after the date fixed for
redemption, upon surrender of such Note, a new Note or Notes in principal amount
at maturity equal to the unredeemed portion thereof will be issued.
<TABLE>
<CAPTION>
(1) (2) (3)
Accrued
Original Redemption
Note Issue Price
Redemption Date Issue Price Discount (1) + (2)
- --------------- ----------- -------- ---------
<S> <C> <C> <C>
November 17, 1996 $ 845.35 $ 60.43 $905.78
November 17, 1997 845.35 82.44 927.79
November 17, 1998 845.35 105.45 950.80
November 17, 1999 845.35 129.50 974.85
At maturity 845.35 154.65 1,000.00
</TABLE>
Notwithstanding the foregoing, if the date fixed for redemption is a May 17 or
November 17, then the interest payable on such date shall be paid to the holder
of record on the next preceding May 1 or November 1.
The Notes are not subject to redemption through the operation of any
sinking fund.
If a Fundamental Change occurs at any time prior to November 17, 2000,
the holder shall have the right, at the holder's option, to require the Company
to redeem all or any part of such holder's Note on the date (the "Fundamental
Change Redemption Date") (or if such date is not a business day, the next
succeeding business day) that is 30 days after the date of the Company's notice
of such Fundamental Change. Such redemption shall be made at a price (the
"Fundamental Change Redemption Price") equal to the Issue Price plus accrued
Original Issue Discount to the Fundamental Change Redemption Date; provided
that, with respect to a Fundamental Change, if the applicable price is less than
the Reference Market Price (as defined herein), the Company shall redeem the
Note at a price equal to the foregoing redemption price multiplied by the
fraction obtained by dividing the Applicable Price by the Reference Market
Price. In each case, the Company shall also pay accrued interest, if any, on the
Note to the Fundamental Change Redemption Date; provided that if such
Fundamental Change Redemption Date is a May 17 or November 17, then the interest
payable on such date shall be paid to the holder of record of the
9
<PAGE>
Note on the next preceding May 1 or November 1. The Company shall mail to all
holders of record of the Notes a notice of the occurrence of a Fundamental
Change and of the redemption right arising as a result thereof on or before the
tenth day after the occurrence of such Fundamental Change. For a Note to be so
repaid at the option of the holder, the Company must receive at the office or
agency of the Company maintained for that purpose in Emeryville, California such
Note with the form entitled "Option to Elect Redemption Upon a Fundamental
Change" on the reverse thereof duly completed, together with such Note duly
endorsed for transfer, on or before the 30th day after the date of such notice
(or if such 30th day is not a business day, the immediately preceding business
day). All questions as to the validity, eligibility (including time of receipt)
and acceptance of any Note for redemption shall be determined by the Company,
whose determination shall be final and binding.
If the Note is called for redemption, unless surrendered for
conversion on or before the close of business on the business day immediately
preceding the date fixed for redemption, the Note may be deemed to be purchased
from the holder of such Note at an amount equal to the applicable Redemption
Price, together with accrued interest to the date fixed for redemption one or
more purchasers who may agree with the Company to purchase such Note from the
holder hereof and convert it into Common Stock of the Company and to make
payment for such Note to the holder.
CONVERSION
The holder hereof has the right, at its option, at any time after 60
days following the latest date of original issuance of the Note through the
close of business on November 17, 2000, or, as to all or any portion hereof
called for redemption, prior to the close of business on the business day
immediately preceding the date fixed for redemption (unless the Company shall
default in payment due upon redemption thereof), to convert the principal hereof
or any portion of such principal which is $1,000,000 principal amount at
maturity or a multiple thereof, into that number of fully paid and nonassessable
shares of the Company's Common Stock, as said shares shall be constituted at the
date of conversion, obtained by dividing the principal amount at maturity of
this Note or portion thereof to be converted by $1,000 and multiplying the
result so obtained by 8.6481 (the "Conversion Rate") or such Conversion Rate as
adjusted from time to time, upon surrender of this Note, together with a
conversion notice, to the Company at the office or agency of the Company
maintained for that purpose in Emeryville, California, and, unless the shares
issuable on conversion are to be issued in the same name as this Note, duly
endorsed by, or accompanied by instruments of transfer in form satisfactory to
the Company duly executed by, the holder or by his duly authorized attorney. No
adjustments in respect of accrued Original Issue Discount, interest or dividends
will be made upon any conversion; PROVIDED, HOWEVER, that if this Note shall be
surrendered for conversion
10
<PAGE>
during the period from the close of business on any record date for the payment
of interest to the opening of business on the following interest payment date,
this Note (unless it or the portion being converted shall have been called for
redemption on a date in such period) must be accompanied by an amount, in New
York Clearing House funds, equal to the interest payable on such interest
payment date on the principal amount at maturity being converted; PROVIDED
FURTHER, HOWEVER, that no such payment shall be required if the Company
exercises its right to redeem the Notes on November 17, 1996. No fractional
shares will be issued upon any conversion, but an adjustment in cash will be
made, in respect of any fraction of a share which would otherwise be issuable
upon the surrender of any Note or Notes for conversion.
The Conversion Rate shall be adjusted from time to time by the Company
as follows:
(a) In case the Company shall (i) pay a dividend, or make a
distribution, in shares of its Common Stock, on its Common Stock, (ii)
subdivide its outstanding Common Stock into a greater number of shares, or
(iii) combine its outstanding Common Stock into a smaller number of shares,
the Conversion Rate in effect immediately prior thereto shall be adjusted
so that the holder of any Note thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock of the Company
which such holder would have owned or have been entitled to receive after
the happening of any of the events described above had such Note been
converted immediately prior to the happening of such event. An adjustment
made pursuant to this subsection (a) shall become effective immediately
after the record date in the case of a dividend and shall become effective
immediately after the effective date in the case of subdivision or
combination.
(b) In case the Company shall issue rights or warrants to all
holders of its Common Stock entitling them (for a period expiring within
45 days after the record date mentioned below) to subscribe for or
purchase Common Stock at a price per share less than the Current Market
Price per share of Common Stock (as defined in subsection (f) below) at
the record date for the determination of stockholders entitled to
receive such rights or warrants, the Conversion Rate in effect
immediately prior thereto shall be adjusted so that the same shall equal
the rate determined by multiplying the Conversion Rate in effect
immediately prior to the date of issuance of such rights or warrants by
a fraction of which the denominator shall be the number of shares of
Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of shares which the aggregate offering price of
the total number of shares so offered would purchase at such Current
Market Price, and of which the numerator shall be the number of shares
of Common Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of
11
<PAGE>
Common Stock offered for subscription or purchase. Such adjustment shall be
made successively whenever any such rights or warrants are issued, and
shall become effective immediately after such record date. In determining
whether any rights or warrants entitle the holders to subscribe for or
purchase shares of Common Stock at less than such Current Market Price, and
in determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received by the Company
for such rights or warrants, the value of such consideration, if other than
cash, to be determined by the Board of Directors.
(c) In case the Company shall distribute to all holders of its Common
Stock any shares of any class of capital stock of the Company (other than
Common Stock) or evidences of its indebtedness or assets (excluding cash
dividends or other distributions to the extent paid from retained earnings
of the Company) or rights or warrants to subscribe for or purchase any of
its securities (excluding those referred to in subsection (b) above), then
in each such case the Conversion Rate shall be adjusted so that the same
shall equal the rate determined by multiplying the Conversion Rate in
effect immediately prior to the date of such distribution by a fraction of
which the denominator shall be the Current Market Price per share (as
defined in subsection (f) below) of the Common Stock on the record date
mentioned below less the fair market value on such record date (as
determined by the Board of Directors of the Company, whose determination
shall be conclusive) of the portion of the capital stock or assets or
evidences of indebtedness so distributed or of such rights or warrants
applicable to one share of Common Stock, and the numerator shall be the
Current Market Price per share (as defined in subsection (f) below) of the
Common Stock on such record date. Such adjustment shall become effective
immediately after the record date for the determination of shareholders
entitled to receive such distribution.
(d) In case the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding (x) any
quarterly cash dividend on the Common Stock to the extent the aggregate
cash dividend per share of Common Stock in any fiscal quarter does not
exceed the greater of (A) the amount per share of Common Stock of the
next preceding quarterly cash dividend on the Common Stock to the extent
such preceding quarterly dividend did not require any adjustment of the
Conversion Rate pursuant to this subsection (d) (as adjusted to reflect
subdivisions or combinations of the Common Stock), and (B) 3.75% of the
average of the last reported sales price of the Common Stock (determined
as provided in subsection (f)) during the ten Trading Days (as defined
in subsection (f)) next preceding the date of declaration of such
dividend and (y) any dividend or distribution in connection with the
liquidation, dissolution or winding up of the Company, whether voluntary
12
<PAGE>
or involuntary), then, in such case, unless the Company elects to reserve
such cash for distribution to the holder of the Note upon the conversion of
the Note so that such holder will receive upon such conversion, in addition
to the shares of Common Stock to which such holder is entitled, the amount
of cash which such holder would have received if such holder had,
immediately prior to the record date for such distribution of cash,
converted its Notes into Common Stock, the Conversion Rate shall be
adjusted so that the same shall equal the rate determined by multiplying
the Conversion Rate in effect immediately prior to the record date by a
fraction of which the denominator shall be the Current Market Price of the
Common Stock on the record date less the amount of cash so distributed (and
not excluded as provided above) applicable to one share of Common Stock and
the numerator shall be such Current Market Price of the Common Stock, such
adjusted to be effective immediately prior to the opening of business on
the day following the record date; PROVIDED, HOWEVER, that in the event the
portion of the cash so distributed applicable to one share of Common Stock
is equal to or greater than the Current Market Price of the Common Stock on
the record date, in lieu of the foregoing adjustment, adequate provision
shall be made so that the holder shall have the right to receive upon
conversion the amount of cash such holder would have received had such
holder converted the Note on the record date. If such dividend or
distribution is not so paid or made, the Conversion Rate shall again be
adjusted to be the Conversion Rate which would then be in effect if such
dividend or distribution had not been declared.
(e) In case a tender or exchange offer made by the Company or any
subsidiary of the Company for all or any portion of the Common Stock shall
expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per share of Common Stock
having a fair market value (as determined by the Board of Directors or, to
the extent permitted by applicable law, a duly authorized committee
thereof, whose determination shall be conclusive, and described in a
resolution of the Board of Directors or such duly authorized committee
thereof, as the case may be, at the last time (the "Expiration Time")
tenders or exchanges may be made pursuant to such tender or exchange offer
(as it shall have been amended) that exceeds the Current Market Price of
the Common Stock on the Trading Day next succeeding the Expiration Time,
the Conversion Rate shall be adjusted so that the same shall equal the rate
determined by multiplying the Conversion Rate in effect immediately prior
to the Expiration Time by a fraction of which the denominator shall be the
number of shares of Common Stock outstanding (including any tendered or
exchanged shares) on the Expiration Time multiplied by the Current Market
Price of the Common Stock on the Trading Day next succeeding the Expiration
Time and the numerator shall be the sum of (x) the fair market value
13
<PAGE>
(determined as aforesaid) of the aggregate consideration payable to
stockholders based on the acceptance (up to any maximum specified in the
terms of the tender or exchange offer) of all shares validly tendered or
exchanged and not withdrawn as of the Expiration Time (the shares deemed
so accepted up to any such maximum, being referred to as the "Purchased
Shares") and (y) the product of the number of shares of Common Stock
outstanding (less any Purchased Shares) on Expiration Time and the
Current Market Price of the Common Stock on the Trading Day next succeeding
the Expiration Time, such reduction to become effective immediately
prior to the opening of business on the day following the Expiration
Time. If the Company is obligated to purchase shares pursuant to any
such tender or exchange offer, but the Company is permanently prevented
by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Rate shall again be adjusted to
be the Conversion Rate which would then be effect if such tender or
exchange offer had not been made.
(f) For the purpose of any computation under subsections (b), (c),
(d) and (e) above, the Current Market Price per share of Common Stock at
any date shall be deemed to be the average of the last reported sale prices
for the ten consecutive Trading Days (as defined below) preceding the day
before the record date with respect to any distribution, issuance or other
event requiring such computation. The last reported sale price for each day
shall be (i) the last reported sale price of Common Stock on the National
Market of the NASDAQ System, or any similar system of automated
dissemination of quotations of securities prices then in common use, if so
quoted, or (ii) if not quoted as described in clause (i), the mean between
the high bid and low asked quotations for Common Stock as reported by the
National Quotation Bureau Incorporated if at least two securities dealers
have inserted both bid and asked quotations for such class of stock on at
least 5 of the 10 preceding days, or (iii) if the Common Stock is listed or
admitted for trading on any national securities exchange, the last sale
price, or the closing bid price if no sale occurred, of such class of stock
on the principal securities exchange on which such class of stock is
listed. If the Common Stock is quoted on a national securities or central
market system, in lieu of a market or quotation system described above, the
last reported sale price shall be determined in the manner set forth in
clause (ii) of the preceding sentence if bid and asked quotations are
reported but actual transactions are not, and in the manner set forth in
clause (iii) of the preceding sentence if actual transactions are reported.
If none of the conditions set forth above is met, the last reported sale
price of Common Stock on any day or the average of such last reported sale
prices for any period shall be the fair market value of such class of stock
as determined by a member firm of the New York Stock Exchange, Inc.
selected by the Company. As used
14
<PAGE>
herein the term "Trading Days" with respect to Common Stock means (i) if
the Common Stock is quoted on the National Market of the NASDAQ System or
any similar system of automated dissemination of quotations of securities
prices, days on which trades may be made on such system or (ii) if the
Common Stock is listed or admitted for trading on any national securities
exchange, days on which such national securities exchange is open for
business.
(g) Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase
shares of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"):
(i) are deemed to be transferred with such shares of Common
Stock,
(ii) are not exercisable, and
(iii) are also issued in respect of future issuances of Common
Stock,
shall not be deemed distributed for purposes of subsection (a) until the
occurrence of the earliest Trigger Event. In addition, in the event of any
distribution of rights or warrants, or any Trigger Event with respect
thereto, that shall have resulted in an adjustment to the Conversion Rate
under subsection (a), (1) in the case of any such rights or warrants which
shall all have been redeemed or repurchased without exercise by any holders
thereof, the Conversion Rate shall be readjusted upon such final redemption
or repurchase to give effect to such distribution or Trigger Event, as the
case may be, as though it were a cash distribution, equal to the per share
redemption or repurchase price received by a holder of Common Stock with
respect to such rights or warrants (assuming such holder had retained such
rights or warrants), made to all holders of Common Stock as of the date of
such redemption or repurchase, and (2) in the case of any such rights or
warrants all of which shall have expired without exercise by any holder
thereof, the Conversion Rate shall be readjusted as if such issuance had
not occurred.
(h) No adjustment in the Conversion Rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in such
rate; PROVIDED, HOWEVER, that any adjustments which by reason of this
subsection (h) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under
this section shall be made by the Company and shall be made to the nearest
cent or to the nearest one hundredth of a share, as the case may be.
Anything in this section to the contrary notwithstanding, the Company shall
15
<PAGE>
be entitled to make such increases in the Conversion Rate, in addition to
those required by this section, as it in its discretion shall determine to
be advisable in order that any stock dividends, subdivision of shares,
distribution of rights to purchase stock or securities, or a distribution
of securities convertible into or exchangeable for stock hereafter made by
the Company to its stockholders shall not be taxable. To the extent
permitted by applicable law, the Company from time to time may increase the
Conversion Rate by any amount for any period of time if the period is at
least 20 days, the increase is irrevocable during the period and the Board
of Directors shall have made a determination that such increase would be in
the best interests of the Company, which determination shall be
conclusive. Whenever the Conversion Rate is so increased, the Company shall
mail to the holder and file with any Conversion Agent a notice of the
increase. The Company shall mail the notice at least 15 days before the
date the increased Conversion Rate takes effect. The notice shall state the
increased Conversion Rate and the period it will be in effect.
(i) Whenever the Conversion Rate is adjusted, as herein provided, the
Company shall promptly file with any conversion agent an Officers'
Certificate setting forth the Conversion Rate after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Rate setting forth the adjusted
Conversion Rate and the date on which such adjustment becomes effective and
shall mail such notice of such adjustment of the Conversion Rate to the
holder of the Note at its last address appearing on the books of the
Company.
(j) In any case in which this section provides that an adjustment
shall become effective immediately after a record date for an event, the
Company may defer until the occurrence of such event (i) issuing to the
holder of the Note converted after such record date and before the
occurrence of such event the additional shares of Common Stock issuable
upon such conversion by reason of the adjustment required by such event
over and above the Common Stock issuable upon such conversion before giving
effect to such adjustment and (ii) paying to such holder any amount in cash
in lieu of any fractional shares.
If any of the following events occur, namely (i) any reclassification
or change of outstanding shares of Common Stock (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
or (iii)
16
<PAGE>
any sale or conveyance of the properties and assets of the Company as, or
substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, then the Company or the successor or purchasing corporation, as
the case may be, shall execute a supplemental note providing that the Note shall
be convertible into the kind and amount of shares of stock and other securities
or property or assets (including cash) receivable upon such reclassification,
change, consolidation, merger, combination, sale or conveyance by a holder of a
number of shares of Common Stock issuable upon conversion of such Note
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance. Such supplemental note shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this section.
The Company shall cause notice of the execution of such supplemental
note to be mailed to the holder of the Note, at its address appearing on books
of the Company.
The above provisions of this section shall similarly apply to
successive reclassifications, consolidations, mergers, combinations, and sales.
MISCELLANEOUS
In case this Note shall become mutilated or be apparently destroyed,
lost or stolen, the Company in its discretion may execute and deliver a new
Note, in exchange and substitution for the mutilated Note, or in lieu of and in
substitution for the Note so apparently destroyed, lost or stolen. In every case
the applicant for a substituted Note shall furnish to the Company such security
or indemnity as may be required by them to save each of them harmless, and, in
every case of destruction, loss or theft, the applicant shall also furnish to
the Company evidence to its satisfaction of the destruction, loss or theft of
such Note and of the ownership thereof. The Company may require the payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other expenses connected therewith.
Upon due presentment for registration of transfer of this Note at the
office or agency of the Company in Emeryville, California, a new Note or Notes
of authorized denominations for an equal aggregate principal amount at maturity
will be issued to the transferee in exchange herefor, without charge except for
any tax or other governmental charge imposed in connection therewith.
The Company may deem and treat the registered holder hereof as the
absolute owner of this Note (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon made by anyone
other than the
17
<PAGE>
Company or any Note registrar), for the purpose of receiving payment hereof, or
on account hereof, for the conversion hereof and for all other purposes, and the
Company shall not be affected by any notice to the contrary. All payments made
to or upon the order of such registered holder shall, to the extent of the sum
or sums paid, satisfy and discharge liability for monies payable on this Note.
No recourse for the payment of the principal amount at maturity, Issue
Price, accrued Original Issue Discount, Redemption Price, Fundamental Change
Redemption Price or interest, if any, in respect of on this Note, or for any
claim based hereon or otherwise in respect hereof, and no recourse under or upon
any obligation, covenant or agreement of the Company in this Note, or because of
the creation of any indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or of any successor corporation, either directly or
through the Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issue hereof, expressly waived and released.
DEFINITIONS
As used herein and not elsewhere defined, the capitalized terms herein
have the following meaning:
APPLICABLE PRICE: The term "Applicable Price" shall mean (i) in the
event of a Fundamental Change in which the holders of the Common Stock receive
only cash, the amount of cash received by the holder of one share of Common
Stock and (ii) in the event of any other Fundamental Change, the average of the
last reported sale price for the Common Stock (determined as set forth in above)
during the ten Trading Days (as defined in above) prior to the record date for
the determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Fundamental Change,
or, if there is no such record date, the date upon which the holders of Common
Stock shall have the right to receive such cash, securities, property or other
assets in connection with the Fundamental Change.
BOARD OF DIRECTORS: The term "Board of Directors" shall mean the
Board of Directors of the Company or a committee of such Board duly authorized
to act for it hereunder.
COMMON STOCK: The term "Common Stock" shall mean any stock of any
class of the Company which has no preference in respect of dividends or of
amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which is not subject to redemption
by the Company. Subject to the provisions contained elsewhere in this
18
<PAGE>
Note, however, shares issuable on conversion of the Note shall include only
shares of Common Stock, $.01 par value per share (which is the class designated
as Common Stock of the Company at the date of this Indenture), or shares of any
class or classes resulting from any reclassification or reclassifications
thereof and which have no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to redemption by the
Company; PROVIDED that if at any time there shall be more than one such
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion to which the total number of shares of such
class resulting from all such reclassifications bears to the total number of
shares of all such classes resulting from all such reclassifications.
FUNDAMENTAL CHANGE: The term "Fundamental Change" means the
occurrence of any transaction or event in connection with which all or
substantially all the Common Stock shall be exchanged for, converted into,
acquired for or constitute the right to receive consideration which is not all
or substantially all common stock listed (or, upon consummation of such
transaction or event, which will be listed) on a United States national
securities exchange or approved for quotation in the NASDAQ System or any
similar United States system of automated dissemination of quotations of
securities prices (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification, recapitalization or
otherwise).
ISSUE PRICE: The term "Issue Price" shall mean, in connection with
the original issuance of such Note (including any Predecessor Note), the initial
issue price at which the Note is sold as set forth on the face of the Note.
NASDAQ SYSTEM: The term "NASDAQ System" shall mean the electronic
inter-dealer quotation system operated by NASDAQ, Inc., a subsidiary of the
National Association of Securities Dealers, Inc.
NOTEHOLDER: The terms "Noteholder" or "holder of the Note", or other
similar terms, shall mean any person in whose name at the time a particular Note
is registered on the books of the Company kept for that purpose in accordance
with the terms hereof.
OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an
opinion in writing signed by legal counsel, who may be an employee of or counsel
to the Company.
ORIGINAL ISSUE DISCOUNT: The term "Original Issue Discount" of the
Note means the difference between the Issue Price and the principal amount at
maturity of the Note as set forth on the face of the Note. For purposes of this
Note, accrual of Original Issue Discount shall be calculated on the basis of a
19
<PAGE>
360-day year of twelve 30-day months, compounded semi-annually.
PERSON: The term "Person" shall mean a corporation, an association, a
partnership, an organization, an individual, a government or a political
subdivision thereof or a governmental agency, and shall include any successor
(by merger or otherwise) of such entity.
PREDECESSOR NOTE: The term "Predecessor Note" of any particular Note
shall mean every previous Note evidencing all or a portion of the same debt as
that evidenced by such particular Note; and, for the purposes of this
definition, any Note in lieu of a lost, destroyed or stolen Note shall be deemed
to evidence the same debt as the lost, destroyed or stolen Note.
QIB: The term "QIB" shall mean a "qualified institutional buyer as
defined in Rule 144A.
REDEMPTION PRICE: The term "Redemption Price" means the applicable
Redemption Price as set forth in the notice, including any applicable additional
Original Issue Discount referred to therein.
REFERENCE MARKET PRICE: The term "Reference Market Price" shall
initially mean $51.50 and in the event of any adjustment to the Conversion Rate
pursuant to subsection (a), (b) or (c) of the foregoing section entitled
"Redemption," the Reference Market Price shall also be adjusted so that the
Reference Market Price after giving effect to any such adjustment shall equal
the Reference Market Price immediately prior to such adjustment multiplied by a
fraction, the numerator of which is the Conversion Rate immediately prior to
such adjustment and the denominator of which is the Conversion Rate after such
adjustment.
SENIOR INDEBTEDNESS: The term "Senior Indebtedness" shall mean the
principal of, premium, if any, interest on, and any other payment due pursuant
to any of the following, whether outstanding at the date hereof or hereafter
incurred or created:
(a) all indebtedness of the Company for money borrowed (including any
indebtedness secured by a mortgage, conditional sales contract or other
lien which is (i) given to secure all or part of the purchase price of
property subject thereto, whether given to the vendor of such property or
to another or (ii) existing on property at the time of acquisition
thereof);
(b) all indebtedness of the Company evidenced by notes, debentures,
bonds or other securities;
(c) all indebtedness or other obligations of the Company with respect
to interest rate and currency swap agreements, cap, floor and collar
agreements, currency spot and forward contracts and other similar
agreements and
20
<PAGE>
arrangements;
(d) all lease obligations of the Company which are capitalized on the
books of the Company in accordance with generally accepted accounting
principles;
(e) all indebtedness of others of the kinds described in any of the
preceding clauses (a), (b) or (c) and all lease obligations of others of
the kind described in the preceding clause (d) assumed by or guaranteed in
any manner by the Company or in effect guaranteed by the Company through an
agreement to purchase, contingent or otherwise; and
(f) all renewals, extensions or refundings of indebtedness of the
kinds described in any of the preceding clauses (a), (b), (c) or (e) and
all renewals or extensions of lease obligations of the kinds described in
any of the preceding clauses (c), (d) or (e);
unless, in the case of any particular indebtedness, lease, renewal, extension or
refunding, the instrument or lease creating or evidencing the same or the
assumption or guarantee of the same expressly provides that such indebtedness,
lease, renewal, extension or refunding is subordinate to any other indebtedness
of the Company or is not superior in right of payment to, or is PARI PASSU with,
the Notes. Notwithstanding the foregoing, Senior Indebtedness shall not include
(i) any indebtedness or lease obligation of any kind of the Company to any
subsidiary of the Company, a majority of the voting stock of which is owned by
the Company and (ii) indebtedness for trade payables or constituting the
deferred purchase price of assets or services incurred in the ordinary course of
business.
This Note shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with
and governed by the laws of said State.
The headings of the sections of this Agreement have been inserted for
convenience of reference only and shall not be deemed a part of this Note.
21
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
CHIRON CORPORATION
BY: /s/ William G. Green
------------------------------
Title: Senior Vice President
Dated: November 24, 1993
------------------------
[seal]
Attest:
/s/ Jane L. Shatton
- ------------------------------
Secretary
22
<PAGE>
[FORM OF CONVERSION NOTICE]
CONVERSION NOTICE
To: Chiron Corporation
The undersigned registered holder of this Note hereby irrevocably
exercises the option to convert this Note, or portion hereof (which is
$1,000,000 principal amount at maturity or a multiple thereof) below designated,
into shares of Common Stock of Chiron Corporation in accordance with the terms
of this Note, and directs that the shares issuable and deliverable upon the
conversion, together with any check in payment for fractional shares and any
Notes representing any unconverted principal amount at maturity hereof, be
issued and delivered to the registered holder hereof unless a different name has
been indicated below. If shares or any portion of this Note not converted are to
be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto. Any amount required to
be paid by the undersigned on account of interest accompanies this Note.
Dated:
------------------------
---------------------------------
---------------------------------
Signature(s)
23
<PAGE>
Fill in for the registration of
shares if to be delivered,
and Notes if to be issued
other than to and in the
name of the registered
holder:
- ------------------------------
(Name)
- ------------------------------
(Street Address)
- ------------------------------
(City, State and Zip Code)
Please print name and address
Principal amount at maturity to be
converted (if less than all):
$_____,000,000
--------------------------------------
Social Security or Other
Taxpayer Identification Number
24
<PAGE>
[FORM OF ASSIGNMENT]
For value received, ____________________________________________hereby sell(s),
assign(s) and transfer(s) unto _____________________________________________the
(Please insert social security or other taxpayer
identification number of assignee)
within Note and hereby irrevocably constitutes and appoints ___________________
attorney to transfer the said Note on the books of the Company, with full power
of substitution in the premises.
In connection with any transfer of the within Note occurring within three years
of the original issuance of such Note, the undersigned confirms that such Note
is being transferred:
/ / To Chiron Corporation or a subsidiary thereof; or
/ / Pursuant to and in compliance with Regulation S under the Securities
Act of 1933, as amended; or
/ / Pursuant to and in compliance with Rule 144 under the Securities Act
of 1933, as amended;
and, unless the box below is checked, the undersigned confirms that such Note is
not being transferred to an "affiliate" of the Company as defined in Rule 144
under the Securities Act of 1933, as amended (an "Affiliate"):
25
<PAGE>
/ / The transferee is an Affiliate of the Company.
Dated:
--------------------------------
------------------------------------
Signature(s)
Signature(s) must be guaranteed by a
commercial bank or trust company or a
member firm of a major stock exchange.
- --------------------------------------
Signature Guarantee
26
<PAGE>
[FORM OF OPTION TO ELECT REDEMPTION
UPON A FUNDAMENTAL CHANGE]
To: Chiron Corporation
The undersigned registered holder of this Note hereby acknowledges
receipt of a notice from Chiron Corporation (the "Company") as to the occurrence
of a Fundamental Change with respect to the Company and requests and instructs
the Company to redeem this Note, or portion hereof (which is $1,000,000
principal amount at maturity or a multiple thereof) below designated, in
accordance with the terms of this Note, together with accrued interest to such
date, to the registered holder hereof.
Principal amount at maturity to be
converted (if less than all):
$_____,000,000
Dated:
--------------------------------
------------------------------------
Signature(s)
------------------------------------
Social Security or Other
Taxpayer Identification Number
NOTICE: The above signature(s) of the holder(s) hereof must correspond with the
name as written upon the face of the Note in every particular without alteration
or enlargement or any change whatever.
1
<PAGE>
EXHIBIT 21
List of Subsidiaries of Chiron Corporation
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION OR
SUBSIDIARY ORGANIZATION
- ---------- ----------------
<S> <C>
Cetus Generic Corporation Delaware, USA
Chiron B.V. The Netherlands
Cephalon Chiron B.V. The Netherlands
Chiron GmbH Germany
Chiron France S.a.r.l. France
Chiron Italia S.r.l Italy
Chiron U.K. Ltd. United Kingdom
Chiron Iberia S.A. Spain
Chiron Partners, Inc. California, USA
Chiron Alpha Corporation California, USA
Chiron/Cephalon JV Delaware, USA
Chiron Properties, Inc. California, USA
Chiron Delta Corporation Delaware, USA
Chiron Investment Corporation California, USA
Chiron (Bermuda) Ltd. Bermuda
Chiron Redevelopment Corp. & Co. KG Germany
31 Corsa Verwaltungsgesellschaft GmbH Germany
Chiron Behring GmbH & Co Germany
Chiron Behring Verwaltungsgesellschaft GmbH Germany
Chiron S.p.A. Italy
Instituto Vaccinogen Pozzi S.p.A. Italy
Biocine S.A.R.L. France
Chiron Technologies Pty. Ltd. Australia
Chiron Mimotopes U.S. California, USA
Chiron Redevelopment Corporation Missouri, USA
Chiron Foreign Sales Corporation U.S. Virgin Islands
Chiron Funding LLC Delaware, USA
Centaur Insurance Company, Inc. Hawaii, USA
Chiron AB Sweden
Chiron Vision, Inc. Canada
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1998 AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998<F7>
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998<F7>
<CASH> 513,315
<SECURITIES> 1,076,699<F1>
<RECEIVABLES> 185,288
<ALLOWANCES> 16,190
<INVENTORY> 79,869
<CURRENT-ASSETS> 1,631,639
<PP&E> 501,190
<DEPRECIATION> 197,812
<TOTAL-ASSETS> 2,524,255
<CURRENT-LIABILITIES> 557,418
<BONDS> 338,158<F2>
0
0
<COMMON> 1,799
<OTHER-SE> 1,544,003<F3>
<TOTAL-LIABILITY-AND-EQUITY> 2,524,255
<SALES> 399,251
<TOTAL-REVENUES> 736,673
<CGS> 178,063
<TOTAL-COSTS> 178,063
<OTHER-EXPENSES> 333,279<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,673
<INCOME-PRETAX> 94,983
<INCOME-TAX> 18,985
<INCOME-CONTINUING> 75,998
<DISCONTINUED> 448,115
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524,113
<EPS-PRIMARY> 2.95<F5>
<EPS-DILUTED> 2.90<F6>
<FN>
<F7>ACTUAL FISCAL YEAR END WAS JAN-03-1999. FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH
END.
<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 INCOME.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT, WRITE-OFF OF PURCHASED IN-PROCESS
TECHNOLOGIES, RESTRUCTURING AND REORGANIZATION CHARGES AND OTHER OPERATING
EXPENSES.
<F5>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM CONTINUING
OPERATIONS AND BASIC INCOME PER SHARE FROM DISCONTINUED OPERATIONS WERE $0.43
AND $2.52, RESPECTIVELY.
<F6>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS AND DILUTED INCOME PER SHARE FROM DISCONTINUED OPERATIONS
WERE $0.42 AND $2.48, RESPECTIVELY.
</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, 1997 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997<F5>
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997<F5>
<CASH> 98,483
<SECURITIES> 159,989<F1>
<RECEIVABLES> 366,962
<ALLOWANCES> 22,918
<INVENTORY> 165,652
<CURRENT-ASSETS> 770,052
<PP&E> 831,521
<DEPRECIATION> 277,623
<TOTAL-ASSETS> 1,768,478
<CURRENT-LIABILITIES> 471,186
<BONDS> 397,217<F2>
0
0
<COMMON> 1,757
<OTHER-SE> 872,188<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,768,478
<SALES> 252,729
<TOTAL-REVENUES> 574,599
<CGS> 113,612
<TOTAL-COSTS> 113,612
<OTHER-EXPENSES> 294,945<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,610
<INCOME-PRETAX> 40,206
<INCOME-TAX> 14,424
<INCOME-CONTINUING> 25,782
<DISCONTINUED> 45,437<F8>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71,219
<EPS-PRIMARY> .41<F6>
<EPS-DILUTED> .40<F7>
<FN>
<F5>ACTUAL FISCAL YEAR END WAS DEC-28-1997, FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH
END.
<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, IMPAIRMENT LOSS ON LONG-LIVED ASSETS AND
OTHER OPERATING EXPENSES.
<F8>ON NOVEMBER 30, 1998, CHIRON CORPORATION COMPLETED THE SALE OF ITS IN VITRO
DIAGNOSTICS BUSINESS, CHIRON DIAGNOSTICS CORPORATION. THIS SCHEDULE FOR THE
YEAR ENDED DEC-31-1997 HAS BEEN RESTATED TO REFLECT THE RESULTS OF CHIRON
DIAGNOSTICS CORPORATION AS DISCONTINUED OPERATIONS.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM CONTINUING
OPERATIONS AND BASIC INCOME PER SHARE FROM DISCONTINUED OPERATIONS WERE $0.15
AND $0.26, RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS AND DILUTED INCOME PER SHARE FROM DISCONTINUED OPERATIONS
WERE $0.14 AND $0.26, RESPECTIVELY.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CHIRON
CORPORATION'S CONSOLIDATED BALANCE SHEET DATED DECEMBER 31, 1996 AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996<F5>
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996<F5>
<CASH> 68,114
<SECURITIES> 60,721<F1>
<RECEIVABLES> 372,663
<ALLOWANCES> 20,692
<INVENTORY> 180,534
<CURRENT-ASSETS> 696,768
<PP&E> 796,821
<DEPRECIATION> 213,217
<TOTAL-ASSETS> 1,688,670
<CURRENT-LIABILITIES> 473,169
<BONDS> 419,589<F2>
0
0
<COMMON> 1,707
<OTHER-SE> 763,148<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,688,670
<SALES> 242,640
<TOTAL-REVENUES> 537,149
<CGS> 116,899
<TOTAL-COSTS> 116,899
<OTHER-EXPENSES> 254,069<F4>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,486
<INCOME-PRETAX> 51,865
<INCOME-TAX> 6,207
<INCOME-CONTINUING> 45,658
<DISCONTINUED> 9,487<F8>
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,145
<EPS-PRIMARY> .33<F6>
<EPS-DILUTED> .31<F7>
<FN>
<F5>ACTUAL FISCAL YEAR END WAS DEC-29-1996. FOR PRESENTATION PURPOSES, DATES USED
IN THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES REFER TO THE FISCAL MONTH
END.
<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 INCOME AND NOTES RECEIVABLE FROM STOCK SALES.
<F4>CONSISTS OF RESEARCH AND DEVELOPMENT AND OTHER OPERATING EXPENSES.
<F8>ON NOVEMBER 30, 1998, CHIRON CORPORATION COMPLETED THE SALE OF ITS IN VITRO
DIAGNOSTICS BUSINESS, CHIRON DIAGNOSTICS CORPORATION. THIS SCHEDULE FOR THE
YEAR ENDED DEC-31-1996 HAS BEEN RESTATED TO REFLECT THE RESULTS OF CHIRON
DIAGNOSTICS CORPORATION AS DISCONTINUED OPERATIONS.
<F6>REPRESENTS BASIC NET INCOME PER SHARE. BASIC INCOME PER SHARE FROM CONTINUING
OPERATIONS AND BASIC INCOME PER SHARE FROM DISCONTINUED OPERATIONS WERE $0.27
AND $0.06, RESPECTIVELY.
<F7>REPRESENTS DILUTED NET INCOME PER SHARE. DILUTED INCOME PER SHARE FROM
CONTINUING OPERATIONS AND DILUTED INCOME PER SHARE FROM DISCONTINUED OPERATIONS
WERE $0.26 AND $0.05, RESPECTIVELY.
</FN>
</TABLE>
