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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NO. 0-12798
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CHIRON CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2754624
(State of Incorporation) (IRS Employer Identification No.)
4560 HORTON STREET
EMERYVILLE, CALIFORNIA 94608
(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: (510) 655-8730
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
WARRANT 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 January 31, 2001 was $4.6 billion.
The number of shares outstanding of each of the Registrant's classes of
common stock as of January 31, 2001:
TITLE OF CLASS NUMBER OF SHARES
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Common Stock, $0.01 par value 189,054,341
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 17, 2001 are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS
THIS REPORT 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 PART II, 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. We apply leading scientific approaches to
discover and develop innovative healthcare products to prevent and treat cancer
and infection. We bring products to the global healthcare market through
collaborations with major healthcare companies and through three growing
businesses: biopharmaceuticals, vaccines and blood testing.
Products sold directly by Chiron include Menjugate-TM-, a conjugate vaccine
to prevent meningococcal C disease, launched in 2000 for sale in the United
Kingdom, Ireland, Spain and Hungary. The Company also markets
TOBI-Registered Trademark- (tobramycin solution for inhalation) in the U.S. and
has launched it in Europe. Cystic fibrosis patients use
TOBI-Registered Trademark- to treat Pseudomonas aeruginosa lung infections.
Chiron is now launching, in collaboration with Gen-Probe Incorporated
("Gen-Probe"), the commercial sale of nucleic acid test systems and assays that
screen blood for transfusion and plasma products for the presence of infectious
viruses. The Company's leading cancer product Proleukin-Registered Trademark-
(aldesleukin) is a recombinant form of interleukin-2 ("IL-2"), which the Company
directly markets in over 40 countries as a treatment for metastatic renal cell
carcinoma and metastatic melanoma. The Company is investigating IL-2 in clinical
trials for other indications, including the treatment of patients with human
immunodeficiency virus ("HIV") infection. In addition, the Company directly
sells a broad line of traditional pediatric and adult vaccines in Germany and
Italy and to international organizations and is developing novel vaccines to
prevent viral and bacterial infections, including Fluad-TM-, Chiron's adjuvanted
flu vaccine that was launched in Europe in 2000.
Chiron also uses collaborations to bring the products of its research to the
marketplace. The Company developed and manufactures
Betaseron-Registered Trademark- (interferon beta-1b) as a treatment for multiple
sclerosis. Betaseron-Registered Trademark- is marketed by Berlex
Laboratories, Inc. ("Berlex") in the U.S. and by its parent company, Schering
AG, in Europe and Japan. Chiron also developed and manufactures PDGF
(recombinant human platelet-derived growth factor-rhPDGF-BB), the active
ingredient in Regranex-Registered Trademark- (becaplermin) Gel, which is
marketed by Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil"), a Johnson &
Johnson ("J&J") company, as a treatment for diabetic foot ulcers. The Company
has a joint immunodiagnostic business with Ortho-Clinical Diagnostics, Inc.
("Ortho"), a J&J company, that sells a full line of immunodiagnostic tests
required to screen blood for hepatitis viruses and retroviruses. Chiron also
manufactures the recombinant antigens used in blood screening tests to detect
hepatitis C virus ("HCV") manufactured and sold by Abbott Laboratories
("Abbott"). HCV immunodiagnostic tests containing Chiron-manufactured antigens
are used to test over 90% of the units of blood that are transfused in the
developed world. Other entities licensed by Chiron under its intellectual
property pay the Company royalties on their product sales,
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including sales of recombinant hepatitis B virus ("HBV") vaccine by Merck &
Co., Inc. ("Merck") and recombinant insulin and glucagon by Novo Nordisk A/S
("Novo Nordisk").
Chiron focuses its substantial investment in research primarily on products
to prevent and treat cancer and infection. It brings together knowledge of
disease mechanisms with its proprietary functional genomics tools to generate
recombinant proteins, small molecule drugs and vaccines. An important segment of
the Company's research and development effort is undertaken through
collaborations with third parties, who may bring complementary or enabling
technologies or other resources and skills to product development and
commercialization, including, in many cases, marketing and sales expertise and
infrastructure.
In September 2000, Chiron acquired PathoGenesis Corporation
("PathoGenesis"), a biotechnology company developing drugs to treat infectious
diseases--particularly serious lung infections--where there is significant need
for improved therapy. In addition to its marketed product,
TOBI-Registered Trademark-, PathoGenesis brought to Chiron two products in
clinical development and strong competencies in inhalation therapy and
anti-infection drug discovery. Chiron has integrated PathoGenesis' activities
with those of Chiron's biopharmaceuticals business and is building a strong
research competence in anti-infectives by combining Chiron's skills in
microbiology, functional genomics, high through-put screening and combinatorial
chemistry with PathoGenesis' strengths in identifying novel antibiotic targets,
assays and drug development.
In January 1995, the Company established an alliance with Novartis AG
("Novartis"), a life sciences company headquartered in Basel, Switzerland. As of
February 1, 2001, Novartis held shares representing approximately 42% of the
outstanding common stock of the Company. For more on the Novartis alliance, see
"Relationship With Novartis" below.
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 manufactures and markets Proleukin-Registered Trademark-, a
recombinant form of 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 and function of immune cells. While the precise anti-tumor mechanism
of Proleukin-Registered Trademark- is unknown, research has demonstrated that it
induces the proliferation of immune cells, including natural killer and
cytotoxic T cells that can recognize and mobilize against tumor-specific
antigens on the surface of malignant cells. Proleukin-Registered Trademark- is
marketed by the Company directly or through distributors in the U.S. and over 40
other countries in North America, Europe, Asia and South America for the
treatment of metastatic renal cell carcinoma (a type of kidney cancer) and in
the U.S. and Canada for the treatment of metastatic melanoma (a form of skin
cancer).
Chiron manufactures Betaseron-Registered Trademark- (interferon beta-1b) for
Berlex and its parent company, Schering AG of Germany. Berlex markets
Betaseron-Registered Trademark- primarily in the U.S. to treat patients with
relapsing remitting multiple sclerosis and in Canada to treat patients with
secondary progressive 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-Registered Trademark-,
which is manufactured by Boehringer Ingelheim and marketed by Schering AG for
the treatment of patients with relapsing remitting and secondary progressive
multiple sclerosis.
TOBI-Registered Trademark- is a stable, premixed, proprietary formulation of
the antibiotic tobramycin for delivery by inhalation using a nebulizer.
TOBI-Registered Trademark- has been tested and approved for cystic fibrosis
patients with Pseudomonas aeruginosa lung infections. TOBI-Registered Trademark-
is the first inhaled antibiotic solution to be approved by the Food and Drug
Administration ("FDA") and has been sold in the U.S. since January 1998. Chiron
obtained TOBI-Registered Trademark- as part of its acquisition of PathoGenesis
in September 2000. Chiron recorded sales of
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TOBI-Registered Trademark- of $27.8 million from the closing date of the
acquisition through year end. Actual sales of TOBI-Registered Trademark- were
$86.0 million and $60.1 million in 2000 and 1999, respectively.
TOBI-Registered Trademark- was approved for sale in the U.S. in 1997, and in
Canada and the United Kingdom in 1999. In 2000, TOBI-Registered Trademark- was
approved for commercial sale in France, the Netherlands, Belgium, Ireland,
Israel, Argentina, Australia, Luxembourg, Portugal, Denmark and Sweden.
TOBI-Registered Trademark- has cleared the mutual recognition process required
for marketing the drug in substantially all of the European Union and marketing
authorizations are expected from the remaining member countries during 2001.
Chiron manufactures PDGF, the active ingredient in
Regranex-Registered Trademark- Gel, developed with Ortho-McNeil through a
collaboration in growth factor research that began in 1984. Ortho-McNeil markets
Regranex-Registered Trademark- in the U.S. as a treatment for diabetic foot
ulcers. Regranex-Registered Trademark- 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-Registered Trademark- was the first product demonstrated
to assist in the healing of diabetic foot ulcers. Regranex-Registered Trademark-
also has been approved for marketing in Canada, Europe, Asia and other regions
of the world.
Sales of Proleukin-Registered Trademark- accounted for approximately 12%,
15% and 13% of consolidated total revenues in 2000, 1999 and 1998, respectively.
Sales of Betaseron-Registered Trademark-, which include product sales to Berlex
and Schering AG and royalties earned on Schering AG's European sales of
Betaferon-Registered Trademark-, accounted for approximately 12% (8% product
sales and 4% royalties), 13% (9% product sales and 4% royalties) and 13% (9%
product sales and 4% royalties) of total revenues in 2000, 1999 and 1998,
respectively. 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
In 2000, the Company commenced sales of Menjugate-TM-, a conjugate vaccine
against meningococcal C disease developed by Chiron. Invasive infection with the
bacteria N. meningitidis can lead to meningitis and septicemia (blood
poisoning). Meningococcal meningitis, which can be caused by multiple serogroups
(A, B, C, Y and others), is associated with a high mortality rate. In
March 2000, the Medicines Control Agency approved Menjugate-TM- for sale in the
United Kingdom. The National Health Service ("NHS") in the United Kingdom
accepted the Company's tender to supply Menjugate-TM- in 2000 and 2001. The
Company also is supplying Menjugate-TM- to Ireland pursuant to a tender, and in
Spain and Hungary. The Company will be seeking approval to market Menjugate-TM-
elsewhere in Europe through the mutual recognition procedure. See "Government
Regulation" below.
The Company also has developed and markets Fluad-TM-, an adjuvanted flu
vaccine. Fluad-TM- currently is marketed in Italy, Germany and Austria. The
Company has gained approval to market Fluad-TM- elsewhere in Europe through the
European mutual recognition procedure. See "Government Regulation" below.
In 2000, the Company entered into a co-promotion and co-marketing agreement
with Aventis Pasteur (formerly Pasteur Merieux Connaught) related to
Menjugate-TM- and Fluad-TM-. Under the agreement, Aventis Pasteur will assist
the Company in marketing and sales efforts (co-promotion) related to
Menjugate-TM- in the United Kingdom and Ireland. Aventis Pasteur will
distribute, market and sell (co-market) Menjugate-TM- under its own label in the
rest of Europe. Aventis Pasteur will similarly co-market Fluad-TM- in Europe.
The Company manufactures and markets in Italy vaccines for diphtheria,
tetanus, pertussis, meningococcus, haemophilus influenzae, flu, measles, mumps,
rubella, hepatitis A virus ("HAV") and an oral polio vaccine and, under license,
markets a vaccine for pneumococcus and pediatric combination vaccines. 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 HAV, measles, mumps, rubella, typhoid fever, pneumococcal
disease, haemophilus influenzae type b, an inactivated polio vaccine, an
acellular pertussis vaccine and a recombinant vaccine for HBV. Certain of these
vaccines are marketed in other European countries and
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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 U.S.
In addition to revenues from the sale of the vaccine products described
above, the Company receives royalties from the sale of certain vaccines from
Merck and SmithKline Beecham Biologics (now part of GlaxoSmithKline plc or
"GlaxoSmithKline"), based upon technology developed by Chiron. Merck's HBV
vaccine, based on Chiron technology, was the first genetically engineered
vaccine licensed by the FDA for human use.
Sales of Menjugate-TM- accounted for approximately 12% of consolidated total
revenues in 2000. No other single vaccine product or class of vaccine product
accounted for 10% or more of consolidated total revenues of the Company in any
of the last three fiscal years.
BLOOD TESTING
Chiron's blood testing business comprises two separate collaborations: a
joint business with Ortho, an affiliate of J&J, and an alliance with Gen-Probe.
Chiron's joint business with Ortho was formed in 1989, based largely on the
screening, using immunodiagnostic technology, of blood in blood banks and other
similar settings for the potential presence of HIV and hepatitis viruses. The
joint business sells a full line of tests required 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 manufactures viral antigens and supplemental hepatitis
tests, 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 HCV
and HIV tests by Abbott and from sales of HCV tests by Bio-Rad
Laboratories, Inc. and certain other licensees.
Chiron's collaboration with Gen-Probe is focused on developing and
commercializing products using nucleic acid testing ("NAT") 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 improves the sensitivity of detection and enables infection to be
detected earlier following infection. 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 and instrument research and development. Chiron sells
the collaboration's products. Gen-Probe receives a fixed percentage of Chiron's
sales revenues. The Chiron/Gen-Probe collaboration's first product, a combined
test for HIV-1 and HCV using a semi-automated instrument system that is marketed
under the Procleix-TM- brand, has been used to screen blood under an
Investigational New Drug ("IND") clinical study in the U.S. since 1999. In
January 2001, Chiron and Gen-Probe completed the filing of a Biologics License
Application ("BLA") with the FDA seeking commercial approval for the
Procleix-TM- HIV-1/HCV assay and instrument system. The Procleix-TM- assay and
instrument system is currently approved for use in France, Germany, Australia,
Portugal, Spain, Singapore, Italy and Austria and is under evaluation in other
European and Asian countries. 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.
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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
Chiron has utilized a variety of approaches for developing biopharmaceutical
products. In 1999, the Company narrowed its research efforts to focus on
platforms which management believes are more likely to generate new product
candidates. Going forward, Chiron expects to concentrate on three primary
product platforms: recombinant proteins, small molecules supported by biological
discovery, and genomics. The Company is seeking corporate partners for its gene
therapy program.
RECOMBINANT PROTEINS Proteins produced naturally by the human body play a
variety of roles in controlling disease. When administered as therapeutic
agents, certain proteins or specific antibodies can enhance the patient's
natural ability to fight disease. However, traditional methods of isolating or
producing proteins can be cost-prohibitive, particularly in the quantities
needed for pharmaceutical use. Through genetic engineering, certain proteins,
which might not otherwise be available, can be produced in relatively large
quantities at reasonable cost.
The Company and its collaborators have a number of recombinant proteins in
clinical development. Proleukin-Registered Trademark-, already approved for
marketing as a treatment for certain forms of kidney and skin cancer, is being
clinically evaluated for other indications, including treatment, in combination
with antiviral drugs, of patients with HIV infection, treatment of acute
myelogenous leukemia and as a treatment for non-Hodgkin's lymphoma in
conjunction with an approved antibody therapeutic. 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 and
peripheral artery disease. Tifacogin (recombinant Tissue Factor Pathway
Inhibitor or "TFPI"), a coagulation inhibitor, is being developed in
collaboration with Pharmacia & Upjohn ("Pharmacia"). The Company and Pharmacia
are conducting clinical studies on the use of TFPI as a treatment for patients
with severe sepsis. Chiron and Cephalon, Inc. ("Cephalon") have discontinued
their joint collaboration to develop Myotrophin-Registered Trademark-
(mecasermin) (IGF-I) as a treatment for amyotrophic lateral sclerosis (also
known as ALS or Lou Gehrig's disease).
SMALL MOLECULE DRUG DISCOVERY Chiron's small molecule drug discovery
program, which obtains targets from the genomics platform as well as the
biological discovery group, 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.
Chiron is working to develop and register a product combining
TOBI-Registered Trademark- and a new inhalation device, which will improve
convenience and reduce the time to deliver TOBI-Registered Trademark- to the
lungs. In addition to TOBI-Registered Trademark-, Chiron is conducting clinical
research on PA-1806, a novel, patented drug candidate that was licensed from
Bristol-Myers Squibb in 1998. In the laboratory, PA-1806 has demonstrated
activity against gram-negative lung pathogens. Chiron intends to initiate
preclinical programs on other antibiotics for inhalation. The Company's
objective is to address broader respiratory infection markets with drug
candidates that have demonstrated activity against both gram-negative and
gram-positive lung pathogens.
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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 therapeutic and prophylactic products.
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. The
Company currently is conducting preclinical studies on vaccines for a number of
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 Fluad-TM-, Chiron's new flu vaccine, which
currently is marketed in Italy, Germany and Austria. 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.
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's
therapeutic vaccine for treatment of chronic HBV infection is in clinical
development.
BLOOD TESTING
Ortho is developing a range of hepatitis and retrovirus assays for IN-VITRO
clinical diagnostics use on its immunodiagnostics instrument system for the
joint business.
The Chiron/Gen-Probe collaboration has two instrument systems in
development, both of which are designed for use with the HIV-1 and HCV nucleic
acid assay to test human plasma. Procleix-TM-, a semi-automated system, is
currently operating under IND in the U.S. while the Company's BLA is pending
before the FDA. Chiron and Gen-Probe are widening the menu from HIV-1/HCV to
include other transfusion transmitted agents, and Gen-Probe is continuing
development of the fully automated Tigris-Registered Trademark- 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, IGF-I, Factor VIII
and Herpes Simplex Virus-thymidine kinase ("HSV-tk"). The agreement provides
that, through December 2001, at Chiron's request, Novartis will fund up to 100%
of the development costs incurred between January 1, 1995 and December 31, 2000
on the funded projects. The amount of funding that Novartis is obligated to
provide is subject to an aggregate limit of $265.0 million. As of December 31,
2000, the Company had used $255.9 million of the funding. 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, 2000, 1999
and 1998 for Company-sponsored research, including payments to collaboration
partners, was $298.8 million, $303.4 million and $286.6 million, respectively.
Of that, $5.9 million, $49.7 million and $61.9 million in 2000, 1999 and 1998,
respectively, was reimbursed by third parties and was recorded in "Collaborative
agreement revenues" in the Consolidated Statements of Operations.
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COMMERCIALIZATION
Technologies arising out of the Company's research and development efforts
are commercialized in a variety of ways. Certain products are marketed and
distributed by the Company, either directly or through distributors. See
"Distribution" below. Other technologies are developed by the Company in
collaboration with third parties, and under the collaboration agreement,
marketing rights may be assigned to the Company or to the collaborator or shared
by both parties. In the event marketing rights are assigned to the collaborator,
the Company generally retains the right to manufacture and supply key raw
materials to the collaborator. Still other technologies are licensed by the
Company to third parties, with the licensee assuming responsibility for further
development and the Company receiving royalties on sales of the resulting
product. Agreements under which the Company currently derives revenues for
technologies licensed to third parties include an agreement with Bayer
Corporation ("Bayer") relating to, among other things, use of the Company's HCV
and HIV technologies for IN VITRO diagnostics; an agreement with Merck relating
to HBV vaccines; an agreement with GlaxoSmithKline relating to recombinant
vaccine manufacturing technology; and agreements with Novo Nordisk relating to
technology used in the manufacture of recombinant human insulin and glucagon. In
September 1999, Chiron granted a license to Abbott under its HCV patents for use
in nucleic acid amplification in clinical diagnostics, excluding blood
screening. In connection with the settlement of litigation in the U.S. and
certain other countries in October 2000, Chiron granted a license to F. Hoffman
La-Roche Limited and Roche Molecular Systems, Inc. ("Roche") under its HCV and
HIV patents for use in nucleic acid amplification in clinical diagnostics, and a
limited license under these patents in blood screening.
DISTRIBUTION
To remain competitive in an intensely competitive environment, Chiron
maintains several specialized marketing and sales forces that concentrate on
individual classes of customers and markets.
Chiron's biopharmaceuticals marketing, sales and distribution organization
for the U.S. is headquartered in Emeryville, California and for Europe is
headquartered in Amsterdam, The Netherlands and London, England. Sales efforts
are focused on specialist physicians, principally oncologists and
pulmonologists, who are based in hospitals and large clinics. In general,
products are sold to wholesalers, distributors, clinics and hospital pharmacies.
Chiron'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 directly and through wholesalers and distributors.
Chiron's blood testing marketing, sales and distribution organization for
its nucleic acid testing products has been established in Emeryville,
California. Products are sold to the public sector through tenders and to
private sector blood banks and hospitals directly and through distributors.
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. Certain of 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
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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 competitive 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 U.S. and other important markets, and a number of patents
and patent applications owned by third parties have been licensed to Chiron.
There can be no assurance that patents and patent applications owned or
licensed to Chiron will provide substantial protection. Important legal
questions remain to be resolved as to the extent and scope of available patent
protection for biotechnology products and processes in the U.S. 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 will be
granted. In the U.S. 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 U.S. 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.
9
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-Registered Trademark- and TOBI-Registered Trademark- are
registered trademarks of the Company and its subsidiaries. Menjugate-TM-,
Fluad-TM-, Begrivac-TM-, Encepur-TM-, ELVS-TM-, Polioral-TM-, Triacelluvax-TM-
and Procleix-TM- are trademarks of the Company and its subsidiaries.
DepoCyt-Registered Trademark- is a registered trademark owned by Chiron and
SkyePharma plc ("SkyePharma"). The following registered trademarks are owned by
the indicated companies: Betaseron-Registered Trademark- and
Betaferon-Registered Trademark- (Schering AG), Myotrophin-Registered Trademark-
(Cephalon), Regranex-Registered Trademark- (J&J), Apligraf-Registered Trademark-
(Novartis), Dermagraf-Registered Trademark- (Advanced Tissue Sciences, Inc.),
Copaxone-Registered Trademark- (Teva Pharmaceutical Industries, Ltd.),
Avonex-Registered Trademark- (Biogen, Inc.), Aredia-Registered Trademark-
(Novartis), Amplicor-Registered Trademark- (Roche),
Novantrone-Registered Trademark- (Immunex), Tigris-Registered Trademark-
(Gen-Probe) and PRISM-Registered Trademark- (Abbott).
SEASONALITY
Sales of certain of the Company's vaccine products, particularly its flu
vaccine, are seasonal, with higher sales in the third and fourth quarters of the
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 2%, 8% and
12% of total revenues in 2000, 1999 and 1998, 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 13%, 14% and 18% of total revenues in 2000,
1999 and 1998, respectively. The Company has a supply agreement with Berlex and
its parent company, Schering AG of Germany. Revenues recognized under this
agreement contributed 12%, 13% and 13% to total revenues in 2000, 1999 and 1998,
respectively. In 2000, the NHS accepted the Company's tender to supply
Menjugate-TM- for a universal vaccination program in the United Kingdom. This
arrangement contributed 10% to total revenues in 2000. Revenues from Aventis
Pasteur contributed 10% to total revenues in 2000.
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.
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.
10
BIOPHARMACEUTICALS
Proleukin-Registered Trademark- is the only FDA product approved for the
treatment of metastatic renal cell carcinoma and one of two approved treatments
for metastatic melanoma. However, there are numerous products used on protocol
or off-label that treat both cancers, including alfa interferons sold by Roche
and Schering-Plough. Other competitors include Eli Lilly, Bristol-Myers Squibb
and Celgene. The Company estimates that about 90% of
Proleukin-Registered Trademark- sales are from metastatic kidney cancer and
melanoma.
Betaseron-Registered Trademark-, as a treatment for multiple sclerosis,
competes with Avonex-Registered Trademark-, a recombinant beta interferon sold
by Biogen, Inc., and with Copaxone-Registered Trademark- from Teva
Pharmaceutical Industries, Ltd. Novantrone-Registered Trademark- from Immunex
was approved and launched for the treatment of secondary progressive multiple
sclerosis in March 2000. In Europe, Schering AG's product,
Betaferon-Registered Trademark-, faces competition from Ares Serono, which sells
another 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.
TOBI-Registered Trademark- is the first inhaled antibiotic solution to be
approved by the FDA. However, the use of antibiotics to treat pseudomonal and
other bacterial infections is well-established. In cystic fibrosis patients with
pseudomonal lung infections, tobramycin is the most commonly used intravenous
antibiotic. The advantage of inhalation is that it permits higher antibiotic
concentrations in the lung and reduces side effects by limiting systemic
exposure. Medical therapies manufactured by other companies for patients with
cystic fibrosis include antibiotics, anti-inflammatory drugs, oral replacement
enzymes to maintain nutrition and mucolytics to clear pulmonary secretions.
Regranex-Registered Trademark- was the first product approved by the FDA for
treatment of diabetic foot ulcers. Products that it indirectly competes with
include Dermagraft-Registered Trademark-, a product from Advanced Tissue
Sciences, Inc. & Smith and Nephew, and Apligraf-Registered Trademark-, 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.
VACCINES
Four large companies hold the greatest share of the worldwide vaccine
market: Merck, GlaxoSmithKline, Wyeth Lederle Vaccines & Pediatrics, a division
of American Home Products Corporation ("Lederle"), and Aventis Pasteur. Aventis
Pasteur 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 25%
and 32% market share in Germany and Italy, respectively, and an aggregate market
share of approximately 11% outside of the U.S., 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 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 the Chiron-Ortho joint business and also manufactures HCV antigens for
Abbott's immunodiagnostic assays. In the immunoassay blood testing market, the
Chiron-Ortho joint business competes with Abbott. The joint business anticipates
increased competitive pressures from Abbott with the introduction of the Abbott
PRISM-Registered Trademark- instrument system. The joint business is also
developing immunodiagnostic instruments and
11
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.
The Chiron/Gen-Probe test for HIV-1/HCV has received approval in France,
Germany, Australia, Portugal, Spain, Singapore, Italy and Austria. The
Chiron/Gen-Probe test for HIV-1/HCV currently is being used under an IND in the
U.S., and it is estimated that approximately 70% of the U.S. blood supply is
tested with this product. The Chiron/Gen-Probe products are expected to compete
primarily with polymerase chain reaction ("PCR") based products supplied by
Roche or developed in-house by customers (homebrew) and, in some markets, the
HCV antigen test under development by the Chiron-Ortho joint business. The
commercial market for nucleic acid testing products in the blood banking and
plasma industries is developing very rapidly as regulatory agencies began in
1999 to develop policies and mandates that require this new technology to be
implemented as an additional measure to improve blood safety.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. 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 U.S., 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 U.S. until an appropriate application is approved
by the FDA. The approval procedures are applied on a product-by-product basis
and typically 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
and appropriate dosing. 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 U.S. In 1995,
the European Union ("EU") established a centralized procedure for licensing of
products derived from the use of high technology/biotechnology processes. This
procedure leads to the grant of a single license for the entire EU. Effective
January 1, 1998, the EU has also adopted a decentralized procedure under which a
license granted in one member state is mutually recognized by the other member
states, leading to a grant of licenses in member states recognizing the original
license. This procedure is expected to replace independent national licensing of
products in the EU. In addition, each product must receive individual country
pricing approvals before it can be marketed in that country.
BLOOD TESTING Blood testing products, whether based upon immunodiagnostics
or NAT 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 blood testing and, in particular, biopharmaceutical 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
12
expense of the research 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, 2000, Chiron and its subsidiaries had 3,422 employees.
RELATIONSHIP WITH NOVARTIS
As noted above, the Company has an alliance with Novartis. Novartis is a
global life sciences company headquartered in Basel, Switzerland. Through a
series of transactions that became effective in January 1995, Novartis acquired
shares of the Company's common stock which, when combined with shares already
held by Novartis, 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 1, 2001, Novartis held
shares representing approximately 42% of the Company's outstanding common stock.
Chiron and Novartis have entered into a series of agreements which provide,
among other things and subject to certain conditions and exceptions: (i) that
Novartis will not increase its ownership interest in the Company above 55%
unless it acquires all of the outstanding capital stock of the Company in a
"buy-out" transaction, although it may exceed this amount and increase its
ownership interest up to 79.9% in a transaction approved by a majority of the
independent members of the Company's Board of Directors; (ii) that Novartis has
the right to nominate three members to Chiron's eleven member Board of Directors
(effective May 16, 2001, the Board will be reduced to ten members); (iii) that
Novartis will provide certain funding to the Company for research services (see
"Research Revenues and Expenses" above); (iv) that Novartis will guarantee
certain bank lines of credit on behalf of the Company through January 1, 2008;
(v) 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 $500.0 million, subject to adjustment);
(vi) 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 (vii) 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 their respective corporate strategies and opportunities.
ITEM 2. PROPERTIES
EMERYVILLE CAMPUS Chiron's principal executive offices are located in
Emeryville, California. The campus consists of 27 buildings, of which 15 are
leased and 12 are owned. The leased facilities include the research and
development facility in Emeryville, which is 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.
13
OTHER RESEARCH AND DEVELOPMENT AND MANUFACTURING FACILITIES The Company
also owns a manufacturing facility in Vacaville, California used principally in
connection with the Company's biopharmaceutical and vaccine businesses. This
facility has available capacity due to lower than expected demand for certain of
the Company's products and improved production yields from other facilities. As
a result, the Company has entered into contract manufacturing agreements to
utilize this available capacity (see Part II, Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" below). In
December 1999, the Company sold its Amsterdam facility and has been leasing back
office and warehouse space for some operational and administrative activities.
In connection with the acquisition of PathoGenesis in 2000, the Company
assumed control over numerous facilities for its biopharmaceutical operations.
Included in the acquisition were research and development and administrative
facilities in Seattle, Washington; sales and marketing and administrative
facilities in Skokie, Illinois; manufacturing and distribution facilities in
Annandale, New Jersey; and several sales offices in Europe and Canada; all of
which are leased. Also included in the acquisition was a sales and marketing and
administrative facility in Cranford, United Kingdom, which is owned.
The Company also has research and development, manufacturing and
administrative facilities in Siena, Italy; Marburg, Germany; and Ankleshwar,
India; and manufacturing facilities in Rosia, Italy related to its vaccine
operations. The Siena, Ankleshwar and Rosia facilities are owned, and the
Marburg facilities are leased.
The Company leased research and development facilities in San Diego,
California in connection with its gene therapy activities. This business was
sold in January 2001, and all facility leases were assumed by the purchaser.
The Company owned 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 Incorporated ("B&L") in December 1997. B&L occupied a
significant portion of the facilities under a three-year lease, which expired in
December 2000. A portion of the Claremont campus was sold in July 1999, with one
remaining warehouse currently being marketed for sale.
The Company leases a number of other facilities in North America, Europe and
Asia, primarily for sales and service offices.
The Company believes that its facilities are in good operating condition and
are adequate for its current needs. The Company continually evaluates future
requirements for its facilities.
ITEM 3. LEGAL PROCEEDINGS
CYSTIC FIBROSIS PHARMACY
In May 2000, PathoGenesis Corporation ("PathoGenesis") initiated an action
against Cystic Fibrosis Pharmacy, Inc. ("CF Pharmacy") in the United States
District Court For The Middle District Of Florida, Orlando Division.
PathoGenesis asserted that CF Pharmacy's advertising and sale of an inhaled
antibiotic infringes PathoGenesis' U.S. Patent No. 5,508,269 (the " '269
patent"). PathoGenesis sought injunctive relief and damages. CF Pharmacy filed a
counterclaim seeking a declaratory judgment of invalidity regarding the '269
patent. In September 2000, the court entered a consent order enjoining CF
Pharmacy from advertising, compounding or selling the aerosol formulation
alleged to infringe the '269 patent or use any imitation of the
TOBI-Registered Trademark- trademark until further order of the court. On
February 1, 2001, the dispute was settled by agreement of the parties. Among the
settlement provisions, CF Pharmacy acknowledged the validity and enforceability
of the '269 patent, agreed not to infringe the '269 patent, and agreed to
certain restrictions on future advertising.
14
DADE BEHRING MARBURG GMBH AND DADE BEHRING S.P.A.
On January 30, 2001, Dade Behring Marburg GmbH and Dade Behring S.p.A.
(collectively, "Dade Behring") filed suit in the Court of Milan against Chiron
regarding Chiron's European Patent No. 0 181 150 (the " '150 patent") relating
to HIV technology. Dade Behring seeks a declaration that certain of its
immunoassay products do not infringe the Italian and other national counterparts
to the '150 patent, and to nullify the Italian portion of the '150 patent. It is
not known when nor on what basis this matter will be resolved.
F. HOFFMAN LA-ROCHE A.G.
Chiron was involved in certain previously reported litigation in the United
States, Italy, Japan, the Netherlands, Belgium, Germany and Australia with F.
Hoffman La-Roche AG and several of its affiliated companies (collectively,
"Roche") concerning infringement and/or validity of certain Chiron patents
related to HCV and HIV technology.
In July 2000, Chiron initiated an action against Roche Diagnostics GmbH in
the German Federal Court ("Landgericht") in Dusseldorf, asserting that Roche's
manufacture and sale of products regarding HCV nucleic acid test and immunoassay
technology infringe Chiron's German Patent Nos. DD 298 527 (the " '527 patent"),
DD 298 524 (the " '524 patent"), DD 287 104 (the " '104 patent"), DD 297 446
(the " '446 patent") and Chiron's European Patent No. EP 0 450 931 (the " '931
patent"). The Landgericht subsequently separated the matter into five individual
actions.
In July 2000, Chiron initiated action against Roche Diagnostics GmbH in the
German Administrative Court ("Verwaltungsgericht") in Karlsruhe, asserting that
Roche's manufacture and sale of HCV immunoassay products infringe the '931
patent. In January 2001, this action was referred to the District Court of
Mannheim. Roche appealed the referral, and in February 2001, the
Verwaltungsgericht transferred the action to the Administrative Appeal Court.
In October 2000, Chiron and Roche resolved all pending litigation between
them in the United States, Italy, Japan, the Netherlands, Belgium, Germany and
Australia regarding HCV and HIV nucleic acid technology. Among the settlement
provisions, Chiron granted Roche licenses to manufacture and sell HCV and HIV
nucleic acid clinical diagnostic tests. Chiron also agreed to license Roche for
a limited time period to sell HCV and HIV nucleic acid tests for blood
screening.
In December 2000, Roche initiated two nullity actions against Chiron's
German national patents (the '104, '524 and '527 patents), and the European '931
patent in the German Federal Patent Court ("Bundespatentgericht"). In
January 2001, the Bundespatentgericht divided the German patent suit into three
individual actions.
It is not known when nor on what basis the remaining matters will be
resolved.
FEDERAL EXPRESS
On September 3, 1999, Federal Express Corporation ("Federal Express") filed
suit in the Supreme Court of the State of New York, County of Orange against
Perseptive Biosystems, Inc., Perkin-Elmer Corporation, PE Biosystems Group and
PE Corporation (together, the "PE Defendants") and Chiron. The Federal Express
complaint related to a fire that allegedly destroyed a Federal Express aircraft
and the majority of its cargo in September 1996. The matter was removed to the
United States District Court for the Southern District of New York. In
March 2000, the Federal court, on its own motion, dismissed the matter for lack
of subject matter jurisdiction. Federal Express appealed the dismissal, arguing
for remand to state court. Defendants filed cross-appeals. In December 2000, the
Second Circuit Court of Appeals dismissed those cross-appeals for lack of
jurisdiction, and remanded the matter to the Supreme Court of the State of New
York, County of Orange. It is not known when nor on what basis this litigation
will be concluded.
15
INNOGENETICS N.V.
In November 2000, Innogenetics N.V. brought a complaint against Chiron and
Ortho-Clinical Diagnostics Systems Inc. ("Ortho") before the Commission of the
European Communities (the "Commission"). Innogenetics N.V. alleges that Chiron
and Ortho violate Articles 81 and 82 of the European Economic Community Treaty
relating to competitive practices. Pursuant to the complaint, the Commission has
sought information from Chiron and Ortho related to HCV and HIV licensing
practices in the European Union. It is not known when nor on what basis this
matter will be resolved.
LIPTON ET AL.
On February 18, 2000, the United States District Court for the Western
District of Washington dismissed with prejudice all eight consolidated putative
class action lawsuits that had been filed in March and April 1999 against
PathoGenesis Corporation ("PathoGenesis"), its chief executive officer and its
chief financial officer. The eight consolidated lawsuits alleged claims on
behalf of all purchasers of PathoGenesis common stock during the period
January 15, 1999 to March 22, 1999. Plaintiffs claimed that PathoGenesis and its
officers violated certain provisions of the federal securities laws by making
statements in early 1999 regarding PathoGenesis' 1998 financial results. The
court's order dismissed the consolidated cases and bars plaintiffs from filing
another lawsuit on the matter. Plaintiffs appealed the dismissal order to the
United States Court of Appeals for the Ninth Circuit. It is not known when nor
on what basis this matter will be resolved.
MEDICARE, MEDI-CAL INVESTIGATIONS
Chiron is responding to two subpoenas from the Office of the Inspector
General of the United States Department of Health and Human Services. Chiron
believes the subpoenas were issued in connection with a pending QUI TAM lawsuit
against Chiron and a number of pharmaceutical companies in the United States.
With respect to Chiron, the subpoenas relate to pricing to Medicare and state
Medicaid programs of certain generic oncology drugs sold by Cetus-Ben Venue
Therapeutics, a joint venture between Chiron and Ben Venue Laboratories. Chiron
sold its interest in that joint venture in 1996.
Chiron is also responding to a subpoena served on September 18, 2000, by the
Office of the Attorney General of the State of California Department of Justice.
Chiron believes that the subpoena was issued in connection with a pending, but
as yet unserved, QUI TAM lawsuit against Chiron and a number of other
pharmaceutical companies. With respect to Chiron, the subpoena seeks information
related to pricing to the Medi-Cal program of certain generic oncology drugs
sold by Cetus-Ben Venue Therapeutics. It is not known when nor on what basis
these matters will be concluded.
ORTHO-CLINICAL DIAGNOSTICS, INC.
On February 17, 1998, Chiron filed a lawsuit against Ortho-Clinical
Diagnostics, Inc. ("Ortho") in the United States District Court for the Northern
District of California. The suit sought to compel arbitration of certain issues
relating to the conduct of the parties' joint business. In December 1998, the
Court granted Chiron's motion to compel arbitration. Ortho appealed that order
to the Ninth Circuit Court of Appeals and then refused Chiron's demand to
arbitrate in accordance with the order. In March 1999, Chiron filed a second
petition in the United States District Court for the Northern District of
California to compel arbitration. In November 1999, the Court entered judgment
in Chiron's favor, ordering Ortho to submit the underlying issues to
arbitration. In March 2000, the Ninth Circuit entered its order affirming
Chiron's original motion to compel arbitration. The parties have since agreed to
defer commencement of the arbitration pending certain negotiation efforts.
SORIN BIOMEDICA/SNIA
On June 14, 1994, Sorin Biomedica S.p.A. filed a lawsuit with the Court of
Milan, Italy against Chiron Corporation and Ortho Diagnostic Systems S.p.A. for
a declaration of nullity and noninfringement of the
16
Italian counterpart to Chiron's European Patent 0 318 216 (the " '216 patent").
Sorin additionally filed a request with the Italian Ministry of Industry,
Commerce and Artisanship ("ICA") for compulsory license to the '216 patent.
Chiron filed a counterclaim and sought a finding that the patent is valid and
infringed by Sorin. The ICA suspended Sorin's request for compulsory license
pending the outcome of the litigation. On February 10, 1997, the Court enjoined
Sorin from manufacturing or selling HCV immunoassay kits in Italy. Subsequent to
the Milan court's ruling, Sorin introduced new claims of nullity of the '216
patent resting on inventorship allegations. Sorin has appealed to Italy's
Counsel of State for reconsideration of the findings of the court of Milan and
the ICA. On October 17, 1999, the Court issued a ruling, which, among other
things, upheld the validity of certain of the claims. As of June 29, 2000 the
European Patent Office Technical Board Of Appeals upheld the validity of the
'216 patent in an amended form which deleted the claims that Chiron alleged to
have been infringed by Sorin. In December 2000, Snia S.p.A., Sorin's parent
company, filed an appeal in the Corte D'Apello Di Milano asking the Court to
declare the Italian portion of the '216 patent null and void and to award Snia
damages. It is not known when nor on what basis this matter will be resolved.
TROXCLAIR
A class action suit was filed on September 15, 2000, in the Eastern District
of Louisiana on behalf of minor child James Paul Troxclair, Jr. against Chiron
and a number of other pharmaceutical companies. With regards to Chiron, the
complaint alleged that RabAvert-Registered Trademark-, a rabies vaccine,
contains Thimerosal, an additive that allegedly causes autism. Troxclair sought
to recover damages based upon claims of negligence, breach of implied warranty
of merchantability, and other unspecified claims relating to misrepresentations,
fraudulent advertising, marketing and distribution of the vaccine. On
November 9, 2000, the Court ordered a dismissal with prejudice of all claims
against Chiron.
CONNAUGHT LABORATORIES, LIMITED
Chiron was involved in litigation in Italy and The Netherlands with
Connaught Laboratories, Limited ("Connaught") relating to TriAcelluvax-TM- and
the Company's diphtheria/tetanus/acellular pertussis vaccine.
Chiron S.p.A. 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.
On February 25, 1998, Chiron filed suit against Connaught in Italy seeking a
declaration of invalidity of Connaught's European Patent 0 322 115 (the " '115
patent"). The '115 patent contains claims allegedly relating to pertussis toxin
mutant.
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.
In January 2000, all of these disputes were settled by agreement of the
parties. The settlement provisions relating to patents covering pertactin and
genetically detoxified pertussis toxin required, inter alia, a payment by Chiron
of a license fee plus a running royalty. The settlement provisions also provided
certain marketing rights to Aventis Pasteur S.A. (as successor to Connaught) for
Fluad-TM- and Menjugate-TM-.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of Chiron's stockholders in the quarter
ended December 31, 2000.
17
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:
NAME AGE TITLE
- ---- -------- -----
Rajen K. Dalal........................... 47 Vice President; President, Chiron Blood Testing
William G. Green, Esq.................... 56 Senior Vice President, General Counsel and Secretary
Peder K. Jensen.......................... 46 Vice President; Head of Development
John A. Lambert.......................... 48 Vice President; President, Chiron Vaccines
Sean P. Lance............................ 53 Chairman of the Board; President and
Chief Executive Officer
Linda W. Short........................... 55 Vice President, Corporate Resources
David V. Smith........................... 41 Vice President, Controller
James R. Sulat........................... 50 Vice President, Chief Financial Officer
Lewis T. Williams, M.D., Ph.D............ 51 Chief Scientific Officer; President, Chiron Research
& Development; Director
MR. DALAL joined the Company in December 1991 as Vice President, Corporate
Development. In 1998, he was appointed President of Chiron Blood Testing. 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.
In January 2001, Mr. Dalal was appointed as a new member to the Department of
Health and Human Services' Advisory Committee on Blood Safety and Availability,
which advises, assists and counsels the Secretary of Health and Human Services
on implications for blood safety and availability in areas such as blood
banking, transfusion medicine, bio-ethics and blood testing.
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. JENSEN joined the Company as Vice President and Head of Development in
August 1999, responsible for managing all aspects of the Company's product
development, including pre-clinical, clinical, project management, regulatory
and medical affairs. Most recently, Dr. Jensen was development director, chief
medical officer and a member of the board of British Biotech plc, and President
of British Biotech, Inc., responsible for all aspects of drug development
including chemical, pharmaceutical and clinical development, quality control and
assurance, manufacturing and regulatory affairs. Dr. Jensen served as a
non-executive director of British Biotech plc until January 31, 2001. From 1991
to 1998, Dr. Jensen was a Vice President at Schering-Plough Research Institute,
where he managed a number of worldwide drug development projects, including the
submission of several New Drug Applications (NDAs), Abbreviated New Drug
Applications (ANDAs), INDs and a number of European applications. Before joining
Schering-Plough, Dr. Jensen worked in different clinical positions at Ciba-Geigy
Limited.
MR. LAMBERT was appointed Vice President; President of Chiron Vaccines,
effective March 5, 2001. Based in Europe, Mr. Lambert will be responsible for
the commercial operations of the Company's global vaccines business and will
serve as a member of the Executive Committee of Chiron. Prior to joining the
Company, Mr. Lambert headed John Lambert Associates, a company that provided
consulting and coaching at the chief executive level to organizations both in
the United Kingdom and internationally. From 1998 to 2000, Mr. Lambert was the
President of Aventis Pasteur MSD, where he headed the vaccines venture formed
between Pasteur Merieux Connaught (now Aventis Pasteur) and Merck & Co.
following four years as that company's Vice President of Operations. From 1987
to 1994, Mr. Lambert held various
18
positions with the Pasteur Merieux Connaught Group, in increasing levels of
responsibility, including Managing Director, Merieux UK Ltd. He is a Fellow of
the Institute of Financial Accountants.
MR. LANCE joined the Company as President and Chief Executive Officer in
May 1998 and became Chairman of the Board in May 1999 upon the resignation of
Dr. William J. Rutter. 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.
MS. SHORT joined the Company in November 1997 as Vice President, Human
Resources. In May 1999, she was promoted to Vice President, Corporate Resources
with increased responsibilities, overseeing human resources, facilities
planning, information management, organizational learning, payroll and benefits,
compensation and stock administration. Prior to joining the Company, she was the
Director of Human Resources of Industrial Indemnity from 1994 to 1997. From 1983
to 1994, Ms. Short held various managerial positions with the Bank of America.
MR. SMITH joined the Company as Vice President, Controller in February 1999
and was designated the Company's principal 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. Mr. Sulat is also a director of Vans, Inc., a
shoe manufacturer, and several private companies.
DR. WILLIAMS joined the Company in August 1994 as Senior Vice President and
President of Chiron Technologies (now called "Chiron Research and Development").
In 1998, he was promoted to Chief Scientific Officer of the Company. In
May 1999, he was appointed a Director of the Company serving for a two-year term
expiring at the Annual Meeting of Stockholders in 2001. 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.
19
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, 2000, there were 5,233
holders of record of Chiron common stock, 14 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 2000 and 1999 are shown
below.
2000 1999
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter........................................ $67.5625 $39.4375 $ 23.25 $20.875
Second Quarter....................................... 49.75 34.125 22.4375 20.00
Third Quarter........................................ 59.125 41.25 33.3125 20.75
Fourth Quarter....................................... 50.4375 37.625 43.25 27.50
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues.......................... $ 972,119 $ 762,646 $ 736,673 $ 574,599 $ 537,149
Income from continuing operations....... 16,102 128,404 75,998 25,782 45,658
Basic earnings per share from continuing
operations............................ 0.09 0.71 0.43 0.15 0.27
Diluted earnings per share from
continuing operations................. 0.08 0.69 0.42 0.14 0.26
Total assets............................ 2,458,076 2,444,778 2,524,264 1,768,478 1,688,670
Long-term debt.......................... 3,039 96,958 338,158 397,217 419,589
The Company has not paid cash dividends on its common stock and does not
expect to do so in the foreseeable future.
Factors that affected the comparability of information between 2000 and 1999
were (i) shipments of Menjugate-TM- for a universal vaccination program in the
United Kingdom, which began in the first quarter 2000, and (ii) Chiron's
acquisition of PathoGenesis in the fourth quarter 2000, including the
$171.6 million write-off of purchased in-process technologies. Both items are
described in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
A factor that affected the comparability of information between 1998 and
1997 was Chiron's acquisition of the remaining 51% interest in, and subsequent
consolidation of, Chiron Behring GmbH & Co. ("Chiron Behring") in the second
quarter 1998. This transaction was described in Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of the Form 10-K
filed for the fiscal year ended January 3, 1999.
See Note 17, "Segment Information," of Notes to Consolidated Financial
Statements for a discussion of operating results by operating segment.
20
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 markets: biopharmaceuticals, vaccines and blood testing. The
biopharmaceuticals segment consists of therapeutic products and services, with
an emphasis on the treatment of cancer and infection, as well as the development
and acquisition of technologies related to recombinant proteins, small molecules
and genomics. The biopharmaceuticals segment also includes collaborations with
Berlex and its parent company, Schering AG of Germany, related to
Betaseron-Registered Trademark-, and Ortho-McNeil, a J&J company, related to
PDGF. The vaccines segment consists principally of adult and pediatric vaccines
for viral infections, including flu, rabies and tick-borne encephalitis, and
bacterial infections, including meningococcus C and haemophilius influenzae type
B, sold primarily in Germany, Italy, the United Kingdom and other international
markets, as well as the development of novel vaccines and vaccination
technology. The blood testing segment consists of Chiron's one-half interest in
the pretax operating earnings of its joint business with Ortho, a J&J company,
and an alliance with Gen-Probe. Chiron's joint business with Ortho sells a line
of immunodiagnostic tests to detect hepatitis viruses and retroviruses and
provides supplemental tests and microplate-based instrument systems to automate
test performance and data collection. Chiron's alliance with Gen-Probe is
focused on developing and selling NAT products using transcription-mediated
amplification ("TMA") technology to screen transfused blood and plasma products
for viral infection. Certain other revenues and expenses are not viewed by
management as belonging to any one segment. As a result, these items have been
aggregated into an "Other" segment.
On December 29, 1997, Chiron completed the sale of its ophthalmics business
("Chiron Vision") to B&L, and on November 30, 1998, Chiron completed the sale of
its IN VITRO diagnostics business ("Chiron Diagnostics") to Bayer. The Company's
Consolidated Statements of Operations reflect the after-tax results of Chiron
Vision and Chiron Diagnostics as discontinued operations.
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. Beginning in the second quarter 1998, the results of Chiron Behring
were consolidated with those of the Company. Chiron Behring is part of the
Company's vaccines segment.
On September 21, 2000, Chiron acquired PathoGenesis, a company that develops
and markets drugs to treat infectious diseases, particularly serious lung
infections. The Company accounted for the acquisition under the purchase method
of accounting and included PathoGenesis' operating results, including the seven
business days from September 21 to 30, 2000, in its consolidated operating
results beginning on October 1, 2000. PathoGenesis' operating results for the
seven business days in September 2000 were not significant to the Company's
consolidated operating results. PathoGenesis is part of the Company's
biopharmaceuticals segment.
RESULTS OF OPERATIONS
BIOPHARMACEUTICALS
PRODUCT SALES Product sales from the biopharmaceuticals segment were
$239.8 million, $187.6 million and $201.9 million in 2000, 1999 and 1998,
respectively. In 2000, 1999 and 1998, product sales consisted principally of
Proleukin-Registered Trademark-, Betaseron-Registered Trademark- and PDGF.
Product sales in 2000 also included TOBI-Registered Trademark- from the
completion of the PathoGenesis acquisition on September 21, 2000.
PROLEUKIN-REGISTERED TRADEMARK- Chiron sells
Proleukin-Registered Trademark- directly in the U.S. and certain international
markets. Sales of Proleukin-Registered Trademark- were $112.7 million,
$111.8 million and $93.2 million in 2000, 1999 and 1998, respectively. Sales of
Proleukin-Registered Trademark- in 2000 as compared with 1999 were affected by
(i) fluctuations in wholesaler inventory management practices; (ii) increasing
cost sensitivity from reimbursement authorities, particularly in
21
Europe; (iii) the onset of competitive clinical trials; and (iv) a weaker
exchange rate of the Euro as compared with the U.S. dollar. The Company expects
these factors to continue into 2001. The overall increase in sales in 1999 as
compared with 1998 was due to (i) volume growth in existing indications and
(ii) higher prices. The Company continues to pursue the use of
Proleukin-Registered Trademark- for additional indications, including HIV.
BETASERON-REGISTERED TRADEMARK- Chiron manufactures
Betaseron-Registered Trademark- for Berlex and its parent company, Schering AG
of Germany. Chiron earns a payment for Betaseron-Registered Trademark- upon
shipment to Berlex and Schering AG, and a subsequent additional payment based on
a contractual percentage of sales made by Berlex and Schering AG. Accordingly,
Chiron's revenues from Betaseron-Registered Trademark- tend to fluctuate based
upon the inventory management practices of Berlex and Schering AG. In
October 1998, the contractual percentage upon which Chiron recognizes revenues
decreased by 2.5% of Berlex's sales of Betaseron-Registered Trademark-. In the
fourth quarter 2003, the contractual percentage will decrease by another 5.0%.
In 2000, 1999 and 1998, Betaseron-Registered Trademark- product sales were
$82.1 million, $66.0 million and $63.4 million, respectively. As discussed in
"Royalties and license fee revenues" below, Betaferon-Registered Trademark-
royalties also increased in 2000 as compared with 1999 and in 1999 as compared
with 1998. The increase in Betaseron-Registered Trademark- product sales in 2000
as compared with 1999 primarily was related to (i) increased utilization of beta
interferon therapy for secondary progressive multiple sclerosis;
(ii) fluctuations in Berlex and Schering AG's inventory management practices;
and (iii) increased underlying purchases by end users in Europe and the U.S. The
increase in Betaseron-Registered Trademark- product sales also included the
effects of the second quarter 1999 conclusion of certain promotional pricing
campaigns. The increase in product sales in 1999 as compared with 1998 primarily
was related to (i) the approval in 1999 of Betaseron-Registered Trademark- for
secondary progressive multiple sclerosis in Canada and Australia and overall
market expansion, offset by (ii) the decrease in the contractual rate discussed
above and (iii) fluctuations in Berlex and Schering AG's inventory management
practices.
The Company also earns royalties on Schering AG's European sales of
Betaferon-Registered Trademark- (see "Royalties and license fee revenues"
below).
TOBI-REGISTERED TRADEMARK- Chiron obtained TOBI-Registered Trademark- as
part of its acquisition of PathoGenesis on September 21, 2000. Chiron sells
TOBI-Registered Trademark- directly in the U.S. and certain international
markets. TOBI-Registered Trademark- was approved for cystic fibrosis lung
infections by the FDA in December 1997 and was launched commercially in
January 1998. In addition, TOBI-Registered Trademark- was approved in Canada in
February 1999 and cleared the mutual recognition process required for marketing
in the European Union in August 2000. Chiron recorded TOBI-Registered Trademark-
sales of $27.8 million in 2000, including $2.2 million from the last seven
business days in September 2000. Actual sales of TOBI-Registered Trademark- were
$86.0 million and $60.1 million in 2000 and 1999, respectively. This growth was
due to increased TOBI-Registered Trademark- use in the U.S. by patients with
cystic fibrosis and other serious lung infections, as well as higher
TOBI-Registered Trademark- sales in international markets. The Company continues
to pursue the use of TOBI-Registered Trademark- to treat other serious lung
infections. Future TOBI-Registered Trademark- sales may be influenced by
wholesaler inventory management practices and foreign exchange rate
fluctuations.
PDGF Chiron manufactures PDGF for Ortho-McNeil, a J&J company. Accordingly,
Chiron's sales of PDGF fluctuate based upon the inventory management practices
of J&J. PDGF is the active ingredient in Regranex-Registered Trademark- Gel, a
treatment for diabetic foot ulcers. Regranex-Registered Trademark- Gel was
approved by the FDA in December 1997 and was launched commercially in early
1998. Regranex-Registered Trademark- Gel was approved for use in the treatment
of diabetic foot ulcers in Canada in December 1998 and Europe in March 1999. Net
sales of PDGF were $10.9 million in 2000, which included a decrease in the
product returns allowance of $3.7 million. The decrease in the product returns
allowance primarily was due to additional historical return information provided
by J&J, as PDGF has been in the commercial market for approximately two years,
as well as extended shelf-life dating on the product. There were no commercial
sales of PDGF to J&J from the first quarter 1999 through the first quarter 2000,
and net sales of PDGF were $36.4 million in
22
1998. The decline in sales from 1998 to 1999 was due to a lack of orders from
J&J in 1999. In addition, the Company increased its product returns allowance in
1999.
DEPOCYT-REGISTERED TRADEMARK- In October 1999, SkyePharma, the manufacturer
of DepoCyt-Registered Trademark-, discovered and recalled two
DepoCyt-Registered Trademark- lots that did not meet manufacturing
specifications. The commercial supply of this product was on hold while the
Company and SkyePharma were working with the FDA to resolve various issues
related to the manufacture of the product. In October 2000, the Company
submitted a request for FDA approval to relaunch DepoCyt-Registered Trademark-.
Management of the Company believes that this event did not have a material
impact on the results of operations for fiscal year 2000. In the first quarter
2001, the FDA granted clearance for the Company and SkyePharma to
recommercialize DepoCyt-Registered Trademark-.
The Company expects the competitive pressures related to many of its
biopharmaceutical products to continue into the foreseeable future as a result
of the introduction of competing products into the market, as listed in Part I,
Item 1. "Business--Competition" above.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. Up-front refundable fees are deferred and recognized as
revenues when earned or when all performance obligations are completed. Up-front
nonrefundable fees where the Company has no continuing performance obligations
are recognized as revenues when receivable. In situations where continuing
performance obligations exist, up-front nonrefundable fees are deferred and
amortized over the performance period. In 2000, 1999 and 1998, the
biopharmaceuticals segment recognized collaborative agreement revenues of
$17.6 million, $20.0 million and $30.5 million, respectively.
NOVARTIS AG 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, 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
up-front milestone and royalty payments, as well as product commercialization
rights for both parties. In connection with this agreement, Chiron recognized
collaborative agreement revenues of $3.3 million, $4.2 million and $6.0 million
in 2000, 1999 and 1998, respectively. This agreement ended in the fourth quarter
2000.
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
$10.0 million in both 2000 and 1999 and $15.0 million in 1998.
The Company's "Other" segment also earns collaborative agreement revenues
under a third Novartis agreement. See "Other--Collaborative agreement revenues"
below.
S*BIO In the second quarter 2000, the Company invested in a Singapore-based
venture, S*BIO Pte Ltd ("S*BIO"), to research and develop therapeutic,
diagnostic and vaccine products. The Company also granted to S*BIO certain
rights to the Company's gene expression and combinatorial chemistry technology.
Under this arrangement, the Company will receive $22.0 million over two years
for technology transfer. In the fourth quarter 2000, the Company recognized
collaborative agreement revenues of $2.8 million under this arrangement. In
addition, the Company will receive certain milestone payments and various
royalties on future product sales if S*BIO commercializes a product using the
Company's gene expression and combinatorial chemistry technology. However, there
can be no assurance that S*BIO will meet its development objectives or
commercialize a product using Chiron's gene expression and combinatorial
chemistry technology.
23
MEDIVIR AB In 1999, Medivir licensed certain of Chiron's combinatorial
chemistry technology for use in the research and development of pharmaceuticals
for human use. Revenue recognized under this agreement was $2.0 million in 1999.
If Medivir commercializes a product using Chiron's combinatorial chemistry
technology, Chiron will receive up to an additional $3.6 million in royalties on
product sales. However, there can be no assurance that Medivir will
commercialize a product using Chiron's combinatorial chemistry technology.
The balance of collaborative agreement revenues recognized in the
biopharmaceuticals segment consisted of various other agreements, which
individually were not significant.
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 revenues, 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.
ROYALTY AND LICENSE FEE REVENUES The biopharmaceuticals segment earns
royalties on third party sales of several products, including
Betaferon-Registered Trademark-, recombinant insulin and glucagon products, as
well as license fees for technologies, such as HCV patents, used by third
parties. Up-front refundable fees are deferred and recognized as revenues when
earned or when all performance obligations are completed. Up-front nonrefundable
license fees where the Company has no continuing performance obligations are
recognized as revenues when receivable. In situations where continuing
performance obligations exist, up-front nonrefundable license fees are deferred
and amortized over the performance period. In 2000, 1999 and 1998, the
biopharmaceuticals segment recognized royalty and license fee revenues of
$50.9 million, $52.4 million and $47.6 million, respectively.
BETAFERON-REGISTERED TRADEMARK- The Company earns royalties on Schering
AG's European sales of Betaferon-Registered Trademark-. In 2000, 1999 and 1998,
Chiron recognized $35.7 million, $29.7 million and $28.6 million, respectively,
under this arrangement. As discussed in "Product
sales--Betaseron-Registered Trademark-" above, the increase in 2000 as compared
with 1999 primarily was related to increased utilization of beta interferon
therapy for secondary progressive multiple sclerosis in Europe, offset by a
weaker exchange rate of the Euro as compared with the U.S. dollar. The increase
in 1999 as compared with 1998 primarily was related to the approval in 1999 of
Betaseron-Registered Trademark- for secondary progressive multiple sclerosis in
Europe and overall market expansion, offset by the decrease in the contractual
rate discussed in "Product sales--Betaseron-Registered Trademark-" above.
DEPOCYT-REGISTERED TRADEMARK- In 2000, royalty and license fee revenues
included $3.5 million recognized upon the resumption of Phase IV clinical trials
for DepoCyt-Registered Trademark- in December 2000. In 1999, royalty and license
fee revenues included $9.7 million recognized upon the grant of a European and
Canadian DepoCyt-Registered Trademark- license to SkyePharma in April 1999.
GLAXO GROUP LIMITED Under a 2000 agreement with Glaxo Group Limited (now
part of GlaxoSmithKline), Chiron granted to GlaxoSmithKline rights under certain
Chiron HCV patents. The agreement provides for certain milestone payments and
minimum annual royalties. If GlaxoSmithKline commercializes products using
Chiron's HCV patents, the agreement provides for royalties on future product
sales, against which the minimum annual royalties will be applied. However,
there can be no assurance that GlaxoSmithKline will meet such development
objectives or commercialize a product using Chiron's HCV patent rights.
PHARMACIA & UPJOHN In January 1998, Chiron recognized $5.0 million related
to an up-front nonrefundable license fee received from Pharmacia to research,
develop, manufacture and commercialize therapeutic products for the treatment of
HCV in humans.
24
OTHER Chiron estimates recombinant insulin and glucagon royalty revenues
based on previous period actual recombinant insulin and glucagon product sales.
Chiron recognized $6.1 million, $11.2 million and $13.0 million in 2000, 1999
and 1998, respectively, under this arrangement. The decrease in 2000 as compared
with 1999 primarily was due to a $5.0 million positive adjustment related to a
royalty audit recovery in 1999. The decrease in 1999 as compared with 1998
primarily was due to a contractual decrease in the insulin royalty rate that was
effective on January 1, 1999, offset by the $5.0 million positive adjustment
related to a royalty audit recovery in 1999.
The balance of royalty and license fee revenues recognized in the
biopharmaceuticals segment consisted of various other agreements, which
individually were not significant.
Royalty and license fee revenues may fluctuate based on the nature of the
related agreements and the timing of receipt of license fees. In addition,
Chiron estimates royalty revenues based on product sales estimates provided by
the third party or previous period actual product sales. In the subsequent
quarter, Chiron records an adjustment equal to the difference between those
estimated royalty revenues recorded in the previous quarter and the contractual
percentage of the third party's actual product sales for that period. Results in
any one period 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.
OTHER REVENUES In 2000, 1999 and 1998, the biopharmaceuticals segment
recognized other revenues of $16.4 million, $14.9 million and $13.5 million,
respectively.
CONTRACT MANUFACTURING REVENUES In 2000, 1999 and 1998, biopharmaceuticals'
other revenues included $13.3 million, $13.3 million and $1.4 million,
respectively, of contract manufacturing revenues. The increase in 1999 as
compared with 1998 was due to the Company's effort to further utilize its excess
manufacturing capacity. The Company entered into several agreements in 1999 to
provide contract manufacturing services to a variety of clients.
AREDIA-REGISTERED TRADEMARK- (PAMIDRONATE DISODIUM FOR INJECTION) From 1994
through April 1998, Chiron promoted Aredia-Registered Trademark- on behalf of
Novartis. In April 1998, this arrangement concluded. In connection with this
arrangement, Chiron recognized other revenues of $9.8 million in 1998.
The balance of other revenues recognized in the biopharmaceuticals segment
consisted of various other arrangements, which individually were not
significant.
Biopharmaceuticals' 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 these revenues will not decline.
GROSS PROFIT Biopharmaceutical gross profit as a percentage of net product
sales was 70%, 68% and 69% in 2000, 1999 and 1998, respectively. The increase in
biopharmaceutical gross profit margins in 2000 as compared with 1999 primarily
was related to a favorable mix of biopharmaceutical product sales. The decrease
in biopharmaceutical gross profit margins in 1999 as compared with 1998
primarily was related to no 1999 commercial sales of PDGF, offset by
manufacturing efficiencies and the conclusion of certain promotional pricing
campaigns in 1999.
Biopharmaceutical gross profit percentages may fluctuate significantly in
future periods as the biopharmaceutical product mix changes.
RESEARCH AND DEVELOPMENT In 2000, 1999 and 1998, the biopharmaceuticals
segment recognized research and development expenses of $221.8 million,
$214.1 million and $172.8 million, respectively. The increase in research and
development spending in 2000 as compared with 1999 was due to the furtherance of
the Company's clinical trials related to Proleukin-Registered Trademark- for HIV
and TFPI for severe sepsis, offset by the
25
timing of various other clinical trials, including FGF for coronary and
peripheral artery diseases. In addition, the acquisition of PathoGenesis
contributed research and development expenses of $9.0 million in 2000. The
increase in research and development spending in 1999 as compared with 1998 was
due, in part, to $9.6 million of milestone and research-funding payments related
to the Company's collaboration agreements with Medivir AB. Also contributing to
the increase in biopharmaceutical research and development expense was the
furtherance of the Company's clinical trials related to
Proleukin-Registered Trademark- for HIV, IGF-I for osteoarthritis, FGF for
coronary artery disease and TFPI for severe sepsis.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
SELLING, GENERAL AND ADMINISTRATIVE In 2000, 1999 and 1998, the
biopharmaceuticals segment recognized selling, general and administrative
("SG&A") expenses of $50.1 million, $50.0 million and $36.6 million,
respectively. The acquisition of PathoGenesis contributed SG&A expenses of
$9.3 million in 2000. SG&A expenses in 2000 also were affected by the Company's
worldwide implementation of its integrated information system in April 1999,
offset by a change in the method of allocating certain legal costs to segments.
In 2000, the Company allocated certain legal costs to the "Other" segment,
whereas in 1999, the Company allocated these certain legal costs to all
segments. The increase in SG&A expenses in 1999 as compared with 1998 primarily
was due to increased sales and marketing costs related to the launch of
DepoCyt-Registered Trademark- in April 1999, increased patent litigation costs
and the Company's worldwide implementation of its integrated information system
in April 1999. In addition, in 1999, the biopharmaceuticals segment recognized a
reduction in SG&A expenses of $6.0 million resulting from a change in estimated
property tax accruals associated with its Puerto Rico facility, which was sold
in June 1998.
VACCINES
PRODUCT SALES Chiron sells pediatric and adult vaccines in Germany, Italy,
the United Kingdom and other international markets. Certain of the Company's
vaccine products, particularly its flu vaccines, are seasonal and typically have
higher sales in the third quarter of the year. In 2000, 1999 and 1998, vaccine
product sales were $344.5 million, $208.7 million and $176.8 million,
respectively.
The increase in sales in 2000 as compared with 1999 primarily was due to
shipments of Menjugate-TM-, Chiron's conjugate vaccine against meningococcal
meningitis caused by the bacterium N. meningitidis serogroup C, to the United
Kingdom, Ireland, Spain and Hungary. In March 2000, the Company received
approval in the United Kingdom to market Menjugate-TM-. During 2000, the Company
shipped $101.5 million of Menjugate-TM- under a tender to the NHS for a
universal vaccination program in the United Kingdom. In addition, in July 2000,
the Department of Health ("DoH") extended a tender to the Company to supply
Menjugate-TM- for a universal vaccination program in Ireland. Under that tender,
the Company will ship approximately $13.0 million of Menjugate-TM- to Ireland,
of which the Company shipped $6.8 million in 2000. The Company expects to ship
the remaining Menjugate-TM- under the tender through April 2001. In
October 2000, the United Kingdom's Medicines Control Agency and the Irish
Medicines Board approved the use of Menjugate-TM- in vaccinating infants. The
United Kingdom and Ireland tenders for Menjugate-TM- included the application
for infant indication. Shipments to the United Kingdom for infant indication
commenced in the first quarter 2001. Menjugate-TM- shipped to Ireland may now
also be used in vaccinating infants. The Company is exploring opportunities for
additional Menjugate-TM- sales in other countries; however, the Company does not
expect Menjugate-TM- shipments in 2001 to be commensurate with those in 2000.
Also contributing to the increase in 2000 vaccine product sales as compared
with 1999 was an increase in flu vaccine sales, attributed to (i) increasing
demand, (ii) manufacturing problems of certain of the Company's competitors and
(iii) the launch of Fluad-TM-, the Company's adjuvanted influenza vaccine, in
Italy, Germany and Austria. The 2000 increase also was attributable to the
re-launch of the Company's tick-borne encephalitis vaccine. In May 2000, the
Company received approval in certain western European
26
countries to market Fluad-TM-. In the first half of 1999, the Company's
tick-borne encephalitis vaccine inventory failed to meet manufacturing
specifications for purity and a portion of inventory was written off.
The increase in sales in 1999 as compared with 1998 was driven by (i) the
Company's acquisition of the remaining 51% interest in, and consolidation of,
Chiron Behring in the second quarter 1998 (see "Equity in earnings of
unconsolidated joint businesses" below), which accounted for $25.4 million in
product sales; (ii) increased flu vaccine sales due to a one-time $4.2 million
sale of adult influenza vaccine to Argentina in the first quarter 1999 and
growth in the flu vaccine market; and (iii) increased rabies vaccine sales as
the Company gained additional market share.
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 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 (see Note 5 of "Notes to
Consolidated Financial Statements"). From July 1, 1996 through the first quarter
1998, the vaccines segment's 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 from the joint business was
$2.4 million for the three months ended March 31, 1998. Beginning March 31,
1998, Chiron Behring's results were consolidated with those of the Company.
ROYALTY AND LICENSE FEE REVENUES The vaccines segment earns royalties on
third party sales of and license fees on several products. Up-front refundable
fees are deferred and recognized as revenues when earned or when all performance
obligations are completed. Up-front nonrefundable license fees where the Company
has no continuing performance obligations are recognized as revenues when
receivable. In situations where continuing performance obligations exist,
up-front nonrefundable license fees are deferred and amortized over the
performance period. In 2000, 1999 and 1998, the vaccines segment recognized
royalty and license fee revenues of $29.0 million, $30.5 million and
$49.1 million, respectively.
SMITHKLINE BEECHAM In August 1998, Chiron recognized $24.0 million related
to a license fee received from SmithKline Beecham (now part of GlaxoSmithKline)
to use certain vaccine product technologies. The agreement provides for
royalties on future product sales, under which Chiron recognized $7.0 million,
$7.3 million and $3.7 million of such royalties in 2000, 1999 and 1998,
respectively. The decrease in 2000 as compared with 1999 primarily was related
to a decrease in GlaxoSmithKline sales due to competitive combination vaccine
products. The increase in 1999 as compared with 1998 was due to the execution of
the license agreement in August 1998, as indicated above.
OTHER Under one arrangement, Chiron recognized $8.0 million, $11.3 million
and $9.4 million in 2000, 1999 and 1998, respectively, of royalty revenues on
third party sales of HBV vaccine products, HAV vaccine products and rabies
vaccine products. The decrease in 2000 as compared with 1999 was due to
competitive combination HBV products, as well as the HAV royalty arrangement,
which expired in 1999, and, to a lesser extent, the rabies royalty arrangement,
which expired in the second quarter 1999. The increase in 1999 as compared with
1998 was due to the acquisition and consolidation of Chiron Behring in the
second quarter 1998, which contributed $3.4 million to royalty and license fee
revenues. Under another arrangement, the Company also earns royalties on third
party sales of HBV products. Royalty revenues recognized under the HBV royalty
arrangement were $11.0 million, $11.9 million and $12.0 million in 2000, 1999
and 1998, respectively.
The balance of royalty and license fee revenues recognized in the vaccines
segment consisted of various other agreements, which individually were not
significant.
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
period are not necessarily indicative of results to be
27
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.
OTHER REVENUES In 2000, 1999 and 1998, the vaccines segment recognized
other revenues of $21.7 million, $27.3 million and $22.5 million, respectively.
COMMISSION REVENUES The Company earns commission revenues on sales of HBV
vaccine and immunoglobulin products. Commission revenues were $7.7 million,
$13.9 million and $10.4 million in 2000, 1999 and 1998, respectively. The
decrease in commission revenues in 2000 as compared with 1999 primarily was
related to a decrease in sales of the monovalent HBV vaccine product due to
competitive combination vaccines. The increase in commission revenues in 1999 as
compared with 1998 was due to the acquisition and consolidation of Chiron
Behring in the second quarter 1998.
NATIONAL INSTITUTES OF HEALTH In the second quarter 2000, the Company
entered into an agreement with the National Institutes of Health ("NIH") to
advance its HIV vaccine program into human clinical trials. Under this
arrangement, the Company could receive $23.2 million over five years. The
Company recognized $2.0 million in 2000 under this arrangement.
The balance of other revenues recognized in the vaccines segment consisted
of various other agreements, which individually were not significant.
Vaccines' 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 these revenues will not decline.
GROSS PROFIT Vaccine gross profit as a percentage of net product sales was
65%, 52% and 49% in 2000, 1999 and 1998, respectively. The increase in vaccine
gross profit margins in 2000 as compared with 1999 primarily was related to
(i) sales of Menjugate-TM-; (ii) manufacturing efficiencies resulting from
increased production; and (iii) a favorable mix of vaccine product sales. A
significant portion of Menjugate-TM- production occurred in 1999. As the Company
had not received approval to market Menjugate-TM- as of the end of fiscal year
1999, the Company expensed manufacturing costs to research and development. The
increase in vaccine gross profit margins in 1999 as compared with 1998 primarily
was related to (i) manufacturing efficiencies resulting from increased
production; offset by (ii) an unfavorable mix of vaccine products and (iii) an
inventory write-off of a portion of the Company's tick-borne encephalitis
vaccine inventory that failed to meet manufacturing specifications for purity
during the first half of 1999.
Vaccine gross profit percentages may fluctuate significantly in future
periods as the vaccine product mix changes.
RESEARCH AND DEVELOPMENT In 2000, 1999 and 1998, the vaccines segment
recognized research and development expenses of $62.3 million, $72.5 million and
$103.5 million, respectively. The decrease in research and development spending
in 2000 as compared with 1999 primarily was due to receipt of approval for sales
of Menjugate-TM- in March 2000, as discussed in "Gross profit" above, offset by
increased spending due to the furtherance of the Company's clinical trials
related to various vaccine programs. The decrease in research and development
spending in 1999 as compared with 1998 primarily was due to the restructuring of
the vaccines' segment research and development department following the
acquisition and consolidation of Chiron Behring in the second quarter 1998. This
decrease was offset by the furtherance of the Company's clinical trials related
to Menjugate-TM- and the acquisition and consolidation of Chiron Behring in the
second quarter 1998.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
28
SELLING, GENERAL AND ADMINISTRATIVE In 2000, 1999 and 1998, the vaccines
segment recognized SG&A expenses of $76.1 million, $79.5 million and
$66.4 million, respectively. The decrease in SG&A expenses in 2000 as compared
with 1999 was due to (i) a change in the method of allocating certain legal
costs to segments, as discussed previously, offset by an increase in SG&A
expenses due to (ii) the Company's re-launch of its tick-borne encephalitis
vaccine product in the first quarter 2000 and (iii) the worldwide implementation
of its integrated information system in April 1999. The increase in SG&A
expenses in 1999 as compared with 1998 primarily was due to the acquisition and
consolidation of Chiron Behring, which contributed an additional $10.7 million
to SG&A expenses in 1999, combined with the Company's worldwide implementation
of its integrated information system in April 1999.
BLOOD TESTING
PRODUCT SALES In 2000, 1999 and 1998, the blood testing segment recognized
product sales of $43.1 million, $25.4 million and $20.6 million, respectively.
ORTHO Under the Ortho arrangement, the Company performs manufacturing
services related to immunodiagnostic products. The Company recognized product
sales under this agreement of $20.7 million, $18.4 million and $20.6 million in
2000, 1999 and 1998, respectively. The increase in 2000 as compared with 1999
primarily was due to the timing of manufacturing services. The decrease in 1999
as compared with 1998 was due to a shift in revenues from product sales to
collaborative agreement revenues, since certain activities that had been
characterized previously as manufacturing services were recharacterized as
research services.
NAT Under the collaboration agreement with Gen-Probe, Chiron and Gen-Probe
jointly participate in new assay and instrument research and development while
Gen-Probe performs certain product development and assay and instrument
manufacturing functions. Currently, Gen-Probe is the only manufacturer of NAT
products using TMA technology. Worldwide product sales related to tests and
instruments were $22.4 million and $7.0 million in 2000 and 1999, respectively.
The Company has contracts with various agencies and distributors worldwide.
In addition, evaluation studies are being conducted to consider the adoption of
NAT for blood screening in different countries. Product revenues are recognized
based on the details of each contract--from cost recovery pricing for IND
applications to contracted price per donation.
In the U.S., the Company began recognizing revenues from sales of nucleic
acid tests under an IND application in the second quarter 1999. In the second
quarter 2000, the Company signed a contract with the U.S. military to test U.S.
Army blood donations using the TMA assay. In the third quarter 2000, (i) the
Company assumed primary account responsibility for a key U.S. customer, which
resulted in increased product sales, and (ii) the Company's remaining U.S.
customers renewed their agreements, with price increases, for NAT products. In
January 2001, Chiron and Gen-Probe completed submission of data to the FDA for
the Procleix-TM- instruments and assays. There can be no assurance as to the
receipt of FDA approval or the timing of any such approval.
In France, the French government has announced its intention to adopt NAT
for blood screening by the end of the second quarter 2001. In 2000, the Company
began recognizing revenue for assay sales and instrument rentals to several
regional blood testing centers in France in connection with evaluation studies,
which were completed in the second quarter 2000. The Company is now responding
to a tender offer issued in France to provide NAT blood screening assays and
instruments. The outcome and impact of the upcoming decision on future revenues
in France is not yet known.
In Australia, the Company signed, and began recognizing revenue under, an
exclusive contract with the Australian Red Cross Blood Service to provide blood
testing products for NAT screening in the fourth quarter 1999. In Singapore, the
Company signed a contract with a local distributor in the second quarter
29
2000 to provide blood testing products for NAT screening and expects to
recognize product sales in the first quarter 2001.
The Company expects the competitive pressures related to many of its blood
testing products to continue into the foreseeable future as a result of the
introduction of competing products into the market, as listed in Part I, Item 1.
"Business--Competition" above.
EQUITY IN EARNINGS OF UNCONSOLIDATED JOINT BUSINESSES In 2000, 1999 and
1998, Chiron's earnings from its joint business with Ortho were $84.2 million,
$78.1 million and $73.5 million, respectively. The overall increase in 2000 as
compared with 1999 primarily was due to increased profitability of Ortho's
foreign affiliates. The overall fluctuations in 1999 as compared with 1998
primarily were due to certain adjustments made during the first quarters of 1999
and 1998. In the first quarter 1999, an inventory adjustment resulted in a
charge of $0.7 million, as compared with a charge of $4.1 million recognized in
the first quarter 1998.
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. Up-front refundable fees are deferred and recognized as
revenues when earned or when all performance obligations are completed. Up-front
nonrefundable fees where the Company has no continuing performance obligations
are recognized as revenues when receivable. In situations where continuing
performance obligations exist, up-front nonrefundable fees are deferred and
amortized over the performance period. In 2000, 1999 and 1998, the blood testing
segment recognized collaborative agreement revenues of $11.7 million,
$9.9 million and $5.0 million, respectively.
Under the Ortho arrangement, the Company performs research services related
to immunodiagnostic products. The Company recognized revenues under this
agreement of $10.1 million, $8.3 million and $5.0 million in 2000, 1999 and
1998, respectively. The fluctuation between 2000 and 1999 primarily was due to
the timing of research services. The fluctuation between 1999 and 1998 primarily
was due to the shift in revenues from product sales to collaborative agreement
revenues. As discussed above, certain activities that had been characterized
previously as manufacturing services were recharacterized as research services.
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 blood testing collaborative
agreement revenues, 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.
ROYALTY AND LICENSE FEE REVENUES The blood testing segment will earn
royalties on blood donations tested with third party NAT products that utilize
certain of Chiron's HCV and HIV patents.
In the fourth quarter 2000, the Company entered into three agreements with
Roche related to the settlement of certain litigation in the U.S. and certain
other countries. Under one of the agreements, Chiron will earn royalties on
blood donations tested with Roche's NAT products that utilize Chiron's HCV and
HIV patents. The Company will recognize revenue under this arrangement in the
first quarter 2001 continuing through 2003. The agreement contemplates future
negotiation that may result in the extension and expansion of this relationship.
The Company's "Other" segment will also earn royalty and license fee revenues
under the other two Roche agreements. See "Other--Royalty and license fee
revenues" below.
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
period 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
30
assurance that the Company will be able to do so or that future royalty and
license fee revenues will not decline.
GROSS PROFIT Blood testing gross profit as a percentage of net product
sales was 30%, 8% and (4%) in 2000, 1999 and 1998, respectively. The increase in
blood testing gross profit margins in 2000 as compared with 1999 primarily was
related to a favorable mix of blood testing product sales. As discussed in
"Product sales" above, Chiron began recognizing NAT product sales for one of its
key U.S. customers, which previously were recorded as collaborative agreement
revenues, in July 2000, and the remaining U.S. customers renewed their
agreements during the third quarter 2000, which resulted in price increases for
NAT products. In addition, the Company recognized NAT product sales in 2000
related to Australia. The increase in blood testing gross profit margins in 1999
as compared with 1998 primarily was related to the sale of NAT products, which
began in the second quarter 1999.
Blood testing gross profit percentages may fluctuate significantly in future
periods as the blood testing product mix changes.
RESEARCH AND DEVELOPMENT In 2000, 1999 and 1998, the blood testing segment
recognized research and development expenses of $14.9 million, $10.0 million and
$7.0 million, respectively. The increase in research and development spending in
2000 as compared with 1999, and in 1999 as compared with 1998, was due to an
increase in development costs related to the NAT business.
Research and development expenses may fluctuate from period to period
depending upon the stage of certain projects and the level of pre-clinical and
clinical trial-related activities.
SELLING, GENERAL AND ADMINISTRATIVE In 2000, 1999 and 1998, the blood
testing segment recognized SG&A expenses of $21.5 million, $16.6 million and
$2.5 million, respectively. The increase in SG&A expenses in 2000 as compared
with 1999 primarily was due to an increase in SG&A expenses associated with the
NAT business and, to a lesser extent, the Company's worldwide implementation of
its integrated information system in April 1999, partially offset by a change in
the method of allocating certain legal costs to segments, as discussed
previously. The increase in SG&A expenses in 1999 as compared with 1998
primarily was due to increased sales and marketing expenses related to the
launch of NAT in the second quarter 1999, increased patent litigation costs and
the Company's worldwide implementation of its integrated information system in
April 1999.
OTHER
COLLABORATIVE AGREEMENT REVENUES Chiron recognizes collaborative agreement
revenues for fees received as research services are performed and as specified
milestones are achieved. Up-front refundable fees are deferred and recognized as
revenues when earned or when all performance obligations are completed. Up-front
nonrefundable fees where the Company has no continuing performance obligations
are recognized as revenues when receivable. In situations where continuing
performance obligations exist, up-front nonrefundable fees are deferred and
amortized over the performance period. In 2000, 1999 and 1998, the other segment
recognized collaborative agreement revenues of $3.0 million, $46.2 million and
$54.4 million, respectively.
31
NOVARTIS AG In December 1995, Chiron and Novartis entered into an agreement
under which Novartis agreed to provide, at Chiron's request, research funding
for certain projects. The funded projects currently consist of adult and
pediatric vaccines, IGF-I, Factor VIII and HSV-tk. Based upon a December 2000
amendment, Novartis has agreed to fund through December 31, 2001, at Chiron's
request and subject to certain annual and aggregate limits, up to 100% of the
development costs incurred between January 1, 1995 and December 31, 2000 on
these projects. In December 1999, Chiron and Novartis amended this agreement to
increase the aggregate maximum amount of funding provided by Novartis from
$250.0 million to $265.0 million. Under this agreement, in 2000, 1999 and 1998,
Chiron recognized collaborative agreement revenues of $3.0 million,
$46.2 million and $54.4 million, respectively. In 2001, the amount of funding
available to be provided by Novartis is limited to $9.1 million.
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 revenues, results in any one period 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. In
particular, the research funding agreement with Novartis will expire on
December 31, 2001, and there can be no assurance that new relationships will be
established.
ROYALTY AND LICENSE FEE REVENUES The other segment earns royalties on third
party sales of and license fees on several products. Up-front refundable fees
are deferred and recognized as revenues when earned or when all performance
obligations are completed. Up-front nonrefundable license fees where the Company
has no continuing performance obligations are recognized as revenues when
receivable. In situations where continuing performance obligations exist,
up-front nonrefundable license fees are deferred and amortized over the
performance period. In 2000, 1999 and 1998, the other segment recognized royalty
and license fee revenues of $110.6 million, $60.0 million and $28.6 million,
respectively.
ROCHE PCR AGREEMENT In accordance with a July 1991 agreement with Roche,
the Company received royalties on sales of PCR products sold by Roche. In 2000,
1999 and 1998, Chiron recognized $26.3 million, $15.7 million and
$15.3 million, respectively, of royalty and license fee revenues related to this
agreement. Roche's sales of PCR products increased in 2000 as compared with
1999. Also in 2000, the Company recorded a $3.3 million positive adjustment
related to the Roche agreement. Chiron estimated royalties on PCR product sales
based on previous period actual sales. In the following quarter, Chiron recorded
an adjustment equal to the difference between those estimated royalty revenues
recorded in the previous quarter and the contractual percentage of actual PCR
product sales for that period. Roche's royalty obligations, with certain limited
exceptions for future products, expired in the fourth quarter 2000.
ABBOTT LABORATORIES In 1999, Chiron entered into a cross-license agreement
with Abbott, under which Chiron granted to Abbott rights under Chiron's HCV
patents. In exchange for these rights, Abbott paid Chiron a license fee of
$10.0 million, which became nonrefundable and was recognized as revenue in the
second quarter 2000. In addition, the cross-license agreement provides for
royalties to Chiron on HCV products sold by Abbott.
BAYER CROSS-LICENSE AGREEMENT In connection with the sale of Chiron
Diagnostics to Bayer, Chiron granted to Bayer rights under certain Chiron
patents, including rights under patents relating to HIV and HCV. In exchange for
these rights, Bayer paid to Chiron a license fee of $100.0 million, which
becomes nonrefundable over a period of three years. Chiron recognized license
fee revenues of $29.2 million, $39.2 million and $13.3 million in 2000, 1999 and
1998, respectively, which represent the portions of the $100.0 million payment
that became nonrefundable during those periods. In addition, the cross-license
agreement provides for royalties to Chiron on HIV and HCV products sold by
Bayer. Chiron recognized $5.1 million in both 2000 and 1999 of royalty revenues
related to this agreement.
32
ROCHE SETTLEMENT In the fourth quarter 2000, the Company entered into three
agreements with Roche related to the settlement of litigation in the U.S. and
certain other countries.
Under the first agreement, Chiron was paid $85.0 million, of which
$40.0 million was recognized in the fourth quarter 2000. Of the $40.0 million,
$34.0 million was for past sales and $6.0 million was for current sales related
to Roche's use of Chiron's HCV patent in its IN VITRO diagnostic products. The
remaining $45.0 million, which was deferred and becomes nonrefundable over time,
will be recognized as revenue through 2005 as royalties on future sales related
to Roche's use of Chiron's HCV patent in its IN VITRO diagnostic products.
Under the second agreement, Chiron received $10.0 million in the fourth
quarter 2000 and received $10.0 million in the first quarter 2001. These amounts
include a nonrefundable license fee and royalties for past sales related to
Roche's use of Chiron's HIV patent in its IN VITRO diagnostic products in
Europe. The $10.0 million that was received in the fourth quarter 2000 became
nonrefundable in January 2001 when the European Patent Office upheld the
Company's HIV patent (for more information, refer to Part I, Item 3. "Legal
Proceedings") and will be recognized as revenue in the first quarter 2001. The
$10.0 million that was received in the first quarter 2001 will be recognized as
revenue in the period that it is earned. Also, the Company will recognize
additional revenue of $10.0 million under this arrangement when and if its
patents on HIV are issued in the U.S.
Under both the HCV and HIV license arrangements, Chiron will also earn
royalties on Roche's future sales of IN VITRO diagnostic products for HCV and
HIV. Such royalties will continue through the lives of the HCV and HIV patents.
Issued HCV patents begin to expire in 2015 for the U.S. and in 2010 for Europe.
The issued HIV patent in Europe expires in 2005. The HIV patent life in the U.S.
will depend upon the decision by the U.S. patent authorities.
See "Blood testing--Royalties and license fee revenues" above for a
discussion of the third agreement.
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
period 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.
OTHER REVENUES Chiron recognized one-time net revenues of $12.5 million in
1998 in exchange for granting Bayer a license to use, reproduce and sell certain
technology developed by Chiron's informatics business. The Company ceased all
informatics activity in 1998; therefore, the Company does not anticipate future
revenues from this technology.
RESEARCH AND DEVELOPMENT In 1999 and 1998, the other segment recognized
research and development expenses of $6.8 million and $3.3 million,
respectively. Research and development spending in the other segment tends to
fluctuate based on the timing of license and collaboration agreements. The
increase in research and development spending in 1999 as compared with 1998 was
due to $5.0 million of license fees related to the Company's FGF patent and
license agreement with Scios, Inc. ("Scios"). Under this agreement, in 1999, the
Company also advanced Scios an additional $7.5 million in exchange for a
promissory note, which may be forgiven if certain conditions are met. The
Company may pay an additional $12.0 million in licensing fees if certain
development objectives are met.
SELLING, GENERAL AND ADMINISTRATIVE In 2000, 1999 and 1998, the other
segment recognized SG&A expenses of $72.0 million, $34.8 million and
$37.1 million, respectively. The increase in SG&A expenses in 2000 as compared
with 1999 was due to (i) costs associated with the integration of PathoGenesis;
33
(ii) increased payroll related expenses and patent litigation costs; (iii) the
Company's worldwide implementation of its integrated information system in
April 1999; and (iv) a change in the method of allocating certain legal costs to
segments, as discussed previously. The decrease in SG&A expenses in 1999 as
compared with 1998 was due to decreased costs associated with the December 1998
disposition of Chiron Diagnostics, offset by the Company's worldwide
implementation of its integrated information system in April 1999.
WRITE-OFF OF PURCHASED IN-PROCESS TECHNOLOGIES The write-off of purchased
in-process technologies was $171.6 million and $1.6 million in 2000 and 1998,
respectively.
On September 21, 2000, Chiron acquired PathoGenesis and accounted for the
acquisition under the purchase method of accounting. A portion of the purchase
price was allocated to purchased in-process technologies for $171.6 million and
was written off entirely in the fourth quarter 2000. The write-off of purchased
in-process technologies represented the fair value at the acquisition date,
calculated utilizing the income approach, of the portion of certain in-process
research and development projects that were not reliant upon core technology.
Core technology represents technology that has been utilized in approved or
commercialized products. Certain research and development projects deemed too
early in terms of completion metrics and any future yet-to-be-defined
technologies were not included in the calculation of in-process technologies.
The Company does not anticipate that there will be any alternative future use
for the in-process technologies that were written off. In valuing the purchased
in-process technologies, the Company used probability-of-success-adjusted cash
flows and a 15% discount rate. Cash inflows from any one in-process product were
assumed to commence between 2002 and 2008. As with all biotechnology products,
the probability of commercial success for any one research and development
project is highly uncertain.
On March 31, 1998, Chiron acquired the remaining 51% interest in Chiron
Behring (see Note 5 of "Notes to Consolidated Financial Statements") and
accounted for the acquisition under the purchase method of accounting. A portion
of the purchase price was allocated to purchased in-process technologies for
$1.6 million and was written off entirely in the second quarter 1998.
AMORTIZATION EXPENSE The Company's other segment recognized amortization
expense of $9.6 million in 2000. As discussed above, Chiron acquired
PathoGenesis on September 21, 2000 and accounted for the acquisition under the
purchase method of accounting. A portion of the purchase price was allocated to
purchased technologies, acquired intangible assets and goodwill, all of which
will be amortized on a straight-line basis over the estimated useful life of
each intangible asset. Purchased technologies represented the fair value of
research and development projects, which will be developed further and supported
after the acquisition date, and are being amortized on a straight-line basis
over 15 years. Acquired intangible assets included the fair value of trademarks
and trade names, patents, databases and the work force, which are being
amortized on a straight-line basis over 5 to 16 years. Goodwill is being
amortized on a straight-line basis over 15 years. Chiron will evaluate
periodically the useful life and value of each intangible asset, which may
result in future adjustments to the amortization periods or book values.
RESTRUCTURING AND REORGANIZATION The Company recorded restructuring and
reorganization charges related to (i) the integration of its worldwide vaccines
operations, (ii) the closure of its Puerto Rico and St. Louis, Missouri
facilities and (iii) the ongoing restructuring of its business operations. The
integration of its worldwide vaccines operations consisted of termination and
other employee-related costs recognized in connection with the elimination of 28
positions in the Company's Italian manufacturing facility and facility-related
costs. The closure of its Puerto Rico and St. Louis facilities and the ongoing
restructuring of its business operations consisted of termination and other
employee-related costs recognized in connection with the elimination of 400
positions in manufacturing, research, development, sales, marketing and
administrative functions, and facility-related costs. Employee termination costs
included wage continuation, advance notice pay and medical and other benefits.
Facility-related costs included losses on disposal of property, plant and
equipment, lease payments and other related costs.
34
During 1999, the Company decided to retain 18 of those 400 positions to
support future contract manufacturing activities and, therefore, adjusted the
number of positions for elimination to 382. Again during 2000, the Company
decided to retain 11 of those 382 positions to support future contract
manufacturing activities and, therefore, adjusted the number of positions for
elimination to 371. Included in the 371 positions were 36 positions at the
Company's Amsterdam facility. These positions were transferred to the buyer in
January 2000 (see "Gain (loss) on sale of assets" below) in connection with the
December 1999 sale of the Amsterdam facility.
For the year ended December 31, 2000, the Company recorded net restructuring
and reorganization charge reversals of $0.4 million primarily related to revised
estimates of termination and other employee-related costs recorded in connection
with the retention of 11 of the 382 positions. As described above, the Company
adjusted the number of positions for elimination to 371, of which 356 had
terminated as of December 31, 2000.
For the year ended December 31, 1999, the Company recorded net restructuring
and reorganization expenses of $0.2 million, which included a charge of
$3.9 million and a charge reversal of $3.7 million. The charge of $3.9 million
primarily related to termination and other employee-related costs recognized in
connection with the elimination of 28 positions at the Company's Italian
manufacturing facility, of which 24 of these positions had terminated as of
December 31, 1999. The charge reversal of $3.7 million related to (i) revised
estimates of facility-related accruals recorded in connection with the closure
of the St. Louis facility and (ii) revised estimates of termination and other
employee-related costs recorded in connection with the transfer of 36 positions
at the Company's Amsterdam facility to the buyer and the retention of 18 of the
400 positions. As described above, the Company adjusted the number of positions
for elimination to 382, of which 319 had terminated as of December 31, 1999.
For the year ended December 31, 1998, the Company recorded net restructuring
and reorganization expenses of $26.8 million, which included a charge of
$30.7 million and a charge reversal of $3.9 million. The charge of
$30.7 million consisted of (i) termination and other employee-related costs
recorded in connection with the elimination of the 400 positions, of which 167
had terminated as of December 31, 1998, and (ii) facility-related costs recorded
in connection with the closure of the St. Louis facility and the ongoing
restructuring of its business operations. The charge reversal of $3.9 million
primarily resulted from a revised estimate of property and other tax-related
accruals recorded in 1995 in connection with the closure of the Puerto Rico
facility.
The liabilities related to restructuring and reorganization are expected to
be substantially settled within one to six years of accruing the related
charges. Management expects employee and facility-related cost savings due to
these restructuring activities in cost of sales, research and development
expense and SG&A expense through 2008. The Company believes that it has begun to
achieve these cost savings.
OTHER OPERATING EXPENSES In 1999, Chiron recognized a reduction in other
operating expenses of $13.4 million resulting from a reversal in estimated tax
accruals related to certain employee payments recorded in 1995. The Company
entered into tax indemnification agreements with certain officers and accrued an
amount based upon the officers' related notional excise tax obligation. As the
statute of limitations expired, based upon the officers' tax return filing
dates, the Company reversed the related excise tax accrual to the extent that
claims were not made against it.
GAIN (LOSS) ON SALE OF ASSETS In December 1999, the Company sold its
manufacturing facility in Amsterdam, resulting in a gain of $0.9 million. 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 January 2001, the Company sold various assets of its San Diego facility.
The Company anticipates that it will recognize a gain upon the sale of these
assets in the first quarter 2001.
35
GAIN ON SALE OF INTANGIBLE ASSETS In December 1999, the Company sold
certain assets that it had developed or acquired in connection with its research
and development of a Cytomegalovirus ("CMV") vaccine to Aventis Pasteur and
recognized a gain of $7.5 million.
INTEREST EXPENSE In 2000, 1999 and 1998, Chiron recognized interest expense
of $12.8 million, $23.9 million and $24.7 million, respectively. The decrease in
interest expense in 2000 as compared with 1999 primarily was due to the
conversions of $253.8 million of the 1.90% convertible debentures to common
stock through October 2000 and $98.4 million of the 5.25% convertible debentures
to common stock through May 2000, as well as the repayment of the note payable
to Novartis on January 4, 2000. The decrease in interest expense in 1999 as
compared with 1998 primarily was due to lower average debt balances.
OTHER INCOME, NET Other income, net, primarily consisted of interest income
on the Company's cash and investment balances and other non-operating gains and
losses. In 2000, 1999 and 1998, Chiron recognized interest income of
$84.5 million, $83.8 million and $29.6 million, respectively. The increase in
interest income in 2000 as compared with 1999 was due to gains realized on the
termination of currency swaps related to the Company's German subsidiary and
higher average interest rates. Due to the $720.7 million cash payment to
purchase PathoGenesis, the Company does not expect interest income in following
years to be commensurate with that in 2000 and 1999. The increase in interest
income in 1999 as compared with 1998 primarily was 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 1998 and Chiron Diagnostics in the
fourth quarter 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. The Company performs
periodic reviews for temporary or other than temporary impairment of its equity
securities and records adjustments to the carrying values of those securities
accordingly. In 2000, 1999 and 1998, Chiron recognized a loss attributable to
the other-than-temporary impairment of certain of these equity securities of
$5.0 million, $1.7 million and $8.4 million, respectively.
In 2000, 1999 and 1998, Chiron recognized gains of $3.2 million,
$3.8 million and $4.5 million, respectively, related to the sale of certain
equity securities. In addition, in 1999, Chiron recognized an unrealized holding
gain of $3.4 million related to equity securities classified as trading.
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. The agreement also provided for Chiron to receive
additional payments, calculated as a pre-determined percentage of Henry
Schein, Inc.'s gross profit, through 2003. The Company received $2.9 million in
2000.
The Company hedged a portion of its exposure to the British pound in 2000
related to Menjugate-TM- sales. The Company settled this hedging contract upon
substantial conclusion of Menjugate-TM- sales in the United Kingdom in the
second quarter 2000. The settlement resulted in a gain of approximately
$5.4 million.
The Company periodically evaluates the recoverability of its goodwill by
comparing the projected undiscounted net cash flows associated with such
goodwill against its respective carrying value. If the carrying value exceeds
the projected undiscounted net cash flows, the Company would record a charge to
operations to reduce the carrying value to the fair value. The Company has not
recorded any such charge in 2000, 1999 or 1998.
As circumstances dictate, the Company evaluates the recoverability of its
other intangible and long-lived assets by comparing the projected undiscounted
net cash flows associated with such assets against their respective carrying
values. If the carrying value exceeds the projected undiscounted net cash
36
flows, the Company would record a charge to operations to reduce the carrying
value to the fair value. The Company has not recorded any such charge in 2000,
1999 or 1998.
INCOME TAXES The reported effective tax rate for 2000 was 84.4% of pretax
income from continuing operations. The adjusted annual tax rate was 32.0% of
pretax income from continuing operations, when taking into account (i) the
write-off of purchased in-process technologies and amortization expense on
goodwill and acquired identifiable intangible assets related to the PathoGenesis
acquisition and (ii) $34.0 million of past royalty revenues related to the Roche
settlement. The reported effective tax rate for 1999 was 18.0% of pretax income
from continuing operations. The adjusted annual tax rate was 26.3% of pretax
income from continuing operations, when adjusted for the impact of the reversal
of a prior year valuation allowance, which resulted in the recognition of
additional domestic deferred tax benefits of $12.9 million. The increase in the
adjusted annual tax provision in 2000 as compared with 1999 primarily was due to
an increase in income earned in foreign countries with marginal income tax rates
higher than the marginal U.S. income tax rate, coupled with a decrease in net
operating loss carryforwards available to offset such foreign income.
The reported effective tax rate for 1998 was 20.0% of pretax income from
continuing operations. The adjusted annual tax rate was 25.8% of pretax income
from continuing operations, when adjusted for restructuring and reorganization
charges, the gain on the sale of the Puerto Rico facility and $6.0 million of
income recognized in 1998 due to a change in estimated property tax accruals
related to the Puerto Rico facility. The increase in the adjusted annual tax
rate in 1999 as compared with 1998 primarily was due to the benefit of certain
tax losses and other tax benefits realized in 1998, substantially offset by a
higher proportion of non-U.S. income subject to tax at lower rates in 1999.
The effective tax rate may be affected in future periods by changes in
management's estimates with respect to the Company's deferred tax assets and
other items affecting the overall tax rate.
DISCONTINUED OPERATIONS In a strategic effort to focus on its core
businesses of Biopharmaceuticals, Vaccines and Blood Testing, the Company
completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997,
respectively. The "Gain (loss) on disposal of discontinued operations" consisted
of the following as of December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Gain on the sale of Chiron Diagnostics, gross............... $ -- $ -- $529,669
Gain on the sale of Chiron Vision, gross.................... -- -- 112,582
Reversal of reserves for contractual obligations to
indemnify B&L............................................. 2,190 8,305 --
Gain on the sale of the Chiron Vision real estate assets,
gross..................................................... -- 1,873 --
Other....................................................... (708) 1,563 (527)
Income tax benefit (provision).............................. (9,070) 20,432 (200,730)
------- ------- --------
$(7,588) $32,173 $440,994
======= ======= ========
CHIRON DIAGNOSTICS On November 30, 1998, Chiron completed the sale of its
IN VITRO diagnostics business to Bayer for $1,013.8 million in cash, subject to
certain post-closing adjustments. The results of operations for Chiron
Diagnostics are reported as a discontinued operation for all periods presented
in the Consolidated Statements of Operations. As a result, "Income from
discontinued operations" of $7.1 million represented the net income of Chiron
Diagnostics from January 1, 1998 through November 30, 1998. Chiron has provided
customary indemnities under the terms of the Stock Purchase Agreement with
Bayer.
CHIRON VISION 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 Company
has provided customary indemnities under the terms of the Stock Purchase
37
Agreement with B&L. In 2000 and 1999, the Company reversed approximately
$2.2 million and $8.3 million, respectively, reserved for contractual
obligations to indemnify B&L against certain potential claims as such
obligations had expired. This was recorded as a component of "Gain (loss) on
disposal of discontinued operations."
The Company retained certain Chiron Vision assets, including certain Chiron
Vision real estate assets (the "real estate assets") with a carrying value of
$25.1 million, upon the completion of the sale. In July 1999, the Company
recognized a gain of $1.9 million upon sale of a portion of these real estate
assets. This gain was recorded as a component of "Gain (loss) on disposal of
discontinued operations."
INCOME TAXES In connection with the sale of Chiron Diagnostics and Chiron
Vision, the Company recorded cumulative net deferred tax assets of
$26.5 million and $26.0 million in 2000 and 1999, respectively, principally
attributable to the timing of the deduction of certain expenses associated with
these sales. The Company also recorded corresponding valuation allowances of
$26.5 million and $26.0 million in 2000 and 1999, respectively, to offset these
deferred tax assets, as management does not believe that it is more likely than
not that the deferred tax assets to which the valuation allowance relates will
be realized. The future recognition of these deferred tax assets will be
reported as a component of "Gain (loss) on disposal of discontinued operations."
"Gain (loss) on disposal of discontinued operations" included an income tax
benefit (provision) of ($9.1) million, $20.4 million and ($200.7) million for
the years ended December 31, 2000, 1999 and 1998, respectively. The tax
provision for the year ended December 31, 2000 resulted from the 1999 estimated
tax provision to tax return true-up adjustment on the Chiron Diagnostics final
purchase price adjustment. The tax benefit for the year ended December 31, 1999
included the utilization of additional foreign sales corporation benefits and
foreign tax credits resulting from the 1998 estimated tax provision to tax
return true-up adjustments for Chiron Diagnostics and Chiron Vision. The tax
provision for the year ended December 31, 1998 was recorded based on the gains
on the sale of Chiron Diagnostics and Chiron Vision.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which 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 implementation of SFAS 133 should be accounted for as a
cumulative effect of a change in accounting principle pursuant to Accounting
Principals Board ("APB") Opinion No. 20 ("APB 20"), "Accounting Changes."
SFAS 133, as amended by SFAS 137 and 138, is effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000. The Company implemented
SFAS 133, as amended, as of January 1, 2001. The implementation of SFAS 133 will
not have a material effect on the Company's results of operations and financial
position.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This statement gives specific guidance and clarification on the
conditions that must be met before an entity may recognize revenue. The
implementation of SAB 101 should be accounted for as a cumulative effect of a
change in accounting principle pursuant to APB 20. In March 2000, the SEC issued
SAB 101A to defer the effective date of implementation of SAB 101. In
June 2000, the SEC issued SAB 101B to defer further the effective date of
implementation of SAB 101 with earlier application encouraged. The Company
adopted SAB 101
38
as of October 1, 2000. The implementation of SAB 101 did not have any effect on
the Company's results of operations and financial position.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). This standard provides
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities. In accordance with SFAS 140, an entity is
required to (i) recognize the financial assets it controls and the liabilities
it has incurred, (ii) derecognize financial assets when control has been
surrendered and (iii) derecognize liabilities when extinguished. The
implementation of SFAS 140 should be accounted for prospectively. SFAS 140 is
effective for transfers of financial assets and extinguishments of liabilities
occurring after March 31, 2001. The Company believes that the implementation of
SFAS 140 will not have a material effect on the Company's results of operations
and financial position.
LIQUIDITY AND CAPITAL RESOURCES
Chiron's capital requirements have generally been funded from operations,
cash and investments on hand, debt borrowings and issuance of common stock.
Chiron's cash, investments in marketable debt securities and short-term
investment in equity securities, which totaled $851.5 million at December 31,
2000, are invested in a diversified portfolio of financial instruments,
including money market instruments, corporate notes and bonds, government or
government agency securities and other debt issued by financial institutions of
high credit standing. 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.
SOURCES AND USES OF CASH Chiron had cash and cash equivalents of
$167.0 million and $363.9 million at December 31, 2000 and 1999, respectively.
OPERATING ACTIVITIES In 2000, net cash provided by operating activities was
$373.4 million as compared with $20.9 million in 1999. The increase in cash
provided by operating activities largely was due to (i) higher income from
operations before the write-off of purchased in-process technologies,
depreciation and amortization and other non-cash charges, (ii) lower tax
payments, both of which were offset partially by (iii) lower federal and state
tax refunds received and (iv) increased accounts receivable. Income from
operations before non-cash charges was $328.2 million in 2000 as compared with
$245.3 million in 1999. In 1999, the Company paid $183.4 million in estimated
taxes related to the sale of Chiron Diagnostics and received $60.2 million in
federal and state tax refunds. Net operating loss carryforwards and federal
business credits attributed to the acquisition of PathoGenesis amounted to
approximately $105.2 million and $6.0 million, respectively, and are available
to offset future domestic taxable income through 2007. As a result, the Company
does not expect tax payments in following years to be commensurate with those in
2000 and 1999. The actual utilization of the net operating loss carryforwards is
restricted pursuant to section 382 of the Internal Revenue Code. The increase in
accounts receivable was driven by increases in product sales, year end billings
under contract manufacturing agreements, royalty receivables due to an increase
in Betaferon-Registered Trademark- sales and receivables from Ortho due to an
increase in earnings from the joint business. The Company anticipates that
research and development expenditures in 2001 will increase due to the research
and development activities that resulted from the acquisition of PathoGenesis in
September 2000. Net cash from operating activities will fund these research and
development activities.
INVESTING ACTIVITIES In 2000, net cash used in investing activities
consisted of purchases of investments in marketable debt securities of
$3.6 billion, cash paid to purchase PathoGenesis of $720.7 million, capital
expenditures of $54.4 million, and purchases of equity investments of
$27.4 million. This use of cash was offset by proceeds from the sale and
maturity of investments in marketable debt securities of $4.1 billion, proceeds
from the sale of equity securities and interests in affiliated companies of
$5.0 million, proceeds from a note receivable of $3.2 million, proceeds from the
sale of assets of $1.0 million and other sources of cash of $58.5 million. In
2000, Chiron paid approximately $720.7 million to purchase the outstanding
39
shares of common stock of PathoGenesis at $38.50 per share. The purchases of
equity securities and interests in affiliated companies primarily consisted of a
$5.0 million capital contribution under a joint venture agreement, a
$6.9 million capital contribution under a limited partnership agreement and a
$13.9 million payment to purchase common stock upon the exercise of warrants.
Under the joint venture agreement, the Company invested in a Singapore-based
venture, S*BIO, to research and develop therapeutic, diagnostic and vaccine
products. The Company will contribute $8.0 million, of which $5.0 million was
paid in June 2000, for a 19.9% ownership interest and will account for the
investment on the cost method. Under the limited partnership agreement, the
Company will pay $25.0 million over five years for an ownership percentage of
25.67% and will account for the investment on the equity method.
In 1999, net cash used in investing activities consisted of purchases of
investments in marketable debt securities of $1.2 billion, capital expenditures
of $64.6 million and other uses of cash of $16.7 million. These uses of cash
were partially offset by proceeds from the sale and maturity of investments in
marketable debt securities of $1.0 billion, proceeds from the disposal of
discontinued operations of $46.9 million, proceeds from the sale of assets of
$21.8 million and proceeds from the sale of equity securities and interests in
affiliated companies of $3.7 million.
In January 2001, the Company sold various assets of its San Diego facility
for $4.8 million in cash.
FINANCING ACTIVITIES In 2000, net cash used in financing activities
consisted of $314.4 million for the acquisition of treasury stock,
$71.1 million for the repayment of debt, including the note owed to Novartis,
and $18.9 million related to short-term borrowings. This use of cash was offset
by $74.7 million in proceeds from the reissuance of treasury stock and the
issuance of common stock, primarily related to stock option exercises and
employee stock purchases.
In 1999, net cash used in financing activities consisted of $140.8 million
for the acquisition of treasury stock, $15.3 million related to short-term
borrowings and $2.4 million for the repayment of debt and capital leases. These
uses of cash were offset partially by proceeds of $63.1 million and
$35.0 million from the reissuance of treasury stock and the issuance of common
stock, respectively, related to stock option exercises and employee stock
purchases and $6.9 million in proceeds from the issuance of long-term debt.
On April 4, 2000, the Company's Board of Directors authorized management to
call for redemption the outstanding $100.0 million 5.25% convertible
subordinated debentures. In 2000, debentures with a face value of $98.4 million
were converted into 3.2 million shares of the Company's common stock, at a
conversion price of $30.83 per share. The remaining unconverted debentures were
redeemed in cash.
On August 11, 2000, the Company's Board of Directors authorized management
to call for redemption the outstanding $253.9 million 1.90% convertible
subordinated debentures, including $10.1 million held by Novartis. In 2000,
debentures with a face value of $253.8 million were converted into 8.8 million
shares of the Company's common stock, at a conversion price of $28.91 per share.
The remaining unconverted debentures were redeemed in cash.
The Company's Board of Directors authorized the repurchase of Chiron common
stock 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. In February 2001, the Board of Directors approved a 5.0 million
share increase. The Board has authorized such repurchases through February 28,
2002. As of December 31, 2000, the Company may repurchase up to an additional
3.4 million shares of its common stock.
In January 2001, the Company initiated a put warrant program. Under this
program, the Company will collect a premium from a third party in return for
selling put warrants on Chiron stock. The put warrants entered into in
January 2001 entitle the holder to sell to the Company 0.5 million shares at
$44.95 per share. If Chiron's stock price is below $44.95 on April 19, 2001, the
Company will be obligated to purchase 0.5 million shares at $44.95 per share. In
January 2001, the Company collected a $2.6 million premium for these puts, which
will be recorded in additional paid-in capital.
40
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, uncollateralized
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 under
a November 1994 Investment Agreement, provides various interest rate options and
matures in February 2003. In December 1999, Chiron and Novartis amended the
November 1994 Investment Agreement to reduce the maximum amount of Chiron
obligations that Novartis will guarantee from $725.0 million to $702.5 million.
There were no borrowings outstanding under this credit facility at December 31,
2000 and 1999.
Chiron also has uncommitted credit facilities available outside the U.S. One
facility is maintained for Chiron's Italian subsidiary and allows for total
borrowings of $62.6 million, which includes a $50.0 million U.S. Dollar
denominated portion and a 26 billion Lira denominated portion ($12.6 million).
At December 31, 2000 and 1999, $0.1 million and $20.3 million, respectively,
were outstanding under this facility at average interest rates of 4.9% and 3.6%,
respectively. Outstanding borrowings under the Italian credit facility are
uncollateralized. Another facility, which was established in 2000, is maintained
for Chiron's 51% owned Indian subsidiary and allows for total borrowings of
$4.3 million (200 million Indian Rupee). At December 31, 2000, $1.1 million was
outstanding under this facility at an interest rate of 15.5%. Outstanding
borrowings under the Indian credit facility were collateralized by machinery and
equipment with a net book value of $3.9 million and trade receivables and
inventory with a total net book value of $2.4 million at December 31, 2000.
In connection with the sale of Chiron Diagnostics to Bayer, a promissory
note owed by Chiron Diagnostics to Novartis was transferred to and assumed by
the Company. The note payable to Novartis bears interest at a variable rate
based on LIBOR (approximately 5.7% at December 31, 1999). As of December 31,
1999, the outstanding amount was $67.8 million, including accrued interest. The
note and accrued interest were paid in full on January 4, 2000.
LEASES Chiron leases laboratory, office and manufacturing facilities, land
and equipment under noncancelable operating leases, which expire through 2014.
Future minimum lease payments, including those for the leaseback of office and
warehouse space in the Amsterdam facility, are estimated to be approximately
$145.9 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, 2000, Novartis had guaranteed the payment of the residual value
guarantee to a maximum of $172.6 million (see Note 9 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, payments to IBM are expected to be approximately $104.9 million.
Payments to IBM are subject to adjustment depending upon the level of services
and infrastructure equipment provided by IBM, as well as inflation.
In future periods, the Company expects to incur substantial capital
spending. At December 31, 2000, the Company had various firm purchase and
capital project commitments totaling approximately $3.9 million. At
December 31, 2000, the Company had $4.8 million outstanding under a letter of
credit, which is required by German law, related to ongoing legal proceedings in
Germany (see Part I, Item 3. "Legal Proceedings" above). The Company also had
various performance bonds and insurance-related letters of credit in the amount
of $14.0 million outstanding at December 31, 2000.
41
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. Future
noncancelable funding commitments under collaborative arrangements are estimated
to be approximately $12.2 million in the aggregate.
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."
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 legacy currencies will remain as legal tender in
the member countries as denominations of the Euro between January 1, 1999 and
January 1, 2002. The Euro is currently traded on currency exchanges and can be
used in business transactions. The Company believes that its financial systems
are Euro-ready in all material respects and has begun minor system upgrades to
assist in its Euro-readiness effort. The cost of the upgrades is not material to
the Company's results of operations and financial position. The Euro conversion
may have competitive implications on the Company's pricing strategies. The
Company is still in the process of evaluating the effect, if any, that the Euro
conversion may have on its product pricing and gross profit percentages.
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, which 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 that appear promising.
These technologies often 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 that 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 or prophylactic 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 may otherwise prevent
successful commercialization.
42
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
Part I, Item 1. "Business--Government Regulation" above. Product candidates that
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 that 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 that
may result in lot failures. Manufacturing processes which are used to produce
the (smaller) quantities of material needed for research and 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 that 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.
Specific to the Company's new product, TOBI-Registered Trademark-
(tobramycin solution for inhalation), the Company relies on others to supply raw
materials and to manufacture TOBI-Registered Trademark- according to regulatory
requirements. Although Chiron believes either one of its two suppliers of bulk
powdered tobramycin will be able to supply sufficient quantities to meet its
current needs, Chiron has not entered into long-term supply contracts with the
suppliers. Rather, the Company has an agreement for the formulation and
packaging of TOBI-Registered Trademark- for a minimum term of 10 years. There
can be no assurance that Chiron will be able to obtain future supplies of bulk
tobramycin on favorable terms, that contract manufacturers will be able to
provide sufficient quantities of TOBI-Registered Trademark- or that the products
supplied will meet specifications.
PATENTS HELD BY THIRD PARTIES MAY DELAY OR PREVENT COMMERCIALIZATION
Third parties, including competitors, have patents and patent applications
in the U.S. 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 that are unfamiliar to the
healthcare community. There can be no
43
assurance that healthcare providers and patients will accept such products. 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.
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 U.S. and other
important markets. It is not known how many of the Company's pending patent
applications will be granted, or the effective coverage of those that are
granted. In the U.S. and other important markets, the issuance of a patent is
neither conclusive as to its validity nor 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 resolve patent litigation successfully 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 U.S. 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
44
have issued regulations relating to the pricing and profitability of
pharmaceutical companies. There have been proposals in the U.S. (at both the
federal and state level) to implement such controls. The growth of managed care
in the U.S. also has placed pressure on the pricing of healthcare products.
These pressures can be expected to continue.
COSTS ASSOCIATED WITH EXPANDING THE BUSINESS
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 may incur
significant charges, costs and expenses which could impact the Company's
profitability, including impairment losses, restructuring charges, the write-off
of purchased in-process technologies, 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 diagnostics and ophthalmics 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 U.S. 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 business strategy depends upon
collaborations with third parties, including research collaborations and joint
efforts to develop and commercialize new products. As circumstances change, the
Company and its corporate partners 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. Any number of events, both
internal and external to the Company, may affect the stock price. 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
45
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 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 that affect the Company's
stock. Changes in the market price of these securities may impact the Company's
profitability.
INCOME TAXES
The Company is taxable principally in the U.S., 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 that 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 reflected properly in its
balance sheet, the Company is presently under audit in several jurisdictions,
and there can be no assurance that the Company will prevail in all cases in the
event the taxing authorities disagree with the Company's 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 (subject
to certain limitations) and Chiron Diagnostics. 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.
46
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. The Company's
primary exposure to foreign exchange rates is associated with the value of the
Euro. An increase in the value of the U.S. Dollar vis-a-vis the Euro will result
in a lower value of the Company's non-U.S. Dollar based revenues. 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 principal amount of these derivative financial instruments at
December 31, 2000 and 1999 was $48.8 million and $254.1 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, 2000, these exposures amounted to $51.6 million and
were offset by forwards with a notional principal amount of $48.8 million (fair
value of $49.2 million). The notional principal amount of the forwards was
$27.3 million (fair value of $27.2 million) as of December 31, 1999. Based on
exposures as of December 31, 2000, a 10% adverse movement against the Company's
portfolio of transaction exposures and hedge contracts would result in a loss of
approximately $0.1 million. A 10% movement in the value of the dollar versus the
Company's portfolio of transaction exposures has not occurred in the last 12
quarters. Foreign currency transaction gains and losses from continuing
operations, including the impact of hedging, were $5.5 million in 2000 but were
not significant in 1999 or 1998. In 2000, the Company hedged a portion of its
exposure to the British pound related to Menjugate-TM- sales. The Company
settled this forward contract upon substantial conclusion of Menjugate-TM- sales
in the United Kingdom in the second quarter 2000. The settlement resulted in a
gain of approximately $5.4 million, which was recorded in "Other income, net" in
the Consolidated Statements of Operations.
Chiron may selectively hedge anticipated currency exposures by purchasing
quarterly put options. The Company's primary anticipated exposures are related
to foreign revenues received from selling products in the major European
countries. To limit hedging costs, the Company generally purchases
out-of-the-money put options. The Company had no option contracts outstanding at
December 31, 2000 and 1999.
The Company had 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
was to fix the interest and currency rate exposures associated with the
Company's wholly-owned German subsidiary. The exposures were denominated in
Deutsche marks. The Company terminated these swaps in the fourth quarter 2000,
which resulted in a gain of approximately $2.7 million recorded as a component
of "Other income, net" in the Consolidated Statements of Operations. The
notional principal amount of the Company's swaps at December 31, 1999 was
$226.8 million. Based on the Company's exposure at December 31, 2000, if the
Deutsche mark had strengthened or weakened by 10% during 2000, the value of the
underlying hedged exposure would have increased or decreased by $20.4 million
and $16.7 million, respectively. A 10% movement in the value of the Deutsche
mark versus the U.S. dollar has occurred in 3 of the last 10 years. Currency
fluctuations in the value of the German subsidiary's assets and liabilities, as
well as changes in the value of related swaps, were reflected as a component of
"Other comprehensive income (loss)" in the Consolidated Statements of
Comprehensive Income.
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 with interest rates tied to LIBOR. The Company maintains investment
portfolio holdings of various issuers, types and maturities. Changes in
47
interest rates do not affect interest expense incurred on the Company's
long-term debt because the Company's long-term debt bore interest at fixed
rates. In addition, all long-term debt was substantially converted to the
Company's common stock during 2000.
Chiron's investment portfolio amounted to approximately $851.5 million at
December 31, 2000. As of that date, the Company also had $172.6 million of
floating rate obligations 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 portfolio balance
of $679.0 million.
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 reported income of $5.8 million over the
12-month period. Similarly, a 150-basis point decrease results in a decrease in
reported income of $5.8 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 (loss)" in the Consolidated Statements of
Comprehensive Income. 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 2 of
the last 10 years, a 100-basis point movement has occurred in 4 of the last
10 years, and a 50-basis point movement has occurred in 6 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. A majority of these securities are 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. The Company periodically reviews the carrying
values of these securities, and other-than-temporary losses are recognized
against earnings in the same period the loss was deemed to have occurred.
Changes in share prices or in the volatility of share prices affect the value of
Chiron's equity portfolio. To reduce this risk, the Company has hedged a portion
of its exposure through short sales and forward sales contracts. The short sales
and forward sales contracts substantially offset the long position and, in
effect, neutralize the impact of market valuation shifts on the hedged
securities. In 2000, the Company settled the short sales upon sale of the
related equity securities. The settlement resulted in a gain of approximately
$2.4 million, which was recorded in "Other income, net" in the Consolidated
Statements of Operations. The notional principal amount of the Company's short
sales at December 31, 1999 was $4.5 million (fair value of $4.6 million). The
notional principal amount of the Company's forward sales contracts on its equity
securities at December 31, 2000 was $36.2 million (fair value of
$31.5 million). The Company had no forward sales contracts on its equity
securities during 1999. In the future, the Company may use additional hedging
strategies in order to mitigate the potential adverse impact from changes in the
market value of stock prices. 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 no charges
in 2000, and recorded charges of $1.7 million and $8.4 million in 1999 and 1998,
respectively, to write down certain available-for-sale equity securities for
which the decline in fair value was deemed to be other-than-temporary. As of
December 31, 2000, if the market price of Chiron's equity investments, including
warrants and preferred stock, decreased by 10%, the market value of the equity
portfolio would decrease by $12.0 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
48
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.
49
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 2001 Annual Meeting to be
filed with the SEC within 120 days of December 31, 2000 (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.
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) 1. Index to Consolidated Financial Statements
PAGE
NUMBER
------
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets at December 31, 2000 and 1999... F-2 - F-3
Consolidated Statements of Operations for each of the three
years ended December 31, 2000, 1999 and 1998.............. F-4 - F-5
Consolidated Statements of Comprehensive Income for each of
the three years ended December 31, 2000, 1999 and 1998.... F-6
Consolidated Statements of Stockholders' Equity for each of
the three years ended December 31, 2000, 1999 and 1998.... F-7 - F-8
Consolidated Statements of Cash Flows for each of the three
years ended December 31,2000, 1999 and 1998............... F-9
Notes to Consolidated Financial Statements.................. F-10 - F-56
2. Index to Financial Statement Schedules
PAGE
NUMBER
------
II Valuation and Qualifying Accounts and Reserves.......... F-57
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 accompanying notes.
(b) Reports on Form 8-K
None.
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
3.01 Restated Certificate of Incorporation of the Registrant, as
filed with the Office of the Secretary of State of Delaware
on August 17, 1987, incorporated by reference to
Exhibit 3.01 of the Registrant's report on Form 10-K 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 report on Form 10-K 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 report on Form 10-Q for the period ended
June 30, 1996.
3.04 Bylaws of the Registrant, as amended and restated.
4.01 Reserved.
4.02 Reserved.
51
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
4.03 Reserved.
4.04 Reserved.
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 report on Form 10-Q 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 report on Form 10-Q 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 Registrant's report on Form 10-Q 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 report on Form 10-K for
fiscal year 1997.
10.102 Reserved.
10.103 Reserved.
10.104 Stock Purchase and Warrant Agreement dated May 9, 1989,
between Cetus Corporation and Hoffmann-La Roche Inc.
(initially filed as Exhibit 10.36 of the Registrant's report
on Form 10-Q for the period ended September 30, 1994),
incorporated by reference to Exhibit 10.104 of Registrant's
report on Form 10-Q for the period ended June 30, 1999.
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 report on Form 10-K for fiscal year
1996.
10.106 Through 10.199 Reserved
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),
(initially filed as Exhibit 10.29 to the Registrant's report
on Form 10-K for fiscal year 1989, and refiled as Exhibit
10.14 of the Registrant's report on Form 10-Q for the period
ended September 30, 1994), incorporated by reference to
Exhibit 10.201 of Registrant's report on Form 10-Q for the
period ended March 31, 1999.
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)
(initially filed as Exhibit 10.31 to Registrant's report on
Form 10-K for fiscal year 1989, and refiled as Exhibit 10.15
of the Registrant's report on Form 10-Q for the quarter
ended June 30, 1994), incorporated by reference to Exhibit
10.202 of Registrant's report on Form 10-Q for the period
ended March 31, 1999.
52
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 (initially filed as
Exhibit 10.50 to Registrant's report on Form 10-Q for period
ended September 30, 1993), incorporated by reference to
Exhibit 10.203 of Registrant's report on Form 10-K for
fiscal year 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 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 (initially
filed as Exhibit 10.51 to Registrant's report on Form 10-K
for fiscal year 1993), incorporated by reference to Exhibit
10.204 of Registrant's report on Form 10-K for fiscal year
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 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 report on 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.")
10.206 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 (initially filed as Exhibit 10.85 to Registrant's
report on Form 10-K for fiscal year 1995), incorporated by
reference to Exhibit 10.206 of Registrant's report on
Form 10-Q for period ended March 31, 1999. (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 report on 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.")
10.208 Contract Manufacturing Agreement dated as of March 17, 2000,
between Chiron S.p.A. and SynCo Bio Partners B.V.,
incorporated by reference to Exhibit 10.208 of the
Registrant's report on Form 10-Q for the period ended June
30, 2000.
10.209 Through 10.299 Reserved
53
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 report on
Form 10-Q 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 report on Form 10-Q 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 report on Form 10-Q 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.)
10.304 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 report on Form 10-Q 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 HCV Probe License and Option Agreement dated September 26,
1999, between Abbott Laboratories, an Illinois corporation,
and the Registrant, incorporated by reference to Exhibit
10.306 of Registrant's report on Form 10-Q for the period
ended September 30, 1999. (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.")
10.307 HCV Probe License Agreement dated October 10, 2000, between
Registrant, F. Hoffman-La Roche Ltd. and Roche Molecular
Systems, Inc., incorporated by reference to Exhibit 10.307
of Registrant's report on Form 10-Q for the period ended
September 30, 2000. (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.")
54
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
10.308 HIV Probe License Agreement dated October 10, 2000, between
Registrant, F. Hoffman-La Roche Ltd. and Roche Molecular
Systems, Inc., incorporated by reference to Exhibit 10.308
of Registrant's report on Form 10-Q for the period ended
September 30, 2000. (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.")
10.309 Blood Screening HCV/HIV Probe License Agreement dated
October 10, 2000, between Registrant, F. Hoffman-La Roche
Ltd. and Roche Molecular Systems, Inc., incorporated by
reference to Exhibit 10.309 of Registrant's report on Form
10-Q for the period ended September 30, 2000. (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.")
10.310 License Agreement dated January 1, 1994, between Children's
Hospital and Medical Center and PathoGenesis Corporation,
initially filed as Exhibit 10.13 to PathoGenesis
Corporation's Registration Statement on Form S-1
Registration No. 33-97070. (Certain information has been
omitted from the Agreement and filed separately with the
Securities and Exchange Commission pursuant to a request by
PathoGenesis Corporation for confidential treatment pursuant
to Rule 24b-2. Brackets denote such omissions.)
10.311 Agreement with Gen-Probe Incorporated dated June 11, 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.") (Certain information
has been omitted from the Agreement relating to rights and
obligations assigned by Registrant to unrelated third party
subsequent to the execution of Agreement. The omitted
information has been identified by the following statement
"Provision Assigned.")
10.312 Addendum to Agreement with Gen-Probe Incorporated dated June
11, 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.")
(Certain information has been omitted from the Agreement
relating to rights and obligations assigned by Registrant to
unrelated third party subsequent to the execution of
Agreement. The omitted information has been identified by
the following statement "Provision Assigned.")
10.313 Amendment to Agreement with Gen-Probe Incorporated dated
December 7, 1999. (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.")
(Certain information has been omitted from the Agreement
relating to rights and obligations assigned by Registrant to
unrelated third party subsequent to the execution of
Agreement. The omitted information has been identified by
the following statement "Provision Assigned.")
55
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
10.314 Amendment No. 2 to Agreement with Gen-Probe Incorporated
dated February 1, 2000. (Certain information has been
omitted from the Agreement relating to rights and
obligations assigned by Registrant to unrelated third party
subsequent to the execution of Agreement. The omitted
information has been identified by the following statement
"Provision Assigned.")
10.315 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 report on
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 and restated,
incorporated by reference to Exhibit 10.501 of the
Registrant's Report on Form 10-Q for the period ended
September 30, 2000.*
10.502 Form of Stock Option Agreement, Chiron 1991 Stock Option
Plan, as amended, for Employees of the Registrant,
incorporated by reference to Exhibit 10.502 of the
Registrant's report on Form 10-Q for the period ended
September 30, 2000.*
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 report on Form 10-Q 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 report on Form 10-Q 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 report on Form 10-Q 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 report on Form
10-K for fiscal year 1996.*
56
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 (initially filed as Exhibit
10.31 of the Registrant's report on Form 10-Q for the period
ended September 30, 1994), incorporated by reference to
Exhibit 10.507 of Registrant's report on Form 10-Q for the
period ended June 30, 1999.
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 (initially filed as Exhibit 10.32 of the
Registrant's report on Form 10-Q for the period ended
September 30, 1994), incorporated by reference to Exhibit
10.508 of Registrant's report on Form 10-Q for the period
ended June 30, 1999.
10.509 Description of Chiron Corporation's 2000 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 report on Form 10-K for fiscal year
1996.*
10.511 Audit Committee Charter, incorporated by reference to
Exhibit 10.511 of the Registrant's report on Form 10-Q for
the period ended June 30, 2000.
10.512 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) (initially filed as Exhibit 10.21 of the
Registrant's report on Form 10-Q for the period ended
September 30, 1994), incorporated by reference to
Exhibit 10.601 of Registrant's report on Form 10-Q for the
period ended June 30, 1999.
10.602 Supplemental Benefits Agreement, dated July 21, 1989,
between the Registrant and Dr. William J. Rutter (initially
filed as Exhibit 10.27 of the Registrant's report on Form
10-Q for the period ended September 30, 1994), incorporated
by reference to Exhibit 10.602 of Registrant's report on
Form 10-Q for the period ended June 30, 1999.*
10.603 Letter Agreement dated September 26, 1990 between the
Registrant and William G. Green (initially filed as Exhibit
10.41 of the Registrant's report on Form 10-K for fiscal
year 1992), incorporated by reference to Exhibit 10.603 of
Registrant's report on Form 10-K for fiscal year 1998.*
10.604 Letter Agreements dated September 11, 1992, July 15, 1994
and September 14, 1994 between the Registrant and Lewis T.
Williams (initially filed as Exhibit 10.54 of the
Registrant's report on Form 10-Q for the period ended
September 30, 1994), incorporated by reference to Exhibit
10.604 of Registrant's report on Form 10-Q for the period
ended June 30, 1999.*
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 report on Form 10-K
for fiscal year 1997.*
10.606 Through 10.610 Reserved
57
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 report on 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, incorporated by reference to Exhibit 10.612 of
the Registrant's report on Form 10-K for fiscal year 1998.*
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 report on Form 10-K for fiscal year
1997.*
10.614 Letter Agreement dated February 20, 2001 between Registrant
and Lewis T. Williams.*
10.615 Consulting Agreement dated February 25, 2000, between
Registrant and Dr. Edward E. Penhoet, incorporated by
reference to Exhibit 10.615 of the Registrant's report on
Form 10-K for fiscal year 1999.*
10.616 Consulting Agreement dated February 25, 2000, between
Registrant and Dr. William J. Rutter, incorporated by
reference to Exhibit 10.616 of the Registrant's report on
Form 10-K for fiscal year 1999.*
10.617 Letter Agreement dated May 28, 1999 between Registrant and
Peder K. Jensen, as supplemented by Promissory Notes dated
as of September 21, 1999, executed by Peder K. Jensen and
Isabel J. Jensen, for the benefit of Registrant,
incorporated by reference to Exhibit 10.617 of the
Registrant's report on Form 10-Q for the period ended
June 30, 2000.*
10.618 Amendment dated February 14, 2001 to Consulting Agreement
dated February 25, 2000, between Registrant and Dr. William
J. Rutter.*
10.619 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 (initially filed as
Exhibit 10.54 of the Registrant's current report on
Form 8-K dated November 20, 1994), incorporated by reference
to Exhibit 10.701 of the Registrant's report on Form 10-Q
for the period ended June 30, 1999.
10.702 Governance Agreement dated as of November 20, 1994 among
Ciba-Geigy Limited, Ciba-Geigy Corporation and Chiron
Corporation (initially filed as Exhibit 10.55 of the
Registrant's current report on Form 8-K dated November 20,
1994), incorporated by reference to Exhibit 10.702 of the
Registrant's report on Form 10-Q for the period ended June
30, 1999.
10.703 Subscription Agreement dated as of November 20, 1994 among
Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech
Partnership, Inc. and Chiron Corporation (initially filed as
Exhibit 10.56 of the Registrant's current report on Form 8-K
dated November 20, 1994), incorporated by reference to
Exhibit 10.703 of the Registrant's report on Form 10-Q for
the period ended June 30, 1999.
58
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
10.704 Cooperation and Collaboration Agreement dated as of November
20, 1994, between Ciba-Geigy Limited and Chiron Corporation
(initially filed as Exhibit 10.57 of the Registrant's
current report on Form 8-K dated November 20, 1994),
incorporated by reference to Exhibit 10.704 of the
Registrant's report on Form 10-Q for the period ended June
30, 1999.
10.705 Registration Rights Agreement dated as of November 20, 1994
between Ciba Biotech Partnership, Inc. and Chiron
Corporation (initially filed as Exhibit 10.58 of the
Registrant's current report on Form 8-K dated November 20,
1994), incorporated by reference to Exhibit 10.705 of the
Registrant's report on Form 10-Q for the period ended June
30, 1999.
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 (initially
filed as Exhibit 10.59 of the Registrant's current report on
Form 8-K dated November 20, 1994), incorporated by reference
to Exhibit 10.706 of the Registrant's report on Form 10-Q
for the period ended June 30, 1999.
10.707 Amendment dated as of January 3, 1995 among Ciba-Geigy
Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership,
Inc. and Chiron Corporation (initially filed as Exhibit
10.60 of the Registrant's current report on Form 8-K dated
January 4, 1995), incorporated by reference to Exhibit
10.707 of the Registrant's report on Form 10-Q for the
period ended September 30, 1999.
10.708 Supplemental Agreement dated as of January 3, 1995 among
Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech
Partnership, Inc. and Chiron Corporation (initially filed as
Exhibit 10.61 of the Registrant's current report on Form 8-K
dated January 4, 1995), incorporated by reference to Exhibit
10.708 of the Registrant's report on Form 10-Q for the
period ended September 30, 1999.
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, (initially filed as Exhibit 10.62 of the
Registrant's current report on Form 8-K dated January 4,
1995), incorporated by reference to Exhibit 10.709 of the
Registrant's report on Form 10-Q for the period ended
September 30, 1999.*
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 current report on Form 8-K
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 report on Form 10-Q for the period ended March
30, 1997.
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 report on Form 10-K for
fiscal year 1997.
59
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 report on 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 report on Form 10-K 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 report on
Form 10-K for fiscal year 1996.*
10.716 Letter Agreement dated September 30, 1999, between Novartis
Corporation and the Registrant, incorporated by reference to
Exhibit 10.716 of the Registrant's report on Form 10-Q for
the period ended September 30, 1999. (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.")
10.717 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 report on Form 10-K 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 report on Form 10-K 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 report on Form 10-Q for the period ended July
2, 1995.
10.720 Reimbursement Agreement, dated as of June 28, 1996, between
Ciba-Geigy Limited, a Swiss corporation, and the Registrant,
incorporated by reference to Exhibit 10.94 of the
Registrant's report on Form 10-Q for the period ended June
30, 1996.
60
EXHIBIT
NUMBER EXHIBIT
--------------------- -------
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 report on Form 10-Q for the period ended June
30, 1996.
10.722 Letter Agreement dated December 31, 1999 between Novartis
Corporation and the Registrant, incorporated by reference to
Exhibit 10.44 of the Registrant's report on Form 10-K for
fiscal year 1999.*
10.723 Letter Agreement dated December 7, 2000, between Novartis
Corporation and the Registrant.
10.724 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.
24 Power of Attorney. The Power of Attorney set forth on pages
62 and 63 is incorporated herein by reference.
- ------------------------
* Management contract, compensatory plan or arrangement.
61
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.
CHIRON CORPORATION
Date: March 7, 2001 By: /s/ SEAN P. LANCE
----------------------------------------
Sean P. Lance
Chief Executive Officer and
President; Chairman of the Board
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 James
R. Sulat, 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.
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.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer and March 7, 2001
/s/ SEAN P. LANCE President; Chairman of the
- ------------------------------------------- Board; Director (Principal
Sean P. Lance Executive Officer)
/s/ JAMES R. SULAT Vice President; Chief Financial March 7, 2001
- ------------------------------------------- Officer (Principal Financial
James R. Sulat Officer)
/s/ DAVID V. SMITH Vice President; Controller March 7, 2001
- ------------------------------------------- (Principal Accounting Officer)
David V. Smith
/s/ WILLIAM J. RUTTER, PH.D. Director March 7, 2001
- -------------------------------------------
William J. Rutter, Ph.D.
62
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAYMUND BREU, PH.D. Director March 7, 2001
- -------------------------------------------
Raymund Breu, Ph.D.
/s/ VAUGHN D. BRYSON Director March 7, 2001
- -------------------------------------------
Vaughn D. Bryson
/s/ LEWIS W. COLEMAN Director March 7, 2001
- -------------------------------------------
Lewis W. Coleman
/s/ PIERRE E. DOUAZE Director March 7, 2001
- -------------------------------------------
Pierre E. Douaze
/s/ PAUL L. HERRLING, PH.D. Director March 7, 2001
- -------------------------------------------
Paul L. Herrling, Ph.D.
/s/ EDWARD E. PENHOET, PH.D. Director March 7, 2001
- -------------------------------------------
Edward E. Penhoet, Ph.D.
/s/ JACK W. SCHULER Director March 7, 2001
- -------------------------------------------
Jack W. Schuler
/s/ PIETER J. STRIJKERT, PH.D. Director March 7, 2001
- -------------------------------------------
Pieter J. Strijkert, Ph.D.
/s/ LEWIS T. WILLIAMS, M.D., PH.D. Director March 7, 2001
- -------------------------------------------
Lewis T. Williams, M.D., Ph.D.
63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Chiron Corporation:
We have audited the accompanying consolidated balance sheets of Chiron
Corporation and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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
January 29, 2001
F-1
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 166,990 $ 363,865
Short-term investments in marketable debt securities...... 534,621 640,027
Short-term investments in equity securities............... -- 3,315
---------- ----------
Total cash and short-term investments................. 701,611 1,007,207
Accounts receivable, net of allowances of $14,576 in 2000
and $16,998 in 1999:
Unrelated parties....................................... 213,816 152,892
Related parties......................................... 5,130 8,991
---------- ----------
218,946 161,883
Current portion of notes receivable....................... 6,179 3,233
Inventories............................................... 108,713 84,724
Current net deferred income taxes......................... 35,980 21,999
Other current assets:
Unrelated parties....................................... 30,553 25,728
Related parties......................................... 576 1,160
---------- ----------
31,129 26,888
---------- ----------
Total current assets.................................. 1,102,558 1,305,934
Noncurrent investments in marketable debt securities........ 149,925 547,580
Property, plant, equipment and leasehold improvements, at
cost:
Land and buildings........................................ 138,981 132,861
Laboratory, production and office equipment............... 345,495 291,503
Leasehold improvements.................................... 87,899 73,143
Construction-in-progress.................................. 24,926 23,894
---------- ----------
597,301 521,401
Less accumulated depreciation and amortization.......... (284,098) (222,566)
---------- ----------
Property, plant, equipment and leasehold improvements,
net................................................... 313,203 298,835
Purchased technology, net of accumulated amortization of
$29,941 in 2000 and $22,933 in 1999....................... 302,134 11,722
Goodwill, net of accumulated amortization of $3,515 in
2000...................................................... 208,536 --
Other intangible assets, net of accumulated amortization of
$69,519 in 2000 and $59,790 in 1999....................... 195,870 143,320
Investments in equity securities and affiliated companies... 155,794 63,021
Noncurrent notes receivable................................. 12,999 13,967
Noncurrent net deferred income taxes........................ -- 19,375
Other noncurrent assets:
Unrelated parties......................................... 15,869 39,909
Related parties........................................... 1,188 1,115
---------- ----------
17,057 41,024
---------- ----------
$2,458,076 $2,444,778
========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-2
CHIRON CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
Current liabilities:
Accounts payable:
Unrelated parties....................................... $ 48,485 $ 43,538
Related parties......................................... 7 2,649
---------- ----------
48,492 46,187
Accrued compensation and related expenses................. 44,972 40,741
Short-term borrowings..................................... 1,171 20,300
Current portion of long-term debt:
Unrelated parties....................................... 1,212 239,689
Related parties......................................... -- 9,845
---------- ----------
1,212 249,534
Note payable to Novartis.................................. -- 67,791
Current portion of unearned revenue:
Unrelated parties....................................... 48,273 42,438
Related parties......................................... -- 86
---------- ----------
48,273 42,524
Taxes payable............................................. 130,862 16,582
Other current liabilities:
Unrelated parties....................................... 138,028 122,096
Related parties......................................... 846 279
---------- ----------
138,874 122,375
---------- ----------
Total current liabilities............................. 413,856 606,034
Long-term debt.............................................. 3,039 96,958
Noncurrent net deferred income taxes........................ 74,921 --
Noncurrent unearned revenue................................. 41,677 19,150
Other noncurrent liabilities:
Unrelated parties......................................... 40,476 36,661
Related parties........................................... -- 232
---------- ----------
40,476 36,893
---------- ----------
Minority interest........................................... 3,025 --
---------- ----------
Total liabilities........................................... 576,994 759,035
---------- ----------
Commitments and contingencies (Note 13)
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; 191,682,000 outstanding in 2000 and
181,863,000 outstanding in 1999......................... 1,917 1,819
Restricted common stock, $0.01 par value; 500,000 shares
authorized; none outstanding............................ -- --
Additional paid-in capital................................ 2,418,032 2,075,887
Deferred stock compensation............................... (22,986) (14,108)
Accumulated deficit....................................... (438,967) (323,037)
Accumulated other comprehensive income (loss)............. 17,497 (8,104)
Treasury stock, at cost (2,183,000 shares in 2000 and
1,230,000 shares in 1999)................................. (94,411) (46,714)
---------- ----------
Total stockholders' equity.................................. 1,881,082 1,685,743
---------- ----------
$2,458,076 $2,444,778
========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-3
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Product sales, net:
Unrelated parties....................................... $626,689 $419,750 $398,165
Related parties......................................... 744 1,927 1,086
-------- -------- --------
627,433 421,677 399,251
Equity in earnings of unconsolidated joint businesses..... 84,248 79,320 73,969
Collaborative agreement revenues:
Unrelated parties....................................... 16,173 15,769 14,506
Related parties......................................... 15,979 60,417 75,352
-------- -------- --------
32,152 76,186 89,858
Royalty and license fee revenues.......................... 190,469 142,915 125,263
Other revenues:
Unrelated parties....................................... 37,817 42,548 38,229
Related parties......................................... -- -- 10,103
-------- -------- --------
37,817 42,548 48,332
-------- -------- --------
Total revenues........................................ 972,119 762,646 736,673
-------- -------- --------
Operating expenses:
Cost of sales:
Unrelated parties....................................... 220,382 183,662 174,318
Related parties......................................... 680 752 485
-------- -------- --------
221,062 184,414 174,803
-------- -------- --------
Research and development:
Unrelated parties....................................... 298,414 303,399 286,622
Related parties......................................... 425 -- --
-------- -------- --------
298,839 303,399 286,622
-------- -------- --------
Selling, general and administrative:
Unrelated parties....................................... 219,336 180,937 142,563
Related parties......................................... 403 -- --
-------- -------- --------
219,739 180,937 142,563
Write-off of purchased in-process technologies............ 171,600 -- 1,645
Amortization expense...................................... 17,651 9,585 6,608
Restructuring and reorganization (charge reversals)
charges................................................. (447) 197 26,754
Other operating expenses.................................. 14,458 1,797 12,783
-------- -------- --------
Total operating expenses.............................. 942,902 680,329 651,778
-------- -------- --------
Income from operations...................................... 29,217 82,317 84,895
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-4
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Income from operations...................................... $29,217 $ 82,317 $ 84,895
Gain (loss) on sale of assets............................... (224) 872 7,751
Gain on sale of intangible assets........................... -- 7,490 --
Interest expense:
Unrelated parties......................................... (12,739) (20,201) (21,294)
Related parties........................................... (48) (3,691) (3,379)
------- -------- --------
(12,787) (23,892) (24,673)
Other income, net........................................... 88,084 89,857 27,010
Minority interest........................................... (809) -- --
------- -------- --------
Income from continuing operations before income taxes....... 103,481 156,644 94,983
Provision for income taxes.................................. 87,379 28,240 18,985
------- -------- --------
Income from continuing operations........................... 16,102 128,404 75,998
------- -------- --------
Discontinued operations:
Income from discontinued operations....................... -- -- 7,121
Gain (loss) on disposal of discontinued operations........ (7,588) 32,173 440,994
------- -------- --------
Net income.................................................. $ 8,514 $160,577 $524,113
======= ======== ========
Basic earnings per share:
Income from continuing operations......................... $ 0.09 $ 0.71 $ 0.43
======= ======== ========
Net income................................................ $ 0.05 $ 0.89 $ 2.95
======= ======== ========
Diluted earnings per share:
Income from continuing operations......................... $ 0.08 $ 0.69 $ 0.42
======= ======== ========
Net income................................................ $ 0.04 $ 0.86 $ 2.90
======= ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-5
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net income.................................................. $ 8,514 $160,577 $524,113
Other comprehensive income (loss):
Foreign currency translation adjustment:
Change in foreign currency translation adjustment during
the period, net of tax benefit of $1,715 in 2000...... (23,219) (28,779) 33,830
Reclassification adjustment for gain included in
discontinued operations............................... -- -- (7,819)
-------- -------- --------
Net foreign currency translation adjustment............. (23,219) (28,779) 26,011
-------- -------- --------
Unrealized gains (losses) from investments:
Unrealized holding gains (losses) arising during the
period, net of tax benefit (provision) of $(31,849),
$(11,517) and $3,777 in 2000, 1999 and 1998,
respectively.......................................... 49,815 18,790 (6,715)
Reclassification adjustment for net losses (gains)
included in net income, net of tax benefit (provision)
of $(594), $(62) and $1,400 in 2000, 1999 and 1998,
respectively.......................................... (928) (102) 2,490
-------- -------- --------
Net unrealized gains (losses) from investments.......... 48,887 18,688 (4,225)
-------- -------- --------
Minimum pension liability adjustment, net of tax benefit
of $7, $55 and $136 in 2000, 1999 and 1998,
respectively............................................ (67) (274) (717)
-------- -------- --------
Other comprehensive income (loss)......................... 25,601 (10,365) 21,069
-------- -------- --------
Comprehensive income........................................ $ 34,115 $150,212 $545,182
======== ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-6
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER TREASURY STOCK
------------------- PAID-IN STOCK ACCUMULATED COMPREHENSIVE -------------------
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) SHARES AMOUNT
-------- -------- ---------- ------------ ----------- ------------- -------- --------
Balances at December 31,
1997.................... 175,659 $1,757 $1,864,110 $ (8,349) $(961,986) $(18,808) -- $ --
Exercise of stock
options................. 3,308 33 51,067 -- -- -- -- --
Tax benefits from employee
stock plans............. -- -- 60,119 -- -- -- -- --
Employee stock purchase
plan.................... 958 9 14,564 -- -- -- -- --
Deferred stock
compensation............ -- -- 4,056 (4,056) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 3,002 -- -- -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- 26,011 -- --
Unrealized loss from
investments............. -- -- -- -- -- (4,225) -- --
Minimum pension liability
adjustment.............. -- -- -- -- -- (717) -- --
Collection of a loan to
employee for stock
purchases............... -- -- -- -- -- -- -- --
Net income................ -- -- -- -- 524,113 -- -- --
------- ------ ---------- -------- --------- -------- ------ --------
Balances at December 31,
1998.................... 179,925 1,799 1,993,916 (9,403) (437,873) 2,261 -- --
Repurchase of treasury
stock................... -- -- -- -- -- -- (4,838) (150,425)
Exercise of stock
options................. 1,742 18 28,975 -- (38,868) -- 3,419 98,575
Tax benefits from employee
stock plans............. -- -- 42,803 -- -- -- -- --
Employee stock purchase
plan.................... 196 2 3,498 -- (1,640) -- 189 5,136
Deferred stock
compensation............ -- -- 6,695 (6,695) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 1,990 -- -- -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- (28,779) -- --
Unrealized gain from
investments............. -- -- -- -- -- 18,688 -- --
Minimum pension liability
adjustment.............. -- -- -- -- -- (274) -- --
Elimination of one-month
lag in reporting of
Chiron S.p.A............ -- -- -- -- (5,233) -- -- --
Net income................ -- -- -- -- 160,577 -- -- --
------- ------ ---------- -------- --------- -------- ------ --------
Balances at December 31,
1999.................... 181,863 $1,819 $2,075,887 $(14,108) $(323,037) $ (8,104) (1,230) $(46,714)
NOTES
RECEIVABLE
FOR STOCK
PURCHASES TOTAL
---------- ----------
Balances at December 31,
1997.................... $(609) $ 876,115
Exercise of stock
options................. -- 51,100
Tax benefits from employee
stock plans............. -- 60,119
Employee stock purchase
plan.................... -- 14,573
Deferred stock
compensation............ -- --
Amortization of deferred
stock compensation...... -- 3,002
Foreign currency
translation
adjustment.............. -- 26,011
Unrealized loss from
investments............. -- (4,225)
Minimum pension liability
adjustment.............. -- (717)
Collection of a loan to
employee for stock
purchases............... 609 609
Net income................ -- 524,113
----- ----------
Balances at December 31,
1998.................... -- 1,550,700
Repurchase of treasury
stock................... -- (150,425)
Exercise of stock
options................. -- 88,700
Tax benefits from employee
stock plans............. -- 42,803
Employee stock purchase
plan.................... -- 6,996
Deferred stock
compensation............ -- --
Amortization of deferred
stock compensation...... -- 1,990
Foreign currency
translation
adjustment.............. -- (28,779)
Unrealized gain from
investments............. -- 18,688
Minimum pension liability
adjustment.............. -- (274)
Elimination of one-month
lag in reporting of
Chiron S.p.A............ -- (5,233)
Net income................ -- 160,577
----- ----------
Balances at December 31,
1999.................... -- $1,685,743
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-7
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER TREASURY STOCK
------------------- PAID-IN STOCK ACCUMULATED COMPREHENSIVE -------------------
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) SHARES AMOUNT
-------- -------- ---------- ------------ ----------- ------------- -------- --------
Balances at December 31,
1999.................... 181,863 $1,819 $2,075,887 $(14,108) $(323,037) $ (8,104) (1,230) $(46,714)
Repurchase of treasury
stock................... -- -- -- -- -- -- (7,297) (314,428)
Exercise of stock
options................. 155 2 2,994 -- (88,598) -- 3,722 152,139
Tax benefits from employee
stock plans............. -- -- 37,865 -- -- -- -- --
Employee stock purchase
plan.................... 49 -- 1,903 -- (4,640) -- 266 10,880
Conversion of PathoGenesis
stock options........... -- -- 3,371 -- -- -- -- --
Conversion of convertible
debentures.............. 9,615 96 281,288 -- (31,206) -- 2,356 103,712
Deferred stock
compensation............ -- -- 14,724 (14,724) -- -- -- --
Amortization of deferred
stock compensation...... -- -- -- 5,846 -- -- -- --
Foreign currency
translation
adjustment.............. -- -- -- -- -- (23,219) -- --
Unrealized gain from
investments............. -- -- -- -- -- 48,887 -- --
Minimum pension liability
adjustment.............. -- -- -- -- -- (67) -- --
Net income................ -- -- -- -- 8,514 -- -- --
------- ------ ---------- -------- --------- -------- ------ --------
Balances at December 31,
2000.................... 191,682 $1,917 $2,418,032 $(22,986) $(438,967) $ 17,497 (2,183) $(94,411)
======= ====== ========== ======== ========= ======== ====== ========
NOTES
RECEIVABLE
FOR STOCK
PURCHASES TOTAL
---------- ----------
Balances at December 31,
1999.................... -- $1,685,743
Repurchase of treasury
stock................... -- (314,428)
Exercise of stock
options................. -- 66,537
Tax benefits from employee
stock plans............. -- 37,865
Employee stock purchase
plan.................... -- 8,143
Conversion of PathoGenesis
stock options........... -- 3,371
Conversion of convertible
debentures.............. -- 353,890
Deferred stock
compensation............ -- --
Amortization of deferred
stock compensation...... -- 5,846
Foreign currency
translation
adjustment.............. -- (23,219)
Unrealized gain from
investments............. -- 48,887
Minimum pension liability
adjustment.............. -- (67)
Net income................ -- 8,514
----- ----------
Balances at December 31,
2000.................... -- $1,881,082
===== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-8
CHIRON CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Cash flows from operating activities:
Net income................................................ $ 8,514 $ 160,577 $ 524,113
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 81,426 68,895 107,861
Write-off of purchased in-process technologies........ 171,600 -- 1,645
(Gain) loss on sale of assets......................... 224 (872) (7,751)
Gain on sale of intangible assets..................... -- (7,490) --
(Gain) loss on disposal of discontinued operations.... 7,588 (32,173) (440,994)
Net loss on sale of marketable debt securities........ 3,720 -- --
Net gain on sale of equity securities................. (3,181) (3,783) (4,475)
Gain on sale of interests in affiliated companies..... (2,927) -- (1,815)
Unrealized gain on trading securities................. -- (3,352) --
Write-off of property, plant, equipment and leasehold
improvements........................................ 12,801 767 5,141
Other than temporary loss on investments.............. 5,000 1,716 8,365
Minority interest..................................... 809 -- --
Changes in reserves................................... 20,399 17,056 18,412
Changes in estimated liabilities...................... -- (2,911) (5,666)
Deferred income taxes................................. (26,502) (5,864) (43,180)
Tax benefits from employee stock plans................ 37,865 42,803 60,119
Undistributed earnings of affiliates.................. -- (1,193) (263)
Other, net............................................ 10,883 11,132 8,910
Changes, excluding effect of acquisitions and
dispositions, to:
Accounts receivable..................................... (75,790) (15,797) (10,540)
Inventories............................................. (12,017) (37,357) (17,985)
Other current assets.................................... (8,162) (327) (48,826)
Accounts payable and accrued expenses................... 85,895 (111,918) (29,998)
Current portion of unearned revenue..................... 14,856 (18,142) 38,527
Other current liabilities............................... 14,008 (38,233) 14,273
Other noncurrent liabilities............................ 24,330 (2,649) 55,796
Proceeds from sale of equity securities................... 2,108 -- --
---------- ---------- ----------
Net cash provided by operating activities............. 373,447 20,885 231,669
---------- ---------- ----------
Cash flows from investing activities:
Purchases of investments in marketable debt securities.... (3,571,355) (1,155,363) (1,206,797)
Proceeds from sale and maturity of investments in
marketable debt securities.............................. 4,065,467 1,047,429 282,658
Proceeds from note receivable............................. 3,233 -- --
Capital expenditures...................................... (54,353) (64,594) (126,303)
Proceeds from sale of assets.............................. 1,000 21,751 38,570
Purchases of equity securities and interests in affiliated
companies............................................... (27,411) -- (1,284)
Proceeds from sale of equity securities and interests in
affiliated companies.................................... 5,035 3,783 24,161
Cash paid to purchase businesses, net of cash acquired.... (720,667) -- (54,770)
Proceeds from disposal of discontinued operations......... -- 46,912 1,292,164
Increase (decrease) in other assets....................... 58,475 (16,745) 6,410
---------- ---------- ----------
Net cash (used in) provided by investing activities... (240,576) (116,827) 254,809
---------- ---------- ----------
Cash flows from financing activities:
Net repayment of short-term borrowings.................... (18,927) (15,332) (129,133)
Repayment of debt and capital leases...................... (71,078) (2,443) (9,069)
Proceeds from issuance of debt............................ -- 6,936 --
Payments to acquire treasury stock........................ (314,428) (140,819) --
Proceeds from reissuance of treasury stock................ 74,680 63,130 --
Proceeds from issuance of common stock.................... 7 35,020 66,556
---------- ---------- ----------
Net cash used in financing activities................. (329,746) (53,508) (71,646)
---------- ---------- ----------
Net (decrease) increase in cash and cash
equivalents......................................... (196,875) (149,450) 414,832
Cash and cash equivalents at beginning of the year.......... 363,865 513,315 98,483
---------- ---------- ----------
Cash and cash equivalents at end of the year................ $ 166,990 $ 363,865 $ 513,315
========== ========== ==========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-9
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
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 global healthcare markets:
(i) biopharmaceuticals, with an emphasis on cancer and infection; (ii) adult and
pediatric vaccines; and (iii) blood testing. The Company is applying a broad and
integrated scientific approach to the development of innovative products for
preventing and treating cancer and infection. This approach is supported by
research strengths in recombinant proteins, small molecules, genomics and
vaccines.
On December 29, 1997, Chiron completed the sale of its ophthalmics business,
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") (see
Note 4). As a result of these transactions, the Company's Consolidated
Statements of Operations reflect the after-tax results of Chiron Vision and
Chiron Diagnostics 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"), not previously owned, from Hoechst AG. Beginning
in the second quarter of 1998, the results of Chiron Behring were consolidated
with those of the Company (see Note 5).
Prior to fiscal year 1999, the results of Chiron's Italian subsidiary
("Chiron S.p.A.") were reported on a one-month lag. In the first quarter of
1999, the results of Chiron S.p.A. were brought current. As a result, during
fiscal year 1999, the Company recorded a loss of $5.2 million for the month of
December 1998 as a component of "Accumulated deficit" in the Consolidated
Balance Sheets.
On September 21, 2000, Chiron acquired PathoGenesis Corporation
("PathoGenesis"). The Company included PathoGenesis' operating results,
including the seven business days from September 21 to 30, 2000, in its
consolidated operating results beginning on October 1, 2000. PathoGenesis'
operating results for the seven business days in September 2000 were not
significant to the Company's consolidated operating results (see Note 6).
FISCAL YEAR
Effective with the beginning of fiscal year 1999, the Company changed its
fiscal year from a 52 or 53-week year ending on the Sunday nearest the last day
in December to coincide with a calendar year ending on December 31. In 1998, the
Company's fiscal year was a 53-week year ending on January 3, 1999. For
presentation purposes, dates used in the consolidated financial statements and
accompanying notes refer to the fiscal year end.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. For consolidated majority-owned
subsidiaries in which the Company owns less than 100%, the Company records
"Minority interest" in the Consolidated Financial Statements to account for the
ownership interest of the minority owner. 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 or cost method. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-10
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's most significant consolidated majority-owned subsidiaries and
respective ownership percentages are as follows:
PERCENTAGE
NAME OWNERSHIP
- ---- ----------
Chiron PathoGenesis U.S..................................... 100%
31 Corsa GmbH............................................... 100%
Chiron Behring GmbH......................................... 100%
Chiron S.p.A................................................ 100%
Chiron B.V.................................................. 100%
Chiron Iberia SA............................................ 100%
Chiron UK Ltd............................................... 100%
Chiron GmbH................................................. 100%
Chiron France SARL.......................................... 100%
Chiron Italia Srl........................................... 100%
Chiron Behring Vaccines Limited............................. 51%
In 2000, the Company began consolidating, and recording minority interest
related to, its 51% owned joint venture, Chiron Behring Vaccines Limited.
In 2000, the Company became a limited partner of Burrill Biotechnology
Capital Fund, L.P. The Company will pay $25.0 million over five years, of which
$6.9 million was paid through December 31, 2000, for an ownership percentage of
25.67%. The Company accounts for the investment under the equity method of
accounting pursuant to EITF Topic No. D-46 "Accounting for Limited Partnership
Investments."
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 accompanying notes. Actual results could differ
materially from those estimates.
The Company, prior to filing its financial statements on Form 10-K, publicly
releases an unaudited condensed balance sheet and statement of operations.
Between the date of the Company's earnings release and the filing of its
Form 10-K, reclassifications may be required. These reclassifications, when
made, have no effect on income from continuing operations, net income or
earnings per share.
Certain previously reported amounts have been reclassified to conform with
the current period presentation.
In 2000, the Company reclassified $32.7 million to "Accumulated other
comprehensive income (loss)" and $2.2 million to "Taxes payable," with an
offsetting entry of $34.9 million to the noncurrent net deferred income tax
liability, which represented the cumulative tax effect on the Company's net
unrealized gains from investments and the Company's foreign currency translation
adjustments, respectively, as the Company had not previously recorded these
amounts net of deferred taxes and taxes payable. The adjustment had no effect on
income from continuing operations, net income or earnings per share. Certain
F-11
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
previously reported amounts in the Consolidated Balance Sheets, the Consolidated
Statements of Comprehensive Income and the Consolidated Statements of
Stockholders' Equity have been reclassified to conform with the current period
presentation as follows:
DECEMBER 31,
1999
------------
Accumulated other comprehensive income (loss), as previously
reported.................................................. $ 3,351
Accumulated other comprehensive income (loss), as currently
reported.................................................. $(8,104)
In 2000, the Company reclassified $18.5 million to "Additional paid-in
capital" and $14.1 million to "Deferred stock compensation," with an offsetting
entry of $4.4 million to "Accrued compensation and related expenses," which
represented the cumulative effect of deferred stock compensation at the options'
measurement dates. The adjustment had no effect on income from continuing
operations, net income or earnings per share. Certain previously reported
amounts in the Consolidated Balance Sheets and the Consolidated Statements of
Stockholders' Equity have been reclassified to conform with the current period
presentation as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
Additional paid-in capital, as previously reported...... $2,057,418 $1,979,615 $1,853,591
Additional paid-in capital, as currently reported....... $2,075,887 $1,993,916 $1,864,110
CASH EQUIVALENTS, INVESTMENTS IN MARKETABLE DEBT SECURITIES AND INVESTMENTS IN
EQUITY 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.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), the Company has classified its investments in certain equity
securities as trading and in certain debt and equity securities as
available-for-sale. Trading securities are recorded at fair value based upon
year-end quoted market prices, and unrealized gains and losses are included in
results of operations. Available-for-sale securities are recorded at fair value
based upon year-end quoted market prices, and unrealized gains and losses,
deemed by the Company as temporary in nature, are reported as a separate
component of other comprehensive income or loss.
The Company periodically reviews its debt and equity securities by comparing
the market value to the carrying value of the security. Impairment, if any, is
based on the excess of the carrying value over the market value. If impairment
is considered other-than-temporary, the security's cost is written down to
market value through earnings.
F-12
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost or market using the moving
weighted-average cost method. Inventories consisted of the following at
December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Finished goods........................................... $ 25,590 $16,614
Work in process.......................................... 57,754 49,193
Raw materials............................................ 25,369 18,917
-------- -------
$108,713 $84,724
======== =======
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
10 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. The Company periodically reviews the
useful lives of its intangible and long-lived assets, which may result in future
adjustments to the amortization periods. Amortization expense for the years
ended December 31, 2000, 1999 and 1998 was $27.4 million, $17.3 million and
$15.7 million, respectively. Amortization of purchased technologies and goodwill
is included primarily in "Amortization expense" and amortization of patents is
included primarily in "Research and development" in the Consolidated Statements
of Operations.
The Company periodically evaluates the recoverability of its goodwill by
comparing the projected undiscounted net cash flows associated with such
goodwill against its respective carrying value. Impairment, if any, is based on
the excess of the carrying value over the fair value.
As circumstances dictate, the Company evaluates the recoverability of its
other intangible and 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.
TREASURY STOCK
Treasury stock is stated at cost. Gains on reissuance of treasury stock are
credited to additional paid-in capital. Losses on reissuance of treasury stock
are charged to additional paid-in capital to the extent of available net gains
on reissuance of treasury stock. Otherwise, losses are charged to accumulated
deficit. For the years ended December 31, 2000 and 1999, the Company charged
losses of $124.4 million and $40.5 million, respectively, to "Accumulated
deficit" in the Consolidated Balance Sheets.
F-13
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
"Product sales, net" primarily consist of revenues recognized upon shipment
of products to customers. For nucleic acid testing ("NAT") product sales, the
Company recognizes revenues based upon the details of each contract, from cost
recovery pricing for investigational new drug ("IND") applications to contracted
price per donation. For sales of Betaseron-Registered Trademark- (interferon
beta-1b), the Company recognizes revenues upon shipment to its marketing partner
and additional revenues upon the marketing partner's subsequent sale of
Betaseron-Registered Trademark- to patients. Provisions for discounts and
rebates to customers, and returns and other adjustments are provided for in the
same period the related product sales are recorded based upon analyses of
historical discounts, rebates and returns.
"Equity in earnings of unconsolidated joint businesses" represents the
Company's share of the operating results generated by its commercial
unincorporated 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 $5.9 million, $49.7 million
and $61.9 million in 2000, 1999 and 1998, respectively. "Royalty and license fee
revenues" consist of product royalty payments and fees under license agreements
and are recognized when earned. Up-front refundable fees are deferred and
recognized as revenues when earned or when all performance obligations are
completed. Up-front nonrefundable fees associated with royalty and license
arrangements where the Company has no continuing performance obligations are
recognized as revenues when receivable. In situations where continuing
performance obligations exist, up-front nonrefundable fees are deferred and
amortized over the performance period. Milestones, if any, related to scientific
achievement are recognized in income when the milestone is accomplished. "Other
revenues" primarily consist of fees for sales and marketing services performed,
commission fees and grants from government agencies and are recognized when
earned. In 1998, "Other revenues" also included revenue related to Chiron's
co-promotion of Novartis AG's product, Aredia-Registered Trademark-, which was
recognized, in part, based on the percentage of effort expended.
CONTRACT MANUFACTURING REVENUES AND EXPENSES
During production pre-planning activites, contract manufacturing revenues
are recognized upon completion of the specified contract milestones and recorded
in "Other revenues" in the Consolidated Statements of Operations. During
production pre-planning activities, contract manufacturing expenses are deferred
as incurred, then expensed upon completion of the specified contract milestones
and recorded in "Other operating expenses" in the Consolidated Statements of
Operations. When production is complete, contract manufacturing revenues and
expenses are recognized upon shipment of products to customers and recorded in
"Other revenues" and "Other operating expenses," respectively, in the
Consolidated Statements of Operations.
SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling fees billed to customers for product shipments are
recorded in "Product sales, net" in the Consolidated Statements of Operations.
Shipping and handling costs incurred for inventory purchases are recorded in
"Cost of sales" in the Consolidated Statements of Operations.
RESEARCH AND DEVELOPMENT EXPENSE AND WRITE-OFF OF PURCHASED IN-PROCESS
TECHNOLOGIES
In accordance with SFAS No. 2, "Accounting for Research and Development
Costs" ("SFAS 2"), research and development costs are charged to expense when
incurred. Purchased in-process technologies
F-14
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
represent the value assigned or paid for acquired research and development for
which there is no alternative future use as of the date of acquisition. In
accordance with SFAS 2, as clarified by FASB Interpretation ("FIN") No. 4,
amounts assigned to purchased in-process technologies meeting the above stated
criteria are charged to expense as part of the allocation of the purchase price
of the business combination.
ADVERTISING EXPENSES
The Company expenses the costs of advertising, including promotional
expenses, as incurred. Advertising expenses for the years ended December 31,
2000, 1999 and 1998 were $11.4 million, $10.0 million and $12.2 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. In 2000, 1999 and 1998, no provision is made for U.S. income
taxes applicable to undistributed earnings of foreign subsidiaries that are
reinvested permanently in foreign operations, except for earnings in Chiron
S.p.A. and 31 Corsa GmbH which, in 2000, were repatriated back to the U.S.
A valuation allowance has been established against the recorded deferred
income tax assets to the extent that management believes it more likely than not
that a portion of the deferred income tax assets are not realizable.
STOCK-BASED COMPENSATION
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") and related Interpretations, including FIN No. 44 "Accounting for
Certain Transactions Involving Stock Compensation." Compensation expense is
based on the difference, if any, between the fair value of the Company's common
stock and the exercise price of the option or share right on the measurement
date, which is typically the date of grant. This amount is recorded as "Deferred
stock compensation" in the Consolidated Balance Sheets and amortized as a charge
to operations over the vesting period of the applicable options or share rights.
Compensation expense is included primarily in "Selling, general and
administrative" in the Consolidated Statements of Operations. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company has provided in Note 14 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
F-15
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. The
Company also uses forward contracts and short sales to reduce equity securities
risk. 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 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 financial institutions of high credit standing. 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.
The Company purchases bulk powdered tobramycin, the primary basic raw
material in TOBI-Registered Trademark-, from two of the principal worldwide
suppliers of the drug. The Company anticipates that either one of these
suppliers alone will be able to supply sufficient quantities to meet current
needs; however, there can be no assurance that these suppliers will be able to
meet future demand in a timely and cost-effective manner. As a result, the
Company's operations could be adversely affected by an interruption or reduction
in the supply of bulk powdered tobramycin.
The Company has entered into contracts with third parties for the production
and packaging of TOBI-Registered Trademark-. Over time, the Company can use
alternative production and packaging sources. However, if the contracted third
parties become unable to produce or package sufficient quantities of
TOBI-Registered Trademark- due to work stoppages or other factors, the Company's
operations could be disrupted until alternative sources are secured.
F-16
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Consolidated Statements of
Comprehensive Income. In 2000, tax effects of repatriated earnings in Chiron
S.p.A. and 31 Corsa GmbH were recorded in accordance with the investment and tax
policy adopted for that year only. For all other foreign jurisdictions, the
undistributed earnings of the Company's foreign investments are expected to be
reinvested permanently. In 1999 and 1998, no tax effect was provided on the
foreign currency translation component as the undistributed earnings of the
Company's foreign investments were expected to be reinvested permanently.
NOTE 2--EARNINGS PER 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 could result from (i) the assumed
exercise of outstanding stock options, warrants and equivalents, which are
included under the treasury-stock method; (ii) performance units (see Note 14)
to the extent that dilutive shares are assumed issuable; and (iii) convertible
subordinated debentures, which are included under the if-converted method (see
Note 12).
The following table sets forth the computation for basic and diluted
earnings per share on income from continuing operations for the years ended
December 31:
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (Numerator):
Income from continuing operations available to common
stockholders............................................ $16,102 $128,404 $ 75,998
Plus: Interest on 1.90% convertible debentures, net of
taxes................................................... -- 1,936 --
------- -------- --------
Income from continuing operations available to common
stockholders, plus assumed conversions.................. $16,102 $130,340 $ 75,998
------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding................ 183,509 181,162 177,587
Effect of dilutive securities:
Options and equivalents................................. 6,137 4,279 2,956
Warrants................................................ 425 288 190
1.90% convertible debentures............................ -- 2,196 --
------- -------- --------
Weighted-average common shares outstanding, plus assumed
conversions............................................. 190,071 187,925 180,733
------- -------- --------
Basic earnings per share.................................... $ 0.09 $ 0.71 $ 0.43
======= ======== ========
Diluted earnings per share.................................. $ 0.08 $ 0.69 $ 0.42
======= ======== ========
F-17
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 2--EARNINGS PER SHARE (CONTINUED)
The following table sets forth the computation for basic and diluted
earnings per share on net income for the years ended December 31:
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (Numerator):
Net income available to common stockholders............... $ 8,514 $160,577 $524,113
Plus: Interest on 1.90% convertible debentures, net of
taxes................................................... -- 1,936 --
-------- -------- --------
Net income available to common stockholders, plus assumed
conversions............................................. $ 8,514 $162,513 $524,113
-------- -------- --------
Shares (Denominator):
Weighted-average common shares outstanding................ 183,509 181,162 177,587
Effect of dilutive securities:
Options and equivalents................................. 6,137 4,279 2,956
Warrants................................................ 425 288 190
1.90% convertible debentures............................ -- 2,196 --
-------- -------- --------
Weighted-average common shares outstanding, plus assumed
conversions............................................. 190,071 187,925 180,733
-------- -------- --------
Basic earnings per share.................................... $ 0.05 $ 0.89 $ 2.95
======== ======== ========
Diluted earnings per share.................................. $ 0.04 $ 0.86 $ 2.90
======== ======== ========
Options to purchase 2.3 million shares, 6.0 million shares and 10.1 million
shares with exercise prices greater than the average market prices of common
stock were outstanding during the years ended December 31, 2000, 1999 and 1998,
respectively. These options were excluded from the respective computations of
diluted earnings per share as their inclusion would be antidilutive.
Also excluded from the computation of diluted earnings per share for the
year ended December 31, 2000 were 6.9 million shares of common stock issuable
upon conversion of the Company's convertible subordinated debentures (see
Note 12) as their inclusion would be antidilutive in accordance with paragraphs
13 and 14 of SFAS No. 128 "Earnings per Share" ("SFAS 128"). In its prior
statements related to 2000 results, the Company included in its actual
year-to-date diluted earnings per share computation pursuant to paragraph 46 of
SFAS 128 these 6.9 million shares, which represented the weighted average shares
included in its actual diluted earnings per share computations for the first,
second and third quarters of 2000. As a result, the actual diluted earnings per
share for both income from continuing operations and net income for 2000 have
been adjusted in this Form 10-K.
Also excluded from the computations of diluted earnings per share for the
years ended December 31, 1999 and 1998 were 9.8 million shares and 12.0 million
shares, respectively, of common stock issuable upon conversion of the Company's
convertible subordinated debentures (see Note 12) as the interest, net of tax,
per common share obtainable on conversion exceeds basic earnings per share. As
of December 31, 2000, substantially all of the convertible subordinated
debentures were converted into 12.0 million shares of common stock.
F-18
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION
2000 1999 1998
-------- -------- ---------
(IN THOUSANDS)
Interest paid............................................... $ 2,898 $ 11,607 $ 14,322
======== ======== =========
Income taxes paid........................................... $ 9,852 $186,707 $ 18,350
======== ======== =========
Noncash investing and financing activities:
Acquisitions:
Cash acquired........................................... $ 3,132 $ -- $ 57,119
Fair value of all other assets acquired................. 829,803 -- 206,922
Liabilities assumed..................................... (23,609) -- (33,815)
Taxes payable........................................... (2,800) -- --
Net deferred tax liability.............................. (72,616) -- --
Fair value, less intrinsic value for unvested portion,
of options exchanged.................................. (3,371) -- --
Acquisition costs not yet paid as of December 31,
2000.................................................. (6,740) -- (1,180)
Carrying value of original investment................... -- -- (117,157)
-------- -------- ---------
Total cash paid....................................... $723,799 $ -- $ 111,889
======== ======== =========
Conversion of subordinated debentures to common stock... $353,890 $ -- $ --
======== ======== =========
NOTE 4--DISCONTINUED OPERATIONS
In a strategic effort to focus on its core businesses of Biopharmaceuticals,
Vaccines and Blood Testing, the Company completed the sale of Chiron Diagnostics
and Chiron Vision in 1998 and 1997, respectively. Basic earnings (loss) per
share from discontinued operations was $(0.04), $0.18 and $2.52 for the years
ended December 31, 2000, 1999 and 1998, respectively. Diluted earnings (loss)
per share from discontinued operations was $(0.04), $0.17 and $2.48 for the
years ended December 31, 2000, 1999 and 1998, respectively.
The "Gain (loss) on disposal of discontinued operations" consisted of the
following as of December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Gain on the sale of Chiron Diagnostics, gross... $ -- $ -- $529,669
Gain on the sale of Chiron Vision, gross........ -- -- 112,582
Reversal of reserves for contractual obligations
to indemnify B&L.............................. 2,190 8,305 --
Gain on the sale of the Chiron Vision real
estate assets, gross.......................... -- 1,873 --
Other........................................... (708) 1,563 (527)
Income tax benefit (provision).................. (9,070) 20,432 (200,730)
------- ------- --------
$(7,588) $32,173 $440,994
======= ======= ========
F-19
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
CHIRON DIAGNOSTICS
On November 30, 1998, Chiron completed the sale of its IN VITRO diagnostics
business 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 "Bayer Agreement"), dated as of September 17, 1998, between
Chiron and Bayer. The results of operations for Chiron Diagnostics are reported
as a discontinued operation for all periods presented in the Consolidated
Statements of Operations. Chiron has provided customary indemnities under the
terms of the Bayer 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 ("HCV"). In exchange for these rights, Chiron Diagnostics paid to Chiron
$100.0 million, which is refundable in decreasing amounts through 2001. In 2000,
1999 and 1998, Chiron recognized revenues of $29.2 million, $39.2 million and
$13.3 million, respectively, which represented the portions of the
$100.0 million payment that became nonrefundable during those periods. The
revenues were recorded as a component of "Royalty and license fee revenues" in
the Consolidated Statements of Operations. The Company anticipates recognizing
the remaining revenue of $18.3 million in 2001.
As a result of the sale of Chiron Diagnostics, the Company assigned certain
technology rights, which it had utilized in its blood testing and diagnostics
businesses, to Bayer. The assigned rights, which had been capitalized as
intangible assets and had a net book value of $9.5 million at the time of
assignment, were expensed against the gain on the sale of Chiron Diagnostics in
1998. Under the terms of the Agreement, Chiron and Bayer agreed to share certain
future milestone payments related to these technology rights. Accordingly,
Chiron made a milestone payment of $8.5 million in December 1999. Since the
Company received regulatory approval in France for and began selling the
transcription-mediated amplification ("TMA") combination HCV/HIV-1 test in
September 1999, the Company ascertained that there is future value in these
technology rights and, therefore, has capitalized the related milestone payment
of $8.5 million, to be amortized over 5 years. For the year ended December 31,
2000, the Company recognized amortization expense of $1.7 million related to
this intangible asset.
In 1998, Chiron Diagnostics recognized total revenues of $527.7 million. For
the year ended December 31, 1998, "Income from discontinued operations" of
$7.1 million represented the net income of Chiron Diagnostics from January 1,
1998 through November 30, 1998, net of an income tax provision of $0.1 million.
"Income from discontinued operations" also included approximately $16.4 million
of net income recognized by Chiron Diagnostics from September 17, 1998 to
November 30, 1998.
CHIRON VISION
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 (the "B&L Agreement"), dated as of
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. The Company has provided
customary indemnities under the terms of the B&L Agreement. In 2000 and 1999,
the Company reversed approximately $2.2 million and $8.3 million, respectively,
reserved for contractual obligations to indemnify B&L against certain potential
F-20
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 4--DISCONTINUED OPERATIONS (CONTINUED)
claims as such obligations had expired unused. This was recorded as a component
of "Gain (loss) on disposal of discontinued operations."
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, 2000 and 1999, the
real estate assets of $1.9 million, which represented all of the remaining net
assets of Chiron's discontinued operations, were recorded in the Consolidated
Balance Sheets as "Other current assets." In July 1999, the Company recognized a
gain of $1.9 million upon sale of a portion of these real estate assets. This
gain was recorded as a component of "Gain (loss) on disposal of discontinued
operations."
INCOME TAXES
In connection with the sale of Chiron Diagnostics and Chiron Vision, the
Company recorded cumulative net deferred tax assets of $26.5 million and
$26.0 million in 2000 and 1999, respectively, principally attributable to the
timing of the deduction of certain expenses associated with these sales. The
Company also recorded corresponding valuation allowances of $26.5 million and
$26.0 million in 2000 and 1999, respectively, to offset these deferred tax
assets, as management does not believe that it is more likely than not that the
deferred tax assets to which the valuation allowance relates will be realized.
The future recognition of these deferred tax assets will be reported as a
component of "Gain (loss) on disposal of discontinued operations."
"Gain (loss) on disposal of discontinued operations" in the Consolidated
Statements of Operations included an income tax benefit (provision) of $(9.1)
million, $20.4 million and $(200.7) million for the years ended December 31,
2000, 1999 and 1998, respectively. The tax provision for the year ended
December 31, 2000 resulted from the 1999 estimated tax provision to tax return
true-up adjustment on the Chiron Diagnostics purchase price adjustment. The tax
benefit for the year ended December 31, 1999 included the utilization of
additional foreign sales corporation benefits and foreign tax credits resulting
from the 1998 estimated tax provision to tax return true-up adjustments for
Chiron Diagnostics and Chiron Vision. The tax provision for the year ended
December 31, 1998 was recorded based on the gains on the sale of Chiron
Diagnostics and Chiron Vision.
NOTE 5--ACQUISITION OF CHIRON BEHRING
Effective July 1, 1996, Chiron purchased a 49% interest in the human vaccine
business of Behringwerke AG, a subsidiary of Hoechst AG. The total acquisition
price, which was paid in cash, was approximately $120.0 million, including costs
directly related to the acquisition. Of the 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.
From July 1, 1996 through March 31, 1998 (period of joint 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 revenues of $2.4 million as a component of "Equity in
earnings of unconsolidated joint businesses" in the Consolidated Statements of
Operations for the year ended December 31, 1998.
F-21
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 5--ACQUISITION OF CHIRON BEHRING (CONTINUED)
In the second quarter of 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 (in thousands):
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
=========
At the time of acquisition, Chiron expensed $1.6 million of purchased
in-process technologies. 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.
F-22
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 6--ACQUISITION OF PATHOGENESIS CORPORATION
On September 21, 2000, Chiron acquired PathoGenesis, a company that develops
and markets drugs to treat infectious diseases, particularly serious lung
infections. The acquisition was accounted for under the purchase method of
accounting and included the purchase of all of the outstanding shares of common
stock of PathoGenesis at $38.50 per share. The components and allocation of the
purchase price were as follows (in thousands):
Consideration and acquisition costs:
Cash paid for common stock................................ $642,522
Cash paid for options on common stock..................... 66,216
Acquisition costs paid as of December 31, 2000............ 15,061
Acquisition costs not yet paid as of December 31, 2000.... 6,740
Fair value, less intrinsic value for unvested portion, of
options exchanged....................................... 3,371
--------
Total purchase price.................................. $733,910
========
Allocation of purchase price:
Assets acquired........................................... $ 94,784
Write-off of purchased in-process technologies............ 171,600
Purchased technologies.................................... 300,600
Acquired intangible assets................................ 53,900
Goodwill.................................................. 212,051
Liabilities assumed....................................... (23,609)
Taxes payable............................................. (2,800)
Net deferred tax liability................................ (72,616)
--------
Total purchase price.................................. $733,910
========
Outstanding options on PathoGenesis' stock were either redeemed in cash or
converted into options on Chiron's stock. The difference between the fair value
of all options and the intrinsic value associated with the unvested portion of
those options was included as part of the purchase price.
Acquisition costs included contractual severance and involuntary termination
costs, as well as other direct acquisition costs. Approximately $13.1 million
represented severance payments, assumed by the Company, to executives as
dictated by their employment agreements.
The Company allocated the purchase price based on the fair value of the
assets acquired and liabilities assumed. A portion of the purchase price was
allocated to purchased in-process technologies and was written off entirely in
the fourth quarter of 2000. The write-off of purchased in-process technologies
represented the fair value at the acquisition date, calculated utilizing the
income approach, of the portion of certain in-process research and development
projects that were not reliant upon core technology. Core technology represents
technology that has been utilized in approved or commercialized products.
Certain research and development projects deemed too early in terms of
completion metrics and any future yet-to-be-defined technologies were not
included in the calculation of in-process technologies. The Company does not
anticipate that there will be any alternative future use for the in-process
technologies that were written off. In valuing the purchased in-process
technologies, the Company used probability-of-success-adjusted cash flows and a
15% discount rate. Cash inflows from any one in-process
F-23
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 6--ACQUISITION OF PATHOGENESIS CORPORATION (CONTINUED)
product were assumed to commence between 2002 and 2008. As with all
biotechnology products, the probability of commercial success for any one
research and development project is highly uncertain.
Purchased technologies represented the fair value of research and
development projects, which will be developed further and supported after the
acquisition date, and are being amortized on a straight-line basis over
15 years. Acquired intangible assets included the fair value of trademarks and
trade names, patents, databases and the work force, which are being amortized on
a straight-line basis over 5 to 16 years. Goodwill resulting from the
PathoGenesis acquisition is being amortized on a straight-line basis over
15 years. Since the Company elected to treat the acquisition as taxable in
California, the Company recorded current taxes payable of $2.8 million. The net
deferred tax liability primarily related to the difference between the carrying
amounts and tax bases of the purchased technology and acquired intangible
assets, offset by future utilization of net operating loss and tax credit
carryforwards. Upon acquisition, the Company acquired federal net operating loss
carryforwards and federal business credits of approximately $116.6 million and
$6.5 million, respectively, attributed to PathoGenesis.
The Company included PathoGenesis' operating results, including the last
seven business days from September 21 to 30, 2000, in its consolidated operating
results beginning on October 1, 2000. PathoGenesis' operating results for the
last seven business days in September 2000 were not significant to the Company's
consolidated operating results for the fourth quarter of 2000.
The following unaudited pro forma information presents the results of
continuing operations of Chiron and PathoGenesis for the years ended
December 31, 2000 and 1999 as if Chiron's acquisition of PathoGenesis had been
consummated as of January 1, 2000 and 1999, respectively. The pro forma
information does not purport to be indicative of what would have occurred had
the acquisition been made as of those dates or of results that may occur in the
future.
The pro forma results exclude nonrecurring charges, such as the write-off of
purchased in-process technologies, which resulted directly from the transaction.
The unaudited pro forma information is as follows (in thousands, except per
share data):
YEARS ENDED
DECEMBER 31,
---------------------
2000 1999
---------- --------
(UNAUDITED)
Total revenues........................................ $1,030,338 $823,490
Income from continuing operations..................... $ 140,749 $ 81,834
Pro forma income per share from continuing operations:
Basic............................................... $ 0.77 $ 0.45
Diluted............................................. $ 0.74 $ 0.45
NOTE 7--RESTRUCTURING AND REORGANIZATION
The Company recorded restructuring and reorganization charges related to
(i) the integration of its worldwide vaccines operations, (ii) the closure of
its Puerto Rico and St. Louis, Missouri facilities and (iii) the ongoing
restructuring of its business operations. The integration of its worldwide
vaccines operations consisted of termination and other employee-related costs
recognized in connection with the elimination of 28 positions in the Company's
Italian manufacturing facility and facility-related costs. The
F-24
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 7--RESTRUCTURING AND REORGANIZATION (CONTINUED)
closure of its Puerto Rico and St. Louis facilities and the ongoing
restructuring of its business operations consisted of termination and other
employee-related costs recognized in connection with the elimination of 400
positions in manufacturing, research, development, sales, marketing and
administrative functions, and facility-related costs. Employee termination costs
included wage continuation, advance notice pay and medical and other benefits.
Facility-related costs included losses on disposal of property, plant and
equipment, lease payments and other related costs.
During 1999, the Company decided to retain 18 of those 400 positions to
support future contract manufacturing activities and, therefore, adjusted the
number of positions for elimination to 382. Again during 2000, the Company
decided to retain 11 of those 382 positions to support future contract
manufacturing activities and, therefore, adjusted the number of positions for
elimination to 371. Included in the 371 positions were 36 positions at the
Company's Amsterdam facility. These positions were transferred to the buyer in
January 2000 (see Note 9) in connection with the December 1999 sale of the
Amsterdam facility.
For the year ended December 31, 2000, the Company recorded net restructuring
and reorganization charge reversals of $0.4 million primarily related to revised
estimates of termination and other employee-related costs recorded in connection
with the retention of 11 of the 382 positions. As described above, the Company
adjusted the number of positions for elimination to 371, of which 356 had
terminated as of December 31, 2000.
For the year ended December 31, 1999, the Company recorded net restructuring
and reorganization expenses of $0.2 million, which included a charge of
$3.9 million and a charge reversal of $3.7 million. The charge of $3.9 million
primarily related to termination and other employee-related costs recognized in
connection with the elimination of 28 positions at the Company's Italian
manufacturing facility, of which 24 of these positions had terminated as of
December 31, 1999. The charge reversal of $3.7 million related to (i) revised
estimates of facility-related accruals recorded in connection with the closure
of the St. Louis facility and (ii) revised estimates of termination and other
employee-related costs recorded in connection with the transfer of 36 positions
at the Company's Amsterdam facility to the buyer and the retention of 18 of the
400 positions. As described above, the Company adjusted the number of positions
for elimination to 382, of which 319 had terminated as of December 31, 1999.
For the year ended December 31, 1998, the Company recorded net restructuring
and reorganization expenses of $26.8 million, which included a charge of
$30.7 million and a charge reversal of $3.9 million. The charge of
$30.7 million consisted of (i) termination and other employee-related costs
recorded in connection with the elimination of the 400 positions, of which 167
had terminated as of December 31, 1998, and (ii) facility-related costs recorded
in connection with the closure of the St. Louis facility and the ongoing
restructuring of its business operations. The charge reversal of $3.9 million
primarily resulted from a revised estimate of property and other tax-related
accruals recorded in 1995 in connection with the closure of the Puerto Rico
facility.
Included in "Gain (loss) on disposal of discontinued operations" in the
Consolidated Statements of Operations were net restructuring and reorganization
charge reversals of $0.3 million in 2000 and expenses of $19.1 million in 1998.
These amounts related to the restructuring of the Company's IN VITRO diagnostics
business operations and primarily consisted of employee termination costs
related to the termination of
F-25
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 7--RESTRUCTURING AND REORGANIZATION (CONTINUED)
331 employees, all of which were terminated as of December 31, 1998. The Company
retained responsibility for $4.5 million of restructuring accruals upon the
completion of the sale of Chiron Diagnostics to Bayer. The restructuring
accruals were fully utilized as of December 31, 2000.
The Company's restructuring and reorganization accruals are expected to be
substantially settled within one to six years of accruing the related charges.
As of December 31, 2000, $1.7 million and $1.0 million were included in "Other
current liabilities" and "Other noncurrent liabilities," respectively, in the
Consolidated Balance Sheets. As of December 31, 1999, $4.0 million and
$1.7 million were included in "Other current liabilities" and "Other noncurrent
liabilities," respectively, in the Consolidated Balance Sheets.
The activity in accrued restructuring and reorganization for the years ended
December 31, 2000, 1999 and 1998 is summarized as follows (in thousands):
AMOUNT OF
AMOUNT OF TOTAL AMOUNT TO
ACCRUAL AT TOTAL RESTRUCTURING AMOUNT UTILIZED BE UTILIZED
DECEMBER 31, RESTRUCTURING CHARGE THROUGH IN FUTURE
1999 CHARGE REVERSAL DECEMBER 31, 2000 PERIODS
------------ ------------- ------------- ------------------ -----------
Employee-related costs........ $3,772 $ -- $(607) $(1,349) $1,816
Other facility-related
costs....................... 1,631 160 -- (952) 839
------ ---- ----- ------- ------
5,403 160 (607) (2,301) 2,655
Discontinued operations....... 285 49 (334) -- --
------ ---- ----- ------- ------
$5,688 $209 $(941) $(2,301) $2,655
====== ==== ===== ======= ======
AMOUNT OF
AMOUNT OF TOTAL AMOUNT TO
ACCRUAL AT TOTAL RESTRUCTURING AMOUNT UTILIZED BE UTILIZED
DECEMBER 31, RESTRUCTURING CHARGE THROUGH IN FUTURE
1998 CHARGE REVERSAL DECEMBER 31, 1999 PERIODS
------------ ------------- ------------- ------------------ -----------
Employee-related costs........ $15,390 $2,826 $(2,697) $(11,747) $3,772
Other facility-related
costs....................... 3,931 1,099 (1,031) (2,368) 1,631
------- ------ ------- -------- ------
19,321 3,925 (3,728) (14,115) 5,403
Discontinued operations....... 4,475 -- -- (4,190) 285
------- ------ ------- -------- ------
$23,796 $3,925 $(3,728) $(18,305) $5,688
======= ====== ======= ======== ======
AMOUNT OF
AMOUNT OF TOTAL AMOUNT TO
ACCRUAL AT TOTAL RESTRUCTURING AMOUNT UTILIZED BE UTILIZED
DECEMBER 31, RESTRUCTURING CHARGE THROUGH IN FUTURE
1997 CHARGE REVERSAL DECEMBER 31, 1998 PERIODS
------------ ------------- ------------- ------------------ -----------
Employee-related costs........ $ -- $23,592 $ (258) $ (7,944) $15,390
Puerto Rico facility.......... 3,695 -- (3,695) -- --
Other facility-related
costs....................... -- 7,115 -- (3,184) 3,931
------ ------- ------- -------- -------
3,695 30,707 (3,953) (11,128) 19,321
Discontinued operations....... 3,162 20,857 (1,789) (17,755) 4,475
------ ------- ------- -------- -------
$6,857 $51,564 $(5,742) $(28,883) $23,796
====== ======= ======= ======== =======
F-26
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 8--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 noncancelable funding commitments under collaborative arrangements are as
follows: 2001-$9.0 million; 2002-$2.3 million; 2003-$0.7 million; and
2004-$0.2 million.
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 2000, 1999 and
1998, Chiron recognized losses of $5.0 million, $1.7 million and $8.4 million,
respectively, attributable to the other-than-temporary impairment of certain of
these equity securities.
On April 1, 1999, the Company received a $9.7 million promissory note in
consideration for payment under a biopharmaceutical collaboration agreement. The
note bears interest at the London Interbank Offered Rate ("LIBOR") plus 3.0%
(9.4% at December 31, 2000 and 9.0% at December 31, 1999). The interest is due
quarterly, and the principal is due in three equal installments, with the first
payment of $3.2 million received in June 2000. The final two installments are
payable on June 30, 2001 and June 30, 2002. On December 28, 2000, the Company
received a $3.5 million promissory note in consideration for another payment
under the same biopharmaceutical collaboration agreement. The note bears
interest at LIBOR plus 3.0% (9.4% at December 31, 2000). The interest is due
quarterly, and the principal is payable in three equal installments, which are
payable on June 30, 2001, June 30, 2002 and June 30, 2003. The Company recorded
$4.4 million and $3.2 million as "Current portion of notes receivable" at
December 31, 2000 and 1999, respectively, and $5.6 million and $6.5 million as
"Notes receivable" at December 31, 2000 and 1999, respectively, in the
Consolidated Balance Sheets. The notes are collateralized by the payor's right,
title and interest in all amounts payable by the Company under the
biopharmaceutical collaboration agreement.
On November 1, 1999, the Company entered into a patent and license
agreement. Under this agreement, the Company paid $5.0 million of license fees,
which were recorded as "Research and development" in the Consolidated Statements
of Operations for the year ended December 31, 1999, and advanced $7.5 million in
return for a promissory note, which was recorded as "Notes receivable" in the
Consolidated Balance Sheets as of both December 31, 2000 and 1999. The note
bears interest at the prime rate (9.5% at December 31, 2000 and 8.5% at
December 31, 1999), is due with accrued interest on December 31, 2006 and will
be forgiven (principal and accrued interest) if the U.S. Food and Drug
Administration ("FDA") approves any product covered by the patent and license
agreement for marketing in the U.S. prior to December 31, 2006. The Company may
pay additional milestone payments if certain development objectives are met. In
addition, the Company may pay royalties on future net product sales of the
product under the patent and license agreement.
F-27
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 9--RELATED PARTY TRANSACTIONS
NOVARTIS AG
The Company has an alliance with Novartis AG ("Novartis"), a life sciences
company headquartered in Basel, Switzerland. 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 42.0% as of December 31, 2000.
THE GOVERNANCE AGREEMENT
In January 1995, Chiron and Novartis entered into a Governance Agreement
whereby 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." 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.
THE INVESTMENT AGREEMENT
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 $402.5 million. 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
$172.6 million of Chiron's operating lease commitments as of December 31, 2000
(see Note 13).
THE LIMITED LIABILITY COMPANY AGREEMENT
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"). In December 2000, this agreement was amended
to provide that, through December 31, 2001, at Chiron's request, Novartis will
fund up to 100% of the development costs incurred between January 1, 1995 and
December 31, 2000 on these projects. The amount of funding that Novartis is
obligated to provide is subject to an aggregate limit of $265.0 million. Under
this agreement, in 2000, 1999 and 1998, Chiron recognized collaborative
agreement revenues of $3.0 million, $46.2 million and $54.4 million,
respectively. In 2001, the amount of R&D funding available to be provided by
Novartis is limited to $9.1 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
F-28
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
October 1, 2001 or the date of the first commercial sale of individual products
covered by the R&D Funding Agreement, as amended. 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 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.
In December 1999, the Company sold certain assets that it had developed or
acquired in connection with its research and development of a Cytomegalovirus
("CMV") vaccine to Aventis Pasteur (formerly Pasteur Merieux Connaught) for
$10.0 million and licensed certain technology to Aventis Pasteur for use in
connection with the CMV vaccine. The sale of these assets resulted in a gain of
$7.5 million, which was included in "Gain on sale of intangible assets" in the
Consolidated Statements of Operations. Under the terms of the agreements, in the
event Aventis Pasteur successfully develops a CMV vaccine, it will pay the
Company royalties on net sales of such vaccine and will grant the Company
marketing rights to such vaccine in Germany and Italy. Novartis had provided
research funding for the Company's CMV vaccine research and development program.
In connection with this sale, Novartis waived its co-promotion rights for the
CMV vaccine in return for royalties equal to 25% of fees and royalties received
by the Company related to the CMV vaccines. At December 31, 1999, the Company
recorded in "Accounts payable--Related parties" in the Consolidated Balance
Sheets an amount payable to Novartis of $2.5 million, which represented 25% of
the Company's $10.0 million payment from Aventis Pasteur. The Company paid this
amount in 2000.
THE NOVEMBER 1995 AGREEMENT
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 up-front milestone and royalty payments, as well as product
commercialization rights for both parties. In connection with this agreement,
Chiron recognized collaborative agreement revenues of $3.3 million,
$4.2 million and $6.0 million in 2000, 1999 and 1998, respectively. This
agreement ended in the fourth quarter of 2000. In connection with the sale of
its Australian subsidiary to Mimotopes Pty. Ltd. ("Mimotopes") in February 2000
(see Note 16), the Company and Mimotopes entered into an agreement, under which
Mimotopes would perform the research and development for the remaining term of
this agreement with Novartis. The Company paid Mimotopes $0.7 million for the
research and development services, which it amortized over the period during
which the services were performed.
THE NOVEMBER 1996 AGREEMENT
In November 1996, in connection with the U.S. Federal Trade Commission's
review of the merger between Ciba-Geigy Limited 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
F-29
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
up to $60.0 million over five years. In connection with the agreement, Chiron
recognized collaborative agreement revenues of $10.0 million, $10.0 million and
$15.0 million in 2000, 1999 and 1998, respectively.
THE PROMOTION AGREEMENT
From 1994 through April 1998, Chiron promoted Aredia-Registered Trademark-
(pamidronate disodium for injection) on behalf of Novartis. In April 1998, the
arrangement concluded. In connection with the arrangement, Chiron recognized
other revenues of $9.8 million in 1998.
NOTE PAYABLE
In connection with the sale of Chiron Diagnostics to Bayer, a promissory
note owed by Chiron Diagnostics to Novartis was transferred to and assumed by
the Company. The note payable to Novartis bore interest at a variable rate based
on LIBOR (5.7% at December 31, 1999). As of December 31, 1999, the outstanding
amount was $67.8 million, including accrued interest. The note and accrued
interest were paid in full on January 4, 2000.
LOANS TO EXECUTIVE OFFICERS
In September 1999, the Company provided a loan of $0.4 million, which
consists of two agreements in the principal amount of $0.2 million each, to a
senior executive officer. The loan is secured by a second deed of trust on real
estate. The first agreement bears a fixed interest rate of 5.98%, and principal
will be forgiven in annual installments over a period of five years, with the
outstanding principal balance to be forgiven in full on August 2, 2004, so long
as the officer remains an employee of the Company or an affiliate thereof. The
second agreement bears a fixed interest rate of 6.25%, with the outstanding
principal balance due in full on August 2, 2009. As of both December 31, 2000
and 1999, the amount outstanding on the loan was $0.4 million.
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 both December 31, 2000 and
1999, the amount outstanding on the loan was $0.9 million.
CONSULTING AGREEMENTS WITH DIRECTORS
In February 2000, the Company entered into one-year consulting agreements
with two directors of the Company. Under these agreements, the directors were
paid $0.05 million and $0.2 million, respectively. These agreements expired in
February 2001. In February 2001, the Company renewed one of the consulting
agreements with one director of the Company, under which he will receive
$0.1 million for consulting services as mutually agreed upon by the parties.
SALE OF THE AMSTERDAM MANUFACTURING FACILITY
In December 1999, the Company sold its Amsterdam manufacturing facility and
related machinery and equipment assets to Synco B.V., a company owned by a
director of the Company, for $15.0 million in cash. The sale of the Amsterdam
manufacturing facility resulted in a gain of $1.2 million, of which
F-30
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
$0.9 million was included in "Gain (loss) on sale of assets" in the Consolidated
Statements of Operations and $0.3 million was deferred as a result of the
leaseback described below. The Company will amortize the unearned revenue as a
reduction to rent expense over the lease term.
The Company is leasing back office and warehouse space in the Amsterdam
facility for some operational and administrative activities. The lease is a
noncancelable operating lease, which expires in 2004 and may be extended for a
period of two consecutive years (see Note 13). Annual rent is NLG 1.4 million
($0.6 million at December 31, 2000).
At its option, the Company may lease certain equipment under the same terms
as the office and warehouse lease. As of December 31, 2000, the Company had not
exercised this option. Also, at the option of the new owner, the Company may
provide various administrative services to the new owner. As of December 31,
2000, no such administrative services were being provided. And, at the option of
the Company, the new owner may provide various contract manufacturing and
quality control services to the Company. For the year ended December 31, 2000,
the Company incurred expenses of approximately $0.3 million, which were included
in "Cost of sales--Related parties" in the Consolidated Statements of
Operations, related to such quality control services.
NOTE 10--JOINT BUSINESS ARRANGEMENT
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, Bio-Rad Laboratories, Inc. 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. Through 1999, the joint
business recorded an inventory adjustment at the end of each year. Included in
Chiron's share of the profits in 1999 and 1998 were inventory adjustments of
$(0.7) million and $(4.1) million, respectively. The change in methodology was
not material to the Company's financial position or results of operations as of
and for the year ended December 31, 2000. Beginning in 2000, the joint business
accounted for inventory adjustments on a quarterly basis. Profit sharing
distributions are payable to Chiron within 90 days after the end of each
quarter. At December 31, 2000 and 1999, $19.7 million and $14.1 million,
respectively, were due from Ortho for profit sharing and reimbursement of costs.
In 2000, 1999 and 1998, Chiron's 50% share of the profits from the joint
business, which was recorded as a component of "Equity in earnings of
unconsolidated joint businesses," was $84.2 million, $78.1 million and
$73.5 million, respectively. Revenues recognized under the cost reimbursement
portion of the agreement in 2000, 1999 and 1998 were $20.7 million,
$18.4 million and $20.6 million, respectively, for product sales and
$10.1 million, $8.3 million and $5.0 million, respectively, for collaborative
research.
F-31
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS
MARKETABLE SECURITIES
At December 31, 1999, trading securities consisted of $3.3 million in equity
securities and were classified as "Short term investments in equity securities"
in the Consolidated Balance Sheets. For the year ended December 31, 1999, the
Company recorded an unrealized gain of $3.3 million as part of "Other income,
net" in the Consolidated Statements of Operations. In 2000, the Company sold
these equity securities and recognized a gain of $0.8 million, which was
recorded in "Other income, net" in the Consolidated Statements of Operations.
The Company had no investments in equity securities classified as trading at
December 31, 2000.
Available-for-sale securities consisted of the following at December 31:
2000 1999
--------------------------------------------- -------------------------------------------------
ADJUSTED UNREALIZED UNREALIZED FAIR ADJUSTED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
-------- ---------- ---------- -------- ---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
U.S. Government............... $ 2,004 $ -- $ (2) $ 2,002 $ 258,521 $ 25,383 $ (28,937) $ 254,967
Corporate Debt................ 626,133 106,263 (105,068) 627,328 1,169,783 105,408 (108,344) 1,166,847
Other......................... 61,380 -- -- 61,380 44,863 -- -- 44,863
-------- -------- --------- -------- ---------- -------- --------- ----------
689,517 106,263 (105,070) 690,710 1,473,167 130,791 (137,281) 1,466,677
Equity........................ 34,075 112,656 (118) 146,613 15,036 41,441 -- 56,477
-------- -------- --------- -------- ---------- -------- --------- ----------
$723,592 $218,919 $(105,188) $837,323 $1,488,203 $172,232 $(137,281) $1,523,154
======== ======== ========= ======== ========== ======== ========= ==========
Available-for-sale securities were classified in the Consolidated Balance
Sheets as follows at December 31:
2000 1999
-------- ----------
(IN THOUSANDS)
Cash equivalents...................................... $ 6,164 $ 279,070
Short-term investments in marketable debt
securities.......................................... 534,621 640,027
Noncurrent investments in marketable debt
securities.......................................... 149,925 547,580
Investments in equity securities...................... 146,613 56,477
-------- ----------
$837,323 $1,523,154
======== ==========
The cost and estimated fair value of available-for-sale debt securities by
contractual maturity consisted of the following at December 31, 2000:
ADJUSTED FAIR
COST VALUE
-------- --------
(IN THOUSANDS)
Due in one year or less................................. $541,139 $540,785
Due in one to five years................................ 148,378 149,925
-------- --------
$689,517 $690,710
======== ========
F-32
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments,
other than those accounted for in accordance with SFAS 115, were as follows at
December 31:
2000 1999
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
ON-BALANCE SHEET FINANCIAL INSTRUMENTS:
Nonmarketable equity investments (accounted for
under the cost method)............................ $ 9,181 $11,408 $ 6,544 $ 20,617
Notes and employee loans receivable................. 21,345 21,345 20,043 20,043
Deposits............................................ 2,282 1,643 4,829 4,045
Due from cross currency interest rate swaps......... -- -- 26,593 24,213
Long-term debt:
Convertible subordinated debentures............... -- -- 343,210 510,318
Notes payable..................................... 15,798 16,123 80,843 80,843
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Due from forward foreign currency contracts......... -- 49,209 -- 27,164
Cross currency interest rate swaps.................. -- -- -- 23,558
Due from short sales................................ -- -- -- 4,562
Forward sales contracts............................. -- 31,463 -- --
The fair value estimates provided above were based on information available
at December 31, 2000 and 1999. Considerable judgment was 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 primarily was based on estimated market prices determined
by a broker. The carrying values of variable rate notes receivable and notes
payable approximated fair value due to the market-based nature of these
instruments. The fair value of the deposits was 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 was based on the discounted value of expected future cash flows using
current rates. The fair value of convertible subordinated debentures was based
on the market price at the close of business on the last day of the fiscal year.
The fair values of the forward foreign currency contracts, the cross currency
interest rate swaps, the short sales and the forward contracts were based on
estimated market prices, determined by a broker. Included in current assets and
current liabilities were certain other financial instruments whose carrying
values approximated 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.
F-33
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 Consolidated Statements of Operations to offset gains or
losses on foreign currency denominated receivables and payables. Outstanding
notional principal amounts of the Company's forwards were $48.8 million and
$27.3 million at December 31, 2000 and 1999, respectively.
Foreign currency transaction gains from continuing operations, net of the
impact of hedging, were $5.5 million in 2000. Foreign currency transaction gains
and losses from continuing operations were not significant in 1999 or 1998. In
2000, the Company hedged a portion of its exposure to the British pound related
to Menjugate-TM- sales. The Company settled this hedging contract upon
substantial conclusion of Menjugate-TM- sales in the United Kingdom in the
second quarter of 2000. The settlement resulted in a gain of approximately
$5.4 million, which was recorded in "Other income, net" in the Consolidated
Statements of Operations.
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 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. The Company terminated the swaps in
December 2000, as described below. Outstanding notional principal amounts of the
Company's swaps were $226.8 million at December 31, 1999.
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 were to mature in April 2003 and were
based on an aggregate notional principal amount of $114.2 million. The
agreements provided 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 July 1996, the Company also entered into swap agreements associated with
the Company's wholly-owned German subsidiary that were to mature in July 2001
with an aggregate notional principal amount of $112.6 million. The Company
effectively created a fixed rate Deutsche mark liability to fund certain
Deutsche mark assets. The agreements provided 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% (6.3% at December 31, 1999).
In 2000, the Company terminated these cross currency interest rate swaps,
resulting in a gain of approximately $2.7 million, which was recorded in "Other
income, net" in the Consolidated Statements of Operations.
F-34
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
FORWARD SALES CONTRACTS
The Company selectively enters into forward sales contracts with major
financial institutions to hedge against possible reductions in market values of
its equity securities. Forward sales contracts are generally marked-to-market at
the end of each quarter with gains or losses recorded in a manner consistent
with the accounting for gains and losses on the underlying securities. If the
underlying securities are classified as trading, the gain or loss on the forward
sales contracts is recorded as a component of "Other income, net" in the
Consolidated Statements of Operations. If the underlying securities are
classified as available-for-sale, the gain or loss on forward sales contracts is
recorded as a component of "Other comprehensive income (loss)" in the
Consolidated Statements of Comprehensive Income. Outstanding notional principal
amounts of the Company's forward sales contracts were $36.2 million at
December 31, 2000. Under the forward sales contracts, the Company earns interest
through the contract maturity dates, which range from June 2002 to
October 2003, based on the three-month LIBOR (6.4% at December 31, 2000) as
applied to the forward prices. Interest on the forward sales contracts was not
significant in 2000. The Company had no forward sales contracts during 1999.
SHORT SALES
The Company selectively enters into short sales with major financial
institutions. Short sales substantially offset long positions and, in effect,
neutralize the impact of market valuation shifts on the hedged securities. Short
sales are generally marked-to-market at the end of each quarter with gains or
losses recorded in a manner consistent with the accounting for gains or losses
on the underlying securities. If the underlying securities are classified as
trading, the gain or loss on the short sales is recorded as a component of
"Other income, net" in the Consolidated Statements of Operations. If the
underlying securities are classified as available-for-sale, the gain or loss on
the short sales is recorded as a component of "Other comprehensive income
(loss)" in the Consolidated Statements of Comprehensive Income. The Company
settled all short sales in December 2000, as described below. Outstanding
notional principal amounts of the Company's short sales were $4.5 million at
December 31, 1999.
In late December 1999, the Company entered into two short sales to hedge
securities classified as trading and available-for-sale. In addition, the
Company entered into two margin account agreements in relation to the short
sales. The agreements required the Company to deposit cash, in an amount equal
to 50% of the market value of the hedged investments on the date of the short
sales, into the margin accounts. Cash in the margin accounts earned interest at
the prevailing market rate (5.0% at December 31, 1999) and was restricted for
use until the short position was covered. At December 31, 1999, the Company had
a cash balance of $2.2 million in the margin accounts, of which $1.1 million was
recorded in "Other current assets" and $1.1 million was recorded in "Other
assets" in the Consolidated Balance Sheets. The interest on this cash balance
was not significant for the years ended December 31, 2000 or 1999. In 2000, the
Company settled these short sales upon sale of the related equity securities.
The settlement resulted in a gain of approximately $2.4 million, which was
recorded in "Other income, net" in the Consolidated Statements of Operations.
F-35
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12--DEBT OBLIGATIONS AND CAPITAL LEASES
Long-term debt consisted of the following at December 31:
2000 1999
-------- ---------
(IN THOUSANDS)
1.90% convertible subordinated debentures............... $ -- $ 248,216
5.25% convertible subordinated debentures............... -- 94,994
Other notes payable..................................... 4,251 3,282
------- ---------
4,251 346,492
Less current portion.................................... (1,212) (249,534)
------- ---------
$ 3,039 $ 96,958
======= =========
CONVERTIBLE SUBORDINATED DEBENTURES
In 1993, Chiron issued 1.90% convertible subordinated debentures with a face
value of $253.9 million and a yield to maturity of 4.50%. The debentures were
carried net of an initial issue discount of $39.3 million, which was being
accreted over the life of the debentures using the interest method. On
August 11, 2000, the Company's Board of Directors authorized management to call
for redemption the outstanding $253.9 million 1.90% convertible subordinated
debentures, including $10.1 million held by Novartis, in accordance with the
original indenture terms. The redemption price for each $1,000 principal amount
of the debentures was $1,004.98, which included accrued interest of $7.60 to the
redemption date. As an alternative to redemption, bondholders were entitled to
convert the debentures into shares of the Company's common stock at a conversion
price of $28.91 per share, or 34.6 shares for each $1,000 principal amount of
bonds held, plus cash in lieu of fractional shares. Through December 31, 2000,
debentures with a face value of $253.8 million, and an amortized cost of
$253.0 million, were converted into 8.8 million shares of the Company's common
stock. The unamortized discount and the related deferred tax liability were
recorded in additional paid-in capital. The interest accrued through the
conversion date, net of income taxes, was also recorded in additional paid-in
capital. The remaining unconverted debentures were redeemed in cash.
As a result of the 1991 acquisition of Cetus Corporation ("Cetus"), the
Company had outstanding 5.25% convertible subordinated debentures with a face
value of $100.0 million. In 1991, these debentures were recorded at their then
fair market value, which resulted in a discount of $20.0 million. This discount
was being accreted over the life of the debentures using the interest method. On
April 4, 2000, the Company's Board of Directors authorized management to call
for redemption the outstanding $100.0 million 5.25% convertible subordinated
debentures, in accordance with the original indenture terms. Through
December 31, 2000, debentures with a face value of $98.4 million, and an
amortized cost of $94.2 million, were converted into 3.2 million shares of the
Company's common stock, at a conversion price of $30.83 per share. The
unamortized discount of $4.2 million and the related deferred tax liability of
$2.0 million were recorded in "Additional paid-in capital" in the Consolidated
Balance Sheets. The remaining unconverted debentures were redeemed in cash.
F-36
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 12--DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
CAPITAL LEASE OBLIGATIONS
At December 31, 1999, 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, 1999, the
assets leased under noncancelable capital leases were fully depreciated.
OTHER NOTES PAYABLE
The Company had various other notes payable with average interest rates of
5.0% and 3.3% at December 31, 2000 and 1999, respectively. Maturities range from
2001 to 2015. Future maturities of other notes payable are as follows:
2001-$1.2 million; 2002-$0.7 million; 2003-$0.2 million; 2004-$0.1 million;
2005-$0.1 million; and $2.0 million thereafter. Approximately $2.6 million of
the other notes payable were collateralized by land and buildings with a net
book value of $4.0 million at December 31, 2000.
SHORT-TERM BORROWINGS
Under a revolving, committed, uncollateralized 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 (see Note 9), provides various
interest rate options and matures in February 2003. There were no borrowings
outstanding under this credit facility at December 31, 2000.
Additionally, the Company has uncommitted credit facilities available
outside the U.S. One facility is maintained for Chiron's Italian subsidiary and
allows for total borrowings of $62.6 million, which includes a $50.0 million
U.S. Dollar denominated portion and a 26 billion Lira denominated portion
($12.6 million). At December 31, 2000 and 1999, $0.1 million and $20.3 million,
respectively, were outstanding under this facility at average interest rates of
4.9% and 3.6%, respectively. Outstanding borrowings under the Italian credit
facility were uncollateralized. Another facility, which was established in 2000,
is maintained for Chiron's 51% owned Indian subsidiary and allows for total
borrowings of 200 million Indian Rupee ($4.3 million). At December 31, 2000,
$1.1 million was outstanding under this facility at an interest rate of 15.5%.
Outstanding borrowings under the Indian credit facility were collateralized by
machinery and equipment with a net book value of $3.9 million and trade
receivables and inventory with a total net book value of $2.4 million at
December 31, 2000.
NOTE PAYABLE TO NOVARTIS
At December 31, 1999, the note payable to Novartis totaled $67.8 million. It
bore interest at a variable rate based on LIBOR (5.7% at December 31, 1999). The
note and accrued interest were paid in full on January 4, 2000.
NOTE 13--COMMITMENTS AND CONTINGENCIES
LEASES
Chiron leases laboratory, office and manufacturing facilities, land and
equipment under noncancelable operating leases, which expire through 2014. Rent
expense, net of sublease income, from continuing operations was $28.7 million,
$24.6 million and $22.3 million in 2000, 1999 and 1998, respectively. Future
minimum lease payments under these leases, net of future minimum payments to be
received under subleases, are as follows: 2001-$34.7 million;
2002-$31.5 million; 2003-$19.7 million; 2004-$12.1 million; 2005-$10.9 million;
and thereafter-$37.0 million. Total future minimum rentals to be received under
noncancelable subleases approximate $1.9 million as of December 31, 2000.
F-37
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, which was under construction until its completion in 1999.
The total cost of the facility covered by this lease is $172.6 million. The
lease provides for a substantial residual value guarantee 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, 2000, Novartis had
guaranteed this lease commitment and the payment of the residual value guarantee
to a maximum of $172.6 million (see Note 9).
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 since these costs are
based on future product sales.
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 at any time
beginning July 1, 1999 subject to certain termination charges. If Chiron does
not terminate this agreement, payments to IBM are expected to be approximately
$104.9 million. Payments to IBM are subject to adjustment depending upon the
levels of services and infrastructure equipment provided by IBM, as well as
inflation.
The Company had various firm purchase and capital project commitments
totaling approximately $3.9 million at December 31, 2000. At December 31, 2000,
the Company had $4.8 million outstanding under a letter of credit, which is
required by German law, related to ongoing legal proceedings in Germany. The
Company also had various performance bonds and insurance-related letters of
credit in the amount of $14.0 million outstanding at December 31, 2000.
NOTE 14--STOCKHOLDERS' EQUITY
STOCK COMPENSATION PLANS
At December 31, 2000, the Company has two stock-based compensation plans,
which are described below. The Company applies APB 25 and FIN No. 44 in
accounting for its plans for shares issued to employees. Accordingly, no
compensation expense has been recognized for its stock-based compensation plans
other than for performance-based awards and share rights as all other awards are
issued at fair value.
F-38
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
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:
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss)--basic:
As reported................................. $ 8,514 $160,577 $524,113
Pro forma................................... $(21,594) $139,760 $500,681
Net income (loss)--diluted:
As reported................................. $ 8,514 $162,513 $524,113
Pro forma................................... $(21,594) $141,696 $500,681
Basic net income (loss) per share:
As reported................................. $ 0.05 $ 0.89 $ 2.95
Pro forma................................... $ (0.12) $ 0.77 $ 2.82
Diluted net income (loss) per share:
As reported................................. $ 0.04 $ 0.86 $ 2.90
Pro forma................................... $ (0.12) $ 0.75 $ 2.77
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.
In February 2000, the stockholders approved an amendment to the Company's
stock option plan, increasing the maximum number of shares that may be issued by
10.0 million shares to 60.3 million shares. At December 31, 2000, 9.3 million
shares were available for grant.
F-39
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of stock option activity is as follows:
2000 1999 1998
----------- ----------- -----------
Outstanding options at January 1,..................... 17,228,190 20,124,981 24,094,166
Granted............................................. 6,845,757 4,271,138 4,688,253
Forfeited........................................... (1,321,421) (1,885,992) (4,785,345)
Surrendered against payment by Novartis............. -- (120,503) (564,337)
Exercised........................................... (3,877,459) (5,161,434) (3,307,756)
----------- ----------- -----------
Outstanding options at December 31,................... 18,875,067 17,228,190 20,124,981
=========== =========== ===========
Options exercisable at December 31,................... 9,135,550 10,033,910 12,159,676
=========== =========== ===========
Weighted average exercise price of:
Outstanding options at December 31,................. $ 31.25 $ 21.00 $ 17.68
Options granted..................................... $ 48.31 $ 28.16 $ 17.54
Options forfeited................................... $ 27.32 $ 19.55 $ 20.35
Options exercised................................... $ 17.14 $ 17.37 $ 15.29
Weighted-average grant-date fair value of options
granted during the year calculated pursuant to SFAS
123................................................. $ 28.85 $ 12.57 $ 7.66
The weighted-average grant-date fair value of each option grant was
estimated using the Black-Scholes option-pricing model and the following
weighted-average assumptions: expected volatility of 61% for 2000 and 37% for
1999 and 1998; risk-free interest rates of 5.0%, 5.6% and 5.2% for 2000, 1999
and 1998, respectively; and an average expected life of 5 years for 2000, 1999
and 1998. No dividends were factored into the calculation in 2000, 1999 or 1998.
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- ------------------------ ----------- ---------------- -------------- ----------- --------------
Less than $19.................. 4,494,763 5.32 $17.20 4,047,377 $15.46
$19 to $29..................... 5,828,051 6.56 22.26 4,353,412 22.42
$29 to $40..................... 2,132,940 8.59 32.24 692,609 32.01
$40 to $52..................... 3,853,013 9.31 45.68 34,829 43.27
$52 to $56..................... 2,537,770 9.67 53.75 199 53.75
Greater than $56............... 28,530 8.08 56.90 7,124 56.89
---------- ---- ------ --------- ------
18,875,067 7.48 $31.25 9,135,550 $20.17
========== =========
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
F-40
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 14--STOCKHOLDERS' EQUITY (CONTINUED)
measured against certain published benchmark indices that are representative of
the Company's peer group. In order to qualify for a stock 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. No such expense was recognized in 2000, 1999 or 1998. There were no
performance units awarded in 2000, 1999 or 1998. No awards were exercisable at
December 31, 2000.
In 1996, the stockholders also approved an amendment to the Company's stock
option plan, permitting the award of share rights to certain key individuals and
non-employee directors, allowing them the right to receive shares of the
Company's common stock, subject to certain vesting terms. In 2000, the
Compensation Committee awarded non-employee directors an aggregate of 6,642
share rights that vest over five years, and also awarded certain key individuals
an aggregate of 264,325 share rights that vest over four years. In 1999, the
Compensation Committee awarded non-employee directors an aggregate of 11,098
share rights that vest over five years, and also awarded certain key individuals
an aggregate of 228,175 share rights that vest over four years. 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. The intrinsic
value of the share rights are recognized ratably over the related vesting
periods and, in 2000, 1999 and 1998, the Company recognized $6.4 million,
$2.1 million and $2.4 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 0.3 million, 0.4 million and 1.0 million in
2000, 1999 and 1998, 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,
8.0 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 reported for the fair value
of the employees' purchase rights, which was estimated using the Black-Scholes
model and the following assumptions: expected volatility of 71%, 40% and 35% for
2000, 1999 and 1998, respectively; risk-free interest rates of 5.3%, 5.1% and
5.1% for 2000, 1999 and 1998, respectively; and an average expected life of one
year for 2000, 1999 and 1998. No dividends were factored into the calculation in
2000, 1999 or 1998. The weighted-average fair value of the purchase rights
granted was $18.60, $8.78 and $5.71 per share in 2000, 1999 and 1998,
respectively.
COMMON STOCK WARRANTS
As a result of the acquisition of Cetus on December 12, 1991, a warrant to
purchase 600,000 shares of Chiron common stock was outstanding at December 31,
2000. The exercise price of the warrant is $13.13, and the warrant expires in
July 2001. The warrant is currently exercisable.
F-41
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 14--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
collateralized primarily by the stock issued upon the exercise of the stock
options. As of December 31, 2000, there were no amounts outstanding relating to
notes receivable for stock purchases.
STOCK REPURCHASE PROGRAM
The Company's Board of Directors authorized the repurchase of Chiron common
stock 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. In February 2001, the Board of Directors approved a 5.0 million
share increase. The Board has authorized such repurchases through February 28,
2002. As of December 31, 2000, the Company may repurchase 3.4 million shares of
its common stock.
NOTE 15--OTHER EMPLOYEE BENEFIT PLANS
RETIREMENT SAVINGS PLANS
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 also sponsors various defined-contribution savings plans
covering its full-time non-U.S. employees. The Company matched employee
contributions according to specified formulas and contributed $4.4 million,
$3.8 million and $4.2 million in 2000, 1999 and 1998, 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 a defined-benefit pension plan and is not
externally funded.
The components of net periodic pension costs were as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Service cost............................................ $423 $421 $436
Interest cost........................................... 462 405 431
Recognized actuarial loss............................... 50 38 24
---- ---- ----
$935 $864 $891
==== ==== ====
F-42
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 15--OTHER EMPLOYEE BENEFIT PLANS (CONTINUED)
The change in the projected benefit obligation, reconciliation of funded
status and weighted average assumptions were as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year......... $ 8,583 $ 8,337 $ --
Acquisitions.............................................. -- -- 5,722
Service cost.............................................. 423 421 436
Interest cost............................................. 462 405 431
Benefits paid............................................. (184) (152) (21)
Actuarial loss............................................ 162 722 1,124
Other..................................................... 9 41 298
Foreign currency translation.............................. (543) (1,191) 347
------- ------- -------
Projected benefit obligation at end of year............... $ 8,912 $ 8,583 $ 8,337
======= ======= =======
Reconciliation of funded status:
Funded status............................................. $(8,912) $(8,583) $(8,337)
Unrecognized actuarial loss............................... 1,607 1,636 1,100
Unrecognized prior service cost........................... (1,131) (1,071) (853)
------- ------- -------
Net amount recognized....................................... $(8,436) $(8,018) $(8,090)
======= ======= =======
Weighted average assumptions:
Discount rate............................................. 5.75% 6.00% 5.50%
Rate of compensation increase............................. 2.75% 3.00% 2.50%
The amounts recognized in the Consolidated Balance sheets were as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Accrued pension cost........................................ $7,305 $6,947 $7,237
Accumulated other comprehensive income...................... 1,131 1,071 853
------ ------ ------
$8,436 $8,018 $8,090
====== ====== ======
POSTEMPLOYMENT BENEFITS OTHER THAN TO RETIREES
Effective October 1, 1997, the Company adopted the Chiron Corporation
Severance Plan (the "Plan"), which provides certain post employment 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 Post
Employment Benefits" (see Note 7).
F-43
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 16--NON-OPERATING INCOME AND EXPENSE
GAIN (LOSS) ON SALE OF ASSETS
In February 2000, the Company sold substantially all assets of its
Australian subsidiary ("the Australian assets") to Mimotopes, a wholly-owned
subsidiary of MitoKor, for $1.0 million in cash, $1.6 million in non-interest
bearing promissory notes and 500,000 shares of MitoKor Series E convertible
preferred stock, to which the Company assigned no fair value due to the
early-stage nature of MitoKor. In connection with the sale, the Company wrote
off $1.3 million in leasehold improvements, which became the property of the
landlord upon termination of the Australian subsidiary's building lease, and
incurred selling costs of $0.4 million. Both amounts were included in "Gain
(loss) on sale of assets" in the Consolidated Statements of Operations. The
Australian subsidiary was part of the Company's biopharmaceuticals segment. The
sale of the Australian assets, net of liabilities assumed, resulted in a net
loss of $0.2 million, which was included in "Gain (loss) on sale of assets" in
the Consolidated Statements of Operations. In 2000, 1999 and 1998, Chiron
recognized operating expenses related to the Australian subsidiary of
$0.6 million, $3.7 million and $3.8 million, respectively. The Company intends
to liquidate the remaining assets and liabilities of the Australian subsidiary
in the first half of 2001.
In December 1999, the Company sold its Amsterdam manufacturing facility and
related machinery and equipment assets to Synco B.V., a company owned by a
director of the Company, for $15.0 million in cash. The Amsterdam manufacturing
facility was part of the Company's biopharmaceuticals segment. The sale of the
Amsterdam manufacturing facility resulted in a net gain of $1.2 million, of
which $0.9 million was included in "Gain (loss) on sale of assets" in the
Consolidated Statement of Operations and $0.3 million was deferred as a result
of the leaseback (see Note 9). At the time of the sale, the carrying amount of
the Amsterdam manufacturing facility was $13.8 million. In 1999 and 1998, Chiron
recognized operating expenses related to the Amsterdam manufacturing facility of
$2.0 million and $1.7 million, respectively.
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 St. Louis facility was part of the Company's
biopharmaceuticals segment. The sale of the St. Louis facility resulted in a net
gain of $1.5 million, which was included in "Gain (loss) on sale of assets" in
the Consolidated Statements of Operations. At the time of the sale, the carrying
amount of the St. Louis facility was $18.3 million. In 1998, Chiron recognized
operating expenses related to the St. Louis facility of $3.2 million.
In June 1998, the Company sold its Puerto Rico facility and related
machinery and equipment assets to IPR Pharmaceuticals, Inc. for $18.5 million in
cash. The Puerto Rico facility was part of the Company's biopharmaceuticals
segment. The sale of the Puerto Rico facility resulted in a net gain of
$6.2 million, which was included in "Gain (loss) on sale of assets" in the
Consolidated Statements of Operations. At the time of the sale, the carrying
amount of the Puerto Rico facility was $11.1 million. In 1998, Chiron recognized
operating expenses related to the Puerto Rico facility of $2.1 million.
GAIN ON SALE OF INTANGIBLE ASSETS
In December 1999, the Company sold certain assets that it had developed or
acquired in connection with its research and development of a CMV vaccine to
Aventis Pasteur for $10.0 million and licensed certain technology to Aventis
Pasteur for use in connection with the CMV vaccine. The sale of these assets
resulted in a gain of $7.5 million, which was included in "Gain on sale of
intangible assets" in the Consolidated Statements of Operations.
F-44
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 16--NON-OPERATING INCOME AND EXPENSE (CONTINUED)
INTEREST EXPENSE
"Interest expense" in the Consolidated Statements of Operations consisted of
the following for the years ended December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Interest expense and related costs on convertible
debentures................................................ $(12,325) $(18,954) $(18,682)
Interest expense on the note payable to Novartis............ (48) (3,691) (3,379)
Other interest expense...................................... (414) (1,247) (2,612)
-------- -------- --------
$(12,787) $(23,892) $(24,673)
======== ======== ========
OTHER INCOME, NET
"Other income, net" in the Consolidated Statements of Operations consisted
of the following for the years ended December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Interest income............................................. $84,467 $83,777 $29,586
Write-down of investments (see Note 8)...................... (5,000) (1,716) (8,365)
Net loss on sale of marketable debt securities.............. (3,720) -- --
Net gain on sale of equity securities (see Note 11)......... 3,181 3,783 4,475
Unrealized holding gain on trading securities (see Note
11)....................................................... -- 3,352 --
Gain on sale of interests in affiliated companies (see
below).................................................... 2,927 -- 1,815
Net realized gain (loss) on foreign exchange transactions
(see below)............................................... 5,467 (60) 203
Other....................................................... 762 721 (704)
------- ------- -------
$88,084 $89,857 $27,010
======= ======= =======
In December 1998, the Company completed the sale of its 30% interest in
General Injectibles & 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. The agreement also provided for Chiron to receive additional
payments, calculated as a pre-determined percentage of Henry Schein, Inc.'s
gross profit, through 2003. The Company received $2.9 million in 2000, which it
included in "Other income, net" in the Consolidated Statements of Operations.
As discussed in Note 11, the Company hedged a portion of its exposure to the
British pound in 2000 related to Menjugate-TM- sales. The Company settled this
hedging contract upon substantial conclusion of Menjugate-TM- sales in the
United Kingdom in the second quarter of 2000. The settlement resulted in a gain
of approximately $5.4 million, which was recorded in "Other income, net" in the
Consolidated Statements of Operations.
F-45
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 17--SEGMENT INFORMATION
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) vaccines and (iii) blood testing. The
biopharmaceuticals segment consists of products and services related to
therapeutics, with an emphasis on cancer and infection as well as the
development and acquisition of technologies related to recombinant proteins,
small molecules and genomics. The vaccines segment consists principally of
products and services related to adult and pediatric vaccines sold primarily in
Germany, Italy, the United Kingdom and other international markets, as well as
the development of novel vaccines and vaccination technology. The blood testing
segment consists of Chiron's one-half interest in the pretax operating earnings
of its joint business with Ortho, a J&J company, and an alliance with Gen-Probe
Incorporated ("Gen-Probe"). Chiron's joint business with Ortho sells a line of
immunodiagnostic tests to detect hepatitis viruses and retroviruses and provides
supplemental tests and microplate-based instrument systems to automate test
performance and data collection. Chiron's alliance with Gen-Probe is focused on
developing and selling NAT products using TMA technology to screen transfused
blood and plasma products for viral infection.
The Company's research and development unit earns revenues and incurs
expenses that specifically benefit each of the reportable segments. As a result,
such revenues and expenses have been included in the results of operations of
the respective reportable segment.
Certain other revenues and expenses, particularly Novartis research and
development 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 No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131").
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 continuing operations, excluding certain special
items, such as restructuring and reorganization charges and the write-off of
purchased in-process technologies, which are shown as reconciling items in the
table below.
F-46
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 17--SEGMENT INFORMATION (CONTINUED)
The following segment information excludes all significant intersegment
transactions as these transactions are eliminated for management reporting
purposes:
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
REVENUES
Biopharmaceuticals........................................ $ 324,670 $274,870 $293,457
Vaccines, including $1,194 and $442 of equity in earnings
of unconsolidated joint businesses in 1999 and 1998,
respectively............................................ 395,221 266,798 248,855
Blood testing, including $84,247, $78,126 and $73,527 of
equity in earnings of unconsolidated joint businesses in
2000, 1999 and 1998, respectively....................... 139,261 113,447 98,878
Other..................................................... 112,967 107,531 95,483
--------- -------- --------
Total revenues.......................................... $ 972,119 $762,646 $736,673
========= ======== ========
INCOME FROM CONTINUING OPERATIONS
Biopharmaceuticals........................................ $ (28,554) $(56,139) $ 19,722
Vaccines.................................................. 125,681 (2,163) (26,296)
Blood testing............................................. 72,758 63,348 67,876
Other..................................................... 30,485 77,468 51,992
--------- -------- --------
Segment income from operations.......................... 200,370 82,514 113,294
Operating income (expense) reconciling items:
Write-off of purchased in-process technologies.......... (171,600) -- (1,645)
Restructuring and reorganization charge reversals
(charges)............................................. 447 (197) (26,754)
--------- -------- --------
Income from operations.................................... 29,217 82,317 84,895
Gain (loss) on sale of assets........................... (224) 872 7,751
Gain on sale of intangible assets....................... -- 7,490 --
Interest expense........................................ (12,787) (23,892) (24,673)
Other income, net....................................... 88,084 89,857 27,010
Minority interest....................................... (809) -- --
--------- -------- --------
Income from continuing operations before income taxes....... $ 103,481 $156,644 $ 94,983
========= ======== ========
In 2000, the Company changed its method of allocating certain legal costs to
segments due to a change in the Executive Committee's evaluation of the
performance of the Company's segments. In 2000, the Company allocated certain
legal costs to the "Other" segment, whereas in 1999 and 1998, the Company
allocated these certain legal costs to all segments. The effect of this change
in methodology was not material to the financial statements.
SEGMENT ASSETS, DEPRECIATION AND AMORTIZATION EXPENSES AND CAPITAL EXPENDITURES
The Company does not evaluate the performance of and allocate resources to
its reportable segments based on the financial position of each reportable
segment. Rather, the Company evaluates the performance of and allocates
resources to its reportable segments based on income from continuing operations,
including depreciation and amortization expenses, and capital expenditures.
F-47
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 17--SEGMENT INFORMATION (CONTINUED)
Depreciation and amortization expenses for property, plant, equipment and
leasehold improvements and intangible assets, 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
were as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
DEPRECIATION AND AMORTIZATION EXPENSES
Biopharmaceuticals............................ $36,343 $27,359 $ 30,544
Vaccines...................................... 32,851 36,316 31,200
Blood testing................................. 4,176 2,488 887
Other......................................... 8,056 2,732 45,230
------- ------- --------
Total depreciation and amortization
expenses.................................. $81,426 $68,895 $107,861
======= ======= ========
Capital expenditures are specifically identified by each reportable segment.
Capital expenditures for each reportable segment were as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
CAPITAL EXPENDITURES
Biopharmaceuticals............................ $21,496 $ 7,706 $ 9,636
Vaccines...................................... 20,556 17,711 38,877
Blood testing................................. 3,768 5,197 946
Other......................................... 8,533 33,980 76,844
------- ------- --------
Total capital expenditures.................. $54,353 $64,594 $126,303
======= ======= ========
F-48
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 17--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.
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
REVENUES
Domestic.................................... $443,424 $333,634 $331,863
Germany..................................... 162,969 170,191 144,234
United Kingdom.............................. 107,799 9,519 1,267
Italy....................................... 53,519 60,081 47,616
Switzerland................................. 3,000 50,106 98,050
Other....................................... 201,408 139,115 113,643
-------- -------- --------
Total revenues.......................... $972,119 $762,646 $736,673
======== ======== ========
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
LONG-LIVED ASSETS
Domestic.................................... $225,256 $226,926 $210,848
Germany..................................... 22,821 13,671 13,816
Italy....................................... 57,735 56,706 58,986
Other....................................... 7,391 1,532 19,431
-------- -------- --------
Total long-lived assets................. $313,203 $298,835 $303,081
======== ======== ========
MAJOR CUSTOMERS
Four significant customers accounted for 13.0%, 12.3%, 10.4% and 10.3% of
total revenues in 2000. Two significant customers accounted for 13.6% and 12.7%
of total revenues in 1999. Three significant customers accounted for 18.4%,
12.9% and 11.6% of total revenues in 1998. Revenues from the Company's
biopharmaceuticals segment consisted of 40.1%, 32.9% and 53.1% of revenues from
major customers in 2000, 1999 and 1998, respectively. Revenues from the
Company's blood testing segment consisted of 83.0% and 92.4% of revenues from
major customers in 2000 and 1999, respectively, and entirely from major
customers in 1998. Revenues from the Company's vaccines segment consisted of
51.1% of revenues from major customers in 2000 and none from major customers in
1999 and 1998, respectively. Revenues from the Company's other segment consisted
of none from major customers in 2000 and 1999, respectively, and 57.0% of
revenues from major customers in 1998.
F-49
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 18--INCOME TAXES
For financial reporting purposes, "Income (loss) from continuing operations
before income taxes" included the following components for the years ended
December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Domestic....................................... $(79,260) $ 93,661 $80,706
Foreign........................................ 182,741 62,983 14,277
-------- -------- -------
$103,481 $156,644 $94,983
======== ======== =======
COMPONENTS OF PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONS
Significant components of the provision (benefit) for income taxes from
continuing operations were as follows for the years ended December 31:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Current:
Domestic..................................... $ 58,403 $ 26,778 $ 57,747
Foreign...................................... 55,478 6,813 4,418
-------- -------- --------
113,881 33,591 62,165
-------- -------- --------
Deferred:
Domestic..................................... (27,719) (10,232) (39,696)
Foreign...................................... 1,217 4,368 (3,484)
-------- -------- --------
(26,502) (5,864) (43,180)
-------- -------- --------
Charge in lieu of taxes resulting from the
recognition of acquired tax benefits that are
allocated to reduce noncurrent intangible
assets related to the acquired entity........ -- 513 --
-------- -------- --------
Provision for income taxes from continuing
operations................................... $ 87,379 $ 28,240 $ 18,985
======== ======== ========
Included in the domestic portion of the deferred tax provision in 1999 was a
benefit of $13.7 million resulting from the recognition of state tax benefits,
which were previously offset by a valuation allowance.
The benefit related to tax deductions for the Company's stock option plans
was recorded as an increase to additional paid-in capital when realized. In
2000, 1999 and 1998, the Company realized tax benefits of approximately
$37.9 million, $42.8 million and $60.1 million, respectively.
F-50
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 18--INCOME TAXES (CONTINUED)
RATE RECONCILIATION
A reconciliation of the expected statutory tax rate (computed at the U.S.
statutory income tax rate of 35.0%) to the actual tax rate on income from
continuing operations for the years ended December 31 is as follows:
2000 1999 1998
-------- -------- --------
Expected statutory tax rate................................. 35.0% 35.0% 35.0%
Increases (reductions) in tax resulting from the following:
State taxes, net of federal benefit....................... 2.9% 2.0% 2.3%
Net impact of foreign tax rates and credits............... 3.7% 1.0% (4.3%)
Write-off of purchased in-process technologies (see
below).................................................. 58.0% -- --
Tax benefit attributed to Foreign Sales Corporation....... (1.9%) (0.6%) --
Disposition and write-down of Puerto Rico facility........ -- -- (6.3%)
Impact of Novartis transaction costs not deducted in prior
years................................................... -- (3.0%) --
Increase in (utilization of) deferred tax assets:
Change in the valuation allowance for state deferred tax
assets................................................ -- (6.5%) (41.8%)
Prepaid income.......................................... -- (8.8%) 33.2%
Other temporary differences............................. -- (0.6%) 1.1%
Utilization of tax credits................................ (13.8%) (1.9%) --
Other..................................................... 0.5% 1.4% 0.8%
------ ------ ------
Actual tax rate on income from continuing operations........ 84.4% 18.0% 20.0%
====== ====== ======
The write-off of purchased in-process technologies was a permanent
difference associated with the PathoGenesis acquisition.
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 their basis for income tax purposes and the tax effects of net
operating loss and tax credit carryforwards.
Net deferred tax assets have been recognized for U.S. federal and state
purposes based on management's estimates of future taxable income for certain
foreign jurisdictions in which the Company's operations have historically been
profitable. The above estimates of gross deferred tax assets and liabilities are
subject to change based upon future events, which include the filing of tax
returns and, therefore, the amount of deferred tax assets recognized may
increase or decrease accordingly.
F-51
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 18--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax assets and
liabilities from continuing operations were as follows at December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Deferred income tax assets:
Basis differences-purchase accounting and
intangibles......................................... $ -- $ 62,251
Capitalized research and development costs............ 4,553 3,395
Prepaid income........................................ 28,585 18,761
Reserves and expense accruals......................... 71,489 41,024
Net operating loss carryforwards...................... 39,026 21,504
Business credit carryforwards......................... 15,771 9,456
Other................................................. 3,558 2,341
-------- --------
162,982 158,732
Less valuation allowance.............................. (69,430) (86,056)
-------- --------
93,552 72,676
-------- --------
Deferred income tax liabilities:
Basis differences-purchase accounting and
intangibles......................................... 56,112 --
Patent costs expensed for tax purposes................ 9,760 10,719
Depreciation and amortization......................... 11,544 2,121
Tax effect of unrealized comprehensive income......... 46,253 11,455
Other................................................. 8,824 7,007
-------- --------
132,493 31,302
-------- --------
Net deferred income tax asset (liability)............. $(38,941) $ 41,374
======== ========
The above net deferred income tax asset (liability) has been reflected in
the accompanying Consolidated Balance Sheets as follows:
2000 1999
-------- --------
(IN THOUSANDS)
Current asset (liability)................................ $ 35,980 $21,999
Noncurrent asset (liability)............................. (74,921) 19,375
-------- -------
Net deferred income tax asset (liability)................ $(38,941) $41,374
======== =======
The net decrease in the valuation allowance for the years ended
December 31, 2000, 1999 and 1998 was $16.6 million, $58.3 million and
$87.6 million, respectively.
The valuation allowances of $69.4 million and $86.1 million as of
December 31, 2000 and 1999, respectively, related to net operating loss
carryforwards and intangible assets in certain foreign jurisdictions.
F-52
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 18--INCOME TAXES (CONTINUED)
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets at December 31, 2000 will be allocated as follows (in
thousands):
Income tax benefit.......................................... $65,586
Goodwill and other noncurrent intangible assets............. 3,844
-------
$69,430
=======
TAX OPERATING LOSS AND CREDIT CARRYFORWARDS
At December 31, 2000, the Company had foreign net operating loss
carryforwards of approximately $16.2 million, of which $1.3 million expires
beginning in 2003 and the remainder is available to offset future taxable income
indefinitely. At December 31, 2000, the Company had federal net operating loss
carryforwards and federal business credits attributed to the acquisition of
PathoGenesis of approximately $105.2 million and $6.0 million, respectively,
expiring in 2007. The actual utilization of the net operating loss carryforwards
is restricted pursuant to section 382 of the Internal Revenue Code. In addition,
at December 31, 2000, the Company had federal and state business tax credit
carryovers of $14.7 million, of which $0.4 million expires in 2007 and the
remainder expires in 2014.
NOTE 19--LEGAL PROCEEDINGS
The Company is party to various claims, investigations and legal proceedings
arising in the ordinary course of its business. These claims, investigations and
legal proceedings relate to intellectual property rights, contractual rights and
obligations, employment matters, claims of product liability and other issues.
While there is no assurance that an adverse determination of any of 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.
F-53
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED)
2000
-----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues...................................... $293,538 $220,981 $240,855 $216,745
Gross margin from net product sales................. 101,701 85,573 112,742 106,355
Income (loss) from continuing operations:
Income (loss)..................................... (124,399) 43,005 57,412 40,084
Basic earnings (loss) per share................... (0.69) 0.24 0.32 0.22
Diluted earnings (loss) per share................. (0.69) 0.23 0.30 0.21
Net income (loss):
Income (loss)..................................... (134,403) 43,079 59,602 40,236
Basic earnings (loss) per share................... (0.74) 0.24 0.33 0.22
Diluted earnings (loss) per share................. (0.74) 0.23 0.31 0.21
1999
-----------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MAR. 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues...................................... $193,600 $204,376 $189,110 $175,560
Gross margin from net product sales................. 67,183 60,426 60,563 49,091
Income from continuing operations:
Income............................................ 25,891 45,041 33,734 23,738
Basic earnings per share.......................... 0.14 0.25 0.19 0.13
Diluted earnings per share........................ 0.14 0.24 0.18 0.13
Net income:
Income............................................ 31,767 68,329 36,743 23,738
Basic earnings per share.......................... 0.18 0.38 0.20 0.13
Diluted earnings per share........................ 0.17 0.36 0.20 0.13
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 license arrangements and 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.
CONTINUING OPERATIONS
The fourth quarter of 2000 included (i) royalty revenues of $34.0 million
for past sales related to F. Hoffman-LaRoche Ltd's ("Roche") use of the
Company's HCV patent in its IN VITRO diagnostic products and (ii) the write-off
of purchased in-process technologies of $171.6 million and amortization expense
of $9.6 million related to the acquisition of PathoGenesis (see Note 6).
The second quarter of 2000 included a $5.0 million loss attributable to the
other-than-temporary impairment of equity securities (see Note 8).
F-54
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 20--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
The fourth quarter of 1999 included (i) a $5.0 million reduction in other
operating expenses resulting from a reversal in estimated tax accruals related
to certain employee payments recorded in 1995, (ii) a $7.5 million gain on the
sale of intangible assets (see Note 16) and (iii) a $3.3 million unrealized
holding gain related to equity securities classified as trading (see Note 11).
Related to (i), the Company entered into tax indemnification agreements with
certain officers and accrued an amount based upon the officers' related notional
excise tax obligation. As the statute of limitations expired, based upon the
officers' tax return filing dates, the Company reversed the related excise tax
accrual to the extent that claims were not made against it. In the fourth
quarter of 1999, the Company also recorded a $5.9 million reclassification from
cost of sales to other operating expenses to record contract manufacturing
expenses in accordance with the Company's accounting policy.
The third and second quarters of 1999 included a $2.0 million and
$6.4 million reduction, respectively, in other operating expenses resulting from
a reversal in estimated tax accruals related to certain employee payments
recorded in 1995, as discussed above.
DISCONTINUED OPERATIONS (SEE NOTE 4)
"Gain (loss) on disposal of discontinued operations" included income tax
provisions of $9.0 million and $0.1 million in the fourth and first quarters of
2000, respectively. Also included in the "Gain (loss) on disposal of
discontinued operations" was $2.2 million recognized in the second quarter of
2000 related to the reversal of reserves for contractual obligations to
indemnify B&L against certain potential claims.
"Gain (loss) on disposal of discontinued operations" included income tax
benefits of $4.4 million, $15.3 million and $0.7 million in the fourth, third
and second quarters of 1999, respectively. Also included in the "Gain (loss) on
disposal of discontinued operations" was $8.3 million recognized in the fourth
quarter of 1999 related to the reversal of reserves for contractual obligations
to indemnify B&L against certain potential claims.
NOTE 21--SUBSEQUENT EVENTS
At its February 16, 2001 meeting, the Board of Directors authorized the
Company to adopt a change in control severance plan for its executive officers.
The Plan provides for three levels of coverage: Tier 1 would be applicable to
the Chief Executive Officer and Chief Operating Officer (the Company does not
presently have an incumbent in that position) and would provide for a change in
control severance benefit of three times base salary and bonus; Tier 2 would
apply to other Executive Committee members and would provide for a change in
control severance benefit of two times base salary and bonus; and Tier 3 would
apply to all other executives and would provide for a change in control
severance benefit equal to one times base salary and bonus.
In February 2001, the Company renewed a one-year consulting agreement with a
director of the Company, under which he will receive $0.1 million for consulting
services as mutually agreed upon by the parties.
In February 2001, the Board of Directors approved a 5.0 million share
increase to the Company's stock repurchase program. The Board has authorized
such repurchases through February 28, 2002.
On January 8, 2001, the Company sold various assets of its San Diego
facility for $4.8 million in cash. The purchaser will assume various liabilities
of the Company's San Diego facility. The San Diego facility
F-55
CHIRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
NOTE 21--SUBSEQUENT EVENTS (CONTINUED)
was part of the Company's biopharmaceuticals segment. The Company anticipates
that it will recognize a gain upon the sale of these assets in the first quarter
2001. As of December 31, 2000, the carrying amount of the San Diego facility
assets, net of liabilities to be assumed, was not material to the Company's
consolidated financial position.
In January 2001, the Company initiated a put warrant program. Under this
program, the Company will collect a premium from a third party in return for
selling put warrants on Chiron stock. The put warrants entered into in
January 2001 entitle the holder to sell to the Company 0.5 million shares at
$44.95 per share. If Chiron's stock price is below $44.95 on April 19, 2001, the
Company will be obligated to purchase 0.5 million shares at $44.95 per share. In
January 2001, the Company collected a $2.6 million premium for these puts, which
will be recorded in additional paid-in capital.
In connection with an agreement with Roche, the Company received
$10.0 million in the fourth quarter of 2000 and received $10.0 million in the
first quarter of 2001. These amounts include a nonrefundable license fee and
royalties for past sales related to Roche's use of Chiron's HIV patent in its IN
VITRO diagnostic products in Europe. The $10.0 million that was received in the
fourth quarter of 2000 became nonrefundable in January 2001 when the European
Patent Office upheld the Company's HIV patent and will be recognized as revenue
in the first quarter of 2001. The $10.0 million that was received in the first
quarter of 2001 will be recognized as revenue in the period that it is earned.
F-56
SCHEDULE II
CHIRON CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
DESCRIPTION OF YEAR EXPENSES(1) ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ----------- -------- ---------- ---------
(IN THOUSANDS)
2000:
Accounts receivable allowance............ $16,998 $17,455 $(19,877) $14,576
Restructuring reserve.................... 5,688 (732) -- (2,301) 2,655
1999:
Accounts receivable allowance............ 18,160 13,494 -- (14,656) 16,998
Restructuring reserve.................... 23,796 197 -- (18,305) 5,688
1998:
Accounts receivable allowance............ 22,918 14,370 (13,322)(2) (5,806) 18,160
Restructuring reserve.................... 6,857 45,822 -- (28,883) 23,796
- ------------------------
(1) Includes amounts charged to discontinued operations.
(2) Represents accounts receivable allowances as of the disposal date related to
disposed businesses.
F-57