<PAGE>
                               CHIRON CORPORATION
                       CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                     <C>
Management's Discussion and Analysis..................................           1
Consolidated Financial Statements.....................................          13
Notes to Consolidated Financial Statements............................          18
Report of Independent Auditors........................................          48
Market Price of Common Stock..........................................          49
</TABLE>
<PAGE>
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
    THE  DISCUSSION BELOW CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES  RELATING  TO  THE  FUTURE  FINANCIAL  PERFORMANCE  OF  CHIRON
CORPORATION (THE "COMPANY" OR "CHIRON"), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY.  IN EVALUATING  SUCH STATEMENTS,  STOCKHOLDERS AND  INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION  "FACTORS
THAT  MAY AFFECT FUTURE  OPERATING RESULTS" WHICH COULD  CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
 
    Chiron is  a diversified,  science-driven  healthcare company  that  applies
biotechnology  and other techniques of modern  biology and chemistry to develop,
produce and sell products intended to improve the quality of life by diagnosing,
preventing and  treating  human  disease.  Chiron  participates  in  four  human
healthcare  markets: (i) diagnostics, including blood screening tests, automated
immunodiagnostic systems, critical  blood analyte systems  and new  quantitative
probe tests; (ii) therapeutics, with an emphasis on oncology, serious infectious
diseases  and  critical  care  diseases;  (iii)  adult  and  pediatric vaccines,
including vaccines  under development  and  a genetically  engineered  acellular
pertussis  vaccine,  currently on  the market  in Italy  and for  which clinical
trials have been completed in the United States and Europe; and (iv)  ophthalmic
surgical  products,  including instruments  and  devices used  for  the surgical
correction of vision and an intraocular  implant to deliver drugs into the  eye.
Chiron  also develops or acquires new technologies, employing these technologies
to discover  new products  for the  Company or  for its  partners. For  example,
Chiron  is developing a new generation of chemical therapeutics through advanced
techniques of drug design and discovery  and is conducting an active program  in
gene therapy.
 
ACQUISITIONS
 
    As   discussed  further  in  Note  2  of  Notes  to  Consolidated  Financial
Statements, effective  January 1,  1995, under  a series  of agreements  between
Chiron  and  Ciba-Geigy Limited  of  Basel, Switzerland  ("Ciba"),  including an
investment agreement, a cooperation and collaboration agreement and a governance
agreement  (collectively  the  "Agreements"),  Ciba  obtained  a  49.9   percent
ownership interest in Chiron common stock (now approximately 47 percent). At the
same  time, Chiron acquired all of the  outstanding common stock of Ciba Corning
Diagnostics Corp.  ("CCD")  and  Ciba's  interests  in  Chiron  Biocine  Company
(formerly  The  Biocine Company)  and  Biocine S.p.A.  (through  JV Vax  B.V., a
Netherlands company), in  exchange for  6.6 million  newly-issued Chiron  common
shares  and a cash payment of $23.5  million. The acquisitions of CCD and Ciba's
interests in Chiron Biocine Company and Biocine S.p.A. were accounted for  under
the  purchase  method of  accounting  and resulted  in  a $222.9  million charge
against earnings for purchased in-process technology. The results of  operations
of  CCD,  Biocine S.p.A.  and Chiron  Biocine Company  are included  in Chiron's
consolidated operating results from January 1, 1995, forward. Chiron's share  of
the operating results of Biocine S.p.A. and Chiron Biocine Company were included
in  the Company's  1994 and  1993 operating results  under the  equity method of
accounting.
 
    In connection with the Agreements, Ciba agreed to guarantee $425 million  of
new  debt for Chiron and agreed to  provide $250 million (which may be increased
up to $300  million subject to  certain reductions in  the debt guarantee)  over
five  years  in support  of research  at Chiron,  and Chiron  has the  option of
issuing up to $500 million of new equity to Ciba.
 
    During 1995,  Chiron  and Ciba  entered  into a  limited  liability  company
agreement  to utilize  research funding  provided by  Ciba, as  discussed above.
Under the terms  of the  agreement, Ciba  will fund  from time  to time  through
December 31, 1999, at Chiron's request, research and development costs for adult
vaccines,  pediatric vaccines  and insulin-like growth  factor-1. Annual funding
amounts are subject  to certain  limitations. In  return, Ciba  will receive  an
interest in a stream of variable
 
                                       1
<PAGE>
royalties  from  future  worldwide  sales  of  certain  adult  vaccines, certain
pediatric vaccines and insulin-like growth factor-1. Royalties will be paid  for
a minimum period of ten years, subject to an extension under certain conditions,
following the later of October 1, 2001, or the date of the first commercial sale
of  individual products  covered by the  agreement. In addition,  Ciba will also
receive an interest  in promotional  rights, in  countries other  than in  North
America and Europe, for certain adult vaccines.
 
    Under  the  terms of  the  agreement Chiron  was  granted an  option through
December 31, 2001, to  repurchase Ciba's interest, at  cost plus an  agreed-upon
return. In addition, if Chiron chooses to exercise the option, Ciba will receive
an  option to acquire exclusive marketing  rights, in countries other than those
in North America and Europe, with respect to certain adult vaccines in countries
in which Ciba has exercised its co-promotion rights. Pursuant to the  agreement,
Chiron received $27 million of funding from Ciba during 1995, which was recorded
as  collaborative agreement  revenues. Chiron  anticipates receiving substantial
additional funding from  Ciba in future  periods, pursuant to  the terms of  the
agreements.
 
    As   discussed  further  in  Note  2  of  Notes  to  Consolidated  Financial
Statements, on March 31, 1995, Chiron  Vision acquired the surgical division  of
IOLAB  from Johnson & Johnson for approximately $95 million. The acquisition was
accounted for under the purchase method  of accounting, and resulted in a  $10.3
million charge against earnings for purchased in-process technology. The Company
recorded  additional charges for  restructuring and integration-related expenses
totaling $16.9 million. IOLAB's results  of operations are included in  Chiron's
consolidated operating results from March 31, 1995, forward.
 
    As   discussed  further  in  Note  2  of  Notes  to  Consolidated  Financial
Statements, on September 29,  1995, Chiron acquired  all the outstanding  common
stock  of Viagene, Inc. ("Viagene") in  exchange for approximately $35.5 million
in cash and 916,000  shares of Chiron common  stock. Additionally, on  September
29,  1995, unexercised options  to purchase Viagene  common stock were converted
into options to purchase  approximately 132,000 shares  of Chiron common  stock.
The  acquisition was accounted  for under the purchase  method of accounting and
resulted  in  an  approximately  $130.3  million  charge  against  earnings  for
purchased in-process technology. Viagene's results of operations are included in
Chiron's  consolidated operating results from September 29, 1995, forward. Prior
to September 29,  1995, Chiron  accounted for its  interest in  Viagene at  fair
value as a marketable equity investment.
 
RESULTS OF OPERATIONS
 
    REVENUES
 
    The  Company's revenues  are derived  from a  variety of  sources, including
product sales, joint business arrangements, collaborative agreements and product
royalty agreements. Product sales,  Chiron's largest revenue category,  consists
of  the following product lines in the human healthcare industry for each of the
three years ended December 31:
 
<TABLE>
<CAPTION>
                                                                           1995         1994         1993
                                                                        -----------  -----------  -----------
<S>                                                                     <C>          <C>          <C>
                                                                                   (IN THOUSANDS)
Diagnostic products...................................................  $   541,113  $    21,678  $    13,704
Ophthalmic products...................................................      176,951      106,062       82,129
Vaccine products......................................................       74,885           --           --
Betaseron-Registered Trademark-.......................................       67,666      100,121       11,774
Oncology products.....................................................       58,042       43,254       38,417
Other products........................................................        4,196        4,851        1,869
                                                                        -----------  -----------  -----------
                                                                        $   922,853  $   275,966  $   147,893
                                                                        -----------  -----------  -----------
                                                                        -----------  -----------  -----------
</TABLE>
 
    As a result of the January 1995 acquisition of CCD, diagnostic product sales
now represent the largest component of product sales. For 1995, CCD added $510.1
million of new revenues to Chiron's
 
                                       2
<PAGE>
operating results. CCD's product sales for 1994 and 1993, which are not included
in Chiron's results, were $455.7  million and $423.1 million, respectively.  CCD
product  sales  include direct  sales and  sales-type leases  of fully-automated
random-access immunodiagnostic (ACS-TM-) testing systems and reagents for  these
systems,  as well as sales of critical blood analyte systems (CBA-TM-), clinical
chemistry products  and manual  immunodiagnostic  systems. Sales  of  diagnostic
systems  often include  the sale of  service and  maintenance contracts. Revenue
from these contracts  is included  in product  sales revenue  and is  recognized
ratably  over the  life of  the contracts.  Both of  CCD's major  product lines,
immunodiagnostic systems and  CBA systems,  have continued  to increase  between
years  due  to  increased  market  penetration,  particularly  in  international
markets, ongoing menu expansion of existing ACS systems and the introduction  in
1995  of a new CBA  system product line (the  800 Series-TM-). Product sales for
CCD would  have  been approximately  $17.8  million  lower in  1995  if  foreign
currency exchange rates had remained the same as in 1994.
 
    Diagnostic  product sales also include sales  of nucleic acid probe products
and instrumentation and sales of antigens and RIBA-Registered Trademark-  tests.
Nucleic  acid probe products accounted for  substantially all of the increase in
this category  of revenue  in 1994  over 1993  as Chiron  began marketing  these
products for research use in early 1993. Nucleic acid probe products are sold at
cost  to Daiichi Pure Chemical Co.,  Ltd. ("Daiichi"), which markets the product
in Japan and pays Chiron a royalty based upon its sales of the product.  Nucleic
acid  probe products are also sold by Chiron on a Research Use Only basis in the
United States and Europe. Antigens and RIBA-Registered Trademark- test kits  are
sold  at cost to Ortho Diagnostic Systems, Inc. ("Ortho"), Chiron's partner in a
joint diagnostic business.
 
    Sales of ophthalmic products continued to increase between years due to  the
impact  of the May 1994 acquisition  of Laboratoires Domilens S.A. ("Domilens"),
the March 1995 acquisition of the surgical division of IOLAB and increased sales
of products incorporating foldable  lens technology. Domilens contributed  $26.1
million and $13.3 million of product sales for the years ended December 31, 1995
and  1994, respectively. The net impact of the acquisition of IOLAB and Domilens
and a change in the marketplace favoring foldable lens technology-based products
resulted in  increased sales  of  $70.9 million  in  1995. Sales  of  refractive
surgery  products in 1995  were substantially consistent with  that of 1994. The
impact of the  Domilens acquisition  and expanded  sales of  excimer lasers  and
corneal  shapers in 1994 resulted in product  sales growth of $23.9 million over
1993.
 
    Prior to  Chiron's  acquisition of  Ciba's  interest in  Biocine  S.p.A.  on
January  1, 1995, the Company's share of the operating results of Biocine S.p.A.
were included as joint business revenues. Subsequent to January 1, 1995, Biocine
S.p.A. is consolidated as a wholly-owned  subsidiary of Chiron with its  vaccine
sales  reflected as  a component of  total product sales.  Vaccine product sales
consist of  sales of  pediatric and  adult vaccines  primarily in  Italy and  to
public   health  organizations.   Biocine  S.p.A.'s   vaccine  products  include
Acelluvax-Registered Trademark-,  a  recombinant  acellular  pertussis  vaccine;
Agrippal-Registered  Trademark-, a flu vaccine;  and Polioral-TM-, an oral polio
vaccine. Sales of Biocine S.p.A.'s flu  vaccine are seasonal, with strong  sales
generally occurring during the pre-flu season in the fourth quarter of the year.
Biocine  S.p.A.'s product  sales for  1994 and 1993,  which are  not included in
Chiron's results,  were  $56.7  million and  $45.8  million,  respectively.  The
increase  in Biocine  S.p.A.'s vaccine product  sales between 1995  and 1994 and
between 1994 and 1993 are due to increasing sales of
Acelluvax-Registered Trademark- and Polioral-TM- between each respective period.
 
    Under the terms  of a  development and  supply agreement  with Schering  AG,
Germany   ("Schering"),  and  its  U.S.  affiliate,  Berlex  Laboratories,  Inc.
("Berlex"), Chiron  manufactures  Betaseron-Registered  Trademark-  for  Berlex.
Through  December 31, 1994,  Chiron manufactured Betaseron-Registered Trademark-
under the  terms of  an amended  development and  supply agreement  whereby  the
Company  received payment  for the  product upon  shipment to  Berlex. Effective
January 1, 1995,  Chiron exercised  its option  to revert  to the  terms of  the
original  Betaseron-Registered Trademark- supply agreement. Under those original
terms, Chiron earns a partial  payment for Betaseron-Registered Trademark-  upon
shipment  to Berlex and a subsequent payment for Betaseron-Registered Trademark-
upon Berlex's net sales of the product.
 
                                       3
<PAGE>
    Because adequate  inventory  levels had  previously  been built  by  Berlex,
Chiron  did not ship any commercial-use vials  during the first quarter of 1995.
The combined impact in 1995 of the reversion to the terms of the original supply
agreement and a six percent reduction in volumes shipped to Berlex resulted in a
decrease in Betaseron-Registered Trademark- revenues  from 1994 to 1995.  Future
levels  of Chiron's  Betaseron-Registered Trademark- shipments  will depend upon
the rate at which  new patients are enrolled  from existing and future  markets,
the  extent  to  which  patients,  once  enrolled,  remain  compliant  with  the
prescribed   treatment    regimen   and    continue   to    regularly    receive
Betaseron-Registered Trademark-, and the timing of approval and market launch of
competing products, including another beta interferon product.
 
    Betaseron-Registered Trademark- product sales increased in 1994 over that of
1993   as   1994  was   the  first   full  year   of  commercial   shipments  of
Betaseron-Registered  Trademark-  and  as  Berlex  continued  to  build  product
inventories  sufficient to supply all of  the patients on the initial enrollment
list.
 
    Sales of  oncology  products, principally  Proleukin-Registered  Trademark-,
increased between 1994 and 1995 due to an increase in
Proleukin-Registered  Trademark- quantities sold  of 23 percent  and 24 percent,
respectively, in the European and domestic markets, as well as an increase of 14
percent and three percent, respectively, in  average net unit selling prices  in
the European and domestic markets. Oncology product sales increased from 1993 to
1994  as vials of  Proleukin-Registered Trademark- sold  increased by 11 percent
and  13  percent,   respectively,  in   the  European   and  domestic   markets.
Proleukin-Registered  Trademark- net unit sales prices increased by nine percent
in Europe but remained constant between 1994 and 1993 in the domestic market.
 
    The Company markets many  of its commercial  products internationally. As  a
result, product revenues in almost all product lines are affected by fluctuating
foreign currency exchange rates. Foreign product sales were approximately $519.4
million,  $71.6 million and $47.0 million for the years ended December 31, 1995,
1994 and 1993, respectively. International  sales of diagnostic products by  CCD
and  vaccine  sales by  Biocine S.p.A.  accounted for  substantially all  of the
increase in foreign product  sales from 1994 to  1995. Product sales would  have
been  approximately $26.1 million  lower in 1995 if  currency exchange rates had
remained the same as in  1994. In 1994, product sales  would have been lower  by
approximately  $1.1 million if currency exchange  rates had remained the same as
in 1993.  For the  year ended  December 31,  1995, approximately  56 percent  of
Chiron's  product sales  were denominated in  foreign currencies.  For the years
ended December  31, 1994  and 1993,  approximately 26  percent and  32  percent,
respectively,  of Chiron's product sales were denominated in foreign currencies.
Therefore, changing currency exchange rates have had, and will continue to have,
an impact on Chiron's  results. The Company's  other revenues, discussed  below,
are largely denominated in U.S. dollars.
 
    An  important  source of  Chiron's revenues  arises from  its equity  in the
earnings of unconsolidated  joint businesses.  As of December  31, 1995,  Chiron
owned  a 50 percent equity interest in  two joint businesses: a joint diagnostic
business with Ortho  and a  generic cancer chemotherapeutics  business with  Ben
Venue  Laboratories,  Inc. Chiron's  one-half interest  in the  pretax operating
earnings of  its joint  diagnostic business  with Ortho  represents the  largest
component of joint business revenues. These revenues are recorded by Chiron on a
one-month  lag based upon estimates supplied by Ortho and are subject to a final
annual accounting during the first quarter of the subsequent year. While  Chiron
and  Ortho believe  that these estimates  reasonably portray the  results of the
joint business, there can be no assurance that subsequent adjustment will not be
required. Chiron recorded joint diagnostic  business revenues of $76.9  million,
$74.3 million, and $77.1 million for the years ended December 31, 1995, 1994 and
1993,  respectively. Revenue amounts include a nominal amount recognized in 1995
and 1994 as a  result of the  final 1994 and  1993 accounting respectively,  and
$6.6  million recognized in 1993  as a result of  the final 1992 accounting. The
Company anticipates that adjustments arising from the final 1995 accounting will
not be significant. Excluding  the impact of  these prior adjustments,  Chiron's
share of the profits of the joint business has increased slightly throughout the
three-year period ended December 31, 1995.
 
                                       4
<PAGE>
    Approximately  78 percent  of the sales  of the  Chiron-Ortho joint business
arise from sales  of hepatitis C  virus ("HCV") tests.  The joint business  also
receives a royalty from Abbott Laboratories ("Abbott") for Abbott's sales of HCV
tests,  which use  the Chiron technology  and which compete  directly with tests
marketed by Ortho.
 
    During 1994, the American  Red Cross ("Red  Cross") renegotiated a  contract
with  the Chiron-Ortho joint business which resulted in a lower selling price on
HCV tests.  During 1995,  the revenues  of the  joint business  continued to  be
negatively  impacted by  lower product  margins resulting  from the renegotiated
contract. Revenues were also negatively impacted  as a result of changes in  the
product  mix whereby the proportion of higher  margin HCV tests sold relative to
other lower-margin  products  decreased  in  1995 as  compared  to  1994.  Joint
business  profits  were  also  impacted by  increased  research  and development
spending due to the  ongoing development of new  products and costs incurred  to
increase  market share in certain foreign  markets. The impact on joint business
profits from reduced  margins and additional  research and development  spending
was  offset by increased royalty revenues and  by the Company's share of a legal
settlement received from  a competitor regarding  certain European HCV  patents.
During  1994, the revenues of the  joint business were negatively impacted, when
compared to 1993,  by the renegotiated  supply contract with  the Red Cross  and
expiring  supply  contracts  with  members of  the  Council  of  Community Blood
Centers.
 
    As noted  previously, prior  to  January 1,  1995,  the Company's  share  of
Biocine  S.p.A.'s  profits were  included as  joint  business revenue.  In 1994,
Chiron and Ciba  entered into a  settlement agreement with  the former owner  of
Biocine  S.p.A. regarding a dispute over representations made in connection with
the acquisition of Biocine  S.p.A. Included in joint  business results for  1994
was  approximately $4.8 million representing  Chiron's share of this settlement.
Without the  impact of  the  settlement, Chiron's  joint business  revenue  from
Biocine S.p.A. for 1994 was $2.5 million and, for 1993, was not significant. The
increase  in revenue from 1993 to 1994 was due primarily to increased sales from
a new  pertussis vaccine  and reduced  reserves  for the  return of  unused  flu
vaccine.
 
    Results for Chiron's equity interest in the generic cancer chemotherapeutics
business were not significant in any of the years in the three-year period ended
December 31, 1995.
 
    Collaborative  agreement  revenue  consists of  fees  received  for research
services as  they  are  performed,  fees  received  for  completed  research  or
technology, fees received upon attainment of benchmarks specified in the related
research  agreements, and proceeds of sales  of biological materials to research
partners for clinical and preclinical testing. Collaborative agreement  revenues
decreased  from 1994 to 1995  due to the January  1, 1995, acquisition of Ciba's
interest in Chiron Biocine  Company. Prior to  the acquisition, Chiron  received
reimbursement  for its vaccine research expenses from Chiron Biocine Company and
recorded such  reimbursement  as  collaborative  agreement  revenue.  After  the
acquisition,  Chiron Biocine Company became  a wholly-owned subsidiary of Chiron
and thus no  longer provides research  revenues to Chiron.  For the years  ended
December 31, 1994 and 1993, the Company recognized revenues of $40.9 million and
$35.4  million, respectively, from Chiron  Biocine Company. Further contributing
to the decrease in revenues in 1995  was the completion of a nucleic acid  probe
development  program with Daiichi and a payment received as reimbursement from a
collaborative research partner,  each of  which provided 1994  revenues of  $3.0
million.  Offsetting  these  decreases  was $27.0  million  of  research funding
received from Ciba under the terms of a limited liability company agreement,  as
discussed  previously. Also included as collaborative agreement revenues in 1995
was $5.5  million  received  from  Ciba for  non-exclusive  access  to  Chiron's
combinatorial  chemistry techniques. Collaborative  agreement revenues decreased
slightly from 1993 to 1994.
 
    Other revenues consist principally  of product royalties, government  grants
and  sales fees earned by the Company  for sales and marketing services rendered
on behalf  of its  generic  chemotherapeutics joint  venture  and on  behalf  of
Ciba-Geigy.  Royalty revenue, the largest component of other revenues, increased
from $14.8 million and  $17.1 million in 1993  and 1994, respectively, to  $22.5
million in 1995.
 
                                       5
<PAGE>
In  both years, this increase was largely  due to increased sales of recombinant
human insulin and Japanese nucleic probe products. Other revenues also increased
in   1995   due   to   sales   fees   received   from   Ciba   for   sales    of
Aredia-Registered  Trademark-, for which Chiron  began earning sales fee revenue
in late 1994,  and nucleic  probes reference laboratory  service revenues  which
contributed  additional revenues of $4.2 million and $2.9 million, respectively,
in 1995.
 
    COSTS AND EXPENSES
 
    Cost of  sales  increased consistent  with  the increase  in  product  sales
between  years. Gross profit margins increased from  54 percent in both 1993 and
1994, respectively, to 55 percent in 1995. The gross profit margin was  affected
negatively  throughout  1995  as  a  result  of  a  reversion  to  the  original
Betaseron-Registered Trademark-  supply  agreement,  discussed  previously,  and
additional   operating  expenses  associated  with  the  Company's  Puerto  Rico
manufacturing facility which  was idled  during 1995.  Offsetting this  downward
pressure  was the addition  of CCD's and Biocine  S.p.A.'s higher margin product
sales in 1995. Gross  margin percentages may  fluctuate significantly in  future
periods as the Company's product mix continues to evolve and as the costs of new
facilities are included in cost of goods sold.
 
    Research  and development expenses increased  significantly between 1994 and
1995, largely due to the acquisitions of CCD and Biocine S.p.A. CCD and  Biocine
S.p.A.  added $71.3  million and  $25.1 million,  respectively, in  research and
development expenses  for 1995.  For the  years  ended 1994  and 1993,  CCD  and
Biocine S.p.A. incurred research and development costs of $61.5 million and $9.2
million,  and  $62.0  million  and $6.3  million,  respectively,  which  are not
included in Chiron's results. Research and development activities at CCD consist
primarily of product development of  new clinical diagnostic testing systems  or
extensions  of test menus on existing  systems. Also included is the development
of quality control products and the  development of data management software  to
be  used  within  a diagnostic  testing  system,  or between  the  system  and a
customer's laboratory information system. Research and development activities at
Biocine S.p.A. consist  of development of  new pediatric and  adult vaccines  as
well as efforts to obtain regulatory approvals of certain vaccines in the United
States  and  Europe. Adjusting  for the  impact  of the  acquisition of  CCD and
Biocine S.p.A.,  Chiron's research  and development  expenses increased  as  the
Company's  products in  development continue to  move towards commercialization,
and as the  Company entered  into a  number of  collaborative arrangements  with
other  pharmaceutical and biotechnology companies  for the research, development
and  marketing  of  certain  technologies   and  products.  As  part  of   these
collaborative  arrangements, Chiron has  made various investments  in the equity
securities of the collaborative partners and,  in some cases, agreed to  provide
specified levels of funding to the collaboration. As discussed further in Note 4
of  Notes to  Consolidated Financial Statements,  new collaborative arrangements
entered into by Chiron during 1995 include the following:
 
    - In March  1995, the  Company reached  an agreement  with Progenitor,  Inc.
      ("Progenitor"),  a  subsidiary  of Interneuron  Pharmaceuticals,  Inc., to
      collaborate in the  development and commercialization  of therapeutic  and
      vaccine  products  incorporating  Progenitor's  proprietary  gene  therapy
      technology. Under the agreement, Chiron received a license to Progenitor's
      nonviral gene expression system for use in the development of products for
      the treatment of certain cancers and cardiovascular disorders, development
      of infectious disease vaccines and  for development of certain other  gene
      therapy products. Chiron will have the right to manufacture and market any
      resulting  products of  the collaboration. In  return for  the license and
      other rights, Chiron made certain financial commitments to Progenitor.  In
      addition,  Progenitor will receive a royalty  from any commercial sales of
      products resulting from the collaboration.
 
    - In  March  1995,   the  Company   reached  an   agreement  with   Genelabs
      Technologies,    Inc.   ("Genelabs"),   whereby    Chiron   and   Genelabs
      cross-licensed certain rights  to HCV,  hepatitis G  virus ("HGV"),  human
      T-cell  leukemia virus -- I ("HTLV-I")  and human T-cell leukemia virus --
      II ("HTLV-II")  diagnostic tests.  Under  the agreement,  Chiron  acquired
      certain rights to develop
 
                                       6
<PAGE>
      and  market  diagnostic  products for  the  detection of  HGV,  HTLV-I and
      HTLV-II. In return, Genelabs acquired development and marketing rights  in
      Asia,  except  Japan,  for  certain  products  incorporating  Chiron's HCV
      technology. Ortho, Chiron's joint diagnostic business partner, has  agreed
      to  participate  as  Chiron's  equal  partner  in  the  collaboration with
      Genelabs and,  therefore, will  share equally  in all  payments under  the
      agreement, including equity investments.
 
    - In  March 1995, the Company reached  an agreement with New York University
      ("NYU") under which Chiron acquired  rights to optical mapping  technology
      for  use  by  Chiron and  its  sublicensee,  Ciba, in  the  development of
      diagnostics, therapeutics and vaccines. Chiron also acquired the right  to
      commercialize  a  potential optical  mapping  instrument. In  exchange for
      these rights, Chiron and Ciba made certain financial commitments to NYU.
 
    Also included in  1995 are payments  totaling $25.3 million  related to  the
funding of certain collaboration expenses and the purchase of additional program
rights from Cephalon, Inc., an existing collaboration partner.
 
    Expenditures   were   also  incurred   during   1995  relating   to  ongoing
collaboration efforts entered into during prior years. During 1995, $8.8 million
was paid pursuant to a collaboration with  G.D. Searle & Co. ("Searle") for  the
development  and marketing of Tissue Factor Pathway Inhibitor ("TFPI") products;
$3.5 million of research  and development expense was  recognized pursuant to  a
collaboration  for  the  development  and  marketing  of  products incorporating
certain drug delivery technologies developed by DepoTech Corporation; and a $1.5
million payment  was  made  pursuant  to  a  collaboration  with  CytoMed,  Inc.
("CytoMed") for the research, development and marketing of complement inhibitors
with   therapeutic  and  diagnostic  applications.  Additionally,  as  discussed
previously, Chiron Viagene was acquired by the  Company at the end of the  third
quarter  of 1995. Chiron Viagene is engaged  in the discovery and development of
gene transfer drugs for  the treatment of severe  viral infections, cancers  and
other  diseases and added an additional $6.0 million of research and development
expense during 1995.
 
    These new or continuing collaborations and program rights payments discussed
above contributed  an  additional  $56.0 million  to  research  and  development
expense  in 1995. The Company  also increased spending at  Chiron Vision by $6.2
million over that of 1994 due to a general increase in costs resulting from  the
acquisition  of IOLAB and inclusion  of a full year  of research and development
activity at Domilens. In addition,  research and development expenses  increased
due   to   higher   levels   of  spending   on   the   development   of  certain
phacoemulsification products  and greater  clinical activity  for certain  other
products.  In 1996,  the Company expects  that research  and development expense
will increase over  prior years, as  Chiron continues to  incur expenses in  its
collaborations,  including  those discussed  above,  and as  Chiron  expands its
diagnostics, vaccines,  therapeutics and  ophthalmics clinical  trials.  Product
development,  manufacturing start-up, and regulatory expenses will also increase
in future periods as Chiron  anticipates manufacturing and marketing  additional
products.
 
    Between  1994 and 1993,  research and development  expenses increased as the
Company entered  into  collaboration arrangements  and  incurred costs  to  move
products  in development towards commercialization. New collaboration agreements
in 1994  resulting  in increased  research  and development  expense  over  1993
included the following:
 
    - Chiron  and  CytoMed  entered  into  a  collaboration  agreement  for  the
      research,  development  and  marketing   of  complement  inhibitors   with
      therapeutic  and diagnostic  applications. Chiron  agreed to  make certain
      milestone payments and to reimburse CytoMed for a portion of its  research
      and  development  expense  during  1995  and  1996.  Additionally,  Chiron
      invested $1.3  million in  CytoMed capital  stock and  warrants which  was
      expensed in 1994.
 
                                       7
<PAGE>
    - Chiron and Searle entered into a collaboration agreement for the research,
      development  and marketing  of TFPI products.  Chiron made  a $3.5 million
      payment to  Searle  and  agreed  to  fund  its  own  collaboration-related
      expenses through 1994. In 1994, Chiron's research and development expenses
      related to this collaboration totaled approximately $6.5 million.
 
    These  collaborations,  among others,  added  approximately $9.1  million of
research and  development expenses  in 1994.  Spending in  the vaccines  program
increased  by approximately  $11.2 million over  1993 due to  clinical trial and
manufacturing expenses  for  vaccines  then in  development.  Additionally,  the
Company  purchased an option from Johnson & Johnson to participate in a home HIV
testing business, of which $5.8 million was expensed in 1994.
 
    Selling, general  and administrative  expenses ("SG&A  expenses")  increased
significantly  from 1994 to 1995 primarily due  to the impact of the acquisition
of CCD and Biocine S.p.A. CCD and Biocine S.p.A. added $179.5 million and  $18.2
million,  respectively, in SG&A expenses  in 1995. For the  years ended 1994 and
1993, CCD and Biocine S.p.A. incurred SG&A expenses of $157.8 million and  $21.8
million,  and  $149.4 million  and $18.7  million,  respectively, which  are not
included in  Chiron's results.  SG&A expenses  in the  ophthalmic business  were
higher  in 1995 due to  the acquisition of IOLAB  and increased costs related to
the ophthalmic sales force,  resulting from the  integration of Chiron  Vision's
operations  with  IOLAB. Selling  and marketing  expenses represent  the largest
portion of total  SG&A expenses  in all  periods as  Chiron devoted  significant
resources to support sales volumes in the diagnostics, ophthalmics, therapeutics
and vaccines product lines. SG&A expenses increased between 1993 and 1994 due to
the  acquisition of Domilens, which added $5.8 million of SG&A expenses in 1994,
and higher legal costs associated with Chiron's defense of HCV patents.
 
    The write-off of purchased in-process technology consists of $222.9  million
for  the acquisitions of CCD, Biocine  S.p.A. and Chiron Biocine Company, $130.3
million for the acquisition of Viagene and $10.3 million for the acquisition  of
IOLAB.  Also  included  was  $1.8  million  related  to  the  acquisition  of an
additional interest in a subsidiary of Chiron Vision. The fair value of the  net
assets  acquired  in the  acquisitions of  CCD,  Biocine S.p.A.,  Chiron Biocine
Company and  IOLAB, including  in-process technology,  were estimated  based  on
independent  valuations of the  acquired net assets.  The fair value  of the net
assets acquired in the Viagene acquisition  were determined to be equal to  book
value as Viagene was an early-stage company with no intangible assets other than
in-process  technology. Amounts  allocated to  base technology  for CCD, Biocine
S.p.A.  and  IOLAB  were  $21.6   million,  $6.6  million  and  $27.0   million,
respectively,  and are being amortized over periods  ranging from 10 to 15 years
using the straight-line  method. Approximately  $11.6 million  was allocated  to
goodwill for IOLAB and is being amortized using the straight-line method over 15
years.
 
    In 1995, costs related to the Ciba transaction consist primarily of employee
payments  and related  tax liabilities  and legal  and investment  advisor fees.
Under the  Agreements  reached with  Ciba,  Ciba reimbursed  the  Company  $24.8
million  for  a portion  of  the employee  payments  and such  reimbursement was
recorded as a capital contribution.
 
    Restructuring and  reorganization costs  in 1995  represent certain  accrued
costs  of integrating the acquired businesses with Chiron's existing businesses,
costs related to the idling of the Company's Puerto Rico manufacturing  facility
and  the  scaling-back of  manufacturing operations  at the  Company's Amsterdam
facility, and costs  related to the  write-down of duplicate  facilities at  the
Company's  Emeryville,  California,  headquarters. Also  included  was  a charge
related to the change in plans  to expand the Company's Emeryville research  and
administrative  facilities.  Of  the $39.1  million  in total  charges  in 1995,
approximately $27.1 million  related to  write-downs of  assets, including  $8.0
million  related to the change in plans  for expansion of the Company's research
and administrative facilities. The remaining charges of $12.0 million  consisted
of  employee costs of $5.5 million and lease termination and other costs of $6.5
million. The majority  of the remaining  accrued costs are  expected to be  paid
through 1996.
 
                                       8
<PAGE>
    Other  operating expenses consist primarily of the amortization of purchased
technologies and goodwill. The increase in other operating expenses in 1995 over
that of 1994 is the result of increased amortization of purchased  technologies,
goodwill  and other intangible assets arising from the 1995 acquisitions of CCD,
Biocine S.p.A. and IOLAB. Purchased  technology and goodwill arising from  these
acquisitions  are  being  amortized over  periods  from  10 to  15  years. Other
intangible assets acquired, such  as the assigned fair  value of customer  lists
and  tradename, are  being amortized  over periods  from 10  to 15  years. Other
operating expenses in 1994 are primarily comprised of amortization of  purchased
technologies.  Other operating expenses  in 1993 also included  a credit of $6.0
million arising from the settlement of a legal dispute.
 
    OTHER ITEMS
 
    Other income (expense), net, consists primarily of investment income on  the
Company's  cash  and investment  balances  and interest  expense  on convertible
subordinated debentures, other debt and capital leases. Included in other income
(expense), net, in 1995 is additional interest expense of $6.8 million  relating
to  debt acquired as a result of the acquisition of CCD and Biocine S.p.A. and a
gain on the sale  of land of  $3.0 million. Also contributing  to the change  in
other  income (expense), net, from 1994 to 1995 is a decrease of $4.0 million in
1995 of interest  capitalized on  the Company's capital  projects. Other  income
(expense), net, decreased between 1993 and 1994 largely as a result of increased
interest   expense  associated  with   the  Company's  convertible  subordinated
debentures issued in  November 1993,  and the write-down  of certain  marketable
investments in 1994 whose fluctuation in fair value was deemed to be "other than
temporary" under Statement of Financial Accounting Standards No. 115.
 
    The  provision for income taxes in  1995 consists primarily of foreign taxes
on certain foreign operations of the  Company. The amount of foreign taxes  paid
by the Company increased in 1995 over 1994 largely due to the acquisition of CCD
and  Biocine S.p.A.,  each of  which have  operations in  foreign countries upon
which income tax is paid. Contributing to  the change in the effective tax  rate
from 1994 to 1995 is the write-off of purchased in-process technologies in 1995,
substantially  all of which is  not deductible for income  tax purposes and thus
does not create a  tax benefit in  1995. The effective  tax rate increased  from
1993 to 1994 due to federal net operating loss benefits which were substantially
depleted in 1993. Also contributing to the increase in the effective tax rate in
1994  over 1993  was the  write-down of  certain marketable  investments in 1994
which did not create a corresponding tax benefit.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    Chiron's capital requirements are  funded from public  and private sales  of
equity  and convertible  debt and  cash provided  by operations.  In addition to
these sources of capital, future capital requirements may be financed through  a
combination   of  debt,  utilization   of  funding  from   Ciba,  possible  off-
balance-sheet financing (such as R&D limited partnerships and operating leases),
cash generated  from operations  and the  use of  existing cash  and  investment
balances. Until required for operations, Chiron's policy is to keep its cash and
investments   in  a   diversified  portfolio   of  investment   grade  financial
instruments, including  money market  instruments,  corporate notes  and  bonds,
government or government agency securities, or other debt securities. By policy,
the  amount  of  credit  exposure  to  any  one  institution  is  limited. These
investments are generally not collateralized  and primarily mature within  three
years.  Investments with maturities in  excess of one year  are presented on the
balance sheet as noncurrent investments. To  the extent that Chiron has  balance
sheet  exposure resulting from  completed transactions denominated  in a foreign
currency, the Company's policy is to mitigate exposure to exchange rate  changes
by  entering  into  forward  currency  contracts.  These  contracts  are settled
quarterly. At December 31,  1995, the Company  had outstanding forward  currency
contracts totaling approximately $65.1 million. In addition, although there were
no amounts
 
                                       9
<PAGE>
outstanding  at  December  31,  1995,  the  Company  has  commenced  a  program,
consisting of purchased average rate options,  designed to reduce the impact  of
fluctuating  foreign  currency  exchange  rates on  the  results  of anticipated
transactions.
 
    In 1993, Chiron began a major  manufacturing expansion designed to meet  the
projected  demand for products recently approved or  that are in the late stages
of  development.  The  Company  has  expanded  its  production  capability   for
Betaseron-Registered  Trademark-  by  improving  its  production  facilities  in
Emeryville, California, The Netherlands and through the purchase and  subsequent
investments  in a  pharmaceutical fill  and finishing  facility in  Puerto Rico.
Additionally, Chiron is expanding its vaccine production facilities in Italy and
has completed the construction of a  facility in Vacaville, California, for  use
in  growth factor production and has completed a remodeling effort in a facility
in St.  Louis, Missouri.  The Company  has also  completed the  construction  of
additional  administration, research and  development, and production facilities
for its diagnostic systems products  in Walpole, Massachusetts. The majority  of
Chiron's  capital  expenditures  of  $101.1  million  in  1995  related  to  the
manufacturing expansion activities discussed above.
 
    In 1995, the Company decided to idle its Puerto Rico facility and scale-back
the manufacturing operations at the Company's Amsterdam facility. This  decision
was  based on the belief that current demand for Betaseron-Registered Trademark-
can be adequately  supplied with  the expanded manufacturing  capability at  the
Company's  Emeryville, California, facility. Full  utilization of the additional
Betaseron-Registered  Trademark-   manufacturing  capability   will  require   a
significant  increase in product  demand. If this  substantial increase does not
occur, a significant  portion of  Betaseron-Registered Trademark-  manufacturing
capability  will  be underutilized.  Chiron  is considering  alternative options
concerning the Puerto Rico facility,  including manufacturing other products  in
that  facility. The facility in Amsterdam is currently being used for production
of bacterial vaccines,  production of clinical  grade materials and  as a  pilot
plant for process development.
 
    In  future periods,  Chiron expects  that substantial  capital spending will
continue as the  Company begins  expansion of its  administrative, research  and
development  facilities in Emeryville.  This expansion is  projected to occur in
stages over the next thirty years. The Company anticipates entering into leasing
arrangements which will provide third-party funding for a significant portion of
the expansion.
 
    Chiron's liquidity may be further impacted in future periods by its decision
to fund its share of expenses in certain of its joint ventures and collaboration
arrangements.  Over  the   next  several  years,   Chiron  anticipates   funding
collaborations  with a number of its  research partners, and may make additional
equity investments in collaborative partners.
 
    During the year ended December 31, 1995, cash and cash equivalents decreased
by approximately $10.6 million. Of this amount, approximately $34.0 million  was
used  in the Company's operating activities,  compared to $15.2 million provided
by operating activities in 1994. In 1993, operating activities provided cash  of
approximately $15.4 million.
 
    Investing  activities consumed cash of $43.1  million in 1995, versus $107.4
million and $140.3 million in 1994 and 1993, respectively, largely in support of
continued capital expansion and  the acquisitions of  IOLAB and Viagene.  Chiron
received  $14.2 million, net  of cash paid,  in its acquisition  of CCD, Biocine
S.p.A. and Chiron Biocine Company. Net  of cash acquired, Chiron expended  $95.0
million  and $28.6 million, respectively, to  acquire IOLAB and Viagene. Capital
expenditures on  plant and  equipment were  $101.1 million  during 1995,  versus
$105.7  million and $115.2 million in 1994 and 1993, respectively. Cash provided
by financing activities of $66.6 million in 1995 largely reflects cash  proceeds
of  $24.8 million received from  Ciba as a capital  contribution pursuant to the
Agreements, as discussed previously, as well as $31.6 million and $9.0  million,
respectively,  received from the  exercise of stock options  and for issuance of
stock under the Company's employee stock purchase plan.
 
                                       10
<PAGE>
    Chiron believes that its cash and  cash equivalents and short and  long-term
investments,  together  with  funds  provided  by  operations  and  the  funding
arrangements discussed above will  be sufficient to  meet its cash  requirements
during the upcoming twelve months and through the foreseeable future.
 
SUBSEQUENT EVENT
 
    On  February 17, 1996,  Chiron and Behringwerke AG,  a subsidiary of Hoechst
AG, reached an agreement whereby Chiron  will purchase a 49 percent interest  in
the human vaccine business of Behringwerke AG for Deutsche mark 171.5 million in
cash.  Under the terms  of the agreement,  Chiron has an  option to purchase the
remaining 51 percent interest in March 1998, 1999, 2000 or 2001 and Behringwerke
AG has the option to  have Chiron acquire the  remaining 51 percent interest  in
March  2001. During the  period of mutual ownership,  Chiron and Behringwerke AG
will operate the  vaccine business as  a joint venture.  Chiron will report  its
share  of the  joint venture's results  as equity in  earnings of unconsolidated
joint  businesses.  Consummation  of  the  transaction  is  subject  to  certain
conditions,  including regulatory  approvals and  customary conditions  prior to
closing.
 
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
 
    Chiron wishes  to  caution stockholders  and  investors that  the  following
important  factors, among others, in some cases have affected, and in the future
could  affect,  Chiron's  actual  results   and  could  cause  Chiron's   actual
consolidated  results  for the  first  quarter of  1996,  and beyond,  to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, Chiron. The  statements under this caption  are intended to serve  as
cautionary  statements within the  meaning of the  Private Securities Litigation
Reform Act of 1995. The  following information is not  intended to limit in  any
way the characterization of other statements or information under other captions
as cautionary statements for such purpose:
 
    - Delays,   difficulties  or   failure  in   obtaining  regulatory  approval
      (including approval of  its facilities for  production) for the  Company's
      products,  including  delays  or difficulties  in  development  because of
      insufficient proof of safety or efficacy.
 
    - Inability to maintain or initiate third party arrangements which  generate
      revenues,  in the form of license  fees, research and development support,
      royalties and  other  payments, in  return  for rights  in  technology  or
      products under development by the Company.
 
    - Delays  or difficulties in developing  and acquiring production technology
      and technical and managerial personnel to manufacture novel  biotechnology
      products  in commercial quantities  at reasonable costs  and in compliance
      with  applicable  quality  assurance  and  environmental  regulations  and
      governmental permitting requirements.
 
    - Difficulties   in  obtaining  key  raw  materials  and  supplies  for  the
      manufacture of the Company's products.
 
    - Increased  and  irregular  costs  of  development,  regulatory   approval,
      manufacture, sales, and marketing associated with introduction of products
      in the late stage of development.
 
    - Difficulties  in launching  or marketing  the Company's  products, many of
      which are novel products based  on biotechnology, and unpredictability  of
      customer acceptance of such products.
 
    - The  ability  and  willingness  of  customers  to  substitute  competitive
      products for  the  Company's  products once  other  products  for  similar
      indications are approved for marketing.
 
    - Continued  flattened  growth rate  in the  Betaseron-Registered Trademark-
      customer base in the  U.S.; the extent to  which patients, once  enrolled,
      remain  compliant with  the prescribed  treatment regimen  and continue to
      regularly receive  Betaseron-Registered Trademark-;  timing, approval  and
      market  launch of  competing products,  including another  beta interferon
      product; pricing,  promotional and  marketing decisions  by the  Company's
      partner, Schering.
 
                                       11
<PAGE>
    - Continued  lower  product margins  resulting  from the  Chiron-Ortho joint
      business' renegotiated contract  with the American  Red Cross; changes  in
      the  product mix  whereby the proportion  of higher margin  HCV tests sold
      relative to other lower  margin products is  less; continued increases  in
      research  and development  spending in order  to develop  new products and
      increase market share; introduction of competing tests by unlicensed third
      parties.
 
    - Continued or increased pressure to reduce selling prices of the  Company's
      products  and  possible negative  effect on  CCD  revenues as  product mix
      shifts from manual to automated equipment.
 
    - Underutilization of the Company's existing or new manufacturing facilities
      or of any facility expansions, resulting in production inefficiencies  and
      higher  costs; start-up costs and  inefficiencies and delays and increased
      depreciation costs  in connection  with  the start  of production  in  new
      plants and expansions.
 
    - The   cost  of   acquiring  in-process  technology,   either  by  license,
      collaboration or purchase of another entity.
 
    - Amount and rate of growth in Chiron's selling, general and  administrative
      expenses;  and the impact of unusual  or infrequent charges resulting from
      Chiron's ongoing evaluation of its business strategies and  organizational
      structures, including the continued costs of integration of newly acquired
      businesses.
 
    - The  acquisition of fixed  assets and other  assets, including inventories
      and receivables;  and the  making  or incurring  of any  expenditures  and
      expenses,   including,  among   others,  depreciation   and  research  and
      development expenses; any revaluation of assets, including, among  others,
      the Company's investments in the equity securities of other companies with
      whom  it collaborates,  or related  expenses, and  the amount  of, and any
      changes to, tax rates.
 
    - The ability or inability  of Chiron to obtain,  or hedge against,  foreign
      currency, foreign exchange rates and fluctuations in those rates.
 
    - The  costs  and  other  effects  of  legal  and  administrative  cases and
      proceedings (whether civil, such  as product-related or environmental,  or
      criminal);  settlements and investigations;  developments or assertions by
      or against Chiron relating to  intellectual property rights and  licenses;
      the  issuance and use of patents  and proprietary technology by Chiron and
      its competitors, including the possible  negative effect on the  Company's
      ability  to develop,  manufacture and  sell its  products in circumstances
      where it is unable to obtain licenses to patents which may be required for
      such products.
 
    - Failure of corporate partners to commercialize successfully the  Company's
      products  or to  retain and  expand the  markets served  by the commercial
      collaborations;  conflicts   of   interest,  priorities   and   commercial
      strategies  which  may  arise  between  the  Company  and  such  corporate
      partners.
 
    - Health  care  reform  and  the  reimbursement  status  of  newly  approved
      healthcare products.
 
                                       12
<PAGE>
                               CHIRON CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                      ----------------------------
                                                                                          1995           1994
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Current assets:
  Cash and cash equivalents.........................................................  $      74,318  $      84,876
  Short-term investments in marketable debt securities..............................         61,066        137,619
                                                                                      -------------  -------------
    Total cash and short-term investments in marketable debt securities.............        135,384        222,495
  Accounts receivable, net of allowances of $18,524 in 1995 and
   $7,210 in 1994:
    Related parties.................................................................         30,157         42,694
    Unrelated parties...............................................................        255,622         97,782
                                                                                      -------------  -------------
                                                                                            285,779        140,476
  Inventories.......................................................................        165,941         47,592
  Other current assets..............................................................         49,899         23,252
                                                                                      -------------  -------------
    Total current assets............................................................        637,003        433,815
Noncurrent investments in marketable debt securities................................         88,833        171,328
Property, plant, equipment and leasehold improvements, at cost:
  Land and buildings................................................................        208,233         60,930
  Laboratory, production and office equipment.......................................        292,828        140,438
  Leasehold improvements............................................................         95,472         82,145
  Construction in progress..........................................................         62,046         78,998
                                                                                      -------------  -------------
                                                                                            658,579        362,511
  Less accumulated depreciation and amortization....................................       (140,761)       (76,337)
                                                                                      -------------  -------------
    Net property, plant, equipment and leasehold improvements.......................        517,818        286,174
Purchased technology, net of accumulated amortization of $21,508 in 1995 and $13,854
 in 1994............................................................................         80,600         35,878
Other intangible assets, net of accumulated amortization of $27,712 in 1995 and
 $19,731 in 1994....................................................................         71,571         49,925
Investments in equity securities and affiliated companies...........................         54,359         51,425
Other assets........................................................................         40,014         21,197
                                                                                      -------------  -------------
                                                                                      $   1,490,198  $   1,049,742
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>
 
                                  (Continued)
 
          The accompanying Notes to Consolidated Financial Statements
                    are an integral part of this statement.
 
                                       13
<PAGE>
                               CHIRON CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                              DECEMBER 31,
                                                                                      ----------------------------
                                                                                          1995           1994
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Current liabilities:
  Accounts payable..................................................................  $      81,081  $      27,778
  Accrued compensation and related expenses.........................................         56,994         24,010
  Short-term borrowings.............................................................         50,036             --
  Current portion of unearned revenue...............................................         20,838          1,544
  Taxes payable.....................................................................         27,551         10,060
  Payable to The Biocine Company....................................................             --          8,645
  Other current liabilities.........................................................        132,095         47,604
                                                                                      -------------  -------------
    Total current liabilities.......................................................        368,595        119,641
Long-term debt:
  Payable to Ciba...................................................................         62,949          8,729
  Unrelated parties.................................................................        350,299        329,332
                                                                                      -------------  -------------
                                                                                            413,248        338,061
Other noncurrent liabilities........................................................         35,943         19,409
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.01 par value; 5,000,000 shares authorized;
   none outstanding.................................................................             --             --
  Common stock, $0.01 par value; 99,500,000 shares authorized; 41,737,849
   outstanding (33,378,937 outstanding at December 31, 1994)........................            417            334
  Restricted common stock, $0.01 par value; 500,000 shares authorized; none
   outstanding......................................................................             --             --
  Additional paid-in capital........................................................      1,727,711      1,161,942
  Accumulated deficit...............................................................     (1,087,699)      (575,236)
  Cumulative foreign currency translation adjustment................................            721         (1,719)
  Unrealized gain (loss) from investments...........................................         31,262        (12,690)
                                                                                      -------------  -------------
    Total stockholders' equity......................................................        672,412        572,631
                                                                                      -------------  -------------
                                                                                      $   1,490,198  $   1,049,742
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>
 
          The accompanying Notes to Consolidated Financial Statements
                    are an integral part of this statement.
 
                                       14
<PAGE>
                               CHIRON CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                          ----------------------------------------
                                                                              1995           1994         1993
                                                                          -------------  ------------  -----------
<S>                                                                       <C>            <C>           <C>
Revenues:
  Product sales, net:
    Related parties.....................................................  $      21,483  $     11,787  $    11,382
    Unrelated parties...................................................        901,370       264,179      136,511
                                                                          -------------  ------------  -----------
                                                                                922,853       275,966      147,893
  Equity in earnings of unconsolidated joint businesses.................         80,356        82,395       77,739
  Collaborative agreement revenues:
    Related parties.....................................................         47,921        53,970       51,226
    Unrelated parties...................................................         10,160        13,531       17,717
                                                                          -------------  ------------  -----------
                                                                                 58,081        67,501       68,943
  Other revenues:
    Related parties.....................................................         11,156         5,439        2,831
    Unrelated parties...................................................         28,136        22,678       20,129
                                                                          -------------  ------------  -----------
                                                                                 39,292        28,117       22,960
                                                                          -------------  ------------  -----------
      Total revenues....................................................      1,100,582       453,979      317,535
Expenses:
  Cost of sales.........................................................        415,798       128,209       68,484
  Research and development..............................................        343,752       166,175      140,030
  Selling, general and administrative...................................        357,066       109,990       95,790
  Write-off of purchased in-process technologies........................        365,286            --           --
  Costs related to Ciba transaction.....................................         49,407         2,117           --
  Restructuring and reorganization charges..............................         39,056            --           --
  Other operating expenses..............................................         12,645         5,088       (1,907)
                                                                          -------------  ------------  -----------
      Total expenses....................................................      1,583,010       411,579      302,397
                                                                          -------------  ------------  -----------
Income (loss) from operations...........................................       (482,428)       42,400       15,138
Other income (expense), net.............................................         (8,346)      (10,403)       7,949
                                                                          -------------  ------------  -----------
Income (loss) before income taxes.......................................       (490,774)       31,997       23,087
Provision for income taxes..............................................         21,689        13,672        4,703
                                                                          -------------  ------------  -----------
Net income (loss).......................................................  $    (512,463) $     18,325  $    18,384
                                                                          -------------  ------------  -----------
                                                                          -------------  ------------  -----------
Net income (loss) per share.............................................  $      (12.62) $       0.53  $      0.55
                                                                          -------------  ------------  -----------
                                                                          -------------  ------------  -----------
Weighted average number of shares used in calculating per share
 amounts................................................................         40,610        34,293       33,681
                                                                          -------------  ------------  -----------
                                                                          -------------  ------------  -----------
</TABLE>
 
          The accompanying Notes to Consolidated Financial Statements
                    are an integral part of this statement.
 
                                       15
<PAGE>
                               CHIRON CORPORATION
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                         CUMULATIVE
                                                                                           FOREIGN    UNREALIZED
                                          COMMON STOCK        ADDITIONAL                  CURRENCY    GAIN (LOSS)     TOTAL
                                     ----------------------    PAID-IN     ACCUMULATED   TRANSLATION     FROM      STOCKHOLDERS'
                                      SHARES      AMOUNT       CAPITAL       DEFICIT     ADJUSTMENT   INVESTMENTS     EQUITY
                                     ---------  -----------  ------------  ------------  -----------  -----------  ------------
<S>                                  <C>        <C>          <C>           <C>           <C>          <C>          <C>
Balances at December 31, 1992......     31,713   $     317   $  1,093,851  $   (611,945)  $  (3,542)   $      --    $  478,681
Exercise of stock options..........        842           9         25,467            --          --           --        25,476
Employee stock purchase plan.......        122           1          5,425            --          --           --         5,426
Foreign currency translation
 adjustment........................         --          --             --            --      (5,678)          --        (5,678)
Net income.........................         --          --             --        18,384          --           --        18,384
                                     ---------       -----   ------------  ------------  -----------  -----------  ------------
Balances at December 31, 1993......     32,677         327      1,124,743      (593,561)     (9,220)          --       522,289
Exercise of stock options,
 including tax effect..............        394           4         21,943            --          --           --        21,947
Exercise of warrants...............        150           1          7,874            --          --           --         7,875
Employee stock purchase plan.......        158           2          7,382            --          --           --         7,384
Foreign currency translation
 adjustment........................         --          --             --            --       7,501           --         7,501
Unrealized loss from investments...         --          --             --            --          --      (12,690)      (12,690)
Net income.........................         --          --             --        18,325          --           --        18,325
                                     ---------       -----   ------------  ------------  -----------  -----------  ------------
Balances at December 31, 1994......     33,379         334      1,161,942      (575,236)     (1,719)     (12,690)      572,631
Issuance of common stock to
 Ciba-Geigy........................      6,600          66        407,484            --          --           --       407,550
Capital contribution by Ciba-
 Geigy.............................         --          --         24,845            --          --           --        24,845
Issuance of common stock and stock
 options related to the Viagene
 acquisition.......................        916           9         91,393            --          --           --        91,402
Exercise of stock options,
 including tax effect..............        670           6         32,921            --          --           --        32,927
Exercise of stock warrants.........         --          --             97            --          --           --            97
Employee stock purchase plan.......        173           2          9,029            --          --           --         9,031
Foreign currency translation
 adjustment........................         --          --             --            --       2,440           --         2,440
Unrealized gain from investments...         --          --             --            --          --       43,952        43,952
Net loss...........................         --          --             --      (512,463)         --           --      (512,463)
                                     ---------       -----   ------------  ------------  -----------  -----------  ------------
Balances at December 31, 1995......     41,738   $     417   $  1,727,711  $ (1,087,699)  $     721    $  31,262    $  672,412
                                     ---------       -----   ------------  ------------  -----------  -----------  ------------
                                     ---------       -----   ------------  ------------  -----------  -----------  ------------
</TABLE>
 
          The accompanying Notes to Consolidated Financial Statements
                    are an integral part of this statement.
 
                                       16
<PAGE>
                               CHIRON CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                          ----------------------------------------
                                                                              1995          1994          1993
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
Cash flows from operating activities:
  Net income (loss).....................................................  $   (512,463) $     18,325  $     18,384
  Adjustments to reconcile net income (loss) to net cash provided by
   (used in) operating activities:
    Depreciation and amortization.......................................        99,097        49,429        25,040
    Write-off of purchased in-process technologies......................       365,286            --            --
    Write-offs of fixed assets..........................................        18,400            --           477
    Reserves............................................................        11,321        15,892         5,740
    Deferred income taxes...............................................         9,041            --         4,680
    Settlement of Cetus acquisition contingencies.......................            --            --       (13,387)
    Write-down of investments in equity securities......................            --        11,607            --
    Undistributed (earnings) loss of affiliates.........................        (3,944)       (5,666)          112
    Changes, excluding effect of acquisitions, to:
      Accounts receivable...............................................         2,000       (58,019)      (18,086)
      Inventories.......................................................       (36,094)       (7,394)      (18,302)
      Other current assets..............................................       (21,462)      (13,692)          201
      Accounts payable and accrued expenses.............................         7,719         8,535         5,530
      Payable to The Biocine Company....................................            --         1,658         6,049
      Other current liabilities.........................................        21,808         2,542        (6,687)
      Current portion of unearned revenue...............................         5,979       (10,132)        9,294
      Other noncurrent liabilities......................................          (719)        2,086        (3,596)
                                                                          ------------  ------------  ------------
        Net cash provided by (used in) operating activities.............       (34,031)       15,171        15,449
Cash flows from investing activities:
  Purchase of investments in marketable debt securities.................      (158,533)     (180,365)     (680,657)
  Sale and maturity of investments in marketable debt securities........       334,117       232,900       686,006
  Businesses acquired, net of cash acquired.............................      (112,633)      (17,726)           --
  Capital expenditures..................................................      (101,052)     (105,691)     (115,185)
  Investments in equity securities and affiliates.......................          (900)      (24,010)      (20,385)
  Increase in other assets..............................................        (4,124)      (12,525)      (10,103)
                                                                          ------------  ------------  ------------
        Net cash used in investing activities...........................       (43,125)     (107,417)     (140,324)
Cash flows from financing activities:
  Net borrowings under line of credit arrangements......................         4,686            --            --
  Proceeds from issuance of convertible debentures and long-term debt...           860            --       209,363
  Proceeds from issuance of common stock................................        40,772        27,126        28,598
  Proceeds from capital contribution from Ciba..........................        24,845            --            --
  Repayment of notes payable and capital leases.........................        (4,565)       (6,520)       (2,319)
                                                                          ------------  ------------  ------------
        Net cash provided by financing activities.......................        66,598        20,606       235,642
                                                                          ------------  ------------  ------------
        Net increase (decrease) in cash and cash equivalents............       (10,558)      (71,640)      110,767
Cash and cash equivalents at beginning of the year......................        84,876       156,516        45,749
                                                                          ------------  ------------  ------------
Cash and cash equivalents at end of the year............................  $     74,318  $     84,876  $    156,516
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
</TABLE>
 
          The accompanying Notes to Consolidated Financial Statements
                    are an integral part of this statement.
 
                                       17
<PAGE>
                               CHIRON CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    THE COMPANY
 
    Chiron   Corporation  (the   "Company"  or   "Chiron")  is   a  diversified,
science-driven  healthcare  company   that  applies   biotechnology  and   other
techniques of modern biology and chemistry to develop, produce and sell products
intended  to improve the quality of  life by diagnosing, preventing and treating
human disease.  Chiron participates  in four  global human  healthcare  markets:
diagnostics, therapeutics, pediatric and adult vaccines, and ophthalmic surgical
products.  Chiron also has  research programs underway in  gene therapy and gene
transfer, combinatorial chemistry, cardiovascular disease and critical care.
 
    Chiron's  diagnostic  business  includes  immunodiagnostics,  critical  care
diagnostics  and quantitative probe  tests. Chiron, through  its subsidiary Ciba
Corning Diagnostics Corp. ("CCD"), provides critical blood analyte systems which
are used  by  hospitals  to  diagnose and  monitor  patients  in  critical  care
settings.  Chiron  also  provides  blood screening  tests,  used  to  detect the
presence of hepatitis viruses and retroviruses, through its joint business  with
Ortho  Diagnostic Systems, Inc. ("Ortho"), a Johnson & Johnson company. Chiron's
therapeutics business emphasizes oncology and infectious diseases, and  provides
products  to  hospitals  and large  clinics  in  the United  States  and Europe.
Chiron's vaccine  business is  based primarily  on the  sale of  non-recombinant
pediatric  and flu vaccines in  Italy and to a  lesser extent in Southern Europe
and other  geographic  regions and  to  certain international  health  services.
Chiron  is also involved in  the development and marketing  of new pediatric and
adult vaccines. Through  its ophthalmic business,  Chiron provides products  for
the  surgical correction  of vision,  as well  as intraocular  implants for drug
delivery to the eye.  Chiron's ophthalmic business markets  its products in  the
United States, Europe, and other geographic regions.
 
    BASIS OF PRESENTATION
 
    The  consolidated financial statements  include the accounts  of the Company
and its majority-owned subsidiaries.  All significant intercompany accounts  and
transactions  have  been  eliminated  in  consolidation.  Investments  in  joint
ventures, partnerships and interests in which  Chiron has an equity interest  of
50  percent or  less are accounted  for using the  equity or cost  method, or in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain  Investments  in  Debt  and  Equity  Securities"  ("SFAS  115"),  as
appropriate.  Certain foreign subsidiaries are accounted for on a one-month lag.
Certain previously reported amounts have  been reclassified to conform with  the
current   period  presentation.  The  preparation  of  financial  statements  in
conformity with generally accepted accounting principles requires management  to
make  estimates and assumptions  that affect the reported  amounts of assets and
liabilities and disclosure of contingent assets  and liabilities at the date  of
the  financial  statements and  the reported  amounts  of revenues  and expenses
during the reporting period. Actual  results could differ materially from  those
estimates.
 
    FISCAL YEAR
 
    During  1995, the Company changed its fiscal year from December 31 each year
to a 52 or 53-week year ending on the Sunday nearest the last day in December of
each year. Therefore, the 1995 fiscal year ended on December 31 and was 52 weeks
long. Fiscal 1994 and 1993 were under  the calendar year ending on December  31.
For  presentation purposes, dates used  in the consolidated financial statements
and notes refer to the calendar month end.
 
                                       18
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    CASH EQUIVALENTS AND INVESTMENTS
 
    All highly liquid investments with a maturity of three months or less at the
date of purchase  are considered to  be cash equivalents.  Cash equivalents  and
short-term  investments consist  principally of  money market  instruments which
include:   corporate   notes,    corporate   bonds,    time   deposits,    Euro-
dollar  certificates of deposits, commercial paper, and government or government
agency securities.  Noncurrent  investments  consist  principally  of  corporate
notes,   corporate  bonds,  government  or  government  agency  securities,  and
investments in affiliated companies.
 
    INVENTORIES
 
    Pharmaceutical inventories are stated at the  lower of cost or market  using
the  average cost method or, in the case of vaccine products, using the last-in,
first-out ("LIFO")  method. Diagnostic  and ophthalmic  products are  valued  at
cost,  using the first-in,  first-out ("FIFO") method which  is less than market
value. Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                                                    1995        1994
                                                                                 -----------  ---------
<S>                                                                              <C>          <C>
                                                                                     (IN THOUSANDS)
Finished goods.................................................................  $    96,327  $  24,402
Work in process................................................................       28,794      8,650
Raw materials..................................................................       40,820     14,540
                                                                                 -----------  ---------
                                                                                 $   165,941  $  47,592
                                                                                 -----------  ---------
                                                                                 -----------  ---------
</TABLE>
 
    PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
 
    Property, plant, equipment  and leasehold improvements  are stated at  cost.
Depreciation  on  property, plant  and  equipment, including  assets  held under
capital leases,  is computed  by  the straight-line  method over  the  estimated
useful  lives of the assets (3 to 10 years  for equipment and 15 to 40 years for
buildings). Capitalized start-up  costs for  completed manufacturing  facilities
are   amortized  over  3  years.  Leasehold  improvements  are  amortized  on  a
straight-line basis over the remaining fixed lease term or asset life, whichever
is shorter.
 
    LONG-LIVED ASSETS, INCLUDING INTANGIBLE ASSETS
 
    In accordance  with Statement  of Financial  Accounting Standards  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be  Disposed Of", the Company evaluates whether changes have occurred that would
require revision of the remaining estimated lives of recorded long-lived assets,
including intangible assets, or rendered  those assets not recoverable. If  such
circumstances  arise, recoverability is determined by comparing the undiscounted
net cash  flows of  long-lived  assets to  their  respective recorded  net  book
values.  The  amount  of impairment,  if  any,  is measured  based  on projected
discounted net cash flows using an appropriate discount rate. At this time,  the
Company  believes that no significant impairment of long-lived assets, including
intangible assets, has occurred  and that no reduction  of the estimated  useful
lives of such assets is warranted.
 
    Intangible  assets consist primarily of purchased technologies, goodwill and
patents and are amortized on a  straight-line basis over their estimated  useful
lives  ranging from  8 to  17 years.  Amortization expense  for the  years ended
December 31,  1995, 1994  and 1993,  was $19.2  million, $9.5  million and  $6.1
million,  respectively. Amortization of purchased  technologies and goodwill are
primarily included in "Other operating expenses" and amortization of patents  is
primarily  included in  "Research and  development expense"  in the Consolidated
Statement of Operations.
 
                                       19
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    REVENUE
 
    Revenue from product sales consists of shipments of diagnostic materials and
instruments,  ophthalmic   and  vaccine   products,  therapeutics,   and   other
biologicals  and  is generally  recognized upon  shipment. Revenue  from service
contracts is recognized ratably over the life of the contract. Revenue from  the
sale  of equipment under sales-type leases is recognized at the inception of the
lease. All of  the types of  revenues discussed above  are included in  "Product
sales,  net" in the Consolidated Statement  of Operations. During 1994 and 1993,
Chiron recognized Betaseron-Registered Trademark- revenues under the terms of an
amended  supply  agreement  whereby  Chiron  recognized  the  majority  of   its
Betaseron-Registered  Trademark- revenues  upon shipment  of the  product to its
marketing partner.  During  1995, the  Company  reverted  to the  terms  of  the
original  supply agreement.  Under the terms  of the  original agreement, Chiron
recognizes a  partial share  of  Betaseron-Registered Trademark-  revenues  upon
shipment  and an  additional share  upon subsequent sale  of the  product by its
marketing partner.
 
    Equity  in  earnings  of  unconsolidated  joint  businesses  represents  the
Company's  share of  the pretax  operating results  generated by  its commercial
joint businesses. Collaborative agreement revenue is earned and recognized based
upon work performed, upon the sale  of product rights, upon shipment of  product
for use in preclinical and clinical testing or upon the attainment of benchmarks
specified  in  the related  agreements. Under  contracts where  reimbursement is
based upon work performed,  the related research  and development expenses  were
$51.8  million,  $72.4  million  and  $61.5  million  in  1995,  1994  and 1993,
respectively. Other revenues consist primarily of royalty payments under license
agreements, sales fees  and grants  from federal  or state  governments and  are
recognized when earned.
 
    PER SHARE DATA
 
    Per  share information is based on the weighted average number of common and
dilutive common equivalent shares  outstanding. Common equivalent shares  result
from  the assumed exercise of outstanding stock options and warrants that have a
dilutive effect when applying  the treasury stock method.  Shares assumed to  be
issued  upon conversion of the Company's convertible debentures are not included
for any of the periods presented  since their inclusion would be  anti-dilutive.
Fully  diluted per share data  has not been presented,  as the amounts would not
differ materially from primary per share data.
 
    STATEMENT OF CASH FLOWS
 
    Supplemental disclosure to the Consolidated Statement of Cash Flows for  the
years ended December 31, 1995, 1994 and 1993, is as follows:
 
<TABLE>
<CAPTION>
                                                                          1995       1994       1993
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
                                                                                (IN THOUSANDS)
Tax effect of stock option deductions.................................  $     912  $   9,895  $  --
Cash paid for interest................................................     18,603     12,866      8,518
Cash paid for income taxes............................................      8,597      1,263      2,393
</TABLE>
 
                                       20
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    Supplemental disclosure regarding noncash investing and financing activities
is as follows:
 
<TABLE>
<CAPTION>
                                                                          1995        1994       1993
                                                                      ------------  ---------  ---------
<S>                                                                   <C>           <C>        <C>
                                                                                (IN THOUSANDS)
Acquisitions:
  Fair value of assets acquired.....................................  $    962,124  $  42,810  $  --
  Liabilities assumed...............................................      (289,025)   (24,103)    --
  Acquisition costs.................................................        (6,013)    --         --
  Stock and options issued..........................................      (498,952)    --         --
  Carrying value of original investment.............................       (14,130)    --         --
                                                                      ------------  ---------  ---------
Total cash paid.....................................................  $    154,004  $  18,707  $  --
                                                                      ------------  ---------  ---------
                                                                      ------------  ---------  ---------
</TABLE>
 
    During 1995, Chiron acquired all of the outstanding common stock of CCD, the
interests  of  Ciba-Geigy Ltd.  and its  affiliates  ("Ciba") in  Chiron Biocine
Company (formerly The Biocine Company) and Biocine S.p.A. (through JV Vax  B.V.,
a  Netherlands  company), in  exchange for  6.6  million newly-issued  shares of
Chiron common stock  and a  cash payment  of $23.5  million. The  fair value  of
assets acquired in the transaction was $694.9 million, and liabilities of $261.5
million were assumed by the Company.
 
    During  1995, Chiron  acquired the surgical  products division  of IOLAB for
approximately $95.0 million in  cash. The fair value  of assets acquired in  the
transaction  (including goodwill and purchased in-process technology) was $108.8
million, and liabilities of $12.8 million were assumed by the Company.
 
    During 1995, Chiron acquired all of the outstanding common stock of Viagene,
Inc.  ("Viagene"),  not  previously  owned  by  the  Company,  in  exchange  for
approximately  $35.5 million in cash and  916,000 shares of Chiron common stock.
Additionally, unexercised options to purchase Viagene stock were converted  into
options  to purchase  approximately 132,000 shares  of Chiron  common stock. The
fair value of  assets acquired (including  purchased in-process technology)  was
$158.5 million, and liabilities of $14.7 million were assumed by the Company.
 
    During  1994,  Chiron  acquired all  of  the  common stock  of  Domilens for
approximately $18.7 million  in cash.  In connection with  the acquisition,  the
fair  value  of  assets acquired  (including  goodwill) was  $42.8  million, and
liabilities of $24.1 million were assumed by the Company.
 
    FOREIGN CURRENCY
 
    The  assets  and   liabilities  of  subsidiaries   and  equity   investments
denominated in foreign currencies are translated at the exchange rates in effect
at  the appropriate year-end. The revenues and expenses of such subsidiaries and
investments are  translated at  the average  exchange rates  for the  period  of
operation.   Adjustments  resulting  from  such  translations  are  included  in
cumulative foreign  currency translation  adjustment,  a separate  component  of
stockholders'  equity. Local foreign  currencies are generally  considered to be
the functional currency.
 
    The Company  enters  into  various foreign  currency  hedging  contracts  to
provide  an  economic hedge  against fluctuations  in foreign  currency exchange
rates that  may  affect certain  transactions.  The Company  has  established  a
control  environment which includes policies  and procedures for risk assessment
and  the  approval,  reporting  and  monitoring  of  foreign  currency   hedging
activities. The use of specific foreign currency hedging contracts is determined
by  the Company's objective  to hedge material  foreign receivables and payables
for which the costs of hedging are not excessive. The
 
                                       21
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does  not use  hedging contracts  for trading  or speculative  purposes.
Counterparties  to these  hedging agreements  are major  international financial
institutions. All foreign  currency contracts are  denominated in currencies  of
major  industrial  countries (primarily  the German  mark, Japanese  yen, French
franc, and Australian dollar).  The hedging contracts  are generally settled  at
the  end  of  each  quarter  with gains  or  losses  recorded  in  "Other income
(expense), net" to offset  losses or gains on  foreign currency receivables  and
payables.  Foreign currency transaction  gains and losses, net  of the impact of
hedging, were not significant  for the years ended  December 13, 1995, 1994  and
1993.
 
    CONCENTRATION OF CREDIT RISK
 
    Financial instruments that potentially subject the Company to concentrations
of  credit  risk  consist principally  of  cash investments  and  trade accounts
receivable. The  Company  invests  cash  which is  not  required  for  immediate
operating  needs principally in a diversified portfolio of financial instruments
issued by  institutions with  investment-grade credit  ratings. By  policy,  the
amount  of credit exposure to any  one institution is limited. These investments
are generally not collateralized  and primarily mature  within three years.  The
Company   has  not  experienced   any  significant  realized   losses  on  these
investments.
 
    The Company  has  not  experienced  any  credit  losses  from  its  accounts
receivable  from joint  business partners or  collaborative research agreements,
and none are currently expected. Other  accounts receivable arise from sales  to
customers  of  ophthalmic,  therapeutic, vaccine  and  diagnostic  products. The
Company performs ongoing  credit evaluations  of these  customers and  generally
does  not  require  collateral.  Reserves  are  maintained  for  potential trade
receivable  credit  losses,  and  such  losses  have  been  within  management's
expectations.
 
    RETIREMENT SAVINGS PLAN
 
    The  Company  maintains a  defined-contribution  savings plan  under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
U.S. employees.  Participating employees  may defer  a portion  of their  pretax
earnings  up  to the  Internal Revenue  Service  annual contribution  limit. The
Company matches employee  contributions according  to a  specified formula.  The
Company's  matching contributions  totaled $2.2  million, $1.8  million and $1.3
million in 1995, 1994 and 1993, respectively.
 
    MAJOR CUSTOMERS
 
    During 1995, no  single customer contributed  ten percent or  more to  total
revenues. As discussed in Notes 2 and 4, Ciba is a related party and contributed
11  percent and 13 percent of total  revenues in 1994 and 1993, respectively. As
discussed in Note 4,  Johnson & Johnson and  its affiliates are related  parties
and  collectively contributed 22 percent and 32 percent of total revenues during
1994  and  1993,  respectively.  Sales  of  Betaseron-Registered  Trademark-  to
Chiron's marketing partner accounted for less than ten percent of total revenues
in 1995 and 1993, and 23 percent in 1994.
 
NOTE 2 -- BUSINESS COMBINATIONS
 
    TRANSACTION WITH CIBA
 
    Effective  January 1, 1995, under a  series of agreements between Chiron and
Ciba,  including  an  investment  agreement,  a  cooperation  and  collaboration
agreement  and a governance agreement (collectively "Agreements"), Ciba obtained
a 49.9 percent ownership interest in  Chiron common stock (now approximately  47
percent),  partially  through a  tender offer  for  approximately 38  percent of
Chiron's outstanding common stock for $117  per share. At the same time,  Chiron
acquired all of the
 
                                       22
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
outstanding  common stock of  CCD and Ciba's interest  in Chiron Biocine Company
and Biocine S.p.A. in exchange for 6.6 million newly-issued Chiron common shares
and a cash payment  of $23.5 million. Prior  to the acquisition, Chiron  Biocine
Company  and Biocine S.p.A.  were joint businesses between  Chiron and Ciba with
each having a 50 percent ownership interest. CCD is involved in the  manufacture
and sale of diagnostic and immunodiagnostic products. Chiron Biocine Company and
Biocine  S.p.A. are involved in the research,  development and sale of adult and
pediatric vaccines. These acquisitions of Chiron common stock by Ciba,  together
with  Ciba's prior holdings  of approximately 1.4 million  shares, result in the
aforementioned 49.9 percent ownership of the Company's common stock.
 
    Under the terms of the Agreements, Ciba is entitled to name three members to
Chiron's Board of Directors and has limited rights to review and approve certain
Chiron transactions.  In connection  with  the Agreements,  Ciba has  agreed  to
guarantee  $425 million of  new debt for  Chiron and has  agreed to provide $250
million (which may be increased up to $300 million subject to certain reductions
in the debt guarantee) through 1999 in support of research at Chiron, and Chiron
has the option of issuing up to $500 million of new equity to Ciba.
 
    The acquisitions of CCD and Ciba's  interests in Chiron Biocine Company  and
Biocine S.p.A. (the "Acquisitions") were accounted for under the purchase method
of  accounting. The purchase price of approximately $433.4 million was allocated
to the acquired assets and assumed  liabilities based upon their estimated  fair
value  on the acquisition date. The fair value of the net assets acquired in the
Acquisitions, including purchased in-process technology, was estimated based  on
an  independent valuation  of the  acquired net  assets. The  aggregate purchase
price of approximately $433.4 million  was less than the  fair value of the  net
assets  acquired  by  approximately  $57.3  million.  This  amount  was  ratably
allocated as a reduction of the noncurrent assets of the acquired companies.  In
connection with the acquisition, liabilities were assumed as follows:
 
<TABLE>
<CAPTION>
                                                                                          (IN THOUSANDS)
<S>                                                                                       <C>
Fair value of assets acquired, net of negative goodwill.................................   $    694,895
Common stock issued.....................................................................       (407,550)
Cash paid...............................................................................        (23,504)
Acquisition costs.......................................................................         (2,304)
                                                                                          --------------
Liabilities assumed.....................................................................   $    261,537
                                                                                          --------------
                                                                                          --------------
</TABLE>
 
    As   required  under   generally  accepted   accounting  principles,  Chiron
recognized as an expense the amount allocated to purchased in-process technology
resulting in  a  noncash  charge  against  earnings  of  $222.9  million.  Other
transaction-related  charges totaling $49.4 million related to employee payments
and the  related  taxes,  and  legal  and  investment  advisor  fees  were  also
recognized as expenses. Ciba agreed to reimburse the Company $24.8 million for a
portion  of the employee payments and such  reimbursement has been recorded as a
capital contribution. Other purchased  intangible assets of approximately  $25.6
million  consisting of base technology are  being amortized over their estimated
useful lives of 10 to 15 years, using the straight-line method.
 
    The operations  of  CCD,  Biocine  S.p.A. and  Chiron  Biocine  Company  are
included  in  Chiron's  consolidated  operating  results  from  January  1, 1995
forward. Chiron's interest in the operating results of Biocine S.p.A. and Chiron
Biocine Company were included in the  Company's 1994 and 1993 operating  results
under the equity method of accounting.
 
                                       23
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
    During  1995,  Chiron  and Ciba  entered  into a  limited  liability company
agreement to  utilize research  funding to  be provided  by Ciba,  as  discussed
above.  Under  the terms  of the  agreement, Ciba  will fund  from time  to time
through December 31, 1999, at  Chiron's request, research and development  costs
for  adult vaccines, pediatric vaccines and insulin-like growth factor-1. Annual
funding amounts are subject to certain limitations. In return, Ciba will receive
an interest in  a stream of  variable royalties from  future worldwide sales  of
certain  adult  vaccines,  certain pediatric  vaccines  and  insulin-like growth
factor-1. Royalties will be paid for a  minimum period of ten years, subject  to
an  extension under certain conditions, following  the later of October 1, 2001,
or the date of the first commercial  sale of individual products covered by  the
agreement.  In  addition,  Ciba will  also  receive an  interest  in promotional
rights, in countries other than in  North America and Europe, for certain  adult
vaccines.
 
    Under  the  terms of  the agreement,  Chiron was  granted an  option through
December 31, 2001, to  repurchase Ciba's interest, at  cost plus an  agreed-upon
return. In addition, if Chiron chooses to exercise the option, Ciba will receive
an option to acquire certain exclusive marketing rights, in countries other than
those  in North America  and Europe, with  respect to certain  adult vaccines in
countries in which Ciba has exercised  its co-promotion rights. Pursuant to  the
agreement, Chiron received $27.0 million of funding from Ciba during 1995, which
Chiron   recorded  as  collaborative   agreement  revenues.  Chiron  anticipates
receiving substantial additional funding from  Ciba in future periods,  pursuant
to the terms of the agreement.
 
    ACQUISITION OF IOLAB
 
    On  March 31, 1995,  Chiron Vision acquired  the ophthalmic surgical product
division of IOLAB from  Johnson & Johnson for  approximately $95.0 million.  The
acquisition  was  accounted for  under the  purchase  method of  accounting, and
accordingly,  IOLAB's  financial   results  have  been   included  in   Chiron's
consolidated results of operations from the date of purchase. The purchase price
was  allocated to the  acquired assets and assumed  liabilities based upon their
estimated fair value on the acquisition date.  The fair value of the net  assets
acquired,  including in-process  technology, was estimated  based on independent
valuations of  the acquired  net  assets. In  connection with  the  acquisition,
liabilities were assumed as follows:
 
<TABLE>
<CAPTION>
                                                                                          (IN THOUSANDS)
<S>                                                                                       <C>
Fair value of assets acquired...........................................................   $    108,768
Cash paid...............................................................................        (95,000)
Acquisition costs.......................................................................         (1,013)
                                                                                          --------------
Liabilities assumed.....................................................................   $     12,755
                                                                                          --------------
                                                                                          --------------
</TABLE>
 
    The amount allocated to purchased in-process technology of $10.3 million was
charged  against  earnings  in  the  first  quarter  of  1995.  Other  purchased
intangible assets of approximately $46.5 million consisting of base  technology,
goodwill,  trade  name  and  a  customer list  are  being  amortized  over their
estimated useful lives of 10 to  15 years using the straight-line method.  Also,
the   Company   recorded  additional   charges   for  IOLAB   restructuring  and
integration-related expenses totaling $16.9 million in 1995 (Note 3).
 
    ACQUISITION OF VIAGENE
 
    On September 29, 1995, Chiron acquired  all of the outstanding common  stock
of  Viagene, not previously owned by  the Company, in exchange for approximately
$35.5 million in cash and 916,000
 
                                       24
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 2 -- BUSINESS COMBINATIONS (CONTINUED)
shares of Chiron common stock. Additionally, on September 29, 1995,  unexercised
options to purchase Viagene common stock were converted into options to purchase
approximately  132,000 shares of Chiron common stock. Viagene is a biotechnology
company involved in  the discovery,  development and  commercialization of  gene
transfer  products for the  treatment or prevention  of severe viral infections,
cancers and other  diseases. Prior  to the  acquisition, Chiron  had an  ongoing
collaboration  with Viagene  in the  area of gene  therapy and,  pursuant to the
collaboration arrangement, held an investment in the outstanding voting stock of
Viagene with a carrying value, net of  unrealized gains and a realized loss,  of
approximately $14.1 million as of September 29, 1995.
 
    The  Viagene acquisition has been accounted for under the purchase method of
accounting. The purchase price of approximately $143.7 million was allocated  to
the  acquired assets  and assumed  liabilities based  upon their  estimated fair
value on the acquisition date.  In connection with the acquisition,  liabilities
were assumed as follows:
 
<TABLE>
<CAPTION>
                                                                                          (IN THOUSANDS)
<S>                                                                                       <C>
Fair value of assets acquired...........................................................   $    158,461
Carrying value of original investment in Viagene........................................        (14,130)
Common stock and options issued.........................................................        (91,402)
Cash paid...............................................................................        (35,500)
Acquisition costs.......................................................................         (2,696)
                                                                                          --------------
Liabilities assumed.....................................................................   $     14,733
                                                                                          --------------
                                                                                          --------------
</TABLE>
 
    As   required  under   generally  accepted   accounting  principles,  Chiron
recognized as an expense the amount allocated to purchased in-process technology
in the third quarter of 1995. This resulted in a noncash charge against earnings
of $130.3 million. The results of operations of Viagene are included in Chiron's
consolidated operating results from September 29, 1995 forward.
 
    PROFORMA FINANCIAL INFORMATION
 
    The following  unaudited  pro  forma information  presents  the  results  of
operations  of Chiron, CCD,  Biocine S.p.A., Chiron  Biocine Company and Viagene
for the years ended December 31, 1995 and 1994, with pro forma adjustments as if
the acquisitions  had  been consummated  as  of  the beginning  of  the  periods
presented.  This pro forma information does not purport to be indicative of what
would have occurred  had the  acquisitions been  made as  of those  dates or  of
results  which  may occur  in the  future.  The pro  forma information  does not
include the write-off of  purchased in-process technology  of $222.9 million  or
other  transaction-related  costs totaling  $49.4  million (related  to employee
payments and the  related taxes, and  investment advisor and  legal fees)  which
were  recognized as  expense during  1995, relating  to the  acquisition of CCD,
Biocine S.p.A. and Chiron Biocine Company. Also, the pro forma information  does
not  include the  write-off of  purchased in-process  technology related  to the
Viagene acquisition of $130.3 million.
<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                              --------------------------
                                                                                  1995          1994
                                                                              -------------  -----------
<S>                                                                           <C>            <C>
                                                                                (IN THOUSANDS, EXCEPT
                                                                                   PER SHARE DATA)
 
<CAPTION>
                                                                                     (UNAUDITED)
<S>                                                                           <C>            <C>
Total revenues..............................................................  $   1,107,958  $   968,568
Income (loss) before non-recurring charges..................................       (127,212)      17,806
Income (loss) before non-recurring charges per share........................          (3.13)        0.43
</TABLE>
 
                                       25
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 3 -- RESTRUCTURING AND REORGANIZATION COSTS
    During  1995,   Chiron  recorded   $39.1   million  in   restructuring   and
reorganization charges, including $16.9 million arising from the acquisition and
integration  of IOLAB (Note  2), representing the  expected costs of integrating
the acquired business with Chiron's existing business as well as write-downs  of
certain previously capitalized costs. Of the total charge of $39.1 million, $8.0
million  is due to a change in plans to expand the Company's Emeryville research
and development  facilities,  $7.7 million  is  related  to the  idling  of  the
Company's  Puerto Rico manufacturing  facility and $1.0 million  is related to a
scale-back of manufacturing operations at the Company's Amsterdam facility.  The
majority  of these  facility-related charges, as  well as $3.7  million of other
facility-related charges, have  been paid  in 1995.  Employee termination  costs
related to the Company's restructuring were not significant.
 
    Of  the $16.9  million recorded  as a  result of  the acquisition  of IOLAB,
approximately $6.7  million related  to  write-downs of  previously  capitalized
facility  and  inventory costs.  The remaining  $10.2  million consists  of $5.5
million of employee termination costs and $4.7 million of lease termination  and
other  costs. Chiron Vision  plans to consolidate  its European intraocular lens
manufacturing operations  into  its facility  in  Lyon, France,  and  the  North
American  manufacturing operations  into its facility  in Claremont, California.
The related  workforce  reduction  is  the  result  of  increased  manufacturing
efficiencies  as plants are closed, a  concentration of research and development
efforts and an  elimination of overlap  in sales and  marketing and general  and
administrative  areas. The integration  process is expected  to be substantially
completed by the end of 1997.
 
    The current status of the accrued restructuring charges is summarized below:
 
<TABLE>
<CAPTION>
                                                                                  AMOUNT
                                                                  AMOUNT OF      UTILIZED     AMOUNT TO
                                                                    TOTAL        THROUGH     BE UTILIZED
                                                                RESTRUCTURING  DECEMBER 31,   IN FUTURE
                                                                   CHARGE          1995        PERIODS
                                                                -------------  ------------  -----------
<S>                                                             <C>            <C>           <C>
                                                                             (IN THOUSANDS)
Chiron Vision restructuring charges:
  Employee-related costs......................................   $     5,506    $   (3,627)   $   1,879
  Facility and lease termination costs........................         6,242        (2,380)       3,862
  Duplicate and excess inventory..............................         3,476        (1,632)       1,844
  Other.......................................................         1,724          (280)       1,444
                                                                -------------  ------------  -----------
                                                                      16,948        (7,919)       9,029
Puerto Rico manufacturing facility............................         7,650        (3,562)       4,088
Postponement of Emeryville facility expansion.................         7,990        (7,990)      --
Amsterdam manufacturing facilities............................         1,000        (1,000)      --
Other facility-related........................................         3,718        (3,718)      --
Other.........................................................         1,750        (1,249)         501
                                                                -------------  ------------  -----------
                                                                 $    39,056    $  (25,438)   $  13,618
                                                                -------------  ------------  -----------
                                                                -------------  ------------  -----------
</TABLE>
 
NOTE 4 -- COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS
 
    GENERAL
 
    The Company has  entered into  a number of  collaborative arrangements  with
other  pharmaceutical  and  biotechnology  companies  for  the  development  and
marketing  of  certain  technologies  and   products.  The  majority  of   these
collaborations  are in the  development or clinical trial  phase. Chiron and its
collaborative partners generally  contribute certain  technologies and  research
efforts to the
 
                                       26
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 4 -- COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
collaboration.  In  addition,  Chiron  and  its  collaborative  partners commit,
subject to certain limitations and cancellation clauses, to share in the funding
of the collaborations' ongoing research and clinical trial costs. Chiron,  under
certain  of the arrangements, has  purchased equity securities, including common
and preferred stock and warrants to purchase common and preferred stock, of  the
collaborative partner.
 
    DIAGNOSTIC JOINT BUSINESS
 
    In  1989, Chiron  entered into an  agreement with Ortho  to jointly develop,
manufacture and market certain immunoassay diagnostic products. Under the  terms
of  the agreement,  Chiron receives 50  percent of the  pretax operating profits
generated by the joint business and  is reimbursed for its continuing  research,
development  and  manufacturing costs.  Ortho  and Chiron  also  licensed Abbott
Laboratories and  Pasteur  Sanofi  Diagnostics to  sell  their  own  immunoassay
diagnostic  tests  for  hepatitis  C using  certain  technology  from  the joint
business.
 
    Chiron records its share of profits of the Chiron-Ortho diagnostic  business
on  a  one-month lag  using  estimates provided  by  Ortho. These  estimates are
subject to a final adjustment 90 days  after the end of each calendar year,  and
profit  sharing distributions are payable to Chiron within 90 days after the end
of each quarter. At December 31, 1995 and 1994, $19.6 million and $18.7 million,
respectively, were due from Ortho for profit sharing and reimbursement of costs.
Chiron's 50  percent share  of the  profits from  the joint  business was  $76.9
million  in  1995,  of  which  $1.8  million was  a  result  of  the  final 1994
accounting. In  1994,  Chiron recognized  $74.3  million  as its  share  of  the
profits,   including  a  negligible  adjustment   relating  to  the  final  1993
accounting. In  1993,  Chiron recognized  $77.1  million  as its  share  of  the
profits,  of  which $6.6  million was  a  result of  the final  1992 accounting.
Revenues recognized under the cost  reimbursement portion of the agreement  with
Ortho  for  collaborative research  were $9.6  million,  $8.5 million,  and $9.8
million in 1995, 1994 and 1993, respectively. Revenues recognized under the cost
reimbursement portion of the agreement with  Ortho for product sales were  $16.1
million, $11.8 million and $11.4 million in 1995, 1994 and 1993, respectively.
 
    CEPHALON, INC. ("CEPHALON")
 
    In  January 1994,  Chiron and Cephalon  established a  collaboration for the
research, development and  marketing of  certain products for  the treatment  of
neurological  disorders. Under the  terms of the  agreement, Chiron and Cephalon
will each  contribute certain  technology and  licenses and  will share  profits
equally.  Each party was responsible for its own collaboration-related expenses,
subject to certain  conditions, until total  collaboration-related expenses  are
equalized  or until the products  reach commercialization. Chiron invested $15.0
million in  equity  securities of  Cephalon  in 1994.  The  cumulative  expenses
incurred by Chiron and Cephalon were equalized during the third quarter of 1995,
and  thereafter, all expenses are to be shared equally. Research and development
expenses recognized by  Chiron related  to this  agreement for  the years  ended
December 31, 1995 and 1994, were $25.3 million and $5.4 million, respectively.
 
    DEPOTECH CORPORATION ("DEPOTECH")
 
    In  March  1994, Chiron  entered  into an  agreement  with DepoTech  for the
research, development and  marketing of certain  products incorporating  certain
drug  delivery technologies developed by DepoTech, and in some cases, certain of
Chiron's therapeutic compounds. Under the terms of the agreement, Chiron  agreed
to   make  specified  payments  to  DepoTech  upon  the  attainment  of  product
development milestones, and agreed to fund  all or a portion of the  development
costs  of the  collaboration in exchange  for marketing rights  to the resulting
commercial products. In addition, the parties
 
                                       27
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 4 -- COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
agreed to share  in the revenues  of any resulting  commercial products.  During
1994,  Chiron invested $3.5  million in equity securities  of DepoTech. In 1995,
DepoTech reached the  first milestone,  and accordingly, a  warrant to  purchase
capital  stock  of DepoTech  was converted  into a  technology license  fee, and
Chiron commenced funding its portion of  development costs, resulting in a  $3.5
million  charge to research and development  expense for the year ended December
31, 1995.
 
    G.D. SEARLE & CO. ("SEARLE")
 
    In October 1994, Chiron entered  into a collaboration agreement with  Searle
for  the research, development and marketing of Tissue Factor Pathway Inhibitor.
Under the terms of the agreement, Chiron made a $3.5 million payment to  Searle,
which  was expensed in 1994. Except for  this payment, each party agreed to fund
its own collaboration-related  expenses through  1994. In 1995,  in addition  to
funding its equal share of continuing development expenses, Chiron exercised its
option  to accelerate the  funding of certain development  expenses of Searle in
exchange for  a  right of  first  negotiation to  manufacture  certain  clinical
supplies.  Accordingly, Chiron  paid $8.8  million to  Searle in  1995 which was
recorded as research and development  expense. Future development expenses  will
be shared equally by the parties.
 
    PROGENITOR, INC. ("PROGENITOR")
 
    In  March  1995,  the  Company  reached  an  agreement  with  Progenitor,  a
subsidiary  of  Interneuron  Pharmaceuticals,   Inc.,  to  collaborate  in   the
development   and   commercialization  of   therapeutic  and   vaccine  products
incorporating  Progenitor's  proprietary  gene  therapy  technology.  Under  the
agreement,  Chiron received a  license to Progenitor's  nonviral gene expression
system for  use in  the development  of products  for the  treatment of  certain
cancers and cardiovascular disorders, development of infectious disease vaccines
and for development of certain other gene therapy products. Chiron will have the
right  to manufacture and market any resulting products of the collaboration. In
return for the license and other rights, Chiron made an initial license  payment
of  $2.5 million to  Progenitor, which was recorded  as research and development
expense in  1995.  Under the  agreement,  Chiron  is required  to  make  certain
additional license and milestone payments to Progenitor. In addition, Progenitor
will  receive a royalty from any commercial sales of products resulting from the
collaboration.
 
    GENELABS TECHNOLOGIES, INC. ("GENELABS")
 
    In March  1995, the  Company  reached an  agreement with  Genelabs,  whereby
Chiron  and Genelabs cross-licensed certain rights to hepatitis C virus ("HCV");
hepatitis G  virus ("HGV"),  a  hepatitis virus  discovered by  Genelabs;  human
T-cell  leukemia virus  -- I  ("HTLV-I") and human  T-cell leukemia  virus -- II
("HTLV-II") diagnostic  tests.  Under  the agreement,  Chiron  acquired  certain
rights  to  develop and  market diagnostic  products for  the detection  of HGV,
HTLV-I and  HTLV-II.  In return,  Genelabs  acquired development  and  marketing
rights  in Asia, except  Japan, for certain  products incorporating Chiron's HCV
technology.  Ortho,  Chiron's  joint  diagnostic  business  partner,  agreed  to
participate  as Chiron's  equal partner in  the collaboration  with Genelabs and
therefore will  share equally  in all  payments under  the agreement,  including
equity  investments. Chiron  and Ortho  agreed to pay  $5.0 million  in up front
license fees and up  to $9.0 million in  HGV development milestones. Chiron  and
Ortho  also agreed to  invest a total  of $10.0 million  in equity securities of
Genelabs. Also, under  the terms  of the agreement,  Chiron and  Ortho have  the
option  to acquire substantially all of  the diagnostics business of Genelabs in
the year 2000 through the conversion of the $10.0 million equity investment  for
approximately  one-half of the  business and an additional  payment equal to the
then
 
                                       28
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 4 -- COLLABORATIONS AND JOINT BUSINESS ARRANGEMENTS (CONTINUED)
fair market value  of the  remaining half.  Under a  separate agreement,  Chiron
agreed  to pay Genelabs  $1.0 million in cash  in exchange for  a right of first
refusal to obtain an  exclusive license to Genelabs'  HGV technology for use  in
vaccines.  Chiron paid Genelabs a total of  $8.5 million during 1995 pursuant to
the terms of these agreements.  Of this total, $2.1  million was recorded as  an
investment  in securities of Genelabs and  $6.4 million was recorded as research
and development expense.
 
    NEW YORK UNIVERSITY ("NYU")
 
    In March 1995, the Company reached an agreement with NYU for the license  of
optical  mapping  technology for  use by  Chiron and  its sublicensee,  Ciba, in
development of diagnostics, therapeutics and vaccines, and Chiron also  acquired
the  right to  commercialize a potential  optical mapping  instrument. Under the
terms of the agreement, Chiron made a $5.0 million initial payment to NYU, which
was recorded as research  and development expense in  1995, for the license  and
for  funding certain research facilities at NYU. If Chiron and NYU both agree to
continue development  of  the  instrument,  Chiron will  be  obligated  to  make
milestone  payments totaling $4.0 million to  NYU and will make royalty payments
to NYU based upon any future product sales of the instrument, subject to certain
minimum royalties. In addition, Ciba has agreed to make certain further research
payments to NYU in connection with development of the instrument in exchange for
the sublicense and in exchange for royalty payments by Chiron to Ciba based upon
sales of the instrument.
 
    CIBA
 
    In November 1995,  Chiron and  Ciba entered into  a collaboration  agreement
through  which Ciba acquired a non-exclusive, perpetual license to broadly apply
Chiron's combinatorial chemistry  technologies in Ciba's  research programs.  In
addition,  Chiron and  Ciba agreed to  collaborate on the  identification of new
drug candidates for specific disease targets. In exchange for these rights, Ciba
agreed to pay certain license, milestone and royalty payments to Chiron.
 
    Under the terms  of the agreement,  Ciba will pay  $26.0 million to  Chiron,
over  a five-year period and subject to certain adjustments, in exchange for the
non-exclusive, perpetual  license to  utilize Chiron's  combinatorial  chemistry
techniques.  In  the fourth  quarter  of 1995,  Chiron  received a  $5.5 million
payment from Ciba pursuant to the agreement which was recorded as  collaborative
research agreement revenues from related parties.
 
    In  addition, Ciba agreed to make certain payments to Chiron in exchange for
access to Chiron's technology, chemical libraries and exclusive rights  relating
to  specific drug discovery targets. Ciba was  also granted the right to develop
and market products resulting  from the drug discovery  targets in exchange  for
certain   milestone  and  royalty   payments  to  Chiron.   Chiron  was  granted
commercialization rights to  products developed  for non-competing  indications,
subject  to the payment of royalties to  Ciba. Ciba also agreed to fund Chiron's
activities relating to the collaboration for a period of three years, extendible
to five years at Ciba's option.
 
NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
 
    MARKETABLE SECURITIES
 
    In accordance with the requirements of SFAS 115, the Company has  classified
its  investments in certain debt  and equity securities as "available-for-sale."
Such investments are recorded at fair  value, with unrealized gains and  losses,
deemed  by the Company as temporary in  nature, reported as a separate component
of stockholders' equity.
 
                                       29
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    At December 31, available-for-sale securities consisted of the following:
 
<TABLE>
<CAPTION>
                                                   1995                                            1994
                              ----------------------------------------------  -----------------------------------------------
                              ADJUSTED   UNREALIZED   UNREALIZED     FAIR     ADJUSTED   UNREALIZED   UNREALIZED
                                COST        GAINS       LOSSES       VALUE      COST        GAINS       LOSSES    FAIR VALUE
                              ---------  -----------  -----------  ---------  ---------  -----------  ----------  -----------
<S>                           <C>        <C>          <C>          <C>        <C>        <C>          <C>         <C>
                                                                      (IN THOUSANDS)
U.S. Government
 securities.................  $  69,659   $     298    $    (125)  $  69,832  $ 126,971   $     137   $   (3,124) $   123,984
Mortgage-backed
 securities.................     11,317          17          (43)     11,291      2,029          --         (710)       1,319
Corporate debt securities...    130,150         128         (213)    130,065    269,559         302       (3,663)     266,198
                              ---------  -----------  -----------  ---------  ---------  -----------  ----------  -----------
                                211,126         443         (381)    211,188    398,559         439       (7,497)     391,501
Marketable equity
 securities.................      9,100      31,200           --      40,300     20,729          --       (5,632)      15,097
                              ---------  -----------  -----------  ---------  ---------  -----------  ----------  -----------
                              $ 220,226   $  31,643    $    (381)  $ 251,488  $ 419,288   $     439   $  (13,129) $   406,598
                              ---------  -----------  -----------  ---------  ---------  -----------  ----------  -----------
                              ---------  -----------  -----------  ---------  ---------  -----------  ----------  -----------
</TABLE>
 
    At December 31, these securities were classified in the Consolidated Balance
Sheet as follows:
 
<TABLE>
<CAPTION>
                                                                                   1995         1994
                                                                                -----------  -----------
<S>                                                                             <C>          <C>
                                                                                     (IN THOUSANDS)
Cash equivalents..............................................................  $    61,289  $    82,554
Short-term investments in marketable debt securities..........................       61,066      137,619
Noncurrent investments in marketable debt securities..........................       88,833      171,328
Investments in equity securities and affiliated companies.....................       40,300       15,097
                                                                                -----------  -----------
                                                                                $   251,488  $   406,598
                                                                                -----------  -----------
                                                                                -----------  -----------
</TABLE>
 
    The cost and estimated fair  value of available-for-sale debt securities  as
of December 31, 1995, by contractual maturity, consisted of the following:
 
<TABLE>
<CAPTION>
                                                                                 ADJUSTED
                                                                                   COST      FAIR VALUE
                                                                                -----------  -----------
<S>                                                                             <C>          <C>
                                                                                     (IN THOUSANDS)
Due in one year or less.......................................................  $   122,418  $   122,355
Due in one to three years.....................................................       77,391       77,542
Due thereafter................................................................           --           --
                                                                                -----------  -----------
                                                                                    199,809      199,897
Mortgage-backed securities....................................................       11,317       11,291
                                                                                -----------  -----------
                                                                                $   211,126  $   211,188
                                                                                -----------  -----------
                                                                                -----------  -----------
</TABLE>
 
    The  proceeds received during  1995 and 1994  from the sale  and maturity of
securities held as  available-for-sale were $334.1  million and $232.9  million,
respectively. During 1995, the gross realized gains and gross realized losses on
sales  of  securities  held as  available-for-sale  were $0.4  million  and $3.5
million, respectively.  Gross realized  gains and  losses during  1994 were  not
significant.   The  cost   of  securities  sold   was  based   on  the  specific
identification method. The change in the  net unrealized holding gain (loss)  on
available-for-sale securities, included as a separate component of stockholders'
equity for 1995 and 1994, was $44.0 million and $(12.7) million, respectively.
 
                                       30
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 5 -- FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
    OTHER FINANCIAL INSTRUMENTS
 
    The  carrying amounts and fair values of the Company's financial instruments
other than those accounted for in accordance  with SFAS 115 at December 31,  are
as follows:
 
<TABLE>
<CAPTION>
                                                                1995                      1994
                                                      ------------------------  ------------------------
                                                       CARRYING/                 CARRYING/
                                                       NOTIONAL                  NOTIONAL
                                                        AMOUNT     FAIR VALUE     AMOUNT     FAIR VALUE
                                                      -----------  -----------  -----------  -----------
<S>                                                   <C>          <C>          <C>          <C>
                                                                        (IN THOUSANDS)
Nonmarketable equity investments (accounted for
 under the cost method).............................  $     9,209  $     9,209  $    10,365  $    10,365
Notes receivable....................................        3,519        3,073       17,646       16,892
Deposits............................................        4,643        4,509          754          754
Long-term debt:
  Convertible subordinated debentures...............      312,467      360,677      305,494      259,247
  Notes payable.....................................       64,755       64,741        6,306        6,306
Foreign currency hedging contracts (off-balance
 sheet financial instruments).......................       65,106       65,188       12,866       12,885
</TABLE>
 
    Nonmarketable  equity  investments which  are accounted  for using  the cost
method have carrying values which  approximate fair values. Estimating the  fair
value  of the Company's interests  in nonmarketable equity investments accounted
for under the equity  method is not  practicable because of  the lack of  quoted
market  prices  and  the inability  to  estimate fair  values  without incurring
excessive costs.  The carrying  amounts of  these investments  reflected in  the
accompanying consolidated financial statements at December 31, 1995 and 1994, of
$4.9  million and $26.0 million,  respectively, represent the investments Chiron
has made to date as well as Chiron's share of the results of operations for  the
time  periods  the  investments  were  held,  less  distributions  and dividends
received from the investee.
 
    The fair values of the notes receivable  and the notes payable are based  on
the  discounted value of expected future cash  flows. The fair value of deposits
is based on  the discounted value  of expected future  cash flows using  current
rates  for  assets  with  similar  maturities.  The  fair  value  of convertible
subordinated debentures is based on the market price at the close of business on
December 31, 1995 and 1994.
 
    The fair  value  of foreign  currency  hedging  contracts is  based  on  the
exchange  rate in  effect on  the last  business day  of the  year. The notional
amount approximates the fair value as the majority of the contracts were entered
into shortly before year-end.
 
                                       31
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 6 -- DEBT OBLIGATIONS AND CAPITAL LEASES
    At December 31, 1995 and 1994, long-term debt and capital lease  obligations
consist of the following:
 
<TABLE>
<CAPTION>
                                                                                   1995         1994
                                                                                -----------  -----------
<S>                                                                             <C>          <C>
                                                                                     (IN THOUSANDS)
1.9 percent convertible subordinated debentures...............................  $   225,215  $   220,076
5.25 percent convertible subordinated debentures..............................       87,252       85,418
Capital lease obligations.....................................................       38,940       29,722
Note payable to Ciba..........................................................       54,016           --
Other notes payable...........................................................       14,765        6,306
                                                                                -----------  -----------
                                                                                    420,188      341,522
Less current portion..........................................................        6,940        3,461
                                                                                -----------  -----------
                                                                                $   413,248  $   338,061
                                                                                -----------  -----------
                                                                                -----------  -----------
</TABLE>
 
    In  1993, Chiron issued 1.9 percent convertible subordinated debentures with
a face value of $253.9 million and a yield to maturity of 4.5 percent. The notes
are convertible, at  the holders' option,  into common stock  at 8.6 shares  per
$1,000 principal amount and are due in 2000. Interest is paid semi-annually. The
debentures  may be redeemed by the Company at any time after November 1996, at a
redemption price starting at $905.78 per $1,000 principal amount increasing to a
redemption price equal to 100 percent  of the principal amount at maturity.  The
debentures  are carried net of an initial  issue discount of $39.3 million which
is being amortized over  the life of the  debentures using the interest  method.
Debentures  with a carrying value of $8.9  million and $8.7 million were held by
Ciba at December 31, 1995 and 1994, respectively.
 
    Cetus Oncology Corporation's ("Cetus") 5.25 percent convertible subordinated
debentures are  due  in 2002,  have  a face  value  of $100.0  million  and  are
convertible  at the holders' option at any  time into common stock at 8.1 shares
per $1,000 principal  amount. Interest is  paid annually. At  the option of  the
Company,  the  debentures may  be  redeemed at  any  time at  face  value. These
debentures are carried at a discount  and the difference between the face  value
of  the debentures and their present value  is being accreted over the remaining
term of  the  debentures  using  the interest  method.  Chiron  and  Cetus  have
cross-guaranteed their respective convertible subordinated debentures.
 
    Capital lease obligations consist primarily of one lease bearing an interest
rate  of 10.5 percent and maturing in  2004. The gross amount of land, buildings
and equipment leased  under noncancelable capital  leases totaled $23.8  million
and  $14.1 million  and accumulated depreciation  totaled $5.2  million and $4.0
million at  December 31,  1995  and 1994,  respectively. Future  payments  under
capital  lease obligations  (including interest of  approximately $35.0 million)
are as  follows: 1996  --  $5.3 million,  1997 --  $5.7  million, 1998  --  $5.0
million,  1999  --  $4.0  million,  2000  --  $3.7  million  and  $50.2  million
thereafter.
 
    The note payable to Ciba for approximately $54.0 million was assumed by  the
Company as part of the acquisition of CCD. The note bears interest at a variable
rate  based on LIBOR (approximately 5.8 percent at December 31, 1995) and is due
in 2000 together with accrued interest.
 
                                       32
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 6 -- DEBT OBLIGATIONS AND CAPITAL LEASES (CONTINUED)
    At December 31, 1995, the Company had various notes payable with an  average
interest  rate of  6.7 percent  and maturities  ranging from  1996 through 2014.
Maturities of notes payable for years 1996 through 2000 are as follows: 1996  --
$4.7  million, 1997 -- $1.6 million, 1998 -- $1.6 million, 1999 -- $1.7 million,
2000 -- $1.8 million and $3.4 million thereafter.
 
    Short-term borrowings totaled $50.0 million as of December 31, 1995. As part
of the acquisition  of CCD, borrowings  under revolving foreign  line of  credit
arrangements  were assumed by the  Company totaling approximately $39.8 million,
bearing interest at rates  which average approximately  2.2 percent at  December
31,  1995. During 1995, the Company entered  into a revolving, unsecured line of
credit arrangement with an international bank under which the Company may borrow
up to  $50.0 million.  This credit  facility  is guaranteed  by Ciba  and  bears
interest at a rate based on LIBOR (approximately 5.8 percent on the $1.0 million
outstanding   at  December  31,  1995).  The  remaining  portion  of  short-term
borrowings  consists  primarily  of  foreign  lines  of  credit  and   overdraft
facilities  maintained for Biocine S.p.A. These borrowings totaled approximately
$4.8 million at December 31, 1995, and  bear interest at an average rate of  5.5
percent.  Unused lines of credit or commitments with banks totaled approximately
$122.6 million at December 31, 1995.
 
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
 
    LEASES
 
    Chiron leases  laboratory, office  and  manufacturing facilities,  land  and
equipment  under noncancelable  operating leases  which expire  at various times
through 2037. Rent expense was $28.0 million in 1995, $12.7 million in 1994, and
$9.0 million in 1993.
 
    Future minimum lease  payments under these  leases are as  follows: 1996  --
$25.7  million, 1997  -- $21.2  million, 1998  -- $17.1  million, 1999  -- $13.1
million, 2000 -- $10.8 million and $25.2 million thereafter.
 
    CETUS HEALTHCARE LIMITED PARTNERSHIPS
 
    Pursuant to certain agreements between  the Company and the former  partners
of  Cetus Healthcare Limited  Partnership ("CHLP"), the  Company is obligated to
fund development of certain CHLP products through regulatory approval if,  based
on  the  Company's  assessment,  the products  are  believed  to  be technically
feasible and commercially viable. Because of the inherent uncertainties both  as
to  the  likelihood  of  any  particular  product  continuing  to  be  viewed as
technically feasible and commercially  viable and as to  the cost of  developing
any  particular product  through regulatory approval,  the Company  is unable to
estimate future costs of developing the products subject to this obligation.  In
addition,  the former partners  of CHLP are  entitled to payments  on net sales,
royalties or other fees received by Chiron for certain products.
 
    In December 1990, Cetus  exercised its purchase options  to acquire all  the
limited  partners'  interest in  Cetus  Healthcare Limited  Partnership  II. The
former partners are entitled to receive a  fixed percentage of the net sales  of
certain  products in  Europe (through December  31, 2005) and  the United States
(until certain aggregate returns are realized).
 
                                       33
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 7 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
    OTHER COMMITMENTS
 
    In connection  with the  expansion of  its manufacturing  capabilities,  the
Company   had   various  commitments   under  construction   contracts  totaling
approximately  $14.8  million  at  December  31,  1995.  The  Company  also  had
performance  bonds outstanding in the amount of  $6.9 million as of December 31,
1995, primarily in connection with sales to public health authorities.
 
NOTE 8 -- STOCKHOLDERS' EQUITY
 
    STOCK OPTION PLANS
 
    In December  1991, Chiron  adopted  a stock  option  plan ("1991  Plan")  to
replace and supersede the separate plans maintained by Chiron, Cetus and certain
Chiron subsidiaries. The 1991 Plan provides for the grant to employees of either
nonqualified  or incentive options  and the grant  to directors, consultants and
contractors of nonqualified options. Incentive options are to be granted at  not
less  than  the fair  market value  of common  stock  at the  date of  grant and
nonqualified options at  not less  than 85 percent  of such  fair market  value.
Options are exercisable as determined by the Board of Directors.
 
    Initially,  the 1991 Plan  had reserved and  available for issuance, options
for 4.5 million shares of Chiron  common stock and restricted common stock  plus
any remaining shares of common stock and restricted stock remaining for issuance
under the Chiron 1982 Stock Option Plan and 1984 Nonqualified Stock Option Plan.
This  amount is increased annually by a number of shares equal to 1.5 percent of
the number  of shares  of common  stock outstanding  plus shares  issuable  upon
conversion   or  exercise  of  outstanding  warrants,  options  and  convertible
securities. For 1995, this increase in  shares available for grant was  627,268.
At December 31, 1995, a total of 2,075,368 shares were available for grant under
the 1991 Plan.
 
    A summary of stock option activity follows:
 
<TABLE>
<CAPTION>
                                                                 1995           1994           1993
                                                             -------------  -------------  -------------
<S>                                                          <C>            <C>            <C>
Outstanding options at January 1,..........................      4,946,884      4,342,618      4,207,545
  Granted..................................................      2,626,904      1,166,982      1,175,834
  Forfeited................................................       (301,834)      (168,834)      (198,721)
  Surrendered against payment by Ciba......................       (767,740)            --             --
  Exercised................................................       (669,801)      (393,882)      (842,040)
                                                             -------------  -------------  -------------
Outstanding options at December 31,........................      5,834,413      4,946,884      4,342,618
                                                             -------------  -------------  -------------
Exercisable options at December 31,........................      2,214,947      2,566,805      1,972,065
Average exercise price of outstanding options at December
 31,.......................................................  $       59.03  $       51.28  $       45.03
Average exercise price of options exercised during
 the year..................................................  $       42.42  $       32.80  $       26.22
Average exercise price of options granted during
 the year..................................................  $       65.32  $       70.67  $       61.93
</TABLE>
 
    EMPLOYEE STOCK PURCHASE PLAN
 
    Chiron has a stock purchase plan in which eligible employees may participate
through  payroll deductions. A total of  1,750,000 shares have been reserved for
issuance under the plan, of which 954,118 shares were available for purchase  at
December 31, 1995. At the end of each quarter, funds
 
                                       34
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 8 -- STOCKHOLDERS' EQUITY (CONTINUED)
deducted  from  participating employees'  salaries are  used to  purchase common
stock at 85 percent of the lower of market value at the quarterly purchase  date
or  the employees' eligibility date for  participation. Purchases of shares made
under the plan were 172,665 in 1995, 157,891 in 1994 and 121,840 in 1993.
 
    COMMON STOCK WARRANTS
 
    As a result of the acquisition of Cetus, the following warrants to  purchase
Chiron common stock are outstanding at December 31, 1995:
 
<TABLE>
<CAPTION>
  NUMBER OF    EXERCISE
   SHARES        PRICE        EXPIRATION DATE
-------------  ---------  -----------------------
<S>            <C>        <C>
     291,938   $   95.33        December 15, 1996
     150,000       52.50        December 31, 1998
</TABLE>
 
    The  $95.33 warrants are  currently exercisable. The  $52.50 warrants become
exercisable upon  reaching  $50.0  million  in annual  worldwide  sales  of  the
Company's Proleukin-Registered Trademark- product.
 
    PREFERRED SHARE PURCHASE RIGHTS
 
    On  August  25, 1994,  the  Board of  Directors  of the  Company  declared a
dividend of one preferred share purchase right ("a right") for each  outstanding
share  of common  stock of  the Company. Each  right entitles  the holder, under
certain circumstances, to purchase from the Company one one-hundredth of a share
of Series A Junior Participating  Preferred Stock of the  Company at a price  of
$325,  subject to  adjustment. The  rights are to  be distributed  to holders of
Chiron common stock upon the acquisition by a third party of certain percentages
of Chiron common stock. As part of the agreements with Ciba, Chiron amended  the
Rights  Agreement such that  Ciba would not  be "an acquiring  person" under the
Rights Agreement and therefore,  the purchase of  an approximately 49.9  percent
interest  in Chiron common stock  by Ciba did not  result in distribution of the
rights.
 
NOTE 9 -- INCOME TAXES
 
    COMPONENTS OF PRE-TAX EARNINGS
 
    For financial  reporting  purposes,  "Income  (loss)  before  income  taxes"
includes the following components for the years ended December 31,:
 
<TABLE>
<CAPTION>
                                                                        1995        1994        1993
                                                                    ------------  ---------  ----------
<S>                                                                 <C>           <C>        <C>
                                                                              (IN THOUSANDS)
United States.....................................................  $   (492,842) $  36,829  $   33,331
Foreign...........................................................         2,068     (4,832)    (10,244)
                                                                    ------------  ---------  ----------
                                                                    $   (490,774) $  31,997  $   23,087
                                                                    ------------  ---------  ----------
                                                                    ------------  ---------  ----------
</TABLE>
 
                                       35
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 9 -- INCOME TAXES (CONTINUED)
    COMPONENTS OF PROVISION FOR INCOME TAXES
 
    Significant  components of the provision for income taxes are as follows for
the years ended December 31,:
 
<TABLE>
<CAPTION>
                                                                       1995         1994        1993
                                                                   ------------  ----------  ----------
<S>                                                                <C>           <C>         <C>
                                                                              (IN THOUSANDS)
Current:
  Federal........................................................  $         --  $   10,741  $     (290)
  State..........................................................         1,807       2,227        (144)
  Foreign........................................................         9,901         266         457
                                                                   ------------  ----------  ----------
                                                                         11,708      13,234          23
Deferred:
  Federal........................................................            --          --       1,113
  State..........................................................            --          --          --
  Foreign........................................................         1,260          --          --
                                                                   ------------  ----------  ----------
                                                                          1,260          --       1,113
Charge in lieu of taxes resulting from recognition of acquired
 tax benefits that are allocated to reduce noncurrent intangible
 assets related to the acquired entity...........................         8,721         438       3,567
                                                                   ------------  ----------  ----------
Total provision..................................................  $     21,689  $   13,672  $    4,703
                                                                   ------------  ----------  ----------
                                                                   ------------  ----------  ----------
</TABLE>
 
    The tax benefit  related to tax  deductions for the  Company's stock  option
plans  is recorded as an increase to paid-in capital when realized. Tax benefits
of approximately $0.9 million  in 1995, $9.9  million in 1994  and none in  1993
were realized.
 
                                       36
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                               December 31, 1995
 
NOTE 9 -- INCOME TAXES (CONTINUED)
    RATE RECONCILIATION
 
    The  reconciliation  of  the provision  for  income taxes,  computed  at the
statutory United States income tax rate,  to the reported amounts is as  follows
for the years ended December 31,:
 
<TABLE>
<CAPTION>
                                                                         1995        1994       1993
                                                                     ------------  ---------  ---------
<S>                                                                  <C>           <C>        <C>
                                                                               (IN THOUSANDS)
Federal tax provision (benefit) at statutory rates.................  $   (171,771) $  11,199  $   8,080
Tax effect of write-off of purchased in-process
 technology........................................................       127,850     --         --
State taxes, net of federal benefit................................         4,895      2,300       (144)
Foreign income taxes...............................................        16,794        266        457
Losses of foreign subsidiaries not providing benefit in current
 year..............................................................          (724)     2,247      4,020
Amortization of intangible assets..................................           696        927      1,006
Effect of net operating loss carryforward..........................        31,691     --         (6,569)
Nontaxable earnings of joint business..............................       --          (2,547)    --
Nondeductible expenses related to Ciba transaction.................         9,308        875     --
Utilization of deferred tax assets not previously
 benefited.........................................................       --          (2,246)    (2,549)
Other..............................................................         2,950        651        402
                                                                     ------------  ---------  ---------
Provision for income taxes.........................................  $     21,689  $  13,672  $   4,703
                                                                     ------------  ---------  ---------
                                                                     ------------  ---------  ---------
</TABLE>
 
                                       37
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 9 -- INCOME TAXES (CONTINUED)
    SUMMARY OF DEFERRED INCOME TAXES
 
    Deferred  income taxes reflect the net  tax effects of temporary differences
between the carrying amounts of  assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes and the tax effects of net
operating loss and credit carryforwards. Significant components of the Company's
deferred income tax liabilities and assets are as follows:
 
<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                              --------------------------
                                                                                  1995          1994
                                                                              ------------  ------------
<S>                                                                           <C>           <C>
                                                                                    (IN THOUSANDS)
Deferred income tax liabilities:
  Basis differences -- purchase accounting..................................  $     19,537  $     10,214
  Patent costs expensed for tax purposes....................................         7,205         5,981
  Other.....................................................................         5,036            --
                                                                              ------------  ------------
                                                                                    31,778        16,195
Deferred income tax assets:
  Basis differences -- purchase accounting and intangibles..................        89,074        93,328
  Depreciation and purchased technologies...................................        22,345         8,155
  Reserves and expense accruals.............................................        43,458        16,063
  Net operating loss carryovers.............................................       128,681        22,659
  Business credit carryforwards.............................................        26,162        10,182
  Other.....................................................................        12,498        13,518
                                                                              ------------  ------------
                                                                                   322,218       163,905
  Less valuation allowance..................................................      (286,757)     (147,710)
                                                                              ------------  ------------
                                                                                    35,461        16,195
                                                                              ------------  ------------
Net deferred income tax asset...............................................  $      3,683  $    --
                                                                              ------------  ------------
                                                                              ------------  ------------
</TABLE>
 
    The  net change in the valuation allowance  for the years ended December 31,
1995 and  1994, was  an  increase of  $139.0 million  and  a decrease  of  $13.9
million, respectively.
 
    Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1995, will be allocated as follows:
 
<TABLE>
<CAPTION>
                                                                                          (IN THOUSANDS)
<S>                                                                                       <C>
Income tax benefit......................................................................   $    209,192
Goodwill and other noncurrent intangible assets.........................................         38,809
Additional paid-in capital..............................................................         38,756
                                                                                          --------------
                                                                                           $    286,757
                                                                                          --------------
                                                                                          --------------
</TABLE>
 
                                       38
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 9 -- INCOME TAXES (CONTINUED)
    TAX OPERATING LOSS AND CREDIT CARRYFORWARDS
 
    The  following presents the carryforwards as  of December 31, 1995 which are
available to offset future income tax liabilities:
 
<TABLE>
<CAPTION>
                                                                                          (IN THOUSANDS)
<S>                                                                                       <C>
Federal net operating loss carryforwards expiring from 2002 through 2010................   $    237,181
State net operating loss carryforwards expiring from 1996 through 2010..................        115,398
Foreign net operating loss carryforwards principally carried forward indefinitely.......        104,797
Federal tax credit carryforwards expiring from 1997 through 2009........................         16,717
State tax credit carryforwards expiring from 1997 through 2010..........................          9,445
</TABLE>
 
NOTE 10 -- OTHER INCOME (EXPENSE), NET
    Other income (expense), net, for each of the three years ended December  31,
consists of the following:
 
<TABLE>
<CAPTION>
                                                                        1995        1994       1993
                                                                     ----------  ----------  ---------
<S>                                                                  <C>         <C>         <C>
                                                                              (IN THOUSANDS)
Interest and dividend income.......................................  $   22,301  $   20,343  $  16,154
Capitalized interest...............................................         420       4,405      1,857
Interest expense and related costs on convertible debentures.......     (17,827)    (16,782)    (8,861)
Write-downs of investments.........................................          --     (11,607)        --
Other interest expense.............................................     (12,535)     (3,404)    (3,366)
Net realized gain (loss) on sale of debt securities................      (3,037)     (2,234)     1,276
Realized/unrealized gain (loss) on foreign exchange transactions...        (193)        156       (405)
Other..............................................................       2,525      (1,280)     1,294
                                                                     ----------  ----------  ---------
                                                                     $   (8,346) $  (10,403) $   7,949
                                                                     ----------  ----------  ---------
                                                                     ----------  ----------  ---------
</TABLE>
 
NOTE 11 -- GEOGRAPHIC AREA INFORMATION
    Chiron  operates in  the global healthcare  industry in  four major markets:
diagnostics,  ophthalmics,  vaccines   and  therapeutics.  The   Company  is   a
multinational corporation with operations in many countries including the United
States,  Canada, France, Germany, the United Kingdom, Italy, The Netherlands and
Australia. Transfers between geographic  areas represent intercompany sales  and
are  accounted for based on established  sales prices between related companies.
In computing earnings from operations  for foreign subsidiaries, no  allocations
of general corporate expenses or interest have been made. Identifiable assets of
foreign  geographic  areas  relate  to the  operating  assets  of  the Company's
subsidiaries in those countries. Domestic assets consist of all operating assets
of the Company located within the United States.
 
    Results of foreign operations  for 1995 consist  of ophthalmic and  oncology
sales  in  addition to  sales of  vaccines and  diagnostic products.  Results of
foreign operations  for  1994  and  1993 consist  primarily  of  ophthalmic  and
oncology product sales.
 
                                       39
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 11 -- GEOGRAPHIC AREA INFORMATION (CONTINUED)
    Information about the Company's operations in different geographic areas for
the three years ended December 31, 1995, is as follows:
 
<TABLE>
<CAPTION>
                            DOMESTIC       EUROPE     ASIA/PACIFIC   OTHER    ELIMINATIONS  CONSOLIDATED
                          -------------  -----------  -----------  ---------  ------------  -------------
<S>                       <C>            <C>          <C>          <C>        <C>           <C>
                                                          (IN THOUSANDS)
1995:
  Sales to unaffiliated
   customers............  $     592,524  $   348,392  $   136,668  $  22,998   $   --       $   1,100,582
  Transfers between
   geographic areas.....        178,084       46,819          586     --         (225,489)       --
                          -------------  -----------  -----------  ---------  ------------  -------------
  Total revenue.........        770,608      395,211      137,254     22,998     (225,489)      1,100,582
  Net loss..............       (453,524)     (37,234)      (1,222)    (4,898)     (15,585)       (512,463)
  Identifiable assets...      1,901,145      292,628       87,684     12,272     (803,531)      1,490,198
1994:
  Sales to unaffiliated
   customers............  $     379,917  $    65,569  $     5,322  $   3,171   $   --       $     453,979
  Transfers between
   geographic areas.....         22,919        1,108        1,370     --          (25,397)       --
                          -------------  -----------  -----------  ---------  ------------  -------------
  Total revenue.........        402,836       66,677        6,692      3,171      (25,397)        453,979
  Net income (loss).....         25,356       (3,456)        (732)    (1,327)      (1,516)         18,325
  Identifiable assets...      1,091,648       62,034        1,345     (1,017)    (104,268)      1,049,742
1993:
  Sales to unaffiliated
   customers............  $     266,671  $    40,829  $     4,932  $   5,103   $   --       $     317,535
  Transfers between
   geographic areas.....         22,917       11,585        1,189     --          (35,691)       --
                          -------------  -----------  -----------  ---------  ------------  -------------
  Total revenue.........        289,588       52,414        6,121      5,103      (35,691)        317,535
  Net income (loss).....         29,114      (12,410)        (130)       144        1,666          18,384
  Identifiable assets...      1,038,047       17,604        2,043      1,006      (90,103)        968,597
</TABLE>
 
    Revenues  by customer  location, including  both local  revenues and exports
from other locations, were as follows:
 
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                 ---------------------------------------
                                                                     1995          1994         1993
                                                                 -------------  -----------  -----------
<S>                                                              <C>            <C>          <C>
                                                                             (IN THOUSANDS)
North America..................................................  $     502,090  $   344,569  $   233,940
Europe.........................................................        367,521       86,804       66,286
Asia and Pacific Basin.........................................        169,367       17,982       15,810
South America, Africa and Other................................         61,604        4,624        1,499
                                                                 -------------  -----------  -----------
                                                                 $   1,100,582  $   453,979  $   317,535
                                                                 -------------  -----------  -----------
                                                                 -------------  -----------  -----------
</TABLE>
 
                                       40
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS
    The Company  is  involved  in  litigation in  the  ordinary  course  of  its
business.  While  the  ultimate  outcome  of  litigation  cannot  be  accurately
predicted, based upon  information presently  known to  management, the  Company
does  not believe  that the ultimate  resolution of any  such litigation matter,
including the matters  described below,  should have a  material adverse  effect
upon its financial statements as presented herein.
 
    ABBOTT   LABORATORIES.    On  December  13,  1993,  Chiron  filed  a  patent
infringement action against Abbott in the  United States District Court for  the
Northern  District  of  California.  The  suit,  which  alleges  infringement of
Chiron's U.S. Patent  No. 5,156,949  ("the '949  patent"), claiming  the use  of
recombinant  envelope antigens in  immunoassays for HIV  antibodies, is based on
Abbott's sale of  unlicensed HIV immunoassay  tests which are  believed to  fall
within  the scope of one or more patent claims. Abbott is defending this suit on
the basis of invalidity and  non-infringement. Chiron is requesting  unspecified
damages  and injunctive relief.  Cross motions for  summary judgment on Abbott's
defenses of inequitable conduct and prior invention were filed. After  argument,
the  Court granted  portions of Chiron's  motion but denied  Abbott's motion for
summary judgment.  Subsequently, the  United States  Patent &  Trademark  Office
declared  an interference  between the '949  patent and an  application owned by
Centocor and the U.S. government. Chiron is the junior party. The Court  refused
Abbott's  request to stay the litigation  pending resolution of the interference
and has scheduled a trial for April 7, 1996.
 
    On April 26,  1994, Abbott filed  suit against Chiron  in the United  States
District Court for the Northern District of Illinois, Eastern Division, alleging
that  the Company has,  by making, using and  selling nucleic acid hybridization
assays, infringed three  U.S. patents  owned by  third parties  and licensed  to
Abbott.  Abbott  is  seeking injunctive  relief  and damages  in  an unspecified
amount. The Company believes that it  has substantial defenses and is  defending
this suit vigorously. Trial is currently scheduled for July 15, 1996.
 
    ALLERGAN MEDICAL OPTICS.  On December 8, 1992, Allergan Medical Optics filed
a  lawsuit  in the  United States  District  Court for  the Central  District of
California against Chiron and Chiron Intra-
Optics (now Chiron Vision)  (together, "Chiron"). The  complaint alleged that  a
mechanical  inserter used to  place the Chiron foldable  intraocular lens in the
eye during cataract surgery infringes a patent licensed exclusively to Allergan.
Allergan sought  an injunction  against sales  of the  inserter, damages  in  an
unspecified amount, and attorneys' fees. On November 27, 1995, Chiron Vision and
Allergan  reached a  settlement in  the lawsuit.  Chiron signed  a Final Consent
Judgment in exchange for a license to the subject patent.
 
    ADVANCED CHEMTECH.  On  August 11, 1994, Advanced  ChemTech, Inc. brought  a
lawsuit  against  Chiron in  the United  States District  Court for  the Western
District of Kentucky, Louisville Division, asserting that certain Chiron patents
relating to peptide mixtures are invalid  and unenforceable and that Chiron  has
engaged  in unfair  competition and unfair  business practices  in asserting its
patent rights.  Advanced ChemTech  is asking  the Court  to: (1)  find that  the
patent  at issue is  invalid and unenforceable; (2)  find that Advanced ChemTech
does not infringe the patents; and (3) award damages according to proof.  Chiron
has answered and counterclaimed for infringement of its patents. Chiron believes
that  it  has  substantial  defenses against  the  claims  asserted  by Advanced
ChemTech.
 
    DANIEL W. BRADLEY.  On  December 20, 1994, Dr.  Daniel W. Bradley, a  former
scientist  at the U.S. Centers  for Disease Control (the  "CDC") brought suit in
the United States District Court for the Northern District of California against
Chiron,   Ortho,    certain    employees    of   Chiron,    and    the    United
 
                                       41
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS (CONTINUED)
States  government.  Subsequently,  Bradley  dismissed the  United  States  as a
defendant. Bradley, who collaborated with Chiron scientists on research that led
to the discovery of HCV, alleges he had been wrongly excluded as an inventor  of
HCV.  He requests various forms of relief,  including declarations that he is an
inventor of  Chiron's  patents  related  to  HCV  and  that  these  patents  are
unenforceable.  Bradley further seeks monetary  damages and a constructive trust
on all past and  future profits derived from  Chiron's HCV invention, which  are
estimated  by Bradley to be in excess of  $1 billion, as well as penalties under
federal and state Racketeering and Corrupt Organization (RICO) statutes.  Chiron
believes  Bradley's claims  to inventorship and  his suit are  without merit and
that substantial defenses  exist. In 1990,  Bradley and the  CDC entered into  a
settlement  agreement regarding  their respective  claims of  inventorship under
which any rights either might have were assigned to Chiron. Chiron believes that
the settlement agreement is  valid and bars substantially  all of the claims  in
the  subject  litigation. Chiron  and  the other  defendants  filed a  motion to
dismiss  Bradley's  First  Amended  Complaint.  The  Court  dismissed  Bradley's
complaint  for failure to  state a claim  upon which relief  can be granted, but
allowed Bradley  to file  an amended  complaint. Chiron  has filed  a motion  to
dismiss Bradley's Second Amended Complaint.
 
    CARNEGIE  MELLON UNIVERSITY.  On August 20, 1994, Carnegie Mellon University
and Three  Rivers Biologicals,  Inc.  brought a  lawsuit  in the  United  States
District  Court  for the  Western District  of Pennsylvania  against Hoffmann-La
Roche, Inc., Roche Molecular Systems, Inc., the Perkin-Elmer Corporation, Chiron
and its wholly-owned subsidiary, Cetus  Oncology Corporation, claiming that  the
defendants  infringed certain United States patents relating to plasmids for the
expression of DNA Polymerase  I and to  plasmids providing for  nick-translation
activity.  Carnegie Mellon  and Three Rivers  Biologicals are  seeking a finding
that the defendants willfully infringed the patents at issue, injunctive  relief
and  damages according  to proof.  All defendants  have answered  the complaint.
Venue of the case was changed to  the Northern District of California on  motion
by  Chiron. Discovery  is ongoing.  The facts  of the  case, including potential
indemnification rights or obligations among the defendants, are currently  under
review. However, Chiron believes that it and Cetus have significant defenses.
 
    EVANS.   On  November 8,  1995, the Tribunal  of Brescia,  an Italian Court,
dismissed a lawsuit brought by Evans Medical Limited (a division of Medeva  plc)
("Evans") against Chiron's Italian vaccine business, Biocine S.p.A., and against
Nuova  Chimica Medica s.r.l., a distributor.  Evans sought injunctive relief via
an emergency procedure. The  suit alleged that the  p69 antigen used in  Biocine
S.p.A.'s recombinant acellular pertussis vaccines
(Acelluvax-Registered   Trademark-  and   Acelluvax-Registered  Trademark-  DTP)
infringed Evans' Italian counterpart  to its European  patent No. 162,639  ("the
'639  patent").  This  patent is  licensed  by Evans  exclusively  to SmithKline
Beecham Biologicals S.A. Counterpart patents are pending or have been issued  in
other jurisdictions, including the United States. Earlier in the year, Evans had
brought  a similar  proceeding against  Biocine S.p.A.  and its  distributor for
emergency injunctive  relief  in the  same  Court.  Following a  June  26,  1995
hearing, Evans abandoned that proceeding.
 
    Biocine S.p.A. previously had opposed issuance of the '639 patent before the
European  Patent Office ("EPO") and has appealed  the finding reached by the EPO
in that opposition proceeding. Biocine S.p.A.  filed an action against Evans  in
Milan on October 23, 1995 alleging invalidity of the same patent that formed the
basis  for the two Italian  suits discussed above. Biocine  S.p.A. later filed a
claim against Evans for non-infringement  with the Milan Court. Evans'  response
to the Milan actions
 
                                       42
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS (CONTINUED)
was  filed in  February 1996.  Also in  February 1996,  Biocine S.p.A.  filed an
action alleging invalidity  and non-infringement of  Evans' Dutch equivalent  to
the  '639 patent in The  Netherlands. Chiron believes that  it does not infringe
any valid claim in the '639 patent or in its foreign counterparts.
 
    MUREX DIAGNOSTICS, LTD.   In a  series of  actions, the first  of which  was
brought  on  March 2,  1992, Chiron,  together with  Ortho and  Ortho Diagnostic
Systems, Ltd. (collectively, "Ortho"), filed suit in the High Court for  England
and  Wales against Murex  Diagnostics, Ltd. ("Murex"),  alleging infringement of
Chiron's U.K. Patent No.  2,212,511 ("the '511 patent")  as a result of  Murex's
manufacture  and sale of HCV immunoassay kits  in the U.K. Murex is a subsidiary
of International Murex Technologies Corp., a Canadian company. Chiron and  Ortho
sought  injunctive relief  and unspecified  damages. On  May 27,  1994, the High
Court granted judgment for Chiron and  Ortho, holding the '511 patent valid  and
infringed,  and ordered Murex to pay damages in an amount to be determined. Both
Murex and the Chiron/Ortho parties appealed various aspects of the High  Court's
judgment. Chiron's and Ortho's request for an injunction was granted on November
30,  1994. Following an interim damages inquiry which was held in February 1996,
the Court  ordered  Murex  to  pay L6  million  (approximately  $9  million)  to
Chiron/Ortho  by  February 23,  1996.  On February  22,  1996, Murex,  which had
changed its name to Specialist Diagnostics, Ltd., filed a petition for voluntary
liquidation. There can be no assurance when or whether Chiron and Ortho will  be
able to collect this damage award. A damages inquiry is scheduled for July 1996.
 
    In  a series of rulings on November 2  and 7, 1995, the U.K. Court of Appeal
held that, with the exception  of one claim, the '511  patent is valid and  that
Chiron  could amend the patent and proceed with the damages inquiry. The parties
have applied for leave to appeal to the House of Lords.
 
    Chiron is informed that officials within the British Ministry of Health have
in the past raised  the possibility of authorizing  Murex's infringement of  the
'511 patent under the "Crown use" provisions of British law, with respect to the
sale  of HCV immunoassay  kits to the British  National Health Service. Further,
Murex has stated  that it will  apply for  a compulsory license  under the  '511
patent.
 
    Infringement  proceedings  against  Murex  on  German  and  European patents
corresponding to the '511  patent also have  been filed by  Chiron and Ortho  in
Germany,  Italy, The  Netherlands and Belgium.  On January 23,  1995, Chiron and
Ortho were granted an injunction in Germany. On May 8, 1995, Chiron was  granted
a cross-border preliminary injunction by the Dutch Court preventing infringement
by  Murex  and  certain of  its  affiliates covering  The  Netherlands, Belgium,
France, Spain and Luxembourg. Murex has  brought an action in Australia  seeking
revocation  of  the  Australian  counterpart  of  the  '511  patent.  Chiron has
counterclaimed for infringement. That matter is  scheduled for trial in June  of
1996.
 
    ORGANON  TEKNIKA,  LTD.   On May  4, 1994,  Chiron instituted  summary legal
proceedings against Organon  Teknika, B.V., Akzo  Pharma, B.V., subsidiaries  of
Akzo   N.V.  (all  subsidiaries  of  Akzo  N.V.  (collectively  referred  to  as
"Organon")), and United Biomedical, Inc. ("UBI"), the supplier of Organon's  HCV
antigens and kits, in the District Court of the Hague, The Netherlands, alleging
infringement  of European Patent No. 318,216 ("the  '216 patent") as a result of
the defendants' manufacture and sale of HCV immunoassay kits. On July 22,  1994,
Chiron  was  granted  a  cross-border  preliminary  injunction  against  further
infringement, including sale  of the UBI  kit, by Organon  in Austria,  Belgium,
Switzerland,  Germany,  Spain,  France,  Italy,  Liechtenstein,  Luxembourg, The
Netherlands and Sweden. Organon and UBI appealed the injunction. The '216 patent
is a counterpart of the British '511 patent. Infringement proceedings brought by
Chiron and Ortho were also pending against
 
                                       43
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS (CONTINUED)
Organon in Italy and Belgium (based  on the '216 patent), and consolidated  with
the  actions against Murex, described above.  Chiron, Ortho, and Organon settled
all European  HCV litigation  on October  9,  1995, and  Chiron and  Ortho  were
compensated  for past infringement.  UBI did not  participate in the settlement,
and has been  ordered to pay  Ortho Ltd. damages  by the U.K.  Court of  Appeal,
along  with  Murex, as  described  above. A  damages  inquiry has  not  yet been
scheduled.
 
    SICOR.   In April  1991, Alco  Chemicals, Ltd.  ("Alco") and  Sicor,  S.p.A.
("Sicor"),  former suppliers of bulk doxorubicin to Cetus Ben Venue Therapeutics
("CBVT"), filed  suit in  the  United States  District  Court for  the  Northern
District  of California against Cetus  Oncology Corporation ("Cetus"), Ben Venue
Laboratories, Inc. ("Ben Venue"), CBVT  and Erbamont, Inc. ("Erbamont") and  its
affiliates.  Plaintiffs claim that  they had distribution  and supply agreements
with CBVT relative to a product called doxorubicin hydrochloride. Sicor had been
prevented from manufacturing  product for  CBVT since September  1990. In  March
1991,  CBVT entered  into an agreement  with Erbamont which  provided for, among
other things, the settlement of several legal proceedings then pending  relating
to  Erbamont's alleged doxorubicin proprietary  rights, and the exclusive supply
of doxorubicin to CBVT  by Erbamont. The Sicor  complaint alleges breach of  the
CBVT  contract to  purchase bulk  doxorubicin from  Sicor, as  well as antitrust
violations and interference with contract and prospective advantage, and  sought
unspecified  damages. Plaintiffs  assert in separate  counts against  all of the
Cetus parties that their contracts with CBVT have been breached, that inducement
of such  breaches  has  been tortious,  that  plaintiffs'  prospective  economic
relations  have been tortiously frustrated, that  the Cetus parties are indebted
to plaintiffs on past accounts said to relate to the joint financing of  earlier
litigation, and that plaintiffs' distribution and supply of doxorubicin has been
foreclosed  by reason  of violations  of the  federal antitrust  laws. Cetus has
denied any entitlement to recovery in this lawsuit and has filed a  counterclaim
against the plaintiffs for fraud and breach of contract based on Sicor's failure
to  deliver the  bulk product. Sicor's  antitrust claims have  been dismissed on
motion and  Sicor has  dismissed  its claims  against  Erbamont. Sicor  filed  a
summary  judgment motion with respect to the counterclaims of the Cetus parties.
On February 2, 1996, the District Court granted that motion in an opinion  which
the  Company  is currently  studying. The  Company  believes it  has substantial
defenses to the  Sicor claims.  A related arbitration  before the  International
Chamber  of Commerce in New York brought by Sicor against Chiron, Cetus, and Ben
Venue has been stayed pending the resolution of the Cetus parties' counterclaims
in the litigation described above.
 
    In February 1995, Sicor and Alco filed a further action in the United States
District Court for the Northern District of California against CBVT for  amounts
allegedly  owed by CBVT  to Sicor and  Alco for the  supply of doxorubicin, plus
interest and attorneys' fees. This case has  been assigned to the same judge  as
the  above-referenced  District Court  case. The  Company  believes that  it has
significant defenses to these claims.
 
    SCRIPPS CLINIC.   The Company is  defending a lawsuit  filed on November  8,
1983,  by the Scripps  Clinic and Research  Foundation and Revlon,  Inc., in the
United States District Court  for the Northern  District of California  alleging
that  Chiron's research  program to synthesize  a protein  associated with human
blood  clotting  ("Factor  VIII:C")   through  genetic  engineering   techniques
infringes plaintiffs' rights under a patent for purified Factor VIII:C. The suit
seeks  an injunction  against further infringement,  an accounting, compensatory
damages of at least $10 million and  punitive damages in the same amount.  After
the  trial court  granted summary  judgment in  favor of  Chiron, the plaintiffs
appealed. Appeal Nos. 89-1541, -1542, -1543,  -1646 and -1647 were filed in  the
United  States Court  of Appeals  for the  Federal Circuit.  The Appellate Court
reversed the trial court, finding that summary judgment
 
                                       44
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS (CONTINUED)
was not appropriate and  directing that a number  of issues be tried,  including
the  issues of inequitable conduct on the  part of Scripps, patent validity, and
patent infringement. No trial date  has been set and it  is unclear when a  date
will be set. Chiron intends to vigorously assert its defenses at trial.
 
    SUMMIT.  On September 29, 1994, Summit Technology Ireland B.V., a subsidiary
of  Summit Technology, Inc., a manufacturer of ophthalmic lasers, filed a patent
infringement action in the  Regional Court of  Dusseldorf, Germany, against  two
German subsidiaries of Chiron Vision (Chiron Technolas and Chiron Adatomed), and
their  respective managing directors. The suit  alleged that the manufacture and
sale in Germany of the Technolas-Registered Trademark-
Keracor-Registered  Trademark-   '116  excimer   laser  infringed   the   German
counterpart of a European patent held by Summit. Summit sought injunctive relief
and  damages which it estimated  at Deutsche mark 2  million. On August 3, 1995,
the German Court  granted judgment  in favor  of Summit,  granted an  injunction
against   defendants'  further   infringement  and  awarded   damages  for  past
infringement in  an  amount to  be  determined.  On September  1,  1995,  Summit
enforced  the judgment and the  injunction by posting security  in the amount of
Deutsche mark 2 million. The Company's  appeal of the Regional Court's  decision
is  pending. Chiron Technolas, Chiron Vision's sole source of ophthalmic lasers,
continues to manufacture  ophthalmic excimer  lasers, which  are distributed  by
Chiron  Vision and its  subsidiaries. The Company  believes these activities are
outside the scope of the judgment  and injunction of the German Regional  Court.
The  Company has also initiated a separate judicial action in Germany seeking to
invalidate Summit's patent.
 
    AMERICAN  HOME  PRODUCTS.    On  April  27,  1995,  American  Home  Products
Corporation  ("AHP")  filed suit  against Chiron  in the  Superior Court  in New
Castle County,  Delaware,  claiming  compensatory,  consequential  and  punitive
damages  based on  an alleged  breach and  repudiation by  Chiron of  a contract
pursuant to which  Chiron had agreed  to purchase certain  assets from AHP.  The
case has been settled and was ordered dismissed on December 2, 1995.
 
    BRILLIANT TRADING CO., WOLFSON.  Following the announcement by Chiron of the
signing  of a  definitive agreement  to acquire  Viagene, Inc.  ("Viagene"), two
lawsuits purporting to be class actions were filed on April 24 and May 1,  1995,
respectively,  in the Court of  Chancery of the State  of Delaware against named
directors and officers of Viagene and  against Viagene and Chiron. In one  case,
Chiron  is  sued on  a  theory that  it aided  and  abetted alleged  breaches of
fiduciary duty by  Viagene's directors  and officers in  approving the  proposed
acquisition by Chiron. In the other case, Chiron is sued for alleged breaches of
fiduciary  duty  as  a  controlling  stockholder  of  Viagene.  Plaintiffs  seek
declaratory and injunctive  relief, an accounting  and costs and  disbursements.
Defendants  have  received an  open  extension of  time  to answer  or otherwise
respond. Chiron believes these suits are without merit.
 
    STOCKHOLDER LITIGATION.    In  November 1994,  Chiron,  its  directors,  and
certain  of its officers were sued  in three essentially identical actions filed
as class actions on behalf of  Chiron stockholders, alleging that the  directors
had  violated their fiduciary  duty by failing to  maximize stockholder value in
connection with  the  series  of  transactions affected  with  Ciba  which  were
announced  on November 20, 1994, by, among other things, not taking all possible
steps to seek out and encourage the best offer for the Company once the  Company
had been put in play. Two of the actions filed respectively on November 14, 1994
and November 22, 1994 (HANNA V. CHIRON CORP., ET AL., C.A. No. 13874, and DEZUBE
V. CHIRON CORPORATION ET AL., C.A. 13896) were filed in the Court of Chancery of
the State of Delaware in and for New Castle County. The complaints in both cases
ask  for injunctive  relief, rescission  and attorneys'  fees. Plaintiff  in the
HANNA action additionally seeks damages  in an unspecified amount. Plaintiff  in
the  DEZUBE action  additionally seeks an  accounting. The  complaints have been
answered
 
                                       45
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 12 -- LEGAL PROCEEDINGS (CONTINUED)
by all defendants,  who deny  the material  allegations of  the complaints.  The
third  action was  filed in  the Superior  Court of  California, Alameda County,
Northern Division, on December 1, 1994 (PERERA ET AL., V. CHIRON CORPORATION  ET
AL., C.A. No. 744522-2). Plaintiff sought injunctive and declaratory relief, and
an  accounting, costs and disbursements, including attorneys' and experts' fees,
and other relief.
 
    On October  17, 1995,  the PERERA  plaintiffs commenced  a new  action  (the
"Federal  Action") in the United States District Court for the Northern District
of California, against  the same defendants  and Ciba-Geigy, Ltd.,  Ciba-Geigy's
Chairman Alex Krauer, Ciba-Geigy Corporation, and Ciba Biotech Partnership, Inc.
(collectively, the "Ciba Defendants"). The Federal Action asserts both state and
federal  claims, including a claim under Sections  10(b), 14(d) and 14(e) of the
Securities Exchange Act  of 1934, and  seeks damages and  injunctive relief.  On
October  23, 1995,  in light  of the  filing of  the Federal  Action, the PERERA
action was dismissed by stipulation of the parties.
 
    Plaintiffs and all  of the defendants  other than the  Ciba Defendants  have
entered  into an agreement to  settle the Federal Action  on a class-wide basis,
subject to approval by the Court. Under the terms of that settlement  agreement,
Chiron  will  pay  plaintiffs' counsel  up  to  $300,000 in  attorneys  fees and
expenses, as  may be  awarded by  the Court,  and will  pay the  costs of  class
notice.   Chiron  has  no  other  financial  obligations  under  the  settlement
agreement, which also  contemplates that the  HANNA and DEZUBE  actions will  be
dismissed  as moot  following approval  of the  settlement and  dismissal of the
Federal Action. It is presently expected  that the settlement will be  presented
to  the District Court for preliminary approval  at a status conference in March
1996, and that  a final  approval hearing will  be scheduled  within two  months
thereafter, following notice to the plaintiff class.
 
NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
                                                                            1995
                                                    ----------------------------------------------------
                                                      DEC. 31      SEPT. 30      JUNE 30      MAR. 31
                                                    -----------  ------------  -----------  ------------
<S>                                                 <C>          <C>           <C>          <C>
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues..........................................  $   325,897  $    274,688  $   281,752  $    218,246
Gross margin......................................      145,846       127,798      139,786        93,627
Net income (loss).................................       17,592      (145,107)         830      (385,778)
Net income (loss) per share.......................         0.40         (3.59)        0.02         (9.64)
 
<CAPTION>
 
                                                                            1994
                                                    ----------------------------------------------------
                                                      DEC. 31      SEPT. 30      JUNE 30      MAR. 31
                                                    -----------  ------------  -----------  ------------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>          <C>           <C>          <C>
Revenues..........................................  $   134,280  $    128,207  $   100,111  $     91,381
Gross margin......................................       46,918        45,476       31,603        23,760
Net income (loss).................................       (4,169)       12,567        5,110         4,817
Net income (loss) per share.......................        (0.13)         0.37         0.15          0.14
</TABLE>
 
    The  Company believes that quarterly  results are not necessarily indicative
of results for a full  year; therefore, the Company  should be evaluated on  the
basis of annual financial information.
 
    As  discussed in Notes 2 and 3, the  first quarter of 1995 included a $230.7
million write-off of purchased in-process technology related to the acquisitions
of CCD, Ciba's interest in Chiron Biocine Company and Biocine S.p.A., and IOLAB.
The   first   quarter   also   included    other   charges   related   to    the
 
                                       46
<PAGE>
                               CHIRON CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               DECEMBER 31, 1995
 
NOTE 13 -- QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
Ciba  transaction totaling  $49.5 million, and  restructuring-related charges of
$37.6 million. The third quarter of 1995 included a $130.3 million write-off  of
purchased in-process technology related to the Viagene acquisition.
 
    The fourth quarter of 1994 included a charge to earnings of $11.6 million to
write-down  the carrying value of investments in marketable equity securities of
Viagene and Cephalon.
 
NOTE 14 -- SUBSEQUENT EVENT
    On February 17, 1996,  Chiron and Behringwerke AG,  a subsidiary of  Hoechst
AG,  reached an agreement whereby Chiron will  purchase a 49 percent interest in
the human vaccine business of Behringwerke AG for Deutsche mark 171.5 million in
cash. Under the terms  of the agreement,  Chiron has an  option to purchase  the
remaining 51 percent interest in March 1998, 1999, 2000 or 2001 and Behringwerke
AG  has the option to  have Chiron acquire the  remaining 51 percent interest in
March 2001. During the  period of mutual ownership,  Chiron and Behringwerke  AG
will  operate the vaccine  business as a  joint venture. Chiron  will report its
share of the  joint venture's results  as equity in  earnings of  unconsolidated
joint  businesses.  Consummation  of  the  transaction  is  subject  to  certain
conditions, including  regulatory approvals  and customary  conditions prior  to
closing.
 
                                       47
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS
 
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, 1995 and 1994, and the  related
consolidated  statements of operations, stockholders'  equity and cash flows for
the years then ended. These financial  statements are the responsibility of  the
Company's  management.  Our responsibility  is to  express  an opinion  on these
financial  statements  based  on  our  audits.  The  accompanying   consolidated
statements  of  operations,  stockholders'  equity  and  cash  flows  of  Chiron
Corporation and subsidiaries for the year ended December 31, 1993, were  audited
by  other auditors  whose report thereon  dated February 25,  1994, expressed an
unqualified opinion on those statements.
 
    We conducted  our  audits in  accordance  with generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence  supporting
the  amounts and disclosures in the financial statements. An audit also includes
assessing the  accounting  principles used  and  significant estimates  made  by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
    In our  opinion, the  consolidated financial  statements referred  to  above
present  fairly,  in all  material respects,  the  financial position  of Chiron
Corporation and subsidiaries as of December  31, 1995 and 1994, and the  results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
 
                                          KPMG Peat Marwick LLP
 
San Francisco, California
February 20, 1996
 
                                       48
<PAGE>
                               CHIRON CORPORATION
                          MARKET PRICE OF COMMON STOCK
 
    The  common stock  of Chiron  Corporation is  traded in  the NASDAQ National
Market System under the symbol CHIR. As  of December 31, 1995, there were  8,078
holders  of record of  Chiron common stock,  846 remaining holders  of record of
Cetus common stock and 45 remaining  holders of record of Viagene common  stock.
The  Company has  declared no  cash dividends since  its inception  and does not
expect to pay any  dividends in the foreseeable  future. The quarterly high  and
low  closing sales  price of  Chiron common  stock for  1995 and  1994 are shown
below.
 
<TABLE>
<CAPTION>
                                                                                   1995                     1994
                                                                           ---------------------    --------------------
                                                                             HIGH         LOW         HIGH        LOW
                                                                           ---------    --------    --------    --------
<S>                                                                        <C>          <C>         <C>         <C>
First Quarter...........................................................   $  81        $ 51 3/4    $ 96        $ 63 1/2
Second Quarter..........................................................      68 3/4      47 3/4      69 1/2      53 3/4
Third Quarter...........................................................     101 3/4      62 1/2      74 1/4      50 3/4
Fourth Quarter..........................................................     113 3/4      83          85          56 1/4
</TABLE>
 
                                       49