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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 1996
Commission File Number: 1-12213
COVANCE INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-3265977
(State of Incorporation) (I.R.S. Employer Identification No.)
210 Carnegie Center, Princeton, New Jersey 08540
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (609) 452-4400
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on which Registered
____________________________ ________________________
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
___ ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
___
As of March 3, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,078,308,751 (based on the closing price
of the Company's Common Stock on the New York Stock Exchange on March 3, 1997 of
$19.25).
As of March 3, 1997, the Registrant had 56,087,500 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business
General
Covance Inc. ("Covance" or the "Company") is a leading contract research
organization ("CRO") providing a wide range of integrated product development
services on a worldwide basis to the biotechnology, pharmaceutical and medical
device industries. Covance also provides services such as health economics for
managed care organizations, hospitals and health care provider networks, and
early development and laboratory testing services to the chemical, agrochemical
and food industries. The services Covance provides constitute six lines of
business: preclinical, biomanufacturing, clinical and periapproval, central
laboratory, clinical packaging and health economics. These six lines of business
can be further categorized as non-clinical (preclinical and biomanufacturing)
and clinical (clinical and periapproval, central laboratory, clinical packaging
and health economics). Covance believes it is one of the largest
biopharmaceutical CROs, based on estimated 1996 annual net revenue, and one of a
few that are capable of providing comprehensive global product development
services.
On May 13, 1996, the Board of Directors of Corning Incorporated
("Corning"), the Company's former indirect parent, approved a plan to distribute
(the "Distributions"), in a tax free distribution to all Corning stockholders of
record as of 11:59 PM on December 31, 1996, all of the Company's outstanding
Common Stock, and that of Quest Diagnostics Inc. ("Quest"). The Distributions
were effected as of the close of December 31, 1996 (the "Distribution Date") and
the Company (as well as Quest) became an independent, publicly-traded company on
such date.
Covance's businesses were initially acquired by its former parent,
Corning, as part of a strategy to create a global, integrated and full service
product development company. In 1987, Corning acquired Hazleton Corporation (now
known as Covance Laboratories Inc.), owner of preclinical drug safety assessment
laboratories and Phase I clinical research units. In 1989, Phase II and Phase
III clinical trials expertise was added with G.H. Besselaar Associates (now
known as Covance Clinical and Periapproval Services Inc.), and Covance further
expanded its clinical trials expertise in 1990 with the purchase of PACT Inc.
(now known as Covance Clinical and Periapproval Services Inc.), a periapproval
studies company. In 1991, SciCor Inc. (now known as Covance Central Laboratories
Inc.), a clinical laboratory dedicated to the drug development process was
purchased. Covance's pharmaceutical laboratory capabilities were expanded in
1992 with the creation in Switzerland of a jointly owned company, SciCor S.A.
Covance acquired 100% of this company in 1994. Also in 1994, the Company
acquired a significant minority equity interest in Bio-Imaging Technologies Inc.
("Bio-Imaging"), which uses proprietary imaging technology to quantify the
diagnostic and therapeutic effectiveness of experimental drugs and devices. In
1995, Covance acquired National Packaging
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Systems, Inc. ("National Packaging") (now known as Covance Pharmaceutical
Packaging Services Inc.), a clinical packaging company. Also in 1995, Covance
formed Covance Biotechnology Services Inc. ("Covance Biotechnology"), a
majority-owned company which will enable Covance to engage in biomanufacturing.
In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics company. In October 1996, Covance expanded its clinical packaging
capabilities to Europe with the purchase of Swiss-based CRS Pacamed AG ("CRS
Pacamed") (now known as Covance Pharmaceutical Packaging Services A.G.). In
addition, Covance acquired a 91,000 square-foot facility in Horsham, United
Kingdom, which will be used, among other things, to enhance the Company's
ability to provide clinical packaging services in Europe, and serve as the
Company's European headquarters.
The Company maintains offices in 15 countries, including offices in
Singapore and Canada, which opened in 1996.
CRO Industry Overview
The CRO industry provides independent product development services to the
pharmaceutical, biotechnology and medical device industries. In general, CROs
derive substantially all of their revenue from the research and development
expenditures of such industries. Today, there are only a few full-service
companies. Full-service CROs design and manage preclinical and clinical and
periapproval studies and trials, provide health economic services, and provide
packaging and central laboratory services and other services required to develop
and market new products in accordance with applicable government regulations in
the jurisdictions where the services are provided, including the regulations of
the FDA in the United States.
Trends Affecting the CRO Industry
Covance believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as a result of a number of factors, as further described below.
Cost Containment Pressures. Market forces and governmental initiatives
have placed significant downward pressure on pharmaceutical and biotechnology
companies' drug prices. Covance believes that the pharmaceutical industry is
responding to these pressures by downsizing its research and development
infrastructure and converting the fixed costs of maintaining such infrastructure
to variable costs by outsourcing drug development activities to CROs. The
downsizing of development capabilities also creates demand for CROs as
biopharmaceutical companies experience internal development resource shortages
when a large number of compounds emerge from the research process and need to
undergo development. Management also believes that many of these companies are
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attempting to decrease the new drug development cycle by using CROs, which may
have greater expertise in the therapeutic area, while offering greater
efficiency at a lower cost.
Marketplace Globalization. Pharmaceutical and biotechnology companies are
increasingly attempting to expand the market for new drugs by pursuing
regulatory approvals in multiple countries simultaneously rather than
sequentially as they have in the past. Covance believes that CROs with a global
presence will continue to benefit from these trends, and that it is
well-positioned to benefit from such trends.
Revenue Enhancement Through Faster Drug Development. Covance believes that
CROs, by providing specialized development services, are often able to perform
the needed services with a higher level of expertise or specialization, and more
quickly, than a pharmaceutical or biotechnology company could perform such
services internally.
Consolidation in the Pharmaceutical Industry. The pharmaceutical industry
is consolidating as such companies seek to obtain cost reduction synergies
through business combinations. Once consolidated, many pharmaceutical companies
aggressively manage costs by reducing jobs, decentralizing the research and
development process, and outsourcing to CROs in an effort to reduce the fixed
costs associated with internal drug development.
Increasingly Stringent Regulation. Increasingly stringent regulatory
requirements throughout the world and their standardization have increased the
need for broader, global regulatory expertise. Covance believes that the
pharmaceutical and biotechnology industries are outsourcing to global CROs to
take advantage of their capabilities and geographic presence.
Therapeutic Focus. Management believes that the economics of the
marketplace require increased research and development expenditures as
biopharmaceutical companies become focused on innovative new products, including
drugs for an aging population, and drugs for the treatment of chronic disorders
and life threatening conditions. The development of therapies for chronic
disorders, such as Alzheimer's disease or arthritis, requires complex clinical
trials to demonstrate the therapies effectiveness and to determine whether the
drug causes any long-term side effects. Management believes that CROs with the
requisite therapeutic experience and the ability to manage complex trials will
present an attractive development alternative for biopharmaceutical companies.
Biotechnology Industry Growth. The United States biotechnology industry
has grown rapidly over the last 10 years and is introducing new therapies which
require regulatory approval. Many biotechnology companies do not have the
necessary internal resources and experience (capital, equipment or people) to
conduct preclinical studies and clinical trials. Accordingly, many biotechnology
companies have chosen to outsource to CROs rather than expend significant time
and resources to develop an internal preclinical or clinical development or
biomanufacturing capability.
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The New Drug Development Process-Overview
Before a new drug may be marketed to the public, it must undergo extensive
testing and regulatory review to determine that the drug is both safe and
effective for its intended purpose. The developmental process and typical
corresponding time periods are as set forth below. Similar extensive testing and
regulatory reviews are required in Europe and some Asian countries to determine
that a new drug is safe and effective for its intended purpose before it can be
marketed to the public.
Preclinical Research (6 months to 3 years). In vitro ("test tube") and in
vivo ("animal") studies are conducted to establish the basic pharmacokinetic
effect and safety of a drug including the toxicity of the drug over a wide range
of doses. Initially, acute toxicology studies are conducted. In the United
States, if results warrant continuing development of the drug, the manufacturer
(also known as the "sponsor") will file an Investigational New Drug Application
("IND"), whereupon the Food and Drug Administration ("FDA") may grant permission
to begin human trials (also known as "clinical trials"). Preclinical studies may
continue after the start of clinical trials to determine the longer term effects
of a product.
Clinical Trials (3.5 to 6 years).
o Phase I (6 months to 1 year). This phase involves the initial basic
safety and pharmacology testing in approximately 20 to 100 human
subjects, usually healthy volunteers in a closely monitored setting,
including studies to determine the side effect profile of the drug, how
the drug works, how it is affected by other drugs, where it goes in the
body, how long it remains active, and how it is broken down and
eliminated from the body.
o Phase II (1 to 2 years). This phase involves basic efficacy
(effectiveness) and dose-range testing in approximately 100 to 400
carefully selected patients suffering from the disease or condition
under study to help determine the best effective dose, confirm that the
drug works as expected, and provide additional safety data. The trials
are typically well controlled and usually involve a placebo, also known
as a "sugar pill." A placebo is an identical tablet or solution which
lacks the active substance under investigation.
o Phase III (2 to 3 years). This phase involves efficacy and safety
studies in broader populations of hundreds or thousands of patients at
many investigational sites (hospitals and clinics) and may involve
placebo-controlled trials, in which the new drug is compared with a
placebo; studies comparing the new drug with one or more drugs with
established safety and efficacy profiles in the same therapeutic
category; or studies where there is no comparison to a placebo or
another drug ("uncontrolled" trials). Generally, Phase III studies are
intended to provide additional information on drug safety and efficacy,
an evaluation of the risk-benefit relationship for the drug, and
information for the adequate labeling of the product.
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NDA Preparation and Submission. Upon completion of Phase III trials, the
sponsor or CRO assembles the tabulated and statistically analyzed data from all
phases of development into a single large document, the New Drug Application
("NDA"), which comprises, on average, approximately 100,000 pages.
FDA Review and Approval (1 to 2 years). At this stage, the FDA will
scrutinize data from all phases of development to confirm that the sponsor has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study. Product labeling is also approved at
this stage, which serves as a guideline to the sponsor about how its product can
be promoted in the marketplace.
Treatment Investigational New Drug (May span late Phase II, Phase III, and
FDA review). When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the manufacturer to make the new
drug available to a larger number of patients through the regulated mechanism of
a treatment investigational new drug ("TIND") application. Although less
scientifically rigorous than a controlled clinical trial, a TIND may enroll and
collect primarily safety data from thousands of patients.
Post-Marketing Surveillance and Phase IV Studies (Periapproval). Federal
regulation requires the sponsor to collect and periodically report to the FDA
additional safety and efficacy data on the drug for as long as the sponsor
markets the drug (post-marketing surveillance). If the drug is marketed outside
the United States, these reports must include data from all countries in which
the drug is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the drug or to test new dosage formulations. All
of these studies are types of "periapproval" studies.
Business Strategy
Based on 1996 net revenues, Covance believes it is one of the largest CROs
serving the biotechnology and pharmaceutical industries. The Company has a
focused strategy to provide high quality, cost effective, integrated,
comprehensive and innovative services to assist its pharmaceutical and
biotechnology clients to develop, produce, obtain approval for and enhance the
commercial success of their new therapeutic products worldwide.
Services. Covance believes that CROs capable of offering a full range of
biopharmaceutical drug development and manufacturing services are better able to
compete for three reasons: (1) a full range of services provides a client with
the choice of using just one provider to secure all of the client's development
needs; (2) an integrated provider of these services can provide economies of
scale and accelerate the development of the client's product through more
comprehensive planning of the development process; and (3) early stage
development provides the CRO with access to the client sooner in the development
cycle and may promote the client's use of later stage development services.
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As part of its strategy, Covance both continually improves its existing
services and endeavors to create new ones. Covance has implemented a total
quality management system throughout its operations which assists the Company in
its goal of producing error-free services on time and within the client's
budget. This management system is overseen by a quality team comprised of
Covance's most senior executives, including its chief executive officer.
Furthermore, certain of Covance's United States and European subsidiaries have
received ISO 9000 and 9001 certifications based on quality standards established
by the International Organization for Standardization. The ISO 9000 standards
define the international requirements for creating a quality assurance system
that will result in providing consistent service.
Covance also developed the Expanded Access Program ("EAP"), one of
Covance's periapproval offerings. EAP is a mechanism that allows innovative new
therapies for life threatening diseases to be given to expanded populations
prior to FDA approval pursuant to a TIND application. In addition to improving
its existing services, Covance also focuses on providing its clients new market
oriented, value-added services, including those that involve integrated services
relying on multidisciplinary teams drawn from various Covance operating units or
divisions. For instance, Covance is duplicating in the United States a Strategic
Product Development ("SPD") program developed in Europe that has successfully
reduced the estimated time from preclinical testing to the first human studies.
Covance's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions. With respect to the former, in
addition to SPD, Covance has invested in the creation of a multi-use
biomanufacturing facility, Covance Biotechnology. With respect to the latter,
Covance added domestic clinical packaging capabilities through the acquisition
of National Packaging in January 1995, European clinical packaging capabilities
through the acquisition of CRS Pacamed in October 1996, and enhanced its health
economics services by acquiring HTA in March 1996. Covance expects to continue
developing services internally and making strategic acquisitions that are
complementary to its existing services and that will expand its capability to
serve its clients.
Streamlining the Drug Development Process. In recognition of its clients
needs with respect to cost containment, reduced testing time frames and global
trials, Covance has also created a dedicated team focused exclusively on
continually examining and redesigning the drug development process with the
objective of reducing the time required to develop a new compound. The mandate
of this team is to examine every significant process, system and information
technology used in product development, with the objective of applying the
considerable experience and technical resources available throughout the
Company. Covance has over 300 information systems professionals working in 12
regional information system centers (nine in the United States and three in
Europe) and nine satellite centers (five in the United States and four in
Europe). All of the Company's employees at its 33 locations (both domestic and
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international) and miniframe computers and thousands of desktop computers are
connected by a wide area network that provides global access to the expertise
and technologies resident in the regional information system centers. These
systems also support the Company's ability to provide integrated services and
connect the Company to its clients. For instance, Covance's development of its
Information Access System permits clients to obtain real time access to their
study data, and its drug supply management system based on Integrated Voice
Response technology allows clients to more efficiently manage the distribution
of their experimental compounds to investigational sites. In examining ways to
improve the drug developmental process, Covance's information technology
strategy is to capitalize on its existing heterogeneous, flexible and
proprietary computer systems, and to both customize them where appropriate for
particular client needs and incorporate new systems and technologies to meet
changing demands in a timely and cost effective manner.
Geographic Expansion. Covance believes that it will become increasingly
important to provide its full range of drug research and development services in
all major and developing biotechnology and pharmaceutical markets, especially
given industry trends to conduct research on new drugs outside the United States
first and to conduct clinical trials in multiple countries simultaneously.
Through its offices, regional monitoring sites, laboratories and manufacturing
sites in over 33 locations in 15 different countries and field work in over 30
other countries, Covance believes it is a leader among CROs in its ability to
deliver services globally. Currently, approximately 30% of Covance's 5,400
employees are based outside of the United States.
Covance will continue its strategy of establishing new or enhancing
existing operations in significant biotechnology and pharmaceutical markets.
Covance expects this will occur as a result of internal growth and through
strategic acquisitions. In April 1996, Covance opened its Singapore office.
Singapore will serve as Covance's center for conducting clinical trials in Asia,
a region that Covance believes will be increasingly important for the research,
development and therapeutic use of drugs. Covance is also collaborating with the
Singapore National Science and Technology Board concerning the Singapore
government's initiative to form the Asia Pacific Economic Cooperation
coordinating center for Good Clinical Practice. In December 1996, Covance opened
an office in Montreal, Canada, to serve the pharmaceutical and biotechnology
markets and to have further access to patients. Covance is also discussing with
its clients opening new offices in Latin America and Africa to serve their
growing need to conduct drug development studies in these regions.
Services
Covance provides a wide range of integrated product development services
on a worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition and to a lesser extent, Covance provides services such
as health economics for managed care organizations, hospitals and health care
provider networks, and early development and laboratory testing services to the
chemical, agrochemical and food
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industries. The services Covance provides constitute six lines of business:
preclinical, biomanufacturing, clinical and periapproval, central laboratory,
clinical packaging and health economics.
Preclinical Services
Covance has four major laboratories, employing over 1,900 people, located
in Madison, Wisconsin, Vienna, Virginia, Harrogate, United Kingdom, and Munster,
Germany. The Company also has an administrative office in Tokyo, Japan. The
preclinical services offered are wide-ranging, including in vivo toxicology
studies (such as acute, subchronic and carcinogenicity studies), genetic
toxicology studies (such as in vitro cytotoxicity, cytogenetics and gene
mutation studies and transgenic mouse models) and chemistry services (such as in
vitro metabolism, pharmacokinetics and bioequivalence studies).
The preclinical area has also been a source of innovation by introducing
new technologies for client access to data, electronic animal identification,
multimedia study reports and data tables and in vivo and in vitro measures of
induced cell proliferation. Covance's preclinical group also works closely with
its Phase I and II groups to minimize product development time and to provide
clients with early data on the safety and efficacy of new molecules. This data
allows clients to make a decision about whether to continue, cease or modify
their development program.
As part of its preclinical services, Covance is duplicating in the United
States an SPD program developed in Europe that has successfully reduced the time
from preclinical testing to the first human studies. SPD involves an integrated
process and team drawn from Covance's preclinical and Phase I and II areas. In
an SPD program, the compound is researched from initial preclinical evaluation
through its first dosing in humans, including the filing and attainment of an
IND application. Specific elements of the process include formulation and dose
delivery testing, product metabolism, chemistry, pharmacology, toxicology and
safety testing. The preclinical testing phase in the United States typically
takes six months to three years and Phase I studies typically take six months to
one year. Because INDs are required in the United States to be filed before
human clinical trials start, it is uncertain whether SPD trial completion speeds
in the United States will be as swift as the Company's experiences with clients
in the United Kingdom (where INDs are not required to commence Phase I clinical
trials), but Covance believes that an SPD program can reduce the typical drug
development time in the United States.
Covance also provides animals, including purpose-bred animals, for
biomedical research. These animals are used by biopharmaceutical companies,
university research centers and CROs, like Covance, as part of their preclinical
in vivo safety and efficacy testing. Through a variety of processes, technology
and specifically constructed facilities, Covance is able to provide both
purpose-bred and specific pathogen free animals that meets clients' rigorous
control requirements. Covance is also a provider of custom
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polyclonal and monoclonal antibody services and owns and operates an 18,000
square-foot state-of-the-art antisera production facility that complies with
both good manufacturing practices ("GMP") and good laboratory practices ("GLP").
Although Covance's animal breeding facilities maintain procedures in
accordance with applicable government regulations and Company policies for the
quarantine and handling of imported animals, including primates, there is a risk
that these animals may be infected with diseases that may be harmful and even
lethal to themselves and humans. In 1996, Covance, with the approval of the
Texas Department of Health and the Centers for Disease Control, destroyed a
shipment of monkeys from the Philippines because some had been infected with a
sub-strain of the Ebola-Reston virus, which is lethal to monkeys.
Covance also provides early development and laboratory testing services to
the chemical, agrochemical and food industries. Covance offers a complete range
of services to agrochemical manufacturers to determine the potential risk to
humans, animals and the environment from plant protection products. Covance also
offers a broad range of services to the food industries, including nutritional
analysis and nutritional content fact labels.
Biomanufacturing
Covance holds a majority interest in Covance Biotechnology, a company
formed in 1995 to manufacture peptides and recombinant proteins for
biotechnology and pharmaceutical clients in accordance with GMP for preclinical
and clinical trials as well as for commercial sales. Covance Biotechnology's
services include process development services, GMP manufacturing by microbial
and mammalian cell expression, laboratory testing, quality assurance and quality
control and regulatory affairs assistance. Covance Biotechnology is able to
process multiple compounds for multiple clients simultaneously and on a scale,
Covance believes, greater than any other contract bioprocessor. Covance
Biotechnology provides an alternative for clients who might otherwise need to
design, finance and construct their own facility to manufacture a compound for
preclinical or clinical trials or commercial sale. By retaining Covance
Biotechnology, a client can avoid the expense, time delay and risk of making
additional investments for a compound whose safety, efficacy and commercial
opportunities are uncertain. This allows clients to preserve their capital and
lower their risks.
Covance Biotechnology has submitted proposals to a number of prospective
biopharmaceutical clients, and it has been awarded two contracts. For the year
ended December 31, 1996, Covance Biotechnology reported a net loss of
approximately $3.1 million. Cumulatively since its inception, Covance
Biotechnology has incurred net losses totaling $5.0 million.
The 109,000 square-foot biomanufacturing facility, located in Research
Triangle Park, North Carolina, became "mechanically complete" in December 1996,
and became operational in January 1997, although the facility continues to
undergo validation. The
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biomanufacturing facility is financed through several tax retention operating
leases provided by a commercial lending institution ("Bank") and, during the
construction phase, was being leased by the General Contractor, before being
transferred to Covance Biotechnology upon the "mechanical completion" of the
facility. The leases expires in December 2006. The annual minimum lease payments
are $5.3 million. At the expiration of the lease term, Covance Biotechnology is
liable for the unamortized balance of the cost of the facility, currently
estimated to be approximately $37 million. Covance Biotechnology may also choose
to purchase the facility at specific dates over the 10 year period. Using
current estimates, the purchase price would be approximately $52 million at the
end of the first year, decreasing on an amortizing basis to approximately $34.5
million at the end of the tenth year.
Covance owns 76% of the voting capital stock of Covance Biotechnology in
the form of convertible preferred stock. The remaining 24% of Covance
Biotechnology's capital stock is owned by certain minority stockholders (the
"Minority Stockholders") in the form of common stock. Covance's ownership in
Covance Biotechnology may be reduced to 68% if certain options granted to key
Covance Biotechnology executives are exercised in full.
The Company, Covance Biotechnology, and the Minority Stockholders are also
party to a capital contribution and stockholder agreement (the "Agreement"),
which, among other things, limits certain Minority Stockholders common stock
transfers, grants Covance a right of first refusal on shares of Minority
Stockholders common stock, and grants Covance the right to purchase up to
one-third of the common stock held by the Minority Stockholders on certain
dates. If Covance chooses not to exercise its purchase right, the Agreement
obligates Covance Biotechnology to use its best efforts to arrange for the sale
of such shares on certain specified terms, and certain other conditions. The
Company has no affirmative obligation to provide further funds or financial
assistance of any kind to Covance Biotechnology.
Clinical and Periapproval Services
Covance offers a comprehensive range of clinical trial services, including
Phase I through III clinical studies and periapproval studies, including Phase
IIIb and Phase IV clinical studies, TINDs, post-marketing surveillance studies
and prescription to over-the-counter switch studies ("Rx to O-T-C Switch").
Covance also has extensive experience in a number of therapeutic areas,
including diseases of the cardiovascular and central nervous systems,
endocrinology and respiratory systems, infectious diseases (including AIDS), and
significant experience in other areas including oncology, bone metabolism
immunology, gastroenterology, urology, dermatology and hematology. Covance has
extensive experience in managing both small, medium and large trials in the
United States and in many parts of the world, including Australia, Canada,
Western, Central and Eastern Europe, Israel, Mexico and Russia. These trials may
be conducted separately or simultaneously as part of a multinational development
plan.
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Covance can manage every aspect of clinical trials by providing its
clients the following services: clinical development plans and protocol design,
consulting services (clinical and data management, regulatory advice and
filings, information systems and drug development strategy), site, investigator
and patient enrollment, preparation and submission of TINDs, INDs, European
study permissions, NDAs, computer assisted NDAs ("CANDAs"), product license
applications ("PLAs"), computer assisted PLAs ("CAPLAs") and European submission
dossiers, computerized patient randomization and dose assignment and tracking,
Phase I - Phase IV study design and implementation, monitoring and safety
evaluation management and reporting, data processing and management, statistical
analyses and report writing, medical writing, good clinical practices ("GCP")
and GMP audits and, through its relationship with Bio-Imaging, medical image
digitization and processing. Clinical trials are managed by a dedicated project
team, which, in each case, is led by a project director who supervises all
aspects of the clinical trial.
The following is a description of the core services Covance provides,
either on an individual or integrated basis depending on client needs, as part
of conducting clinical trials:
Study Design. Covance serves its clients in the critical area of study
design by applying its experience in the preparation of study protocols and case
report forms ("CRFs"). The study protocol defines the medical issues to be
examined in evaluating the safety and efficacy of the drug under study, the
number of patients required to produce statistically valid results, the clinical
tests to be performed in the study, the time period over which the study will be
conducted, the frequency and dosage of drug administration and the exact
inclusion and exclusion criteria to be met for the patients enrolled in the
study. The success of the study depends not only on the ability of the protocol
to accurately reflect requirements of regulatory authorities, but also on the
ability of the protocol to fit coherently with the other aspects of the
development process and the ultimate marketing strategy for the drug. This
includes outcomes and pharmacoeconomic concerns and reimbursement planning. With
study protocol finalization, CRFs must be developed to record the desired
information to be obtained from the clinical studies. The various other
disciplines involved in the drug development process, including data management,
statistics and regulatory affairs, must work closely with the clinical trial
management project team to assure that the right data are acquired in a form
which is most efficient for subsequent data entry, management analyses and
reporting.
Investigator Recruitment. During the clinical trials, administration of
the drug to patients is supervised by physicians, also referred to as
investigators, at hospitals, clinics or other locations, also referred to as
investigational sites. Covance solicits the participation in the study of
investigators who contract directly with either Covance or its client. Covance
maintains and continually expands and refines its computerized database of
approximately 30,000 investigators. Information regarding Covance's experience
with these investigators, including factors relevant to rapid study initiation,
are contained in
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the database. Covance has worked with approximately 25,000 general practitioners
in connection with the conduct of Phase III and IV studies.
Study Monitoring. Covance provides study monitoring services which include
investigational site initiation, patient enrollment assistance and data
collection through subsequent site visits. These visits also serve to assure
that data are gathered according to GCP, the requirements of the client, as
specified in the study protocol or otherwise, and applicable regulations.
Covance focuses at an early stage on identifying and quickly completing the
critical rate-limiting steps of screening and selecting investigators,
processing pre-study regulatory paperwork, obtaining institutional review board
approvals and scheduling investigational site initiation visits.
Clinical Data Management and Biostatistical Analysis. Covance's data
management and biostatistical analysis operations are managed by professionals
with extensive pharmaceutical and biotechnology industry experience in the
design and construction of local and multinational clinical trial databases.
Data management and biostatistical analysis services are offered as discrete
products and as part of an integrated drug development program. During the
design of development plans and protocols, Covance offers consulting services
relating to, and the determination of, sample size parameters for patient
enrollment, development of data analysis plans and randomization schemes. During
the conduct of clinical trials, Covance assists in the rapid acquisition of
clean and accurate data. Following completion of the clinical trials, Covance
assists in report preparation and regulatory submissions. Covance's
biostatisticians may participate with clients in meetings with the FDA to
present and discuss biostatistical analyses prepared by Covance. Covance has
expertise in electronically capturing and integrating geographically diverse
data. Covance employs a variety of software, which may be specified by clients
or combined with customized programs developed by Covance.
Clinical Development Technologies. To expedite the drug development
process and to help reduce costs, Covance created a proprietary drug management
system based on an Interactive Voice Response System ("IVRS") and an Information
Access System ("IAS"), which are interactive information technologies. IVRS uses
touch-tone telephone technology to assist biopharmaceutical clients in managing
the "just-in-time" delivery of clinical drug supplies and patient randomization.
IVRS is available in multiple languages using toll free numbers and has, in some
cases, demonstrated up to 30% reduction in study drug waste. IAS, based on Lotus
Notes(R) software, provides clients with 24-hour access to study data, such as
study patient enrollment progress, patient visit information, CRF status and
serious adverse event experience.
Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients in a manner designed to
complement parallel development processes to reduce overall development time.
These services are fully integrated with Covance's other services to accelerate
development speed consistent with good service and regulatory compliance.
Services in this area include integrated
12
clinical/statistical reports, manuscripts, risk/benefit assessment reports,
package inserts, quality assurance and environmental risk assessments. Covance
believes it was one of the first CROs to develop CANDAs and CAPLAs.
Treatment Investigational New Drug Applications. The TIND is an
application by a pharmaceutical or biotechnology sponsor and the associated
procedure to allow broader populations of patients to receive treatment with an
investigational new drug for a serious or immediate life-threatening disease,
such as AIDS or cancer, for which no comparable or satisfactory therapy is
available. This treatment is provided during the clinical trial phase of
development but does not typically use controlled clinical trials. The Company
is experienced with TINDs and has developed specialized systems for prompt
initiation and effective operation of TIND programs, such as computerized
patient screening, optical scanning of CRFs and drug management systems. Other
special TIND programs or systems involve providing project specific information
to physicians, patients and patient advocacy groups, and data processing,
management, analyses and reporting systems. Covance's EAP, which is conducted
pursuant to a TIND, is a mechanism that allows innovative new therapies for
life-threatening diseases to be given to expanded populations prior to FDA
approval.
Other Periapproval Studies. Besides TINDs, Phase IIIb studies (involving
studies conducted after NDA submission but before regulatory approval is issued)
and Phase IV studies, Covance performs other types of periapproval studies such
as post-marketing surveillance studies and Rx to O-T-C Switch studies.
Post-marketing surveillance studies are epidemiologically based evaluations of
the use of products in actual medical practice using a broad range of patients.
These studies use practicing physicians to evaluate primarily the safety profile
of the product under actual medical practice conditions. Post-marketing
surveillance studies are large, typically involving over 1,000 physicians and
thousands of patients, and usually focus on evaluating just a limited number of
key clinical outcomes, such as a particular side effect. In Rx to O-T-C Switch
studies, Covance gathers, on behalf of a sponsor, the necessary safety data to
obtain regulatory permission for the sale of its drug without the need of a
prescription. These studies are also large, well-controlled programs.
Health Economics
Covance offers a wide range of health economic services for managed care
organizations, hospitals, health care provider networks and pharmaceutical and
device manufacturers. These services include outcomes and pharmacoeconomic
studies, reimbursement planning services and disease management services, as
discussed below.
Outcomes and Pharmacoeconomic Studies. Covance offers its clients a full
range of strategic and analytic services, including strategic planning,
quality-of-life assessment, and economic studies (including feasibility studies,
protocol and instrument design and data analysis). Outcomes studies may be
prospective, often conducted in conjunction with clinical trials, or
retrospective. Many cost-effectiveness studies employ economic
13
modeling techniques to evaluate the full financial impact of new medical
technologies. When planning studies, the Company examines the audience for the
study's findings to determine which of the client's concerns (such as regulatory
approval, clinical acceptance, insurer coverage or insurer payment) might be
more fully informed by the availability of outcomes data, and then determines
how such data can be efficiently collected and communicated. Covance typically
involves academic and clinical experts to ensure that appropriate techniques are
used and to enhance study credibility and acceptance. Covance also designs most
studies with a goal of publishing its findings in respected, peer-reviewed
journals.
Covance believes that given the changing competitive pressures affecting
the pharmaceutical industry and the rising need to more rigorously demonstrate
the value of particular drugs, both in their own right and compared to other
drugs and treatment regimes, the ability to perform outcomes and
pharmacoeconomic studies will become increasingly important.
Reimbursement Planning. Covance offers its customers strategic
reimbursement and market planning services. These services enable clients to
enhance the commercial success of their medical products. Covance analyzes, on
behalf of the customer, who will pay for a medical product (e.g., third-party
payors such as private insurance companies or federal programs like Medicare)
and what economic barriers or opportunities exist for the product (e.g., claims
coding, coverage policy, or payment amounts). In addition, Covance often offers
its reimbursement planning activities in conjunction with its other services
that evaluate existing and potential market size, pricing, distribution, and
economic impact.
Through its Medical Technology Hotlines(R) division, Covance also provides
full service reimbursement case management, including: (1) contacting insurers
to investigate specific coverage and benefit matters, resolving denied claims
and educating insurers; (2) assisting manufacturers in designing and effectively
running their indigent patient programs, pursuant to which costly new products
are made available to patients who cannot afford them because of inadequate
insurance coverage or other cost reasons; (3) designing and administering
transition programs for manufacturers, which includes obtaining third-party
payment for a product for patients who had previously received it free as part
of a clinical trial; and (4) conducting reimbursement training seminars for
clients and their customers.
All of these services are supported by a dedicated information services
group that provides a range of data products, services and information systems,
including customized hospital cost reports, patient average lengths of stay or
mortality rates at the federal, state, local or individual hospital level. The
extensive economic and epidemiologic databases Covance maintains are used to
perform market research, determine the economics of a disease or inform
government authorities about the need for potential policy changes.
14
Disease Management Services. Working for a variety of customers, including
pharmaceutical and device manufacturers, managed care organizations, hospitals,
provider networks and computerized medical record companies, Covance designs and
implements systems that track patterns of care, patient outcomes, and costs, and
develops programs and tools designed to improve quality and decrease costs of
care. Such programs and tools include medical practice guidelines and
computerized decision support tools.
Central Laboratory Services
Covance believes that the ability to conduct high quality and
sophisticated central laboratory services is an integral aspect of what
constitutes a full service CRO. Covance's two facilities (one located in the
United States and the other in Switzerland) provide central laboratory services
dedicated exclusively to biopharmaceutical studies. These facilities provide
clients with combinable data in studies that can be conducted separately, or
multinationally and simultaneously. Providing combinable data eliminates the
need for statistical correlation among different laboratories by using
consistent laboratory methods, the use of same reagent manufacturers, and the
use of identical clinical trial reference ranges and equipment calibration.
Covance also employs a proprietary clinical trials management system, which
Covance believes is unique, that enables it to enter a sponsor's protocol
requirements directly into its own database. This system, based on protocol
requirements, constructs the drug kits that will go to the investigational sites
and the requisition forms therefor, allows for proper laboratory specimen
collection from the investigational site, sequencing of study participants
visits and investigator test ordering of additional tests and ensures that all
demographic data is complete and accurate and will produce for the client
reports that are customized to their specifications. The laboratories provide a
comprehensive audit trail by ensuring that all laboratory data are traceable to
source documents, are capable of delivering customized data electronically
within 24 hours and provide safety test results within 48 hours from most
locations. As the need for central laboratory services expands geographically,
the Company has expanded the reach of its central laboratories business through
a contractual arrangement with a leading South African laboratory that allow
Covance to combine the testing capabilities of such laboratory with its own
proprietary systems.
Clinical Packaging
Covance offers full service contract packaging for the pharmaceutical
industry in the United States and Europe including package development and
design, coldformed and thermoformed blister units, blister packaging, multi-dose
bottle filling, clinical labeling, storage and site distribution of clinical
supplies and return services for unused supplies. With the addition, in 1996, of
Covance Pharmaceutical Packaging Services AG, Covance packaging services and
products have been expanded to include software inventory and validation
controls and processes and the manufacturing of robotic packaging machines.
Covance believes that by integrating packaging services with its other clinical
and periapproval services it can accelerate the drug development process through
operational
15
efficiencies that arise from coordinating at the outset the design of a clinical
trial. Also in 1996, Covance purchased a 91,000 square foot packaging facility
in Horsham, United Kingdom. This facility will provide a modern pharmaceutical
packaging operation at one of the largest packaging facilities in Europe.
Management expects commercial operations to commence early in the second quarter
1997, with the facility to be fully operational in mid 1997.
Clients and Marketing
Covance provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. In 1996, Covance
served over 270 biopharmaceutical companies, including all 50 of the world's
largest pharmaceutical companies and 17 of the world's 25 largest biotechnology
companies. Of the 270 biopharmaceutical companies Covance serves, 45 are
Japanese. The Japanese biopharmaceutical companies are served by Covance's
United States and European operations.
For the year ended December 31, 1996, approximately 71% of Covance's net
revenues, 77% of Covance's operating income and 77% of Covance's identifiable
assets were attributed principally to United States operations, while
approximately 29% of Covance's net revenues, 23% of Covance's operating income
and 23% of Covance's identifiable assets were attributed to European (including
Asian) operations. Approximately 62% of Covance's net revenues during 1996 were
attributed to the Company's clinical lines of business. Approximately 38% of
Covance's net revenues during 1996 were attributed to the Company's nonclinical
lines of business. In 1996, no client accounted for more than 10% of the
Company's net revenue, and only one client accounted for more than 5% of the
Company's net revenue. In 1996, Covance's top five clients accounted for
approximately 20% of Covance's net revenues.
Covance's sales activities are conducted by more than 120 business
development people based in Covance's operations in the United States, Europe,
Australia, Japan and Singapore. Most of Covance business development personnel
have technical or scientific backgrounds.
To strengthen its sales and marketing activities, Covance introduced in
1995 a Lotus Notes(R) based large account management process ("LAMP") that
allows Covance business development personnel in all locations to promptly
ascertain the status of any new client activity with any Covance operation. LAMP
is an important tool in managing Covance's key account program. Through LAMP,
the key account program and dedicated resources, Covance believes it can better
coordinate and unite the efforts of its sales and marketing personnel and
strengthen relationships with pivotal biopharmaceutical clients. Covance
believes that this will allow it to improve its understanding of its clients'
organizational structure, management practices and product pipeline, and, thus,
better serve its clients' needs. Conversely, LAMP also enables
16
clients, across different business functions, to better understand the full
range of Covance's services.
Contractual Arrangements
Most of Covance's contracts in the preclinical, central laboratory,
clinical packaging and health economics areas are fixed price or
fee-for-service, and in the clinical and periapproval areas are fee-for-service
with a cap. To a lesser extent, some of the contracts in the clinical and
periapproval areas are fixed price or fee-for-service without a cap. In cases
where the contracts are fixed price, Covance bears the cost of overruns, with
certain exceptions, but benefits if the costs are lower than anticipated. In
cases where the contracts are fee-for-service with a cap, the contracts contain
an overall budget for the trial based on time and cost estimates. If costs are
lower than anticipated, the client keeps the savings, but if costs are higher
than estimated, then Covance is responsible for the overrun unless the increased
cost is a result of a change requested by the client, such as an increase in the
number of patients to be enrolled or the type or amount of data to be collected.
Contracts may range from a few months to several years depending on the nature
of the work performed. In some cases, for multiyear contracts involving either
preclinical or clinical and periapproval trials, a portion of the contract fee
is paid at the time the study or trial is started with the balance of the
contract fee payable in installments over the study or trial duration and may be
performance based. For instance, in clinical and periapproval trials,
installment payments may be related to investigator recruitment, patient
enrollment or delivery of the database.
Most of Covance's contracts for the provision of its services are
terminable by the client either immediately or upon notice. Contracts may be
terminated for a variety of reasons, including the failure of a product to
satisfy safety requirements, unexpected or undesired results of the product, the
client's decision to forego or terminate a particular study, insufficient
enrollment or investigator recruitment, or the Company's failure to properly
discharge its obligations thereunder.
Backlog
Certain of Covance's studies and projects are performed over an extended
period of time which may be as long as several years. With respect to such
studies or projects, Covance maintains an order backlog to track anticipated net
revenues for such work that has yet to be earned. However, Covance does not
maintain an order backlog for all the services it provides because such services
are performed within a short period of time or for other reasons where it is not
practical or feasible to maintain an order backlog. Additionally, services
appropriate for backlog measurement do not correspond exactly with any
particular line of business.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however,
17
Covance will work on a project prior to executing a letter of intent and the
backlog may include the net revenue expected from such project.
No assurance can be given that the Company will be able to realize all or
any net revenue included in backlog. Although backlog can be meaningful to
management with respect to a particular study where study-specific information
is known (for example, study duration, performance clauses and other
study-specific contract terms), Covance believes that its aggregate backlog as
of any date is not necessarily a meaningful indicator of future results for a
variety of reasons, including the following: First, studies vary in duration.
For instance, some studies that are included in 1995 backlog may be completed in
1996, while others may be completed in later years. Second, the scope of studies
may change, which may either increase or decrease their value. Third, studies
included in backlog may be subject to bonus or penalty payments. Fourth, trials
under letters of intent or contracts included in backlog are subject to
termination or delay at any time by the client or regulatory authorities.
Termination or delays can result from a number of reasons. Delayed contracts
remain in Covance's backlog pending determination of whether to continue, modify
or cancel the study.
Based upon the above discussion, Covance's aggregate backlog was
approximately $503 million, compared to approximately $392 million at December
31, 1995.
Competition
The CRO industry is highly fragmented, with participants ranging from
hundreds of small, limited-service providers to a few full service CROs with
global capabilities. Covance primarily competes against in-house departments of
pharmaceutical companies, full-service CROs and, to a lesser extent,
universities and teaching hospitals. Covance believes, based on 1996 revenues,
that the five largest CROs besides itself include Pharmaceutical Product
Development Inc. (after its merger with Applied Bioscience International Inc.),
Quintiles Transnational Corporation, Huntington International Holdings PLC,
Parexel International Corporation and ClinTrials Inc.
As a result of competitive pressures, the CRO industry is consolidating.
This trend is likely to produce competition among the larger CROs for both
clients and acquisition candidates and companies may choose to limit the CROs
with whom they are willing to work. In addition, there are few barriers to entry
for small, limited-service entities considering entering the CRO industry. CROs
compete on the basis of several factors, including reputation for on-time
quality performance, expertise and experience in specific therapeutic areas,
scope of service offerings, how well such services are integrated, strengths in
various geographic markets, price, technological expertise and efficient drug
development processes, the ability to acquire, process, analyze and report data
in a time-saving and accurate manner, the ability to manage large-scale clinical
trials both domestically and internationally, expertise and experience in health
economics and size. The Company believes that it competes favorably in all of
these areas.
18
Relationship With Corning and Quest
Effective as of the Distribution Date, Corning, Quest and Covance entered
into certain agreements to provide for an orderly transition to the status of
three separate independent companies, to govern their relationship subsequent to
the Distributions and to provide for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Distributions.
Transaction Agreement. The Transaction Agreement between Corning, Quest
and the Company provided for, among other things, certain conditions precedent
to the Distributions, certain corporate transactions required to effect the
Distributions and other arrangements between Corning, Quest and Covance
subsequent to the Distributions. The Transaction Agreement provided for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate generally, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
business of the Company, Quest and Corning.
In addition to the specific indemnity described below, Corning, Quest and
Covance are obligated under the Transaction Agreement to indemnify and hold
harmless each other in respect of Indemnifiable Losses (as defined therein)
arising out of or otherwise relating to the management or conduct of their
respective businesses or the breach of any provision of the Transaction
Agreement. The Transaction Agreement also provided that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution Date in connection with the Distributions are to be
allocated among the parties. Except as set forth in the Transaction Agreement or
any related agreement, each party shall bear its own costs and expenses incurred
after the Distribution Date.
Spin-Off Tax Indemnification Agreements. Corning and Covance entered into
a tax indemnification agreement (the "Corning/Covance Spin-Off Tax
Indemnification Agreement") pursuant to which, among other things, Covance
agreed with Corning that during the period from December 31, 1996 to December
31, 1998 (the "Restricted Period") (i) it would continue active conduct in its
CRO business, (ii) it would continue to own and manage at least 50% of the
assets which it owned immediately after the Distribution Date, and (iii) it
would refrain from certain stock issuances, mergers or liquidations, or any
revisions to its Rights Plan (as defined therein). Covance also agreed to
indemnify Corning for Taxes (as defined therein) arising from certain violations
of the Corning/Covance Spin-Off Tax Indemnification Agreement and for Taxes
arising as a result of the purchase of 20% or more of Covance Stock during the
Restricted Period or the commencement of a tender or purchase offer by a third
party for 20% or more of Covance stock. If the Company's obligations under the
Corning/Covance Spin-Off Tax Indemnification Agreement were breached and, as a
result thereof, one or both of the Distributions do not qualify for the
treatment stated in the Private Letter Ruling issued by the Internal Revenue
Service (the "IRS Ruling"), the Company would be required to
19
indemnify Corning for Taxes imposed, and such indemnification obligations could
exceed the Company's net asset value at such time.
Quest and Covance also entered into a tax indemnification agreement (the
"Quest Diagnostics/Covance Spin-Off Tax Indemnification Agreement") which was
essentially the same as the Corning/Covance Spin-Off Tax Indemnification
Agreement, except that Covance made representations and covenants to and
indemnified Quest, as opposed to Corning. Quest and Covance also entered into a
second tax indemnification agreement (the "Covance/Quest Diagnostics Spin-Off
Tax Indemnification Agreement") which is essentially the same as the spin-off
tax indemnification agreement between Corning and Quest, except that Quest made
representations and covenants to and indemnified Covance as opposed to Corning.
The various Spin-Off Tax Indemnification Agreements also require Covance
to take such actions as Corning and Quest may reasonably request to preserve the
favorable tax treatment provided for in the rulings obtained from the IRS in
respect of the Distributions.
Tax Sharing Agreement. Corning, Quest and Covance entered into a tax
sharing agreement (the "Tax Sharing Agreement") which allocated responsibility
for federal income and various other taxes ("Taxes") among the three companies.
The Tax Sharing Agreement provides that, except for Taxes arising as a result of
the failure of either or both of the Distributions to qualify for the treatment
stated in the IRS Ruling (which Taxes are allocated either pursuant to the
Spin-Off Tax Indemnification Agreements or as described below), Corning is
liable for and will pay the federal income taxes of the consolidated group that
includes Quest and Covance and their subsidiaries, provided, however, that Quest
and Covance were required to reimburse Corning for taxes for periods beginning
after December 31, 1995 in which they were members of the Corning consolidated
group and for which tax returns have not been filed as of the Distribution Date.
This reimbursement obligation is based on the hypothetical separate federal tax
liability of Quest and Covance, calculated on a separate consolidated basis,
subject to certain adjustments. Under the Tax Sharing Agreement, in the case of
adjustments by a taxing authority of a consolidated federal income tax or
certain other tax returns prepared by Corning which includes Quest or Covance,
then, subject to certain exceptions, Corning is liable for and will pay any tax
assessments, and is entitled to any tax refunds, resulting from such audit.
The Tax Sharing Agreement further provided that, if either of the
Distributions fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the
Spin-Off Tax Indemnification Agreements), Taxes imposed upon or incurred by
Corning, Quest or Covance as a result of such failure are to be allocated among
Corning, Quest and Covance in such a manner as will take into account the extent
to which the actions or inactions of each may have contributed to such failure,
and Corning, Quest and Covance each will indemnify and hold harmless the other
from and against the taxes so allocated. If it is determined that none of the
companies
20
contributed to the failure of such Distribution to qualify for the tax treatment
stated in the IRS Ruling, the liability for taxes will be borne by each company
in proportion to its relative average market capitalization as determined by the
average closing price for the common stock of each company during the 20
trading-day period immediately following the Distribution Date. In the event
that either of the Distributions fails to qualify for the tax treatment stated
in the IRS Ruling and the liability for taxes as a result of such failure is
allocated among Corning, Quest and the Company, the liability so allocated to
the Company could exceed the net asset value of Covance.
Banking Facilities
In November 1996, Covance obtained from a syndicate of banks (the "Banks")
a five-year $250,000,000 Senior Revolving Credit Facility (the "Credit
Facility"). The Credit Facility is guaranteed by certain material United States
subsidiaries of Covance and, in certain circumstances, by the pledges of stock
of certain foreign subsidiaries of Covance. The proceeds of the Credit Facility
were used to effect certain repayments required by the Distributions. The Credit
Facility will also be used to provide financing for the Company's and its
subsidiaries' working capital needs, capital expenditures, acquisitions and
other corporate purposes. Covance may prepay the loans under the Credit Facility
in whole or in part (subject to certain reimbursements to the Banks) and may
permanently reduce or terminate the Banks commitments. Under the Credit
Facility, Covance may choose to obtain different forms of loans, at varying
interest rates. The Company is also obligated to pay certain fees in connection
with the Credit Facility, including a facility fee. Covance will be required to
comply with certain affirmative and negative covenants, including financial
covenants which require the Company to meet minimum interest coverage targets
and maximum leverage ratios.
Government Regulation
The laboratory, manufacturing and packaging services performed by Covance
are subject to various regulatory requirements designed to ensure the quality
and integrity of the testing, manufacturing and packaging processes. The
industry standards for conducting preclinical laboratory testing are embodied in
the GLP and GMP regulations and for central laboratory operations in the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). Covance's central
laboratories also, in limited circumstances and when required by a client,
follow GLP. Covance's central laboratory in Geneva has also been certified by
the College of American Pathologists ("CAP"). GMP sets forth the requirements
for manufacturing facilities. GLP and GMP have been adopted by the FDA, by the
Department of Health in the United Kingdom and by similar regulatory authorities
in other parts of the world. GLP and GMP stipulate requirements for facilities,
equipment and professional staff. The regulations require standardized
procedures for studies, for recording and reporting data and for retaining
appropriate records. To help satisfy its compliance obligations, Covance has
established quality assurance controls at its laboratory and manufacturing
facilities which monitor ongoing
21
compliance with GLP, GMP and CLIA regulations, as applicable, by auditing test
data and conducting regular inspections of testing and manufacturing procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations require (1)
complying with specific requirements governing the selection of qualified
investigators; (2) obtaining specific written commitments from the
investigators; (3) verifying that patient informed consent is obtained; (4)
monitoring the validity and accuracy of data; (5) verifying drug or device
accountability; (6) instructing investigators to maintain records and reports;
and (7) permitting appropriate governmental authorities access to data for their
review. Covance must also maintain reports for each study for specified periods
for inspection by the study sponsor and the FDA during audits. As with GLP and
GMP, noncompliance with GCP can result in the disqualification of data
collection during the clinical trial.
Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
European Community Note for Guidance "Good Clinical Practice for Trials on
Medicinal Products in the European Community" and the requirements of the
applicable country. In addition, FDA regulations and guidelines serve as a basis
for Covance's North American and Asian/Pacific standard operating procedures.
From an international perspective, when applicable, Covance has implemented
common standard operating procedures across regions to assure consistency
whenever it is feasible and appropriate to do so.
Covance's animal import and breeding facilities are also subject to a
variety of federal and state laws and regulations, including The Animal Welfare
Act and the rules and regulations promulgated thereunder by the United States
Department of Agriculture ("USDA"). These regulations establish the standards
for the humane treatment, care and handling of animals by dealers and research
facilities. Covance's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to comply with
applicable regulations for the humane treatment of the animals in its custody.
Besides being licensed by the USDA as both a dealer and research facility, this
business is also accredited by the American Association for the Accreditation of
Laboratory Animal Care and has registered assurance with the United States
National Institutes of Health Office of Protection for Research Risks.
The use of controlled substances in testing for drugs of abuse is
regulated by the Drug Enforcement Administration (the "DEA"). All Covance
laboratories and packaging sites using controlled substances for testing or
packaging purposes are licensed by the DEA.
22
Covance's United States laboratories are subject to licensing and
regulation under federal, state and local laws relating to hazard communication
and employee right-to-know regulations, the handling and disposal of medical
specimens and hazardous waste and radioactive materials, as well as to the
safety and health of laboratory employees. All Covance laboratories are operated
in material compliance with applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens including the
regulations of the Environmental Protection Agency, the Nuclear Regulatory
Commission, the Department of Transportation, the National Fire Protection
Agency and the Resource Conservation and Recovery Act. Although Covance believes
that it is currently in compliance in all material respects with such federal,
state and local laws, failure to comply could subject Covance to denial of the
right to conduct business, fines, criminal penalties and other enforcement
actions.
In addition to its comprehensive regulation of safety in the workplace,
the Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. These regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations and
other measures designed to minimize exposure to chemicals, and transmission of
blood-borne and airborne pathogens. Furthermore, relevant Covance employees
receive initial and periodic training to ensure compliance with applicable
hazardous materials regulations and health and safety guidelines.
The regulations of the Department of Transportation, the Public Heath
Service and the Postal Service apply to the surface and air transportation of
laboratory specimens. Covance's laboratories also comply with the International
Air Transport Association regulations, which govern international shipments of
laboratory specimens. Furthermore, when the materials are sent to a foreign
country, the transportation of such materials becomes subject to the laws, rules
and regulations of such foreign country.
Intellectual Property
Covance has developed certain computer software and technically derived
procedures that provide separate services and are intended to maximize the
quality and effectiveness of its services. Although Covance's intellectual
property rights are important to its results of operations, Covance believes
that such factors as the technical expertise, knowledge, ability and experience
of Covance's professionals are more important, and that, overall, these
technological capabilities provide significant benefits to its clients.
Employees
At January 15, 1997, Covance had approximately 5,400 employees,
approximately 30% of whom are employed outside of the United States.
Approximately 25 of Covance's employees hold M.D. degrees, 169 hold Ph.D.
degrees, 11 hold Pharm.D.
23
degrees, 25 hold D.V.M. degrees and 434 hold masters or other postgraduate
degrees. Covance believes that its relations with its employees are good.
Item 2. Properties
Covance both owns and leases its facilities. Covance's principal executive
offices are located in Princeton, New Jersey where it leases approximately
157,000 square feet of space. The lease expires in 2004. Covance owns its
397,000 square-foot preclinical laboratory located in Madison, Wisconsin and its
205,000 square-foot preclinical laboratory in Harrogate, United Kingdom. Covance
leases most of its 201,000 square-foot preclinical laboratory in Vienna,
Virginia. It also owns several of the buildings. The leases expire in 1999 and
have a 10-year renewal option. Covance also leases its 152,000 square-foot
pharmaceutical laboratory in Indianapolis, Indiana, which expires in 2000.
Covance leases its 51,000 square-foot pharmaceutical laboratory in Geneva,
Switzerland, which lease expires in 2000. Covance's domestic packaging
operations are conducted from several leased facilities. The principal packaging
facility is in Allentown, Pennsylvania. The leases are for approximately 100,000
square feet of space and they all expire in 1999. Covance's Swiss-based
packaging operation currently conducts business in a 20,000 square-foot leased
facility, but has plans to construct a new, purpose-designed 37,000 square-foot
facility. The new facility is expected to be completed in early 1998. In
addition, in October 1996, Covance purchased a 91,000 square-foot former
pharmaceutical manufacturing facility in Horsham, United Kingdom. After its
renovation is completed by mid-1997, this facility will be used to provide
clinical packaging, clinical and periapproval services and health economics
services and also serve as Covance's European headquarters. Covance
Biotechnology's facility in North Carolina is leased. Covance also owns or
leases other facilities in the United States, United Kingdom, Ireland, Belgium,
France, Germany, Switzerland, Sweden, Australia, Singapore and Japan.
Item 3. Legal Proceedings
Covance is party to lawsuits and administrative proceedings incidental to
the normal course of its business. Covance does not believe that any liabilities
related to such lawsuits or proceedings will have a material effect on its
financial condition or results of operations.
24
Item 4. Submission of Matters to a Vote of Security Holders
In October 1996, the Company's sole stockholder, Quest Diagnostics, Inc.
("Quest"), by unanimous written consent, approved the change of the Company's
name from Corning Pharmaceutical Services Inc. to Covance Inc.
In October 1996, Quest, by unanimous written consent, approved the merger
of the Company's subsidiary, Covance Clinical and Periapproval Services Inc.
with and into the Company.
On December 31, 1996, the Company held a Special Meeting, in lieu of an
Annual Meeting of Stockholders, to elect Class I, II and III Directors. All
shares were voted in favor of the election of the following Directors to their
respective Class, with each term expiring at the Annual Meeting of Stockholders
as noted, or until their successors have been elected and qualified:
Name Class Term Expiring
---- ----- -------------
Robert M. Baylis I 1998
Irwin Lerner I 1998
J. Randall MacDonald II 1999
William C. Ughetta II 1999
Van C. Campbell III 2000
Christopher A. Kuebler III 2000
Nigel W. Morris III 2000
25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange
(symbol: CVD). The following table sets forth the high and low sales prices on
the New York Stock Exchange since the Company's Common Stock began trading on a
"when issued" basis on December 17, 1996. The Company's Common Stock began
trading "regular way" on January 14, 1997.
Quarter Ended High Low
------------- ---- ---
Fourth Quarter 1996 $25.00 $20.875
(December 17th
through December 31st)
As of March 3, 1997, there were 15,448 holders of record of the Company's
Common Stock.
The Company does not currently intend to pay dividends in the foreseeable
future, but to reinvest earnings in the Company's business. The Company is also
restricted (subject to certain exceptions) from paying dividends on its Common
Stock by certain covenants contained in a credit agreement to which the Company
is a party.
26
Item 6. Selected Financial Data
The following table presents selected historical financial data of Covance
at the dates and for each of the periods indicated. The selected financial data
as of and for each of the years ended December 31, 1996, 1995, 1994 and 1993 has
been derived from the audited consolidated financial statements of Covance. The
selected financial data as of and for the year ended December 31, 1992 has been
derived from Covance's unaudited consolidated financial statements. In the
opinion of management, the unaudited financial statements include all
adjustments, consisting of normal recurring accruals, that are necessary for a
fair presentation of the financial position and results of operation for 1992.
The selected financial data should be read in conjunction with the audited
Covance financial statements and notes thereto ("Audited Covance Financial
Statements") filed elsewhere herein. Historical consolidated financial data may
not be indicative of Covance's future performance. See the Audited Covance
Financial Statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Covance."
27
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands)
Income Statement Data:
Net revenues ......................... $ 494,828 $ 409,174 $ 319,501 $289,697 $270,871
Costs and expenses:
Cost of revenue .................... 324,345 270,726 213,490 192,783 192,375
Selling, general and
administrative ................. 80,014 64,201 48,892 42,949 41,230
Spin-off related charge .............. 27,404
Restructuring charge ................. 4,616 3,373
Depreciation and
amortization ................... 25,204 22,070 18,520 16,984 15,212
--------- --------- --------- -------- --------
Total .......................... 456,967 361,613 280,902 252,716 252,190
--------- --------- --------- -------- --------
Income from operations ............... 37,861(a) 47,561(b) 38,599 36,981 18,681
--------- --------- --------- -------- --------
Other expense (income)
Interest expense, net .............. 6,791 5,269 4,307 4,421 5,686
Foreign exchange (gain)
loss ........................... 1,116 (784) (712) 852 1,258
--------- --------- --------- -------- --------
7,907 4,485 3,595 5,273 6,944
--------- --------- --------- -------- --------
Income before taxes and
equity investee loss
(gain) ........................... 29,954(a) 43,076(b) 35,004 31,708 11,737
Taxes on income ...................... 17,377 18,445 14,924 13,506 6,834
Equity investee (gain) loss .......... (139) 405 435 1,391 303
--------- --------- --------- -------- --------
Net income before cumulative
effect of change in
accounting method ................ 12,716 24,226 19,645 16,811 4,600
Cumulative effect of change
in method of accounting
for postretirement
benefits other than
pensions ......................... 4,334
--------- --------- --------- -------- --------
Net income ........................... $ 12,716(a) $ 24,226(b) $ 19,645 $ 16,811 $ 266
========= ========= ========= ======== ========
Balance Sheet Data (at end of period):
Working capital .................... $ 65,946 $ 18,472 $ 12,961 $ 12,076 $ 15,451
Total assets ....................... 451,047 322,510 271,992 229,693 225,337
Long-term debt ..................... 163,000 89,836 75,178 69,239 77,916
Stockholder's equity ............... 110,704 82,517 63,908 49,388 37,197
- ------------
(a)Excluding the impact of the fourth quarter 1996 one-time spin-off
related charge totaling $27,404 ($19,725 net of tax), income from
operations, income before taxes and equity investee gain and net income
for the year ended December 31, 1996 was $65,265, $57,358 and $32,441,
respectively.
(b)Excluding the impact of the second quarter 1995 restructuring charge
totaling $4,616 ($2,770 net of tax), income from operations, income
before taxes and equity investee loss and net income for the year ended
December 31, 1995 was $52,177, $47,692 and $26,996, respectively.
28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, Covance
provides services such as health economics for managed care organizations,
hospitals and health care provider networks, and early development and
laboratory testing services to the chemical, agrochemical and food industries.
The foregoing services can be broadly classified into six lines of business:
preclinical, biomanufacturing, clinical and periapproval, central laboratory,
clinical packaging, and health economics. These six lines of business can be
further categorized as non-clinical (preclinical and biomanufacturing) and
clinical (clinical and periapproval, central laboratory, clinical packaging and
health economics). Covance believes it is one of the largest biopharmaceutical
CROs, based on estimated 1996 annual net revenue, and one of only a few that are
capable of providing comprehensive global product development services. Covance
offers its clients high quality services designed to reduce product development
time, allowing them to introduce their products into the marketplace faster and,
thus, maximize the period of marketing exclusivity and monetary return on their
investments. Additionally, Covance's comprehensive services and broad experience
provide clients with a variable cost alternative to fixed cost internal
development capabilities.
The businesses that today constitute Covance were acquired by Corning,
starting in 1987, as part of a strategy to create a global, integrated and full
service product development company. In keeping with this strategy, during the
period 1994 through the present, Covance has purchased the remaining interest in
a jointly owned company, acquired a significant minority interest in a
complementary service business, acquired three new businesses and formed a major
new business venture. Specifically, in April 1994, Covance acquired the
remaining interest in SciCor S.A., a provider of central laboratory testing
services based in Switzerland. The transaction was accounted for as a purchase
business combination. In October 1994, Covance acquired a significant minority
equity position in Bio-Imaging Technologies, Inc. ("Bio-Imaging"), which uses
proprietary imaging technology to quantify the diagnostic and therapeutic
effectiveness of experimental drugs and devices. Covance expanded its offering
of value added product development services in January 1995 with the acquisition
of National Packaging Systems, Inc., a leading clinical packaging company. The
transaction was accounted for as a purchase business combination. In February
1995, Covance formed Covance Biotechnology, a majority-owned company which will
enable Covance to engage in biomanufacturing. In recognition of the rapid
changes in the biopharmaceutical industry's marketplace, particularly the need
for the industry to further demonstrate the benefits and cost effectiveness of
their products to payors, Covance purchased in March 1996 all the assets and
substantially all of the liabilities of Health Technology Associates,
29
Inc. ("HTA"), a leading health economics company, in a transaction accounted for
as a purchase business combination. In October 1996, Covance expanded its
clinical packaging capabilities to Europe with the purchase of Swiss based CRS
Pacamed AG (now known as Covance Pharmaceutical Packaging Services AG). In
addition, Covance acquired an 81,000 square foot facility in Horsham, England,
which will be used, among other things, to provide clinical packaging services
in Europe.
During the year ended December 31, 1996, approximately three-quarters of
Covance's net revenues were earned under contracts, which generally range in
duration from a few months to two years. Revenue from these contracts is
recognized as costs are incurred on the basis of the relationship between costs
incurred and estimated total costs. Typically, Covance's contracts in the
preclinical, central laboratory, clinical packaging and health economics areas
are fixed price or fee-for-service and in the clinical and periapproval areas
are fee-for-service with a cap. To a lesser extent, some of the contracts in the
clinical and periapproval areas are fixed price or fee-for-service without a
cap. The contracts may contain provisions for renegotiation for cost overruns
arising from changes in the level of work scope. Renegotiated amounts are
included in net revenues when earned and realization is assured. In some cases,
for multi-year contracts involving preclinical and clinical and periapproval
trials, a portion of the contract fee is paid at the time the trial is
initiated, with performance-based installments payable over the contract
duration, in some cases on a milestone achievement basis. Covance routinely
subcontracts with independent physician investigators in connection with
multi-site clinical trials. Investigator fees are not reflected in net revenues
or expenses since such fees are granted by customers on a "pass-thru basis"
without risk or reward to Covance. While most contracts are terminable either
immediately or upon notice by the client, they typically require payment of
expenses to wind down a study and fees earned to date, and, in some cases, a
termination fee or a payment of some portion of the fees or profit that could
have been earned under the contract if it had not been terminated early.
Covance's cost of revenue includes appropriate amounts necessary to
complete the net revenues and earnings process and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These costs,
as a percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 2% in either direction) principally as a
result of changes in labor utilization and the mix of service offerings
involving hundreds of studies conducted during any period of time. Accordingly,
changes in cost of revenue as a percentage of net revenues plus or minus 2% are
expected from one period to another.
30
Results of Operations
Year ended December 31, 1996 Compared with Year Ended December 31, 1995.
Net revenues increased 20.9% to $494.8 million for 1996 from $409.2 million for
1995. Excluding the impact of 1996 acquisitions, growth in net revenues was
16.4%. Net revenues from Covance's combined clinical lines of business,
excluding the recently acquired health economics and Swiss packaging businesses,
grew approximately 20%, benefiting from the continuing trend in outsourcing of
clinical development activities, while net revenues from Covance's more mature
preclinical business grew approximately 10%.
Cost of revenue increased 19.8% to $324.3 million for 1996 from $270.7
million for 1995 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, decreased to 65.5% for 1996 from 66.2% for
1995.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 24.6% to $80.0 million for
1996 from $64.2 million for 1995. As a percentage of net revenues, selling,
general and administrative expense increased to 16.2% for 1996 from 15.7% for
1995. Contributing to the increase in selling, general and administrative
expense were a continuing increase in Covance's corporate center function,
increasing pre-operating costs relative to Covance's biomanufacturing business,
investment in a Covance-wide global sales force initiative, administrative costs
associated with the establishment of Covance's new Singapore operation and the
evaluation of further geographic expansion opportunities, partially offset by a
reduction in certain administrative costs allocated by Corning and affiliates.
Depreciation and amortization increased 14.2% to $25.2 million or 5.1% of
net revenues for 1996 from $22.1 million or 5.4% of net revenues for 1995 as the
growth in net revenues outpaced the increase in these non-cash charges.
Inclusive of special non-recurring charges in both years, income from
operations decreased by $9.7 million to $37.9 million for 1996 from $47.6
million for 1995. During the fourth quarter of 1996, Covance recorded a large
one-time charge totaling $27.4 million ($19.7 million after tax) associated with
its spin-off from Corning. This charge consisted of the cost to establish and
fund two employee stock ownership plans ($16.7 million) and the direct expenses
incurred to establish Covance as a separate publicly traded company ($10.7
million). During the second quarter of 1995, Covance recorded a restructuring
provision totaling $4.6 million ($2.8 million after tax) as a result of
management's decision to discontinue certain nonstrategic operations. Excluding
the impact of the 1996 spin-off related charge and the 1995 restructuring
provision, income from operations increased 25.1% to $65.3 million or 13.2% of
net revenues for 1996 from $52.2 million or 12.8% of net revenues for 1995.
31
Other expense increased $3.4 million to $7.9 million for 1996 from $4.5
million for 1995, due to a net foreign exchange transaction loss of $1.1 million
incurred in 1996 as compared to a net gain of $0.8 million recorded in 1995 and
to an increase in net interest expense of $1.5 million.
Covance's effective tax rate, excluding the special non-recurring charges
in both years, increased to 43.7% for 1996 from 42.5% for 1995. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic dispersion of its pre-tax earnings changes.
Net income decreased to $12.7 million for 1996 from $24.2 million for
1995. Excluding the after tax impact of the 1996 spin-off related charge and
1995 restructuring provision, net income increased $5.4 million or 20.2% to
$32.4 million from $27.0 million for 1995.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994.
Net revenues increased 28.1% to $409.2 million for 1995 from $319.5 million for
1994. Excluding the impact of the 1995 acquisition of National Packaging
Systems, Inc., growth in net revenues was 23.8%. Net revenues from Covance's
combined clinical lines of business, excluding the newly acquired clinical
packaging business, grew in excess of 35%, generally as a result of the growth
in outsourcing of clinical development activities in 1995 as compared to 1994
and more specifically because of Covance's central laboratory's effort to
complete development work on several large protease inhibitor studies by the end
of 1995. Net revenues from Covance's preclinical business grew nearly 10%,
largely as a result of particularly strong growth in Europe, fueled by new
service offerings, overall volume increases and favorable foreign exchange rates
in 1995 compared to 1994.
Cost of revenue increased 26.8% to $270.7 million or 66.2% of net revenues
for 1995 from $213.5 million or 66.8% of net revenues for 1994, as a result of
the increase in net revenues.
Overall, selling, general and administrative expense increased 31.3% to
$64.2 million for 1995 from $48.9 million for 1994. As a percentage of net
revenues these costs increased to 15.7% for 1995 from 15.3% for 1994. Largely
contributing to the increase in selling, general and administrative expenses
were administrative costs associated with the establishment of Covance's new
biomanufacturing business, an increase in Covance's corporate center function,
strategic consulting expenses incurred to reorganize a large portion of
Covance's clinical operations into customer teams to better manage large scale
clinical trials and increased marketing initiatives such as the establishment of
a Lotus Notes(R) based centralized client contact database for use by Covance's
sales force, partially offset by a non-recurring charge incurred in 1994 in
connection with a separation payment made to Covance's then chief executive
officer upon his resignation.
32
During 1995, Covance recorded a restructuring provision totaling $4.6
million ($2.8 million after tax) as a result of management's decision to
discontinue certain nonstrategic operations. The restructuring charge included
severance costs relating to approximately 90 employees of which approximately 50
had been terminated as of December 31, 1995. The remaining employees were
terminated and all other substantive activities to complete the restructuring
plan were completed by April 30, 1996. Severance benefits are being paid in the
form of salary continuation. The restructuring activities have occurred
substantially in accordance with the restructuring plan.
Depreciation and amortization increased 19.2% to $22.1 million or 5.4% of
net revenues for 1995 from $18.5 million or 5.8% of net revenues for 1994 as the
growth in net revenues outpaced the increase in these non-cash charges.
Income from operations increased $9.0 million or 23.2% to $47.6 million
for 1995 from $38.6 million for 1994. Excluding the impact of the 1995
restructuring provision, the increase in income from operations was $13.6
million or 35.2% to 12.8% of net revenues for 1995 from 12.1% of net revenues
for 1994.
Other expense increased $0.9 million for 1995 to $4.5 million from $3.6
million for 1994. This increase is entirely a result of an increase in interest
expense relating principally to 1995 acquisition activity. Substantially all
borrowings to date have been from Corning.
Covance's effective tax rate for 1995 increased slightly to 42.8% from
42.6% for 1994.
Net income increased 23.3% to $24.2 million for 1995 from $19.6 million
for 1994. Excluding the impact of the 1995 restructuring provision, the increase
in net income was $7.4 million or 37.4% for 1995.
Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant preclinical and clinical and
periapproval trials, termination of preclinical and clinical and periapproval
trials, acquisitions and exchange rate fluctuations. Delays and terminations of
studies or trials are often the result of actions taken by clients or regulatory
authorities and are not typically controllable by Covance. Since a large amount
of Covance's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the commencement, progress or completion of
preclinical and clinical and periapproval trials may cause significant
variations in quarterly operating results.
33
The following table presents unaudited quarterly operating results of
Covance for each of the ten most recent fiscal quarters in the period ended
December 31, 1996. In the opinion of Covance, this information has been prepared
on the same basis as the Audited Covance Financial Statements and reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for those periods. This quarterly
financial data should be read in conjunction with the Audited Covance Financial
Statements included elsewhere herein. The operating results for any quarter are
not necessarily indicative of the results to be expected in any future period.
Quarter Ended
---------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
Net revenues.. $ 82,904 $ 84,612 $ 91,974 $ 104,813 $ 106,099 $ 106,288 $ 108,697 $ 121,530 $ 127,179 $ 137,422
Operating
expenses.... 73,214 74,967 78,991 95,148 92,428 95,046 94,659 104,195 109,677 148,436
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.. 9,690 9,645 12,983 9,665(b) 13,671 11,242 14,038 17,335 17,502 (11,014)(a)
Other expense,
net......... 1,030 897 1,434 1,644 231 1,176 1,156 1,615 1,550 3,586
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Pre-tax
income (loss). 8,660 8,748 11,549 8,021(b) 13,440 10,066 12,882 15,720 15,952 (14,600)(a)
Income taxes.. 3,693 3,732 4,953 3,423 5,771 4,298 5,619 6,861 6,931 (2,034)
Equity investee
loss (gain). -- 87 49 149 153 54 (44) 29 (53) (71)
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Net income
(Loss)...... $ 4,967 $ 4,929 $ 6,547 $ 4,449(b)$ 7,516 $ 5,714 $ 7,307 $ 8,830 $ 9,074 $ (12,495)(a)
======= ======= ======= ======= ======== ======== ======== ======== ======== ========
- ----------
(a) Excluding the impact of the fourth quarter 1996 spin-off related
charge totaling $27,404 ($19,725 net of tax), income from operations,
pre-tax income and net income were $16,390, $12,804 and $7,230
respectively.
(b) Excluding the impact of the second quarter 1995 restructuring provision
totaling $4,616 ($2,770 net of tax), income from operations, pre-tax
income and net income were $14,281, $12,637 and $7,219 respectively.
34
Liquidity and Capital Resources
Historically, Covance had participated in the centralized treasury and
cash management processes of Corning. For domestic operations, cash received
from operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was transferred to Corning periodically.
Cash disbursements for operations were funded as needed from Corning. From time
to time excess cash balances were maintained at Covance, generally for specific
cash requirements.
In November 1996, Covance established the $250 million Credit Facility.
Covance borrowed $160 million in November 1996 under the Credit Facility to
repay Corning and affiliates for all of its intercompany borrowings and income
tax liabilities existing at that time. Under the Credit Facility, Covance has
several different interest rate options. Interest on all outstanding borrowings
under the Credit Facility is computed based upon the London Interbank Offered
Rate plus a margin. The Credit Facility expires in November 2001 and contains
various covenants which, among other things, may restrict Covance from engaging
in certain financing activities and prohibits Covance from paying cash dividends
on the Covance Common Stock during a default or an event of default, as defined
in the Credit Facility, or after giving effect to the payment of such dividends
Covance would not be in compliance with the financial covenants of the Credit
Facility. At December 31, 1996, Covance was in compliance with the terms of the
Credit Facility.
Covance has now established a similar centralized cash management function
as had existed when Covance was a subsidiary of Corning, whereby cash received
from operations is generally swept daily, for domestic operations, and
periodically, for international operations, to a concentration account managed
centrally. Cash disbursements for operations are funded as needed from the
concentration account. From time to time excess cash balances are maintained at
Covance, generally for specific cash requirements.
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Covance's management believes that the Credit Facility will provide it with
sufficient financial flexibility and ready access to cash on both a short-term
and a long-term basis to fund, as required, capital expenditures, potential
future acquisitions and other longer-term growth opportunities.
During the year ended December 31, 1996, Covance's operations provided net
cash of $29.9 million, a decrease of $15.2 million from the corresponding 1995
amount. This reduction is attributable to a larger increase in working capital
during 1996 as compared to 1995. Working capital was $65.9 million at December
31, 1996, an increase of $47.4 million from the December 31, 1995 level of $18.5
million. This increase was primarily attributable to an increase in cash of
$17.3 million to $25.4 million at December 31, 1996 and to an increase in
aggregate accounts receivable and unbilled services of $35.8 million or 36.9% to
$133.0 million at December 31, 1996. Excluding the impact of acquisitions
35
made in 1996, the aggregate increase in accounts receivable and unbilled
services was 29.1%. Covance initiated collection and contract management efforts
during the fourth quarter of 1996 to reduce the percentage increase in aggregate
accounts receivable and unbilled services to a level more consistent with the
increase in net revenues. While further progress still needs to be made, the
percentage increase in aggregate accounts receivable and unbilled services from
year end 1995 to year end 1996 is down from the 42.8% increase (35.7% excluding
acquisitions) experienced during the first nine months of 1996. Covance's ratio
of current assets to current liabilities was 1.43 at December 31, 1996 and 1.15
at December 31, 1995.
Investing activities for the years ended December 31, 1996 and 1995
included acquisitions and capital spending to expand existing operations and
purchase equipment to enhance scientific technology capabilities. In March 1996,
Covance acquired Health Technology Associates, Inc. for a cash payment of
approximately $14.9 million. In October 1996, Covance acquired CRS Pacamed AG
for a cash payment of approximately $14.4 million, a new facility to house its
clinical packaging, clinical and periapproval services and health economics
operations in Europe for a cash payment of approximately $9.0 million and paid
$7.0 million in contingent purchase price in connection with Covance's 1995
acquisition of National Packaging Systems, Inc. During 1996, Covance spent
approximately $37.9 million on capital expenditures (excluding the October 1996
facility purchase of $9.0 million) for maintenance and upgrade of existing
equipment, outfitting of new facilities and computer equipment and software for
newly hired employees. Funding for new business acquisitions was provided
through borrowings from Corning.
As described in Note 10 to the Audited Covance Financial Statements, a
Covance subsidiary, Covance Biotechnology, entered into an operating lease
arrangement in June 1995 whereby a custom-designed, fully equipped facility
would be constructed. The lease, which commenced in December 1996 upon
completion of construction of the facility, requires minimum annual lease
payments of approximately $5.3 million.
Foreign Currency
Contracts between Covance's foreign subsidiaries and its clients are
frequently denominated in currencies other than the applicable subsidiary's
local currency. Accordingly, payments received for services rendered under such
contracts are denominated in a currency different than the currency used for the
payment of the subsidiary's expenses. Therefore, the subsidiary's net revenues,
expenses and earnings are affected by fluctuations in exchange rates. In
addition, Covance's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of such
subsidiary's financial results into U.S. dollars for purposes of reporting
Covance's consolidated financial results. Translation adjustments are reported
as a separate section of stockholder's equity. To date, such adjustments have
not been material to Covance's financial statements.
36
Taxes
Since Covance conducts operations on a global basis, Covance's effective
tax rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of Covance's pre-tax earnings among various
tax jurisdictions changes, Covance's effective tax rate may vary from period to
period. See Note 5 to the Audited Covance Financial Statements.
Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
37
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF COVANCE INC.
Report of Price Waterhouse LLP--Independent Accountants.................................................... 39
Consolidated Financial Statements:
Consolidated Balance Sheets--December 31, 1996 and 1995.................................................. 40
Consolidated Statements of Income--Years ended December 31, 1996, 1995 and 1994.......................... 41
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994...................... 42
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1996, 1995 and 1994....................................................................... 43
Notes to Consolidated Financial Statements............................................................... 44
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Covance Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of stockholders'
equity appearing on pages 40 through 56 present fairly, in all material
respects, the financial position of Covance Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. 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. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Morristown, NJ
January 27, 1997
39
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Dollars in thousands) 1996 1995
----- -----
Assets
Current Assets:
Cash and cash equivalents.......................................... $ 25,416 $ 8,068
Accounts receivable, net........................................... 93,700 78,968
Unbilled services.................................................. 39,313 18,217
Inventory.......................................................... 16,410 14,004
Deferred income taxes.............................................. 17,529 11,337
Prepaid expenses and other assets.................................. 25,526 15,189
-------- --------
Total Current Assets........................................... 217,894 145,783
Property and equipment, net............................................ 167,809 140,708
Goodwill, net.......................................................... 53,271 24,028
Other assets........................................................... 12,073 11,991
-------- --------
Total Assets................................................... $451,047 $322,510
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable............................................. $ 26,652 $ 23,761
Accrued payroll and benefits....................................... 28,212 20,339
Accrued expenses and other liabilities............................. 35,840 24,701
Unearned revenue................................................... 57,794 41,879
Income taxes payable............................................... 3,450 16,631
-------- --------
Total Current Liabilities...................................... 151,948 127,311
Long-term Debt......................................................... 163,000 --
Due to Corning Incorporated and affiliates............................. -- 89,836
Deferred income taxes.................................................. 9,957 6,406
Other liabilities...................................................... 15,438 16,440
-------- --------
Total Liabilities.............................................. 340,343 239,993
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock - Par value $0.01 per share; 140,000,000
shares authorized; 57,063,644 shares issued and
outstanding at December 31, 1996................................ 571 --
Additional paid-in capital......................................... 48,970 30,816
Retained earnings.................................................. 58,010 48,653
Cumulative translation adjustment.................................. 3,153 3,048
-------- --------
Total Stockholders' Equity..................................... 110,704 82,517
-------- --------
Total Liabilities and Stockholders' Equity..................... $451,047 $322,510
======== ========
The accompanying notes are an integral part of these financial statements.
40
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data) 1996 1995 1994
----- ------ ------
Net revenues................................................... $ 494,828 $ 409,174 $ 319,501
Cost and expenses
Cost of revenue.............................................. 324,345 270,726 213,490
Selling, general and administrative expenses................. 80,014 64,201 48,892
Spin-off related charge...................................... 27,404 -- --
Restructuring charge......................................... -- 4,616 --
Depreciation and amortization................................ 25,204 22,070 18,520
-------- -------- --------
Total.................................................... 456,967 361,613 280,902
-------- -------- --------
Income from operations......................................... 37,861 47,561 38,599
-------- -------- --------
Other expense (income)
Interest expense, net........................................ 6,791 5,269 4,307
Foreign exchange loss (gain)................................. 1,116 (784) (712)
-------- -------- --------
7,907 4,485 3,595
-------- -------- --------
Income before taxes and equity investee (gain) loss............ 29,954 43,076 35,004
Taxes on income................................................ 17,377 18,445 14,924
Equity investee (gain) loss.................................... (139) 405 435
-------- -------- --------
Net income..................................................... $ 12,716 $ 24,226 $ 19,645
======== ======== ========
Earnings per share............................................. $ 0.22 N/A N/A
Weighted average shares outstanding............................ 57,063,644 N/A N/A
The accompanying notes are an integral part of these financial statements.
41
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands) 1996 1995 1994
----- ------ ------
Cash flows from operating activities
Net income.......................................................... $ 12,716 $ 24,226 $ 19,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................... 25,204 22,070 18,520
ESOP component of spin-off related charge....................... 16,673 -- --
Restructuring reserve, net of cash paid......................... -- 2,965 --
Deferred income tax provision................................... (3,188) (4,503) (1,502)
Related party charges........................................... 2,052 3,288 3,504
Other........................................................... 237 1,266 1,375
Changes in operating assets and liabilities, net of effects
of acquisitions
Accounts receivable............................................. (12,444) (10,082) (11,706)
Unbilled services............................................... (18,568) (5,023) 2,058
Inventory....................................................... (1,911) (2,576) (603)
Accounts payable................................................ 2,327 6,783 4,372
Accrued liabilities............................................. 15,800 11,669 7,550
Unearned revenue................................................ 14,701 (7,556) 2,894
Income taxes payable............................................ (13,606) 8,673 194
Other assets and liabilities, net............................... (10,135) (6,094) (3,369)
------- ------- -------
Net cash provided by operating activities........................... 29,858 45,106 42,932
------- ------- -------
Cash flows from investing activities
Capital expenditures............................................ (46,941) (34,792) (25,242)
Acquisition of businesses, net of cash acquired................. (33,883) (14,000) (10,789)
Other, net...................................................... 34 571 (2,432)
------- ------- -------
Net cash used in investing activities............................... (80,790) (48,221) (38,463)
------- ------- -------
Cash flows from financing activities
Proceeds from Long-term debt.................................... 160,000 -- --
Due to Corning Incorporated and affiliates...................... (88,361) 14,236 6,079
Capital contributions........................................... -- 1,000 --
Dividends paid to Corning....................................... (3,359) (10,229) (9,465)
------- ------- -------
Net cash provided by (used in) financing activities................. 68,280 5,007 (3,386)
------- ------- -------
Net change in cash and cash equivalents............................. 17,348 1,892 1,083
Cash and cash equivalents, beginning of year........................ 8,068 6,176 5,093
------- ------- -------
Cash and cash equivalents, end of year.............................. $ 25,416 $ 8,068 $ 6,176
======= ======= =======
The accompanying notes are an integral part of these financial statements.
42
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Additional Cumulative Total
Common Paid-in Retained Translation Stockholders'
(Dollars in thousands) Stock Capital Earnings Adjustment Equity
-------- -------- ------- --------- ---------
Balance, December 31, 1993.................. -- $ 23,024 $ 24,476 $ 1,888 $ 49,388
Net income.................................. -- -- 19,645 -- 19,645
Dividends paid to Corning................... -- -- (9,465) -- (9,465)
Capital contribution........................ -- 3,504 -- -- 3,504
Currency translation adjustment............. -- -- -- 836 836
------- ------- ------- ------ -------
Balance, December 31, 1994.................. -- 26,528 34,656 2,724 63,908
Net income.................................. -- -- 24,226 -- 24,226
Dividends paid to Corning................... -- -- (10,229) -- (10,229)
Capital contribution........................ -- 4,288 -- -- 4,288
Currency translation adjustment............. -- -- -- 324 324
------- ------- ------- ------ -------
Balance, December 31, 1995.................. -- 30,816 48,653 3,048 82,517
Net income.................................. -- -- 12,716 -- 12,716
Dividends paid to Corning................... -- -- (3,359) -- (3,359)
Capital contribution........................ -- 2,052 -- -- 2,052
Adjustment to reflect par value
of shares issued in spin-off
(56,208,644 shares)........................ $ 562 (562) -- -- --
ESOP contribution (855,000 shares).......... 9 16,664 -- -- 16,673
Currency translation adjustment............. -- -- -- 105 105
------- ------- ------- ------ -------
Balance, December 31, 1996.................. $ 571 $ 48,970 $ 58,010 $ 3,153 $ 110,704
======= ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements.
43
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
1. Organization and Spin-off
Organization
Covance Inc. and its subsidiaries ("Covance") is a leading contract
research organization providing a wide range of integrated product development
services on a worldwide basis to the biotechnology, pharmaceutical and medical
device industries. Also, Covance provides services such as health economics for
managed care organizations, hospitals and health care provider networks, and
early development and laboratory testing services to the chemical, agrochemical
and food industries. Covance's operations involve a single industry segment for
financial reporting purposes. At the present time, operations are principally
focused in the United States and Europe.
Spin-off
Prior to December 31, 1996, Covance was an indirect wholly-owned business
of Corning Incorporated ("Corning"). In May 1996, Corning's Board of Directors
approved a plan to distribute to its stockholders on a pro rata basis all of its
ownership interest in Covance (the "Spin-Off Distribution"). The intent of the
plan was to create an independent, publicly-owned company (Covance). In June
1996, Corning submitted to the Internal Revenue Service ("IRS") a request for a
ruling that the Spin-Off Distribution qualify as a tax free distribution under
the Internal Revenue Code of 1986, as amended. In November 1996, the IRS
approved that request. In November 1996, Corning's Board of Directors approved
the final terms of the Spin-Off Distribution, and effective December 31, 1996
the Spin-Off Distribution was complete. Under the terms of the Spin-Off
distribution, shareholder's of record of Corning common stock on December 31,
1996 received one share of Covance common stock for each four shares of Corning
common stock held. As a result of the Spin-Off Distribution, Covance issued
approximately 56.2 million shares of its common stock.
In connection with the Spin-Off distribution, Covance recorded a one-time
charge totaling $27.4 million ($19.7 million net of tax), consisting of the cost
of establishing and funding two employee stock ownership plans (collectively,
the "ESOP") and the direct costs incurred to effect the Spin-Off distribution.
The ESOP component of the charge, which totaled $16.7 million, represents the
fair market value of the shares (approximately 855,000) issued into the ESOP.
The direct costs consist primarily of accounting, legal and other professional
fees associated with Covance being established as a separate publicly traded
entity.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Covance, including Covance Biotechnology, a majority owned
business. All significant intercompany accounts and transactions are eliminated.
The equity method of accounting is used for investments in affiliates in which
Covance owns between 20 and 50 percent.
44
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Use of Estimates
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,
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 from these estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, assets and liabilities are translated to United States
dollars at year-end exchange rates. Income and expense items are translated at
average rates of exchange prevailing during the year. Translation adjustments
are accumulated in a separate component of stockholders' equity. Transaction
gains and losses are included in the determination of income.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at date of purchase and consist
principally of amounts temporarily invested in money market funds.
Financial Instruments
The fair value of cash, accounts receivable, trade accounts payable and
accrued expenses are not materially different than their carrying amounts as
reported at December 31, 1996 and 1995.
Accounts receivable and unbilled services from Covance customers are
concentrated primarily in the pharmaceutical and biotechnology industries.
Covance monitors the creditworthiness of its customers to which it grants credit
terms in the ordinary course of business. Although Covance customers are
concentrated primarily within these two industries, management considers the
likelihood of material credit risk exposure as remote. Covance in some cases
requires advance payment for a portion of the contract price from its customers
upon the signing of a contract for services. Historically, bad debts have been
minimal.
Inventory
Inventories, which consist principally of supplies, are valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight line method at rates adequate to allocate the cost
of the applicable assets over their estimated useful lives, which range in term
from three to thirty years.
45
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Goodwill
Goodwill (investment costs in excess of the fair value of net tangible
assets acquired) is capitalized and amortized on a straight-line basis over the
period expected to be benefited, which ranges from twenty to forty years.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), was adopted in 1995. Assessments of the recoverability of
long-lived assets are conducted when events or changes in circumstances occur
that indicate that the carrying value of the asset may not be recoverable. The
assessment of possible impairment is based upon the ability to recover the asset
from the expected future undiscounted cash flows of related operations. The
policy on impairment prior to the adoption of SFAS No. 121 was not materially
different.
Revenue Recognition
Revenue is recognized using the cost-to-cost type of
percentage-of-completion method of accounting for services rendered in
connection with contractual arrangements, which generally range from a few
months to two years. Revenue is recognized as costs are incurred on the basis of
the relationship between costs incurred and total estimated costs. Contracts may
contain provisions for renegotiation in the event of cost overruns due to
changes in the level of work scope. Renegotiated amounts are included in revenue
when earned and realization is assured. Provisions for losses to be incurred on
contracts are recognized in full in the period in which it is determined that a
loss will result from performance of the contractual arrangement. Most service
contracts may be terminated for a variety of reasons by Covance's customers
either immediately or upon notice. The contracts often require payments to
Covance to recover costs incurred, including costs to wind down the study and
fees earned to date, and in some cases to provide Covance with a portion of the
fees or profits that would have been earned under the contract had the contract
not been terminated early.
Revenue from performing clinical laboratory testing services is recognized
as tests are completed. Revenue from other activities is recognized as services
are performed or products are shipped.
Unbilled receivables are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms. In general,
amounts become billable upon the achievement of milestones or in accordance with
predetermined payment schedules. Unbilled receivables are billable to customers
within one year from the respective balance sheet date. Unearned revenue is
recorded for advance billings to customers for which revenue has not been
recognized at a given date.
Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not reflected
in revenue or expense since such fees are granted by customers on a "pass-thru
basis" without risk or reward to Covance.
46
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process and encompass direct labor and related
benefit charges, other direct costs and allocable expenses (including facility
charges, indirect labor and information technology costs). Selling, general and
administrative expenses primarily consist of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative travel and
allocable expenses (facility charges and information technology costs).
Advertising expense is recognized as incurred.
Taxes on Income
Covance uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the temporary differences are expected to
reverse. The effect on deferred taxes of a change in enacted tax rates is
recognized in income in the period when the change is effective.
Earnings per share
Earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. Earnings per share has been presented for
1996 based upon the number of Covance shares issued and outstanding as a result
of the Spin-Off Distribution. Historical earnings per share has not been
presented for periods prior to 1996 because Covance's status as a wholly-owned
business of Corning for such periods does not permit a determination of the
number of shares outstanding on a comparable or consistent basis. Common stock
equivalents are not included in the earnings per share computation because they
do not result in material dilution.
3. Property and Equipment
Property and equipment at December 31, 1996 and 1995 consist of the
following:
1996 1995
----- -----
Property and equipment at cost:
Land................................................................... $ 6,859 $ 2,996
Buildings and improvements............................................. 116,176 105,291
Equipment.............................................................. 136,711 101,686
Furniture, fixtures & leasehold improvements........................... 41,116 39,622
Construction-in-progress............................................... 4,025 5,861
-------- --------
304,887 255,456
Less: Accumulated depreciation and amortization.......................... (137,078) (114,748)
-------- --------
Property and equipment................................................... $ 167,809 $140,708
======== ========
Depreciation and amortization expense aggregated $23.2 million, $20.8
million and $17.8 million for 1996, 1995 and 1994, respectively.
47
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
4. Acquisitions and Goodwill
In October 1996, Covance acquired the stock of CRS Pacamed AG (now known
as Covance Pharmaceutical Packaging Services AG) for a cash payment of
approximately $14.4 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction aggregated
$10.3 million.
In March 1996, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash payment
of approximately $14.9 million in a transaction accounted for as a purchase
business combination. In accordance with the terms of the asset purchase
agreement, Covance is contingently obligated to pay up to an additional $17.2
million in contingent purchase price if HTA achieves certain established
earnings targets for the three year period ending March 1999. The goodwill
resulting from the initial cash payment on this transaction aggregated $13.7
million.
In January 1995, Covance acquired National Packaging Systems, Inc. ("NPS",
now known as Covance Pharmaceutical Packaging Services Inc.) for an initial cash
payment of $14.0 million in a transaction accounted for as a purchase business
combination. In October 1996, Covance paid, pursuant to the terms of the
acquisition agreement, an additional $7.0 million in contingent purchase price
to former NPS shareholders as NPS achieved certain established earnings targets
for the period January 1995 through September 1996. The goodwill resulting from
this transaction aggregated $16.1 million.
In April 1994, Covance acquired SciCor S.A. (now known as Covance Central
Laboratory Services SA), a provider of laboratory testing services domiciled in
Switzerland, for total consideration of approximately $10.8 million in a
transaction accounted for as a purchase business combination. The goodwill
resulting from this transaction aggregated $9.5 million.
Results of operations for these entities have been included in the
accompanying financial statements beginning on the respective dates of
acquisition. Pro forma information for these entities has not been presented,
due to their insignificance to Covance taken as a whole.
Goodwill associated with these and prior acquisitions aggregated $53.3
million and $24.0 million, net of accumulated amortization of $5.2 million and
$3.5 million at December 31, 1996 and 1995, respectively. Amortization expense
aggregated $1.7 million, $0.9 million and $0.5 million for 1996, 1995 and 1994,
respectively.
48
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
5. Taxes on Income
Historically, Covance and its subsidiaries have operated under a tax
sharing agreement with Corning, pursuant to which they were required to compute
their provision for income taxes on a separate return basis and pay to Corning
the separate Federal income tax return liability so computed. Covance's
operations through December 31, 1996 will be included in the Federal income tax
return filed by Corning.
In connection with the Spin-Off Distribution, Covance entered into a tax
indemnification agreement with Corning and a former affiliate of Corning that
prohibits Covance for a period of two years after the date of the Spin-Off
Distribution from taking certain actions that might jeopardize the favorable tax
treatment of the Spin-Off Distribution under Section 355 of the Internal Revenue
Code of 1986, as amended, and will provide Corning and the former affiliate of
Corning with certain rights of indemnification against Covance. The tax
indemnification agreement will also require Covance to take such actions as
Corning and the former affiliate of Corning may request to preserve the
favorable tax treatment provided for in any rulings obtained from the Internal
Revenue Service in respect of the Spin-Off Distribution.
Covance also entered into a tax sharing agreement with Corning and a
former affiliate of Corning which allocates responsibility for federal, state
and local taxes relating to taxable periods before the Spin-Off Distribution and
provides for computing and apportioning tax liabilities and tax benefits for
such periods.
The components of income before taxes and the related provision (benefit)
for taxes on income for 1996, 1995 and 1994 are as follows:
1996 1995 1994
----- ----- ------
Income before taxes and equity investee (gain) loss:
Domestic................................... $23,259 $ 32,771 $ 30,928
International.............................. 6,695 10,305 4,076
------- ------- -------
Total.................................... $29,954 $ 43,076 $ 35,004
======= ======= =======
Federal income taxes:
Current provision.......................... $17,108 $ 19,118 $ 12,167
Deferred benefit........................... (6,311) (6,760) (1,742)
International income taxes:
Current (benefit) provision................ 1,248 (933) 602
Deferred provision......................... 1,635 3,434 1,440
State and other income taxes:
Current provision.......................... 4,174 3,959 2,868
Deferred benefit........................... (477) (373) (411)
------- ------- -------
Net income tax provision............... $17,377 $ 18,445 $ 14,924
======= ======= =======
49
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
The differences between the provision for income taxes and income taxes
computed using the Federal statutory income tax rate for 1996, 1995 and 1994 are
as follows:
1996 1995 1994
----- ----- -----
Taxes at statutory rate.............................. 35.0% 35.0% 35.0%
State and local taxes, net of Federal benefit........ 8.0 5.5 4.6
Non-deductible spin-off related charge............... 7.1 -- --
Goodwill amortization................................ 2.1 1.1 0.5
Impact of international operations................... 1.8 (0.3) 1.7
Other, net........................................... 4.0 1.5 0.8
---- ---- ----
Total........................................ 58.0% 42.8% 42.6%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
1996 1995
----- -----
Current deferred tax assets:
Liabilities not currently deductible................... $15,571 $ 10,356
Net operating losses................................... 2,332 888
Other.................................................. 792 538
------- -------
Gross current deferred tax assets...................... 18,695 11,782
Less: valuation allowance.............................. (1,166) (445)
------- -------
Net current deferred tax assets........................ $17,529 $ 11,337
======= =======
Noncurrent deferred tax assets:
Liabilities not currently deductible................... $ 5,256 $ 5,857
Less: valuation allowance.............................. (1,212) --
------- -------
Net noncurrent deferred tax assets..................... 4,044 5,857
Noncurrent deferred tax liabilities:
Property and equipment................................. (14,001) (12,263)
------- -------
Net noncurrent deferred tax liabilities................ $ (9,957) $ (6,406)
======= =======
Income taxes payable at December 31, 1996 consist primarily of liabilities
for state and international income taxes, while income taxes payable at December
31, 1995 consist of Federal income taxes payable to Corning of $17.0 million,
state and other income taxes payable of $1.6 million and international income
taxes receivable of $2.0 million. Covance paid income taxes of $25.5 million,
$16.7 million and $17.0 million for the years 1996, 1995 and 1994, respectively.
Covance currently provides income taxes on the earnings of foreign
subsidiaries to the extent they are taxable or expected to be remitted. Taxes
have not been provided on $18.9 million of accumulated foreign unremitted
earnings because those earnings are expected to remain invested indefinitely. It
is not practical to estimate the amount of additional tax that might be payable
if such accumulated earnings were remitted. Additionally, if such accumulated
earnings were remitted, certain countries impose withholding taxes that, subject
to certain limitations, are available for use as a tax credit against any
Federal income tax liability arising from such remittance.
50
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
6. Long-Term Debt
In connection with being established as a separate publicly traded
company, Covance negotiated a five year $250 million senior revolving credit
facility (the "Credit Facility") with a syndicate of banks. Under the Credit
Facility, borrowings can be made in a number of different currencies until the
fifth anniversary thereof at which time all outstanding loans must be paid in
full. Under the Credit Facility, Covance has several different interest rate
options. Interest on all outstanding borrowings during 1996 was computed based
upon the London Interbank Offered Rate ("LIBOR") plus an applicable margin.
Covance has the option to prepay the loans outstanding under the Credit Facility
in whole or in part at any time, subject to payment of breakage costs, in
certain circumstances. The Credit Facility contains certain covenants and
requires the maintenance of key ratios, as defined in the Credit Facility.
In order to repay Corning and affiliates for intercompany borrowings and
income tax liabilities, Covance borrowed $160.0 million under the Credit
Facility in November 1996. For the period of time during 1996 that this
borrowing was outstanding, interest was incurred at the rate of approximately
6.0% per annum.
7. Employee Benefit Plans
Covance has several defined contribution plans covering substantially all
of its full-time employees. Contributions to these plans aggregated $6.6
million, $4.9 million and $4.2 million for 1996, 1995 and 1994, respectively.
8. Stockholders' Equity
Preferred Stock
Covance is authorized to issue up to 10.0 million shares of Series
Preferred Stock, par value $1.00 per share (the "Covance Series Preferred
Stock"). The Covance Board of Directors has the authority to issue such shares
from time to time, without stockholder approval, and to determine the
designations, preferences, rights, including voting rights, and restrictions of
such shares, subject to the Delaware General Corporate Laws. Pursuant to this
authority, the Covance Board of Directors has designated 1.0 million shares of
the Covance Series Preferred Stock as Covance Series A Preferred Stock. No other
class of Covance Series Preferred Stock has been designated by the Board. As of
December 31, 1996 no Covance Series Preferred Stock has been issued or is
outstanding.
Dividends - Common Stock
While owned by Corning, Covance paid to Corning dividends of $3.4 million,
$10.2 million and $9.5 million during 1996, 1995 and 1994, respectively. As a
separate publicly traded company, Covance's Board of Directors may declare
dividends on the shares of Covance Common Stock out of legally available funds
(subject to any preferential rights of any outstanding Covance Series Preferred
Stock). However, Covance has no present intention to declare dividends for the
foreseeable future, but instead intends to retain earnings to provide funds for
the operation and expansion of its business. In addition, the Credit Facility
prohibits Covance from paying cash dividends on the Covance Common Stock during
a default or event of default, as defined in the Credit Facility, or after
giving effect to the payment of such dividends Covance would not be in
compliance with the financial covenants of the Credit Facility.
51
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Stock Compensation Plans
In December 1996, Covance adopted, in connection with the Spin-Off
Distribution, the Employee Equity Participation Program ("EEPP"). The EEPP
consists of two plans: (a) a stock option plan (the "Covance Stock Option
Plan"); and (b) an incentive stock plan (the "Covance Incentive Stock Plan").
The EEPP, which is administered by the Covance Compensation Committee of the
Board of Directors, provides for the grant to eligible employees of either
non-qualified or incentive stock options, or both, to purchase shares of Covance
common stock at no less than fair market value on the date of grant. Options
granted are not exercisable for at least twelve months and expire no more than
ten years from date of grant. The EEPP also authorizes the Covance Compensation
Committee to award eligible employees shares, or the right to receive shares, of
Covance common stock. The shares awarded may be subject to certain restrictions
prohibiting sale or other disposition and may be subject to forfeiture, in
certain circumstances. A maximum of 6.0 million shares may be optioned or
granted to eligible employees under the EEPP.
Also in December 1996, Covance adopted a stock purchase plan (the "Covance
Stock Purchase Plan") pursuant to which Covance may make available for sale to
employees shares of its common stock at a price equal to 85% of the lower of the
market value on the first or last day of each calendar quarter. The Covance
Stock Purchase Plan, which is administered by the Covance Compensation
Committee, is intended to give Covance employees the opportunity to purchase
shares of Covance common stock through payroll deduction. A maximum of 1.0
million shares may be purchased by Covance Employees under the Covance Stock
Purchase Plan.
From 1990 through 1996, certain employees of Covance were granted
restricted stock awards or options, or both, to purchase shares of Corning
common stock under existing Corning stock award and option plans. In connection
with the Spin-Off Distribution, options outstanding under the Corning stock
option plans held by Covance employees and restricted share awards made to
Covance employees were replaced by substitute awards under a newly established
conversion plan (the "Covance Conversion Plan"). The Covance Conversion Plan has
essentially all of the same characteristics as the EEPP. The replacement stock
awards have the same terms and conditions as the Corning stock awards they
replaced. The replacement stock options have the same vesting provisions, option
periods and other terms and conditions and retain the same ratio of exercise
price per share to market value per share and the same aggregate difference
between market value and exercise price as the Corning stock options they
replaced.
Covance has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", and accordingly, applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Had Covance elected to recognize compensation expense, in accordance
with the provisions of SFAS No. 123, for the stock option awards granted under
the Corning stock option plans to Covance employees and for the stock purchased
by Covance employees under the Corning employee stock purchase program, its net
income in 1996 and 1995 would have been $10.8 million and $23.8 million,
respectively, and its earning per share in 1996 would have been $0.19. The fair
value of the Corning stock options used to compute the pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 24.5%; risk free interest rate of 5.5% to
7.2%; and an expected holding period of five years.
52
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
The following table sets forth on a pro forma basis the stock option
activity during 1996, 1995 and 1994 for the Covance stock options issued in
replacement of the Corning stock options under the Covance Conversion Plan
(grant dates are original Corning option grant dates):
Number Weighted
of Shares Average
(in thousands) Price
----------- ---------
Pro Forma:
Options outstanding, January 1, 1994..................... 67.5 $13.21
Granted.................................................. 429.1 $15.28
------
Options outstanding, January 1, 1995..................... 496.6 $15.43
Granted.................................................. 306.0 $15.81
Exercised................................................ (0.3) $11.66
------
Options outstanding, December 31, 1995................... 802.3 $15.58
Granted.................................................. 268.6 $17.61
Exercised................................................ (8.4) $13.43
------
Options outstanding, December 31, 1996................... 1,062.5 $16.11
======
The weighted average fair value of the stock options granted during 1996,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $6.20 per share.
The following table sets forth the status of the options outstanding at
December 31, 1996:
Stock Options Outstanding Stock Options Exercisable
-------------------------------------- -----------------------
Weighted
Option Number Average Weighted Number Weighted
Price of Shares Remaining Average of Shares Average
Range (in thousands) Contractual Life Price (in Thousands) Price
----------- ----------- ------------- --------- ------------ ---------
$11.66 - $16.49 787.2 8.1 years $15.58 212.8 $15.23
$16.50 - $19.57 275.3 9.3 years $17.63 3.7 $18.40
In connection with the Spin-Off Distribution, Covance established two
employee stock ownership plans (collectively, the "ESOP") for the benefit of all
active Covance employees as of December 31, 1996. Covance contributed
approximately 855,000 shares of its common stock into the ESOP. The shares
contributed were allocated among the plan participants based upon a percentage
of each employees annual compensation. As a result of this contribution, Covance
recorded a one-time charge of $16.7 million, representing the fair market value
of the shares issued into the ESOP.
53
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
9. Restructuring Charge
In 1995, Covance recorded a provision for restructuring charges totaling
$4.6 million as a result of management's decision to discontinue certain
nonstrategic operations. The restructuring charge consisted of employee
termination costs of $1.5 million (relating to approximately 90 employees), the
write-off of fixed assets of $1.7 million and costs of exiting leased facilities
of $1.4 million. During 1995 approximately 50 of the employees had been
terminated and a total of approximately $1.7 million had been charged against
the restructuring reserve. During 1996, the remaining 40 employees were
terminated and all other substantive activities to complete the restructuring
plan were completed. At December 31, 1996 approximately $1.0 million in
restructuring reserves remain relating to facility lease obligations, which are
expected to be paid during 1997.
10. Commitments and Contingent Liabilities
Minimum rental commitments under noncancellable operating leases,
primarily office and laboratory facilities (including the Covance Biotechnology
facility), in effect at December 31, 1996 are as follows:
Year ended December 31,
1997........................................... $24,514
1998........................................... $21,434
1999........................................... $18,910
2000........................................... $16,183
2001........................................... $13,169
2002 and beyond................................ $20,619
Operating lease rental expense aggregated $16.1 million, $14.1 million and
$11.0 million for 1996, 1995 and 1994, respectively.
In June 1995, Covance Biotechnology ("lessee") entered into a lease
arrangement whereby a custom-designed, fully equipped facility would be
constructed for the lessee at a cost of approximately $55 million to perform
specialized research and manufacturing activities for biotechnology and
pharmaceutical companies. The lessor in this arrangement is a subsidiary of one
of the largest banks in the United States. The lease arrangement contains
purchase and cancellation options for the lessee at any time during the ten year
period covered by the lease arrangement. Although the lease arrangement is
cancelable by the lessee at any time throughout the ten year period, an initial
lease term of five years, representing management's estimate at the lease
inception date of the period in which occupancy of the facility is reasonably
assured, has been selected for financial reporting purposes. The initial term of
the lease commenced in December 1996, upon completion of construction of the
facility. The annual minimum lease payments total approximately $5.3 million.
The lease arrangement is classified as an operating lease.
A purchase price option has been established at specific dates over the
ten year period covered by the lease arrangement. Using current estimates, the
purchase price would approximate $52 million at the end of the first year and
decreases on an amortizing basis to approximately $37 million at the end of the
tenth year.
54
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
The cancellation option provisions of the lease arrangement stipulate a
residual value guarantee by Covance at specific dates over the ten year period.
Sale of the facility is stipulated in the lease arrangement at such time that
the lessee exercises the cancellation option provisions. The lessee's residual
value guarantee ("Deficiency Payment") is unconditionally payable to the lessor
in the event that the lessee terminates the lease arrangement and the sale of
the facility results in receipt of sales proceeds by the lessor in an amount
less than the lessor's unamortized investment in the lease arrangement. The
lessee's maximum Deficiency Payment would approximate $35 million at the end of
the first year and decreases to approximately $25 million at the end of the
tenth year, assuming that the sales proceeds received by the lessor were zero.
11. Geographic Information
United Europe &
States Other
------ -------
Net revenue:
1996....................... $348,996 $145,832
1995....................... $286,474 $122,700
1994....................... $242,131 $ 77,370
Income from operations:
1996....................... $ 29,244(1) $ 8,617(1)
1995....................... $ 34,799(2) $ 12,762
1994....................... $ 32,710 $ 5,889
Identifiable assets:
1996....................... $297,386 $153,661
1995....................... $229,720 $ 92,790
1994....................... $202,986 $ 69,006
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404, United States and European & Other income from
operations were $48,848 and $16,417, respectively.
(2) Excluding the impact of the 1995 restructuring provision totaling
$4,616, United States income from operations was $39,415.
55
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
12. Related Party Transactions
Historically, Covance had participated in Corning's centralized treasury
and cash management processes. For domestic operations, cash received from
operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was periodically transferred to Corning.
Cash disbursements for operations, acquisitions and other investments was funded
as needed from Corning. Substantially all of Covance's borrowings during 1996
(prior to the establishment of the Credit Facility), 1995 and 1994 were from
Corning. The blended rate on those borrowings for 1996, 1995 and 1994 was
approximately 6.0%.
During 1996, 1995 and 1994, certain members of Covance management
participated in various stock compensation programs sponsored by Corning
resulting in Covance recognizing compensation expense of $1.5 million, $0.4
million and $0.1 million, respectively.
During 1996, 1995 and 1994 Corning and affiliates provided a number of
administrative functions to Covance which resulted in charges of $3.4 million,
$5.3 million and $5.7 million being recorded in Covance's results of operations
for 1996, 1995 and 1994, respectively. Management believes the method used to
allocate such costs is reasonable under the circumstances. The charges for these
functions are included primarily in selling, general and administrative expenses
and do not necessarily reflect the amount of expenses that would have been
incurred by Covance on a stand-alone basis. In certain cases, related party
expenses allocated to Covance have not required reimbursement in cash and,
accordingly, have been treated as capital contributions.
13. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information
for 1996 and 1995:
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
Net revenues....................................... $108,697 $121,530 $127,179 $137,422
Income (loss) from operations...................... 14,038 17,335 17,502 (11,014)(1)
Net income......................................... 7,307 8,830 9,074 (12,495)(1)
First Second Third Fourth
Year Ended December 31, 1995 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
Net revenues....................................... $ 91,974 $104,813 $106,099 $106,288
Income from operations............................. 12,983 9,665(2) 13,671 11,242
Net income......................................... 6,547 4,449(2) 7,516 5,714
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404 ($19,725 net of tax), income from operations and
net income in the fourth quarter of 1996 were $16,390 and $7,230,
respectively.
(2) Excluding the impact of the 1995 restructuring provision totaling
$4,616 ($2,770 net of tax), income from operations and net income in
the second quarter of 1995 were $14,281 and $7,219, respectively.
56
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
57
PART III
Item 10. Directors and Executive Officers of the Registrant
Management
Directors. The Covance Board of Directors ("Covance Board") is comprised
of seven Directors and is divided into three classes, each class is elected for
a three-year term at the annual meeting of stockholders. Set forth below is the
names and ages of each Director, and their class and term of office. Messrs.
Campbell, Kuebler and Ughetta are continuing Directors of the Company. In
connection with the Distribution, Messrs. Baylis, Lerner, MacDonald, and Morris
were elected to the Covance Board on December 31, 1996. The Company does not
intend to hold an annual meeting of stockholders until Spring 1998.
Name Age Class Term Expires
- ---------------------------- --- ----- ------------
Robert M. Baylis 58 I 1998
Van C. Campbell 58 III 2000
Christopher A. Kuebler 43 III 2000
Irwin Lerner 66 I 1998
J. Randall MacDonald 48 II 1999
Nigel W. Morris 38 III 2000
William C. Ughetta 63 II 1999
Robert M. Baylis was a Vice Chairman of CS First Boston Corporation
("First Boston"), a financial services company, from March 1992 to March 1994,
and from August 1995 to January 1996. He was Chairman and Chief Executive
Officer of CS First Boston Pacific Inc./Hong Kong from March 1994 to August
1995. Prior to March 1992, Mr. Baylis held a variety of positions with First
Boston, including Managing Director-Investment Banking Group and Managing
Director-Equity Security Department. Prior to his retirement, Mr. Baylis was
with First Boston for over 33 years. He is also a director of Host Marriott
Corporation (hotels), Gryphon Holdings, Inc. (insurance), Home State Holdings,
Inc. (insurance) and New York Life Insurance Company (insurance). Mr. Baylis has
been a member of the Covance Board since December 1996.
Van C. Campbell is the Vice Chairman of Corning, an affiliate of the
Company prior to the Distribution Date, which he joined in 1964. He was elected
assistant treasurer in 1971, treasurer in 1972, a vice president in 1973,
financial vice president in 1975 and senior vice president for finance in 1980.
He became general manager of the Consumer Products Division in 1981. Mr.
Campbell was elected Vice Chairman and a director of Corning in 1983. He is a
director of Armstrong World Industries, Inc. (flooring and building products),
General Signal Corporation (industrial products) and Quest Diagnostics, Inc.
(clinical testing), an affiliate of the Company prior to the Distribution Date.
Mr. Campbell has been a member of the Covance Board since May 1995.
58
Christopher A. Kuebler has been Covance's President and Chief Executive
Officer since November 1994. From March 1993 through November 1994, he was the
Corporate Vice President, European Operations for Abbott Laboratories Inc.
("ALI"), a diversified health care company. From January 1991 until March 1993,
Mr. Kuebler was the Vice President, Sales and Marketing for ALI's Pharmaceutical
Division. Mr. Kuebler has been a member of the Covance Board since November
1994, and was elected Chairman in November 1996. Mr. Kuebler also serves in
various executive officer and director capacities of Covance's subsidiaries.
Irwin Lerner was the Chairman of the Board of Directors and Executive
Committee of Hoffmann-La Roche, Inc. ("Roche"), a pharmaceutical company, from
January to September 1993. From April 1980 to January 1993, Mr. Lerner was the
President and Chief Executive Officer of Roche. He is also a director of Humana,
Inc. (HMO), Medarex, Inc. (biotechnology), Public Service Enterprise Group Inc.
(public utility) and Sequana Therapeutics, Inc. (genomics). Mr. Lerner has been
a member of the Covance Board since December 1996.
J. Randall MacDonald has been the Senior Vice President-Human Resources
and Administration for the GTE Corporation, a telecommunications company, since
April 1995. Prior to April 1995, Mr. MacDonald held various senior positions
with GTE, including Vice President-Employee Relations and Organizational
Development (from 1988) and Vice President of Organizational Development (from
1986). Mr. MacDonald joined GTE in 1983 as a Director of Employee Relations. Mr.
MacDonald has been a member of the Covance Board since December 1996.
Nigel W. Morris has been the President and Chief Operating Officer of
Capital One Financial Corporation ("Capital One"), a financial services company,
since July 1994. Mr. Morris was an Executive Vice President of the Signet
Banking Corporation ("Signet Bank") credit card division from May 1993 to
November 1994. From October 1988 until April 1993, Mr. Morris was the Senior
Vice President-Policy/Strategy-Credit Card Business for Signet Bank. He is also
a director of Capital One and a member of Visa U.S.A. Inc.'s Marketing
Committee. Mr. Morris has been a member of the Covance Board since December
1996.
William C. Ughetta is the Senior Vice President and General Counsel of
Corning, an affiliate of the Company prior to the Distribution Date. Mr. Ughetta
joined Corning in 1968 as assistant secretary and assistant counsel. He was
elected secretary of the corporation in 1971 and vice president in 1972. He was
elected a senior vice president in 1983. Mr. Ughetta has been a member of the
Covance Board since July 1996. He is a director of Siecor Corporation (fiber
optics) and Chemung Canal Trust Company (banking).
59
Directors' Compensation. Each director of Covance, other than a director
who is an employee of Covance, receives $15,000 annually for services as a
director and is also paid $1,000 for each meeting of the Covance Board and $500
for each meeting of any committee thereof which he attends.
Pursuant to a Directors Deferred Compensation Plan ("DDCP"), adopted
December 1996, each director may elect to defer until a date specified by him
receipt of all or a portion of his cash compensation. Such plan provides that
amounts deferred may be allocated to (i) a cash account upon which amounts
deferred may earn interest, compounded quarterly, at the base rate of Citibank,
N.A. in effect on certain specified dates, (ii) a market value account, the
value of which will be based upon the market value of Covance Common Stock from
time to time, or (iii) a combination of such accounts. All six non-employee
directors are eligible to participate in the DDCP.
Non-Employee Directors also participate in a Director's Restricted Stock
Plan ("DRSP"), adopted December 1996, pursuant to which Covance issues to each
non-employee director elected 200 shares of Covance Common Stock for each year
of their term of service, subject to forfeiture and restrictions on transfer,
and 2,000 shares upon such director's election, subject to forfeiture and
restrictions on transfer.
Committees of the Board of Directors. Covance has established three Board
committees: the Audit and Finance Committee, the Corporate Governance Committee,
and the Compensation Committee (collectively, the "Committees"). The Committees
were established in December 1996. No meetings of any of these Committees took
place in 1996. The Audit and Finance Committee examines and considers matters
relating to the financial affairs of Covance, including reviewing Covance's
annual financial statements, the scope of the independent and internal audits
and the independent auditor's letter to management concerning the effectiveness
of Covance's internal financial and accounting controls. The Audit and Finance
Committee's members are Mr. Baylis (Chairman), Mr. Campbell and Mr. Ughetta. The
Corporate Governance Committee examines, considers and makes recommendations
concerning various policies relating to the management of the Company, including
policies concerning the evaluation and remuneration of Directors, and
performance requirements for Directors. The Corporate Governance Committee's
members are Mr. Morris (Chairman), Mr. Kuebler, Mr. MacDonald and Mr. Ughetta.
The Compensation Committee makes recommendations to the Covance Board with
respect to programs for human resource development and management organization
and succession, determine senior executive compensation, consider and make
recommendations to the Covance Board with respect to compensation matters and
policies and employee benefit and incentive plans, administer such plans, and
administer Covance's stock option and equity based plans and grant stock options
and other rights under such plans. The Compensation Committee's members are Mr.
MacDonald (Chairman), Mr. Morris and Mr. Lerner.
60
Executive Officers. In addition to Mr. Kuebler, the following persons
serve as executive officers of Covance:
Richard J. Andrews (49) has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Andrews has served as the President of
Covance Central Laboratory Services Inc. ("Central Labs"), a wholly owned
subsidiary of Covance, since June 1994. From January 1993, Mr. Andrews has
served as the President of Covance Central Laboratory Services S.A. ("Central
Labs S.A."), a wholly owned subsidiary of Central Labs. Central Labs and Central
Labs S.A. provide the Company's central laboratory services. Prior to January
1993, Mr. Andrews served in various executive capacities in Europe, including
Worldwide Business Director, for Dupont International S.A., a multinational
chemical and pharmaceutical company. Mr. Andrews also serves as a director of
several of Covance's subsidiaries.
Michael Giannetto (34) has been the Company's Controller since July 1996
and a Vice President since November 1996. From December 1992 to March 1995, Mr.
Giannetto was the Manager of Financial Reporting and Technical Accounting for
Corning Life Sciences Inc. ("CLSI"), an affiliate of the Company prior to the
Distribution Date. From March 1995 to July 1996, Mr. Giannetto was the Business
Controller for Covance. Prior to December 1992, Mr. Giannetto was a Senior Audit
Manager for Deloitte & Touche.
Charles C. Harwood, Jr. (43) has been the Company's Corporate Senior Vice
President and Chief Financial Officer since July 1996. From November 1994 to
July 1996, Mr. Harwood was the Company's Vice President and Chief Financial
Officer. From May 1993 to November 1994, Mr. Harwood was Executive Director,
Finance of Covance. From January 1993 to May 1993, Mr. Harwood was Chief
Financial Officer and Vice President of Finance with Integrated Telecom
Technologies, Inc. Prior to that position, he was the President of Pembroke
Development Co., Inc., a commercial real estate development company. Mr. Harwood
also serves as a director of Bio-Imaging, Covance Biotechnology and several of
Covance's subsidiaries.
Jeffrey S. Hurwitz (36) has been the Company's Corporate Senior Vice
President, General Counsel and Secretary since July 1996. From November 1994 to
July 1996, Mr. Hurwitz was Covance's Vice President, General Counsel and
Secretary. From October 1993 to November 1994, Mr. Hurwitz was Covance's General
Counsel and Secretary. From May 1992 to October 1993, Mr. Hurwitz was an
Assistant Counsel and Assistant Secretary for CLSI, an affiliate of the Company
prior to the Distribution Date. From August 1991 to May 1992, Mr. Hurwitz was an
Assistant Counsel for Corning, an affiliate of the Company prior to the
Distribution Date. From February 1991 to June 1991, Mr. Hurwitz was an Associate
with the law firm of Luskin & Stern. Prior to February 1991, Mr. Hurwitz was an
Associate with the law firm of Shearman & Sterling. Mr. Hurwitz also serves as a
director of Bio-Imaging, Covance Biotechnology and several of Covance's
subsidiaries.
61
Kim D. Lamon, M.D., Ph.D. (44) has been a Corporate Senior Vice President
of Covance since July 1996. In addition, Dr. Lamon has been the President of
Covance Clinical and Periapproval Services Inc. ("CAPS") and Covance
Periapproval Services Inc. ("CPSI") since May 1996. CAPS and CPSI, and their
European affiliates, provide the Company's clinical and periapproval services.
From April 1994 until May 1996, he was the Executive Vice President, Chief
Medical Officer for Quest Diagnostics Incorporated, and Senior Vice President,
Science and Technology for CLSI, in each case an affiliate of the Company prior
to the Distribution Date. From July 1992 until April 1994, Dr. Lamon was Senior
Vice President, Clinical Research and Development and Executive Medical Director
for Rhone-Poulenc Rorer ("RPR"), a pharmaceutical company. Prior to July 1992,
Dr. Lamon was Senior Vice President, Clinical Research and Regulatory Affairs at
RPR. Dr. Lamon received his M.D. and Ph.D. in Pharmacology from Thomas Jefferson
University. Since 1989, Dr. Lamon has been an Adjunct Assistant Professor of
Pharmacology at Thomas Jefferson University. Dr. Lamon also serves as a director
of several of Covance's subsidiaries.
James D. Utterback (41) has been the Company's Corporate Senior Vice
President and Group President, Global Ventures, since August 1995. Global
Ventures is responsible for the Company's international expansion plans. Mr.
Utterback has also been responsible for Covance's global clinical packaging
operations since August 1995. From May 1994 until August 1995, Mr. Utterback was
the Senior Vice President, Human Resources and Quality for CLSI, an affiliate of
the Company prior to the Distribution Date. Prior to May 1994, Mr. Utterback
served in various executive capacities, including Chief Executive Officer in
South Africa, for RPR, a pharmaceutical company. Mr. Utterback has worked in the
pharmaceutical industry since 1985, living in Europe, Africa and the United
States. Mr. Utterback also serves as a director of several of Covance's
subsidiaries.
Michael G. Wokasch (45) has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Wokasch has been the President of
Covance Laboratories Inc. ("Labs"), a wholly owned subsidiary of Covance, since
July 1995. Labs and its affiliates provide the Company's preclinical services.
From January 1992 until July 1995, Mr. Wokasch served as Divisional Vice
President of Sales of ALI. From October 1991 to January 1992, Mr. Wokasch served
as Director for New Product/Marketing/Development & Scientific Relations at ALI.
Prior to October 1991, Mr. Wokasch was a Director, New Product Development at
ALI. Mr. Wokasch also serves as a director of several of Covance's subsidiaries.
62
Item 11. Executive Compensation
Compensation. The following table sets forth information with respect to
annual and long-term compensation paid by Covance and its subsidiaries, or its
affiliates (prior to the Distribution Date) as noted in the footnotes, to each
of the chief executive officer and the four other most highly compensated
executive officers (collectively, the "named executive officers") of Covance
during the years ended December 31, 1996, 1995 and 1994 for services rendered by
each of the named executive officers. Unless otherwise noted, all references in
the following tables and footnotes to stock and stock options relate to awards
of, and options to purchase, Corning Common Stock. Effective on the Distribution
Date, all such Corning awards were terminated or otherwise forfeited. See
Footnote 2 to this table. The Corning awards are being presented for historical
purposes only.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation (1) Awards (1) (2)
____________________________________________ ____________________________
Restricted Securities All Other
Name and Other Annual Stock Underlying Compensation
Principal Position Year Salary Bonus Compensation Awards (3) Options (4) (1) (5)
____________________________________________________________________________________________________________________________________
Christopher A. Kuebler, 1996 345,833 231,000 72,447 (14) (18) -0- 72,043
Chairman, President and 1995 322,567 303,958 50,427 (19) (26) 68,680
Chief Executive Officer 1994 51,667 (8) 101,679 -0- -0- (26) 2,140
____________________________________________________________________________________________________________________________________
Richard J. Andrews, 1996 231,444 106,696 -0- -0- (27) 58,788
Corporate Senior Vice 1995 222,833 176,512 -0- -0- -0- 57,478
President; President, 1994 197,635 41,000 -0- -0- (27) 50,499
Covance Central
Laboratory Services Inc.
____________________________________________________________________________________________________________________________________
Kim D. Lamon (6), 1996 206,111 (9) 156,957 (12) 40,745 (15) (20) -0- 55,786
Corporate Senior Vice 1995 (9) (12) 34,097 (21) (28) 58,060
President; President, 1994 (9) (12) -0- -0- (28) 18,534
Covance Clinical and
Periapproval Services
Inc. and Covance
Periapproval Services
Inc.
____________________________________________________________________________________________________________________________________
James D. Utterback (7), 1996 244,565 162,200 34,254 (16) (22) -0- 45,376
Corporate Senior 1995 98,820 (10) 78,738 (13) 26,831 (23) (29) 41,595
Vice President; Group 1994 (10) (13) -0- -0- (29) 17,509
President, Global
Ventures
____________________________________________________________________________________________________________________________________
Michael G. Wokasch, 1996 202,614 103,334 -0- (17) (24) -0- 17,730
Corporate Senior 1995 100,000 (11) 76,500 -0- (25) (30) 4,740
Vice President;
President, Covance
Laboratories, Inc.
____________________________________________________________________________________________________________________________________
63
(1) As noted in the footnotes set forth below, compensation disclosed
in this table, including the footnotes thereto, may reflect
compensation paid by the Company, Corning, Quest or CLSI, for
services rendered by the named executive to entities other than the
Company.
(2) All awards reflected in these columns, including the footnotes
thereto, reflect awards to the named executives by Corning for
Corning securities. Except to the extent noted in the footnotes
below, all such awards were terminated or forfeited on the
Distribution Date. For the purpose of the discussion set forth in
the footnotes below, (i) a "terminated" Corning stock or option
award refers to Corning awards which ended as at the Distribution
Date but were eligible for regrant by the Company pursuant the
Conversion Plan (as hereinafter defined) and (ii) a "forfeited"
Corning stock or option award refers to Corning awards which ended
as at the Distribution Date and were not eligible for regrant under
any Company plan.
(3) No Covance restricted stock awards were granted in 1996. All
restricted stock awards granted in 1996, 1995 and 1994 were for
shares of Corning common stock granted pursuant to Corning benefit
plans. Except as noted below, all such Corning restricted stock
awards terminated as at the Distribution Date and were replaced by
Company restricted stock awards pursuant to the Conversion Plan as
follows: (i) for Mr. Kuebler, an aggregate of 31,805 Corning
restricted shares were terminated and 15,000 shares were forfeited,
all at the Distribution Date, and an aggregate of 62,579 Covance
shares were granted in January 1997 pursuant to the Conversion
Plan; (ii) for Dr. Lamon, an aggregate of 14,841 Corning restricted
shares were terminated, 11,250 shares were forfeited and 3,750
shares were released from restriction, all at the Distribution
Date, and an aggregate of 29,201 Covance shares were granted in
January 1997 pursuant to the Conversion Plan; (iii) for Mr.
Utterback, an aggregate of 7,076 Corning restricted shares were
terminated, 7,500 shares were forfeited and 2,500 shares were
released from restriction, all at the Distribution Date, and an
aggregate of 13,923 Covance shares were granted in January 1997
pursuant to the Conversion Plan; and (iv) for Mr. Wokasch, an
aggregate of 5,950 Corning restricted shares were terminated, 2,250
shares were forfeited and 750 shares were released from
restriction, all at the Distribution Date, and an aggregate of
11,707 Covance shares were granted in January 1997 pursuant to the
Conversion Plan. Conversion Plan restricted shares, in substitution
of all terminated Corning restricted shares, were granted to the
named executives on January 31, 1997, which shares are subject to
forfeiture conditions and restrictions on transfer until July 1,
1997.
(4) No Covance options were granted in 1996. All options granted in
1996, 1995 and 1994 were options for shares of Corning common stock
granted pursuant to Corning benefit plans. All such Corning options
terminated as at the Distribution Date and were replaced by Company
options pursuant to the Conversion Plan, as noted below. Conversion
Plan options, in substitution of the Corning options, were granted
to the named executives on January 31, 1997.
(5) Includes the following amounts contributed by Covance, except as
noted, as matching contributions to such individuals 401(k) Plan
(as defined below) account for 1996: $6,531 for Mr. Kuebler, $6,517
for Mr. Andrews, $5,774 for Dr. Lamon, $8,250 for Mr. Utterback and
$8,250 for Mr. Wokasch. In addition, pursuant to a non-qualified
benefit plan of which Mr. Andrews is the sole beneficiary, Mr.
Andrews received a 1996 Company contribution of $43,951 to his
account in such plan. Also includes a $12,840 automobile allowance
received by each of Messrs. Kuebler, Utterback and Dr. Lamon,
$8,320 received by Mr. Andrews and $9,480 received by Mr. Wokasch.
Also includes (i) the forgiveness of 20% of principal on
interest-free loans made by Covance to the following individuals,
for the following amounts forgiven: $40,000 for Mr. Kuebler,
$30,000 for Dr. Lamon, and $20,000 for Mr. Utterback, and (ii)
imputed interest on such loans to the following individuals for the
following amounts: $12,672 for Mr. Kuebler, $7,172 for Dr. Lamon
and $4,286 for Mr. Utterback. The original principal amount of such
loans were $200,000 for Mr. Kuebler, $150,000 for Dr. Lamon and
$100,000 for Mr. Utterback, which loans are to be forgiven over a
five year period provided
64
such individuals continue to be employed by Covance. Such loans
were made to assist these individuals in relocating to the New
Jersey area.
(6) Dr. Lamon joined the Company in May 1996. All compensation and
benefits reflected in this table for fiscal 1994 and 1995, and
January through May 1996, reflect compensation received from CLSI
or Quest, affiliates of the Company prior to the Distribution Date,
for services performed for such company. All stock and option
awards during such dates were issued by Corning for CLSI or Quest
performance by Dr. Lamon.
(7) Mr. Utterback joined the Company in August 1995. All compensation
and benefits reflected in this table for fiscal 1994, and January
through August 1995, reflect compensation received from CLSI or
Quest, affiliates of the Company prior to the Distribution Date,
for services performed for such company. All stock and option
awards during such dates were issued by Corning for CLSI or Quest
performance by Mr. Utterback.
(8) Mr. Kuebler joined the Company in November 1994.
(9) For the period January through April 1996, Dr. Lamon also received
salary from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $115,813. In fiscal 1995 and 1994, Dr. Lamon received
salary from CLSI, for work performed for CLSI or Quest, in the
amounts of $309,417 and $200,000, respectively.
(10) For the period January through July 1995, Mr. Utterback also
received salary from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $138,347. In fiscal 1994, Mr. Utterback received salary
from CLSI, for work performed for CLSI or Quest, in the amount of
$153,333.
(11) Mr. Wokasch joined the Company in July 1995.
(12) For the period January through April 1996, Dr. Lamon received a
bonus from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $37,102. In fiscal 1995 and 1994, Dr. Lamon received
bonuses from CLSI, for work performed for CLSI or Quest, in the
amounts of $160,265 and $175,625, respectively.
(13) For the period January through July 1995, Mr. Utterback also
received a bonus from CLSI (an affiliate of the Company prior to
the Distribution Date), for work performed for CLSI or Quest, in
the amount of $26,088. In fiscal 1994, Mr. Utterback received a
bonus from CLSI, for work performed for CLSI or Quest, in the
amount of $134,646.
(14) The amount shown for Mr. Kuebler reflects (i) dividends on shares
of Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $42,727, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
(15) The amount shown for Dr. Lamon reflects (i) dividends on shares of
Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $27,545, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
65
(16) The amount shown for Mr. Utterback reflects (i) dividends on shares
of Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $21,364, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
(17) The value of benefits received by the named individual did not
exceed the lesser of either $50,000 or 10% of the total annual
salary and bonus reported.
(18) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr. Kuebler
was granted 13,500 Corning restricted performance shares in
December 1995. Mr. Kuebler, pursuant to the terms of such plan,
earned an aggregate of 16,065 Corning restricted shares in fiscal
1996, valued at $743,006 as of December 31,1996. As a result of the
Distribution, Mr. Kuebler's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Mr.
Kuebler pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(19) Pursuant to Corning's Corporate Performance Plan/CPP-5, Mr. Kuebler
was granted 10,000 Corning restricted performance shares in
December 1994. Mr. Kuebler, pursuant to the terms of such plan,
earned an aggregate of 10,740 Corning restricted shares in fiscal
1995, valued at $326,926 as of December 31, 1995. As a result of
the Distribution, Mr. Kuebler's rights to such CPP-5 shares were
terminated. Furthermore, pursuant to a Corning benefit plan, Mr.
Kuebler was also granted 20,000 restricted shares ("Career Shares")
valued at $608,800 as of December 31, 1995. Such Career Shares were
subject to certain restrictions on transfer until retirement, and
certain forfeiture provisions. With respect to such Career Shares,
5,000 shares were terminated and 15,000 shares were forfeited as at
the Distribution Date. See Footnote 3 with respect to shares
granted to Mr. Kuebler pursuant to the Conversion Plan in January
1997 as a replacement for all terminated Corning shares. Forfeited
shares were not replaced.
(20) Pursuant to Corning's Corporate Performance Plan/CPP-6, Dr. Lamon
was granted 10,000 Corning restricted performance shares in
December 1995. Dr. Lamon, pursuant to the terms of such plan,
earned an aggregate of 11,900 Corning restricted shares in fiscal
1996, valued at $550,375 as of December 31, 1996. As a result of
the Distribution, Dr. Lamon's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Dr.
Lamon pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(21) Pursuant to Corning's Corporate Performance Plan/CPP-5, Dr. Lamon
was granted 6,500 Corning restricted performance shares in December
1994. Dr. Lamon, pursuant to the terms of such plan, earned an
aggregate of 2,941 Corning restricted shares in fiscal 1995, valued
at $89,524 as of December 31, 1995. As a result of the
Distribution, Dr. Lamon's rights to such CPP-5 shares were
terminated. Furthermore, pursuant to a Corning benefit plan, Dr.
Lamon was also granted 15,000 Career Shares, valued at $456,600 as
of December 31, 1995. Such Career Shares were subject to certain
restrictions on transfer until retirement, and certain forfeiture
provisions. With respect to such Career Shares, 11,250 shares were
forfeited and 3,750 shares were released from all restriction and
delivered to Dr. Lamon prior to the Distribution Date. See Footnote
3 with respect to shares granted to Dr. Lamon pursuant to the
Conversion Plan in January 1997 as a replacement for all terminated
Corning shares. Forfeited shares were not replaced.
66
(22) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr.
Utterback was granted 4,000 Corning restricted performance shares
in December 1995. Mr. Utterback, pursuant to the terms of such
plan, earned an aggregate of 4,760 Corning restricted shares in
fiscal 1996, valued at $220,150 as of December 31, 1996. As a
result of the Distribution, Mr. Utterback's rights to such CPP-6
shares were terminated. See Footnote 3 with respect to shares
granted to Mr. Utterback pursuant to the Conversion Plan in January
1997 as a replacement for all terminated Corning shares. Forfeited
shares were not replaced.
(23) Pursuant to Corning's Corporate Performance Plan/CPP-5, Mr.
Utterback was granted 4,000 Corning restricted performance shares
in December 1994. Mr. Utterback, pursuant to the terms of such
plan, earned an aggregate of 2,316 Corning restricted shares in
fiscal 1995, valued at $70,499 as of December 31, 1995. As a result
of the Distribution, Mr. Utterback's rights to such CPP-5 shares
were terminated. Furthermore, pursuant to a Corning benefit plan,
Mr. Utterback was also granted 10,000 Career Shares, valued at
$304,400 as of December 31, 1995. Such Career Shares were subject
to certain restrictions on transfer until retirement, and certain
forfeiture provisions. With respect to such Career Shares, 7,500
shares were forfeited and 2,500 shares were released from all
restriction and delivered to Mr. Utterback prior to the
Distribution Date. See Footnote 3 with respect to shares granted to
Mr. Utterback pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(24) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr. Wokasch
was granted 5,000 Corning restricted performance shares in December
1995. Mr. Wokasch, pursuant to the terms of such plan, earned an
aggregate of 5,950 Corning restricted shares in fiscal 1996, valued
at $275,188 as of December 31, 1996. As a result of the
Distribution, Mr. Wokasch's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Mr.
Wokasch pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(25) Pursuant to a Corning benefit plan, Mr. Wokasch was granted 3,000
Career Shares, valued at $91,320 as of December 31, 1995. Such
Career Shares were subject to certain restrictions on transfer
until retirement, and certain forfeiture provisions. With respect
to such Career Shares, 2,250 shares were forfeited and 750 shares
were released from all restriction and delivered to Mr. Wokasch
prior to the Distribution Date. See Footnote 3 with respect to
shares granted to Mr. Wokasch pursuant to the Conversion Plan in
January 1997 as a replacement for all terminated Corning shares.
Forfeited shares were not replaced.
(26) Pursuant to various Corning stock options plans, Mr. Kuebler was
granted (i) in 1995, an option to purchase 81,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 20,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 145,611 Covance shares pursuant to the
Conversion Plan.
(27) Pursuant to various Corning stock options plans, Mr. Andrews was
granted (i) in 1996, an option to purchase 4,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 12,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 31,487 Covance shares pursuant to the
Conversion Plan.
67
(28) Pursuant to various Corning stock options plans, Dr. Lamon was
granted (i) in 1995, an option to purchase 60,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 23,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 123,967 Covance shares pursuant to the
Conversion Plan.
(29) Pursuant to various Corning stock options plans, Mr. Utterback was
granted (i) in 1995, an option to purchase 24,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 18,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 66,902 Covance shares pursuant to the
Conversion Plan.
(30) Pursuant to various Corning stock options plans, Mr. Wokasch was
granted in 1995 an option to purchase 38,000 shares of Corning
common stock. As at the Distribution Date, all such options
terminated and were replaced in January 1997 with options to
purchase an aggregate of 55,095 Covance shares pursuant to the
Conversion Plan.
68
Option Grants. The following table sets forth certain information
regarding options granted by Corning in 1996 to all of the named executive
officers pursuant to Corning stock option plans. All such options terminated as
of the Distribution Date. These awards are being presented for historical
purposes only. No Covance options were granted in 1996. Employees of Covance,
including the named executive officers, who held at the Distribution Date
Corning stock options or restricted shares, received new Covance options or
restricted shares under the Conversion Plan (as defined below) in exchange for
the surrender of all such eligible Corning options or restricted shares. Such
grants under the Conversion Plan were approved on January 31, 1997 and are not
reported herein.
OPTION/SAR GRANTS IN FISCAL YEAR 1996 (1)
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
______________________________________ ___________________________________________
% of Total
Number of Options
Securities Granted to Gain
Underlying Employees at
Options in Fiscal Exercise Expiration 0%
Name Granted Year Price Date (4) Gain at 5% Gain at 10%
______________________________ _______________ ______________ __________ _______________ ________ _______________ _________________
Christopher A. Kuebler -0-
Richard J. Andrews 4,000 (2) 0.1% 34.44 4/24/06 0 86,637 219,554
Kim D. Lamon -0-
James D. Utterback -0-
Michael G. Wokasch -0-
All Optionees as a
Group 4,000 100.0 % 4.44 2006 0 86,637 219,554
______________________________ _______________ ______________ __________ _______________ ________ _______________ _________________
(1) No SARs were granted.
(2) The Corning stock option agreement with Mr. Andrews provided that
one-half of the options would become exercisable on April 24, 1997
and all of the options would become exercisable on April 24, 1998.
Such agreement was terminated as of the Distribution Date and Mr.
Andrews received conversion options under the Conversion Plan on
January 31, 1997. This award is being presented for historical
purposes only.
(3) The dollar amounts set forth under these columns are the result of
calculations at 0% and at the 5% and 10% rates established by the
Commission and therefore are not intended to forecast future
appreciation of the Company's or Corning's stock price.
(4) No gain to the optionees is possible without an appreciation in
stock price, an event which will also benefit all stockholders. If
the stock price does not appreciate, the optionees will realize no
benefit.
69
Option Exercises and Fiscal Year-End Values. The named executive officers
exercised no Corning options pursuant to Corning plans in 1996. The named
executive officers did not exercise any options pursuant to Company plans in
1996.
Corporate Performance Plan Activity. Awards of performance-based shares of
Corning Common Stock were granted to Covance's executive officers pursuant to a
series of Corning performance-based plans (the "Corporate Performance Plan").
The Corporate Performance Plan provided the mechanisms to reward improvement in
corporate performance as measured by net income, earnings per share and/or
return on equity. Each year minimum, target and maximum goals were set and
shares awarded (at target levels) which were subject to forfeiture in whole or
in part if performance goals were not met. The percentage of awards that could
have been earned range from 0% to 150% of target. Shares earned remained subject
to forfeiture and restrictions on transfer for two years following the end of
the performance period.
In December 1996, the Compensation Committee of the Board of Directors of
Corning assessed performance against goals, determined the number of shares
earned of the CPP-6 target shares granted in December 1995. As set forth in the
footnotes to the Summary Compensation Table, Corporate Performance Plan awards
for the CPP-5 and CPP-6 Corning grants were terminated as at the Distribution
Date. Covance granted, in substitution, Covance restricted shares pursuant to
the Covance Conversion Plan, on January 31, 1997.
Variable Compensation. During fiscal 1996, Company employees participated
in a Corning approved variable compensation plan (the "Plan"), for approximately
400 supervisory, management and executive employees. The performance-based
annual cash incentive awards payable under the Plan were based on financial
goals such as net income, operating margin, return on equity, or earnings per
share, or a combination thereof, and quantifiable non-financial goals. Each
participant was assigned a target award, as a percentage of base salary in
effect at the end of the performance year for which the target is set, payable
if the target is achieved. Actual results were compared to the scale of targets
with each gradation of desired result corresponding to a percentage which was
multiplied by the employee's assigned target award. If the actual result was
below target, awards are less than target, down to a point below which no awards
are earned. If the desired result was above target, awards were greater than
target, up to a stated maximum award. The maximum award assigned to the chief
executive officer could not exceed 200% of base salary in effect on the date the
Corning Compensation Committee set the target for such performance year. The
committee also retained the right to reduce any award if it believed individual
performance did not warrant the award calculated by reference to the result.
Bonus' earned in 1996 for the named executive officers are disclosed in the
Summary Compensation Table.
Employee Equity Participation Plan. Covance adopted, in December 1996, the
Employee Equity Participation Program ("EEPP"). The EEPP consists of two plans:
(a) a stock option plan from which the Company may grant incentive or
non-statutory stock
70
options and (b) an incentive stock plan from which the Company may grant
restricted stock awards. No awards were granted to the named executive officers
pursuant to the EEPP in 1996.
Conversion Plan. In December 1996, the Company adopted the Conversion
Equity Plan (the "Conversion Plan"). The Conversion Plan has essentially the
same characteristics as the EEPP, but any grants made pursuant to the Conversion
Plan are to replace all eligible Corning options and restricted shares held by
Company employees at the Distribution Date, all of which were terminated or
forfeited at the Distribution Date. No awards were granted to the named
executive officers pursuant to the Conversion Plan in 1996.
Pension Plans. Covance does not currently have any qualified defined
pension benefit plans. In December 1996, Covance adopted a nonqualified
Supplemental Executive Retirement Plan ("SERP") for the benefit of certain
executive officers of Covance, including the named executive officers. Such plan
is, in whole or in part, an unfunded, unsecured obligation of Covance and
administered by the Compensation Committee.
Eligible executives may commence receiving full benefits under the plan
upon attaining age 60, so long as they have completed at least twenty years of
service (fifteen years for certain Company executives, including the named
executives) with Covance (including service with Corning) or any subsidiary
thereof. Retirement benefits to be provided under the plan will be based on 40%
of an executive's "Final Average Pay," defined to mean the average of an
executive's base salary plus bonus, taking into account the highest five
consecutive years of the executive's last ten years of employment with Covance
or any subsidiary thereof. Under the terms of the plan, executives may, with the
approval of the Compensation Committee, elect to commence receiving reduced
benefits prior to age 60, provided that they have completed at least five years
of service with Covance or any subsidiary thereof and have attained age 55.
Benefits commencing prior to age 60 will be reduced by 5% of the amount of
benefits earned for each year prior to age 60. For example, at age 55, an
executive with at least twenty years (or fifteen years, if applicable) of
service may be eligible to receive 30% of Final Average Pay so long as the
executive receives approval from the Compensation Committee.
At retirement, the normal form of payment under the plan will be monthly
payments over the lifetime of the executive (or actuarially reduced joint and
survivor benefits over the joint lives of the executive and a named
beneficiary). Alternatively, the executive may elect under the plan, subject to
the approval of the Compensation Committee, the right to receive an actuarially
determined lump-sum distribution from the plan.
Maximum annual benefits, based on at least twenty years of service and the
Final Average Pay calculated under the straight life annuity option form of
pension, payable to participants at ages 55 to 60 are illustrated in the table
set forth below. The same benefits would apply for those participants eligible
for full benefits with 15 years of service. The
71
table below does not reflect any limitations on benefits imposed by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Pension Plan Table
Age (with at Least 20 Years of Service)
______________________________________________________________________________________________________________
Final Average
Pay 55 56 57 58 59 60
_________________ _______________ _______________ ______________ ______________ ______________ ______________
$ 100,000 30,000 32,000 34,000 36,000 38,000 40,000
200,000 60,000 64,000 68,000 72,000 76,000 80,000
300,000 90,000 96,000 102,000 108,000 114,000 120,000
400,000 120,000 128,000 136,000 144,000 152,000 160,000
500,000 150,000 160,000 170,000 180,000 190,000 200,000
600,000 180,000 192,000 204,000 216,000 228,000 240,000
700,000 210,000 224,000 238,000 252,000 266,000 280,000
800,000 240,000 256,000 272,000 288,000 304,000 320,000
900,000 270,000 288,000 306,000 324,000 342,000 360,000
1,000,000 300,000 320,000 340,000 360,000 380,000 400,000
1,100,000 330,000 352,000 374,000 396,000 418,000 440,000
1,200,000 360,000 384,000 408,000 432,000 456,000 480,000
____________________________________________________________________________________________________________________________________
Retirement Savings Plan. Most of the employees of Covance and its
subsidiaries have been eligible to participate in a tax-qualified, defined
contribution plan known as the Stock Purchase Savings Plan (the "401(k) Plan"),
which provides for investment of employee contributions, including tax-deferred
contributions under Section 401(k) of the Code, and matching contributions made
by their employers, in several investment funds, including Covance Common Stock,
at the employees' discretion. As of the January 1, 1997, Covance Common Stock
was added as an investment fund and all or a portion of the employer matching
contributions will automatically be invested in Covance Common Stock. Corning
Common Stock will no longer be available as an investment fund except with
respect to amounts already so invested under the 401(k) Plan. All of the named
executives are eligible to participate in the 401(k) Plan, and their respective
Company matching contributions are disclosed in the Summary Compensation Table
for the periods covered thereby.
Employee Stock Ownership Plan. Individuals who were active employees of
Covance and its United States subsidiaries as of the Distribution Date became
participants in the Employee Stock Ownership Plan ("ESOP"). To the extent
permitted under the ESOP, Covance contributed, in the aggregate and as of the
Distribution Date, an amount equal to a portion of each participating employee's
annual compensation. Covance may in its discretion from time to time make
additional contributions to the ESOP for the benefit of participating employees.
The assets of the ESOP will be invested primarily in shares of Covance Common
Stock. Amounts contributed to the ESOP for the benefit of participating
employees will be 100% vested on the earlier of death, disability or the
72
second anniversary of the effective date of the grant. Contributions to the ESOP
will not currently be taxable income to the participating employees and will not
generally be available to them until termination of employment.
Restricted Share Plan. In December 1996, Covance adopted the Restricted
Share Plan ("RSP"), intended to provide to Covance's foreign national employees
in its non-United States locations who otherwise are ineligible to participate
in the ESOP and to domestic employees whose participation therein is subject to
limitations imposed by ERISA benefits similar to the ESOP. To the extent
permitted under the RSP, Covance will award to participating employees shares of
Covance Common Stock as of the Distribution Date, the market value of which
shall equal a portion of such employee's annual compensation. Covance may in its
discretion from time to time make additional awards to participating employees.
Shares of Covance Common Stock awarded to participating employees will be 100%
vested on the earlier of death, disability or the second anniversary of the date
of each grant.
Employee Stock Purchase Plan. In December 1996, Covance adopted the
Employee Stock Purchase Plan (the "ESPP") pursuant to which Covance makes
available for sale to employees shares of its Common Stock at a price equal to
85% of the market value on the first or last day of each calendar quarter,
whichever is lower. The ESPP, administered by the Compensation Committee, is
designed to give eligible employees (generally, employees of Covance and its
United States subsidiaries) the opportunity to purchase shares of Covance Common
Stock through payroll deductions up to 10% of compensation in a series of
quarterly offerings commencing January 1, 1997, and ending no later than
December 31, 2006.
Employment Agreements; Severance and Change in Control Arrangements. In
November 1996, Mr. Kuebler entered into an employment agreement with Covance.
The agreement expires on or before the third anniversary of the Distribution
Date. The agreement includes provisions for an annual salary of no less than
$450,000, with increases subject to the discretion of the Covance Board; annual
target participation in the Variable Compensation Plan of Covance in amounts no
less than 65% of annual salary in effect at the time performance goals are
established; and severance payments following a termination or a change in
control in accordance with the severance policy described below, except that Mr.
Kuebler will receive three times his base annual salary and three times his
annual award of variable compensation in the event of termination for reasons
other than cause.
In November 1996, Covance adopted an employment and severance policy
pursuant to which it provided to each executive officer, including the named
executive officers, compensation equal to two times the executive officer's base
annual salary at the annual rate in effect on the date of termination and two
times the annual award of variable compensation at the most recent target level
in the event that such executive officer has been terminated for reasons other
than cause. Such executive officer will also be entitled to participate in
Covance's health and benefits plans (to the extent permitted by the
73
administrative provisions of such plans and applicable federal and state law)
for a period of up to two years or until such officer is covered by a successor
employer's benefit plans, whichever first occurs. Pursuant to such policy,
Covance will also provide to each executive officer upon the termination of
employment by Covance other than for cause during the twelve months following a
change in control of Covance compensation equal to three times base annual
salary in effect on the termination date and three times the annual variable
compensation at the most recent target level and such officer will be entitled
to participate in Covance's health and benefits plans for a period of up to
three years. A "change in control" is defined in the policy to include the
following: the acquisition by a person of 20% or more of the voting stock of
Covance; as a result of a contested election a majority of the Covance Board
members are different than the individuals who served on Covance's Board in the
two years prior to such contested election; or approval by Covance's
stockholders of a merger or consolidation in which Covance is not the survivor
thereof, or a sale or disposition of all or substantially all of Covance's
assets or a plan of partial or complete liquidation.
74
Item 12. Security Ownership by Certain Beneficial Owners and Management
of Covance
The following table sets forth the number of shares of Covance Common
Stock beneficially owned by Directors, by the named executive officers and by
all Directors and executive officers of Covance as a group, as of March 3, 1997.
Except as otherwise noted, the named individual has sole voting and investment
with respect to such power securities.
Number of Shares Number of Currently Percent
Name Beneficially Owned (1) Exercisable Options Outstanding
_____________________________________ ______________________________ ________________________ ________________
Richard J. Andrews 509 (2) 19,545 *
Robert M. Baylis 5,200 (3) 0 *
Van C. Campbell 24,787 (3) 0 *
Christopher A. Kuebler 340 (2) 39,345 *
Kim D. Lamon 1,365 (2) 19,678 *
Irwin Lerner 3,200 (3) 0 *
J. Randall MacDonald 3,100 (3) 0 *
Nigel W. Morris 2,200 (3) 0 *
William C. Ughetta 29,598 (3) 0 *
James D. Utterback 768 (2) 19,678 *
Michael G. Wokasch 221 (2) 7,869 *
All Directors and Executive 71,461 (1),(2),(3) 132,187 *
Officers as a Group (14)
____________________________
* Less than 1%.
(1) Does not include 53 shares owned by the spouses and minor children
of certain executive officers and Directors, as to which such
officers and Directors disclaim beneficial ownership.
(2) Does not include restricted performance shares granted in January
1997 pursuant to the EEPP. Such shares are subject to performance
conditions, certain vesting restrictions and forfeiture
restrictions.
(3) Includes 2,000 shares of Covance Common Stock, issued pursuant to
the DRSP, which each non-employee Director received in connection
with their election as a director. Such shares are currently
subject to certain vesting restrictions, restrictions on transfer
and forfeiture restrictions. Also, includes a minimum of 200 shares
of Covance Common Stock, issued pursuant to the DRSP, which each
non-employee Director receives annually in connection with their
yearly service as a Director. Such shares are currently subject to
certain restrictions on transfer and forfeiture restrictions.
75
Item 13. Certain Relationships and Related Transactions
None.
76
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K
(a) Documents filed as part of this report.
1. Financial Statements.
Report of Price Warehouse LLP - Independent Accountants
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders Equity - Years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Index to Financial Statement Schedules. Schedules are omitted because
they are not applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed as
part of, or incorporated by reference in, this report are listed in (c)
below and in the accompanying Exhibit Index.
(b) Reports on Form 8-K.
None.
(c) Item 601 Exhibits.
2.1 Transaction Agreement among Corning Incorporated, Corning Life
Science Inc., Corning Clinical Laboratories Inc. (Delaware),
Covance Inc. and Corning Clinical Laboratories Inc. (Michigan),
dated November 22, 1996.
3.1 Certificate of Incorporation.
3.2 By-Laws.
4.1 Form of Common Stock Certificate.
4.2 Form of Rights Agreement between Covance Inc. and Harris Trust and
Savings Bank, dated December 31, 1996.
77
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning
Incorporated and Covance Inc., dated December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and
Corning Clinical Laboratories Inc., dated December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia
Bank of Georgia, N.A. and Lenders named therein, dated November
26, 1996.
10.6 Employee Stock Ownership Plan.
10.7 Stock Purchase Savings Plan, as amended.
10.8 Employee Stock Purchase Plan.
10.9 Employee Equity Participation Plan.
10.10 Executive Retirement Supplemental Plan.
10.11 Restricted Share Plan.
10.12 Directors' Restricted Stock Plan.
10.13 Directors' Deferred Compensation Plan.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
10.15 Executive Employment Letters and Schedule.
21 Subsidiaries.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedules. (Edgar filing only)
(d) Financial Statement Schedules.
None.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COVANCE INC.
Dated: March 24, 1997 By: /s/ Christopher A. Kuebler
---------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Christopher A. Kuebler
- ----------------------------------
Christopher A. Kuebler Chairman of the Board, March 24, 1997
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- ----------------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President March 24, 1997
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ----------------------------------
Michael Giannetto Vice President and Controller March 24, 1997
(Principal Accounting Officer)
/s/ Robert M. Baylis
- ----------------------------------
Robert M. Baylis Director March 24, 1997
/s/ Van C. Campbell
- ----------------------------------
Van C. Campbell Director March 24, 1997
/s/ Irwin Lerner
- ----------------------------------
Irwin Lerner Director March 24, 1997
/s/ J. Randall MacDonald
- ----------------------------------
J. Randall MacDonald Director March 24, 1997
/s/ Nigel W. Morris
- ----------------------------------
Nigel W. Morris Director March 24, 1997
/s/ William C. Ughetta
- ----------------------------------
William C. Ughetta Director March 24, 1997
EXHIBIT INDEX
Exhibit
Number Description
- ------------- ---------------------------------------------------------
2.1 Transaction Agreement among Corning Incorporated, Corning
Life Science Inc., Corning Clinical Laboratories Inc.
(Delaware), Covance Inc. and Corning Clinical Laboratories
Inc. (Michigan), dated November 22, 1996. Filed herewith.
3.1 Certificate of Incorporation. Incorporated by reference to
Registrant's filing on Amendment No. 2 on Form 10, filed with
the SEC on November 19, 1996.
3.2 By-Laws. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November
19, 1996.
4.1 Form of Common Stock Certificate. Incorporated by reference
to Registrant's filing on Amendment No. 3 on Form 10, filed
with the SEC on November 25, 1996.
4.2 Form of Rights Agreement between Covance Inc. and Harris
Trust and Savings Bank, dated December 31, 1996. Incorporated
by reference to Registrant's filing on Amendment No. 2 on
Form 10, filed with the SEC on November 19, 1996.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning
Clinical Laboratories Inc. and Covance Inc., dated December
31, 1996. Filed herewith.
10.2 Spin-Off Tax Indemnification Agreement between Corning
Incorporated and Covance Inc., dated December 31, 1996. Filed
herewith.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc.
and Corning Clinical Laboratories Inc., December 31, 1996.
Filed herewith.
10.4 Spin-Off Tax Indemnification Agreement between Corning
Clinical Laboratories Inc. and Covance Inc., dated December
31, 1996. Filed herewith.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A.,
Wachovia Bank of Georgia, N.A. and Lenders named therein,
dated November 26,1996. Filed herewith.
10.6 Employee Stock Ownership Plan. Filed herewith.
10.7 Stock Purchase Savings Plan, as amended. Filed herewith.
10.8 Employee Stock Purchase Plan. Filed herewith.
10.9 Employee Equity Participation Plan. Incorporated by reference
to Registrant's filing on Amendment No. 3 on Form 10, filed
with the SEC on November 25, 1996.
10.10 Executive Retirement Supplemental Plan. Filed herewith.
10.11 Restricted Share Plan. Filed herewith.
10.12 Directors' Restricted Stock Plan. Filed herewith.
10.13 Directors' Deferred Compensation Plan. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance
Inc. Filed herewith.
10.15 Executive Employment Letters and Schedule. Filed herewith.
21 Subsidiaries. Incorporated by reference to Registrant's
filing on Amendment No. 2 on Form 10, filed with the SEC on
November 19, 1996.
23 Consent of Price Waterhouse LLP. Filed herewith.
27 Financial Data Schedules. (Edgar filing only) Filed herewith.