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 pharmaceutical, biotechnology and medical
device industries. In addition and to a lesser extent, Covance also provides
health economics and outcomes services for managed care organizations,
hospitals and other health care providers and laboratory testing services to
the chemical, agrochemical and food industries. The services Covance provides
constitute two segments: early development services (preclinical and Phase I
clinical), and late-stage development services (clinical and clinical support
services). Covance believes it is one of the largest biopharmaceutical CROs,
based on 1998 annual net revenues, 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.
Most of the service offerings that constitute Covance's business were
initially acquired by its former parent, Corning, as part of a strategy to
create a global 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 Services
Inc.). Covance further expanded its clinical trials expertise in 1990 with the
purchase of PACT Inc. (now known as Covance 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. In 1995, Covance acquired National Packaging Systems, Inc. ("National
Packaging") (now known as Covance Pharmaceutical Packaging Services Inc.), a
pharmaceutical packaging company. Also in 1995, Covance formed Covance
Biotechnology Services Inc. ("Covance Biotechnology"), a majority-owned company
which has enabled Covance to engage in the manufacture of biologics.
In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics and outcomes company. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of
Swiss-based CRS Pacamed AG ("CRS Pacamed") (now known as Covance Pharmaceutical
Packaging Services AG). In addition, in connection with the acquisition of CRS
Pacamed, Covance acquired a 91,000 square-foot facility in Horsham, United
Kingdom, which is used, among other things, to enhance the Company's ability to
provide pharmaceutical packaging services in Europe. In 1998, Covance commenced
operating a 45,000 square-foot facility in Allschwil, Switzerland, to further
enhance its packaging capabilities in Europe. Covance has also built an
additional 160,000 square-foot facility at its Princeton location. The
Princeton facility became operational in January 1999, is leased and supports
the Company's clinical services and corporate functions, and permits increased
employee capacity. Covance has also increased its Indianapolis, Indiana,
facility by 112,000 square feet to expand its pharmaceutical laboratory
operations. The additional space in Indianapolis, which is also leased, became
operational in 1998.
In November 1998, Covance acquired GDXI, Inc., a company located in Reno,
Nevada (now known as Covance Central Diagnostics Inc.), which provides
centralized electrocardiogram analysis for clinical trials. Also in November of
1998, Covance acquired Berkeley Antibody Company, Inc. (now a subsidiary of
Covance Research Products Inc.), a company located in Richmond, California,
which provides contract services in custom antibody production, applied
immunology, and custom animal research to support the medical device industry
and preclinical evaluations.
The Company maintains offices in 17 countries, including offices in
Canada, Argentina, and Poland, all of which opened in 1997 and in China, which
opened in 1998.
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, development and
marketing expenditures of such industries. Full service CROs design and manage
preclinical and clinical and periapproval studies and trials,
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and provide health economics and outcome services, and may provide other
services including health economics and outcomes services, packaging, central
laboratory, manufacturing biologics 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
Food and Drug Administration ("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 downward pressure on pharmaceutical and biotechnology companies'
drug prices. Covance believes that the pharmaceutical industry is responding to
these pressures by converting some of the fixed costs of maintaining research
and development infrastructure to variable costs by outsourcing drug
development activities to CROs. Demand for CROs is also driven by internal
development resource shortages experienced 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 attempting to shorten new drug
development cycle time by using CROs, which may have greater expertise in a
therapeutic area and/or offer 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 the Company 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.
Pharmaceutical Company Consolidation. Business combinations in the
pharmaceutical industry present an opportunity for CROs, as such companies
generally seek to obtain cost reduction synergies. Once combined, 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 drugs cause 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 twelve 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.
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.
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 ("IND") application, whereupon the FDA
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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 Research (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. 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
("controlled trials"); 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.
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") in the United States, which comprises, on average, approximately
100,000 pages.
Regulatory Review and Approval. At this stage, the regulatory agency 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 are of minimal value in the United States, 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). United
States Federal regulation requires the sponsor to collect and periodically
report to the FDA additional safety and effectiveness 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 1998 annual net revenues, Covance believes it is one of the
largest CROs serving the biotechnology and pharmaceutical industries. The
Company's strategy is 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. As this
strategy unfolds, Covance intends to focus increased attention on customers who
are biased towards development approaches that are flexible, innovative and
more likely to yield optimal outcomes.
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
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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.
As part of its strategy, Covance strives to continually improve its
existing services. 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
Standards Organization. The ISO 9000 standards define the international
requirements for creating a quality assurance system that will result in
providing consistent service.
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 operations. 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 and alliances. With respect to
the former, in addition to the programs noted above, Covance has invested in
the creation of a multi-use biomanufacturing facility which became operational
in 1997. With respect to the latter, Covance added domestic pharmaceutical
packaging capabilities through the acquisition of National Packaging in 1995,
European pharmaceutical packaging capabilities through the acquisition of CRS
Pacamed in 1996, enhanced its health economics and outcomes services by
acquiring HTA in 1996, acquired centralized electrocardiogram analysis
capabilities through the acquisition of GDXI, Inc. in 1998, and enhanced its
custom animal research and antibody production capabilities through the
acquisition of Berkeley Antibody Company, Inc. in 1998. 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 the Company's
clients' needs with respect to cost containment, reduced testing time frames
and global trials, Covance has invested in and created a Clinical Trials
Research and Development Group which has the goal of improving Covance's
clinical trials processes with a primary focus on improving speed, efficiency,
quality and customer service. This group, which is comprised of experts in
information technology, clinical and data management processes, and medicine,
will examine processes and technologies across the clinical development
continuum in an effort to develop evolutionary and revolutionary improvements
in the conduct of clinical development programs. In addition to focusing on key
development processes, the group intends to use technologies and applications
that have been developed or enhanced by Covance such as optical character
recognition/intelligent character recognition imaging technology, integrated
voice response systems (IVRS), web-enabled data information and reporting
tools, as well as new technologies in the areas of remote data capture (RDC)
and work flow automation.
In early 1997, the Company created the Covance Investigator Alliance
("CIA"). The CIA's purpose is to identify and form alliances with leading
investigators and institutions throughout North America and Europe to
facilitate expeditious study approvals, patient and data access and to improve
the timeliness and quality of data. Over 50 member organizations encompassing
several hundred active investigators in North America are currently part of the
CIA. Management intends to continue to expand the number of CIA sites in North
America and Europe.
With respect to technical resources, Covance has over 400 information
systems professionals working in 14 regional information system centers (nine
in the United States, four in Europe and one in Australia) and 22 satellite
centers (six in the United States, 11 in Europe, four in Asia/Pacific and one
in South America). Most of the Company's employees (both domestic and
international) as well as its file server and desktop computer systems, are
connected by a wide area network that provides global access to the expertise,
technologies and data resident in the regional information system centers.
These systems support the Company's ability to provide integrated services and
connect the Company to its clients. For instance, Covance's development of its
Trial Tracker(SM) Information Access System ("Trial Tracker(SM)") provides
clients with 24-hour access to study data, such as study patient enrollment
progress, patient visit information, case report form status, serious adverse
event experiences and other pertinent clinical trial information. Covance's drug
supply management system based on IVRS technology allows clients to more
efficiently manage the distribution of their experimental compounds to
investigational sites. In continually 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, by customizing them where appropriate for client specific requirements,
and to 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 many developing biotechnology and pharmaceutical markets,
especially given
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industry trends to conduct clinical trials in multiple countries
simultaneously. Through its offices, regional monitoring sites, laboratories
and manufacturing sites in over 39 locations in 17 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 34%
of Covance's 7,200 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. For example, in February 1997, Covance opened an office
in Montreal, Canada which serves the Company's Canadian clients and those North
American customers who are developing their products in Canada. In March 1997,
Covance opened its Buenos Aires, Argentina office which serves as Covance's
center for conducting clinical research in Latin America, a region that Covance
believes will be a significant contributor of clinical and central laboratory
data for global regulatory dossiers. In October 1997, Covance opened its
Warsaw, Poland office. Warsaw presents an opportunity for Covance to conduct
clinical trials in a region which provides previously untapped sources for new
patient populations and investigator networks.
Covance also continues to collaborate in the Asia-Pacific region (from
Japan through Australia) with various science and technology boards and
ministries to assist in the improvement of the regulatory environment necessary
to attract more international trials. Covance is also continuing its
collaboration 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 July
1997, Covance signed a collaboration agreement with the Chinese Ministry of
Science and Technology--China Innovation Center for Life Sciences ("Chinese
Ministry of Science") to enhance multinational pharmaceutical development in
the Chinese market. Covance is currently teaching Good Clinical Practices
("GCP") to key physicians and investigators in select Chinese hospitals and
clinical pharmacology centers. The training is expected to be expanded in
future years to include Good Laboratory Practices ("GLP") and Good
Manufacturing Practices ("GMP"). Covance also tests traditional Chinese
botanical-based products for approval by the FDA on behalf of the Chinese
Ministry of Science and leading Chinese pharmaceutical companies. Covance and
the Chinese Ministry of Science will also be evaluating the possible
development of alternative alliances and joint venture strategies. In October
1998, Covance opened an office in Beijing, China, offering clinical services.
Services
Covance provides a wide range of product development services on a
worldwide basis to the pharmaceutical, biotechnology and medical device
industries. In addition and to a lesser extent, Covance provides health
economics and outcomes services for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. The services Covance provides constitute two
segments: early development (preclinical and Phase I clinical) and late-stage
development (clinical and clinical support services).
Early Development
Preclinical and Phase I Clinical Services
Covance has four major laboratories, located in Madison, Wisconsin and
Vienna, Virginia in the United States and Harrogate, United Kingdom and
Munster, Germany. The Company also has an administrative and sales 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
the Phase I and II operations of the early development and clinical services
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, modify or cease their development
programs.
As part of its preclinical services, Covance has duplicated in the United
States the SPD program developed in Europe. This program has successfully
reduced in Europe 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 IND applications are
required in the United States to be filed before
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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 IND applications 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. Several SPD
trials in the United States are continuing, with the program scheduled to be
expanded in 1999.
In early 1997, Covance launched the compound appraisal and selection
service, an integrated labs service which combines several preclinical
offerings. This program is particularly directed to small and start-up
companies, and offers consultancy, in vitro screens and in vivo animal tests to
determine the viability of compounds for future development.
Covance also provides purpose-bred animals for biomedical research. These
research animals are required 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 meet clients' rigorous
control requirements. Although Covance's preclinical research 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.
Covance is also a provider of custom polyclonal and monoclonal antibody
services and owns and operates a state-of-the-art antisera production facility
that complies with both GMP and GLP. In November 1998, Covance augmented this
capability with the acquisition of Berkely Antibody Company, Inc., which
provides contract services in custom antibody production as well as offers
custom animal research, applied immunology and preclinical evaluations.
Covance also provides 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, and in 1998 Covance began
offering residue and bioavailability testing services to the growing
nutriceutical industry.
Late-Stage Development
Clinical Development Services
Covance offers a comprehensive range of clinical trial services, including
Phase II through III clinical studies. Covance also has extensive experience in
a number of therapeutic areas, including diseases of the cardiovascular and
central nervous systems, endocrinology and respiratory systems, oncology,
infectious diseases (including AIDS) as well as significant experience in other
areas including bone metabolism immunology, gastroenterology, urology,
dermatology and hematology. Covance has extensive experience in managing small,
medium and large trials in the United States and in many parts of the world.
These trials may be conducted separately or simultaneously as part of a
multinational development plan.
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 consulting and
filings, information systems and drug development strategy), site, investigator
and patient enrollment, and preparation and submission of IND applications,
European study submissions, NDAs, product license applications ("PLAs"),
European submission dossiers, computerized patient randomization and dose
assignment and tracking, Phase II - Phase III study design and implementation,
monitoring and safety evaluation management and reporting, data processing and
management, statistical analyses and report writing, medical writing, and GCP,
GLP and GMP audits. 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 including the ultimate marketing strategy for the drug.
Marketing strategy considerations include outcomes and pharmacoeconomic
concerns and reimbursement planning. During study protocol finalization, CRFs
are developed to record the desired information and ensure that valid data are
acquired
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in a form that is most efficient for the investigator. The various disciplines
involved in the drug development process, including epidemiology, 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 a clinical trial, patient drug
administration is supervised by physicians, also referred to as investigators,
at hospitals, clinics or other locations, also referred to as investigational
sites. The success of a clinical trial depends, in large part, on the
performance of these investigators. Covance solicits the participation of
investigators, who contract directly with either Covance or Covance's clients.
Covance maintains, and continually expands and refines, its investigator
databases. Information regarding Covance's experience with these investigators,
including factors relevant to rapid study initiation, are contained in the
databases.
Study Monitoring. Covance provides study monitoring services, which
include investigational site initiation, patient enrollment assistance and data
collection, through periodic site visits. These visits also serve to assure
that data is 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 services are managed by professionals
with pharmaceutical and biotechnology industry experience in the design and
construction of local and multinational clinical trial databases. They are
offered either as discrete products or 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 a clinical trial,
Covance assists in the rapid acquisition of clean and accurate data. Following
completion of the clinical trial, 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 and in connection therewith employs a
variety of software, which may be specified by clients or combined with
customized programs developed by Covance.
Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients, which include integrated
clinical/statistical reports, manuscripts, risk/benefit assessment reports,
package inserts, quality assurance and environmental risk assessments. These
services, which are fully integrated with Covance's other clinical services,
are designed to complement parallel development processes and therefore
accelerate development speed, consistent with good service and regulatory
compliance, reducing overall drug development time.
Clinical Support Services
Central Laboratory Services. Covance believes that the ability to provide
high quality and sophisticated central laboratory services is an integral
aspect of what constitutes a full service CRO. Covance has two laboratories
(one located in the United States and the other in Switzerland) that 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 the use of consistent laboratory methods, the same reagent
manufacturers and the 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 sites, sequencing of
study participants visits and investigator 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 of test completion and provide
safety test results within 48 hours of test completion from most locations.
As the need for central laboratory services expands geographically, the
Company has expanded the reach of its central laboratories services through
contractual arrangements, one with a leading South African laboratory and the
other with a leading Australian laboratory, each of which allows Covance to
combine the testing capabilities of such laboratory with its own proprietary
systems. In June 1998, Covance completed a 112,000 square-foot expansion of its
152,000 square-foot United States laboratory to further accommodate expanding
operations and expected future requirements.
7
Centralized Electrocardiogram Services. In November 1998, Covance expanded
its centralized clinical trial data collection capabilities with the purchase
of GDXI, Inc. which undertakes the capture and interpretation of
electrocardiograms ("ECG"). ECG analysis, one of the most frequently used tools
in clinical trials, is included in more than one-half of clinical trials as
part of the study protocol. GDXI, Inc. distributes a proprietary hand-held ECG
device to clinical trial sites. The device can be used anywhere in the world
and collects the data, performs a real-time quality check, and transmits the
information by telephone to a full-time central operations center.
Clinical Development Technologies. To expedite the drug development
process and to help reduce costs, Covance created a proprietary interactive
trial management system utilizing an Interactive Voice Response System
("IVRS"). IVRS uses data entry via touch-tone telephone technology to assist
pharmaceutical and biotechnology clients in managing clinical trials on a real
time basis and in reducing product waste with just in time inventory
processing. IVRS is a multilingual system which is available world-wide through
toll-free numbers seven days per week, 24 hours per day. The most frequently
used functions include patient screening, enrollment, randomization, drug
assignment(s), drug inventory management, titration(s), unblinding,
discontinuation(s) and patient diaries. Through this information technology,
clients can realize substantial cost savings by reducing and better managing
clinical supply requirements and controlling wastage. In addition, real time
data access offers clients precise and accurate information for quick analysis
thus expediting the clinical trial process. Covance offers IVRS both in
conjunction with clinical trials conducted by Covance and as a stand alone
service.
Pharmaceutical Packaging Services. Covance offers full service contract
clinical 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,
wallet packaging, storage and site distribution of clinical supplies and return
services for unused supplies. Management believes that by integrating packaging
services with its other clinical and clinical support services it can
accelerate the drug development process for its clients through operational
efficiencies that arise from the upfront coordination of clinical trial design.
In 1997, Covance completed its substantial renovation and upgrade to the
91,000 square-foot packaging facility in Horsham, United Kingdom which Covance
had purchased in 1996. The facility, which became fully operational with the
completion of this renovation, is one of the largest clinical packaging
facilities in Europe. In April 1998, Covance completed construction of a new,
purpose designed, 45,000 square-foot facility in Allschwil, Switzerland. This
new facility replaced Covance's 20,000 square-foot facility in Basel,
Switzerland and further increased its European operations and capabilities.
Also in 1998, Covance introduced multi-product blister packaging technology
which is intended to increase efficiency and reduce time lines for clinical
supplies.
Biomanufacturing Services. Covance holds a majority interest in Covance
Biotechnology, a company formed in 1995 to manufacture recombinant proteins for
biotechnology and pharmaceutical clients 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 produce
multiple compounds for multiple clients simultaneously and on a scale, Covance
believes, greater than most other contract biomanufacturers. Covance
Biotechnology provides an alternative for clients who might otherwise have to
design, finance and construct their own facility to manufacture a
biopharmaceutical compound for clinical trials or commercial sale. By retaining
Covance Biotechnology, a client can avoid the expense, time delay and risk of
making additional significant investments for a product whose safety, efficacy
and commercial success are uncertain. This allows clients to preserve their
capital and lower their financial risk. In 1998, Covance Biotechnology
commenced an expansion of its production capacity intended to significantly
expand its production from microbial cell sources. The expansion is scheduled
for completion by July 1999.
Covance owns 78% of the voting capital stock of Covance Biotechnology in
the form of convertible preferred stock. The remaining 22% 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 could be reduced to approximately 68% in the event that
all stock options granted to key Covance Biotechnology executives were
exercised in full.
The Company, Covance Biotechnology and the Minority Stockholders are also
party to a capital contribution and stockholder agreement (the "Stockholders'
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
the common stock held by the Minority Stockholders in increments of one-third
each within 60 days of December 31, 1998, 1999 and 2000. If Covance chooses not
to exercise its purchase right, the Stockholders' Agreement gives the Minority
Stockholders the right to require Covance Biotechnology to use its best efforts
to arrange for the sale of such shares on certain specified terms, and certain
other conditions. Supplementing the Stockholders' Agreement, in October 1997,
the Company and
8
the Minority Stockholders entered into an agreement by which, subject to the
satisfaction of certain conditions, the Company and the Minority Stockholders
are obligated to make, upon request by Covance Biotechnology, in proportion to
their ownership interests, additional capital contributions to Covance
Biotechnology not to exceed an aggregate amount of $30.0 million. Through
December 31, 1998, aggregate capital contributions of $18.5 million have been
made to Covance Biotechnology pursuant to this agreement. Covance's pro-rata
share of the capital contributions has totaled $14.4 million and Covance has
loaned to the Minority Stockholders $4.1 million in the aggregate to fund their
required capital contributions.
Periapproval Services. Covance offers a range of periapproval services,
including TINDs, Phase IIIb clinical studies (involving studies conducted after
NDA submission, but before regulatory approval is issued), Phase IV clinical
studies, and other types of periapproval studies such as post-marketing
surveillance studies and prescription to over-the-counter switch studies. A
TIND application by a pharmaceutical or biotechnology sponsor and the
associated procedure allows 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. Covance 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 expanded access program, which is conducted pursuant to a
TIND application, is a mechanism that allows innovative new therapies for
life-threatening diseases to be given to expanded populations prior to FDA
approval. 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. Covance also offers adverse event processing
services, both in the context of periapproval studies and as a stand alone
service, which involves the fielding and processing of telephone calls and
inquiries relating to adverse experiences with a drug.
Health Economics and Outcomes Services. Covance offers a wide range of
health economics and outcomes services, including outcomes and pharmacoeconomic
studies, reimbursement planning services, reimbursement advocacy programs and
disease management services, as discussed below, for pharmaceutical,
biotechnology and medical device manufacturers as well as, to a lesser extent,
managed care organizations, hospitals and other health care providers.
Covance offers its clients a full range of strategic and analytical
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 modeling techniques to evaluate the full financial impact of new
medical technologies. When planning studies, Covance 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 as compared to other
drugs and treatment regimes, the ability to perform outcomes and
pharmacoeconomic studies will become increasingly important.
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 payers 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 and
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.
Covance also provides full service reimbursement case management programs
on behalf of manufacturers. These programs generally consist of toll-free
telephone hotlines offering one or more of the following services: (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
9
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.
In 1998, Covance added an additional service offering in this area, which
utilizes field based representatives, known as the Payer Alliance Group[TM], to
intervene with major third party payers to secure favorable coverage and
reimbursement policies.
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 and patient average length 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.
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. These
programs and tools include medical practice guidelines and computerized
decision support tools.
Customers and Marketing
Covance provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. In 1998, Covance
served approximately 290 biopharmaceutical companies, including nearly all of
the world's 50 largest pharmaceutical companies and most of the largest
biotechnology companies. Approximately 45 of the biopharmaceutical companies
Covance serves are Japanese. The Japanese biopharmaceutical companies are
served by Covance's United States and European operations.
Early development net revenues from external customers comprised
approximately 33%, 37% and 41% respectively, of total net revenues for the
years ended December 31, 1998, 1997 and 1996, while late-stage development
comprised approximately 67%, 63% and 59%, respectively. Early development
operating income comprised approximately 35%, 42% and 40%, respectively, of
total operating income for the years ended December 31, 1998, 1997 and 1996,
while late-stage development comprised approximately 65%, 58% and 60%,
respectively. Early development segment assets comprised approximately 37%, 41%
and 47%, respectively, of total segment assets for the years ended December 31,
1998, 1997 and 1996, while late-stage development comprised approximately 63%,
59% and 53%, respectively. Net revenues from external customers attributable to
United States operations totaled approximately 68%, 68% and 71% for the years
ended December 31, 1998, 1997 and 1996, respectively. Net revenues from
external customers attributable to operations in the United Kingdom totaled
approximately 16%, 17% and 17%, respectively, and net revenues from external
customers attributable to other countries totaled approximately 16%, 15% and
12%, respectively. Long-lived assets attributable to United States operations
totaled approximately 61%, 52% and 54% for the years ended December 31, 1998,
1997 and 1996, respectively. Long-lived assets attributable to operations in
the United Kingdom totaled approximately 32%, 36% and 35%, respectively, and
long-lived assets attributable to other countries totaled approximately 7%, 12%
and 11%, respectively. See Note 10 to Notes to Consolidated Financial
Statements.
Covance's sales activities (including client contact and support) are
conducted by more than 120 sales and business development personnel based in
Covance's operations in the United States, Europe, Australia, Japan, Argentina
and Singapore. Most of Covance's business development personnel have technical
or scientific backgrounds.
Covance's sales force consists primarily of account executives, account
managers and client service managers. Account executives and account managers
are each responsible for optimizing business opportunities for specific service
offerings. Client service managers are focused on providing timely responses to
client requests for information and fostering client relationships. In late
1998, Covance reorganized its sales force by shifting the focus of its Key
Account Directors and Strategic Account Managers, who formerly were part of a
central sales effort, to specific service offerings. This strategic shift is
intended to permit the Company to adapt its services/products to regional
market differences and specific client needs. Also in 1998, Covance created a
Client Relations Group which is headed by senior executives of Covance and is
intended to enable Covance to build better relationships with some of the
largest users of development services and to create long-term strategic
relationships with these customers.
In September 1998, Covance entered into a strategic alliance with
Proliance Pharmaceuticals Inc. ("Proliance"), a company specializing in
collaborative drug development. Under the terms of the agreement, Covance is a
preferred provider of services to Proliance. In addition, Covance is a minority
stockholder of Proliance.
10
In 1998, Covance commenced a program, known as the Covance Institute,
which is intended to provide a platform for the Company to showcase its
company-wide scientific talent and expertise by collecting and organizing
Covance's institutional knowledge regarding the effective design and execution
of clinical development programs, provide strategic input to clients and raise
Covance's profile in the pharmaceutical, academic and scientific communities.
The Covance Institute focuses upon the internal development of talent and
capabilities, educational initiatives, seminars and conferences and training
programs.
Contractual Arrangements
Most of Covance's contracts are either fixed price, fee-for-service or
fee-for-service with a cap. To a lesser extent, some of the contracts are
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 customer keeps the savings, but if costs are higher than estimated, Covance
is responsible for the overrun unless the increased cost is a result of a
change requested by the customer, 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 multi-year contracts, 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, sometimes performance based, over the
study or trial duration. For example, in clinical and periapproval trials,
installment payments may be related to investigator recruitment, patient
enrollment or delivery of a database.
Most of Covance's contracts for the provision of its services are
terminable by the customer 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 customer'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 certain services it provides because such
services are performed within a short period of time or where it is not
otherwise practical or feasible to maintain an order backlog.
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, 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 revenues 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 1998 backlog may be completed
in 1999, 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 verbal approvals, letters of intent or contracts included
in backlog are subject to termination or delay at any time by the client or
regulatory authorities. Terminations 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 description, Covance's aggregate backlog at December
31, 1998 and 1997 was approximately $780 million and $625 million,
respectively.
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 1998 net
revenues, that the six largest CROs besides itself include Quintiles
Transnational Corp., Parexel International Corporation, Pharmaceutical Product
Development, Inc., Phoenix International Life Sciences Inc., Kendle
International, Inc. and ClinTrials Research Inc.
11
There is competition among the larger CROs for both customers and
acquisition candidates. Companies may also choose to limit the CROs with whom
they are willing to work. In addition, there are few barriers to entry for
small, limited-service providers considering entry into 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 outcomes services and size. The Company believes that
it competes favorably in all of these areas.
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 Covance 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 Covance, 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 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 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 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 tax indemnification agreements described above 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 tax indemnification agreements described above or as described below),
Corning is liable for and will pay the federal income taxes of the consolidated
group that includes
12
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 tax
indemnification agreements described above), 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 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.
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
laboratory in Geneva has also been certified by the College of American
Pathologists ("CAP"). GMP sets forth the requirements for manufacturing
facilities. The standards of GLP and GMP are required 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 compliance with GLP and GMP
regulations and CLIA, as applicable, by auditing test data and conducting
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. 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, but are not limited to, the following: (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) ensuring adverse drug reactions are medically
evaluated and reported; (5) monitoring the validity and accuracy of data; (6)
verifying drug or device accountability; (7) instructing investigators and
studies staff to maintain records and reports; and (8) permitting appropriate
governmental authorities access to data for their review. Covance must also
maintain reports for each study for specified periods for auditing by the study
sponsor and by the FDA. 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
International Conference on Harmonization-Good Clinical Practice Guidelines
("ICH-GCP Guidelines"), and the requirements of the applicable country.
Although the U.S. is a signatory to the ICH-GCP Guidelines, the FDA has not
adopted all of the guidelines as statutory regulations, but has currently
adopted them only as guidelines. 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.
13
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 with a potential for
abuse is regulated by the U.S. Drug Enforcement Administration (the "DEA"). All
Covance laboratories and packaging sites using controlled substances for
testing or packaging purposes are licensed by the DEA.
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 subject
to 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 focusing on compliance with applicable
hazardous materials regulations and health and safety guidelines.
The regulations of the U.S. Department of Transportation, the U.S. Public
Health Service and the U.S. 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 December 31, 1998, Covance had approximately 7,200 full-time employees,
approximately 34% of whom are employed outside of the United States.
Approximately 76 of Covance's employees hold M.D. degrees, 219 hold Ph.D.
degrees, 21 hold Pharm.D. degrees, 33 hold D.V.M. degrees and 927 hold masters
or other postgraduate degrees. Management 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
318,000 square feet of space in two buildings. The lease for one of the
buildings expires in 2004 and the other in 2013. The building subject to the
later expiration is intended primarily to accommodate the growth of the
corporate office and Princeton clinical operations. This building became
operational in January 1999 and is being leased for a 15-year period. In
mid-1997, Covance leased a 32,000 square-foot office facility in Walnut Creek,
California to accommodate the growth of its clinical development services on
the West Coast. The lease is for a 5-year term. In early 1997, the Company
leased an additional 18,000 square feet at its Radnor, Pennsylvania
periapproval facility, bringing the total square feet being rented there to
approximately 60,000. The Radnor lease expires in 2002 and has one three-year
renewal term. Covance leases approximately 67,000 square feet in Washington
D.C. for its health economics and outcomes research activities which lease
expires in 2000. Covance also leases an aggregate of 69,500 square feet in
several buildings in Maidenhead, United Kingdom for its clinical, periapproval
operations and health economics and outcomes services, and in late 1997 added
an additional 27,000 square feet to accommodate expanding operations in that
location. Covance owns its 397,000 square-foot preclinical laboratory located
in
14
Madison, Wisconsin, its 279,000 square-foot preclinical laboratory in
Harrogate, United Kingdom and its 50,000 square-foot preclinical laboratory in
Munster, Germany. Covance leases most of its 201,000 square-foot preclinical
laboratory in Vienna, Virginia. The leases expire in 2009. It also owns several
of the buildings in Vienna, Virginia. Covance also leases its 152,000
square-foot pharmaceutical laboratory in Indianapolis, Indiana, which lease was
recently extended to 2013, with renewal options, in connection with the lease
of an additional 112,000 square-foot, "build-to-suit" adjoining facility, which
became operational in June 1998. 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 its principal
packaging facility in Allentown, Pennsylvania. The packaging leases are for
approximately 100,000 square feet of space and they all expire in 1999. In
1998, construction of a new 200,000 square foot packaging facility in Allentown
commenced and is expected to be completed in the second quarter of 1999. This
site is intended to allow Covance to consolidate packaging operations and
accommodate future growth needs. In addition, in October 1996, Covance
purchased a 91,000 square-foot former pharmaceutical manufacturing facility in
Horsham, United Kingdom. With its renovation completed in June 1997, the
Horsham facility is used to provide pharmaceutical packaging, clinical and
periapproval services. Also in 1997, Covance began construction on a new,
purpose-designed, 45,000 square-foot facility in Allschwil, Switzerland to
further enhance its packaging capabilities in Europe, and to replace its
existing 20,000 square-foot facility, located in Basel, Switzerland. The new
Allschwil facility became operational in April 1998. Covance also owns or
leases other facilities in the United States, Canada, Europe, Asia and Latin
America.
Covance Biotechnology's 109,000 square-foot biomanufacturing facility,
located in Research Triangle Park, North Carolina, is financed through several
tax retention operating leases provided by a commercial lending institution
("Bank"). The lease expires in December 2006. The annual minimum lease payments
are approximately $5.7 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 $37.0 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 $52.0 million at the end of 1997 (the first year of the lease),
decreasing on an amortizing basis to approximately $37.0 million at the end of
2006 (the tenth year of the lease).
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 January 14, 1997, when the Company's Common
Stock commenced trading on a "regular way" basis.
Quarter High Low
------- ---- ---
First Quarter 1997 .......... $ 22.875 $ 15.500
Second Quarter 1997 ......... $ 20.625 $ 14.625
Third Quarter 1997 .......... $ 23.187 $ 18.125
Fourth Quarter 1997 ......... $ 22.750 $ 17.063
First Quarter 1998 .......... $ 24.875 $ 17.688
Second Quarter 1998 ......... $ 24.750 $ 20.125
Third Quarter 1998 .......... $ 28.875 $ 21.625
Fourth Quarter 1998 ......... $ 29.563 $ 23.375
As of February 10, 1999, there were 8,897 holders of record of the
Company's Common Stock.
The Company has not paid any dividends during 1998 or 1997. The Company
does not currently intend to pay dividends in the foreseeable future, but
rather, intends to reinvest earnings in its 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.
15
Item 6. Selected Financial Data
The following table presents selected historical consolidated financial
data of Covance as of and for each of the years ended December 31, 1998, 1997,
1996, 1995 and 1994. This data has been derived from the audited consolidated
financial statements of Covance.
The selected historical consolidated financial data should be read in
conjunction with the audited Covance consolidated financial statements and
notes thereto ("Audited Covance Consolidated Financial Statements") filed
elsewhere herein. Historical consolidated financial data may not be indicative
of Covance's future performance. See the Audited Covance Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ----------------- ----------------- -----------
(Dollars in thousands, except per share data)
Income Statement Data:
Net revenues ...................................... $ 731,574 $ 590,651 $494,828 $409,174 $319,501
Costs and expenses:
Cost of revenue .................................. 484,128 389,785 324,345 270,726 213,490
Selling, general and administrative .............. 117,844 92,329 80,014 64,201 48,892
Depreciation and amortization .................... 37,723 30,877 25,204 22,070 18,520
Spin-off related charge .......................... -- -- 27,404 -- --
Restructuring charge ............................. -- -- -- 4,616 --
--------- --------- -------- -------- --------
Total ........................................... 639,695 512,991 456,967 361,613 280,902
--------- --------- -------- -------- --------
Income from operations ............................ 91,879 77,660 37,861(a) 47,561(b) 38,599
--------- --------- -------- -------- --------
Other expense, net:
Interest expense, net ............................ 7,361 8,314 6,791 5,269 4,307
Other expense (income) ........................... 373 167 1,116 (784) (712)
--------- --------- -------- -------- --------
Other expense, net .............................. 7,734 8,481 7,907 4,485 3,595
--------- --------- -------- -------- --------
Income before taxes and equity investee results ... 84,145 69,179 29,954(a) 43,076(b) 35,004
Taxes on income ................................... 35,099 29,367 17,377 18,445 14,924
Equity investee loss (gain) ....................... 438 58 (139) 405 435
--------- --------- -------- -------- --------
Net income ........................................ $ 48,608 $ 39,754 $ 12,716(a) $ 24,226(b) $ 19,645
========= ========= ======== ======== ========
Basic earnings per share .......................... $ 0.84 $ 0.69 $ 0.22(a) N/A N/A
Diluted earnings per share ........................ $ 0.83 $ 0.69 N/A(c) N/A N/A
Balance Sheet Data:
Working capital ................................... $ 81,488 $ 59,488 $ 65,946 $ 18,472 $ 12,961
Total assets ...................................... $ 593,415 $ 484,014 $451,047 $322,510 $271,992
Long-term debt .................................... $ 149,909 $ 132,423 $163,000 $ 89,836 $ 75,178
Stockholders' equity .............................. $ 225,015 $ 157,057 $110,704 $ 82,517 $ 63,908
Other Financial Data:
Gross margin ...................................... 33.8% 34.0% 34.5% 33.8% 33.2%
Operating margin .................................. 12.6% 13.1% 13.2%(d) 12.8%(e) 12.1%
Net margin ........................................ 6.6% 6.7% 6.6%(d) 6.6%(e) 6.1%
Current ratio ..................................... 1.42 1.35 1.43 1.15 1.12
Debt to capital ................................... 0.40 0.46 0.60 0.52 0.54
Book value per share .............................. 3.88 2.74 1.94 N/A N/A
Net days sales outstanding ........................ 55 48 50 47 33
(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 results and net income for the
year ended December 31, 1996 were $65,265, $57,358 and $32,441,
respectively, and basic earnings per share ("EPS") was $0.57.
(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 results and net income for the year
ended December 31, 1995 were $52,177, $47,692 and $26,996, respectively.
(c) Since Covance common stock began "regular way" trading on the NYSE on
January 14, 1997, computation of diluted EPS for 1996 is not possible.
(d) Operating margin and net margin exclude the impact of the fourth quarter
1996 one-time spin-off related charge. Including the impact of this
charge, operating income and net margin were 7.7% and 2.6%, respectively.
(e) Operating margin and net margin exclude the impact of the second quarter
1995 restructuring charge. Including this charge, operating income and
net margin were 11.6% and 5.9%, respectively.
16
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 pharmaceutical, biotechnology
and medical device industries. In addition, and to a lesser extent, Covance
provides services such as health economics and outcomes for managed care
organizations, hospitals and other health care providers and laboratory testing
to the chemical, agrochemical and food industries. The foregoing services
comprise two segments for financial reporting purposes: early development
services (preclinical and Phase I clinical); and late-stage development
services (clinical and clinical support services). Covance believes it is one
of the largest biopharmaceutical CROs, based on 1998 annual net revenues, and
one of a few that is capable of providing comprehensive global product
development services. Covance offers its clients high quality services designed
to reduce product development time, enabling them to introduce their products
into the marketplace faster and thus, maximize the period of market exclusivity
and monetary return on their research and development investments.
Additionally, Covance's comprehensive services and broad experience provides
clients with a variable cost alternative to fixed cost internal development
capabilities.
Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is generally recognized under either the
percentage of completion method of accounting or as services are rendered or
products are delivered. The contracts may contain provisions for renegotiation
for cost overruns arising from changes in the scope of work. Renegotiated
amounts are included in net revenues when earned and realization is assured. In
some cases, for multi-year contracts a portion of the contract fee is paid at
the time the trial is initiated, with performance-based installments payable
over the contract duration as milestones are achieved. Covance routinely
subcontracts with independent physician investigators in connection with either
single or multi-site clinical trials. Investigator fees are not reflected in
net revenues or expenses since such fees are granted by customers on a
"pass-through 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, payment of 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 revenue 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 and are expected to fluctuate from
one period to another (generally within a range of up to 200 basis points 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.
Results of Operations
Year ended December 31, 1998 Compared with Year Ended December 31, 1997.
Net revenues increased 23.9% to $731.6 million for 1998 from $590.7 million for
1997. Net revenues from Covance's late-stage development segment grew 31.9%,
benefiting from the continuing trend in outsourcing of clinical development
activities. Net revenues from Covance's early development segment grew 10.1%.
Cost of revenue increased 24.2% to $484.1 million for 1998 from $389.8
million for 1997 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.2% for 1998 from 66.0% for
1997.
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 27.6% to $117.8
million for 1998 from $92.3 million for 1997. As a percentage of net revenues,
selling, general and administrative expense increased to 16.1% for 1998 from
15.6% for 1997. The increase in selling, general and administrative expense of
27.6% is attributable to a number of factors, including higher sales and
marketing expenses and higher recruitment expenses during 1998 as compared to
1997.
Depreciation and amortization increased 22.2% to $37.7 million or 5.2% of
net revenues for 1998 from $30.9 million or 5.2% of net revenues for 1997.
Depreciation and amortization from Covance's late-stage development and early
development segments totaled $22.4 million and $15.3 million, respectively.
Income from operations increased $14.2 million or 18.3% to $91.9 million
for 1998 from $77.7 million for 1997. Income from operations as a percentage of
net revenues decreased from 13.1% for 1997 to 12.6% for 1998, primarily as a
result of the increase in cost of revenue and selling, general and
administrative expense, as discussed above. Income from operations from
Covance's late-stage development and early development segments for the year
ended December 31, 1998 totaled $57.6 million
17
and $34.2 million, respectively, as compared to $45.2 million and $32.4
million, respectively, for the year ended December 31, 1997.
Other expense (net) decreased $0.8 million to $7.7 million for 1998 from
$8.5 million for 1997, due to a reduction in net interest expense of $1.0
million, partially offset by an increase in net foreign exchange transaction
losses of $0.2 million, in 1998 as compared to 1997.
Covance's effective tax rate decreased to 41.7% for 1998 from 42.5% for
1997. Since Covance operates on a global basis, its effective tax rate is
subject to variation from year to year as the geographic distribution of its
pre-tax earnings changes.
Net income increased $8.9 million or 22.3% to $48.6 million for 1998 from
$39.8 million for 1997.
Year ended December 31, 1997 Compared with Year Ended December 31, 1996.
Net revenues increased 19.4% to $590.7 million for 1997 from $494.8 million for
1996. Excluding the impact of 1996 acquisitions and the impact on net revenues
of foreign exchange differences between both years, growth in net revenues was
18.1%. Net revenues from Covance's late-stage development segment, excluding
the impact of acquisitions and the impact on net revenues of foreign exchange
rate differences between both years, grew 30.3%, benefiting from the continuing
trend in outsourcing of clinical development activities. Net revenues from
Covance's early development segment grew 6.2%.
Cost of revenue increased 20.2% to $389.8 million for 1997 from $324.3
million for 1996 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.0% for 1997 from 65.5% for
1996. This increase is primarily attributable to Covance's biomanufacturing
operations. During the first eleven months of 1996, all costs incurred in
Covance's biomanufacturing operations were of an administrative nature as the
biomanufacturing facility was being prepared for revenue producing operations
(which began in December 1996). Once the biomanufacturing operations began
generating revenue, many expenses shifted from administrative to cost of
revenue.
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 15.4% to $92.3
million for 1997 from $80.0 million for 1996. As a percentage of net revenues,
selling, general and administrative expense decreased to 15.6% for 1997 from
16.2% for 1996. The decrease in selling, general and administrative expense as
a percentage of net revenues is primarily a result of two factors. The shift in
expenses in Covance's biomanufacturing operations, as discussed above, accounts
for most of the reduction in selling, general and administrative expense as a
percentage of net revenues for 1997 compared to 1996. Second, as a wholly-owned
business of Corning, certain administrative activities were historically
performed on Covance's behalf by Corning. Charges incurred for these services
totaled $3.4 million, or 0.7% of net revenues, in 1996. While these charges are
no longer incurred as a result of Covance's spin-off from Corning, they have
been substantially, but not entirely, replaced by internal costs as additional
resources continue to be added to perform the services previously provided by
Corning, as well as to perform functions new to Covance as a separate publicly
traded company.
Depreciation and amortization increased 22.5% to $30.9 million or 5.2% of
net revenues for 1997 from $25.2 million or 5.1% of net revenues for 1996 as
the growth in these non-cash charges outpaced the increase in net revenues.
Depreciation and amortization from Covance's late-stage development and early
development segments totaled $16.2 million and $14.7 million, respectively.
Inclusive of a special non-recurring charge in 1996, income from
operations increased $39.8 million to $77.7 million for 1997 from $37.9 million
for 1996. 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). Excluding the impact of the 1996 spin-off related charge, income from
operations increased $12.4 million or 19.0% to $77.7 million for 1997 as
compared to $65.3 million for 1996. Income from operations from Covance's
late-stage development and early development segments for the year ended
December 31, 1997 totaled $45.2 million and $32.4 million, respectively, as
compared to $39.2 million and $26.1 million, respectively, for the year ended
December 31, 1996, excluding the impact of the 1996 spin-off related charge.
Other expense (net) increased $0.6 million to $8.5 million for 1997 from
$7.9 million for 1996, due to an increase in net interest expense of $1.5
million, partially offset by a decrease in net foreign exchange transaction
losses of $0.9 million, in 1997 as compared to 1996.
Covance's effective tax rate, excluding the special non-recurring charge
in 1996, decreased to 42.5% for 1997 from 43.7% for 1996. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic distribution of its pre-tax earnings changes.
18
Net income increased to $39.8 million for 1997 from $12.7 million for
1996. Excluding the after tax impact of the 1996 spin-off related charge, net
income increased $7.3 million or 22.5%.
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 drug development trials,
termination of drug development 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 drug development trials may cause
significant variations in quarterly operating results.
The following table presents unaudited quarterly operating results of
Covance for each of the eight most recent fiscal quarters during the period
ended December 31, 1998. In the opinion of Covance, this information has been
prepared on the same basis as the Audited Covance Consolidated 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 Consolidated Financial Statements included elsewhere
herein. Operating results for any quarter are not necessarily indicative of the
results that may be reported in any future period.
Covance has a centralized domestic cash management function whereby cash
received from operations is generally swept daily to a centrally managed
concentration account. 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.
In November 1996, Covance borrowed $160 million under a newly established
five-year $250 million senior revolving credit facility ("the Credit Facility")
to repay Corning and affiliates for all intercompany borrowings and income tax
liabilities existing at that time. At December 31, 1998, there was $140.0
million of outstanding borrowings and $11.3 million in outstanding letters of
credit, resulting in a remaining availability of $98.7 million under the Credit
Facility. Covance has several different interest rate options available to it
under the Credit Facility. Interest on all outstanding borrowings under the
Credit Facility during 1998 was computed based upon the London Interbank
Offered Rate plus a margin and approximated 5.8% per annum. 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 if
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,
1998, Covance was in compliance with the terms of the Credit Facility.
As of December 31, 1998, Covance Biotechnology had $3.0 million in
short-term debt outstanding with the North Carolina Biotechnology Center. This
debt matures in December 1999 and is guaranteed by Covance. In addition,
Covance Biotechnology has a $10.0 million short-term revolving credit facility
with a bank, of which $10.0 million of borrowings were outstanding as of
December 31, 1998. This short-term revolving credit facility carries interest
at a rate substantially equivalent to the rate in effect on Covance's
borrowings under the Credit Facility and is guaranteed by Covance.
19
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million
Swiss Francs from a bank. This loan bears interest at a fixed rate of 2.9% per
annum and matures in October 2000. In connection with this loan, Covance
provided a letter of credit in favor of the lender which may be drawn upon in
event of default. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.
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.
Management believes that a combination of borrowings under the Credit Facility,
cash generated from operations and possible future capital market financings
will provide Covance 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, 1998, Covance's operations provided net
cash of $64.1 million, a decrease of $12.5 million from the corresponding 1997
amount. Cash flows from net earnings adjusted for non-cash activity provided
$98.1 million during 1998, up $13.4 million or 15.9% from the corresponding
1997 amount of $84.7 million. The change in net operating assets used $34.0
million in cash during 1998, primarily due to an increase in accounts
receivable, while this net change used $8.1 million in cash during 1997.
Covance's ratio of current assets to current liabilities was 1.42 at December
31, 1998 and 1.35 at December 31, 1997.
Investing activities for the years ended December 31, 1998 and 1997
included capital spending to expand existing operations and purchase equipment
to enhance scientific technology capabilities. During 1998 and 1997, Covance
spent approximately $74.9 million and $56.5 million, respectively, on capital
expenditures for maintenance and upgrade of existing equipment, outfitting of
new facilities and computer equipment and software for newly hired employees.
Investing activities for the year ended December 31, 1998 also included
acquisitions. In the fourth quarter of 1998, Covance acquired GDXI, Inc. and
Berkeley Antibody Company, Inc. for cash payments totaling approximately $26
million.
As discussed in Note 9 to the Audited Covance Consolidated Financial
Statements, Covance has, and may from time to time in the future, enter into
build-to-suit operating lease arrangements. These transactions may allow
Covance to purchase the underlying facility and / or equipment or cancel the
lease arrangement on various dates over the lease term. In the event of
cancellation, Covance may be obligated under residual value guarantee
provisions of the leases. Covance has one lease arrangement whereby it has a
contingent residual value guarantee payment in the event that Covance
terminates the lease and the sale of the underlying facility and equipment
results in sales proceeds by the lessor in an amount less than the lessor's
unamortized investment in the lease arrangement. Under these circumstances,
Covance's maximum payment would approximate $35 million at the end of 1997 (the
first year of the lease) and decreases to approximately $25 million at the end
of 2006 (the tenth year of the lease), assuming Covance terminates the lease
and the sales proceeds received by the lessor were zero.
Foreign Currency
Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical services. The first risk occurs as revenue
recognized for services rendered is denominated in a currency different from
the currency in which the subsidiary's expenses are incurred. As a result, the
subsidiary's net revenues and resultant earnings can be affected by
fluctuations in exchange rates. While some contracts provide that currency
fluctuations from the rates in effect at the time the contract is executed are
the responsibility of the customer and others provide that currency
fluctuations from the rates in effect at the time the contract is executed up
to a specified threshold (generally plus or minus a few percentage points) are
absorbed by Covance while fluctuations in excess of the threshold are the
customer's responsibility, most contracts do not specifically address
responsibility for currency fluctuations. Historically, fluctuations in
exchange rates from those in effect at the time contracts were executed have
not had a material effect upon Covance's consolidated financial results.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer
payments against such invoices. Because the contract is denominated in a
currency other than the subsidiary's local currency, Covance recognizes a
receivable at the time of invoicing for the local currency equivalent of the
foreign currency invoice amount. Changes in exchange rates from the time the
invoice is prepared and payment from the customer is received will result in
Covance receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by Covance as a foreign
currency transaction gain or loss, as applicable, and is reported in other
expense (income) in Covance's Consolidated Statements of Income.
20
Finally, Covance's consolidated financial statements are denominated in
U.S. dollars. Accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of each
foreign subsidiary's financial results into U.S. dollars for purposes of
reporting Covance's consolidated financial results. The process by which each
foreign subsidiary's financial results are translated into U.S. dollars is as
follows: income statement accounts are translated at average exchange rates for
the period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical
exchange rates. Translation of the balance sheet in this manner affects the
stockholders' equity account, referred to as the cumulative translation
adjustment account. This account exists only in the foreign subsidiary's U.S.
dollar balance sheet and is necessary to keep the foreign balance sheet stated
in U.S. dollars in balance. To date such cumulative translation adjustments
have not been material to Covance's consolidated financial position.
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.
See Note 5 to the Audited Covance Consolidated 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.
Year 2000 Issues
Information systems are an integral part of the services and products
Covance provides. Covance has formed a group, led by its Year 2000 Project
Director working in conjunction with a steering committee of executives from
Covance, to implement Covance's Year 2000 assessment and remediation plan (the
"Plan") from an internal, supplier and customer perspective. Presently, there
are approximately 51 full-time employee equivalents who are dedicated to the
Year 2000 project. This Plan is being executed under the guidance of Covance's
senior management, including the Chief Executive Officer and the Board of
Directors. Specifically, the Plan is managed at the operational level by the
General Manager and Group President of each applicable business location. In
addition, each business location undergoes periodic comprehensive management
reviews with other executives of Covance, including the Chief Executive
Officer, the Chief Financial Officer and the General Counsel concerning the
Year 2000 readiness of such location. The Board of Directors also periodically
reviews with Covance's management the progress under the Plan.
State of Readiness. The Plan is intended to provide a comprehensive and
rigorous methodology for identifying and addressing the risks of Year 2000
problems to Covance. Its goal is to minimize the number and seriousness of any
defects and related disruptions or problems stemming from Year 2000 issues and
to quickly repair any that do occur. Covance's Plan has been divided into six
phases: inventory, risk assessment, evaluation, remediation, validation and
implementation.
The inventory is intended to cover all of Covance's systems and processes
that involve the use of dates irrespective of whether or not the system is
deemed Year 2000 compliant, including computer related hardware, computer
related software, internally developed systems, devices, equipment, scientific
instrumentation, outsourced services, outsourced products and client systems
that Covance interacts with. The inventory phase also involves assessing
systems interrelationships to minimize the adverse effects non-compliant data
or systems could have on remediated systems. Risk assessment involves
determining the potential impact to Covance's operations because of Year 2000
non-compliance. Specifically, the most business critical systems are
prioritized and potential material liabilities identified. Evaluation involves
determining whether a system is Year 2000 compliant. The inventory, risk
assessment and evaluation phases of the Plan commenced in October 1997 and were
substantially completed for internal systems in May 1998.
In conjunction with the inventory, risk assessment and evaluations phases,
Covance has undertaken a company-wide and operation specific Year 2000
awareness campaign for purposes of employee awareness and involvement. Covance
believes that employee awareness will serve to maximize the completeness of its
Year 2000 inventory and enhance the effectiveness of the Plan generally.
Also as part of the inventory, assessment and evaluation phases, Covance
is conducting an assessment of material third-party relationships for Year 2000
compliance. These third parties include investigational sites, utility
companies, telecommunications companies, business specific product suppliers,
such as software, animal feed and reagent suppliers or providers,
transportation companies, and payroll and benefit services companies. Important
vendors, suppliers and service providers are being requested
21
to supply Covance with certification that their systems are (or in some cases
notification that they are not) Year 2000 compliant. Generally, where
certification cannot be obtained, or even when certification is obtained but
the risk of disruption to Covance's business is considered so potentially
severe, Covance is investigating alternative sources and considering
stockpiling supplies to guard against potential shortages. However, there can
be no assurances that Covance's suppliers, vendors and service providers will
attain Year 2000 compliance or that suitable alternative suppliers, vendors and
service providers can be engaged. It is possible that delays, increased costs
or supplier, vendor or service provider failures could have a material adverse
impact on Covance's business, financial condition, results of operations and
cash flows, by, for example, negatively effecting Covance's ability to meet its
contractual or regulatory obligations or service its customers.
While Covance is taking steps to raise awareness of the Year 2000 issue
among its customers, Covance does not believe it is appropriate to require
clients to certify their Year 2000 readiness and compliance. For the fiscal
year ended December 31, 1998, Covance had no single customer which accounted
for greater than 10% of its net revenues and only one customer which accounted
for more than 5% of its net revenues. However, in the event a significant
customer or group of customers were adversely effected by Year 2000 related
problems, Covance could experience a reduction of business and revenue and a
consequent material adverse effect on its business, financial condition,
results of operations and cash flows.
Remediation is defined as the phase of the Plan where systems are fixed to
maximize Year 2000 compliance so that they are able to properly calculate dates
without interfering with the proper operation of other components of the
system. Remediation includes, without limitation, the repair, replacement or
removal of non-compliant systems. Covance is presently in the process of
remediating its systems and will continue to do so, as necessary, for the
duration of the Plan.
In the validation phase of the Plan, remediated systems are required to be
tested and the testing to be documented. In addition, systems deemed compliant
in the evaluation phase are required to be documented as are vendor and
supplier systems. The validation phase is scheduled to be substantially
completed for business critical systems by March 1999.
The final phase of the Plan is the implementation phase where remediated
systems, which have undergone and completed validation, are put into
operational use and observed for interaction with other aspects and components
of systems that may or may not be related to the Year 2000 issue to ensure
non-disruption of essential functions. This phase is scheduled to be 95%
completed for internal business critical systems by August 1999 and completed
for business critical systems by December 1999.
Costs of Year 2000 Project. Covance has, beginning in early 1998, and
expects to continue through the end of the year 2000, to incur costs and make
expenditures relating to the Year 2000 project. These costs and expenditures
can be broadly classified into two categories: amounts that will be expensed as
incurred (internal payroll relating to employees newly hired or redeployed to
work on the Year 2000 project, external consultants and the net book value of
non-Year 2000 compliant equipment to be replaced); and amounts that will be
capitalized and depreciated over the useful lives of the associated assets (the
purchase price of new hardware, software and other equipment acquired to
replace existing hardware, software and other equipment that is not Year 2000
compliant).
Covance currently estimates that the costs of internal payroll, external
consultants and the net book value of equipment to be replaced (amounts that
have and will be expensed as incurred) will total between $7.5 million and $9.0
million over the three year period ending December 31, 2000. Of these amounts,
a total of $2.3 million has been incurred and expensed during the year ended
December 31, 1998. Covance currently estimates that the cost of new hardware,
software and other equipment to be acquired in replacement of existing non-Year
2000 compliant hardware, software and other equipment (amounts that will be
capitalized and depreciated over the useful lives of the related assets) will
total between $7.0 million and $8.5 million and will primarily be incurred over
the two year period ending December 31, 1999. Of these amounts, capitalizable
expenditures totaling $1.7 million have been made during the year ended
December 31, 1998. The primary source of funds for all costs to be incurred and
expenditures to be made is expected to be provided by Covance's operating cash
flows.
Risks of Year 2000 Problems. Worst-case scenarios resulting from Year 2000
problems deemed by Covance to be most reasonably likely include the following:
loss of power and other utility services which could result in disruption to
existing and future studies generally, harm to specimens and test samples used
in studies and an adverse impact on the health and well being of the animals;
inability to obtain timely and sufficient supplies of reagents, lab ware or
animal feed, which could result in the inability to perform existing and future
laboratory and central laboratory studies and an adverse impact on the health
and well being of the animals; computer hardware, software and embedded
technology failure which could disrupt Covance's equipment, systems and
networks resulting in an inability to perform existing and future studies
and/or an adverse impact on the health and well being of patients; the loss of
telecommunications capabilities (both voice and data), which could result in an
inability for Covance to internally communicate or to communicate with, among
others, its clients and investigational sites; and the inability of Covance's
third party investigational sites to become Year 2000 compliant, which could
result in the loss to Covance of their services. Any one or more of these or
other events could result in business slowdowns or suspensions, subject Covance
to liability
22
for breach of contract or personal injury and have a material adverse effect on
Covance's business, financial condition, results of operations and cash flows.
While deferrals of scheduled information technology projects as a result
of the need to remediate Year 2000 problems are not presently expected to have
a material adverse effect on Covance's business, financial condition, results
of operations and cash flows, in the event the implementation of the Plan
requires greater expenditures or more qualified employees than presently
estimated or qualified information technology workers become more difficult or
expensive to attract and retain, certain significant projects may be subject to
deferral. If such deferrals occur, they may have a material adverse effect on
Covance's business, financial condition, results of operations and cash flows.
Contingency Plans. Covance has developed and is continuing to develop
contingency plans for handling these critical areas in the event remediation is
unsuccessful. Contingency plans include the utilization of back-up generators
for power supply; identifying alternative suppliers for reagents, animal feed
and other supplies as well as stockpiling significant quantities of such
supplies in advance of the year 2000; porting from one long distance carrier to
another and utilizing cell phones and call access cards when available; and
manning interactive voice response system phones with staff and manually
randomizing systems on paper to ensure the continued validity of studies.
Contingency plans not yet developed will be developed on a case by case basis
and are scheduled to be in place by September 1999. Contingency plans
themselves; however, are subject to variables and uncertainties and therefore
there can be no assurance that Covance will correctly anticipate the level,
impact or duration of non-compliance of computer hardware, software, systems or
suppliers, vendors or service providers (which may supply inaccurate
information to Covance or otherwise be unable to provide their service or
product free of defect or disruption arising from Year 2000 problems) or that
its contingency plans will be sufficient to mitigate the impact of
non-compliance. Thus, there can be no assurance that the Year 2000 problem,
even after giving effect to the implementation of applicable contingency plans,
will not materialize and such occurrence could have a material adverse impact
on Covance's business, financial condition, results of operations and cash
flows.
Forward Looking Statements. Statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as in
certain other parts of this Annual Report on Form 10-K that look forward in
time, are forward looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance, expectations, predictions, and
assumptions and other statements which are other than statements of historical
facts. All such forward looking statements are based on the current
expectations of management and are subject to, and are qualified by, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied by those statements. These risks and uncertainties
include, but are not limited to, Covance's ability to identify and correct all
relevant computer codes and embedded chips, Covance's ability to attract and
retain qualified information technology personnel to address and remediate Year
2000 problems, the availability or affordability of alternative sources for
critical supplies and services, the effect of the Year 2000 problem on
Covance's suppliers, customers and other third parties, Covance's ability to
estimate costs of Year 2000 remediation and predict problems and costs that
might arise with respect to Year 2000 issues, and Covance's ability to address
other Year 2000 issues, and risks and uncertainties set forth in Covance's
filings with the Securities and Exchange Commission including without
limitation its Annual Report on Form 10-K.
23
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for the
accounting treatment of various costs typically incurred during the development
or purchase of computer software for internal use. SOP 98-1 is effective for
fiscal periods beginning after December 15, 1998 (calendar year 1999 for
Covance). Historically, Covance's policy has been to expense internal costs
associated with software developed for internal use. Upon adoption of SOP 98-1
in 1999, Covance may capitalize certain internal software development costs,
which under Covance's current policy would have been expensed. Had Covance
accounted for internal software development costs in 1998 in accordance with
SOP 98-1, results of operations, financial position and cash flows would not
have been materially different.
In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 provides guidance on
the financial reporting of start-up and organization costs; requiring such
costs be expensed as incurred. SOP 98-5 is effective for fiscal periods
beginning after December 15, 1998 (calendar year 1999 for Covance). Application
of SOP 98-5 is not expected to have a material impact on Covance's consolidated
results of operations, financial position or cash flows.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
See Management's Discussion and Analysis of Financial Condition and
Results of Operations
24
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of PricewaterhouseCoopers LLP--Independent Accountants ............................ 26
Consolidated Balance Sheets--December 31, 1998 and 1997 .................................. 27
Consolidated Statements of Income--Years ended December 31, 1998, 1997 and 1996 .......... 28
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997 and 1996 ...... 29
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998, 1997 and
1996 ................................................................................... 30
Notes to Consolidated Financial Statements ............................................... 31
25
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 27 through 41 present fairly, in all material
respects, the financial position of Covance Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Florham Park, NJ
January 20, 1999
26
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
(Dollars in thousands) ---------- ----------
Assets
Current Assets:
Cash and cash equivalents ............................................. $ 19,263 $ 28,027
Accounts receivable, net .............................................. 139,145 104,789
Unbilled services ..................................................... 41,589 40,980
Inventory ............................................................. 26,726 18,088
Deferred income taxes ................................................. 9,671 10,474
Prepaid expenses and other assets ..................................... 38,095 28,120
-------- --------
Total Current Assets ................................................ 274,489 230,478
Property and equipment, net ............................................ 237,587 193,129
Goodwill, net .......................................................... 71,999 50,979
Other assets ........................................................... 9,340 9,428
-------- --------
Total Assets ........................................................ $593,415 $484,014
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ...................................................... $ 33,381 $ 24,344
Accrued payroll and benefits .......................................... 41,505 39,647
Accrued expenses and other liabilities ................................ 39,117 30,702
Unearned revenue ...................................................... 60,226 62,099
Short-term debt ....................................................... 13,000 10,000
Income taxes payable .................................................. 5,772 4,198
-------- --------
Total Current Liabilities ........................................... 193,001 170,990
Long-term debt ......................................................... 149,909 132,423
Deferred income taxes .................................................. 12,416 10,758
Other liabilities ...................................................... 13,074 12,786
-------- --------
Total Liabilities ................................................... 368,400 326,957
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock--Par value $0.01 per share; 140,000,000 shares authorized;
58,417,536 and 57,678,977 shares issued and outstanding at
December 31, 1998 and 1997, respectively ............................. 584 577
Paid-in capital ....................................................... 75,853 58,276
Retained earnings ..................................................... 146,372 97,764
Accumulated other comprehensive income--
Cumulative translation adjustment ................................... 2,206 440
-------- --------
Total Stockholders' Equity .......................................... 225,015 157,057
-------- --------
Total Liabilities and Stockholders' Equity .......................... $593,415 $484,014
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
27
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
(Dollars in thousands, except per share data) ------------- --------------- ---------------
Net revenues ............................................. $ 731,574 $ 590,651 $ 494,828
Cost and expenses:
Cost of revenue ......................................... 484,128 389,785 324,345
Selling, general and administrative ..................... 117,844 92,329 80,014
Depreciation and amortization ........................... 37,723 30,877 25,204
Spin-off related charge ................................. -- -- 27,404
----------- ------------ ------------
Total ................................................. 639,695 512,991 456,967
----------- ------------ ------------
Income from operations ................................... 91,879 77,660 37,861
----------- ------------ ------------
Other expense, net:
Interest expense, net ................................... 7,361 8,314 6,791
Other expense ........................................... 373 167 1,116
----------- ------------ ------------
Other expense, net .................................... 7,734 8,481 7,907
----------- ------------ ------------
Income before taxes and equity investee results .......... 84,145 69,179 29,954
Taxes on income .......................................... 35,099 29,367 17,377
Equity investee loss (gain) .............................. 438 58 (139)
----------- ------------ ------------
Net income ............................................... $ 48,608 $ 39,754 $ 12,716
=========== ============ ============
Basic earnings per share ................................. $0.84 $0.69 $0.22
Weighted average shares outstanding--basic ............... 58,050,114 57,254,042 57,063,644
Diluted earnings per share ............................... $0.83 $0.69 N/A
Weighted average shares outstanding--diluted ............. 58,774,334 57,463,587 N/A
The accompanying notes are an integral part of these consolidated financial statements.
28
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
(Dollars in thousands) ------------ ------------ ------------
Cash flows from operating activities:
Net income .................................................. $ 48,608 $ 39,754 $ 12,716
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 37,723 30,877 25,204
Stock issued under employee benefit and stock
compensation plans ........................................ 6,929 5,523 --
Deferred income tax provision .............................. 4,420 7,856 (3,188)
ESOP component of spin-off related charge .................. -- -- 16,673
Related party charges ...................................... -- -- 2,052
Other ...................................................... 429 673 237
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable ....................................... (31,877) (11,089) (12,444)
Unbilled services ......................................... (609) (1,667) (18,568)
Inventory ................................................. (8,342) (1,678) (1,911)
Accounts payable .......................................... 8,087 (2,308) 2,327
Accrued liabilities ....................................... 7,441 6,297 15,800
Unearned revenue .......................................... (2,247) 4,305 14,701
Income taxes payable ...................................... 1,574 748 (13,606)
Other assets and liabilities, net ......................... (7,997) (2,662) (10,135)
---------- --------- ---------
Net cash provided by operating activities ................... 64,139 76,629 29,858
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures ....................................... (74,945) (56,538) (46,941)
Acquisition of businesses, net of cash acquired ............ (25,546) -- (33,883)
Other, net ................................................. 129 196 34
---------- --------- ---------
Net cash used in investing activities ....................... (100,362) (56,342) (80,790)
---------- --------- ---------
Cash flows from financing activities:
Repayments of long-term debt ............................... -- (40,000) --
Proceeds from short-term debt .............................. -- 10,000 --
Proceeds from long-term debt ............................... 20,000 9,423 160,000
Stock issued under employee stock purchase and stock
option plans .............................................. 7,459 2,901 --
Due to Corning Incorporated and affiliates ................. -- -- (88,361)
Dividends paid to Corning .................................. -- -- (3,359)
---------- --------- ---------
Net cash provided by (used in) financing activities ......... 27,459 (17,676) 68,280
---------- --------- ---------
Net change in cash and cash equivalents ..................... (8,764) 2,611 17,348
Cash and cash equivalents, beginning of year ................ 28,027 25,416 8,068
---------- --------- ---------
Cash and cash equivalents, end of year ...................... $ 19,263 $ 28,027 $ 25,416
========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
29
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Accumulated
Other Compre- Total
Common Paid-in Retained Comprehensive hensive Stockholders'
Stock Capital Earnings Income Income Equity
(Dollars in thousands) -------- ----------- ------------ --------------- ----------- --------------
Balance, December 31, 1995 ............... -- $ 30,816 $ 48,653 $ 3,048 $ 82,517
Comprehensive income:
Net income .............................. -- -- 12,716 -- $ 12,716 12,716
Currency translation adjustment ......... -- -- -- 105 105 105
--------
Total comprehensive income ............. -- -- -- -- $ 12,821 --
========
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 ........................ 9 16,664 -- -- 16,673
---- -------- -------- -------- --------
Balance, December 31, 1996 ............... 571 48,970 58,010 3,153 110,704
Comprehensive income:
Net income .............................. -- -- 39,754 -- $ 39,754 39,754
Currency translation adjustment ......... -- -- -- (2,713) (2,713) (2,713)
--------
Total comprehensive income ............. -- -- -- -- $ 37,041 --
========
Capital contribution ..................... -- 888 -- -- 888
Shares issued under various
employee benefit and stock
compensation plans ...................... 6 8,245 -- -- 8,251
Stock option exercises ................... -- 173 -- -- 173
---- -------- -------- -------- --------
Balance, December 31, 1997 ............... 577 58,276 97,764 440 157,057
Comprehensive income:
Net income .............................. -- -- 48,608 -- $ 48,608 48,608
Currency translation adjustment ......... -- -- -- 1,766 1,766 1,766
--------
Total comprehensive income ............. -- -- -- -- $ 50,374 --
========
Capital contribution ..................... -- 3,196 -- -- 3,196
Shares issued under various
employee benefit and stock
compensation plans ...................... 5 10,511 -- -- 10,516
Stock option exercises ................... 2 3,870 -- -- 3,872
---- -------- -------- -------- --------
Balance, December 31, 1998 ............... $584 $ 75,853 $146,372 $ 2,206 $225,015
==== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
30
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
1. 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 pharmaceutical, biotechnology and medical
device industries. In addition and to a lesser extent, Covance provides
services such as health economics and outcomes for managed care organizations,
hospitals and other health care providers and laboratory testing to the
chemical, agrochemical and food industries. Covance's operations constitute two
segments for financial reporting purposes. The first segment, early development
services, is comprised of preclinical and Phase I clinical service offerings.
The second segment, late-stage development services, is comprised of clinical
and clinical support services. At the present time, operations are principally
focused in the United States and Europe.
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 Services Inc. ("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.
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, income and expense items are translated to United States
dollars at average rates of exchange prevailing during the year, assets and
liabilities are translated at year-end exchange rates and equity accounts are
translated at historical exchange rates. Translation adjustments are
accumulated in a separate component of stockholders' equity in the Consolidated
Balance Sheets and are included in the determination of comprehensive income in
the Consolidated Statements of Stockholders' Equity. Transaction gains and
losses are included in the determination of net income in the Consolidated
Statements of Income. Transaction losses totaled $0.4 million, $0.2 million and
$1.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
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 and cash equivalents, accounts receivable, accounts
payable, accrued expenses and long and short-term debt are not materially
different than their carrying amounts as reported at December 31, 1998 and
1997.
Accounts receivable and unbilled services represent amounts due from
Covance customers who 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. In addition, in some cases Covance 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.
31
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
Inventory
Inventories, which consist principally of supplies and animals, 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.
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 generally ranges from twenty to forty
years.
Impairment of Long-Lived Assets
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.
Revenue Recognition
Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is generally recognized under either the
percentage of completion method of accounting or as services are rendered or
products are delivered. 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 payment of 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.
Unbilled services 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 services are billable to
customers within one year from the respective balance sheet date. Unearned
revenue is recorded for cash received from customers for which revenue has not
been recognized at the balance sheet 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-through basis" without risk or reward to Covance. Amounts receivable from
customers in connection with billed and unbilled investigator fees and out-
of-pocket pass-through costs are included in prepaid expenses and other current
assets in the accompanying Consolidated Balance Sheets and totaled $27.3
million and $20.1 million at December 31, 1998 and 1997, respectively.
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process and encompasses 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.
32
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
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. See
Note 5.
Comprehensive Income
During 1998, Covance adopted Financial Accounting Standards Board ("FASB")
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in the financial statements and requires the reporting of
comprehensive income in addition to net income from operations. Covance has
elected to present comprehensive income in its Consolidated Statements of
Stockholders' Equity. Covance's total comprehensive income represents net
income plus the change in the cumulative translation adjustment equity account
for the periods presented. The adoption of SFAS 130 did not affect results of
operations or financial position.
Segment Reporting
During 1998, Covance also adopted FASB Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131,
which supersedes FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise, establishes standards for the way that public business
enterprises report information about operating segments in financial
statements. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. The adoption of
SFAS 131 did not affect results of operations or financial position. See Note
10 for segment disclosure.
Supplemental Cash Flow Information
Cash paid for interest for the years ended December 31, 1998, 1997 and
1996 totaled $9.1 million, $9.1 million and $6.5 million, respectively. Cash
paid for income taxes for the years ended December 31, 1998, 1997 and 1996
totaled $25.5 million, $27.9 million and $25.5 million, respectively.
Earnings Per Share
Earnings per share is computed in accordance with FASB Statement No. 128,
Earnings Per Share. Basic EPS is computed by dividing net income available to
common stockholders by the weighted average number of shares outstanding during
the period. The computation of diluted EPS is similar to the computation of
basic EPS, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
In computing diluted earnings per share for the years ended December 31,
1998 and 1997, the denominator was increased by 724,220 shares and 209,545
shares, respectively; representing the dilution of stock options outstanding at
December 31, 1998 and 1997 with exercise prices less than the average market
price of Covance's Common Stock during each respective period. Excluded from
the computation of diluted earnings per share at December 31, 1998 were options
to purchase 185,650 shares of common stock at prices ranging from $24.56 to
$29.13 per share because the exercise prices of such options were greater than
the average market price of Covance's Common Stock during 1998. Excluded from
the computation of diluted earnings per share at December 31, 1997 were options
to purchase 1,474,585 shares of common stock at prices ranging from $19.00 to
$20.56 per share because the exercise prices of such options were greater than
the average market price of Covance's Common Stock during 1997. Since Covance's
Common Stock began "regular way" trading on the NYSE in January 1997,
computation of diluted earnings per share for 1996 is not possible. Basic
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 (see
Note 8).
33
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
3. Property and Equipment
Property and equipment at December 31, 1998 and 1997 consist of the
following:
1998 1997
------------- -------------
Property and equipment at cost:
Land .............................................. $ 6,859 $ 6,859
Buildings and improvements ........................ 137,682 126,594
Equipment ......................................... 212,681 156,872
Furniture, fixtures & leasehold improvements ...... 62,888 50,994
Construction-in-progress .......................... 14,952 14,492
---------- ----------
435,062 355,811
Less: Accumulated depreciation and amortization..... (197,475) (162,682)
---------- ----------
Property and equipment, net ........................ $ 237,587 $ 193,129
========== ==========
Depreciation and amortization expense aggregated $35.2 million, $28.0
million and $23.2 million for 1998, 1997 and 1996, respectively.
4. Acquisitions and Goodwill
In November 1998, Covance acquired the stock of GDXI, Inc. (now known as
Covance Central Diagnostics Inc.) and the assets and liabilities of Berkeley
Antibody Company, Inc. (now known as Covance Antibody Services Inc.) for cash
payments totaling approximately $26 million in separate transactions accounted
for as purchase business combinations. The goodwill resulting from these
transactions aggregated $23.4 million.
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.
Results of operations for these entities have been included in the
accompanying consolidated 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 $72.0
million and $51.0 million, net of accumulated amortization of $10.0 million and
$7.5 million at December 31, 1998 and 1997, respectively. Amortization expense
aggregated $2.5 million, $2.3 million and $1.7 million for 1998, 1997 and 1996,
respectively.
34
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
5. Taxes on Income
The components of income before taxes and the related provision (benefit)
for taxes on income for 1998, 1997 and 1996 are as follows:
1998 1997 1996
---------- ---------- ----------
Income before taxes and equity investee results:
Domestic ...................................... $63,401 $48,927 $ 23,259
International ................................. 20,744 20,252 6,695
------- ------- --------
Total ........................................ $84,145 $69,179 $ 29,954
======= ======= ========
Federal income taxes:
Current provision ............................. $23,179 $14,968 $ 17,108
Deferred (benefit) provision .................. (324) 2,700 (6,311)
International income taxes:
Current provision ............................. 3,648 3,987 1,248
Deferred provision ............................ 2,472 2,387 1,635
State and other income taxes:
Current provision ............................. 6,714 5,840 4,174
Deferred benefit .............................. (590) (515) (477)
------- ------- --------
Net income tax provision ..................... $35,099 $29,367 $ 17,377
======= ======= ========
The differences between the provision for income taxes and income taxes
computed using the Federal statutory income tax rate for 1998, 1997 and 1996
are as follows:
1998 1997 1996
---------- ---------- ----------
Taxes at statutory rate ................................ 35.0% 35.0% 35.0%
State and local taxes, net of Federal benefit .......... 4.7 5.1 8.0
Non-deductible spin-off related charge ................. -- -- 7.1
Goodwill amortization .................................. 1.0 1.1 2.1
Impact of international operations ..................... (1.3) (1.0) 1.8
Other, net ............................................. 2.3 2.3 4.0
---- ---- ----
Total ................................................ 41.7% 42.5% 58.0%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
1998 1997
------------- -------------
Current deferred tax assets:
Liabilities not currently deductible ............ $ 5,926 $ 8,007
Net operating losses ............................ 5,084 3,793
Other ........................................... 727 592
--------- ---------
Gross current deferred tax assets ............... 11,737 12,392
Less: Valuation allowance ....................... (2,066) (1,918)
--------- ---------
Net current deferred tax assets ................. $ 9,671 $ 10,474
========= =========
Noncurrent deferred tax assets:
Liabilities not currently deductible ............ $ 6,436 $ 5,842
Less: Valuation allowance ....................... (1,579) (1,212)
--------- ---------
Net noncurrent deferred tax assets .............. 4,857 4,630
Noncurrent deferred tax liabilities:
Property and equipment .......................... (17,273) (15,388)
--------- ---------
Net noncurrent deferred tax liabilities ......... $ (12,416) $ (10,758)
========= =========
35
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
Covance currently provides income taxes on the earnings of foreign
subsidiaries to the extent those earnings are taxable or are expected to be
remitted. Taxes have not been provided on $48.8 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.
Prior to December 31, 1996, Covance was an indirect wholly-owned business
of Corning Incorporated ("Corning"). During that time, Covance and its
subsidiaries had operated under a tax sharing agreement with Corning, pursuant
to which they computed their provision for income taxes on a separate return
basis and paid to Corning the separate Federal income tax return liability so
computed. Covance's operations through December 31, 1996 were included in the
Federal income tax return filed by Corning.
On December 31, 1996, Corning distributed to its stockholders, on a pro
rata tax-free basis, all of its ownership interest in Covance (the "Spin-Off
Distribution") and as a result, Covance began to file its own separate Federal
income tax return beginning in 1997. In connection with the Spin-Off
Distribution, Covance entered into a tax indemnification agreement with Corning
and a former affiliate of Corning that prohibited 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
provided Corning and the former affiliate of Corning with certain rights of
indemnification against Covance. The tax indemnification agreement also
required 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 allocated responsibility for federal, state
and local taxes relating to taxable periods before the Spin-Off Distribution
and provided for computing and apportioning tax liabilities and tax benefits
for such periods.
6. Short and Long-Term Debt
Covance has a $250 million senior revolving credit facility (the "Credit
Facility") with a syndicate of banks, as to which there was $140.0 million of
outstanding borrowings and $11.3 million in outstanding letters of credit at
December 31, 1998. Under the Credit Facility, borrowings can be made in a
number of different currencies until November 2001 at which time all
outstanding loans must be paid in full. In addition, Covance has several
different interest rate options under the Credit Facility. Interest on all
outstanding borrowings during 1998 was computed based upon the London Interbank
Offered Rate ("LIBOR") plus an applicable margin and approximated 5.8% per
annum. 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.
As of December 31, 1998, Covance Biotechnology had $3.0 million in
short-term debt outstanding with the North Carolina Biotechnology Center. This
debt matures in December 1999 and is guaranteed by Covance. In addition,
Covance Biotechnology has a $10.0 million short-term revolving credit facility
with a bank, of which $10.0 million of borrowings were outstanding as of
December 31, 1998. This short-term revolving credit facility carries interest
at a rate substantially equivalent to the rate in effect on Covance's
borrowings under the Credit Facility and is guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million
Swiss Francs from a bank. This loan bears interest at a fixed rate of 2.9% per
annum and matures in October 2000. These funds were used to repay certain
cross-currency intercompany obligations and to fund capital expenditures.
7. Employee Benefit Plans
Covance has several defined contribution plans covering substantially all
of its full-time employees. Contributions to these plans aggregated $9.4
million, $8.1 million and $6.6 million for 1998, 1997 and 1996, respectively.
36
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
8. Stockholders' Equity
Spin-off--Common Stock
Under the terms of the Spin-Off Distribution, shareholders 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, resulting in Covance
issuing approximately 56.2 million shares of its common stock.
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, 1998 no Covance Series Preferred Stock has been issued or is
outstanding.
Dividends--Common Stock
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 when after
giving effect to the payment of such dividends Covance would not be in
compliance with the financial covenants of the Credit Facility. While owned by
Corning, Covance paid to Corning dividends of $3.4 million during 1996.
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 Covance Stock Option Plan of the EEPP, which is administered by the Covance
Compensation and Organization 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 Covance Incentive Stock Plan of the EEPP authorizes the Covance
Compensation and Organization 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.
Covance also established in December 1996 an employee stock purchase plan
(the "ESPP") 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 ESPP, which is
administered by the Covance Compensation and Organization Committee, is
intended to give Covance employees the opportunity to purchase shares of
Covance Common Stock through payroll deductions. A maximum of 1.0 million
shares may be purchased by Covance employees under the ESPP. During 1998 and
1997, a total of 204,573 shares and 190,928 shares of common stock,
respectively, were issued under the ESPP.
From 1990 through 1996, certain employees of Covance were granted
incentive stock awards or options, or a combination thereof, 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 incentive share awards
made to Covance employees were replaced by substitute awards under a newly
established conversion equity plan (the "CEP"). The CEP 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,
37
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
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.
During 1998 and 1997, Covance recorded compensation expense of $1.7
million and $1.1 million, respectively, in connection with stock issued to
certain members of Covance's executive management under the Covance Incentive
Stock Plan. During 1996, certain members of Covance management participated in
various stock compensation programs sponsored by Corning resulting in Covance
recognizing compensation expense of $1.5 million.
Covance has adopted the disclosure-only provisions of FASB Statement No.
123 ("SFAS 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 123 for the stock option
awards and for the stock purchased by Covance employees under the ESPP or
Corning employee stock purchase program, as applicable, its net income in 1998,
1997 and 1996 would have been $39.5 million, $35.9 million and $10.8 million,
respectively, its basic and diluted earnings per share would have been $0.68
and $0.67, respectively, in 1998; its basic and diluted earnings per share
would both have been $0.63 in 1997; and its basic earnings per share would have
been $0.19 in 1996. The fair value of the Covance stock options used to compute
the 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 for 1998, 1997 and 1996, respectively:
expected volatility of 49.0%, 33.3% and 24.5%; risk free interest rate of
5.47%, 6.50% and 6.34%; and an expected holding period of seven years, seven
years and five years.
The following table sets forth Covance's stock option activity during 1998
and 1997, and during 1996 on a pro forma basis, the stock option activity for
the Covance stock options issued in replacement of the Corning stock options
under the CEP (grant dates are original Corning option grant dates):
The weighted average fair value of the stock options granted during 1998,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $12.42 per share.
38
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
The following table sets forth the status of all options outstanding at December 31, 1998:
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--$16.49 729.7 6.1 years $ 15.09 458.5 $ 14.63
$17.25--$24.56 3,097.8 8.5 years $ 20.10 850.4 $ 19.16
$25.81--$29.13 148.0 9.8 years $ 26.69 -- --
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 (accounting, legal and other
professional fees) incurred to effect the Spin-Off Distribution and to
establish Covance as a separate publicly traded entity. As a result of the ESOP
contribution, Covance recorded a one-time charge of $16.7 million, representing
the fair market value of the shares (approximately 855,000) issued into the
ESOP. The shares contributed were allocated among the plan participants based
upon a percentage of each employee's annual compensation.
9. Commitments and Contingent Liabilities
Minimum annual rental commitments under noncancellable operating leases,
primarily office and laboratory facilities in effect at December 31, 1998 are
as follows:
Year ended December 31,
---------------------------
1999 .................... $29,677
2000 .................... $26,301
2001 .................... $22,787
2002 .................... $13,900
2003 .................... $12,074
2004 and beyond ......... $60,011
Operating lease rental expense aggregated $27.0 million, $26.0 million and
$16.1 million for 1998, 1997 and 1996, respectively.
Covance has, and may from time to time in the future, enter into
build-to-suit operating lease arrangements. These transactions may allow
Covance to purchase the underlying facility and / or equipment or cancel the
lease arrangement on various dates over the lease term. In the event of
cancellation, Covance may be obligated under residual value guarantee
provisions of the leases. Covance has one lease arrangement whereby it has a
contingent residual value guarantee payment in the event that Covance
terminates the lease and the sale of the underlying facility and equipment
results in sales proceeds by the lessor in an amount less than the lessor's
unamortized investment in the lease arrangement. Under these circumstances,
Covance's maximum payment would approximate $35 million at the end of 1997 (the
first year of the lease) and decreases to approximately $25 million at the end
of 2006 (the tenth year of the lease), assuming Covance terminates the lease
and the sales proceeds received by the lessor were zero.
39
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
10. Segment Information
Covance has two reportable segments: early development and late-stage
development. The early development segment includes Covance's preclinical and
Phase I clinical service capabilities. The late-stage development segment
includes Covance's clinical and clinical support service capabilities. Early
development services involve evaluating the safety, early efficacy and
pharmacokinetic profile of a new compound. It is at this stage that a
pharmaceutical company, based on available data, will generally make a "go or
no-go" decision about the future development of a drug. Late-stage development
services are geared toward demonstrating the clinical effectiveness of a
compound, obtaining regulatory approval and maximizing the drug's commercial
potential.
Covance evaluates performance and allocates resources based on operating
earnings. The accounting policies of the reportable segments are the same as
those described in Note 2.
(a) Exclusive of a one-time spin-off related charge totaling $27.4 million.
40
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1998, 1997 and 1996
(Dollars in thousands, unless otherwise indicated)
11. Geographic Information
United United
States Kingdom Other Total
----------- ----------- ----------- -----------
Net revenues from external customers(1)
1998 ................................ $500,463 $118,820 $112,291 $731,574
1997 ................................ $402,642 $102,704 $ 85,305 $590,651
1996 ................................ $352,109 $ 85,057 $ 57,662 $494,828
Long-lived assets(2)
1998 ................................ $132,671 $ 75,009 $ 29,907 $237,587
1997 ................................ $101,170 $ 70,059 $ 21,900 $193,129
1996 ................................ $ 90,332 $ 59,071 $ 18,406 $167,809
---------
(1) Net revenues are attributable to geographic locations based on the physical
location where the services are performed.
(2) Long-lived assets represents the net book value of property, plant and equipment.
12. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information for 1998 and 1997:
First Second Third Fourth
Year Ended December 31, 1998 Quarter Quarter Quarter Quarter
------------------------------------------------- ------------- ------------- ------------- -------------
Net revenues ................................. $ 168,509 $ 182,089 $ 182,187 $ 198,789
Income from operations ....................... $ 20,314 $ 24,302 $ 24,275 $ 22,988
Net income ................................... $ 10,452 $ 12,868 $ 13,063 $ 12,225
Basic and diluted earnings per share ......... $ 0.18 $ 0.22 $ 0.22 $ 0.21
First Second Third Fourth
Year Ended December 31, 1997 Quarter Quarter Quarter Quarter
------------------------------------------------- ------------- ------------- ------------- -------------
Net revenues ................................. $ 135,723 $ 145,392 $ 151,464 $ 158,072
Income from operations ....................... $ 17,139 $ 20,222 $ 20,902 $ 19,397
Net income ................................... $ 8,627 $ 10,519 $ 10,859 $ 9,749
Basic and diluted earnings per share ......... $ 0.15 $ 0.18 $ 0.19 $ 0.17
41
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors.
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended.
(b) Identification of Officers.
Christopher A. Kuebler, 45, 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.
Richard J. Andrews, 51, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Andrews has served as President of
the Client Relations Group--Europe, since September 1998 and the Group
President of Central Laboratory Services ("Central Labs"), since June 1994 and
served as the President of Central Lab's Swiss operations ("CLS") since January
1993. Central Labs and CLS 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, 36, has been the Company's Controller since July 1996
and a Corporate Vice President since February 1998. From November 1996 to
February 1998, Mr. Giannetto was a Vice President of Covance. From March 1995
to July 1996, Mr. Giannetto was the Business Controller for Covance. 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. Prior to December
1992, Mr. Giannetto was a Senior Audit Manager for Deloitte & Touche.
Charles C. Harwood, Jr., 45, 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 January 1993, Mr. Harwood worked for seven years in
the field of commercial real estate development and six years with the
Hewlett-Packard Company in its Medical Products Division. Mr. Harwood also
serves as a director of several of Covance's subsidiaries.
Jeffrey S. Hurwitz, 38, 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. 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 several of Covance's subsidiaries.
Kim D. Lamon, M.D., Ph.D., 46, has been a Corporate Senior Vice President
of Covance since July 1996. In addition, Dr. Lamon has been the Group
President, Clinical Development Services since May 1996. From April 1994 until
May 1996, he was the Executive Vice President, Chief Medical Officer for Quest
Diagnostics Incorporated, an affiliate of the Company prior to the Distribution
Date, and Senior Vice President, Science and Technology for CLSI. 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.
Paul H. Sartori, Ph.D., 52, has been a Corporate Senior Vice
President--Human Resources of Covance since January 1999. From January 1997
through December 1998, Dr. Sartori was Executive Vice President of External
Affairs and Human Resources
42
for Novartis Corporation, a global life sciences company. From January 1995
through December 1996, Dr. Sartori was Senior Vice President--Human Resources &
Communications for the pharmaceuticals division of Ciba-Giegy Corporation and
from December 1988 to December 1994 he was Senior Vice President--Human
Resources of that division.
James D. Utterback, 43, has been a Corporate Senior Vice President of
Covance since July 1996 and President of the Client Relations Group--North
America and Asia of Covance since September 1998. From August 1996 to September
1998, Mr. Utterback was Group President, Global Ventures for Covance. From
August 1995 to August 1998, Mr. Utterback was also responsible for Covance's
global packaging operations and from May 1994 until August 1995, Mr. Utterback
was the Senior Vice President, Human Resources and Quality for CLSI. Prior to
May 1994, Mr. Utterback served in various executive capacities, including Chief
Executive Officer in South Africa, for RPR. 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, 47, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Wokasch has been the Group President,
Early Development Services since July 1995. Early Development Services provide
the Company's preclinical services and Phase I clinical 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.
Item 11. Executive Compensation
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership by Certain Beneficial Owners and Management of
Covance
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1999 Annual Meeting of Shareholders to be held on April 27,
1999, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report.
1. Financial Statements. The financial statements filed as part of this
report are listed on the Index to Consolidated Financial Statements on
page 25.
2. Financial Statement Schedules. Schedules are omitted because they are not
applicable or the required information is shown in the consolidated
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 Sciences Inc., Corning Clinical Laboratories
Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
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 Rights Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and Covance Inc.,
dated December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated December 31,
1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories Inc.,
December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance Inc., dated
December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended 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. Incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
10.6 Employee Stock Ownership Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
44
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
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 Amended and Restated Supplemental Executive Retirement Plan. Filed herewith.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.12 Non-Employee Directors' Amended and Restated Restricted Stock Plan. Filed herewith.
10.13 Directors' Deferred Compensation Plan, as amended. Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.15 Corporate Senior Vice President Employment Letters and Schedule. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's filing on a Registration Statement on Form
S-8, Registration No. 333-29467, filed with the SEC on June 18, 1997.
10.18 Non-Employee Directors' Stock Option Plan. Filed herewith.
10.19 Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors. Filed herewith.
10.20 Amendment No. 1 to Employment Agreement between Christopher Kuebler and Covance Inc. Filed herewith.
10.21 Amendment No. 1 to Corporate Senior Vice President Employment Letters. 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 PricewaterhouseCoopers LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).
(d) Financial Statement Schedules.
None.
45
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 4, 1999 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 Chairman of the Board March 4, 1999
-------------------------- President and Chief Executive Officer
Christopher A. Kuebler (Principal Executive Officer)
/s/ Charles C. Harwood, Jr. Corporate Senior Vice President March 4, 1999
-------------------------- and Chief Financial Officer
Charles C. Harwood, Jr. (Principal Financial Officer)
/s/ Michael Giannetto Corporate Vice President and Controller March 4, 1999
-------------------------- (Principal Accounting Officer)
Michael Giannetto
/s/ Robert M. Baylis Director March 4, 1999
--------------------------
Robert M. Baylis
/s/ Van C. Campbell Director March 4, 1999
--------------------------
Van C. Campbell
/s/ Irwin Lerner Director March 4, 1999
--------------------------
Irwin Lerner
/s/ J. Randall MacDonald Director March 4, 1999
--------------------------
J. Randall MacDonald
/s/ Nigel W. Morris Director March 4, 1999
--------------------------
Nigel W. Morris
/s/ Kathleen G. Murray Director March 4, 1999
--------------------------
Kathleen G. Murray
/s/ William C. Ughetta Director March 4, 1999
--------------------------
William C. Ughetta
46
EXHIBIT INDEX
Exhibit
Number Description
----- ----
2.1 Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical Laboratories
Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
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 Rights Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and Covance Inc.,
dated December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated December 31,
1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories Inc.,
December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance Inc., dated
December 31, 1996. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
ended 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. Incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
10.6 Employee Stock Ownership Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
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 Amended and Restated Supplemental Executive Retirement Plan. Filed herewith.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.12 Non-Employee Directors' Amended and Restated Restricted Stock Plan. Filed herewith.
10.13 Directors' Deferred Compensation Plan, as amended. Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
47
Exhibit
Number Description
----- --------------------------------------------------------------------------------------------------------------
10.14 Employment Agreement between Christopher Kuebler and Covance Inc. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.15 Corporate Senior Vice President Employment Letters and Schedule. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's filing on a Registration Statement on Form
S-8, Registration No. 333-29467, filed with the SEC on June 18, 1997.
10.18 Non-Employee Directors' Stock Option Plan. Filed herewith.
10.19 Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors. Filed herewith.
10.20 Amendment No. 1 to Employment Agreement between Christopher Kuebler and Covance Inc.
Filed herewith.
10.21 Amendment No. 1 to Corporate Senior Vice President Employment Letters. 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 PricewaterhouseCoopers LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).
48
Exhibit 10.10
Covance Inc.
Amended and Restated
Supplemental Executive Retirement Plan
Covance Inc.
AMENDED AND RESTATED
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I
INTRODUCTION
In recognition of the services provided to Covance Inc. by certain of its key
executives, the Board of Directors of Covance Inc. establishes this Supplemental
Executive Retirement Plan (the "Plan") for the purpose of providing supplemental
retirement income for each selected individual. The Plan is to be maintained and
operated according to the terms of this document. The Compensation and
Organization Committee of the Board of Directors of Covance Inc. shall have the
sole authority to manage and administer this Plan.
ARTICLE II
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
described below:
2.1 Accrued Benefit shall mean the amount of pension benefit payable
as a single life annuity as shall be considered earned at any time for a
Participant in accordance with the provisions of Article IV. Such pension
benefit shall be payable in the form chosen by the Participant pursuant to
Article VII.
2.2 Actuarial Equivalent shall mean a lump sum benefit of equivalent
value based on the applicable mortality rates, set back one year, and 120% of
the applicable interest rate, both as published by the Pension Benefit Guaranty
1
Corporation for purposes of determining the present value of a lump sum
distribution on plan termination. Such lump sum benefit shall be determined as
of the first day of the year prior to the Participant's date of retirement or
other termination of employment occurs. Application of such assumptions to the
computation of benefits payable under the Plan shall be made uniformly and
consistently with all respect to the Plan.
2.3 Board shall mean the Board of Directors of Covance Inc.
2.4 Change In Control shall mean:
(i) any person (including as such term is used in Section 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
beneficial owner, directly or indirectly, of Covance's securities
representing 20% or more of the combined voting power of Covance's
then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in
the aggregate), a majority of the individuals elected to serve on
Covance's Board of Directors are different then the individuals who
served on Covance's Board of Directors at any time within the two
years prior to such proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in
the aggregate); or
(iii) Covance shareholders approve a merger, or consolidation
(where in each case Covance is not the survivor thereof), or sale or
disposition of all or substantially all of Covance's assets or a plan
of partial or complete liquidation; or
(iv) an offerer (other than Covance Inc.) purchases shares of the
Covance's common stock pursuant to a tender or exchange offer for such
shares.
2.5 Code shall mean the Internal Revenue Code of 1986, as amended from
time to time.
2.6 Committee shall mean the Compensation and Organization Committee of
the Board of Directors.
2.7 Constructive Termination shall mean:
2
(i) a material breach by Covance of this Agreement, including,
without limitation, a reduction in your then current salary or the
percentage of base salary eligible for incentive compensation;
(ii) a diminution of your responsibilities, status, title or
duties hereunder;
(iii) a relocation of your work place which increases the
distance between your principal residence and your work place by more
than 25 miles;
(iv) a failure by Covance to provide you with benefits which are
as favorable to you in all material respects as those provided
immediately prior to the Change of Control; or
(v) the failure of any acquiror or successor in interest to the
business of Covance to agree in writing to be bound by the terms of this
Agreement within four months of any Change of Control.
2.8 Covance Inc. shall mean Covance Inc., a Delaware Corporation and any
successor thereto.
2.9 Disability shall mean a disability qualifying for benefits payable
under the Covance Inc. long-term disability plan under which the Participant is
covered.
2.10 Final Average Earnings shall mean the average of the sum of the
Participant's monthly Plan Compensation during the sixty (60) consecutive
calendar months (or the total number of months if less than sixty) within the
one hundred twenty (120) months (or the total number of months if less than 120)
immediately preceding the Participant's termination of employment with Covance
Inc., in which his Plan Compensation was the highest. In the case of a disabled
Participant, who is receiving disability benefits under any long term disability
insurance provided by Covance Inc., his Final Average Earnings shall be computed
based on his Plan Compensation immediately prior to becoming disabled.
2.11 Participant shall mean an individual who has been designated as a
Participant in this Plan under Section 3.1. In the event of the death or
3
incompetency of a Participant, the term shall mean his personal representative
or guardian.
2.12 Plan shall mean the Covance Inc. Supplemental Executive Retirement
Plan set forth in this document and as amended by Covance Inc. from time to
time.
2.13 Plan Compensation shall mean the base salary paid to a Participant
by Covance Inc. (including salary reductions which are deferred under Section
401(k) or 125 of the Code), plus annual bonuses.
2.14 Plan Year shall mean the calendar year.
2.15 Year of Service shall mean each full 12 consecutive months of
employment completed by a Participant as an employee of Covance Inc., or its
subsidiaries. In addition, the Years of Service of a Participant employed by
Covance Inc. on January 1, 1997 shall include all periods of service completed
with Corning Incorporated or its affiliates.
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. Any individual designated by the
Committee shall be eligible to participate in this Plan. The Committee may
delegate the authority to designate eligible employees to the Chief Executive
Officer. Plan Participants shall be limited to a select group of management and
highly compensated employees of Covance Inc. and its subsidiaries.
3.2 Commencement of Participation. Each individual who has satisfied the
requirements of Section 3.1 shall commence participation in the Plan upon
designation by the Committee as a Participant in the Plan.
4
ARTICLE IV
AMOUNT OF PENSION BENEFITS
4.1 Normal Retirement Benefits. A Participant who retires on or after
the completion of 20 Years of Service shall have an Accrued Benefit equal to 40%
of his Final Average Earnings payable on the attainment of age 60.
Notwithstanding the foregoing, a Participant employed with Covance Inc. on
January 1, 1997 who completes 15 Years of Service shall have an Accrued Benefit
equal to 40% of his Final Average Earnings payable on the attainment of age 60.
A Participant who retires or terminates employment prior to the
completion of 20 Years of Service shall have his Accrued Benefit reduced by
multiplying the Accrued Benefit by a fraction, the numerator of which is the
Participant's actual Years of Service and the denominator of which is 20.
Notwithstanding the preceding sentence, a Participant employed by Covance Inc.
on January 1, 1997 who retires or terminates employment prior to completion of
15 Years of Service shall have his Accrued Benefit reduced by multiplying the
Accrued Benefit by a fraction, the numerator of which is the Participant's
actual Years of Service and the denominator of which is 15.
A Participant who becomes Disabled shall be immediately eligible to
receive a benefit under the Plan.
A Participant's benefits determined under this Section shall be adjusted
in accordance with Section 4.2 or Section 4.3 if his Accrued Benefit becomes
payable at other than his attainment of age 60.
4.2 Early Retirement. A Participant who has been credited with five
Years of Service and has attained age 55 may, with Committee approval, elect to
retire before becoming eligible for normal retirement benefits. A Participant
who elects to retire and commence benefit payments prior to the attainment of
age 60, shall be subject to a reduction in his Accrued Benefit of 5% of the
amount of Accrued Benefit for each year payment of benefits occurs prior to the
Participant's attainment of age 60.
5
4.3 Late Retirement. A Participant who elects to retire and commence
benefit payments after age 60 will be entitled to an increase in his Accrued
Benefit of 5% of the amount of Accrued Benefit for each year benefit payments
are delayed beyond age 60. A Participant's Accrued Benefit will not be increased
for benefit payments that commence after age 65.
4.4 Service Crediting. Years of Service for purposes of determining the
amount of a Participant's Accrued Benefit and vesting shall be determined in
accordance with Section 2.14 of this Plan. In addition, a Participant may be
granted, at the discretion of the Committee, credit for years of service with a
previous employer for the purposes of determining his Accrued Benefit and
vesting. The Committee shall credit such service in writing at the time of the
Participant's commencement of participation in this Plan and shall have the
authority to require a reduction or offset of the Participant's Accrued Benefit
under this Plan by the amount of any retirement benefit provided to the
Participant under the plan or plans of the previous employer for which prior
service credit is given.
ARTICLE V
VESTING
5.1 Vesting of Benefits. A Participant shall become 100% vested in his
Accrued Benefit upon being credited with five Years of Service. In addition, a
Participant shall become 100% vested upon his Disability or death while still
employed by Covance Inc. or its subsidiaries.
ARTICLE VI
DEATH PRIOR TO RETIREMENT
6
6.1 Pre-Retirement Death Benefits for Married Participants. In the event
of the death of a married Participant whose death occurs while still in the
employ of Covance Inc. or its subsidiaries and after the completion of five
Years of Service, his surviving spouse shall be entitled to receive an amount in
the form of a lump sum payment which shall be fifty percent (50%) of the
Actuarial Equivalent of the Accrued Benefit the Participant would have been
eligible to receive under Section 4.1 adjusted in accordance with Sections 4.2
or 4.3, if applicable, had he retired on the day before his death. Such payment
will commence as of the date the Participant would have attained age 55, or if
later, as soon as administratively feasible after the Participant's death.
6.2 Pre-Retirement Death Benefit for Participants with Surviving
Children. In the event of the death of a Participant, who is survived by one or
more children, while the Participant is still in the employ of Covance Inc. or
its subsidiaries and after the completion of five Years of Service, his
surviving children shall be entitled to receive an amount in the form of a lump
sum payment which shall be fifty percent (50%) of the Actuarial Equivalent of
the Accrued Benefit the Participant would have been eligible to receive under
Section 4.1 adjusted in accordance with Sections 4.2 or 4.3, if applicable, had
he retired on the day before his death. The benefit described in the preceding
sentence shall be divided equally among the Participant's surviving children.
Such payment will occur as of the date the Participant would have attained age
55, or if later, as soon as administratively feasible after the Participant's
death.
6.3 No Other Pre-Retirement Death Benefits. Except as provided in
Sections 6.1 and 6.2, no other death benefits shall be payable under this Plan
in the event of the death of a Participant prior to retirement or termination of
employment.
ARTICLE VII
7
PAYMENT OF BENEFITS
7.1 Retirement. A Participant shall, upon his retirement, in accordance
with Article IV, be entitled to receive his Accrued Benefit in the form of one
of the following: a single life annuity payable monthly, quarterly or on an
annual basis; a lump sum equal to the Actuarial Equivalent of the Accrued
Benefit, calculated in accordance with Section 2.2; or a joint and 50% or 100%
survivor annuity actuarially reduced to reflect the joint life expectancies of
the Participant and his spouse.
7.2 Termination of Employment. A Participant who chooses to voluntarily
terminate his employment with Covance Inc. and it subsidiaries prior to the
completion of 5 Years of Service shall forfeit any Accrued Benefit.
7.3 Facility of Payment. Whenever, in the Committee's opinion, an
individual entitled to receive any payment of a benefit hereunder is under a
legal disability or is incapacitated in any way so as to be unable to manage his
financial affairs, Covance Inc. may make payments to the legal representative of
such person or to a relative or friend of such individual for his benefit or
apply the payment for the benefit of such individual as the Committee deems
advisable.
7.4 Change In Control. In the event of a Change in Control of Covance
Inc.:
(a) Each Participant in this Plan as of the date of the Change in
Control who is involuntarily terminated or experiences a Constructive
Termination during the three-year period following the Change in Control shall
be credited with three additional Years of Service and three additional years of
age for Accrued Benefit and vesting determination purposes; provided, however,
that such additional credit for these Participants shall be reduced by the
period of service and increase in age the Participant has completed and
experienced between the Change in Control and actual termination of employment.
(b) In the event this Plan is terminated at any time, each Participant
shall be credited with three additional Years of Service and three additional
8
years of age for Accrued Benefits and vesting determination purposes; provided,
however, that this Section 7.4(b) shall not apply to any Participant who has
received additional Years of Service and Years of Age pursuant to Section 7.4(a)
above.
(c) (i) Anything in this Plan to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by, to or for the
benefit of the Participant subsequent to a Change in Control (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Excise Tax"), then the Participant shall
be entitled to receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by such Participant of all taxes (including any Excise
Tax) imposed upon the Gross-Up Payment, the Participant retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(ii) All determinations as to whether a Gross-Up Payment is
required and the amount of such Gross-Up Payment, shall be made by the
accounting firm utilized by Covance Inc. for the preparation of its annual
external financial statements (the "Accounting Firm") which shall provide
detailed supporting calculations both to Covance Inc. and the Participant within
30 days of termination of the Participants's employment, if applicable, or such
earlier time as is requested by Covance Inc. The Gross-Up Payment, if any, as
determined pursuant to this Paragraph (b), shall be paid to Participant within
10 days of the receipt of the Accounting Firm's determination. Any determination
by the Accounting Firm shall be binding upon Covance Inc. and the Participant.
If subsequent final determinations of the Excise Tax made by the Internal
Revenue Service give rise to additional Excise Tax, then additional Gross-Up
Payments shall be made by Covance Inc. to the Participant within 10 days after
the notice is received by Covance Inc. of such final determination.
(iii) Participants shall notify Covance Inc. in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by Covance Inc. of a Gross-Up Payment. Such notification shall be given
as soon as practicable but no later than 10 business days after a Participant
learns
9
of such claim. Participant shall not pay such claim prior to the expiration of
the thirty-day period following the date on which Participant gives such notice
to Covance Inc. (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If Covance Inc. notifies a Participant
in writing prior to the expiration of such period that it desires to contest
such claim, Participant shall:
(A) give Covance Inc. any information reasonably
requested by Covance Inc. relating to such claim,
(B) take such action in connection with contesting such
claims as Covance Inc. shall reasonably request in writing from time to
time, including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by Covance Inc.,
(C) cooperate with Covance Inc. in good faith in order to
effectively contest such claim, and
(D) permit Covance Inc. to participate in any proceedings
relating to such claim;
provided, however, that Covance Inc. shall bear all costs and expenses incurred
in connection with such contest and shall indemnify and hold the Participant
harmless, on an after-tax basis, for any Excise Tax or income tax imposed as a
result of such contest or representation and payment of costs and expenses.
Covance Inc. shall control all proceedings taken in connection with such
contest. Covance Inc. may, at its sole option, either direct the Participant to
pay the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Participant shall prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as Covance Inc. shall determine; provided,
however, that if Covance Inc. directs a Participant to pay such claim and sue
for a refund, Covance Inc. shall advance the amount of such payment to such
Participant on an interest-free basis and shall indemnify and hold such
10
Participant harmless, on an after-tax basis, from any Excise Tax or income tax
imposed with respect to such advance.
(d) If, after the receipt by a Participant of an amount advanced by
Covance Inc. pursuant to Section 7.4(b)(iii), such Participant shall become
entitled to receive any refund with respect to such claim, such Participant
shall promptly pay to Covance Inc. the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If, after the
receipt by a Participant of an amount advanced by Covance Inc. pursuant to
Section 7.4(b)(iii), a final determination is made that such Participant shall
not be entitled to any refund with respect to such claim, then such advance
shall be forgiven and shall not be required to be repaid and the amount of such
advance shall offset the amount of Gross-Up Payment required to be paid.
ARTICLE VIII
AMENDMENTS AND TERMINATION
8.1 Amendments Generally. The Committee reserves the right to make any
amendment or amendments to this Plan from time to time which do not cause any
reduction in a Participant's Accrued Benefit at the time the amendment is
adopted or the effective date of the amendment, whichever is earlier. Any
amendment shall be made pursuant to a duly adopted resolution of the Committee.
8.2 Right to Terminate. The Committee may terminate the Plan at any time
in whole or in part. Termination of the Plan shall be made pursuant to a duly
adopted resolution of the Committee. In the event of termination, the Committee
may, at its option, pay each Participant the present value of his Accrued
Benefit at the time of termination of the Plan and make such payments in an
Actuarially Equivalent lump sum. In addition, the Committee may, at its option,
refrain from making payments to any Participant until such time and in such
manner as he would have been entitled to receive his Accrued Benefit
11
under the terms of the Plan as in effect on the date of termination.
Notwithstanding the foregoing, if the Plan terminates within three years of a
Change in Control, each Participant will be paid the Actuarial Equivalent of his
Accrued Benefit immediately. No termination of the Plan shall reduce a
Participant's Accrued Benefit as of the date of termination.
8.3 Funding Obligation. The obligation of Covance Inc. to pay any
benefits under this Plan shall be unfunded and unsecured; any payments under
this Plan shall be made from the general assets of Covance Inc.; provided,
however, in the event of a Change in Control Covance Inc. shall purchase an
annuity from a nationally recognized, credit worthy financial institution of
good reputation for the benefit of the plan in an amount sufficient to fund all
present and reasonably anticipated future obligations under the Plan.
Notwithstanding the foregoing, the Board, in its discretion, may authorize the
establishment of a rabbi trust or any other funding vehicle it deems appropriate
in order to set aside assets to discharge its obligations under this Plan.
ARTICLE IX
ADMINISTRATION AND INTERPRETATION
9.1 Interpretation. The Committee may take any action, correct any
defect, supply any omission or reconcile any inconsistency in the Supplemental
Executive Retirement Plan, or in any election hereunder, in the manner and to
the extent it shall deem necessary to carry the Plan into effect or to carry out
the Board's purposes in adopting the Plan. Any decision, interpretation or other
action made or taken in good faith by or at the direction of Covance Inc., the
Board, or the Committee, arising out of or in connection with the Plan, shall be
within the absolute discretion of all and each of them, as the case may be, and
shall be final, binding and conclusive on Covance Inc., and all Participants and
their respective heirs, executors, administrators, successors and assigns. The
Committee's determinations hereunder need not be uniform, and may be made
selectively among Participants, whether or not they are similarly situated. Any
actions to be taken by the Committee will require the consent of a majority
12
of the Committee members. If a member of the Committee is a Participant in this
Plan, such member may not decide or determine any matter or question concerning
his benefits under this Plan that such member would not have the right to decide
or determine if he were not a member.
9.2 Payment of Expenses. Covance Inc., and its subsidiaries, in such
proportions as the Committee determines, shall bear all expenses incurred by
them and by the Committee in administering this Plan. If a claim or dispute
arises concerning the rights of a Participant or Beneficiary to amounts payable
under this Plan, regardless of the party by whom such claim or dispute is
initiated, Covance Inc. shall pay all legal expenses, including reasonable
attorneys' fees, court costs, and ordinary and necessary out-of-pocket costs of
attorneys, billed to and payable by the Participant or by anyone claiming under
or through the Participant (such person being hereinafter referred to as the
"Participant's Claimant"), in connection with the bringing, prosecuting,
defending, litigating, negotiating, or settling of such claim or dispute;
provided, that:
(a) The Participant or the Participant's Claimant obtains a judgment in
its favor from a court of competent jurisdiction from which no appeal may be
taken, whether because the time to do so has expired or otherwise; and provided
further, that
(b) In the case of any claim or dispute initiated by a Participant or
the Participant's Claimant, such claim shall be made, or notice of such dispute
given, with specific reference to the provisions of this Plan, to the Committee
within two years (three years, in the event of a Change in Control) after the
occurrence of the event giving rise to such claim or dispute.
9.3 Indemnification for Liability. Covance Inc. shall indemnify the
members of the Committee, against any and all claims, losses, damages, expenses
and liabilities arising from their responsibilities in connection with this
Plan, unless the same is determined to be due to gross negligence or willful
misconduct.
13
9.4 Claims Procedure. If a claim for benefits or for participation under
this Plan is denied in whole or in part, a Participant will receive written
notification. The notification will include specific reasons for the denial,
specific reference to pertinent provisions of this Plan, a description of any
additional material or information necessary to process the claim and why such
material or information is necessary, and an explanation of the claims review
procedure. If the Committee fails to respond within 90 days, the claim is
treated as denied.
9.5 Review Procedure. Within 60 days after the claim is denied or, if
the claim is deemed denied, within 150 days after the claim is filed, a
Participant (or his duly authorized representative) must file a written request
with the Committee for a review of his denied claim or the denial shall be
considered final and no appeal may be taken. The Participant may review
pertinent documents that were used in processing his claim, submit pertinent
documents, and address issues and comments in writing to the Committee. The
Committee will notify the Participant of its final decision in writing. In its
response, the Committee will explain the reason for the decision, with specific
references to pertinent Plan provisions on which the decision was based. If the
Committee fails to respond to the request for review within 60 days, the review
is treated as denied.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Right of Covance Inc. to Take Employment Actions. The adoption and
maintenance of this Plan shall not be deemed to constitute a contract between
Covance Inc. and any eligible Participant, nor to be a consideration for, nor an
inducement or condition of, the employment of any person. Nothing herein
contained, or any action taken hereunder, shall be deemed to give any eligible
Participant the right to be retained in the employ of Covance Inc. or to
interfere with the right of Covance Inc. to discharge any eligible Participant
at any time, nor shall it be deemed to give to an Employer the right to require
the eligible Participant to remain in its employ, nor shall it interfere with
the eligible
14
Participant's right to terminate his or her employment at any time. Nothing in
this Plan shall prevent Covance Inc. from amending, modifying, or terminating
any other Covance Inc. benefit plan.
10.2 Alienation or Assignment of Benefits. A Participant's rights and
interest under the Plan shall not be assigned or transferred except as otherwise
provided herein, and the Participant's rights to benefit payments under the Plan
shall not be subject to alienation, pledge or garnishment by or on behalf of
creditors (including heirs, beneficiaries, or dependents) of the Participant or
of a Beneficiary. Notwithstanding the preceding, the Committee may direct
distributions to an alternate payee pursuant to a Qualified Domestic Relations
Order (QDRO), as defined in Section 414(p) of the Code prior to any distribution
date described in Article IV.
10.3 Applicable Law. This Plan shall be construed and enforced in
accordance with the laws of Delaware except to the extent superseded by the
Employee Retirement Income Security Act of 1974, as amended.
10.4 Number and Gender. Whenever any words used herein are in the
singular form, they shall be construed as though they were also used in the
plural form in all cases where they would so apply, and references to the male
gender shall be construed as applicable to the female gender where applicable,
and vice versa.
10.5 Accelerated Distributions. In the event Federal income is
accelerated on the value of future prospective benefits due to a determination
by the Internal Revenue Service, the Participant may at his election receive an
immediate distribution of the amount necessary to pay the tax obligation due
currently. The Participant's Accrued Benefit under the Plan will be reduced to
reflect the accelerated distribution.
15
To record the adoption of the Plan, Covance Inc. has caused its
authorized officers to affix its corporate name and seal effective November 10,
1998.
Amended and Restated Restricted Stock Plan
For Non-Employee Directors
1. Purpose
The Restricted Stock Plan for Non-Employee Directors (the "Plan") is to be a
part of the compensation paid by Covance Inc. (the "Corporation") for
service as a director to individuals who are not employees of (i) the
Corporation, (ii) any subsidiary corporation of the Corporation within the
meaning of Section 425 (f) of the Internal Revenue Code of 1986, as amended
(the "Code") or of any successor section (a "Subsidiary") or (iii) any other
entity in which the Corporation has at least one half of the ownership
interest (such persons being referred to herein as "Non-Employee
Directors"). The Plan is intended to establish the proprietary interest of
the Non-Employee Directors, as owners of additional shares of the common
stock of the Corporation, in the Corporation's success and progress.
2. Administration
The plan shall be administered by the Compensation and Organization
Committee ("the Committee") of the Board of Directors of the Corporation,
which shall consist of at least three directors who together shall have the
authority to adopt rules and regulations for carrying out the Plan and to
interpret, construe and implement the provisions of the Plan. The Committee
may obtain such advice or assistance as it deems appropriate from persons
not serving on the Committee.
3. Eligibility
Any Director of Covance Inc. (the "Company") who is not an officer or
employee of the Company or a subsidiary thereof is eligible to participate
in the Plan.
4. Restricted Stock
The stock subject to grant under the Plan shall be limited to shares of the
Corporation's Common Stock, from the authorized and unissued Covance Board
approved pool of 105,000 of Covance Inc. Common Stock.
5. Recapitalization
The number of units in the participant's market value account shall be
proportionally adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a subdivision or
consolidation of
shares or other capital adjustment, or the payment of a stock dividend or
other increase or decrease in such shares effected without receipt of
consideration by the Company, or any distribution or spin-off assets (other
than cash) to the stockholders of the Company.
6. Terms of Grant
a) Issuance - Each individual upon becoming a Non-Employee Director, and
eligible to participate in the Plan pursuant to Section 3 hereof, shall be
issued by the Corporation one or more certificates representing in the
aggregate Two Thousand (2,000) shares of the Common Stock of the
Corporation, which shares shall be issued and subject to the provisions of
the Plan.
b) Restrictions on Transfer - All shares granted to a Participant shall be
subject to restriction on transfer so long as the Participant remains a
Non-Employee Director and may not be sold, assigned, transferred, pledged or
otherwise encumbered while the Participant is a Non-Employee Director.
c) Forfeitability - Except as set forth in the next paragraph, in the event the
Participant ceases to be a Non-Employee Director of the Corporation, all
shares of Common Stock granted to him under the Plan shall be forfeited and
all rights of the Participant to such shares shall terminate without
further obligation on the part of the Corporation; provided however, if
such cessation is on account of death or medical or health reasons which
render the Participant unable to perform the duties and responsibilities
owed to the Corporation in his capacity as a Director, the possibility of
forfeiture shall lapse in its entirety and all such shares shall be vested
in him.
d) Vesting - Shares granted as the initial award of 2,000 Covance common shares
shall be subject to the possibility of forfeiture until the date on which
the Participant terminates service as a Non-Employee Director with the
affirmative consent of a majority of the members of the Board of Directors,
which consent (i) shall be given upon such termination of service following
the Participant's having reached age 72 and/or (ii) may be given following
the Participant's having completed six years (cliff vesting) of service as
a Non-Employee Director (including service as such prior to the date of
initial grant) and having terminated service for reasons or under
circumstances approved by a majority of the Committee. If a Participant
terminates service as a Non-Employee Director prior to meeting the
requirements set forth in the preceding sentence, the Board of Directors
may, in its sole discretion, remove the restrictions on transfer and the
possibility of forfeiture from such number of shares held by the
Participant under the Plan as it determines is equitable; provided,
however, such number shall not exceed an amount based upon the ratio that
the number of years of service as a Non-Employee Director at the time of
termination
(including service prior to the date of initial grant) bears to six years
(cliff vesting) service as a Director. In addition, all Shares shall become
immediately vested as of the date on which there is a "Change in Control"
of the Corporation. For this purpose, a "Change in Control" shall be deemed
to have occurred upon the earliest to occur of the following: (i) the date
the Corporation becomes a party to a merger, consolidation, or sale of
substantially all of its assets or any other corporate reorganization in
which the Corporation will not be the surviving corporation, or in which
the holders of the Corporation's Common Stock will receive securities of
another corporation, (ii) the purchase by an individual, or group of
individuals acting in concert, of at least twenty percent of the voting
securities of the Corporation, or (iii) during any twenty-four month
period, individuals who at the beginning of such period constituted the
Board of Directors cease for any reason to constitute a majority thereof.
e) Certificates - Each certificate representing the shares of Common Stock
awarded hereunder may be stamped or otherwise imprinted on the face thereof
with a legend in substantially the following form: "The shares represented
by this certificate have not been registered under the Securities Act of
1933. This certificate and the shares represented hereby are subject to the
possibility of forfeiture under, and may be sold, transferred, or otherwise
disposed of only in accordance with, the terms of the Restricted Stock Plan
for Non-Employee Directors of Covance Inc., a copy of which Plan is on file
in the office of the Secretary of Covance, Princeton, New Jersey.
f) Possession - Each certificate issued with respect to the shares of Common
Stock granted pursuant to the Plan shall be registered in the name of the
Participant but shall be held by the Corporation for safekeeping until
possibility of forfeiture and the restriction on transfer of the shares
lapse pursuant to the terms of the Plan. After the possibility of
forfeiture and the transfer restrictions applicable to shares registered in
the name of a Participant shall have lapsed, the Corporation shall deliver
to the Participant or to the Participant's beneficiary or estate one or
more certificates representing the number of shares then vested in the
Participant and free of restrictions.
7. Amendment of the Plan
The Board of Directors may from time to time alter, amend, suspend, or
discontinue the Plan, except that no alteration or amendment (i) to the
provisions of Section 6 hereof shall be made more often than once in any six
month period and (ii) shall, without the approval of the holders of a
majority of the outstanding shares of Common Stock of the Corporation
entitled to vote thereon, provide for the grant of Common Stock from shares
authorized and unissued.
8. Miscellaneous
a) Nothing in the Plan shall be deemed to create any obligation on the part of
the Board of Directors to nominate any director for re-election by the
Corporation's stockholders.
b) The Corporation shall have the right to require, prior to delivery of any
shares granted hereunder, payment by the Participant of cash or shares of
Common Stock of the Corporation to cover such taxes as are required by law
with respect to the issuance or delivery of such shares.
9. Effective Date and Term of Plan
The Plan shall become effective on 16 March 1998 when approved by the vote of
the Board of Directors of the Corporation and shall continue until terminated by
such Board.
Exhibit 10.16
COVANCE WAY
COVANCE INC.
VARIABLE COMPENSATION PLAN
1. Purpose. The purpose of the Covance Inc. Variable Compensation Plan (as
amended, modified or supplemented, from time to time, the "Plan") is to reward
participating employees of Covance Inc. ("Covance") and its subsidiaries
(collectively, the "Company") for the attainment of superior performance. The
Plan does not constitute an amendment, supplement or modification of any
individual employment agreement between the Company and an employee or to that
certain Asset Purchase Agreement dated as of March 15, 1996 among Covance and
the parties specified therein with respect to the earning or payment of variable
or bonus compensation.
2. Eligibility. Variable compensation awards under the Plan may be made to
individuals who are full-time employees of the Company (including executives or
managers of the Company) provided, that (1) the employee is employed with the
Company on or before October 1 of the performance year in question, except as
specified below, and (2) the employee is employed by the Company both as of
December 31 of the performance year in question and on the date that the
variable compensation award for the performance year in question is actually
paid, except as specified below; provided, further, that (a) with respect to
clause (1) above, in the event an individual is employed by the Company (i) on
or after October 1 for the performance year in question but otherwise satisfies
the eligibility or performance requirements of the Plan, then the Committee may
approve a variable compensation award for such individual based on the chief
executive officer's ("CEO") recommendation or (ii) after January 1 of the
performance year in question but before October 1 of such year and otherwise
satisfies the eligibility or performance requirements of the Plan, then such
employee's variable compensation award, if any, shall be prorated based on the
actual service provided by the employee for
the performance year in question based either on time worked or base pay earned
and (b) with respect to clause (2) above, in the event any employee who leaves
the Company during the performance year in question or prior to the date the
variable compensation award for such performance year is paid, in each case as a
result of death, disability or retirement with the consent of Covance, any such
award or payment shall be prorated based on actual service provided by the
employee for the performance year in question based on time worked or base pay
earned in the performance year in question. In all cases any variable
compensation awards under the Plan will be based on actual service provided by
the employee for the performance year in question based on time worked or base
pay earned in the performance year in question. The term "subsidiary" means any
corporation in an unbroken chain descending from the parent company, where each
corporation, other than the last in the chain, owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in the chain.
3. Administration/Disputes. The Compensation Committee of the Covance Board of
Directors (the "Committee"), or a subcommittee of such committee, consisting of
at least two members who qualify as outside directors under applicable Internal
Revenue Code and Securities and Exchange Commission (the "SEC") rules, codes and
regulations, shall manage and administer the Plan. No member of the Committee
shall be eligible for awards under the Plan. The Committee may adopt policies,
rules and regulations that it deems necessary for governing, managing or
administering the Plan. It may take action either by a majority vote of its
members in attendance provided there is a quorum, or by an instrument in writing
signed by all members without a meeting. Members of the Committee shall not be
liable for any act or omission in their capacities as such members, except for
bad faith, gross negligence or intentional misconduct or inaction. Any dispute
or disagreement which shall arise under, or as a result of, or pursuant to, this
Plan shall be finally determined by the Committee in its absolute and
uncontrolled discretion, and any such determination or any other determination
by the Committee under or pursuant to this
2
Plan and any interpretation by the Committee of the terms of this Plan, shall be
final, binding and conclusive on all persons affected thereby.
4. Performance Year. Each consecutive twelve month period from January 1 through
December 31 shall be treated as a separate performance year for the purpose of
the Plan.
5. Covance Bonus Pool. The Committee shall approve at the beginning of each
performance year in question, or as soon as practicable thereafter, but in no
event later than the date that is 90 days after the beginning of such
performance year, the minimum and maximum aggregate amount of money available
for variable compensation under the Plan and the target aggregate variable
compensation awards in each case based on a financial target such as pre-tax and
pre-bonus income of the Company (the "Bonus Pool"). The Bonus Pool shall be
allocated among Covance's corporate group (such group, other than the CEO and
executive management (including the Corporate Senior Vice Presidents), being,
"Covance Corporate"), various divisions, Business Units and Operating Groups and
the CEO and executive management (including the Corporate Senior Vice
Presidents) as specified in Paragraph 8.
6. Scorecards. (a) Executive/Business Units/Operating Groups/Scorecards. Within
the time limit specified in Paragraph 5, the CEO shall approve a "scorecard" of
objectives to be achieved during the performance year for each Business Unit or
Operating Group of the Company (other than the Non-Scorecard Business Units, as
defined in Paragraph 7). Such objectives may be based on a variety of business
criteria, including financial performance, such as operating margin, pre-tax
income, or revenue, and other criteria, all or some of which may be applicable
to all of the Company or only to the Business Unit or Operating Group.
(b) Individuals. (i) Objectives. Within the time period specified in
Paragraph 5, the Committee shall approve the objectives for the performance year
in question of the
3
CEO and the CEO shall approve the objectives of his direct reports, including
the Corporate Senior Vice Presidents. In the case of the CEO and his executive
management team, including the Corporate Senior Vice Presidents, such objectives
shall be based on a variety of criteria, including financial performance, such
as operating margin, pre-tax, pre-bonus operating margin, revenue or earnings
per share and other criteria which are of the category type (as opposed to the
actual objectives) specified in the scorecards of the Business Units and
Operating Groups.
The Committee shall also review and approve by category employees who shall
be subject to individual performance objectives for the performance year in
question. Such objectives shall be in form and substance acceptable to such
employee's supervisor or senior management, as applicable, and completed within
the time period specified in Paragraph 5. The Committee shall also designate
employees by category who shall not be required to provide such objectives.
(ii) Variable Compensation Targets. The Committee will establish a
variable compensation target for each level of participating employee by
category of position reflected as a percentage of an employee's base pay earned
during the performance year in question (the "Employee Bonus Percentage", and
the product of an employee's base pay earned during the performance year and the
applicable Employee Bonus Percentage is, the "Employee Bonus Target Amount").
(iii) Performance Ratings. The Committee shall establish performance
assessment categories for both employees with and without objectives and the
impact, in each case, of such performance assessment on such individuals'
variable compensation award, if any, under the Plan.
7. Non-Scorecard Business Units. Covance Corporate and the Business Units
approved by the CEO (individually, a "Non-Scorecard Business Unit" and,
collectively,
4
the "Non-Scorecard Business Units") shall not be required to prepare
"scorecards". Instead, the CEO shall approve within the time period specified in
Paragraph 5 financial targets for such Non-Scorecard Business Units for the
performance year in question and the amount of variable compensation each such
Non-Scorecard Business Units would be eligible for in the aggregate if its
applicable financial target is achieved for the performance year in question.
8. Computations. (a) Measurement. The Committee shall certify in writing before
the payment of any variable compensation under the Plan the amount of the actual
Bonus Pool for the applicable performance year and whether the objectives of
Covance's CEO has been satisfied for the performance year in question. Further,
Covance's CEO shall assess the performance of the Business Units and Operating
Groups and his executive management, including the Corporate Senior Vice
Presidents, compared to their applicable scorecards or objectives and, as more
fully specified in Paragraph 8(c), whether the performance targets for the
Non-Scorecard Business Units have been satisfied, in each case, for the
performance year in question and shall, at the Committee's request, review such
assessments with the Committee. Approved minutes of the Committee shall satisfy
the foregoing requirement. In calculating the amount of the actual Bonus Pool as
of the end of the performance year in question and assessing whether the
scorecards and objectives and the financial targets for the Non-Scorecard
Business Units, in each case, have been satisfied, in whole or in part, as
applicable, or exceeded on a basis consistent with circumstances existing when
the budgeted Bonus Pool, such scorecards and objectives and the financial
targets for the Non-Scorecard Business Units, in each case, were established,
the Committee or the CEO, as applicable, may include or exclude, as applicable,
the effect on the Bonus Pool, the scorecards and objectives and the financial
targets for the Non-Scorecard Business Units arising from any acquisition of the
stock or assets of any other person or entity, the divestiture of all or any of
the Company's businesses, restructurings, strategic expenditures by Covance
identified to the Covance Board of Directors as such, force majeure events,
material
5
litigation, any adjustment to the Bonus Pool financial target, where such target
is based on pre-bonus and pre-tax income, necessary to achieve the budgeted
earnings per share target for the performance year in question based on the
actual results for the performance year in question for items below the pre-tax
line on the income statement such as taxes, equity earnings and the weighted
average shares outstanding, changes in tax laws or accounting practices, or any
other unexpected or unforeseen extraordinary event or occurrence during the
performance year; provided, however, that with respect to Company employees who
meet the definition of "covered employee" under Section 162(m) of the Internal
Revenue Code, as amended from time to time and the regulations thereunder the
Committee shall not increase the amount of compensation payable to such employee
that would otherwise be paid based upon attainment of the scorecards in
question.
(b) Bonus Pool Allocations - CEO Discretionary Awards. The CEO shall have
the discretion and authority to allocate up to $500,000 of the Bonus Pool (the
"Discretionary Bonus") to any individual who is not a Corporate Vice President
or higher or to any of the Business Units (including the Non-Scorecard Business
Units) or Operating Groups based on his sole and absolute judgment that such
individual or entity has made a significant contribution to the Company's
success or for some other compelling business reason. Such Discretionary Bonus
shall not be paid until (1) the CEO has advised the Committee of his rationale
for such award and (2) the other amounts payable under the Plan have been paid.
(c) Bonus Pool Allocations - Non-Scorecard Units. The CEO shall review the
Non-Scorecard Business Units' financial results after the completion of the
performance year in question. In the event that such Non-Scorecard Business
Units either do better or worse than the financial target specified for such
Non-Scorecard Business Unit, then the CEO shall determine and approve the amount
from the Bonus Pool, if any, that should be allocated to each such Non-Scorecard
Unit, if any.
6
(d) Bonus Pool Allocations - Covance Corporate. Covance Corporate employees
shall be awarded a variable compensation amount under the Plan equal to the
product of (1) a fraction, (x) the numerator of which is the Bonus Pool and (y)
the denominator of which is the 1x Bonus Pool (as hereinafter defined), (2) such
Covance Corporate employee's Employee Bonus Target Amount and (3) such
employee's bonus payout percentage, determined in accordance with such
employee's performance rating. "1x Bonus Pool" means the aggregate amount of
variable compensation that would accrue under the Plan if the Company earned
100% of the financial target approved by the Committee for the applicable
performance year; provided that the foregoing amount shall be adjusted for the
actual number of employees who are actually employed by the Company both as of
December 31 of the performance year in question and the date that variable
compensation under the Plan is actually paid for the performance year in
question, their length of service during the performance year in question, and
the actual time worked or base pay earned during the performance year in
question.
(e) Bonus Pool Allocations - CEO and Executive Management. Part I of
Appendix 1 sets forth the components of the variable compensation awards under
the Plan for any given performance year for the CEO and executive management
(including the Corporate Senior Vice Presidents). Part II of Appendix 1 sets
forth the method for computing such awards based on actual Company financial
performance.
(f) Bonus Pool Allocations - Business Units/Operating Groups. The amount of
the Bonus Pool that shall be available for allocation to the Business Units and
Operating Groups for a given performance year shall be the difference between
(1) the actual Bonus Pool for such performance year and (2) the sum of the
variable compensation awards determined pursuant to Paragraphs 7(b) - (e) above
(the foregoing sum being, the "Bonus Deductions"). Appendix 2 sets forth the
methodology for determining a Business Unit's or Operating Group's actual
allocable share of the Bonus Pool (after giving effect to the Bonus Deductions)
for the performance year in question (such variable compensation
7
amount being for each such Business Unit or Operating Group, a "Business Unit
Actual Bonus Pool").
(g) Bonus Pool Allocations - Individuals. Except in the case of the CEO and
the members of executive management (including Corporate Senior Vice Presidents)
and all employees of Covance Corporate, actual variable compensation awards
under the Plan to all employees of the Company are determined as set forth in
Appendix 3; provided, however, that with respect to employees who are not
Corporate Vice Presidents of the Company or higher, the CEO shall have the
authority to adjust, after consultation with appropriate members of management,
any individual's variable compensation award under the Plan; provided, further,
however, that in no event shall the aggregate amount of the variable
compensation payments to a Business Unit or Operating Group for a given
performance year exceed such Business Unit's or Operating Group's allocable
share of the Bonus Pool, nor shall the aggregate of the variable compensation
awards to all employees under the Plan for a given performance year exceed the
actual Bonus Pool earned for such performance year.
(h) Prorations. In furtherance of the second provisio of Paragraph 8(g),
the computation of any individual variable compensation award to any employee
under this Plan (including the CEO and executive management) shall be prorated
for the aggregate effect of individual performance assessments that, without
giving effect to such proration, would result in variable compensation awards
that would otherwise exceed the amount of the actual Bonus Pool for the
performance year in question.
9. Maximum Variable Compensation Award Payout. In no event shall any individual
receive more than 200 percent of such individual's variable compensation target.
8
10. Payment of Awards. Variable compensation awards earned under the terms of
the Plan in excess of specified base levels may at the discretion of the
Committee, after consultation with Covance's management, be paid in cash, or in
stock options through the Employee Equity Participation Plan, or both. Payment
will be made as soon as practicable after the performance year in question, but
no later than each March 15 following the close of the applicable performance
year. Individuals may elect to defer payment of the variable compensation awards
in the event the Company has established a deferred compensation plan for
employees on the terms and conditions of such deferred compensation plan.
11. GOVERNING LAW; BINDING EFFECT. THIS PLAN SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY (WITHOUT REGARD TO THE
CONFLICT OF LAW PROVISIONS THEREOF) AND ALL QUESTIONS CONCERNING THE VALIDITY
AND CONSTRUCTION THEREOF SHALL BE GOVERNED IN ACCORDANCE WITH THE LAWS OF SAID
STATE; PROVIDED, HOWEVER, THAT ALL MATTERS OF CORPORATE GOVERNANCE AND OTHER
CORPORATE MATTERS CONCERNING DELAWARE CORPORATIONS SHALL BE GOVERNED BY THE
DELAWARE GENERAL CORPORATION LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN,
THIS PLAN SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES HERETO,
THEIR LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS.
12. Termination of Employment. Participation in the Plan does not create a
contract of employment, nor grant any employee of the Company the right to be
retained in the service of, or otherwise employed by, the Company. Individuals
will not receive a variable compensation award under this Plan for the
performance year in which their employment terminates for any reason or if they
are terminated for any reason prior to the date the variable compensation is
actually paid for the performance year in question, except as otherwise provided
in Paragraph 2 hereof. Without limitating the foregoing or
9
Paragraph 2 hereof, any individual whose employment is terminated for
wrongdoing, including, but not limited to, a violation of the Company's Business
Integrity Program, including the Code of Conduct, will forfeit all rights to
payment under this Plan.
13. Effective Date. The Plan will take effect as of January 1, 1999 and
supersedes in their entirety the Covance Way Covance Inc. Variable Compensation
Plan, as amended, effective January 1, 1998, the Covance Inc. Variable
Compensation Plan, as amended, and effective January 1, 1997, the Covance Inc.
General Employee Variable Compensation Plan, as amended, and effective January
1, 1997 and the Covance Biotechnology Services Inc. Variable Compensation Plan,
as amended, and effective January 1, 1997.
14. Amendment, Suspension, or Termination. The Board or Committee may, at any
time, suspend, terminate or amend the Plan, in such respects as the Board or
Committee deems to be in the best interest of the Company. No amendment will
adversely affect any right of any grantee, or his successors in interest, to
keep any variable compensation award actually made hereunder before the
effective date of the amendment. Plan deferrals, if any, in effect at the Plan's
termination remain in effect according to their original terms.
10
APPENDIX 1
COMPONENTS, ADJUSTMENTS AND COMPUTATIONS
OF EXECUTIVE MANAGEMENT
VARIABLE COMPENSATION AWARDS
Part I. Components
A. CEO and STAFF EXECUTIVE MANAGEMENT (e.g., CORPORATE SENIOR
VICE PRESIDENTS)
o 50% of variable compensation award is based on satisfaction of
objectives specified in individual objectives (which objectives
shall include an earnings per share target).
o 50% of variable compensation awards is based on satisfaction of
targeted Covance pre-tax and pre-bonus income as specified for
the applicable performance year.
B. OPERATIONS EXECUTIVE MANAGEMENT (e.g., CORPORATE SENIOR
VICE PRESIDENTS who are GROUP PRESIDENTS)
o 50% of the variable compensation award based on satisfaction of
objectives specified in individual objectives.
o 50% of the variable compensation award is based on satisfaction
of targeted Covance pre-tax and pre-bonus income as specified for
the applicable performance year.
Part II. Methodology
The CEO or any member of Executive Management (e.g., Corporate Senior Vice
Presidents) shall be awarded a variable compensation amount under the Plan equal
to the sum of (1) an amount equal to the product of (w).5, (x) such executive's
Employee Bonus Target Amount, (y) such executive's bonus payout percentage,
determined in accordance with such executive's performance rating and (z) a
fraction (i) the number of which is the actual Bonus Pool and (ii) the
denominator of which is the 1x Bonus Pool, as adjusted, and (2) an amount equal
to the product of (x) .5, (y) such executive's Employee Bonus Target Amount and
(z) a fraction (i) the numerator of which is the actual Bonus Pool and (ii) the
denominator of which is the 1x Bonus Pool, as adjusted.
11
APPENDIX 2
BONUS POOL ALLOCATION
METHODOLOGY
Methodology: The CEO shall review and determine a Business Unit's or
Operating Group's performance against its scorecard after the completion of the
performance year in question. The scorecard point total shall be determined by
assessing the Business Unit's or Operating Group's scorecard performance in two
areas: "earnings" and "other". With respect to "earnings", the Business Unit or
Operating Group will earn 90 points if it meets the earnings target specified
in its scorecard and 10 points if it meets, in their totality, the "other"
targets specified in its scorecard. Achieving total targeted performance for the
Business Unit or Operating Group results in a total of 100 points. A Business
Unit's or Operating Group's actual performance against either the "earnings" or
"other" targets will result in a scorecard point adjustment as specified below:
(1) A Business Unit or Operating Group scores the maximum of 110 points for the
"earnings" category if it achieves 120% of its earning's target, as specified in
its scorecard (such entity gets 1 additional point for each 1% over its earnings
target), and a minimum of 50 points by achieving 80% or less of its earnings
target (i.e., such entity loses 2 points for each 1% deficiency to its earnings
target).
(2) A Business Unit or Operating Group can earn as low as zero points for
failure to achieve its "other" targets in their totality as specified in its
scorecard and up to 20 points for exceeding such targets in their totality.
12
APPENDIX 3
INDIVIDUAL EMPLOYEE PAYOUT METHODOLOGY
Methodology
Any employee of the Company, except as specified in Paragraph 8(g) of the Plan,
will be paid a variable compensation amount under the Plan equal to the product
(1) a fraction, (a) the numerator of which is the Employee Theoretical Bonus
Amount (as hereinafter defined) and (b) the denominator of which is the sum of
the Business Unit's or Operating Group's Employee Theoretical Bonus Amounts and
(2) the Business Unit Actual Bonus Pool.
"Employee Theoretical Bonus Amount" means the product of the Employee Bonus
Target Amount and the individual's bonus payout percentage, determined in
accordance with the individual's performance rating as specified under the Plan.
Variable
Compensation
Award = (Actual Bonus Pool) x (Employee's Bonus Target Amount) x (Employee's Performance Rating)
------------------
1 x Bonus Pool
Variable
Compensation
Award = ($23,350,000) x ($30,000) x (1.2)
-----------
($21,900,000)
Variable Compensation Award = (1.066) x ($30,000) x (1.2) = $38,376.56(2)
(1) This assumes, in reference to Appendix A, that there are fewer employees on
the bonus payment date than budgeted at the time Appendix A was adopted or that
there has been higher turnover than budgeted, or that there is a less costly mix
of wages and salaries than budgeted.
(2) This example assumes that no proration was required because of inflated
performance assessments as specified in Paragraph 8(h) of the Plan.
14
Exhibit 10.18
COVANCE INC.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. The purpose of the Plan is to retain the services of
qualified individuals who are not employees of the Company to serve as members
of the Board and to secure for the Company the benefits of the incentives
inherent in increased Common Stock ownership by such individuals by granting
such individuals Options to purchase shares of Common Stock.
2. Administration. The Administrator will be responsible for
administering the Plan. The Administrator will have authority to adopt such
rules as it may deem appropriate to carry out the purpose of the Plan, and shall
have authority to interpret and construe the provisions of the Plan and any
agreements and notices under the Plan and to make determinations pursuant to any
Plan provision. Each interpretation, determination or other action made or taken
by the Administrator pursuant to the Plan shall be final and binding on all
persons. The Administrator shall not be liable for any action or determination
made in good faith, and shall be entitled to indemnification and reimbursement
in the manner provided in the Company's Restated Articles of Incorporation and
By-Laws, as such documents may be amended from time to time.
3. Shares Available. Subject to the provisions of Section 7(b) of the
Plan, the maximum number of shares of Common Stock which may be issued under the
Plan shall not exceed the Section 3 Limit. Either authorized and unissued shares
of Common Stock or treasury shares may be delivered pursuant to the Plan. For
purposes of determining the number of shares that remain available for issuance
pursuant to the Plan, (i) the number of shares of Common Stock underlying
Options shall be charged against the Section 3 Limit, (ii) the Section 3 Limit
shall be increased by the number of shares subject to an Option which lapses,
expires or is otherwise terminated without the issuance of such shares, and
(iii) the Section 3 Limit shall be increased by such number of shares of Common
Stock used by an optionee as full or partial payment to the Company for the
purchase price of shares subject to an Option, the terms of which explicitly
provide for the grant of additional Options as contemplated by Section 4(e)(vi)
hereof.
4. Options. Each Non-Employee Director shall receive grants of Options
under the Plan as follows:
(a) Option Grants.
(i) Initial Grant. Non-Employee Directors who are members of the
Board on the Effective Date shall be granted an Initial Option to
purchase 3,000 shares of Common Stock as of the Initial Grant Date.
Non-Employee Directors who are elected or appointed to the Board after
the Effective Date shall be granted an Initial Option to purchase 3,000
shares of Common Stock as of the date of their election or appointment
to the Board.
(ii) Annual Grants. Each Non-Employee Director shall receive an
Annual Option to purchase 3,000 shares of Common Stock on each
subsequent calendar January 2nd, provided that the individual has
remained in continuous service as a Director of the
1
Company through such date and is a Non-Employee Director on such date.
Each Annual Option award shall be automatic, shall not require any
action on the part of the Board or its designees, and shall be made by
the Company automatically issuing an award agreement to each
Non-Employee Director.
(b) Exercise Price. The per share exercise price of each Option shall be
not less than 100% of the Fair Market Value of a share of Common Stock as of the
date of grant of the Option determined in accordance with the provisions of the
Plan.
(c) Vesting. Options shall vest and become exercisable in equal annual
installments on each of the first through third anniversaries of the date of
grant, provided that the Non-Employee Director has remained in continuous
service as a Director of the Company through each such vesting date.
(d) Term of Options.
(i) Ten-Year Term. Each Option shall expire ten (10) years from
its date of grant, subject to earlier termination as provided herein.
(ii) Exercise Following Termination of Service Due to Death. If a
Non-Employee Director ceases to be a member of the Board by reason of
such Director's death, the Options granted to such Non-Employee Director
shall become immediately vested and may be exercised by such
Non-Employee Director's Beneficiary, at any time during the remaining
life of the Option. At the end of such period, the unexercised vested
portion of the Option shall expire.
(iii) Termination of Options if a Non-Employee Director is
Removed from the Board for Cause. In the event a Non-Employee Director
is removed from the Board for "cause," all Options granted to such
Director (whether or not then vested and exercisable) shall immediately
terminate and be of no further force and effect as of the effective date
of such Non-Employee Director's removal from the Board. Whether a
Non-Employee Director is removed by the Board for "cause" shall be
determined by the Board in accordance with the Restated Articles of
Incorporation and the By-Laws of the Company.
(iv) Exercise Following Other Terminations of Service. If a
Non-Employee Director ceases to be a member of the Board for any reason
other than death, disability, removal from the Board for cause or
retirement or resignation with consent of the Company, the Options
granted to such Non-Employee Director may be exercised by such Director,
but only to the extent the Option was exercisable at the time of such
Director's termination, at any time within ninety (90) days after the
date of such termination of service, subject to the earlier expiration
of such Options as provided in Section 4(d)(i) above. At the end of such
ninety-day period, the vested portion of the Option shall expire. The
unvested portion of the Option shall expire on the date of the
Non-Employee Director's termination of service with the Board.
2
(v) Exercise Following Retirement or Resignation with Consent of
Company. In the event a Non-Employee Director retires or resigns from
the Board with the consent of the Company, the Options granted to such
Non-Employee Director shall become immediately vested and may be
exercised by such Non-Employee Director at any time during the remaining
life of the Option. At the end of such period, the unexercised vested
portion of the Option shall expire.
(vi) Exercise Following Termination of Service Due to Disability.
If a Non-Employee Director ceases to be a member of the Board by reason
of such Director's disability (as defined in Section 22(e)(3) of the
Code), the Options granted to such Non-Employee Director shall become
immediately vested and may be exercised by such Director (or his legally
appointed guardian), at any time during the remaining life of the
Option. At the end of such period, the unexercised vested portion of the
Option shall expire.
(e) Time and Manner of Exercise of Options.
(i) Notice of Exercise. Subject to the other terms and conditions
hereof, a Non-Employee Director may exercise any Option, to the extent
such Option is vested, by giving written notice of exercise to the
Company; provided, however, that in no event shall an Option be
exercisable for a fractional share. The date of exercise of an Option
shall be the later of (A) the date on which the Company receives such
written notice or (B) the date on which the conditions provided in
Section 4(e)(ii) are satisfied.
(ii) Method of Payment. The consideration to be paid for the
shares to be issued upon exercise of an Option may consist of (A) cash,
(B) certified, bank or broker check, (C) other shares which have a Fair
Market Value on the date of surrender equal to the aggregate exercise
price of the shares as to which the Option shall be exercised, or (D) a
combination of any of the above.
(iii) Stockholder Rights. A Non-Employee Director shall have no
rights as a stockholder with respect to any shares of Common Stock
issuable upon exercise of an Option until a certificate evidencing such
shares shall have been issued to the Non-Employee Director pursuant to
Section 4(e)(v), and no adjustment shall be made for dividends or
distributions or other rights in respect of any share for which the
record date is prior to the date upon which the Non-Employee Director
shall become the holder of record thereof.
(iv) Limitation on Exercise. No Option shall be exercisable
unless the Common Stock subject thereto has been registered under the
Securities Act and qualified under applicable state "blue sky" laws in
connection with the offer and sale thereof, or the Company has
determined that an exemption from registration under the Securities Act
and from qualification under such state "blue sky" laws is available.
(v) Issuance of Shares. Subject to the foregoing conditions, as
soon as is reasonably practicable after its receipt of a proper notice
of exercise and payment of the exercise price of the Option for the
number of shares with respect to which the Option is
3
exercised, the Company shall deliver to the Non-Employee Director (or
following the Non-Employee Director's death or disability, the
Beneficiary or legally appointed guardian, respectively, entitled to
exercise the Option), at the principal office of the Company or at
such other location as may be acceptable to the Company and the
Non-Employee Director (or such Beneficiary or guardian), one or more
stock certificates for the appropriate number of shares of Common
Stock issued in connection with such exercise. Shares sold in
connection with a "cashless exercise" shall be delivered to the broker
referred to therein in accordance with the procedures established by
the Company from time to time.
(vi) Reload. If payment of the Option's exercise price is made in
whole or in part with freely transferable, unencumbered shares of the
Company's Common Stock, the Non-Employee Director shall receive new
non-qualified stock options to purchase the Common Stock at the then
current market price (being the mean between the high and low selling
prices of the Common Stock on the New York Stock Exchange on the date of
exercise) for the same number of shares surrendered upon exercise of the
original Option. In no circumstance (A) will the total number of shares
subject to the new Option granted exceed the number of shares
surrendered upon exercise of the original Option, (B) will the new
Option be exercisable within twelve months of the date of exercise, or
(C) will the new Option have a life beyond that of the original Option.
Shares of Common Stock surrendered to the Company pursuant to this
Section 4(e)(vi) shall be valued at the closing price of the Common
Stock on the New York Stock Exchange on the date of exercise.
(f) Restrictions on Transfer. An Option may not be transferred, pledged,
assigned, or otherwise disposed of, except by will or by the laws of descent and
distribution.
(g) Non-Qualified Stock Options. Only non-qualified stock options may be
granted to Non-Employee Directors pursuant to this Plan.
(h) Shareholder Approval. Any Options granted pursuant to this Plan are
subject to the approval of the Plan by the Company's shareholders and no rights
shall vest with respect to any grant hereunder or otherwise under this Agreement
until and unless such approval is received.
5. Designation/Change of Beneficiary. Each Non-Employee Director may
designate a Beneficiary to exercise an Option upon the Non-Employee Director's
death by executing a Beneficiary Designation Form. A Non-Employee Director may
change an earlier Beneficiary designation by executing a later Beneficiary
Designation Form and delivering it to the Administrator. The execution of a
Beneficiary Designation Form and its receipt by the Administrator will revoke
and rescind any prior Beneficiary Designation Form.
6. Change in Control. Anything in the Plan to the contrary
notwithstanding, in the event of a Change in Control of the Company, any Options
outstanding as of the date such Change in Control is determined to have occurred
that are not yet exercisable and vested on such date shall become fully
exercisable and vested.
4
7. Recapitalization or Reorganization.
(a) Authority of the Company and Shareholders. The existence of the Plan
shall not affect or restrict in any way the right or power of the Company or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Common Stock, or the dissolution or liquidation of the Company, or
any sale or transfer of all or an part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
(b) Change in Capitalization. Notwithstanding any other provision of the
Plan, in the event of any change in the outstanding Common Stock by reason of a
stock dividend, recapitalization, reorganization, merger, consolidation, stock
split, combination or exchange of shares (a "Change in Capitalization"), (i)
such proportionate adjustments as may be necessary (in the form determined by
the Administrator in its sole discretion) to reflect such change shall be made
to prevent dilution or enlargement of the rights of Non-Employee Directors under
the Plan with respect to the aggregate number of shares of Common Stock
authorized to be awarded under the Plan, the number of shares of Common Stock
covered by each outstanding Option and the exercise prices in respect thereof
and the number of shares of common Stock covered by future Option grants and
(ii) the Administrator may make such other adjustments, consistent with the
foregoing, as it deems appropriate in its sole discretion.
(c) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, each outstanding Option will vest and become
exercisable on a date prior to the consummation of the proposed action that is
reasonably sufficient to enable the Non-Employee Directors to exercise their
Options.
8. Termination and Amendment to the Plan. The Plan shall terminate on
the tenth anniversary of the Effective Date. Following such date, no further
grants of Options shall be made pursuant to the Plan. Notwithstanding anything
herein to the contrary, the Board may at any time and from time to time
terminate, modify, suspend or amend the Plan in whole or in part; provided,
however, that no such termination, modification, suspension or amendment shall
be effective without shareholder approval if such approval is required to comply
with any applicable law or stock exchange rule; and provided further, that the
Board may not, without shareholder approval, increase the maximum number of
shares issuable under the Plan except as provided in Section 7(b) above,
decrease the price at which Options may be granted, materially increase the
benefits of the Plan to Directors (except to the extent of an increase of the
number of Options which may be granted to Directors at any time), or extend the
term of the Plan or any Options granted thereunder.
9. Miscellaneous.
5
(a) No Right to Re-election. Nothing in the Plan shall be deemed to
create any obligation on the part of the Board to nominate any of its members
for reelection by the Company's stockholders, nor confer upon any Non-Employee
Director the right to remain a member of the Board for any period of time, or at
any particular rate of compensation.
(b) Securities Law Restrictions. The Administrator may require each
Non-Employee Director purchasing or acquiring shares of Common Stock pursuant to
the Plan to agree with the Company in writing that such Non-Employee Director is
acquiring the shares for investment and not with a view to the distribution
thereof. All certificates for shares of Common Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Administrator may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission or any exchange upon
which the Common Stock is then listed, and any applicable federal or state
securities law, and the Administrator may cause a legend or legends to be put on
any such certificates to make appropriate reference to such restrictions. No
shares of Common Stock shall be issued hereunder unless the Company shall have
determined that such issuance is in compliance with, or pursuant to an exemption
from, all applicable federal and state securities laws.
(c) Expenses. The costs and expenses of administering the Plan shall be
borne by the Company.
(d) Applicable Law. Except as to matters of federal law, the Plan and
all actions taken thereunder shall be governed by and construed in accordance
with the laws of the State of Delaware without giving effect to conflicts of law
principles.
(e) Effective Date. The Plan shall be effective as of the date of Board
approval.
10. Definitions. Capitalized words not otherwise defined in the Plan
have the meanings set forth blow:
"Administrator" means the General Counsel of the Company or the
individual appointed by the General Counsel to administer the Plan.
"Annual Option" means an Option granted to a Non-Employee
Director pursuant to Section 4(a)(ii) of the Plan.
"Beneficiary" or Beneficiaries" means an individual or entity
designated by a Non-Employee Director on a Beneficiary Designation Form
to exercise Options in the event of the Non-Employee Director's death;
provided, however, that, if no such individual or entity is designated
or if no such designated individual is alive at the time of the
Non-Employee Director's death, Beneficiary shall mean the Non-Employee
Director's estate.
"Beneficiary Designation Form" means a document, in a form
approved by the Administrator to be used by Non-Employee Directors to
name their respective Beneficiaries. No Beneficiary Designation Form
shall be effective unless it is signed by
6
the Non-Employee Director and received by the Administrator prior to
the date of death of the Non-Employee Director.
"Board" means the Board of Directors of the Company.
"Change in Control" means the happening of any of the following:
(i) When any "person", as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, a Subsidiary or a
Company employee benefit plan, including any trustee of such plan acting
as trustee) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing twenty percent (20%) or more of the combined
voting power of the Company's then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in the
aggregate), a majority of the individuals elected to serve on the Board
are different than the individuals who served on the Board at any time
within the two years prior to such proxy contest or contests or other
forms of contested shareholder votes (in each case either individually
or in the aggregate); or
(iii) when Company shareholders approve a merger, or
consolidation (where in each case the Company is not the survivor
thereof), or sale or disposition of all or substantially all of the
Company's assets or a plan or partial or complete liquidation; or
(iv) where an offerer (other than the Company) purchases shares
of the Company's Common Stock pursuant to a tender or exchange offer for
such shares.
"Code" means the Internal Revenue Code of 1986, as amended, and
the applicable rules and regulations promulgated thereunder.
"Common Stock" means the common stock of the Company, $.01 par
value per share.
"Company" means Covance Inc., a Delaware corporation.
"Effective Date" means the date of Board approval.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the applicable rules and regulations promulgated
thereunder.
"Fair Market Value" means the value of Common Stock determined by
the closing price of the Common Stock (or the closing bid if no sales
were reported), as quoted on the New York Stock Exchange for the date of
determination or, if the date of determination is not a trading day, the
immediately preceding trading day, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable. In the
7
absence of an established market for the Common Stock, the Fair Market
Value thereof shall be determined in good faith by the Administrator.
"Initial Grant Date" means March 16, 1998.
"Initial Option" means an Option granted to a Non-Employee
Director pursuant to Section 4(a)(i) of the Plan.
"Non-Employee Director" means a member of the Board who is not
an employee of the Company or any of its Subsidiaries.
"Option" means an option to purchase shares of Common Stock
awarded to a Non-Employee Director pursuant to the Plan and includes
Initial Options and Annual Options.
"Plan" means the Covance Inc. 1998 Non-Employee Director Stock
Option Plan.
"Securities Act" means the Securities Act of 1933, as amended,
and the applicable rules and regulations promulgated thereunder.
"Section 3 Limit" means 300,000 shares.
"Subsidiary" means any corporation which is a "subsidiary
corporation" within the meaning of Section 424(f) of the Code with
respect to the Company.
8
Exhibit 10.19
STOCK UNIT PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF COVANCE INC.
As of January 30, 1998
DEFERRED STOCK UNIT PLAN FOR NON-EMPLOYEE MEMBERS OF
THE BOARD OF DIRECTORS OF COVANCE INC.
Table of Contents
Page
ARTICLE I INTRODUCTION
1.01 Name of Plan 1
1.02 Purpose of Plan 1
ARTICLE II AWARDS AND PAYMENT ELECTIONS
2.01 Awards 2
2.02 Payment Elections 2
2.03 Designation of Beneficiaries 4
ARTICLE III ACCOUNTS AND INVESTMENTS
3.01 Accounts 5
3.02 Investments 5
3.03 Hypothetical Nature of Accounts and Investments 7
ARTICLE IV PAYMENTS
4.01 Exclusive Entitlement to Payment 8
4.02 Payment Commencement Date 8
4.03 Method of Payment 8
4.04 Limitations on Rights to Payment 10
ARTICLE V MISCELLANEOUS
5.01 Severability 11
5.02 Board Authority 11
5.03 Change in Control 11
5.04 Usage and Definitions 12
ARTICLE I
INTRODUCTION
1.01. Name of Plan.
This Plan shall be known as the Deferred Stock Unit Plan for
Non-Employee Members of the Board of Directors of Covance Inc.
1.02. Purpose of Plan.
The purpose of the Plan is to benefit the shareholders of Covance Inc.
by increasing the proprietary interests of non-employee directors of Covance
Inc. in the growth and success of Covance Inc.
ARTICLE II
AWARDS AND PAYMENT ELECTIONS
2.01. Awards.
On January 30, 1998 and on January 30th of each calendar year after
1998, each director of Covance Inc. who is a member of the Board on that date
shall receive an award of two hundred (200) hypothetical shares of Covance
Common Stock. In addition, each director who first becomes a member of the Board
on a date after January 30, 1998 for the 1998 calendar year or January 30 during
any calendar year after 1998, as applicable, shall receive an award thirty (30)
days after he first becomes a member of the Board of two hundred (200)
hypothetical shares of Covance Common Stock. Notwithstanding any other provision
of the Plan, no individual shall be eligible to receive an Award under this Plan
unless, on the Award Date, he is a member of the Board and is not an employee of
Covance Inc. or any Subsidiary or Affiliate thereof. Each Award shall be
automatic, shall not require any action on the part of the Board or its
designees, and shall be made by crediting the director's account maintained
pursuant to Section 3.01 with two hundred (200) hypothetical shares of Covance
Common Stock.
2.02. Payment Elections.
(a) Express Election. A director who receives an Award pursuant to
Section 2.01 may submit an election to the Senior Vice President, General
Counsel or his/her successor or designee ("SVP-Legal") that specifies the time
and the manner in which the director wishes to receive payments with respect to
the Award. Such election shall satisfy each of the requirements set forth in
paragraphs (1) through (5), below.
(1) Deadline for Submitting Election. A director's election with
respect to an Award shall be submitted on or before the Award Date.
Notwithstanding the preceding sentence, a director's election with
respect to an Award made on January 30, 1998, shall be submitted on or
before April 30, 1998.
(2) Form of Election. The election shall be in writing and in a
form acceptable to the SVP-Legal.
(3) Payment Commencement Date. The election shall specify the
date, selected by the director in accordance with Section 4.02, on which
payments with respect to the Award are to commence under the Plan (i.e.,
any date on or after his Release Date).
(4) Method of Payment. The election shall specify the method,
selected by the director in accordance with Section 4.03, in which
payments with respect to the Award are to be made under the Plan (i.e.,
whether such payments are to be made in the form of a lump sum, annual
installments, or flexible installments, and whether such payments are to
be made in cash or in Covance Common Stock).
2
(5) Election Irrevocable. The payment commencement date and the
method of payment elected by a director with respect to an Award
pursuant to paragraphs (3) and (4), above, shall not be revocable or
subject to modification at any time. Notwithstanding the foregoing, a
director may at any time submit a request to the SVP-Legal to modify the
payment commencement date, the method of payment, or both, with respect
to the Award, provided that the modification does not become effective
before the director's Release Date, and provided further that the
request is submitted before any payment is made to the director with
respect to the Award pursuant to Article IV. If the modification has the
effect of accelerating all or part of any payment otherwise due the
director under Article IV, the request shall be subject to the approval
of the SVP-Legal, which approval the SVP-Legal may grant or deny in his
sole discretion. If the modification has the effect of deferring until a
later calendar year all or part of any payment otherwise due the
director under Article IV, the request shall be granted to the extent of
such deferral, provided that the request is submitted on or before the
last day of the calendar year immediately preceding the calendar year in
which the payment otherwise would have been made to the director under
Article IV. If the modification has the effect of deferring until a
later date within the same calendar year all or part of any payment
otherwise due the director under Article IV during such calendar year,
the request shall be granted to the extent of such deferral, provided
that the request is submitted before the date on which the payment
otherwise would have been made to the director under Article IV. A
director may, in his sole discretion, specify that his request for a
modification pursuant to this paragraph (5) be submitted to the Board or
the Committee for its prior approval.
(b) Default Election. A director who fails to make an express election
with respect to an Award in accordance with subsection (a), above, shall be
deemed to have made such an election. The payment commencement date and the
method of payment under a deemed election pursuant to this subsection (b) shall
be the same as specified in the director's most recent express election in
effect on the Award Date under subsection (a), above. If the director has no
express election in effect on the Award Date under subsection (a), above, or if
his most recent express election under that subsection does not satisfy the
requirements of Sections 4.02 and 4.03 with respect to his current Award, then
the payment commencement date and the method of payment under the deemed
election pursuant to this subsection (b) shall be the same as specified in the
director's most recent deferral election in effect on the Award Date under the
Deferred Compensation Plan. If the director has no deferral election in effect
on the Award Date under the Deferred Compensation Plan, or if his most recent
deferral election under that plan does not satisfy the requirements of Sections
4.02 and 4.03 with respect to his current Award, he shall be deemed to have
elected to receive his payments with respect to the Award in 10 annual
installments payable in cash in accordance with Section 4.03(2) commencing on
his Release Date. A deemed election pursuant to this subsection (b) shall not be
revocable or subject to modification except in accordance with the provisions of
subsection (a)(5), above.
3
2.03. Designation of Beneficiaries.
A director who receives an Award pursuant to Section 2.01 may designate
one or more beneficiaries under the Plan with respect to such Award.
Notwithstanding Section 2.02(a)(5), a director may, at any time, revoke a prior
designation and make a new designation pursuant to this Section 2.03. Any such
designation or revocation shall be in writing and shall be submitted to the
SVP-Legal in such form and in such manner as is acceptable to the Board. If a
director dies before he has received all payments due him under the Plan, the
remaining payments shall be made to his beneficiaries in accordance with his
designation, or, if there is no such beneficiary, then to the director's
personal representative. All such payments shall be made in accordance with the
payment schedule (or schedules) that would have applied to the director had he
survived, unless the director specified in his designation that a shorter
payment schedule (or schedules) is to take effect upon his death.
4
ARTICLE III
ACCOUNTS AND INVESTMENTS
3.01. Accounts.
(a) Establishment of Accounts. A separate account shall be maintained
for each director who receives an Award pursuant to Section 2.01. Such account
shall be (1) credited with the Awards granted to the director pursuant to
Section 2.01, (2) credited (or charged, as the case may be) with the investment
results determined pursuant to Section 3.02, and (3) charged with the amounts
paid by the Plan to or on behalf of the director pursuant to Article IV.
(b) Subaccounts. Within each director's account, separate subaccounts
shall be maintained to the extent necessary for the administration of the Plan.
For example, it may be necessary to maintain separate subaccounts where the
director has specified different payment commencement dates or different methods
of payment with respect to his Awards granted on different Award Dates.
3.02. Investments.
(a) Deemed Investment in Covance Common Stock. Until a director's
Release Date, the entire balance in his account shall be treated as if it were
invested in Covance Common Stock. In addition, on or after a director's Release
Date, the portion of the balance in his account that he has elected to receive
payments in the form of Covance Common Stock pursuant to Section 4.03(4) shall
be treated as if it were invested in Covance Common Stock. The deemed investment
in Covance Common Stock of all or part of the balance in a director's account
shall be determined in accordance with the following rules:
(1) Deemed Reinvestment of Dividends. The number of hypothetical
shares of Covance Common Stock credited to a director's account shall be
increased on each date that a dividend is paid on Covance Common Stock.
The number of additional hypothetical shares of Covance Common Stock
credited to a director's account as a result of such increase shall be
determined, first, by multiplying the total number of hypothetical
shares of Covance Common Stock credited to the director's account
immediately before such increase by the amount of the dividend paid per
share of Covance Common Stock on the dividend payment date, and, then,
by dividing the product so determined by the closing price of Covance
Common Stock on the composite tape of New York Stock Exchange issues on
the dividend payment date (or if there was no reported sale of Covance
Common Stock on such date, on the next preceding day on which there was
such a reported sale).
5
(2) Conversion Out of Covance Common Stock. The dollar value of
the hypothetical shares of Covance Common Stock credited to a director's
account on any date shall be determined by multiplying the number of
hypothetical shares of Covance Common Stock credited to the director's
account on that date by the average closing price of Covance Common
Stock, as reported on the composite tape of New York Stock Exchange
issues for the most recent 10 business days ending on or before that
date.
(3) Effect of Recapitalization. In the event of a transaction or
event described in this paragraph (3), the number of hypothetical shares
of Covance Common Stock credited to a director's account shall be
adjusted in such manner as the Board, in its sole discretion, deems
equitable. A transaction or event is described in this paragraph (3) if
and only if (A) it is a dividend or other distribution (whether in the
form of cash, shares, other securities, or other property),
extraordinary cash dividend, recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of shares or other securities, the
exercisability of stock purchase rights received under the Rights Plan,
the issuance of warrants or other rights to purchase shares or other
securities, or other similar corporate transaction or event, and (B) the
Board determines that such transaction or event affects the shares of
Covance Common Stock, such that an adjustment pursuant to this paragraph
(3) is appropriate to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under this Plan.
(b) Deemed Investment in Deferred Compensation Plan Investment Option.
On and after a director's Release Date, the portion of the balance in his
account that is not required to be treated as if it were invested in Covance
Common Stock on and after his Release Date pursuant to subsection (a), above,
shall be treated as if it were invested in the investment option specified in
Section 5(b) of the Deferred Compensation Plan. The deemed investment in the
investment option specified in Section 5(b) of the Deferred Compensation Plan of
all or part of the balance in a director's account shall be determined in
accordance with the following rules:
(1) Covance Common Stock. On and after a director's Release Date,
the portion of the balance in his account that is not required to be
treated as if it were invested in Covance Common Stock on and after his
Release Date pursuant to subsection (a), above, shall not be treated as
if it were invested in Covance Common Stock. However, subject to
paragraph (2) below, at any time on or after his Release Date, a
director may elect to have all or part of such portion of the balance in
his account treated as if it were invested in the Market Value Account
described in Section 5(c) of the Deferred Compensation Plan.
(2) Limitation on Deemed Investment in Market Value Account.
During the six-month period following his Release Date, a director shall
not be entitled to direct that any portion of the balance in his account
be treated as invested in the Market Value Account described in Section
5(c) of the Deferred Compensation Plan if at any previous time such
portion was treated as invested in any investment other than the Market
Value Account described in Section 5(c) of the Deferred Compensation
Plan.
6
3.03. Hypothetical Nature of Accounts and Investments.
Each account and investment established under this Article III shall be
hypothetical in nature and shall be maintained for bookkeeping purposes only. In
accordance with Section 4.04(a), neither the Plan nor any of the accounts or
investments established hereunder shall hold any actual funds or assets.
7
ARTICLE IV
PAYMENTS
4.01. Exclusive Entitlement to Payment.
An Award made pursuant to Section 2.01 shall entitle a director to
receive the payments due him at the times, in the amounts, and in the form
specified in this Article IV. No other amounts shall be due or payable to a
director under this Plan.
4.02. Payment Commencement Date.
The payments to a director with respect to an Award shall commence on
the date selected by the director in accordance with this Section 4.02. Such
date shall be a date that is on or after his Release Date, and that is no later
than the last day of his life expectancy, determined as of the age he will have
attained on the payment commencement date. A director may select different
payment commencement dates with respect to his Awards granted on different Award
Dates. In addition, a director may select different payment commencement dates
with respect to different portions of his Award granted on the same Award Date.
4.03. Method of Payment.
The payments to a director with respect to an Award shall be made
pursuant to the method selected by the director in accordance with paragraph
(1), (2), or (3), below. All payments to a director with respect to an Award
shall be made solely in cash, except as provided in paragraph (4), below, which
permits a director to elect to receive payments with respect to an Award in the
form of Covance Common Stock. A director may select different methods of payment
with respect to his Awards granted on different Award Dates. In addition, a
director may select different methods of payment with respect to different
portions of his Award granted on the same Award Date.
(1) Lump Sum. The director may elect to receive payment with
respect to an Award in a lump sum. The lump sum shall be payable to the
director on the payment commencement date and shall equal the portion of
the balance in his account attributable to the Award, determined as of
the payment commencement date.
(2) Annual Installments. The director may elect to receive the
payments with respect to an Award in two or more annual installments. If
so, the director shall indicate in his election pursuant to Section
2.02(a) the number of annual installments he wishes to elect. The number
of annual installments elected shall not exceed 20 and shall not extend
the period of payment beyond the director's life expectancy, determined
as of the age he will have attained on the payment commencement date. If
the number of annual installments elected by a director would otherwise
exceed the limits in the preceding sentence, he shall be deemed to have
elected the maximum number of annual installments permitted under the
preceding sentence. The annual installments shall be payable to the
director
8
beginning on the payment commencement date and on each anniversary
thereof until the total number of installments elected by the director
have been paid. Each annual installment shall equal the portion of the
balance in the director's account attributable to the Award,
determined as of the date the installment is payable and after giving
effect to the previous annual payments, if any, multiplied by a
fraction, the numerator of which is one, and the denominator of which
is the excess of the total number of installments elected by the
director over the number of installment payments previously made under
the schedule. For example, the respective fractions under a 5-year
installment schedule are 1/5 for the first installment, 1/4 for the
second installment, 1/3 for the third installment, 1/2 for the fourth
installment, and 1/1 for the fifth and final installment.
(3) Flexible Installments. The director may elect to receive the
payments with respect to an Award in accordance with any other
reasonable method he specifies. Such payments shall be referred to
herein as flexible installments. If a director elects to receive the
payments with respect to an Award in the form of flexible installments,
he shall indicate in his election pursuant to Section 2.02(a) the method
under which he wishes the date and the amount of each such installment
to be determined. Flexible installments shall be payable to the director
on the dates and in the amounts determined in accordance with the method
specified in his election. Regardless of the method of payment he
elects, no installment shall be payable to a director before the payment
commencement date he has selected in accordance with Section 4.02. Nor
shall any installment be payable to a director to the extent that the
portion of the balance in his account attributable to the Award has been
depleted, determined as of the date the installment is otherwise payable
to him. Furthermore, the period over which flexible installments are
paid to a director shall not exceed the lesser of 20 years or the
director's life expectancy, determined as of the age he will have
attained on the payment commencement date. If the period over which a
director has elected to receive flexible installments would otherwise
exceed the maximum period permitted under the preceding sentence, a
final installment shall be payable to the director upon the expiration
of such maximum period. Such final installment shall equal the portion
of the balance in the director's account attributable to the Award,
determined as of the date the installment is payable.
(4) Payment in the Form of Covance Common Stock. Notwithstanding
the general requirement of this Section 4.03 that all payments to a
director with respect to an Award be made solely in cash, a director may
elect to receive payments with respect to an Award in the form of
Covance Common Stock rather than cash. Distributions in the form of
Covance Common Stock shall be made in whole shares only, and any
resulting fractional shares shall be distributed in cash. In accordance
with Section 3.02(a), the portion of the balance in a director's account
with respect to which he has elected to receive payments in the form of
Covance Common Stock shall at all times be treated as invested solely in
Covance Common Stock.
9
4.04. Limitations on Rights to Payment.
(a) Rights Unsecured. The right of any person to receive one or more
payments under the Plan shall be an unsecured claim against the general assets
of Covance Inc.
(b) Rights Not Assignable. No payment due any person under the Plan
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, or charge such payment shall be void.
No such payment or interest therein shall be liable for or subject to the debts,
contracts, liabilities, or torts of any director or beneficiary. If any director
or beneficiary becomes bankrupt or attempts to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge any payment under the Plan, the
Board may direct that such payment be suspended and that all future payments to
which such person otherwise would be entitled be held and applied for the
benefit of such person, the person's children or other dependents, or any of
them, in such manner and in such proportions as the Board may deem proper.
Notwithstanding the foregoing, a director may assign his right to payment under
the Plan to Covance Inc. or its Affiliates.
(c) Rights Forfeited Upon Competition. A director who, without the
written consent of Covance Inc., engages in competition with Covance Inc. or any
Subsidiary thereof, accepts employment with or acquires or holds any substantial
interest in any business that is competitive with the business carried on by
Covance Inc. or any Subsidiary thereof, or serves as an officer or director of
any corporation engaged in competition with the business carried on by Covance
Inc. or any Subsidiary thereof, shall forfeit all rights to any payments under
the Plan that would otherwise be payable to the director or his beneficiaries on
or after the initial date of such action by the director. The purchase by a
director, for investment, on a recognized securities exchange, of stock or other
securities of a competitor of Covance Inc. or Subsidiary thereof representing
not more than one percent of the total voting power represented by all
outstanding stock and securities of such competitor, or the holding thereof,
shall not be deemed to constitute the acquisition or holding of a substantial
interest in such competitor for purposes of this subsection (c). This subsection
(c) shall not apply to any director on or after the occurrence of a Change in
Control.
10
ARTICLE V
MISCELLANEOUS
5.01. Severability.
If any provision of the Plan is held unlawful or otherwise invalid or
unenforceable in whole or in part, the unlawfulness, invalidity, or
unenforceability shall not affect any other provision of the Plan or part
thereof, each of which shall remain in full force and effect.
5.02. Board Authority.
(a) In General. Except to the extent that the Plan specifically provides
otherwise, the Board shall have the sole authority and discretion (1) to amend,
suspend, or terminate the Plan, (2) to interpret the Plan, (3) to establish and
revise rules and regulations relating to the Plan, (4) to delegate such
responsibilities or duties as it deems desirable, and (5) to make any other
determination that it believes necessary or advisable for the administration of
the Plan. Unless otherwise provided, the Board shall be deemed to have delegated
such authority and discretion to the Committee.
(b) Plan Termination. Except to the extent that the Plan specifically
provides otherwise, the Board may terminate the Plan at any time. Upon
termination of the Plan, all Awards made before the date of termination, and any
rights to payment with respect to such Awards, shall continue to be governed by
the provisions of the Plan in effect immediately before the date of termination.
5.03. Change in Control.
(a) Plan Modifications Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, the Board may amend, modify, or suspend
the Plan (including the Change in Control Provisions) at any time before a
Change in Control occurs, but except as may be required by law, after a Change
in Control occurs: (1) the Change in Control Provisions shall not be amended,
modified, suspended, or terminated, directly or indirectly, and (2)(A) no other
provisions of the Plan shall be amended, modified, suspended, or terminated,
directly or indirectly, (B) no rules, regulations, or procedures under the Plan
shall be established or modified, (C) no interpretation of the Plan shall be
adopted, (D) no determination under the Plan shall be made, and (E) no authority
or discretion shall be exercised, in a manner that would alter the meaning or
operation of the Change in Control Provisions or that would undermine or
frustrate their purposes.
(b) Rights Protected Following Change in Control. Notwithstanding any
provision of the Plan to the contrary, no amendment, suspension, or termination
of the Plan, or revocation of any required approval by the Board, effected after
a Change in Control shall operate to reduce, eliminate, or otherwise adversely
affect any director's or beneficiary's right to receive any payment under the
Plan (including, without limitation, the amount, timing, and method thereof)
11
in accordance with any Award made prior to the date of such amendment,
suspension, termination, or revocation of approval and in accordance with any
investment or payment option permitted (irrespective of any requirement for
approval) pursuant to the Plan as in effect on the date immediately preceding
the date on which the Change in Control occurs. Notwithstanding any provision of
the Plan to the contrary, upon and after a Change in Control, the rights
described in the immediately preceding sentence shall be fully vested,
nonforfeitable contractual rights enforceable by or on behalf of any director or
former director against Covance Inc. or any successor to all or substantially
all of the business or assets of Covance Inc.
5.04. Usage and Definitions.
(a) Titles and Headings Not to Control. The titles to Articles and the
headings of Sections, subsections, paragraphs, and subparagraphs in this Plan
are placed herein for convenience of reference only and, as such, shall be of no
force or effect in the interpretation of the Plan.
(b) Definitions. Unless the context clearly indicates otherwise, the
following terms, when used in capitalized form in this Plan, shall have the
meanings set forth below.
Acquiring Person. "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall
be the Beneficial Owner of 20% or more of the Covance Common Stock then
outstanding, but shall not include Covance Inc., any Subsidiary of
Covance Inc., any employee benefit plan of Covance Inc. or any
Subsidiary of Covance Inc., or any entity holding Covance Common Stock
for or pursuant to the terms of any such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of
an acquisition of Covance Common Stock which, by reducing the number of
shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 20% or more of Covance Common Stock
then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 20% or more of Covance Common Stock then outstanding
by reason of share purchases by Covance and shall, after such share
purchases by Covance Inc., become the Beneficial Owner of any additional
Covance Common Stock, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board
determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of
this paragraph, has become such inadvertently, and such Person divests
as promptly as practicable a sufficient number of Covance Common Stock
so that such Person would no longer be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph, then such Person
shall not be deemed to be an "Acquiring Person" for any purposes of this
Plan.
Affiliate. "Affiliate" shall have the meaning ascribed to such
term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Article. "Article" shall mean an article of this Plan.
12
Associate. "Associate" shall have the meaning ascribed to such
term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
Award. "Award" shall mean the annual award of hypothetical shares
of Covance Common Stock made to a director pursuant to Section 2.01.
Award Date. "Award Date" shall mean the date on which an Award is
made to a director pursuant to Section 2.01.
Beneficial Owner. A Person shall be deemed the "Beneficial Owner"
of, and shall be deemed to "beneficially own," any securities:
(1) which such Person or any of such Person's Affiliates
or Associates beneficially owns, directly or indirectly;
(2) which such Person or any of such Person's Affiliates
or Associates has (A) the right or obligation to acquire (whether
such right or obligation is exercisable or effective immediately
or only after the passage of time) pursuant to any agreement,
arrangement, or understanding (whether or not in writing) (other
than customary agreements with and between underwriters and
selling group members with respect to a bona fide public offering
of securities) or upon the exercise of conversion rights,
exchange rights, rights (other than the rights granted pursuant
to the Rights Plan), warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner"
of, or to "beneficially own," securities tendered pursuant to a
tender or exchange offer made by such Person or any of such
Person's Affiliates or Associates until such tendered securities
are accepted for purchase or exchange; or (B) the right to vote
pursuant to any agreement, arrangement, or understanding (whether
or not in writing); provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this clause if the agreement, arrangement, or
understanding to vote such security (i) arises solely from a
revocable proxy given in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the
applicable rules and regulations of the Exchange Act, and (ii) is
not also then reported by such person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(3) which are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement,
or understanding (whether or not in writing) (other than
customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting (except
to the extent contemplated by the proviso to clause (B) of
paragraph (2), above), or disposing of any securities of Covance
Inc.
13
Board. "Board" shall mean the Board of Directors of Covance Inc..
Change in Control. A "Change in Control" shall occur when and
only when the first of the following events occurs:
(1) the date that an Acquiring Person first becomes such;
provided that in determining whether a Change in Control has
occurred, the acquisition of securities of Covance Inc. in a
Non-Control Transaction shall not constitute an acquisition that
would cause a Change in Control; or
(2) three or more directors, whose election or nomination
for election is not approved by a majority of the members of the
"Incumbent Board" (as defined below) then serving as members of
the Board, are elected within any single 12-month period to serve
on the Board; provided that an individual whose election or
nomination for election is approved as a result of either an
actual or threatened "Election Contest" (as described in Rule
14a-11 promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of
a person other than the Board (a "Proxy Contest"), including by
reason of any agreement intended to avoid or settle any Election
Contest or Proxy Contest, shall be deemed not to have been
approved by a majority of the Incumbent Board for purposes
hereof; or
(3) members of the Incumbent Board cease for any reason to
constitute at least a majority of the Board; "Incumbent Board"
shall mean individuals who, as of January 30, 1998, are members
of the Board, provided that if the election, or nomination for
election by Covance Inc.'s shareholders, of any new director was
approved by a vote of at least three-quarters of the Incumbent
Board, such new director shall, for purposes of the Plan, be
considered as a member of the Incumbent Board; provided further
that no individual shall be considered a member of the Incumbent
Board if such individual initially assumed office as a result of
either an actual or threatened Election Contest or other actual
or threatened Proxy Contest, including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest; or
(4) approval by shareholders of Covance Inc. of:
(A) a merger, consolidation, or reorganization
involving Covance Inc., unless
(i) the shareholders of Covance Inc.,
immediately before the merger, consolidation, or
reorganization, own, directly or indirectly
immediately following such merger, consolidation,
or reorganization, at least 50 percent of the
combined voting power of the outstanding voting
securities of the corporation resulting from such
merger, consolidation, or reorganization (the
"Surviving
14
Corporation") in substantially the same
proportion as their ownership of the voting
securities immediately before such merger,
consolidation, or reorganization;
(ii) individuals who were members of the
Incumbent Board immediately prior to the execution
of the agreement providing for such merger,
consolidation, or reorganization constitute at
least a majority of the board of directors of the
Surviving Corporation; and
(iii) no Person (other than Covance Inc. or
any Subsidiary, any employee benefit plan (or any
trust forming a part thereof) maintained by Covance
Inc., the Surviving Corporation or any Subsidiary,
or any Person who, immediately prior to such
merger, consolidation, or reorganization had
Beneficial Ownership of securities representing 20
percent or more of the Voting Power) has Beneficial
Ownership of securities representing 20 percent or
more of the combined voting power of the Surviving
Corporation's then outstanding voting securities;
(B) a complete liquidation or dissolution of
Covance Inc.; or
(C) an agreement for the sale or other disposition
of all or substantially all of the assets of Covance Inc.
to any Person (other than a transfer to a Subsidiary).
Change in Control Provisions. "Change in Control Provisions"
shall mean (1) the last sentence of Section 4.04(c), (2) Section 5.03,
and (3)this Section 5.04(b).
Committee. "Committee" shall mean the Compensation and
Organization Committee of the Board, or any successor committee thereto.
Deferred Compensation Plan. "Deferred Compensation Plan" shall
mean the Deferred Compensation Plan for Directors of Covance Inc., dated
as of December 3, 1996 as amended and in effect from time to time, or
any successor plan thereto.
Exchange Act. "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended and in effect from time to time, or any
successor thereto.
Covance Common Stock. "Covance Common Stock" shall mean the
common stock of Covance Inc..
Non-Control Transaction. "Non-Control Transaction" shall mean a
transaction described in clauses (i) through (iii) of subparagraph (4)
(A) of the definition of "Change in Control" herein.
15
Person. "Person" shall mean any individual, firm, corporation,
partnership, joint venture, association, trust, or other entity.
Plan. "Plan" shall mean the Deferred Stock Unit Plan for
Non-Employee Members of the Board of Directors of Covance Inc., as
amended and in effect from time to time.
Release Date. "Release Date" shall mean, with respect to a
director, the first day on which the director is no longer either a
"director" or an "officer" of Covance Inc., within the meaning of
section 16 of the Exchange Act.
Rights Plan. "Rights Plan" shall mean the Rights Agreement, dated
as of December 31, 1996, between Covance Inc. and Harris Trust and
Savings Bank as it may be amended from time to time, or any successor
thereto.
Section. "Section" shall mean a section of this Plan.
Subsidiary. "Subsidiary" of any Person shall mean any corporation
or other entity of which a majority of the voting power of the voting
equity securities or voting interest is owned, directly or indirectly,
by such Person, or which is otherwise controlled by such Person.
Voting Power. "Voting Power" shall mean the voting power of all
securities of Covance Inc. then outstanding generally entitled to vote
for the election of directors of Covance Inc.
16
Exhibit 10.20
[Covance Letterhead]
10 November 1998
Mr. Christopher Kuebler
[address]
Re: Amendment No. 1 to Employment Agreement between
Christopher Kuebler and Covance Inc.
Dear Chris:
Please refer to that certain Employment Agreement between you and Covance Inc.
dated as of November 1, 1996 (the "Employment Agreement"). This Letter Agreement
will constitute Amendment No. 1 to the Employment Agreement and will amend the
Employment Agreement as follows:
1. Section IX(d) shall be amended to read in its entirety as follows:
"(d) Change-of-Control: In the event of an Event of Termination (as
defined below), Executive will be entitled to receive all of the
"Severance Benefits" described in paragraph (c) above, and, in addition:
(i) All stock options (including the Stock Options), restricted
stock (including the Restricted Stock), deferred compensation and
similar benefits which have not become vested on the date of an Event of
Termination shall become vested upon such Event.
(ii) The Executive shall be entitled to receive any payments
calculated pursuant to Section XVIII hereof.
(iii) In the event you are involved in any dispute about your
rights or obligations under this Agreement arising on or after a
Change-of-Control, the Company shall pay all legal costs and fees
incurred by you in connection with such dispute promptly upon receipt of
any invoice relating thereto.
(iv) The benefits set forth in Sections VIII(c) and VIII(d)
hereof and medical, dental, disability and life insurance will be
continued, to the extent they are not otherwise prohibited under the
respective plans, until you find other employment but not longer than
three years from the date of the Event of Termination.
For the purposes of this Agreement, an Event of Termination is defined
to be a termination of Executive's employment by the Company (for
reasons other than Cause)
or a Constructive Termination (as defined below) of Executive's
employment, in each case within 24 months following a
Change-of-Control (as defined below), or Executive's voluntary
termination of his employment for any reason or no reason during the
one-month period commencing twelve months following a
Change-of-Control and ending thirteen months after such
Change-of-Control (a "Voluntary Termination"); provided, however, a
Voluntary Termination shall not be an Event of Termination if it
arises from a Change-of-Control pursuant to subsection (iv) under the
definition of Change-of-Control unless the tender offer or exchange
offer is a tender or exchange offer for securities representing 20% or
more of the combined voting power of Covance's then outstanding
securities.
For purposes of this Agreement, a Change-Of-Control is defined to occur
when:
(i) any person (including as such term is used in Section 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
beneficial owner, directly or indirectly, of Company securities
representing 20% or more of the combined voting power of the Company's
then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in the
aggregate), a majority of the individuals elected to serve on the
Company's Board of Directors are different than the individuals who
served on the Company's Board of Directors at any time within the two
years prior to such proxy contest or contests or other forms of
contested shareholder votes; or
(iii) the Company's shareholders approve a merger or
consolidation (where in each case the Company is not the survivor
thereof), or a sale or disposition of all or substantially all of the
Company's assets or a plan of partial or complete liquidation; or
(iv) an offeror (other than the Company) purchases shares of the
Company's common stock pursuant to a tender or exchange offer for such
shares.
For purposes of this Agreement, a Constructive Termination is defined to
be:
(i) a material breach by the Company of this Agreement,
including, without limitation, a reduction in your then current salary
or the percentage of base salary eligible for incentive compensation;
(ii) a diminution of Executive's responsibilities, status, title
or duties under this Agreement;
(iii) a relocation of Executive's work place which increases the
distance between Executive's principal residence and Executive's work
place by more than 25 miles;
(iv) a failure by the Company to provide Executive with benefits
which are as favorable to Executive in all material respects as those
provided immediately prior to the Change-of-Control; or
2
(v) the failure of any acquirer or successor in interest to the
business of the Company to agree in writing to be bound by the terms of
this Agreement within four months of any Change-of-Control."
2. Section IX(f) shall be amended to read in its entirety as follows:
If there has been an Event of Termination or if there has been no
Change-of-Control but Executive has been terminated without Cause, the
Company shall provide for Executive, at the Company's cost, executive
outplacement support for one year following such termination.
3. Section XVII(i) shall be amended to read in its entirety as follows:
If there has been an Event of Termination or if there has been no
Change-of-Control but Executive has been terminated without Cause, the
obligation of the Company to make to Executive any or all of the
payments specified under this Agreement (including, without limitation,
the payments specified in Section IX) shall be subject to Executive's
execution and delivery to the Company of a release in form and substance
reasonably satisfactory to the Company of all claims, demands, suits, or
actions, whether in law or at equity, Executive has or may have relating
to or giving rise from such Event of Termination or non-Cause
termination.
If the foregoing meets with your understanding of our Agreement, please so
indicate by signing this Agreement below.
Very truly yours,
COVANCE INC.
By:
Jeffrey S. Hurwitz
Corporate Senior Vice President
ACCEPTED AND AGREED:
By:
Christopher A. Kuebler
Exhibit 10.21
Schedule A
Pursuant to Item 601(a)(4), Instruction 2, of Regulation S-K, the
Company has not filed the Amendment to Executive Employment Letters for the
following named Executives:
Mr. Richard J. Andrews
Mr. James D. Utterback
Mr. Michael G. Wokasch
Such Amendments are substantially similar to the Amendment for Dr. Kim
D. Lamon, attached hereto.
[Covance Letterhead]
20 November 1998
Dr. Kim D. Lamon
[address]
Re: Employment Letter Agreement (the "Agreement")
Dear Kim :
Please refer to that certain Employment Letter Agreement dated November 20, 1996
between Covance Inc. ("Covance" or, the "Company") and you (the "Letter
Agreement"). This letter will constitute Amendment No. 1 to the Letter Agreement
and will amend the Letter Agreement as follows:
1. The Section entitled "Severance" shall be amended to read in its entirety as
follows:
Severance
Except as provided below under the paragraph headed "Change-of-Control", Covance
guarantees that should you be involuntarily terminated for reasons other than
for Cause, you will receive an amount equal to the sum of (a) two years base
salary (payable on the normal payroll cycle) determined at the time of
termination, and (b) two years of the annual incentive bonus (payable on the
normal bonus cycles) in an amount equal for each such year to the product of
your base salary in effect at termination and 55% (the sum of (a) and (b) being,
collectively, the "Termination Payments").
"Cause" shall mean (i) your convictions of a felony or a misdemeanor if such
misdemeanor involves moral turpitude; (ii) your committing any act of gross
negligence or intentional misconduct in the performance or non-performance of
your duties as an employee of Covance or its affiliates, including, any actions
which constitute sexual harassment under applicable laws, rules or regulations;
(iii) your failure to perform your duties assigned for a period of thirty (30)
or more days unless such failure is caused by an Extended Disability; or (iv)
misappropriation of assets, personal dishonesty or intentional misrepresentation
of facts which may cause Covance or its affiliates financial or reputational
harm.
Should such involuntary termination occur because of an Extended Disability, and
not for any other reason that constitutes Cause, for 120 consecutive days where
you have not returned to your duties on a full-time basis after the expiration
of such 120 day period within 30 days after written notice of termination is
given to you, Covance shall pay to you the Termination Payments at the times
specified above.
Extended Disability shall (i) mean you are unable, as a result of a medically
determinable physical or mental impairment, to perform the duties and services
of your position, or (ii) have the meaning specified in any disability insurance
policy maintained by Covance, whichever is more favorable to you.
Except as may be otherwise provided in applicable Covance compensation and
benefit plans, Covance shall not be liable for any salary or benefit payments to
you beyond the date of your voluntary termination of employment with Covance. In
the event of a termination of employment for Cause or Extended Disability, you
shall not be entitled to any compensation or other benefits not already earned
and owing to you on account of your services on the date of such termination of
employment except as provided above with respect to a termination for Extended
Disability.
Medical, dental, disability and life insurance will be continued, to the extent
they are not otherwise prohibited under the respective plans, while you are
receiving the Termination Payments.
Change-of-Control
In the event of an Event of Termination (as defined below), you will be entitled
to a lump sum payment equal to the sum of (1) the product of (a) 3 and (b) your
base annual salary in effect at the time of the Event of Termination and (2) the
product of (a) 3 and (b) number that is 55% of your base annual salary in effect
at the time of the Event of Termination. Such payment will be made within 60
days of the Event of Termination. In addition to, and as a result of, the
foregoing (i) all of your stock options (including the Stock Options),
restricted stock (including the Restricted Stock), deferred compensation and
similar benefits which have not become vested on the date of an Event of
Termination shall become vested upon such event and (ii) you shall be entitled
to receive any payments calculated pursuant to the paragraph headed "Certain
Additional Payments by Covance".
For the purposes of this Agreement, an Event of Termination is defined to be a
termination of your employment by Covance (for reasons other than Cause) or a
Constructive Termination (as defined below) of your employment, in each case
within 24 months following a Change-of-Control (as defined below), or your
voluntary termination of your employment for any reason or no reason during the
one-month period commencing twelve months following a Change-of-Control and
ending thirteen months after such Change-of-Control (a "Voluntary Termination");
provided, however, that a Voluntary Termination shall not be an Event of
Termination if it arises from a Change-of-Control pursuant to clause (iv) under
the definition of Change-of-Control unless the tender offer or exchange offer is
a tender or exchange offer for securities representing 20% or more of the
combined voting power of Covance's then outstanding securities.
For purposes of this Agreement, a Change-of-Control is defined to occur when:
(i) any person (including as such term is used in Section 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) becomes the beneficial owner,
directly or indirectly, of Covance's securities representing 20% or more of the
combined voting power of Covance's then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in the
aggregate), a majority of the individuals elected to serve on Covance's Board of
Directors are different than the individuals who served on Covance's Board of
2
Directors at any time within the two years prior to such proxy contest or
contests or other forms of contested shareholder votes (in each case either
individually or in the aggregate); or
(iii) Covance shareholders approve a merger, or consolidation (where in
each case Covance is not the survivor thereof), or sale or disposition of all or
substantially all of Covance's assets or a plan or partial or complete
liquidation; or
(iv) an offeror (other than Covance) purchases shares of Covance common
stock pursuant to a tender or exchange offer for such shares.
For purposes of this Agreement, a Constructive Termination is defined to be:
(i) a material breach by Covance of this Agreement, including, without
limitation, a reduction in your then current salary or the percentage of base
salary eligible for incentive compensation;
(ii) a diminution of your responsibilities, status, title or duties
hereunder;
(iii) a relocation of your work place which increases the distance
between your principal residence and your work place by more than 25 miles;
(iv) a failure by Covance to provide you with benefits which are as
favorable to you in all material respects as those provided immediately prior to
the Change-of-Control; or
(v) the failure of any acquiror or successor in interest to the business
of Covance to agree in writing to be bound by the terms of this Agreement within
four months of any Change-of-Control.
In the event you are involved in any dispute about your rights under this
Agreement arising on or after a Change-of-Control, Covance shall pay all legal
costs and fees incurred by you in connection with such dispute promptly upon
receipt of any invoice relating thereto.
The benefits set forth under the paragraph headed Auto and Financial Counseling
Allowance and medical, dental, disability and life insurance will be continued,
to the extent they are not otherwise prohibited under the respective plans,
until you find other employment but not longer than three years from the date of
the Event of Termination.
2. The Section entitled "Outplacement" shall be amended to read in its entirety
as follows:
Outplacement
If there has been an Event of Termination or if there has been no
Change-of-Control but you have been terminated without Cause, Covance shall
provide for you, at Covance's cost, executive outplacement support for one-year
following such termination.
3. The Section entitled "Release" shall be amended to read in its entirety as
follows:
Release
If there has been an Event of Termination or if there has been no
Change-of-Control but you have been terminated without Cause, the obligation of
Covance to make to you any or all of the payments specified under this Agreement
(including, without limitation, the Termination Payments or the payments
specified under the paragraph headed "Change of Control", as applicable) shall
be subject to your execution and delivery to Covance of a release in form and
substance reasonably satisfactory to Covance of all claims,
3
demands, suits or actions, whether in law or at equity, you have or may have
relating to or giving rise from such Event of Termination or non-Cause
termination.
Please indicate your agreement with the terms and conditions of this Amendment
No. 1 by signing one copy of this letter and returning it to my attention.
Very truly yours,
Christopher A. Kuebler
President and CEO
Accepted as of the date first above specified:
By: __________________________________
4
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-18485, 333-18487, 333-18493, 333-29467,
333-33185 and 333-36469) of Covance Inc. of our report dated January 20, 1999
appearing on page 26 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
March 4, 1999
ARTICLE 5
This schedule contains summary financial information extracted from the
Covance consolidated financial statements for the year ended December 31, 1998
and is qualified in its entirety by reference to such financial statements.
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