SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
CORNING PHARMACEUTICAL SERVICES INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3265977
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
210 Carnegie Center
Princeton, New Jersey 08540-6233
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(Address of principal executive offices) (Zip Code)
609 452 4440
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, with attached Preferred New York Stock Exchange
Stock Purchase Right
Securities to be registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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2
CORNING PHARMACEUTICAL SERVICES INC.
INTRODUCTION
This Registration Statement on Form 10 relates to the
registration under the Securities Exchange Act of 1934, as amended, of the
common stock, with attached Preferred Stock Purchase Right, of the Registrant
which is being issued as described in the Information Statement, subject to
completion or amendment (the "Information Statement"), dated September 20, 1996,
of Corning Incorporated. Selected pages of the Information Statement which are
related to the Registrant and the securities being registered hereunder (the
"CPS Information") are attached hereto as Exhibit 99.1 and are incorporated
herein by reference in answer to the items of this Registration Statement set
forth below.
Item 1. Business
The information required by this item is contained under the
sections "Risk Factors--Risks Relating to CPS--Loss of Brand Names," "Risk
Factors--Risks Relating to CPS," "Business of CPS," and "The Relationship Among
Corning, CCL and CPS After the Distributions" of the CPS Information and such
sections are incorporated herein by reference.
Item 2. Financial Information
The information required by this item is contained under the
sections "Capitalization of CPS", "Pro Forma Financial Information of CPS,"
"Selected Historical Financial Data of CPS" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CPS" of the CPS
Information and such sections are incorporated herein by reference.
Item 3. Properties
The information required by this item is contained under the
sections "Business of CPS--Facilities" and "Business of
CPS--Services--Biomanufacturing" of the CPS Information, and such sections are
incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained under the
section "Security Ownership of Certain Beneficial Owners and Management of CPS"
of the CPS Information and such section is incorporated herein by reference.
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3
Item 5. Directors and Executive Officers
The information required by this item is contained under the
section "Management of CPS" of the CPS Information and such section is
incorporated herein by reference.
Item 6. Executive Compensation
The information required by this item is contained under the
section "Management of CPS" of the CPS Information and such section is
incorporated herein by reference.
Item 7. Certain Relationships and Related Transactions
The information required by this item is contained under the
section "Management of CPS" of the CPS Information and such section is
incorporated herein by reference.
Item 8. Legal Proceedings
The information required by this item is contained under the
section "Business of CPS--Legal Proceedings" of the CPS Information and such
section is incorporated herein by reference.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
The information required by this item is contained under the
sections "Risk Factors--Risks Relating to CPS--Absence of Dividends," "Risk
Factors--Risks Relating to CPS--Absence of Prior Public Market," "Risk
Factors--Risks Relating to CPS--Potential Volatility of Stock Price,"
"Description of CPS Capital Stock--CPS Common Stock--Dividend Policy,""--CPS
Common Stock--Listing and Trading" and "Management of CPS" of the CPS
Information and such sections are incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities
Not applicable.
Item 11. Description of Registrant's Securities to be Registered
The information required by this item is contained under the
sections "Description of CPS Capital Stock" and "Antitakeover Effects of Certain
Provisions of the
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4
CPS Certificate of Incorporation and By-Laws" of the CPS Information and such
sections are incorporated herein by reference.
Item 12. Indemnification of Directors and Officers
The information required by this item is contained under the
section "Liability and Indemnification of Directors and Officers of CPS" of the
CPS Information and such section is incorporated herein by reference.
Item 13. Financial Statements and Supplementary Data
The information required by this item is contained under the
sections "Capitalization of CPS," "Pro Forma Financial Information of CPS,"
"Selected Historical Financial Data of CPS," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CPS" and "Financial
Statements of Corning Pharmaceutical Services Inc." of the CPS Information and
such sections are incorporated herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 15. Financial Statements and Exhibits
(a) Financial Statements
The information required by this item is contained under the
section "Financial Statements of Corning Pharmaceutical Services Inc." of the
CPS Information and such section is incorporated herein by reference.
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5
(b) Exhibits
Exhibit
Number Description
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2.1* Form of Transaction Agreement among Corning Incorporated, Corning
Clinical Laboratories Inc. and Corning Pharmaceutical Services Inc.,
dated [ _____ ], 1996
3.1* Certificate of Incorporation of the Registrant
3.2* By-Laws of the Registrant
4.1* Form of Common Stock certificate
4.2* Form of Rights Agreement between Corning Pharmaceutical Services
Inc. and [___], dated [___], 1996
10.1* Form of Tax Sharing Agreement among Corning Incorporated, Corning
Clinical Laboratories Inc. and Corning Pharmaceutical Services Inc.
dated [ _____ ], 1996
10.2* Form of Tax Indemnification Agreement between Corning Incorporated
and Corning Pharmaceutical Services Inc., dated [_____ ], 1996
10.3* Form of Tax Indemnification Agreement between Corning
Pharmaceutical Services Inc. and Corning Clinical Laboratories
Inc., dated [ _______ ], 1996
10.4* Form of Corning Pharmaceutical Services Inc. Employee Stock
Ownership Plan
10.5* Form of Corning Pharmaceutical Services Inc. Employee Share
Trust
10.6* Form of Stock Purchase Plan of Corning Pharmaceutical Services Inc.
10.7* Form of Employees Stock Purchase Program
10.8* Form of the Corning Pharmaceutical Services Inc. Employee Equity
Participation Program
21* Subsidiaries of the Registrant
27* Financial Data Schedules
99.1 Selected pages of the Information Statement, subject to completion
or amendment, of Corning Incorporated dated September 20, 1996
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* To be filed by amendment.
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6
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
CORNING PHARMACEUTICAL SERVICES INC.
Dated: September 20, 1996 By: /s/ Christopher A. Kuebler
------------------------------
Christopher A. Kuebler, President
and Chief Executive Officer
Information contained herein is subject to completion or amendment. A
registration statement on Form 10 relating to these securities has been filed
with the Securities and Exchange Commission. This preliminary Information
Statement shall not constitute an offer to sell or the solicitation of an offer
to buy these securities.
SUBJECT TO COMPLETION OR AMENDMENT, DATED SEPTEMBER 20, 1996
INFORMATION STATEMENT
CORNING CLINICAL LABORATORIES INC.
Common Stock
with attached Preferred Stock Purchase Rights
AND
CORNING PHARMACEUTICAL SERVICES INC.
Common Stock
with attached Preferred Stock Purchase Rights
[CORNING LOGO]
This information statement (the "Information Statement") is being
furnished in connection with the distributions to holders of common stock with
attached preferred share purchase rights (the "Corning Common Stock") of Corning
Incorporated ("Corning"), a New York corporation, of all of the outstanding
common stock with attached preferred stock purchase rights, of (i) Corning
Clinical Laboratories Inc. ("CCL"), a Delaware corporation which will be, at the
time of such distributions, a direct wholly owned subsidiary of Corning, and
(ii) Corning Pharmaceutical Services Inc. ("CPS"), a Delaware corporation which
currently is and, at the time of such distributions, will be a direct wholly
owned subsidiary of CCL. The distribution (the "CCL Spin-Off Distribution") of
all of the outstanding common stock with attached preferred stock purchase
rights of CCL (the "CCL Common Stock") to the holders of Corning Common Stock
will be immediately followed by the distribution (the "CPS Spin-Off
Distribution" and, together with the CCL Spin-Off Distribution, the
"Distributions") of all of the outstanding common stock with attached preferred
stock purchase rights of CPS (the "CPS Common Stock") to the holders of CCL
Common Stock. Since the CPS Spin-Off Distribution will be immediately after (but
on the same day as) the CCL Spin-Off Distribution, each holder of Corning Common
Stock will, immediately after the Distributions, not only hold shares of Corning
Common Stock but also shares of CCL Common Stock and CPS Common Stock.
The CCL Common Stock and CPS Common Stock will be distributed at 11:59
p.m. on ____, 1996 (the "Distribution Date") to holders of record of Corning
Common Stock as of the close of business on ____, 1996 (the "Record Date"). Each
such holder will receive one share of CCL Common Stock for every eight shares of
Corning Common Stock held on the Record Date and one share of CPS Common Stock
for every four shares of Corning Common Stock held on the Record Date, with cash
being paid to holders in lieu of fractional shares. No consideration will be
paid by Corning's shareholders for shares received in the Distributions nor will
such shareholders be required to surrender or exchange shares of Corning Common
Stock. There have been no public trading markets for the CCL Common Stock or the
CPS Common Stock, although "when issued" markets are expected to develop prior
to the Distribution Date. Applications will be made to list the shares of CCL
Common Stock and CPS Common Stock on the New York Stock Exchange ("NYSE") under
the symbols "__" and "__," respectively, subject to official notice of the
Distributions.
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NO SHAREHOLDER APPROVAL OF THE DISTRIBUTIONS IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES.
--------------------------------
Corning Shareholders with inquiries related to the Distributions should
contact Investor Relations, Corning Incorporated, One Riverfront Plaza, Corning,
New York 14831, telephone (607) 974-9000, or Corning's stock transfer agent
Harris Trust and Savings Bank, Shareholder Services Division, P.O. Box 755,
Chicago, Illinois 60690-0755, Telephone (800) 255-0461.
The date of this Information Statement is ____, 1996.
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TABLE OF CONTENTS
Page
SUMMARY ................................................................ 3
INTRODUCTION............................................................. 15
CORNING ................................................................ 16
SELECTED CONSOLIDATED FINANCIAL DATA OF CORNING..................... 17
CAPITALIZATION OF CORNING........................................... 22
THE DISTRIBUTIONS........................................................ 23
THE RELATIONSHIP AMONG CORNING, CCL AND CPS AFTER THE
DISTRIBUTIONS....................................................... 27
CORNING CLINICAL LABORATORIES INC.
RISK FACTORS........................................................ 30
CAPITALIZATION OF CCL............................................... 35
SELECTED HISTORICAL FINANCIAL DATA OF CCL........................... 36
PRO FORMA FINANCIAL INFORMATION OF CCL.............................. 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CCL................................ 47
BUSINESS OF CCL..................................................... 56
MANAGEMENT OF CCL................................................... 80
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CCL........................................... 92
DESCRIPTION OF CCL CAPITAL STOCK.................................... 93
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CCL
CERTIFICATE OF INCORPORATION AND BY-LAWS........................ 97
DESCRIPTION OF CERTAIN INDEBTEDNESS OF CCL.......................... 101
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF CCL...... 102
CORNING PHARMACEUTICAL SERVICES INC.
RISK FACTORS........................................................ 103
CAPITALIZATION OF CPS.................................................... 109
SELECTED HISTORICAL FINANCIAL DATA OF CPS........................... 110
PRO FORMA FINANCIAL INFORMATION OF CPS.............................. 112
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CPS................................ 117
BUSINESS OF CPS..................................................... 125
MANAGEMENT OF CPS................................................... 145
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF CPS............................................... 156
DESCRIPTION OF CPS CAPITAL STOCK.................................... 157
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CPS
CERTIFICATE OF INCORPORATION AND BY-LAWS........................ 161
DESCRIPTION OF CERTAIN INDEBTEDNESS OF CPS.......................... 165
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF CPS...... 166
AVAILABLE INFORMATION.................................................... 167
INDEX TO FINANCIAL STATEMENTS............................................ F-1
2
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THE RELATIONSHIP AMONG CORNING, CCL AND CPS
AFTER THE DISTRIBUTIONS
After the Distributions, Corning will not have any ownership interest
in either CCL or CPS, and CCL and CPS will be independent public companies.
Corning, CCL and CPS will enter into certain agreements, summarized below, 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. Copies of the forms of such
agreements are filed as exhibits to the Registration Statements of which this
Information Statement is a part. The following description summarizes the
material terms of such agreements, but is qualified by reference to the texts of
such agreements as filed.
Transaction Agreement
Corning, CCL and CPS will enter into the Transaction Agreement (the
"Transaction Agreement") providing for, among other things, certain conditions
precedent to the Distributions, certain corporate transactions required to
effect the Distributions and other arrangements between Corning, CCL and CPS
subsequent to the Distributions.
See "The Distributions--Conditions; Termination."
The Transaction Agreement will provide 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 (i) the clinical laboratory
business to CCL and its subsidiaries, (ii) the contract research business to CPS
and its subsidiaries and (iii) all other business conducted by Corning prior to
the Distribution Date to Corning and its subsidiaries other than CCL and CPS.
The Transaction Agreement will provide that Corning, CCL and CPS will
use their respective commercially reasonable efforts to achieve an allocation of
consolidated indebtedness of Corning and a capital structure that reflects the
capital structure after the Distributions of Corning, CCL and CPS as
contemplated in the discussion under "Capitalization of CCL" and "Capitalization
of CPS." Each of Corning, CCL and CPS will agree to indemnify the other parties
to the Transaction Agreement in connection with losses that may result from
certain liabilities or the breach of any provision of the Transaction Agreement.
In addition, Corning will agree to indemnify CCL against all monetary penalties,
fines or settlements arising out of any governmental criminal, civil or
administrative investigations or claims that are pending as of the Distribution
Date to the extent that such investigations or claims arise out of or are
related to alleged violations of federal laws by reason of CCL, its affiliates,
officers or directors billing any federal program or agency for services
rendered to beneficiaries of such program or agency. Corning will not indemnify
CCL against losses of revenues and profits as a consequence of any exclusion
from participation in federal or state health care programs or against any
governmental claims that arise after the Distribution Date, even though related
to periods prior to the Distributions.
The Transaction Agreement will also provide 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 will 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 CCL will enter into a tax indemnification agreement (the
"Corning/CCL Spin-Off Tax Indemnification Agreement") pursuant to which (1) CCL
will represent to Corning that, to the best of its knowledge, the materials
relating to CCL submitted to the IRS in connection with the request for ruling
submitted to the IRS are complete and accurate in all material respects, (2) CCL
will represent that it has no present intention to
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undertake the transactions described in part (3)(iii) hereafter or to cease to
engage in the active conduct of providing clinical laboratory testing services,
(3) CCL will covenant and agree that for a period of two years following the
Distribution Date (the "Restricted Period"), (i) CCL will continue to engage in
the clinical laboratory testing business, (ii) CCL will continue to manage and
own at least 50% of the assets which it owns directly and indirectly immediately
after the Distribution Date and (iii) neither CCL, nor any related corporation
nor any of their respective directors, officers or other representatives will
undertake, authorize, approve, recommend, permit, facilitate, or enter into any
contract, or consummate any transaction with respect to: (A) the issuance of CCL
Common Stock (including options and other instruments convertible into CCL
Common Stock) which would exceed fifty percent (50%) of the outstanding shares
of CCL Common Stock immediately after the Distribution Date; (B) the issuance of
any other instrument that would constitute equity for federal tax purposes
("Disqualified CCL Stock"); (C) the issuance of options and other instruments
convertible into Disqualified CCL Stock; (D) any repurchases of CCL Common
Stock, unless such repurchases satisfy certain requirements; (E) the
dissolution, merger, or complete or partial liquidation of CCL or any
announcement of such action; or (F) the waiver, amendment, termination or
modification of any provision of the CCL Rights Plan (as defined therein) in
connection with, or in order to permit or facilitate, any acquisition of CCL
Common Stock or other equity interest in CCL, and (4) CCL will agree to
indemnify Corning for Taxes arising from violations of (1), (2) or (3) above and
for Taxes arising as a result of an acquisition of 20% or more of the stock of
CCL by a person or related persons during the Restricted Period. If obligations
of CCL under this agreement were breached and as a result thereof one or both of
the Distributions do not qualify for the treatment stated in the IRS Ruling, CCL
would be required to indemnify Corning for Taxes imposed and such
indemnification obligations could exceed the net asset value of CCL at such
time.
Corning and CPS will enter into a tax indemnification agreement (the
"Corning/CPS Spin-Off Tax Indemnification Agreement") pursuant to which (1) CPS
will represent to Corning that to the best of its knowledge, the materials
relating to CPS submitted to the IRS in connection with the request for ruling
submitted to the IRS are complete and accurate in all material respects, (2) CPS
will represent that it has no present intention to undertake the transactions
described in part (3)(iii) hereafter or to cease to engage in the active conduct
of providing contract research services, (3) CPS will covenant and agree that
during the Restricted Period, (i) CPS will continue to engage in the contract
research business, (ii) CPS will continue to manage and own at least 50% of the
assets which it owns directly and indirectly immediately after the Distribution
Date and (iii) neither CPS, nor any related corporations nor any of their
respective directors, officers or other representatives will undertake,
authorize, approve, recommend, permit, facilitate, or enter into any contract,
or consummate any transaction with respect to: (A) the issuance of CPS Common
Stock (including options and other instruments convertible into CPS Common
Stock) which would exceed fifty percent (50%) of the outstanding shares of CPS
Common Stock immediately after the Distribution Date; (B) the issuance of any
other instrument that would constitute equity for federal tax purposes
("Disqualified CPS Stock"); (C) the issuance of options and other instruments
convertible into Disqualified CPS Stock; (D) any repurchases of CPS Common
Stock, unless such repurchases satisfy certain requirements; (E) the
dissolution, merger, or complete or partial liquidation of CPS or any
announcement of such action; or (F) the waiver, amendment, termination or
modification of any provision of the CPS Rights Plan (as defined therein) in
connection with, or in order to permit or facilitate, any acquisition of CPS
Common Stock or other equity interest in CPS and (4) CPS will agree to indemnify
Corning for Taxes arising from violations of (1), (2) or (3) above and for Taxes
arising as a result of an acquisition of 20% or more of the stock of CPS by a
person or related persons during the Restricted Period. If obligations of CPS
under this agreement were breached and as a result thereof one or both of the
Distributions do not qualify for the treatment stated in the IRS Ruling, CPS
would be required to indemnify Corning for Taxes imposed and such
indemnification obligations could exceed the net asset value of CPS at such
time.
CCL and CPS will enter into a tax indemnification agreement (the
"CCL/CPS Spin-Off Tax Indemnification Agreement"). The CCL/CPS Tax Spin-Off Tax
Indemnification Agreement will be essentially the same as the Corning/CPS
Spin-Off Tax Indemnification Agreement except that CPS will make representations
to and indemnify CCL as opposed to Corning. If obligations of CPS under this
agreement were breached and as a result thereof one or both of the Distributions
do not qualify for the treatment stated in the IRS Ruling, CPS would be required
to
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indemnify CCL for Taxes imposed and such indemnification obligations could
exceed the net asset value of CPS at such time.
The Spin-Off Tax Indemnification Agreements will also require CCL and
CPS to take such actions as Corning may reasonably request to preserve the
favorable tax treatment provided for in any rulings obtained from the IRS in
respect of the Distributions.
Tax Sharing Agreement
Corning, CCL and CPS will enter into the Tax Sharing Agreement which
will allocate responsibility for federal income and various other taxes
("Taxes") among the three companies. The Tax Sharing Agreement provides that,
except for Taxes arising as a result of the failure of either or both of the
Distributions to qualify for the treatment stated in the IRS Ruling (which Taxes
are allocated either pursuant to the Spin-Off Tax Indemnification Agreements or
as described below), Corning is liable for and will pay the federal income taxes
of the consolidated group that includes CCL and CPS and their subsidiaries,
provided, however, that CCL and CPS are required to reimburse Corning for taxes
for periods in which they are 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 CCL and CPS, including their respective subsidiaries, 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 CCL or CPS, 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 provides that, if either of the
Distributions fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the Spin-
Off Tax Indemnification Agreements), Taxes imposed upon or incurred by Corning,
CCL or CPS as a result of such failure are allocated among Corning, CCL and CPS
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, CCL and CPS
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 in proportion to its
relative average market capitalization as determined by the average closing
price for the common stock of each 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, CCL
and CPS, the liability so allocated to CCL or CPS could exceed the net asset
value of CCL or CPS, respectively.
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CORNING PHARMACEUTICAL SERVICES INC.
RISK FACTORS
Corning shareholders should be aware that the Distributions and
ownership of the CPS Common Stock involve certain risks, including those
described below, which could adversely affect the value of their holdings.
Neither Corning nor CPS makes, nor is any other person authorized to make, any
representations as to the future market value of CPS Common Stock.
Risks Relating to the Distributions
Effects on Corning Stock. Following the Distributions, Corning Common
Stock will continue to be listed and traded on the NYSE and certain other stock
exchanges. As a result of the Distributions, the trading price of Corning Common
Stock is expected to be correspondingly lower than the trading price of Corning
Common Stock immediately prior to the Distributions. There can be no assurance
that the combined trading prices of Corning Common Stock, CCL Common Stock and
CPS Common Stock after the Distributions will be equal to or greater than the
trading price of Corning Common Stock prior to the Distributions.
Risks Relating to CPS
Financial Impact of the Distributions on CPS. While CPS has a
substantial operating history, it has not operated as a separate independent
company. As a Corning subsidiary, CPS has had access to the cash flow generated
by Corning and to Corning's credit, which is based on the combined assets of
Corning, which included CCL and CPS. Subsequent to the Distributions, CPS will
not have the benefit of Corning's cash flow or assets. This may impact, among
other things, CPS's ability to expand, through acquisitions or otherwise, and
could thereby have an adverse effect on CPS's operating earnings and cash flow.
Dependence on and Effect of Government Regulation. CPS's business
depends on the continued strict government regulation of the drug development
process, especially in the United States and Europe. Changes in regulation,
including a relaxation in regulatory requirements or the introduction of
simplified drug approval procedures, could have a material adverse effect on the
demand for the services offered by CPS.
The failure on the part of CPS to comply with applicable regulations
could result in the termination of ongoing research or the disqualification of
data for submission to regulatory authorities. Furthermore, the issuance of a
notice of finding by the Food and Drug Administration (the "FDA") to either CPS
or its clients based upon a material violation by CPS of Good Clinical Practices
("GCP"), Good Laboratory Practices ("GLP") or Current Good Manufacturing
Practices ("GMP") requirements could have a material adverse effect on CPS. See
"Business of CPS--CRO Industry Overview" and "Business of CPS--Government
Regulation."
Fixed Price Nature of Contracts; Loss or Delay of Large Contracts. Most
of CPS's contracts for the provision of its services are fixed price or
fee-for-service with a cap. Since CPS's contracts are predominantly structured
this way, CPS bears the risks of cost overruns. Underpricing of contracts or
significant cost overruns could have a material adverse effect on CPS.
Most of CPS's contracts for the provision of its services, including
contracts with governmental agencies, are terminable by the client immediately
or upon notice. Contracts may be terminated for a variety of reasons, including
the failure of products to satisfy safety requirements, unexpected or undesired
results of the product, the client's decision to terminate the development of
the product or to forego or end a particular study, insufficient patient
enrollment or investigator recruitment or CPS's failure to properly discharge
its obligations thereunder. Although the contracts often require payment to CPS
of expenses to wind down the study and fees earned to date
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and, in some cases, a termination fee or a payment of a portion of the fees or
profits that would have been earned under the contract if the contract had not
been terminated early, the loss of a large contract or the loss of multiple
contracts could have a material adverse effect on CPS. See "Business of
CPS--Contractual Arrangements."
Biomanufacturing -- New Business Venture. CPS holds a majority interest
in Corning Bio Inc. ("Corning Bio"), a majority owned company formed in 1995 to
manufacture peptides and recombinant proteins for biotechnology and
pharmaceutical clients in accordance with GMP for preclinical and clinical
trials as well as for commercial sales and to provide process development
services. See "Business of CPS--Services--Biomanufacturing." Outsourced
biomanufacturing is a relatively new industry and as such companies in this
industry are subject to all of the risks inherent in a new or emerging industry,
including changes in the regulatory regime, an absence of an established
earnings history, the availability of adequately trained management and
employees, and the potential for significant client concentration. As a start-up
venture, Corning Bio is subject to the risks inherent in the establishment of a
new business enterprise, including, among others, unanticipated construction
delays, operational and manufacturing problems, additional and unforeseen costs
and expenses and inability to attract and retain clients. There can be no
assurance that, even after the expenditure of substantial funds and efforts,
Corning Bio will be able to market successfully its biomanufacturing services.
Corning Bio's biomanufacturing facility is still under construction and is
expected to be "mechanically" completed during the fourth quarter of 1996.
Mechanical completion occurs when all structural aspects of the facility are
complete, all mechanical equipment and systems are installed and a certificate
of occupancy has been issued by an applicable governmental authority. After
mechanical completion, the facility must be "validated," which means that the
various equipment, systems and procedures that are required to manufacture a
biologic must be thoroughly tested and reviewed. Although Corning Bio has
submitted proposals to a number of prospective biopharmaceutical clients, it has
not yet been awarded any contracts. For the period ended December 31, 1995,
Corning Bio reported a net loss of approximately $1.9 million, and for the six
months ended June 30, 1996, Corning Bio reported a net loss of approximately
$1.6 million.
The biomanufacturing facility is being financed through several tax
retention operating leases provided by a commercial lending institution (the
"Bank") and, during the construction phase, is being leased by a general
contractor (the "General Contractor"). Under certain circumstances, including
mechanical completion of the facility after March 1, 1998 or some other default
of the General Contractor, Corning Bio may become liable for the entire cost of
constructing, equipping and validating the biomanufacturing facility, which CPS
believes should not exceed $55 million. The leases expire 10 years from the date
of mechanical completion of the facility. The annual minimum lease payments are
currently estimated at $5.5 million. At the expiration of the lease term,
Corning Bio is liable for the unamortized balance of the cost of the facility,
currently estimated to be $37 million. Corning Bio may also choose to purchase
the facility at specific dates over the 10 year period. Using current estimates,
the purchase price would be approximately $54 million at the end of the first
year, decreasing on an amortizing basis to approximately $37 million at the end
of the tenth year.
Volatility of Quarterly Operating Results. CPS's quarterly operating
results are subject to volatility due to such factors as the commencement,
completion or cancellation of large contracts, progress of ongoing contracts,
acquisitions, the timing of start-up expenses for new offices and changes in the
mix of services. Since a large percentage of CPS's operating costs are
relatively fixed, variations in the timing and progress of large contracts can
materially affect quarterly results. Because a significant portion of CPS's
revenues are generated by its international operations, exchange rate
fluctuations may also influence these results. CPS believes that comparisons of
its quarterly financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance. However, fluctuations in
quarterly results could affect the market price of the CPS Common Stock in a
manner unrelated to the longer term operating performance of CPS. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CPS--Quarterly Results."
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Dependence on Certain Industries and Clients. Revenues of CPS are
highly dependent on research and development expenditures by the pharmaceutical
and biotechnology industries. Accordingly, CPS's operations could be materially
and adversely affected by general economic downturns in these industries, the
impact of the current trend toward consolidation in these industries or other
factors resulting in a decrease in research and development expenditures.
Furthermore, CPS has benefitted to date from the increasing tendency of
pharmaceutical and biotechnology companies to outsource both small and large
clinical research projects. A reversal of this trend could have a material
adverse effect on the revenues of CPS.
CPS believes that concentrations of business in the contract research
organization ("CRO") industry are not uncommon. CPS has experienced such
concentration in the past and may experience such concentration in fiscal 1997
and in future years. No client accounted for 10% or more of CPS's net revenues
in 1993, 1994 or 1995. None of CPS's clients accounted for greater than 5% of
CPS's net revenues in the year ended December 31, 1993. In the years ended
December 31, 1994 and 1995, one client accounted for greater than 5% of CPS's
net revenue. In fiscal 1993, 1994 and 1995 and the six months ended June 30,
1996, CPS's top five clients accounted for approximately 17%, 20%, 21% and 23%,
respectively, of CPS's net revenue. The loss of business from a significant
client or group of clients could have a material adverse effect on CPS. See
"Business of CPS--Trends Affecting the CRO Industry" and "Business of
CPS--Clients and Marketing."
Competition; CRO Industry Consolidation; Few Barriers to Entry. The CRO
industry is highly fragmented, with participants ranging from hundreds of small,
limited-service providers to a few full service CROs with global operations. CPS
primarily competes against in-house departments of pharmaceutical companies,
full-service CROs and, to a lesser extent, universities and teaching hospitals.
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 timesaving accurate manner, the ability to manage large-scale clinical
trials both domestically and internationally, expertise and experience in health
economics and size. While CPS has competed effectively in these areas, there can
be no assurance that CPS will be able to continue to do so. As a result of
competitive pressures, the CRO industry is consolidating. This trend is likely
to produce competition among the larger CROs for both clients and acquisition
candidates and companies may choose to limit the CROs they are willing to work
with. In addition, there are few barriers to entry for small, limited-service
entities considering entering the CRO industry. These entities may compete
against larger CROs for clients. Furthermore, the CRO industry has attracted the
attention of the investment community, which could lead to increased competition
by increasing the availability of financial resources for CROs. Increased
competition may lead to price and other forms of competition that could have a
material adverse effect on the results of operations of CPS. See "Business of
CPS--Competition."
Potential Liability. In connection with many clinical trials, CPS
contracts with physicians, also referred to as investigators, to conduct the
clinical trials to test new drugs on human volunteers. Such testing creates risk
of liability for personal injury or death to volunteers, particularly to
volunteers with life-threatening illnesses, resulting from adverse reactions to
the drugs administered. Although CPS does not believe it is legally accountable
for the medical care rendered by third-party investigators, it is possible that
CPS could be held liable for the claims and expenses arising from any
professional malpractice of the investigators with which it contracts or in the
event of personal injury or death of persons participating in clinical trials.
CPS also could be held liable for errors or omissions in connection with the
services it performs that result in harm that arises either during or after a
trial to study volunteers or consumers of the drug in the general marketplace
subsequent to regulatory approval of the drug. For instance, improper storage,
packaging or manufacturing of a compound could lead to its adulteration. In
addition, CPS could be liable for the general risks associated with its Phase I
facility including, but not limited to, adverse events resulting from the
administration of drugs to clinical trial participants or the professional
malpractice of Phase I medical care providers. Further, CPS could be held liable
for harm to study volunteers or consumers of an approved drug for testing errors
or omissions by either its preclinical or central laboratories. Moreover,
because CPS's preclinical laboratories also conduct tests for the agrochemical
and food industries, CPS could be
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<PAGE>
held liable for errors or omissions that result in unsafe products entering the
marketplace. Finally, although CPS's animal breeding facilities maintain
procedures in accordance with applicable government regulations and company
policies for the quarantine and handling of imported animals, including
primates, there is a risk that these animals may be infected with diseases that
may be harmful and even lethal to themselves and humans. In 1996 CPS, with the
approval of the Texas Department of Health and the Centers for Disease Control,
destroyed a shipment of monkeys from the Philippines because some had been
infected with a substrain of the Ebola-Reston virus, which is lethal to monkeys.
CPS believes that its risks are generally reduced by contractual
indemnification provisions with clients and, where applicable, investigators
(the scope of which varies from client to client and the performance of which
are not secured); insurance maintained by clients and, where applicable,
investigators and by CPS; and various regulatory requirements, including the use
of institutional review boards in the clinical area and the procurement of each
volunteer's informed consent to participate in the clinical study. The
contractual indemnifications generally do not protect CPS against liability
arising from certain of its own actions such as negligence. CPS could be
materially and adversely affected if it were required to pay damages or bear the
costs of defending any claim outside the scope of or in excess of a contractual
indemnification provision or beyond the level of insurance coverage or in the
event that an indemnifying party does not fulfill its indemnification
obligations. There can be no assurance that CPS will be able to maintain such
insurance coverage on terms acceptable to CPS.
Risks Associated with Acquisitions; Integration of Acquired Operations.
CPS reviews many acquisition candidates in the ordinary course of business and,
in addition to acquisitions already made, CPS is continually evaluating new
acquisition opportunities. Acquisitions involve numerous risks, including, among
other things, difficulties and expenses incurred in connection with the
acquisitions and the subsequent assimilation of the operations and services or
products of the acquired companies, the diversion of management's attention from
other business concerns and the potential loss of key employees of the acquired
company. Acquisitions of foreign companies also may involve the additional risks
of assimilating differences in foreign business practices and overcoming
language and other cultural barriers. In the event that the operations of an
acquired business do not perform as expected, CPS may be required to restructure
the acquired business or write off the value of some or all of the assets of the
acquired business. There can be no assurance that acquisition candidates will be
available on terms and conditions acceptable to CPS or, despite CPS's success
with prior acquisitions, that any past or future acquisition will be
successfully integrated into CPS's operations, or that they will contribute
favorably to CPS's results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CPS."
Potential Adverse Impact of Health Care Reform. The health care
industry is subject to changing political, economic and regulatory influences
that may affect the pharmaceutical and biotechnology industries. During 1994,
several comprehensive health care reform proposals were introduced in Congress.
The intent of the proposals was, generally, to expand health care coverage for
the uninsured and reduce the growth of total health care expenditures. While
none of the proposals was adopted, health care reform may again be addressed by
Congress, and there have been efforts recently to enact less comprehensive
reform bills. Similar reform movements have occurred in Europe and Asia.
Implementation of government health care reform may adversely affect research
and development expenditures by pharmaceutical and biotechnology companies which
could decrease the business opportunities available to CPS in the United States
and abroad. CPS is unable to predict the likelihood of such or similar
legislation being enacted into law or the effects such legislation would have on
CPS.
Loss of Brand Names. In connection with the CPS Spin-Off Distribution,
CPS will change the trade names under which it conducts its business. CPS
believes that its business has benefitted from the use of the "Corning,"
"Besselaar," "SciCor," "Hazleton," "PACT," "HTA," "National Packaging" and "HRP"
brand names. The impact of the change in trade names on CPS's business and
operations cannot be fully predicted.
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<PAGE>
Absence of Dividends. It is currently contemplated that, following the
Distributions, CPS will not pay cash dividends in the foreseeable future, but
will retain earnings to provide funds for the operation and expansion of its
business. In addition, the CPS Credit Facility contains covenants that will
limit the ability of CPS to pay dividends on the CPS Common Stock. See
"Description of Capital Stock of CPS--CPS Common Stock--Dividend Policy."
Potential Liability under the Spin-Off Tax Indemnification Agreements.
CPS will enter into the Corning/CPS Spin-Off Tax Indemnification Agreement that
will prohibit CPS for a period of two years after the Distribution Date from
taking certain actions, including a sale of 50% or more of the assets of CPS or
engaging in certain equity or financing transactions, that might jeopardize the
favorable tax treatment of the Distributions under Code section 355 and will
provide Corning with certain rights of indemnification against CPS. The
Corning/CPS Spin-Off Tax Indemnification Agreement will also require CPS to take
such actions as Corning may reasonably request to preserve the favorable tax
treatment provided for in any rulings obtained from the IRS in respect of the
Distributions. CPS will also enter into the CCL/CPS Spin-Off Tax Indemnification
Agreement that will prohibit CPS for a period of two years after the
Distribution Date from taking certain actions, including a sale of 50% or more
of the assets of CPS or engaging in certain equity or financing transactions,
that might jeopardize the favorable tax treatment of the CPS Spin-Off
Distribution under Code section 355 and will provide CCL with certain rights of
indemnification against CPS. The CCL/CPS Spin-Off Tax Indemnification Agreement
will also require CPS to take such actions as CCL may reasonably request to
preserve the favorable tax treatment provided for in any rulings obtained from
the IRS in respect of the Distributions. If obligations of CPS under either the
Corning/CPS Spin-Off Tax Indemnification Agreement or the CCL/CPS Spin-Off Tax
Indemnification Agreement were breached and primarily as a result thereof either
of the Distributions do not receive such treatment, CPS would be required to
indemnify Corning and CCL for Taxes imposed and such indemnification obligations
could exceed the net asset value of CPS at such time. See "The Relationship
Among Corning, CCL and CPS After the Distributions--Spin-Off Tax Indemnification
Agreements."
Potential Adverse Effect of Exchange Rate Fluctuations on Results.
Approximately 22%, 24% and 30% of CPS's net revenues for the years ended
December 31, 1993, 1994, and 1995, respectively, were derived from CPS's
operations outside of the United States. Contracts between CPS's foreign
subsidiaries and its clients are frequently denominated in currencies other than
the applicable subsidiary's local currency. Accordingly, payments received for
services rendered under such contracts are denominated in a currency different
than the currency used for the payment of the subsidiary's expenses. Therefore,
the subsidiary's net revenues, expenses and earnings are affected by
fluctuations in exchange rates. To the extent CPS is unable to shift to its
clients the effects of currency fluctuations, these fluctuations could have a
material adverse effect on CPS's results of operations. CPS does not currently
hedge against the risk of exchange rate fluctuations. In addition, CPS's
combined financial statements are denominated in U.S. dollars, and, accordingly,
changes in exchange rates between the applicable foreign currency and the U.S.
dollar will affect the translation of such subsidiary's financial results into
U.S. dollars for purposes of reporting CPS's combined financial results.
Absence of a Prior Public Market. Prior to the Distributions, there has
been no public market for the CPS Common Stock. Although it is expected that the
CPS Common Stock will be approved for listing on the NYSE, there is no existing
market for the CPS Common Stock and there can be no assurance as to the
liquidity of any markets that may develop, the ability of CPS stockholders to
sell their shares of CPS Common Stock or at what price CPS stockholders will be
able to sell their shares of CPS Common Stock. Future trading prices will depend
on many factors including, among other things, prevailing interest rates, CPS's
operating results and the market for similar securities.
Potential Volatility of Stock Price. The market price of CPS Common
Stock could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results, changes in earnings estimates by analysts,
market conditions in the contract research industry, prospects for health care
reform, changes in government regulation and general economic conditions. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have been unrelated to the operating performance of
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<PAGE>
particular companies. Moreover, CPS Common Stock could be subject to wide
fluctuations for some time after the Distributions as a result of heavy trading
volume stemming from sales by shareholders of Corning Common Stock who decide
not to continue owning CPS Common Stock. Certain of such sales may include those
to be made on behalf of investment plans maintained for the benefit of Corning
employees. These plans currently hold slightly less than 5% of the outstanding
Corning Common Stock and, as a result of the Distributions, are expected to hold
a similar percentage of the CPS Common Stock. From time to time as market
conditions warrant, and as the administrator of the plans believes to be in the
best interests of the employee beneficiaries, the administrator will sell all of
the CPS Common Stock held by the plans. Such sales are expected to occur within
a period of three years after the Distribution Date. See "Security Ownership by
Certain Beneficial Owners and Management of CPS." These market fluctuations
could have an adverse effect on the market price of CPS Common Stock. CPS
stockholders should be aware, and must be willing to bear the risk, of such
fluctuations in earnings and stock price.
Dependence on Key Employees. CPS's affairs are managed by a small
number of key management personnel, the loss of any of whom could have an
adverse impact on CPS. CPS has separation agreements with such persons. There
can be no assurance that CPS can retain its key managerial and technical
employees or that it can attract, assimilate or retain other skilled technical
personnel in the future. See "Management of CPS."
Certain Provisions Relating to Changes in Control. CPS's amended and
restated certificate of incorporation (the "CPS Certificate") and by-laws (the
"CPS By-Laws"), and the Delaware General Corporation Law ("DGCL"), contain
several provisions that could have the effect of delaying, deferring or
preventing a change in control of CPS in a transaction not approved by the CPS
Board, or, in certain circumstances, by the disinterested members of the CPS
Board. In addition, an acquisition of certain securities or assets of CPS within
two years after the Distribution Date might jeopardize the tax treatment of the
Distributions and could result in CPS being required to indemnify Corning and
CCL. See "-- Potential Liability under the Spin-Off Tax Indemnification
Agreements" and "Antitakeover Effects of Certain Provisions of the CPS
Certificate of Incorporation and the CPS By-Laws."
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CAPITALIZATION OF CPS
The following table sets forth CPS's capitalization as of June 30, 1996
giving effect to the estimated initial borrowing under the CPS Credit Facility
and the CPS Spin-Off Distribution as if such transactions occurred on such date.
This table should be read in conjunction with the CPS Financial Statements and
notes thereto, and the CPS Pro Forma Financial Information (as defined below)
and notes thereto included elsewhere herein. Historical and pro forma
capitalization may not be indicative of CPS's future capitalization as an
independent company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CPS" and "Business of CPS."
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Long-Term Debt:
Due to banks.............................. $ $ 120,104 (a) $ 120,104
Due to Corning and affiliates............. 110,104 (110,104) (a)
---------------- ---------------------- ---------------
Total Long-Term Debt.................... 110,104 10,000 120,104
---------------- ---------------------- ---------------
Stockholder's Equity:
Contributed capital....................... 31,868 28,750 (b) 60,618
Retained earnings......................... 61,429 (21,104) (b) 40,325
Cumulative translation adjustment......... 2,243 2,243
---------------- ---------------------- ---------------
Total Stockholder's Equity.............. 95,540 7,646 103,186
---------------- ---------------------- ---------------
Total Capitalization........................ $ 205,644 $ 17,646 $ 223,290
================ ====================== ===============
- -------------------------
</TABLE>
(a) The pro forma adjustment to long-term debt due to banks and due to
Corning and affiliates reflect the borrowings to be incurred in
connection with the CPS Spin-Off Distribution. Immediately prior to the
CPS Spin-Off Distribution, CPS will incur long-term bank borrowings to
repay Corning and affiliates for all intercompany borrowings and income
tax liabilities. Assuming the CPS Spin-Off Distribution occurred on
June 30, 1996, such borrowings would aggregate approximately $120.1
million. The assumed interest rate on these borrowings is 6.0%.
(b) The pro forma adjustments to contributed capital and retained earnings
represent costs directly related to the CPS Spin-Off Distribution
expected to be incurred during the fourth quarter of 1996. Such costs
consist of direct costs of the CPS Spin-Off Distribution and one-time
charges associated with shares allocated to the employee stock
ownership and other employee benefit plans.
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<PAGE>
SELECTED HISTORICAL FINANCIAL
DATA OF CPS
The following table presents selected historical financial data of CPS
at the dates and for each of the periods indicated. The selected financial data
as of and for each of the years ended December 31, 1995, 1994 and 1993 have been
derived from the audited combined financial statements of CPS and the notes
thereto included elsewhere herein. The selected financial data as of and for the
six months ended June 30, 1996 and 1995 and the years ended December 31, 1992
and 1991 have been derived from the unaudited combined financial statements of
CPS. In the opinion of management, the unaudited combined financial statements
include all adjustments, consisting of normal recurring accruals, that are
necessary for a fair presentation of the financial position and results of
operations for these periods. The unaudited interim results of operations for
the six months ended June 30, 1996 are not necessarily indicative of the results
for the entire year ending December 31, 1996.
The selected financial data should be read in conjunction with the CPS
Financial Statements and notes thereto, and the CPS Pro Forma Financial
Information included elsewhere herein. Historical combined financial data may
not be indicative of CPS's future performance as an independent company. See the
CPS Financial Statements and notes thereto and CPS Pro Forma Financial
Information and notes thereto. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations of CPS" and "Business of CPS."
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<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Six Months Ended
June 30, Year Ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues.......................... $ 230,227 $196,787 $ 409,174 $ 319,501 $ 289,697 $ 270,871 $ 246,949
Costs and expenses:
Cost of revenue ................... 149,624 128,763 270,726 213,490 192,783 192,375 176,860
Selling, general and administrative 36,946 30,083 64,201 48,892 42,949 41,230 37,106
Restructuring charge .............. 4,616 4,616 3,373
Depreciation and amortization ..... 12,284 10,677 22,070 18,520 16,984 15,212 14,621
--------- -------- --------- --------- --------- --------- ---------
Total .......................... 198,854 174,139 361,613 280,902 252,716 252,190 228,587
--------- -------- --------- --------- --------- --------- ---------
Income from operations................ 31,373 22,648(a) 47,561(a) 38,599 36,981 18,681 18,362
--------- -------- --------- --------- --------- --------- ---------
Other expense (income)
Interest expense, net............. 2,665 2,751 5,269 4,307 4,421 5,686 4,388
Foreign exchange (gain) loss...... 109 327 (784) (712) 852 1,258
--------- -------- --------- --------- --------- --------- ---------
2,774 3,078 4,485 3,595 5,273 6,944 4,388
--------- -------- --------- --------- --------- --------- ---------
Income before taxes and equity
investee loss..................... 28,599 19,570(a) 43,076(a) 35,004 31,708 11,737 13,974
Taxes on income....................... 12,480 8,376 18,445 14,924 13,506 6,834 6,835
Equity investee loss (gain)........... (15) 198 405 435 1,391 303 394
--------- -------- --------- --------- --------- --------- ---------
Net income before cumulative
effect of change in
accounting method................. 16,134 10,996 24,226 19,645 16,811 4,600 6,745
Cumulative effect of change in method of
accounting for postretirement benefits
other than pensions............... 4,334
--------- -------- --------- --------- --------- --------- ---------
Net income............................ $ 16,134 $ 10,996(a) $ 24,226(a) $ 19,645 $ 16,811 $ 266 $ 6,745
========= ======== ======== ========= ========= ========= =========
Balance Sheet Data (at end of period):
Working capital................... $ 35,983 $ 18,659 $ 18,472 $ 12,961 $ 12,076 $ 15,451 $ 12,817
Total assets...................... 359,942 309,239 322,510 271,992 229,693 225,337 183,174
Long-term debt.................... 110,104 90,702 89,836 75,178 69,239 77,916 88,801
Stockholder's equity.............. 95,540 73,866 82,517 63,908 49,388 37,197 37,206
</TABLE>
- -------------------
(a) Excluding the impact of the second quarter 1995 restructuring charge
totalling $4,616 ($2,770 net of tax), income from operations, income before
taxes and equity investee loss and net income for the six months ended June
30, 1995 was $27,264, $24,186 and $13,766, respectively, and for the year
ended December 31, 1995 was $52,177, $47,692 and $26,996, respectively.
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<PAGE>
PRO FORMA FINANCIAL INFORMATION OF CPS
The unaudited pro forma combined statements of income for the six
months ended June 30, 1996 and the year ended December 31, 1995 present the
results of operations of CPS assuming that the CPS Spin-Off Distribution had
been completed as of January 1, 1995. The unaudited pro forma combined balance
sheet as of June 30, 1996 presents the combined financial position of CPS
assuming that the CPS Spin-Off Distribution had been completed on that date. In
the opinion of CPS management, the unaudited pro forma combined financial
information of CPS ("CPS Pro Forma Financial Information") includes all material
adjustments necessary to restate CPS's historical results. The adjustments
required to reflect such assumptions are described in the Notes to the CPS Pro
Forma Financial Information and are set forth in the "Pro Forma Adjustments"
column.
The CPS Pro Forma Financial Information should be read in conjunction
with the CPS Financial Statements and notes thereto included elsewhere herein.
The CPS Pro Forma Financial Information presented is for informational purposes
only and may not necessarily reflect the future results of operations or
financial position or what the results of operations or financial position would
have been had the CPS Spin-Off Distribution occurred as assumed herein, or had
CPS been operated as an independent company during the periods shown.
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<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments As Adjusted
---------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues........................................... $ 230,227 $ $ 230,227
Cost and expenses
Cost of revenue............................. 149,624 149,624
Selling, general and administrative
expenses................................. 36,946 1,000(a) 37,946
Depreciation and amortization............... 12,284 12,284
------------ -------------- ------------
Total................................... 198,854 1,000 199,854
------------ -------------- ------------
Income from operations................................. 31,373 (1,000) 30,373
------------ -------------- ------------
Other expense
Interest expense, net....................... 2,665 (b) 2,665
Foreign exchange loss....................... 109 109
------------ -------------- ------------
2,774 2,774
------------ -------------- ------------
Income before taxes and equity investee loss........... 28,599 (1,000) 27,599
Taxes on income........................................ 12,480 (395)(c) 12,085
Equity investee (gain)................................. (15) (15)
------------ -------------- ------------
Net income............................................. $ 16,134 $ (605) $ 15,529
============ ============== ============
Pro forma shares outstanding........................... 57,063,867(d)
Net income per share................................... $0.27(e)
</TABLE>
The accompanying notes to unaudited pro forma combined financial information are
an integral part hereof.
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<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments As Adjusted
---------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues........................................... $ 409,174 $ $ 409,174
Cost and expenses
Cost of revenue............................... 270,726 270,726
Selling, general and administrative
expenses................................... 64,201 2,000(a) 66,201
Restructuring charge.......................... 4,616 4,616
Depreciation and amortization................. 22,070 22,070
------------- ----------- -------------
Total..................................... 361,613 2,000 363,613
------------- ----------- -------------
Income from operations................................. 47,561 (2,000) 45,561
------------- ----------- -------------
Other expense (income)
Interest expense, net......................... 5,269 (b) 5,269
Foreign exchange (gain)....................... (784) (784)
------------- ----------- -------------
4,485 4,485
Income before taxes and equity investee loss........... 43,076 (2,000) 41,076
Taxes on income........................................ 18,445 (790)(c) 17,655
Equity investee loss................................... 405 405
------------- ----------- -------------
Net income............................................. $ 24,226 $ (1,210) $ 23,016
============= =========== =============
Pro forma shares outstanding........................... 57,063,867(d)
Net income per share................................... $0.40(e)
</TABLE>
The accompanying notes to unaudited pro forma combined financial information are
an integral part hereof.
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<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
Pro Forma As
Historical Adjustments Adjusted
---------- ----------- --------
(in thousands)
Assets
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 13,051 $ $13,051
Accounts receivable, net ......................... 85,448 85,448
Unbilled services ................................ 28,337 28,337
Inventory......................................... 13,810 13,810
Deferred income taxes............................. 11,515 11,515
Prepaid expenses and other assets................. 16,139 16,139
--------- ---------- ---------
Total Current Assets........................... 168,300 168,300
Property and equipment, net ...................... 141,429 141,429
Goodwill, net..................................... 37,094 37,094
Other assets...................................... 13,119 13,119
--------- ---------- ---------
Total Assets................................... $ 359,942 $359,942
========= ========== =========
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable............................ $ 19,797 $ $ 19,797
Accrued payroll and benefits...................... 24,467 24,467
Accrued expenses and other liabilities............ 32,460 4,500 (f) 36,960
Unearned revenue.................................. 37,067 37,067
Income taxes payable.............................. 18,526 (10,000)(g) 8,526
--------- --------- ---------
Total Current Liabilities...................... 132,317 (5,500) 126,817
--------- --------- ---------
Long-term debt...................................... 120,104 (g) 120,104
Due to Corning Incorporated and affiliates.......... 110,104 (110,104)(g)
Deferred income taxes............................... 6,344 (12,146)(f) (5,802)
Other liabilities................................... 15,637 15,637
--------- --------- ---------
Total Liabilities.............................. 264,402 (7,646) 256,756
--------- --------- ---------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital .............................. 31,868 28,750 (f) 60,618
Retained earnings................................. 61,429 (21,104)(f) 40,325
Cumulative translation adjustment................. 2,243 2,243
--------- --------- ---------
Total Stockholder's Equity.................. 95,540 7,646 103,186
--------- --------- ---------
Total Liabilities and
Stockholder's Equity............................. $ 359,942 $ 0 $ 359,942
========= ========= =========
</TABLE>
The accompanying notes to unaudited pro forma combined financial information are
an integral part hereof.
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<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1 - Pro Forma Adjustments:
Statements of Income
(a) The pro forma adjustment to selling, general and administrative
expenses represents estimated incremental administrative overhead costs
associated with being a public company.
(b) Immediately prior to the CPS Spin-Off Distribution, CPS will incur
long-term bank borrowings to repay Corning and affiliates for all
intercompany borrowings and income tax liabilities due at the date of
the CPS Spin-Off Distribution. Assuming the CPS Spin-Off Distribution
occurred on June 30, 1996, such borrowings would aggregate
approximately $120.1 million. Since the assumed interest rate on these
borrowings of 6.0% approximates the blended rate on CPS's historical
borrowings from Corning, no pro forma adjustment to interest expense is
necessary. If the interest rate on the bank borrowings fluctuates by
1/8%, interest expense fluctuates by approximately $150,000 annually.
(c) The pro forma adjustment to taxes on income represents the estimated
income tax benefit of pro forma adjustment (a) above at an effective
tax rate of 39.5%.
(d) The pro forma common shares outstanding represents CPS management's
current estimate of the number of shares to be outstanding after the
CPS Spin-Off Distribution. Management's estimate includes (a) the
issuance of approximately 55.9 million shares of CPS Common Stock at an
exchange ratio of one share of CPS Common Stock issued for every four
shares of Corning Common Stock outstanding and (b) the issuance of an
estimated 1,150,000 shares into the employee stock ownership and other
benefit plans. CPS's management's estimate of shares outstanding is
subject to change as the result of normal issuances and repurchases of
Corning Common Stock prior to the date of the CPS Spin-Off
Distribution, finalization of the proposed structure of the employee
stock ownership plan and the market value of CPS Common Stock on the
Distribution Date.
Net Income Per Share
(e) Net income per share is computed by dividing net income by the pro
forma number of shares of common stock outstanding. Common stock
equivalents are not included in the net income per share computation
because they do not result in material dilution. Historical net income
per share is not presented as CPS's historical capital structure is not
comparable to periods subsequent to the CPS Spin-Off Distribution.
Balance Sheet
(f) The pro forma adjustments to accrued expenses and other liabilities,
contributed capital, deferred income taxes and retained earnings
represent costs directly related to the CPS Spin-Off Distribution
expected to be incurred during the fourth quarter of 1996. Such costs,
which consist of direct costs of the CPS Spin-Off Distribution and
one-time charges associated with the issuance of shares into the
employee stock ownership and other benefit plans have not been
reflected in the Unaudited Pro Forma Combined Statements of Income
because they are non-recurring.
(g) The pro forma adjustments to long-term debt, due to Corning and
affiliates and income taxes payable reflect the borrowings to be
incurred in connection with the CPS Spin-Off Distribution. Immediately
prior to the CPS Spin-Off Distribution, CPS will incur long-term bank
borrowings to repay Corning and affiliates for all intercompany
borrowings and income tax liabilities. Assuming the CPS Spin-Off
Distribution occurred on June 30, 1996 such borrowings would aggregate
approximately $120.1 million.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CPS
Overview
CPS is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, CPS provides
services such as health economics for managed care organizations, hospitals and
health care provider networks, and early development and laboratory testing
services to the chemical, agrochemical and food industries. The foregoing
services can be broadly classified into six lines of business: preclinical,
biomanufacturing, clinical and periapproval, central laboratory, clinical
packaging, and health economics. These six lines of business can be further
categorized as non-clinical (preclinical and biomanufacturing) and clinical
(clinical and periapproval, central laboratory, clinical packaging and health
economics). CPS believes it is the largest biopharmaceutical CRO, based on
estimated 1995 annual net revenue, and one of only a few that are capable of
providing comprehensive global product development services. CPS offers its
clients high quality services designed to reduce product development time,
allowing them to introduce their products into the marketplace faster and, thus,
maximize the period of marketing exclusivity and monetary return on their
investments. Additionally, CPS's comprehensive services and broad experience
provide clients with a variable cost alternative to fixed cost internal
development capabilities.
The businesses that today constitute CPS were acquired by Corning,
starting in 1987, as part of a strategy to create a global, integrated and full
service product development company. In keeping with this strategy, during the
period 1994 through the present, CPS has purchased the remaining interest in a
jointly owned company, acquired a significant minority interest in a
complementary service business, acquired two new businesses and formed a major
new business venture. Specifically, in April 1994, CPS acquired the remaining
interest in SciCor S.A., a provider of central laboratory testing services based
in Switzerland. The transaction was accounted for as a purchase business
combination. In October 1994, CPS acquired a significant minority equity
position in Bio-Imaging Technologies, Inc. ("Bio-Imaging"), which uses
proprietary imaging technology to quantify the diagnostic and therapeutic
effectiveness of experimental drugs and devices. CPS expanded its offering of
value added product development services in January 1995 with the acquisition of
National Packaging Systems, Inc., a leading clinical packaging company. The
transaction was accounted for as a purchase business combination. In February
1995, CPS formed Corning Bio, a majority-owned company which will enable CPS to
engage in biomanufacturing. In recognition of the rapid changes in the
biopharmaceutical industry's marketplace, particularly the need for the industry
to further demonstrate the benefits and cost effectiveness of their products to
payors, CPS purchased in March 1996 all the assets and substantially all of the
liabilities of Health Technology Associates, Inc. ("HTA"), a leading health
economics company, in a transaction accounted for as a purchase business
combination. See Note 4 to the Audited CPS Financial Statements for additional
information regarding these transactions.
Approximately three-quarters of CPS's net revenues are earned under
contracts, which generally range in duration from a few months to two years.
Revenue from these contracts is recognized as costs are incurred on the basis of
the relationship between costs incurred and estimated total costs. Typically,
CPS's contracts in the preclinical, central laboratory, clinical packaging and
health economics areas are fixed price or fee-for-service and in the clinical
and periapproval areas are fee-for-service with a cap. To a lesser extent, some
of the contracts in the clinical and periapproval areas are fixed price or
fee-for-service without a cap. The contracts may contain provisions for
renegotiation for cost overruns arising from changes in the level of work scope.
Renegotiated amounts are included in net revenues when earned and realization is
assured. In some cases, for multi-year contracts involving preclinical and
clinical and periapproval trials, a portion of the contract fee is paid at the
time the trial is initiated, with performance-based installments payable over
the contract duration, in some cases on a milestone achievement basis. CPS
routinely subcontracts with independent physician investigators in connection
with multi-site clinical trials. Investigator fees are not reflected in net
revenues or expenses since such fees are granted by customers on a "pass-thru
basis" without risk or reward to CPS. While most contracts are terminable
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<PAGE>
either immediately or upon notice by the client, they typically require payment
of expenses to wind down a study and fees earned to date, and, in some cases, a
termination fee or a payment of some portion of the fees or profit that could
have been earned under the contract if it had not been terminated early.
CPS's cost of revenue includes appropriate amounts necessary to
complete the net revenues and earnings process and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These costs,
as a percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 2% in either direction) principally as a
result of changes in labor utilization and the mix of service offerings
involving hundreds of studies conducted during any period of time. Accordingly,
changes in cost of revenue as a percentage of net revenues plus or minus 2% are
expected from one period to another.
Results of Operations
Three Months Ended June 30, 1996 Compared with Three Months Ended June
30, 1995. Net revenues increased 15.9% to $121.5 million for the three months
ended June 30, 1996 from $104.8 million for the corresponding 1995 period.
Excluding the impact of the 1996 acquisition of HTA, growth in net revenues was
11.8%. Net revenues from the clinical and periapproval and clinical packaging
lines of business grew in excess of 20% and 30%, respectively, benefitting from
the continuing trend in outsourcing of clinical development activities. Net
revenues from the central laboratory business grew approximately 10% over the
corresponding 1995 period. This business experienced a strong second quarter in
1995, with growth in net revenues in excess of 70% over the corresponding 1994
period, primarily relating to a large amount of net revenues associated with
several protease inhibitor studies. Net revenues from CPS's more mature
preclinical business grew at approximately 4.0% over the corresponding 1995
period, as the growth in preclinical outsourcing continues to be relatively
slow.
Cost of revenue increased 13.5% to $78.2 million for the three months
ended June 30, 1996 from $68.9 million for the corresponding 1995 period as a
result of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, decreased to 64.3% for the three months ended June 30, 1996 from 65.7%
for the corresponding 1995 period.
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 20.7% to $19.5 million for
the three months ended June 30, 1996 from $16.2 million for the corresponding
1995 period. As a percentage of net revenues, selling, general and
administrative expense increased to 16.1% for the quarter ended June 30, 1996
from 15.5% for the corresponding 1995 period. Contributing to the increase in
selling, general and administrative expense were increasing pre-operating costs
relative to CPS's biomanufacturing business, a continuing increase in CPS's
corporate center function, administrative costs associated with the
establishment of CPS's new Singapore operation and the evaluation of further
geographic expansion opportunities, partially offset by a reduction in certain
administrative costs allocated by Corning and affiliates.
Depreciation and amortization increased 19.1% to $6.5 million or 5.3%
of net revenues for the three months ended June 30, 1996 from $5.4 million or
5.2% of net revenues for the corresponding 1995 period.
Income from operations increased 79.4% to $17.3 million for the quarter
ended June 30, 1996 from $9.7 million for the corresponding 1995 period. During
the second quarter of 1995, CPS recorded a restructuring provision totalling
$4.6 million ($2.8 million after tax) as a result of management's decision to
discontinue certain nonstrategic operations. The restructuring provision
included severance costs relating to approximately 90 employees, all of whom
were terminated as of April 30, 1996. The restructuring activities occurred
substantially in accordance with the restructuring plan. See Note 7 to the
Audited CPS Financial Statements. Excluding the
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<PAGE>
impact of the 1995 restructuring provision, income from operations increased
21.4% to 14.3% of net revenues for the quarter ended June 30, 1996 compared to
13.6% of net revenues for the corresponding 1995 period.
Other expense remained unchanged from the corresponding 1995 period at
$1.6 million. Although net interest expense was $0.2 million higher in the 1996
quarter (attributable to the 1996 acquisition of HTA), foreign exchange losses
were $0.2 million lower.
CPS's effective tax rate for the three months ended June 30, 1996
increased to 43.6% from 42.7% for the comparable period in 1995. Since CPS
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic dispersion of its pre-tax earnings changes.
Net income increased $4.3 million to $8.8 million for the quarter ended
June 30, 1996 from $4.5 million for the corresponding 1995 period. Excluding the
impact of the 1995 restructuring provision, net income increased $1.6 million or
22.3% for the three months ended June 30, 1996 compared to the corresponding
1995 period.
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30,
1995. Net revenues increased 17.0% to $230.2 million for the six months ended
June 30, 1996 from $196.8 million for the corresponding 1995 period. Excluding
the impact of the 1996 acquisition of HTA, growth in net revenues was 14.4%. Net
revenues from CPS's combined clinical lines of business, excluding the newly
acquired health economics business, grew in excess of 20%, benefitting from the
continuing trend in outsourcing of clinical development activities, while net
revenues from its more mature preclinical line of business grew approximately
5.0%.
Cost of revenue increased 16.2% to $149.6 million for the six months
ended June 30, 1996 from $128.8 million for the corresponding 1995 period as a
result of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, decreased slightly to 65.0% for the six months ended June 30, 1996
from 65.4% for the corresponding 1995 period.
Overall, selling, general and administrative expense increased 22.8% to
$36.9 million for the six months ended June 30, 1996 from $30.1 million for the
corresponding 1995 period. As a percentage of net revenues, selling, general and
administrative expense increased to 16.0% for the six months ended June 30, 1996
from 15.3% for the corresponding 1995 period. Contributing to the increase in
selling, general and administrative expenses were increasing pre-operating costs
relative to CPS's biomanufacturing business, an increase in CPS's corporate
center function, administrative costs associated with the establishment of CPS's
new Singapore operation and the evaluation of further geographic expansion
opportunities, partially offset by a reduction in certain administrative costs
allocated by Corning and affiliates.
Depreciation and amortization increased 15.1% to $12.3 million or 5.3%
of net revenues for the six months ended June 30, 1996 from $10.7 million or
5.4% of net revenues for the corresponding 1995 period as the growth in net
revenues outpaced the increase in these non-cash charges.
Income from operations increased 38.3% to $31.4 million for the six
months ended June 30, 1996 from $22.6 million for the corresponding 1995 period.
Excluding the impact of the 1995 restructuring provision, income from operations
increased 15.0% to 13.6% of net revenues for the six months ended June 30, 1996
from 13.9% of net revenues for the corresponding 1995 period.
Other expense decreased $0.3 million for the six months ended June 30,
1996 to $2.8 million from $3.1 million for the corresponding 1995 period, due
primarily to larger foreign exchange losses incurred during the first half of
1995.
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CPS's effective tax rate for the six months ended June 30, 1996
increased to 43.6% from 42.8% for the comparable period in 1995. Since CPS
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic dispersion of its pre-tax earnings changes.
Net income increased $5.1 million to $16.1 million for the six months
ended June 30, 1996 from $11.0 million for the corresponding 1995 period.
Excluding the impact of the 1995 restructuring provision, net income increased
$2.4 million or 17.2% for the six months ended June 30, 1996 compared to the
corresponding 1995 period.
Year Ended December 31, 1995 Compared with Year Ended December 31,
1994. Net revenues increased 28.1% to $409.2 million for 1995 from $319.5
million for 1994. Excluding the impact of the 1995 acquisition of National
Packaging Systems, Inc., growth in net revenues was 23.8%. Net revenues from
CPS's combined clinical lines of business, excluding the newly acquired clinical
packaging business, grew in excess of 35%, generally as a result of the growth
in outsourcing of clinical development activities in 1995 as compared to 1994
and more specifically because of CPS's central laboratory's effort to complete
development work on several large protease inhibitor studies by the end of 1995.
Net revenues from CPS's preclinical business grew nearly 10%, largely as a
result of particularly strong growth in Europe, fueled by new service offerings,
overall volume increases and favorable foreign exchange rates in 1995 compared
to 1994.
Cost of revenue increased 26.8% to $270.7 million or 66.2% of net
revenues for 1995 from $213.5 million or 66.8% of net revenues for 1994, as a
result of the increase in net revenues.
Overall, selling, general and administrative expense increased 31.3% to
$64.2 million for 1995 from $48.9 million for 1994. As a percentage of net
revenues these costs increased to 15.7% for 1995 from 15.3% for 1994. Largely
contributing to the increase in selling, general and administrative expenses
were administrative costs associated with the establishment of CPS's new
biomanufacturing business, an increase in CPS's corporate center function,
strategic consulting expenses incurred to reorganize a large portion of CPS's
clinical operations into customer teams to better manage large scale clinical
trials and increased marketing initiatives such as the establishment of a Lotus
Notes(R) based centralized client contact database for use by CPS's sales force,
partially offset by a non-recurring charge incurred in 1994 in connection with a
separation payment made to CPS's then chief executive officer upon his
resignation.
During 1995, CPS recorded a restructuring provision totalling $4.6
million ($2.8 million after tax) as a result of management's decision to
discontinue certain nonstrategic operations. The restructuring charge included
severance costs relating to approximately 90 employees of which approximately 50
had been terminated as of December 31, 1995. The remaining employees were
terminated and all other substantive activities to complete the restructuring
plan were completed by April 30, 1996. Severance benefits are being paid in the
form of salary continuation. The restructuring activities have occurred
substantially in accordance with the restructuring plan.
Depreciation and amortization increased 19.2% to $22.1 million or 5.4%
of net revenues for 1995 from $18.5 million or 5.8% of net revenues for 1994 as
the growth in net revenues outpaced the increase in these non-cash charges.
Income from operations increased $9.0 million or 23.2% to $47.6 million
for 1995 from $38.6 million for 1994. Excluding the impact of the 1995
restructuring provision, the increase in income from operations was $13.6
million or 35.2% to 12.8% of net revenues for 1995 from 12.1% of net revenues
for 1994.
Other expense increased $0.9 million for 1995 to $4.5 million from $3.6
million for 1994. This increase is entirely a result of an increase in interest
expense relating principally to 1995 acquisition activity. Substantially all
borrowings to date have been from Corning.
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CPS's effective tax rate for 1995 increased slightly to 42.8% from
42.6% for 1994.
Net income increased 23.3% to $24.2 million for 1995 from $19.6 million
for 1994. Excluding the impact of the 1995 restructuring provision, the increase
in net income was $7.4 million or 37.4% for 1995.
Year Ended December 31, 1994 Compared with Year Ended December 31,
1993. Net revenues increased 10.3% to $319.5 million for 1994 from $289.7
million for 1993. Excluding the impact of 1994 acquisitions, net revenues growth
was 7.9%. Net revenues from CPS's combined clinical lines of business grew
nearly 20%, largely due to growth in the European clinical and periapproval and
central laboratory operations. Net revenues from CPS's preclinical operations
was relatively unchanged compared to 1993 due to low volume together with
pricing pressures in various product line offerings.
Cost of revenue increased 10.7% to $213.5 million or 66.8% of net
revenues for 1994 from $192.8 million or 66.5% of net revenues for 1993.
Overall, selling, general and administrative expense increased 13.8% to
$48.9 million or 15.3% of net revenues for 1994 from $42.9 million or 14.8% of
net revenues for 1993. Largely contributing to the increase in selling, general
and administrative expenses was a separation payment made to CPS's then chief
executive officer upon his resignation. Exclusive of this non-recurring charge,
selling, general and administrative expenses were relatively unchanged from
1993.
Depreciation and amortization increased 9.0% to $18.5 million or 5.8%
of net revenues for 1994 from $17.0 million or 5.9% of net revenues for 1993 as
the growth in net revenues outpaced the increase in these non-cash charges.
Income from operations increased 4.4% to $38.6 million or 12.1% of net
revenues for 1994 from $37.0 million or 12.8% of net revenues for 1993.
Other expense decreased $1.7 million for 1994 to $3.6 million versus
$5.3 million for 1993. This reduction is a result of a net foreign currency
transaction gain of $0.7 million reported for 1994 versus a net foreign currency
transaction loss of $0.9 million reported for 1993.
CPS's effective tax rate for 1994 remained unchanged from 1993 at
42.6%.
Net income increased 16.9% or $2.8 million to $19.6 million for 1994
from $16.8 million for 1993.
Quarterly Results
CPS's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant preclinical and clinical and
periapproval trials, termination of preclinical and clinical and periapproval
trials, acquisitions and exchange rate fluctuations. Delays and terminations of
studies or trials are often the result of actions taken by clients or regulatory
authorities and are not typically controllable by CPS. Since a large amount of
CPS's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the commencement, progress or completion of
preclinical and clinical and periapproval trials may cause significant
variations in quarterly operating results.
The following table presents unaudited quarterly operating results of
CPS for each of the ten most recent fiscal quarters in the period ended June 30,
1996. In the opinion of CPS, this information has been prepared on the same
basis as the Audited CPS 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 CPS Financial
Statements and notes thereto included
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elsewhere herein. The operating results for any quarter are not necessarily
indicative of the results to be expected in any future period. See "Risk
Factors--Risks Relating to CPS--Volatility of Quarterly Operating Results."
<TABLE>
<CAPTION>
Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1994 1994 1994 1994 1995 1995 1995 1995
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues .............. $ 74,223 $ 77,762 $ 82,904 $ 84,612 $ 91,974 $ 104,813 $ 106,099 $106,288
Operating expenses ........ 66,036 66,685 73,214 74,967 78,991 95,148 92,428 95,046
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations .... 8,187 11,077 9,690 9,645 12,983 9,665(a) 13,671 11,242
Other expense, net ........ 792 876 1,030 897 1,434 1,644 231 1,176
--------- --------- --------- --------- --------- --------- --------- ---------
Pre-tax income ............ 7,395 10,201 8,660 8,748 11,549 8,021(a) 13,440 10,066
Income taxes .............. 3,164 4,335 3,693 3,732 4,953 3,423 5,771 4,298
Equity investee loss (gain) 208 140 -- 87 49 149 153 54
--------- --------- --------- --------- --------- --------- --------- ---------
Net income ................ $ 4,023 $ 5,726 $ 4,967 $ 4,929 $ 6,547 $ 4,449(a) $ 7,516 $ 5,714
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
Mar. 31, June 30,
1996 1996
(in thousands)
<S> <C> <C>
Net revenues .............. $ 108,697 $ 121,530
Operating expenses ........ 94,659 104,195
--------- ---------
Income from operations .... 14,038 17,335
Other expense, net ........ 1,159 1,615
--------- ---------
Pre-tax income ............ 12,879 15,720
Income taxes .............. 5,619 6,861
Equity investee loss (gain) (44) 29
--------- ---------
Net income ................ $ 7,304 $ 8,830
========= =========
</TABLE>
(a) Excluding the impact of the second quarter 1995 restructuring provision
totalling $4,616 ($2,770 net of tax), income from operations, pre-tax
income and net income were $14,281, $12,637 and $7,219 respectively.
Liquidity and Capital Resources
Historically, CPS has participated in the centralized treasury and cash
management processes of Corning. For domestic operations, cash received from
operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was transferred to Corning periodically.
Cash disbursements for operations were funded as needed from Corning. From time
to time excess cash balances were maintained at CPS, generally for specific cash
requirements.
CPS is currently negotiating with several banks concerning the
establishment of the CPS Credit Facility. CPS expects that the CPS Credit
Facility will provide for borrowings of up to $250 million on an unsecured
basis, carry interest at LIBOR plus approximately 45 basis points and mature in
five years. CPS intends to borrow under the CPS Credit Facility before the CPS
Spin-Off Distribution to repay Corning and affiliates for all of its
intercompany borrowings and income tax liabilities. Assuming the borrowing and
CPS Spin-Off Distribution both occurred on June 30, 1996, CPS would borrow
approximately $120.1 million for such purpose. This would result in CPS's debt
to equity and debt to capital ratios being 1.26:1 and 0.56:1, respectively. See
"Description of Certain Indebtedness of CPS."
CPS'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.
Currently, CPS is negotiating to acquire an entity providing clinical services
for a purchase price of approximately $14.5 million. CPS expects to close this
transaction in the fourth quarter of 1996. Additionally, CPS expects to spend
approximately another $40 million on capital expenditures between July 1 and
December 31, 1996, approximately $13.5 million of which relates to a new
facility to house CPS's clinical operations in Europe. The balance of the
capital spending is for maintenance and upgrade of existing equipment,
outfitting of new facilities and computer equipment and software for newly hired
employees. Assuming these expenditures occur prior to the CPS Spin-Off
Distribution, CPS estimates that its debt at the Distribution Date will be
approximately $135 million to $145 million.
CPS's management believes that the CPS Credit Facility would provide it
with sufficient financial flexibility and ready access to cash to fund, as
required, capital expenditures, potential future acquisitions and other
longer-term growth opportunities.
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During the six months ended June 30, 1996, CPS's operations provided
net cash of $15.0 million, a decrease of $7.8 million from the corresponding
1995 amount. This reduction is attributable to a larger increase in working
capital during the first six months of 1996 as compared to the first six months
of 1995. During the year ended December 31, 1995, CPS's operations provided net
cash of $45.1 million, an increase of $2.2 million from 1994's level.
Investing activities for the six months ended June 30, 1996 and the
years ended December 31, 1995 and 1994 included acquisitions and capital
spending to expand existing operations and purchase equipment to enhance
scientific technology capabilities. Funding for new business acquisitions was
provided through borrowings from Corning. Cash provided by operations has
historically been sufficient to fund capital expenditures.
Working capital was $36.0 million at June 30, 1996, an increase of
$17.5 million from the December 31, 1995 level of $18.5 million. This increase
was primarily attributable to an increase in aggregate accounts receivable and
unbilled services of $16.6 million or 17.1% to $113.8 million from $97.2 million
as at December 31, 1995, due primarily to the continued growth in net revenue.
CPS's ratio of current assets to current liabilities was 1.27 at June 30, 1996
and 1.15 at December 31, 1995.
As described in Note 8 to the Audited CPS Financial Statements, a CPS
subsidiary, Corning Bio, entered into an operating lease arrangement in June
1995 whereby a custom-designed, fully equipped facility would be constructed.
The lease will commence on the date of completion of construction of the
facility, which is currently anticipated during the fourth quarter of 1996 and
requires minimum annual lease payments of approximately $5.5 million. See "Risk
Factors--Risks Relating to CPS--Biomanufacturing--New Business Venture" and
"Business of CPS--Services--Biomanufacturing."
In the fourth quarter of 1996, CPS plans to record a one-time charge of
approximately $33 million associated with the CPS Spin-Off Distribution. The
largest component of the charge will be the cost of establishing an employee
stock ownership plan. The remainder of the charge is expected to consist of the
direct costs of the CPS Spin-Off Distribution as well as the value of restricted
stock awards expected to be granted.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). This
statement defines a fair value-based method of accounting for employee stock
options and similar equity investments and encourages adoption of that method of
accounting for employee stock compensation plans. However, it also allows
entities to continue to measure compensation cost for employee stock
compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Entities which elect to continue accounting for stock compensation
plans utilizing APB 25 are required to disclose pro forma net income and
earnings per share, as if the fair value-based method of accounting under SFAS
123 had been applied. CPS intends to account for the stock compensation plans
pursuant to APB 25 and, as such, will include the pro forma disclosures required
by SFAS 123 in its financial statements beginning in 1996.
Foreign Currency
Contracts between CPS's foreign subsidiaries and its clients are
frequently denominated in currencies other than the applicable subsidiary's
local currency. Accordingly, payments received for services rendered under such
contracts are denominated in a currency different than the currency used for the
payment of the subsidiary's expenses. Therefore, the subsidiary's net revenues,
expenses and earnings are affected by fluctuations in exchange rates. In
addition, CPS's combined financial statements are denominated in U.S. dollars
and, accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of such subsidiary's
financial results into U.S. dollars for purposes of reporting CPS's combined
financial results. Translation adjustments are reported as a separate section of
stockholder's equity. To date, such adjustments have not been material to CPS's
financial statements.
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Taxes
Since CPS conducts operations on a global basis, CPS's effective tax
rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. CPS's profits are
further impacted by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of CPS's pre-tax earnings among various tax
jurisdictions changes, CPS's effective tax rate may vary from period to period.
See Note 5 to the Audited CPS Financial Statements.
Inflation
CPS believes that the effects of inflation generally do not have a
material adverse effect on its operations or financial condition.
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BUSINESS OF CPS
General
CPS is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, CPS provides
services such as health economics for managed care organizations, hospitals and
health care provider networks and early development and laboratory testing
services to the chemical, agrochemical and food industries. The foregoing
services can be broadly classified into six lines of business: preclinical,
biomanufacturing, clinical and periapproval, central laboratory, clinical
packaging and health economics. These six lines of business can be further
categorized as non-clinical (preclinical and biomanufacturing) and clinical
(clinical and periapproval, central laboratory, clinical packaging and health
economics). CPS believes it is the largest biopharmaceutical CRO, based on
estimated 1995 annual net revenue, and one of a few that are capable of
providing comprehensive global product development services. CPS offers its
clients high quality services designed to reduce product development time,
allowing them to introduce their products into the marketplace faster and, thus,
maximize the period of marketing exclusivity and monetary return on their
investments. Additionally, CPS's comprehensive services and broad experience
provide clients with a variable cost alternative to fixed cost internal
development capabilities.
History
The businesses that today constitute CPS were acquired by Corning as
part of a strategy to create a global, integrated and full service product
development company. In 1987 Corning acquired Hazleton Corporation (recently
known as Corning Hazleton), owner of leading preclinical drug safety assessment
laboratories and Phase I clinical research units. In 1989 Corning added Phase II
and Phase III clinical trials expertise with the acquisition of a leading,
global clinical CRO, G.H. Besselaar Associates (recently known as Corning
Besselaar), and expanded its clinical trials expertise in 1990 with the purchase
of PACT Inc. (recently known as Corning PACT), a leading periapproval studies
company. In 1991 Corning purchased SciCor Inc. (recently known as Corning
SciCor), a clinical laboratory dedicated to the drug development process.
Corning expanded its pharmaceutical laboratory capabilities in 1992 with the
creation in Switzerland of a jointly owned company, SciCor S.A., and, through
CPS, acquired 100% of this company in 1994. Focusing on innovative ways to
accelerate the drug development cycle, CPS acquired in late 1994 a significant
minority equity position in Bio-Imaging, which uses proprietary imaging
technology to quantify the diagnostic and therapeutic effectiveness of
experimental drugs and devices. CPS expanded its offering of value-added
development services in 1995 with the acquisition of National Packaging Systems,
Inc. (recently known as Corning National Packaging, Inc.), a leading clinical
packaging company. In 1995 CPS also formed Corning Bio, a majority-owned company
which will enable CPS to engage in biomanufacturing. In recognition of the rapid
changes in the biopharmaceutical industry's marketplace, particularly the need
for the industry to further demonstrate the benefits and cost effectiveness of
their products to payors, CPS purchased in early 1996 HTA, a leading health
economics company serving at the date of acquisition over 100 clients.
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 follows:
Preclinical Research (6 months to 3 years). In vitro ("test tube") and
in vivo ("animal") studies are conducted to establish the basic pharmacokinetic
effect and safety of a drug including the toxicity of the drug over a wide range
of doses. Initially, acute toxicology studies are conducted. In the United
States, if results warrant continuing development of the drug, the manufacturer
(also known as the "sponsor") will file an Investigational New Drug Application
("IND"), whereupon the FDA may grant permission to begin human trials (also
known as "clinical trials").
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Preclinical studies may continue after the start of clinical trials to
determine the longer term effects of a product. For instance, a preclinical
study might focus on the possible side effects, metabolism and/or
pharmacokinetic disposition of a drug.
Clinical Trials (3.5 to 6 years).
o Phase I (6 months to 1 year). This phase involves the initial
basic safety and pharmacology testing in approximately 20 to
100 human subjects, usually healthy volunteers in a closely
monitored setting, including studies to determine the side
effect profile of the drug, how the drug works, how it is
affected by other drugs, where it goes in the body, how long
it remains active, and how it is broken down and eliminated
from the body.
o Phase II (1 to 2 years). This phase involves basic efficacy
(effectiveness) and dose-range testing in approximately 100 to
400 carefully selected patients suffering from the disease or
condition under study to help determine the best effective
dose, confirm that the drug works as expected, and provide
additional safety data. The trials are typically well
controlled and usually involve a placebo, also known as a
"sugar pill." A placebo is an identical tablet or solution
which lacks the active substance under investigation.
o Phase III (2 to 3 years). This phase involves efficacy and
safety studies in broader populations of hundreds or thousands
of patients at many investigational sites (hospitals and
clinics) and may involve placebo-controlled trials, in which
the new drug is compared with a placebo; studies comparing the
new drug with one or more drugs with established safety and
efficacy profiles in the same therapeutic category; or studies
where there is no comparison to a placebo or another drug
("uncontrolled" trials). Generally, Phase III studies are
intended to provide additional information on drug safety and
efficacy, an evaluation of the risk-benefit relationship for
the drug, and information for the adequate labeling of the
product.
NDA Preparation and Submission. Upon completion of Phase III trials,
the sponsor or CRO assembles the tabulated and statistically analyzed data from
all phases of development into a single large document, the New Drug Application
("NDA"), which comprises, on average, approximately 100,000 pages.
FDA Review and Approval (1 to 2 years). At this stage, the FDA will
scrutinize data from all phases of development to confirm that the sponsor has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study. Product labeling is also approved at
this stage, which serves as a guideline to the sponsor about how its product can
be promoted in the marketplace.
Treatment Investigational New Drug (May span late Phase II, Phase III,
and FDA review). When results from Phase II or Phase III show special promise in
the treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the manufacturer to make the new
drug available to a larger number of patients through the regulated mechanism of
a treatment investigational new drug ("TIND") application. Although less
scientifically rigorous than a controlled clinical trial, a TIND may enroll and
collect primarily safety data from thousands of patients. See
"--Services--Clinical and Periapproval Services--Treatment Investigational New
Drug Applications."
Post-Marketing Surveillance and Phase IV Studies (Periapproval).
Federal regulation requires the sponsor to collect and periodically report to
the FDA additional safety and efficacy data on the drug for as long as the
sponsor markets the drug (post-marketing surveillance). If the drug is marketed
outside the United States, these reports must include data from all countries in
which the drug is sold. Additional studies (Phase IV) may be undertaken after
initial approval to find new uses for the drug or to test new dosage
formulations. All of these
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studies are types of "periapproval" studies. See "--Services--Clinical and
Periapproval Services--Other Periapproval Studies."
Similar extensive testing and regulatory reviews are required in Europe
and some Asian countries to determine that a new drug is safe and effective for
its intended purpose before it can be marketed to the public.
CRO Industry Overview
The CRO industry provides independent product development services to
the pharmaceutical, biotechnology and medical device industries, and, in
general, CROs derive substantially all of their revenue from the research and
development expenditures of these industries. Today, there are a few
full-service companies. Full-service CROs design and manage preclinical and
clinical and periapproval studies and trials, provide health economic services,
and provide packaging and central laboratory services and other services
required to develop and market new products in accordance with applicable
government regulations in the jurisdictions where the services are provided,
including the regulations of the FDA in the United States.
The CRO industry is highly fragmented, with hundreds of small,
limited-service providers, several medium-sized CROs and a few full service CROs
with global operations. CPS believes there are currently only approximately 20
CROs with revenues in excess of $30 million and only four with revenues in
excess of $100 million. As a general matter, the clinical CRO industry is not
capital intensive and the financial costs of entry into the industry are
relatively low. Although there are few barriers to entry for small,
limited-service providers, CPS believes that there are significant barriers to
becoming a full service CRO with global operations. These barriers include the
cost, infrastructure and experience necessary to own and manage multiple
international offices to serve the global demands of clients; develop
sophisticated drug development processes; develop broad therapeutic expertise;
conduct trials that accelerate the transition from preclinical to clinical
trials; manage complex clinical trials involving large patient populations in
numerous countries simultaneously; provide health economic services; and prepare
multinational regulatory submissions. Capital requirements, however, are
relatively high for CROs that provide sophisticated preclinical and central
laboratory and data management services and biomanufacturing services.
Trends Affecting the CRO Industry
In 1994 worldwide expenditures on research and development by
pharmaceutical and biotechnology companies are estimated to have been $30
billion, of which CPS estimates $20 billion was spent on drug development
activities of the type offered by the CRO industry. CPS believes that
approximately $3 billion of such spending was outsourced to CROs primarily for
preclinical testing and clinical development.
CPS believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase for the following reasons:
Cost Containment Pressures. Market forces and governmental initiatives
have placed significant downward pressure on pharmaceutical and biotechnology
companies' drug prices. Pressures on profit margins have arisen from increased
competition as a result of patent expiration, market acceptance of generic
drugs, the need for truly innovative rather than "me too" drugs and governmental
and private efforts to reduce health care costs, especially in the United
States. In addition, private managed care organizations are beginning to limit
the selection of drugs that affiliated physicians may prescribe, thereby further
increasing competition among pharmaceutical and biotechnology companies. CPS
believes that the pharmaceutical industry is responding to these pressures by
downsizing its research and development infrastructure and converting the fixed
costs of maintaining such infrastructure to variable costs by outsourcing drug
development activities to CROs. The downsizing of development capabilities also
creates demand for CROs as biopharmaceutical companies experience internal
development resource shortages when a large number of compounds emerge from the
research process and need to undergo development. Moreover, many of these
companies are attempting to decrease the new drug development
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cycle by using CROs, which may have greater expertise in a therapeutic area,
while offering greater efficiency at a lower cost. Some large pharmaceutical and
biotechnology companies now contract with large full service CROs under a single
multi-year master agreement which allows the company to select the CRO for a
broader array of drug development services instead of separately contracting
individual studies or specific phases to several different CROs. The
establishment of a master agreement itself can expedite the development process
by avoiding the delay inherent in negotiating and reviewing separate agreements
for each new study. Accordingly, once selected by a pharmaceutical company, the
CRO can commence work promptly. CPS has executed a number of master agreements
with large pharmaceutical companies and believes that it is in an advantageous
position to enter into such agreements with additional pharmaceutical companies.
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. Expanding the market for a drug is
particularly important to the industry because of limited patent lives and the
high development costs of new drugs. To gain access to the global marketplace,
pharmaceutical and biotechnology companies are increasingly outsourcing
development work to CROs that are deployed in key geographical markets worldwide
and that are capable of coordinating concurrent regulatory approvals. In
addition, these companies are increasingly using CROs that have the systems in
place to compile and analyze large volumes of complex data from multinational
clinical trials and prepare regulatory submissions simultaneously on a
multinational basis. Pharmaceutical companies also are outsourcing an increasing
number of large scale Phase III-IV studies involving thousands of patients which
are often simultaneously conducted in multiple jurisdictions including Europe,
North and South America, Australia and Asia. CPS believes that CROs with a
global presence will continue to benefit from these trends.
Revenue Enhancement Through Faster Drug Development. Pharmaceutical and
biotechnology companies are increasingly attempting to reduce the time required
to bring new drugs to market. Reducing the time it takes to market a new drug
can reduce costs and accelerate revenue realization. Currently, successfully
developing a new drug takes approximately 8 to 12 years, which generally
represents a significant portion of the drug's 15 to 20 year period of
protection under most patent laws internationally (17 years in the United
States). Industry data suggest that it generally costs between $291 million and
$597 million to discover and develop a drug in the United States. Accordingly,
pharmaceutical and biotechnology companies are increasingly examining the drug
development process itself to determine ways to reduce the time required to
bring a new drug to market. As part of this evaluation, some companies are
establishing time goals for how long the process should take. CPS 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. In addition, CPS believes that CROs with advanced global
drug development processes will be more attractive to pharmaceutical and
biotechnology companies.
Consolidation in the Pharmaceutical Industry. The pharmaceutical
industry is consolidating as pharmaceutical companies seek to obtain cost
reduction synergies through business combinations. Recent consolidations include
some of the largest multinational pharmaceutical companies in the world, such as
American Home Products-American Cyanamid Company, Glaxo-Wellcome, Roche-Syntex,
and Pharmacia and Upjohn. Ciba-Geigy and Sandoz have also announced their
intention to merge and form a new company, Novartis. Once consolidated, many
pharmaceutical companies aggressively manage costs by reducing jobs,
decentralizing the research and development process, and outsourcing to CROs in
an effort to reduce the fixed costs associated with internal drug development.
CPS believes that full service global CROs will benefit from this trend.
Increasingly Stringent Regulation; Need for Capabilities. Increasingly
stringent regulatory requirements throughout the world and their standardization
have increased the need for broader, global regulatory expertise. As regulatory
requirements become more stringent and the need for sophisticated capabilities
becomes more important, including regulatory services and advice and global drug
development processes, the pharmaceutical and
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biotechnology industries are outsourcing to global CROs to take advantage of
their capabilities and geographic presence.
In addition to increasingly stringent regulatory requirements, CPS
believes that recent efforts to develop global harmonized regulatory standards
will increase the importance of advanced global drug development processes among
CROs. In recent years, the FDA and the corresponding regulatory agencies of
Canada, Japan and Europe have had substantive discussions for the purpose of
developing harmonized standards for both the conduct of preclinical and clinical
studies and the format and content of applications for new drug approval.
Further, the FDA encourages the use of computer assisted filings in an effort to
expedite the approval process. CPS believes that CROs which stay abreast of the
changing regulatory requirements in multiple international jurisdictions and
which are able to rapidly improve their drug development processes will have a
competitive advantage.
Therapeutic Focus. CPS believes that the economics of the marketplace
require 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 such as cancer, heart disease and infectious diseases, including
AIDS. The development of therapies for chronic disorders, such as Alzheimer's
disease or arthritis, requires complex clinical trials to demonstrate the
therapy's effectiveness and to determine whether the drug causes any long-term
side effects. CPS 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 U.S. biotechnology industry has
grown rapidly over the last 10 years and is introducing new therapies which
require regulatory approval. Many biotechnology companies do not have the
necessary internal resources and experience (capital, equipment or people) to
conduct preclinical studies and clinical trials. Accordingly, many biotechnology
companies have chosen to outsource to CROs rather than expend significant time
and resources to develop an internal preclinical or clinical development or
biomanufacturing capability. In addition, CPS believes that many biotechnology
companies are turning to certain CROs for sophisticated regulatory expertise and
will also outsource manufacturing of their experimental compounds during the
preclinical and clinical stages. Moreover, the biotechnology industry is rapidly
expanding into Europe, and CPS believes that significant growth opportunities
exist for CROs with an international presence. Further, CPS believes that the
biotechnology companies will enter into single multi-year master agreements with
CROs, as pharmaceutical companies have done. CPS has been serving one of the
largest biotechnology companies for over a year pursuant to such an agreement
and believes that it is in an advantageous position to enter into additional
master agreements with other biotechnology companies.
Consolidation in the CRO Industry. As a result of competitive pressures
and the trend towards larger and more global studies, the CRO industry is
consolidating. For instance, in June 1996 two of the largest CROs, Applied
Bioscience International Inc. ("APBI") and Pharmaceutical Product Development
Inc. ("PPD"), announced their intention to merge. Such mergers and acquisitions
have resulted in the emergence of a few large, full service CROs that have the
capital, technical, financial and human resources to conduct all phases of
preclinical and clinical trials on behalf of pharmaceutical and biotechnology
companies. As pharmaceutical and biotechnology companies increasingly outsource
development, they may turn to large CROs that provide a broad range of
preclinical and clinical services, while at the same time they may also limit
the number of CROs they choose to provide such services. CPS believes that this
trend will further concentrate market share among large CROs with a reputation
for quality, efficiency, flexibility, responsiveness and overall development
experience and expertise and that CPS will benefit from this trend.
Business Strategy
CPS believes it is the largest CRO serving the biotechnology and
pharmaceutical industries, based on estimated 1995 net revenues, and has a
focused strategy to provide high quality, cost effective, integrated,
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comprehensive and innovative services to assist its pharmaceutical and
biotechnology clients develop, produce, obtain approval for and enhance the
commercial success of their new therapeutic products worldwide. CPS has and will
continue to execute this strategy by: hiring and retaining the best people
available in terms of knowledge, ability and customer-focused attitude;
continually improving its existing services and creating new services that
respond to the demands of the biotechnology and pharmaceutical industries;
continually improving its drug development processes; and selectively expanding
into new locations. CPS expects that these improvements or additions will occur
as the result of internal expansion and development activity, through continued
linking of CPS's various services and through strategic acquisitions.
Personnel. CPS is guided by a senior management team of experts in drug
development who in many cases have had previous careers in the relevant
industries served by CPS, providing them insight into what CPS's clients need
and expect from a full service CRO. Moreover, CPS has a performance management
system that involves an interactive annual objective process, career development
plan and annual review process designed to focus on both individual strengths
and opportunities for growth. In general, CPS seeks to retain and hire the
best-qualified individuals for all aspects of its operations, emphasizing the
need for experience and a customer focus. CPS provides its employees with the
necessary resources for achieving these goals, including information technology
and internal and external training programs to enable them to more effectively
perform their jobs.
Services. CPS is a full service CRO that provides a broad array of
product development services to the biotechnology, pharmaceutical and medical
device industries. In addition, and to a lesser extent, CPS provides services
such as health economics for managed care organizations, hospitals and health
care provider networks and early development and laboratory testing services to
the chemical, agrochemical and food industries. CPS believes that CROs capable
of offering a full range of drug development and manufacturing services are
better able to compete for three reasons: (1) a full range of services provides
a client with the choice of using just one provider to secure all of the
client's development needs; (2) an integrated provider of these services can
provide economies of scale and accelerate the development of the client's
product through more comprehensive planning of the development process; and (3)
early stage development provides the CRO with access to the client sooner in the
development cycle and may promote the client's use of later stage development
services.
As part of its strategy, CPS both continually improves its existing
services and endeavors to create new ones. CPS 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 CPS's most
senior executives, including its chief executive officer. This team meets
regularly to set quality goals, to determine whether such goals are being met
and to discuss initiatives that should be implemented to improve the quality of
its services. As an important supplement to CPS's quality management system,
certain of CPS's U.S. and European subsidiaries have received ISO 9000 and 9001
certifications based on quality standards established by the International
Organization for Standardization. The ISO 9000 standards define the
international requirements for creating a quality assurance system that will
result in providing consistent service.
An example of CPS's efforts to continuously improve its existing
services is the Expanded Access Program ("EAP"), one of CPS's periapproval
offerings. EAP is a mechanism that allows innovative new therapies for life
threatening diseases to be given to expanded populations prior to FDA approval
pursuant to a TIND. See "--Services--Clinical and Periapproval
Services--Treatment Investigational New Drug Applications." In addition to
improving its existing services, CPS also focuses on providing its clients new
market oriented, value-added services. Some of these involve integrated services
that rely on multidisciplinary teams drawn from various CPS operating units or
divisions. For instance, CPS 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.
See "--Services--Preclinical Services."
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CPS's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions. With respect to the former, in
addition to SPD, CPS has invested in the creation of a multi-use
biomanufacturing facility, Corning Bio. See "--Services--Biomanufacturing." With
respect to the latter, CPS added clinical packaging capabilities through the
acquisition of National Packaging Systems, Inc. in January 1995 and enhanced its
health economics services by acquiring HTA in March 1996. CPS expects to
continue developing services internally and making strategic acquisitions that
are complementary to its existing services and that will expand its ability to
serve its clients.
Streamlining the Drug Development Process. CPS believes that when
selecting CROs to conduct trials the biopharmaceutical industry will become more
demanding with respect to factors such as containing costs, reducing testing
time frames and being able to conduct trials on a global basis. For CROs to
become more efficient, with the resultant savings in time for clients, the drug
development process itself will undergo continuous change. In recognition of
this, CPS has created a dedicated team focused exclusively on redesigning the
drug development process with the objective of reducing the time required to
develop a new compound. The mandate of this team is to examine every significant
process, system and information technology used in product development with the
objective of applying the considerable experience and technical resources
available throughout CPS. Currently, CPS has over 300 information systems
professionals working in 12 regional information system centers (nine in the
United States and three in Europe) and nine satellite centers (five in the
United States and four in Europe). All of CPS's employees at its 31 locations
(both domestic and international) and miniframe computers and thousands of
desktop computers are connected by a wide area network that provides global
access to the expertise and technologies resident in the regional information
system centers. These systems also support CPS's ability to provide integrated
services and connect CPS to its clients. For instance, CPS's Information Access
System permits clients to obtain real time access to their study data, and its
drug management system based on Integrated Voice Response technology allows
clients to more efficiently manage the distribution of their experimental
compounds to investigational sites. See "--Services--Clinical and Periapproval
Services--Clinical Development Technologies."
In examining ways to improve the drug developmental process, CPS's
information technology strategy is to capitalize on its existing heterogeneous,
flexible and proprietary computer systems, which are time-proven through
thousands of trials, and to both customize them where appropriate for particular
client needs and incorporate new systems and technologies to meet changing
demands in a timely and cost effective manner.
Geographic Expansion. CPS believes that it will become increasingly
important to provide its full range of drug research and development services in
all major and developing biotechnology and pharmaceutical markets, especially
given industry trends to conduct research on new drugs outside the United States
first and to conduct clinical trials in multiple countries simultaneously. CPS
has a tradition of serving its clients throughout the world. Through its
offices, regional monitoring sites, laboratories and manufacturing sites in over
31 locations in 15 different countries and field work in 11 other countries, CPS
believes it is a leader among CROs in its ability to deliver services globally.
Currently, approximately 30% of CPS's 4,900-person work force is based outside
of the United States.
CPS will continue its strategy of establishing new or enhancing
existing operations in significant biotechnology and pharmaceutical markets. CPS
expects this will occur as the result of internal growth and through strategic
acquisitions. For instance, CPS opened its Singapore office in April 1996.
Singapore will serve as CPS's center for conducting clinical trials in Asia, a
region that CPS believes will be increasingly important for the research,
development and therapeutic use of drugs. Given the need in Asia to set
processes and standards for conduct of clinical trials that meet international
standards, and the Singapore government's desire to be the Asian center for
human drug development and research, CPS is collaborating with the Singapore
National Science and Technology Board concerning the Singapore government's
initiative to form the Asia Pacific Economic Cooperation coordinating center for
Good Clinical Practice. CPS is also discussing with its clients opening new
offices in Latin America and Canada to serve their growing need to conduct drug
development studies in these areas.
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Services
CPS is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, CPS provides
services such as health economics for managed care organizations, hospitals and
health care provider networks and early development and laboratory testing
services to the chemical, agrochemical and food industries. The foregoing
services constitute six lines of business: preclinical, biomanufacturing,
clinical and periapproval, central laboratory, clinical packaging and health
economics.
Preclinical Services
CPS believes that it is one of the largest independent providers of
preclinical drug safety assessment and analytical chemistry services. With four
major laboratories, employing over 1,900 people, located in Madison, Wisconsin,
Vienna, Virginia, Harrogate, England, and Munster, Germany and with an
administrative office in Tokyo, Japan, CPS conducted approximately 1,000
toxicology studies in 1995. 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. CPS's preclinical group also works
closely with its Phase I and II groups to minimize product development time and
to provide clients with early data on the safety and efficacy of new molecules.
This data allows clients to make a decision about whether to continue, cease or
modify their development program. See "--Business Strategy--Services."
As part of its preclinical services, CPS is duplicating in the United
States an SPD program developed in Europe that has successfully reduced the time
from preclinical testing to the first human studies. SPD involves an integrated
process and team drawn from CPS'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 the
IND. Specific elements of the process include formulation and dose delivery
testing, product metabolism, chemistry, pharmacology, toxicology and safety
testing. Through clearly defined objectives, plans, timetables, and coordination
with clients, CPS has used SPD in the United Kingdom (where INDs are not
required to commence Phase I clinical trials) on over 10 compounds and has
averaged just six months to nine months from the start of preclinical testing to
the start of a Phase I clinical trial. In one example, the entire preclinical
testing phase was completed in 4 1/2 months with the Phase I clinical trial
concluding just five months thereafter. The preclinical testing phase in the
United States typically takes six months to three years and Phase I studies
typically take six months to one year. Because INDs are required in the United
States to be filed before human clinical trials start, it is uncertain whether
SPD trial completion speeds in the United States will be as swift as in the
United Kingdom, but CPS believes that an SPD program will reduce the drug
development time in the United States.
CPS is also one of the largest providers of animals, including
purpose-bred animals, for biomedical research. These animals are used by
biopharmaceutical companies, university research centers and CROs, like CPS, as
part of their preclinical in vivo safety and efficacy testing. Often, these
preclinical studies require animals which are free of genetic anomalies to
assure that results from the testing are accurate. In addition, animals will
often need to be free of all pathogens, again, to ensure the integrity of the
testing results. Through a variety of processes, technology and specifically
constructed facilities, CPS is able to provide both purpose-bred and specific
pathogen free animals that will meet the clients' rigorous control requirements.
CPS is also one of the largest providers of custom polyclonal and monoclonal
antibody services and recently opened an 18,000-square-foot state-of-the-art
antisera production facility that complies with both GMP and GLP. Finally,
although CPS's animal breeding facilities maintain procedures in accordance with
applicable government regulations and company policies for the
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quarantine and handling of imported animals, including primates, there is a risk
that these animals may be infected with diseases that may be harmful and even
lethal to themselves and humans. In 1996 CPS, with the approval of the Texas
Department of Health and the Centers for Disease Control, destroyed a shipment
of monkeys from the Philippines because some had been infected with a sub-strain
of the Ebola-Reston virus, which is lethal to monkeys.
Outside the area of biopharmaceutical development, CPS also provides
early development and laboratory testing services to the chemical, agrochemical
and food industries. For instance, CPS offers a complete range of services to
agrochemical manufacturers to determine the potential risk to humans, animals
and the environment from plant protection products. Further, CPS offers a broad
range of services to the food industries including nutritional analysis and
nutritional content fact labels.
Biomanufacturing
CPS holds a majority interest in Corning Bio, a company formed in 1995
to manufacture peptides and recombinant proteins for biotechnology and
pharmaceutical clients in accordance with GMP for preclinical and clinical
trials as well as for commercial sales. Corning Bio's services will include
process development services, GMP manufacturing by microbial and mammalian cell
expression, laboratory testing, quality assurance and quality control and
regulatory affairs assistance. Corning Bio expects to lease and commence
operations by the end of 1996 in a biomanufacturing facility located in Research
Triangle Park, North Carolina. Corning Bio will be able to process multiple
compounds for multiple clients simultaneously and on a scale, CPS believes,
greater than any other contract bioprocessor. Corning Bio provides an
alternative for clients who might otherwise need to design, finance and
construct their own facility to manufacture a compound for preclinical or
clinical trials or commercial sale. By hiring Corning Bio, a client can avoid
the expense, time delay and risk of making additional investments for a compound
whose safety, efficacy and commercial opportunities are uncertain. This allows
clients to preserve their capital and lower their risks. See "Risk Factors--Risk
Factors Relating to CPS--Corning Bio--New Business Venture."
Outsourced biomanufacturing is a relatively new industry and as such
companies in this industry are subject to all of the risks inherent in a new or
emerging industry, including changes in the regulatory regime, an absence of an
established earnings history, the availability of adequately trained management
and employees, and the potential for significant client concentration. In an
attempt to enter this industry at an early stage of its development, Corning Bio
has hired personnel from the biopharmaceutical industry experienced in
biomanufacturing.
As a start-up venture, Corning Bio is subject to the risks inherent in
the establishment of a new business enterprise, including, among others,
unanticipated construction delays, operational and manufacturing problems,
additional and unforeseen costs and expenses and an inability to attract and
retain clients. There can be no assurance that, even after the expenditure of
substantial funds and efforts, Corning Bio will be able to market successfully
its biomanufacturing services. Corning Bio's biomanufacturing facility is still
under construction and is expected to be "mechanically" completed during the
fourth quarter of 1996. Mechanical completion occurs when all structural aspects
of the facility are complete, all mechanical equipment and systems are installed
and a certificate of occupancy has been issued by an applicable governmental
authority. After mechanical completion, the facility must be "validated," which
means that the various equipment, systems and procedures that are required to
manufacture a biologic must be thoroughly tested and reviewed. Although Corning
Bio has submitted proposals to a number of prospective biopharmaceutical
clients, it has not yet been awarded any contracts. For the period ended
December 31, 1995, Corning Bio reported a net loss of approximately $1.9
million, and for the six months ended June 30, 1996, Corning Bio reported a net
loss of approximately $1.6 million.
The biomanufacturing facility is being financed through several tax
retention operating leases provided by the Bank and, during the construction
phase, is being leased by the General Contractor. Under certain circumstances,
including mechanical completion of the facility after March 1, 1998 or some
other default of the General Contractor, Corning Bio may become liable for the
entire cost of constructing, equipping and validating
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the biomanufacturing facility, which CPS believes should not exceed $55 million.
The leases expire 10 years from the date of mechanical completion of the
facility. The annual minimum lease payments are currently estimated at $5.5
million. At the expiration of the lease term Corning Bio is liable for the
unamortized balance of the cost of the facility, currently estimated to be
approximately $37 million. Corning Bio may also choose to purchase the facility
at specific dates over the 10 year period. Using current estimates, the purchase
price would be approximately $54 million at the end of the first year,
decreasing on an amortizing basis to approximately $37 million at the end of the
tenth year.
CPS owns 76% of the voting capital stock of Corning Bio in the form of
convertible preferred stock (the "Corning Bio Preferred Stock"). The remaining
24% of Corning Bio's capital stock is owned by certain minority stockholders
(the "Minority Stockholders") in the form of common stock. CPS's ownership in
Corning Bio could be reduced to as much as 68% of the voting capital stock if
certain options granted to key Corning Bio executives to acquire Corning Bio
common stock owned by CPS are exercised in full. The Corning Bio Preferred Stock
held by CPS entitles CPS to a 12% annual cumulative dividend. No dividend has
been paid on the Corning Bio Preferred Stock nor does CPS currently anticipate
the payment of any such dividend until and unless Corning Bio becomes
profitable.
Corning Bio, CPS and the Minority Stockholders entered into a capital
contribution and shareholder agreement (the "Agreement"), which, among other
things, limits the persons to whom the Minority Stockholders may transfer their
Corning Bio common stock, grants CPS a right of first refusal with respect to
the transfer of Corning Bio common stock held by the Minority Stockholders,
grants CPS the right to purchase up to one third of the Corning Bio common stock
held by the Minority Stockholders on each of the second, third and fourth
anniversary of the completion of the construction of the facility or, if CPS
chooses not to exercise this right, obligates Corning Bio to use its best
efforts to arrange for the sale of such shares on certain specified terms, and
provides for the Minority Stockholders the right to nominate up to two directors
of Corning Bio to the extent that the Minority Stockholders own, in the
aggregate, greater than 50% of their initial equity position in Corning Bio. The
Agreement also contains certain provisions which restrict the circumstances and
set forth the terms and conditions upon which CPS may provide additional capital
or funds to Corning Bio. CPS has no affirmative obligation to provide further
funds or financial assistance of any kind to Corning Bio.
Clinical and Periapproval Services
CPS offers a comprehensive range of clinical trial services, including
Phase I through III clinical studies and periapproval studies including Phase
IIIb and Phase IV clinical studies, TINDs, post-marketing surveillance studies
and prescription to over-the-counter switch studies ("Rx to O-T-C Switch"). CPS
also has extensive experience in a number of therapeutic areas, including
diseases of the cardiovascular and central nervous systems, endocrinology and
respiratory systems, infectious diseases (including AIDS), and significant
experience in other areas including oncology, bone metabolism immunology,
gastroenterology, urology, dermatology and hematology. CPS has extensive
experience in managing both small, medium and large trials in the United States
and in many parts of the world, including Australia, Canada, Western, Central
and Eastern Europe, Israel, Mexico and Russia. These trials may be conducted
separately or simultaneously as part of a multinational development plan. In
1995 CPS completed 135 Phase I studies involving over 2,900 study patients
through two clinical research facilities, a 60-bed facility in Madison,
Wisconsin and a 60-bed facility in Leeds, England; 113 Phase II and III studies
involving over 26,900 study volunteers and 2,100 investigational sites; and 42
Phase IIIb - IV clinical and other periapproval studies involving approximately
8,400 study sites and approximately 53,000 study patients. Through 1995, CPS has
cumulatively been involved in 14 TINDs involving over 2,600 investigational
sites and over 25,000 patients. In addition, CPS has cumulatively conducted over
625 Phase IIIb - Phase IV studies through 1995 involving approximately 20,000
investigational sites and over 215,000 patients; over 34 post-marketing studies
through 1995 involving over 74,000 investigational sites and over 480,000
patients; and three Rx to O-T-C Switch studies through 1995 involving over 3,000
investigational sites and over 10,000 patients.
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CPS can manage every aspect of the foregoing types of trials by
providing its clients the following services: clinical development plans and
protocol design, consulting services (clinical and data management, regulatory
advice, information systems and drug development strategy), site, investigator
and patient enrollment, preparation and submission of TINDs, INDs, European
study permissions, NDAs, computer assisted NDAs ("CANDAs"), product license
applications ("PLAs"), computer assisted PLAs ("CAPLAs") and European submission
dossiers, computerized patient randomization and dose assignment and tracking,
Phase I - Phase IV study design and implementation, monitoring and safety
evaluation management and reporting, data processing and management, statistical
analyses and report writing, medical writing, GCP and GMP audits and, through
its relationship with Bio-Imaging, medical image digitization and processing.
Clinical trials are managed by a dedicated project team, which, in each case, is
led by a project director who supervises all aspects of the clinical trial.
The following is a description of the core services CPS provides,
either on an individual or integrated basis depending on client needs, as part
of conducting clinical trials:
Study Design. CPS serves its clients in the critical area of
study design by applying its wide development experience in the
preparation of study protocols and case report forms ("CRFs"). The
study protocol defines the medical issues to be examined in evaluating
the safety and efficacy of the drug under study, the number of patients
required to produce statistically valid results, the clinical tests to
be performed in the study, the time period over which the study will be
conducted, the frequency and dosage of drug administration and the
exact inclusion and exclusion criteria to be met for the patients
enrolled in the study. The success of the study depends not only on the
ability of the protocol to accurately reflect requirements of
regulatory authorities, but also on the ability of the protocol to fit
coherently with the other aspects of the development process and the
ultimate marketing strategy for the drug. This includes outcomes and
pharmacoeconomic concerns and reimbursement planning. See "--Health
Economics Services."
Once the study protocol has been finalized, CRFs must be
developed to record the desired information to be obtained from the
clinical studies. The various other disciplines involved in the drug
development process, including data management, statistics and
regulatory affairs, must work closely with the clinical trial
management project team to assure that the right data are acquired in a
form which is most efficient for subsequent data entry, management
analyses and reporting. Proper CRF design is critical to allowing
investigators and field monitors to conduct their respective jobs
quickly, accurately and effectively.
Investigator Recruitment. During the clinical trials,
administration of the drug to patients is supervised by physicians,
also referred to as investigators, at hospitals, clinics or other
locations, also referred to as investigational sites. CPS solicits the
participation in the study of investigators who contract directly with
either CPS or its client. The successful rapid identification and
recruitment of investigators who have the appropriate expertise and an
adequate base of patients who satisfy the requirements of the study
protocol are critical to the timely completion of the trial. CPS
maintains and continually expands and refines its computerized database
of approximately 30,000 investigators. Information regarding CPS's
experience with these investigators, including factors relevant to
rapid study initiation, are contained in the database. This information
allows project managers to choose the appropriate investigators for a
particular study in an efficient manner. In addition, CPS has worked
with approximately 25,000 general practitioners in connection with the
conduct of Phase III and IV studies.
Study Monitoring. CPS provides study monitoring services which
include investigational site initiation, patient enrollment assistance
and data collection through subsequent site visits. These visits also
serve to assure that data are gathered according to GCP, the
requirements of the client, as specified in the study protocol or
otherwise, and applicable regulations. Project management and
monitoring services are the operational center of all clinical studies.
In most instances a project will meet, exceed or fail to meet
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expected timeliness for completion based on meeting deadlines during
the first few months of study initiation. Therefore, CPS 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. Drugs under study cannot be released to the investigational
sites, and, thus, the study cannot begin until these activities have
been completed.
Clinical Data Management and Biostatistical Analysis. CPS's
data management and biostatistical analysis operations are managed by
professionals with extensive pharmaceutical and biotechnology industry
experience in the design and construction of local and multinational
clinical trial databases. Data management and biostatistical analysis
services are offered as discrete products and as part of an integrated
drug development program. During the design of development plans and
protocols, CPS offers consulting services relating to, and the
determination of, sample size parameters for patient enrollment,
development of data analysis plans and randomization schemes. During
the conduct of clinical trials, CPS assists in the rapid acquisition of
clean and accurate data. Following completion of the clinical trials,
CPS assists in report preparation and regulatory submissions. CPS's
biostatisticians may participate with clients in meetings with the FDA
to present and discuss biostatistical analyses prepared by CPS. CPS has
expertise in electronically capturing and integrating geographically
diverse data. CPS employs a variety of software, which may be specified
by clients or combined with customized programs developed by CPS.
Drug development time is reduced by performing data management
and biostatistical analysis activities in parallel with other drug
development activities where possible. For example, data management
personnel work as part of an integrated team with clinical program
managers and field monitors to continuously enter data, program output
tables and listings and validate the database so that there is a rapid
progression from "data lock," to "database freeze," to final tables and
listings preparation and to biostatistical analyses. Similarly, there
is a close working relationship with medical writing and regulatory
services personnel.
Clinical Development Technologies. To expedite the drug
development process and to help reduce costs, CPS has created a
proprietary drug management system based on an Interactive Voice
Response System ("IVRS") and an Information Access System ("IAS"),
which are interactive information technologies. IVRS uses touch-tone
telephone technology to assist biopharmaceutical clients in managing
the "just-in-time" delivery of clinical drug supplies and patient
randomization. IVRS is available in multiple languages using toll free
numbers and has, in some cases, demonstrated up to 30% reduction in
study drug waste. IAS, based on Lotus Notes(R) shareware, provides
clients with 24-hour access to study data, such as study patient
enrollment progress, patient visit information, CRF status and serious
adverse event experience. In another example, by incorporating new
optical scanning technology and redesigning the development process for
a 40,000-patient Phase IV clinical trial involving 900 investigators,
CPS was able to decrease the per patient study cost by approximately
60%.
Medical Writing and Regulatory Services. CPS provides medical
report writing and regulatory services to its clients in a manner
designed to complement parallel development processes to reduce overall
development time. Strategic plan and protocol design services provided
at the beginning of a project, combined with clear, concise data
presentation, analysis and discussion at the completion of the project
assist the client in obtaining regulatory approvals. These services are
fully integrated with CPS's other services to assure maximum speed
consistent with good service and regulatory compliance. Services in
this area include integrated clinical/statistical reports, manuscripts,
risk/benefit assessment reports, package inserts, quality assurance and
environmental risk assessments. Through 1995, CPS has prepared a total
of 79 INDs or their equivalent. In addition, through 1995, CPS has
cumulatively prepared 66 NDAs, or their equivalents, in the United
States or abroad, of which 47 NDAs, or their equivalents, in the United
States or abroad are pending and 19 NDAs, or their equivalents, have
been approved in the United States
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and abroad. Further, CPS believes it was one of the first CROs to
develop CANDAs and CAPLAs, and CPS worked on two such applications in
1995 and has completed nine such applications since their inception in
1987.
Although CPS's clinical regulatory affairs group typically
conducts GCP and GMP audits as part of its overall involvement in a
clinical trial, because of the experience and reputation of this group,
it is common for the group to be hired independently by a sponsor to
conduct such audits. Governmental agencies have also recognized the
ability of CPS's regulatory affairs group. Hired by an intermediary,
CPS worked in 1992 with the European Commission (Directorate General
III) on a study concerning the establishment and operations of the then
proposed European Medicines Evaluation Agency ("EMEA"), Europe's rough
analogy to the FDA. The EMEA became operational on January 1, 1995, and
CPS's head of European clinical regulatory affairs was listed as a
co-author of the report. In another example, CPS was hired in 1995 by
an intermediary to advise the National Drugs Advisory Board in Ireland
concerning the recommended structure, systems and procedures for the
then proposed creation of the Irish Medicines Board, which was
ultimately established in January 1996.
Treatment Investigational New Drug Applications. The TIND is
an application by a pharmaceutical or biotechnology sponsor and the
associated procedure to allow broader populations of patients to
receive treatment with an investigational new drug for a serious or
immediate life-threatening disease, such as AIDS or cancer, for which
no comparable or satisfactory therapy is available. This treatment is
provided during the clinical trial phase of development but does not
typically use controlled clinical trials. CPS has had substantial
experience 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.
CPS's EAP, which is conducted pursuant to a TIND, is a
mechanism that allows innovative new therapies for life-threatening
diseases to be given to expanded populations prior to FDA approval. In
one recent situation, a pharmaceutical company contacted CPS to conduct
an EAP for a promising new treatment for AIDS. The sponsor, who had
little experience with EAPs and had limited supply of the new drug,
required that the study be conducted on a global scale (21 countries
simultaneously), that enrollment of patients start rapidly (within 90
days of CPS's selection as the CRO) and that all components of the
study, including project management, data management, regulatory
support and drug supply management, be integrated seamlessly worldwide.
To accomplish the sponsor's aggressive goals, CPS formed a
multidisciplinary team drawn from six different locations in the United
States and Europe involving the clinical and periapproval and the
clinical packaging operations. After redesigning the EAP processes,
customizing existing technology and employing new systems, CPS has been
able to meet or exceed the client's requirements without jeopardizing
quality or increasing costs.
Other Periapproval Studies. Besides TINDs, Phase IIIb studies
(involving studies conducted after NDA submission but before regulatory
approval is issued) and Phase IV studies, CPS performs other types of
periapproval studies such as post-marketing surveillance studies and Rx
to O-T-C Switch studies. Post-marketing surveillance studies are
epidemiologically based evaluations of the use of products in actual
medical practice using a broad range of patients. Accordingly, 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, CPS 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.
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Central Laboratory Services
CPS believes that the ability to conduct high quality and sophisticated
central laboratory services is an integral aspect of what constitutes a full
service CRO. CPS's two facilities (one located in the United States and the
other in Switzerland) provide central laboratory services dedicated exclusively
to biopharmaceutical studies. These facilities, which have conducted over 60
million assays from the specifications of more than 3,000 protocols and have
collected data from over 16,500 investigational sites, provide clients with
combinable data in studies that can be conducted separately or multinationally
and simultaneously. Providing combinable data eliminates the need for
statistical correlation among different laboratories by using consistent
laboratory methods, the use of same reagent manufacturers, and the use of
identical clinical trial reference ranges and equipment calibration. CPS also
employs a proprietary clinical trials management system, which CPS believes is
unique, that enables it to enter a sponsor's protocol requirements directly into
its own database. This system, based on protocol requirements, constructs the
drug kits that will go to the investigational sites and the requisition forms
therefor, allows for proper laboratory specimen collection from the
investigational site, sequencing of study participants visits and investigator
test ordering of additional tests and ensures that all demographic data is
complete and accurate and will produce for the client reports that are
customized to their specifications.
The laboratories provide a comprehensive audit trail by ensuring that
all laboratory data are traceable to source documents, are capable of delivering
customized data electronically within 24 hours and provide safety test results
within 48 hours from most locations. As the need for central laboratory services
expands geographically, CPS has expanded the reach of its central laboratories
business through a contractual arrangement with a leading South African
laboratory that allows CPS to combine the testing capability of this laboratory
with its own proprietary systems. CPS expects to continue to investigate other
opportunities for geographical expansion of its central laboratory service
offerings.
Clinical Packaging
Through Corning National Packaging, Inc., CPS offers full service
contract packaging for the pharmaceutical industry including package development
and design, coldformed and thermoformed blister units, blister packaging,
multi-dose bottle filling, clinical labeling, storage and site distribution of
clinical supplies and return services for unused supplies. CPS believes that by
integrating packaging services with its other clinical and periapproval services
it can accelerate the drug development process through operational efficiencies
that arise from coordinating at the outset the design of a clinical trial.
Health Economics
As a result of its acquisition of HTA in March of 1996, CPS offers a
wide range of health economic services for managed care organizations,
hospitals, health care provider networks and pharmaceutical and device
manufacturers. These services include outcomes and pharmacoeconomic studies,
reimbursement planning services and disease management services.
Outcomes and Pharmacoeconomic Studies. In this area, HTA offers CPS's
clients a full range of strategic and analytic services, including strategic
planning, quality-of-life assessment, and economic studies, including
feasibility studies, protocol and instrument design and data analysis. Outcomes
studies may be prospective, often conducted in conjunction with clinical trials,
or retrospective. Many cost-effectiveness studies employ economic modeling
techniques to evaluate the full financial impact of new medical technologies.
For example, among the studies undertaken by HTA in 1995, HTA completed a
cost-effectiveness study for a medical device manufacturer to determine the
device's clinical effectiveness in treating brain metastases and to compare the
cost of such treatment with other therapies. HTA also completed in 1995 several
quality-of-life studies that determined various products' impacts on patients'
lives. For example, in a study on the effects of a new treatment for amyotrophic
lateral sclerosis (Lou Gehrig's disease), HTA designed the measures for
evaluating how treatment affected a patient's
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ability to function on a daily basis. Through 1995, HTA has designed over 100
outcomes and pharmacoeconomic studies.
When planning studies, HTA examines the audience for the study's
findings to determine which of the client's concerns (e.g., 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. HTA typically involves academic
and clinical experts to ensure that appropriate techniques are used and to
enhance study credibility and acceptance. HTA designs most studies with a goal
of publishing its findings in respected, peer-reviewed journals.
CPS believes that given the changing competitive pressures affecting
the pharmaceutical industry and the rising need to more rigorously demonstrate
the value of particular drugs, both in their own right and compared to other
drugs and treatment regimes, the ability to perform outcomes and
pharmacoeconomic studies will become increasingly important.
Reimbursement Planning. CPS offers its customers strategic
reimbursement and market planning services. These services enable clients to
enhance the commercial success of their medical products. CPS analyzes, on
behalf of the customer, who will pay for a medical product (e.g., third-party
payors such as private insurance companies or federal programs like Medicare)
and what economic barriers or opportunities exist for the product (e.g., claims
coding, coverage policy, or payment amounts). This work typically involves
evaluating government policies and, sometimes, leads to changes in those
policies. In addition, CPS often offers its reimbursement planning activities in
conjunction with its other services that evaluate existing and potential market
size, pricing, distribution, and economic impact.
Through its Medical Technology Hotlines(R) division, CPS also provides
full service reimbursement case management, including: (1) contacting insurers
to investigate specific coverage and benefit matters, resolving denied claims
and educating insurers; (2) assisting manufacturers in designing and effectively
running their indigent patient programs, pursuant to which costly new products
are made available to patients who cannot afford them because of inadequate
insurance coverage or other cost reasons; (3) designing and administering
transition programs for manufacturers, which includes obtaining third-party
payment for a product for patients who had previously received it free as part
of a clinical trial; and (4) conducting reimbursement training seminars for
clients and their customers.
All of these services are supported by a dedicated information services
group that provides a range of data products, services and information systems,
including customized hospital cost reports, patient average lengths of stay or
mortality rates at the federal, state, local or individual hospital level. The
extensive economic and epidemiologic databases CPS maintains are used to perform
market research, determine the economics of a disease or inform government
authorities about the need for potential policy changes.
Disease Management Services. Working for a variety of customers,
including pharmaceutical and device manufacturers, managed care organizations,
hospitals, provider networks and computerized medical record companies, CPS
designs and implements systems that track patterns of care, patient outcomes,
and costs, and develops programs and tools designed to improve quality and
decrease costs of care. Such programs and tools include medical practice
guidelines and computerized decision support tools. For example, CPS is
developing nationwide standards for the optimal treatment of dialysis patients.
This work is being performed in conjunction with a major national professional
society and is being funded by a manufacturer. In another initiative, CPS has
started a national database to track practice patterns and outcomes concerning
eye care provided by ophthalmologists. CPS is analyzing the national data and
providing reports to individual ophthalmologists regarding their performance.
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Clients and Marketing
CPS provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. Specifically, CPS
serves over 270 biopharmaceutical companies, including all 50 of the world's
largest pharmaceutical companies and 17 of the world's 25 largest biotechnology
companies. Of the 270 biopharmaceutical companies CPS serves, 45 are Japanese.
The Japanese biopharmaceutical companies are served by CPS's U. S. and European
operations. For the years ended December 31, 1995, 1994 and 1993, approximately
70%, 76% and 78%, respectively, of CPS's net revenues were attributed
principally to U.S. operations, while approximately 30%, 24% and 22%,
respectively, was attributed to European operations. Approximately 59%, 52% and
48% of CPS's net revenue during 1995, 1994 and 1993, respectively, was
attributed to CPS's clinical lines of business. Approximately 41%, 48% and 52%
of CPS's net revenues during 1995, 1994 and 1993, respectively, were attributed
to CPS's nonclinical lines of business. No client accounted for 10% or more of
CPS's net revenues in 1995, 1994, or 1993. None of CPS's clients accounted for
greater than 5% of CPS's net revenue in the year ended December 31, 1993. In the
years ended December 31, 1994 and 1995, one client accounted for greater than 5%
of CPS's net revenues. In fiscal 1993, 1994 and 1995 and the six months ended
June 30, 1996, CPS's top five clients accounted for approximately 17%, 20%, 21%
and 23%, respectively, of CPS's net revenues. See "Risk Factors--Risks Relating
to CPS--Dependence on Certain Industries and Clients."
CPS's sales activities are conducted by more than 90 business
development people based in CPS's operations in the United States, Europe,
Australia, Japan and Singapore. Most of CPS business development personnel have
technical or scientific backgrounds.
To strengthen its sales and marketing activities, CPS introduced in
1995 a Lotus Notes(R) based large account management process ("LAMP") that
allows CPS business development personnel in all locations to promptly ascertain
the status of any new client activity with any CPS operation and is an important
tool in managing CPS's key account program. Through LAMP, the key account
program and dedicated resources, CPS believes it can better coordinate and unite
the efforts of its sales and marketing personnel and strengthen relationships
with pivotal biopharmaceutical clients. CPS believes that this will allow it to
improve its understanding of its clients' organizational structure, management
practices and product pipeline, and, thus, better serve its clients' needs.
Conversely, LAMP also enables clients, across different business functions, to
better understand the full range of CPS's services.
Contractual Arrangements
Most of CPS's contracts in the preclinical, central laboratory,
clinical packaging and health economics areas are fixed price or fee-for-service
and in the clinical and periapproval areas are fee-for-service with a cap. To a
lesser extent, some of the contracts in the clinical and periapproval areas are
fixed price or fee-for-service without a cap. In cases where the contracts are
fixed price, CPS bears the cost of overruns, with certain exceptions, but
benefits if the costs are lower than anticipated. In cases where the contracts
are fee-for-service with a cap, the contracts contain an overall budget for the
trial based on time and cost estimates. If costs are lower than anticipated, the
client keeps the savings, but if costs are higher than estimated, then CPS is
responsible for the overrun unless the increased cost is a result of a change
requested by the client, such as an increase in the number of patients to be
enrolled or the type or amount of data to be collected. Contracts may range from
a few months to several years depending on the nature of the work performed. In
some cases, for multiyear contracts involving either preclinical or clinical and
periapproval trials, a portion of the contract fee is paid at the time the study
or trial is started with the balance of the contract fee payable in installments
over the study or trial duration and may be performance based. For instance, in
clinical and periapproval trials, installment payments may be related to
investigator recruitment, patient enrollment or delivery of the database.
Most of CPS's contracts for the provision of its services are
terminable by the client either immediately or upon notice. Contracts may be
terminated for a variety of reasons, including the failure of a product to
satisfy safety requirements, unexpected or undesired results of the product, the
client's decision to forego or terminate a
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particular study, insufficient enrollment or investigator recruitment, or CPS's
failure to properly discharge its obligations thereunder. Although the contracts
often require payment of expenses to wind down the study and fees earned to
date, and in some cases, a termination fee or a payment of a portion of the fees
or profits that would have been earned under the contract if the contract had
not been terminated early, the loss of a large contract or the loss of multiple
contracts could materially and adversely affect CPS. See "Risk Factors--Risks
Relating to CPS--Fixed Price Nature of Contracts; Loss or Delay of Large
Contracts."
Backlog
Certain of CPS'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, CPS maintains an order backlog to track anticipated net
revenues for such work that has yet to be earned. CPS does not maintain an order
backlog for all the services it provides because such services are performed
within a short period of time or for other reasons where it is not practical or
feasible to maintain an order backlog. Additionally, services appropriate for
backlog measurement do not correspond exactly with any particular line of
business.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however, CPS 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 CPS will be able to realize all or any
net revenue included in backlog. Although backlog can be meaningful to
management with respect to a particular study where study-specific information
is known (e.g., study duration, performance clauses and other study-specific
contract terms), CPS believes that its aggregate backlog as of any date is not
necessarily a meaningful indicator of future results for a variety of reasons,
including the following: First, studies vary in duration. For instance, some
studies that are included in 1995 backlog may be completed in 1996, while others
may be completed in later years. Second, the scope of studies may change, which
may either increase or decrease their value. Third, studies included in backlog
may be subject to bonus or penalty payments. Fourth, trials under letters of
intent or contracts included in backlog are subject to termination or delay at
any time by the client or regulatory authorities. Termination or delays can
result from a number of reasons. See "--Contractual Arrangements." Delayed
contracts remain in CPS's backlog pending determination of whether to continue,
modify or cancel the study.
Using this method of measuring backlog, at December 31, 1995, 1994 and
1993, CPS's aggregate backlog was approximately $392 million, $344 million and
$294 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. CPS primarily competes against in-house departments of
pharmaceutical companies, full-service CROs and, to a lesser extent,
universities and teaching hospitals. CPS believes, based on 1995 revenues, that
the five largest CROs after itself include PPD (after its anticipated merger
with APBI), Quintiles Transnational Corporation, Huntington International
Holdings PLC, Parexel International Corporation and ClinTrials Inc. CROs compete
on the basis of several factors, including reputation for on-time quality
performance, expertise and experience in specific therapeutic areas, scope of
service offerings, how well such services are integrated, strengths in various
geographic markets, price, technological expertise and efficient drug
development processes, the ability to acquire, process, analyze and report data
in a time-saving and accurate manner, the ability to manage large-scale clinical
trials both domestically and internationally, expertise and experience in health
economics and size. While CPS has competed effectively in these areas, there can
be no assurance that CPS will be able to continue to do so. As a result of
competitive pressures, the CRO industry is consolidating. This trend is likely
to produce competition among the larger CROs for both clients and acquisition
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candidates and companies may choose to limit the CROs they are willing to work
with. In addition, there are few barriers to entry for small, limited-service
entities considering entering the CRO industry. These entities may compete
against larger CROs for clients. Furthermore, the CRO industry has attracted the
attention of the investment community, which could lead to increased competition
by increasing the availability of financial resources for CROs. Increased
competition may lead to price and other forms of competition that could have a
material adverse effect on the results of operations of CPS. See "--CRO Industry
Overview."
Government Regulation
The laboratory and manufacturing services performed by CPS are subject
to various regulatory requirements designed to ensure the quality and integrity
of the testing and manufacturing processes. See "--The Drug Development
Process--Overview." The industry standards for conducting preclinical laboratory
testing are embodied in the GLP and GMP regulations and for central laboratory
operations in Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). CPS's
central laboratories also, in limited circumstances and when required by a
client, follow GLP. CPS's central laboratory in Geneva has also been certified
by CAP. GMP sets forth the requirements for manufacturing facilities. GLP and
GMP have been adopted by the FDA, by the Department of Health in the United
Kingdom and by similar regulatory authorities in other parts of the world. GLP
and GMP stipulate requirements for facilities, equipment and professional staff.
The regulations require standardized procedures for studies, for recording and
reporting data and for retaining appropriate records. To help ensure compliance,
CPS has established quality assurance controls at its laboratory and
manufacturing facilities which monitor ongoing compliance with GLP, GMP and CLIA
regulations, as applicable, by auditing test data and conducting regular
inspections of testing and manufacturing procedures.
The industry standard for the conduct of clinical research and
development studies is embodied in the regulations for GCP. Although GCP has not
been formally adopted by the FDA nor, with certain exceptions, by similar
regulatory authorities in other countries, certain provisions of GCP have been
included in FDA regulations. As a matter of practice, the FDA and many other
regulatory authorities require that test results submitted to such authorities
be based on studies conducted in accordance with GCP. These regulations require
(1) complying with specific requirements governing the selection of qualified
investigators; (2) obtaining specific written commitments from the
investigators; (3) verifying that patient informed consent is obtained; (4)
monitoring the validity and accuracy of data; (5) verifying drug or device
accountability; (6) instructing investigators to maintain records and reports;
and (7) permitting appropriate governmental authorities access to data for their
review. CPS must also maintain reports for each study for specified periods for
inspection by the study sponsor and the FDA during audits. As with GLP and GMP,
noncompliance with GCP can result in the disqualification of data collection
during the clinical trial.
CPS's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
European Community Note for Guidance "Good Clinical Practice for Trials on
Medicinal Products in the European Community" and the requirements of the
applicable country. In addition, FDA regulations and guidelines serve as a basis
for CPS's North American and Asian/Pacific standard operating procedures. From
an international perspective, when applicable, CPS has implemented common
standard operating procedures across regions to assure consistency whenever it
is feasible and appropriate to do so.
CPS'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. CPS's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to assure
compliance with applicable regulations for the humane treatment of the animals
in its custody. Besides being licensed by the USDA as both a dealer and research
facility, this business is also accredited by the American Association for the
Accreditation of
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Laboratory Animal Care and has registered assurance with the U.S. National
Institutes of Health Office of Protection for Research Risks.
The use of controlled substances in testing for drugs of abuse is
regulated by the Drug Enforcement Administration (the "DEA"). All CPS
laboratories using controlled substances for testing purposes are licensed by
the DEA.
CPS's U.S. 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 CPS laboratories are operated in material
compliance with applicable federal and state laws and regulations relating to
the storage and disposal of all laboratory specimens including the regulations
of the Environmental Protection Agency, the Nuclear Regulatory Commission, the
Department of Transportation, the National Fire Protection Agency and the
Resource Conservation and Recovery Act. Although CPS believes that it is
currently in compliance in all material respects with such federal, state and
local laws, failure to comply could subject CPS 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 CPS employees receive
initial and periodic training to ensure compliance with applicable hazardous
materials regulations and health and safety guidelines.
The regulations of the Department of Transportation, the Public Heath
Service and the Postal Service apply to the surface and air transportation of
laboratory specimens. CPS'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
CPS 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 CPS's intellectual property
rights are important to its results of operations, CPS believes that such
factors as the technical expertise, knowledge, ability and experience of CPS's
professionals are more important, and that, overall, these technological
capabilities provide significant benefits to its clients.
Employees
At June 30, 1996 CPS had approximately 4,900 employees, approximately
30% of whom are employed outside of the United States. Approximately 32 of CPS's
employees hold M.D. degrees, 134 hold Ph.D. degrees, 8 hold Pharm.D. degrees, 25
hold DVM degrees and approximately 128 hold masters or other postgraduate
degrees. CPS believes that its relations with its employees are good.
CPS's performance depends on its ability to attract and retain
qualified professional, scientific and technical staff. The level of competition
among employers for such skilled personnel is high. CPS believes that its
employee compensation and benefit plans, including its recently adopted employee
stock ownership plan, enhance employee morale, professional commitment and work
productivity and provide an incentive for employees to remain with CPS. While
CPS has not experienced any significant problems in attracting or retaining
qualified staff, there can be no assurance that CPS will be able to avoid such
problems in the future.
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Facilities
CPS both owns and leases its facilities. CPS's principal executive
offices are located in Princeton, New Jersey where it leases approximately
157,000 square feet of space. The lease expires in 2004. Because its existing
space is approximately 95% occupied and to accommodate its growth, CPS is
currently in discussions with the landlord of this facility to either lease or
purchase additional space in Princeton, New Jersey. No assurance can be provided
that these discussions will be satisfactorily resolved. CPS owns its 397,000
square-foot preclinical laboratory located in Madison, Wisconsin and its 205,000
square-foot preclinical laboratory in Harrogate, England. CPS leases most of its
201,000 square-foot preclinical laboratory in Vienna, Virginia. It also owns
several of the buildings. The leases expire in 1999 and have a 10-year renewal
option. CPS also leases its 152,000 square-foot pharmaceutical laboratory in
Indianapolis, Indiana, which expires in 2000. CPS is investigating extensions of
both leases and other options with respect to such facilities. CPS leases its
51,000 square-foot pharmaceutical laboratory in Geneva, Switzerland, which lease
expires in 2000. CPS's packaging operations are conducted from several leased
facilities. The principal packaging facility is in Allentown, Pennsylvania. The
leases are for approximately 100,000 square feet of space and they all expire in
1999. CPS is currently reviewing facility needs for its packaging operations.
Corning Bio's facility in North Carolina is leased. See "Risk Factors--Risks
Relating to CPS--Corning Bio--New Business Venture." CPS also owns or leases
other facilities in the United States, England, Ireland, Belgium, France,
Germany, Switzerland, Sweden, Australia, Singapore and Japan.
Legal Proceedings
CPS is party to lawsuits and administrative proceedings incidental to
the normal course of its business. CPS 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.
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MANAGEMENT OF CPS
Management
Directors. Certain information with respect to the persons who will
serve as directors of CPS following the Distributions is set forth below. As
provided in the CPS Certificate, the CPS Board will be divided into three
classes effective upon the Distributions and one class of the CPS Board will be
elected for a three-year term at each annual meeting of stockholders. Included
in the information set forth below are the names of the directors of each class
and their original terms. CPS is contemplating the selection of additional
directors which selection may occur prior to the Distributions. The CPS Board
will be comprised of eight directors, one of whom will be an officer of CPS and
two of whom will be officers of Corning. CPS does not intend to hold an annual
meeting of stockholders until the Spring of 1998.
Name Age Year Term Expires
- ------------------------- ----------------- ---------------------
Christopher A. Kuebler 43
Van C. Campbell 58
William C. Ughetta 63
Christopher A. Kuebler has been CPS's President and Chief Executive
Officer, and an Executive Vice President of CLSI, an affiliate of CPS, 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 CPS Board since November 1994. Mr. Kuebler
also serves in various executive officer and director capacities of CPS's
subsidiaries.
Van C. Campbell is the Vice Chairman of Corning, which he joined in
1964. He was elected assistant treasurer in 1971, treasurer in 1972, a vice
president in 1973, financial vice president in 1975 and senior vice president
for finance in 1980. He became general manager of the Consumer Products Division
in 1981. Mr. Campbell was elected vice chairman and a director in 1983 and
during 1995 was appointed to the additional position of chairman of Corning Life
Sciences, Inc. Mr. Campbell has been a member of the CPS Board since May 1995.
He is a director of Armstrong World Industries, Inc. and General Signal
Corporation.
William C. Ughetta is a Senior Vice President and General Counsel of
Corning. Mr. Ughetta joined Corning in 1968 as assistant secretary and assistant
counsel. He was elected secretary of the corporation in 1971 and vice president
in 1972. He was elected a senior vice president in 1983. Mr. Ughetta has been a
member of the CPS Board since July 1996. He is a director of Chemung Canal Trust
Company.
Directors' Compensation. Each director of CPS, other than a director
who is an employee of CPS, will receive $15,000 annually for service as a
director and will also be paid $1,000 for each meeting of the CPS Board and $500
for each meeting of any committee thereof which he attends. In lieu of a meeting
fee, chairmen of committees of the CPS Board will be paid an annual retainer of
$1,000.
CPS has adopted, effective the Distribution Date, a deferred
compensation plan for directors pursuant to which each director may elect to
defer until a date specified by him receipt of all or a portion of his
compensation. Such plan provides that amounts deferred may be allocated to (i) a
cash account upon which amounts deferred may earn interest, compounded
quarterly, at the prime rate of Citibank, N.A. in effect on certain specified
dates, (ii) a market value account, the value of which will be based upon the
market value of CPS Common Stock from time
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to time, or (iii) a combination of such accounts. As of the Distribution Date,
it is anticipated that there will be _____ non-employee directors eligible to
participate in the deferred compensation plan.
CPS has adopted, effective the Distribution Date, a restricted stock
plan for non-employee directors, pursuant to which CPS will issue to each
non-employee director elected 200 shares of CPS Common Stock for each year
specified in the term of service for which such director was elected, subject to
forfeiture and restrictions on transfer, and 2,000 shares upon such director's
election, subject to forfeiture and restrictions on transfer.
Committees of the Board of Directors. Prior to the Distributions, the
CPS Board is expected to establish and designate specific functions and areas of
oversight to an Audit Committee and a Compensation Committee (the "CPS
Compensation Committee"). The Audit Committee will examine and consider matters
relating to the financial affairs of CPS, including reviewing CPS's annual
financial statements, the scope of the independent and internal audits and the
independent auditor's letter to management concerning the effectiveness of CPS's
internal financial and accounting controls. The CPS Compensation Committee will
make recommendations to the CPS Board with respect to programs for human
resource development and management organization and succession, determine
senior executive compensation, consider and make recommendations to the CPS
Board with respect to compensation matters and policies and employee benefit and
incentive plans, administer such plans, and administer CPS's stock option and
equity based plans and grant stock options and other rights under such plans.
Executive Officers of CPS. In addition to Mr. Kuebler, the following
persons will serve as executive officers of CPS after the Distributions:
Richard J. Andrews (49) has been a Senior Vice President of CPS since
July of 1996. In addition, Mr. Andrews has served as the President of Corning
SciCor Inc., a wholly owned subsidiary of CPS, since June 1994. From January
1993, Mr. Andrews has served as the President of Corning SciCor S.A., a wholly
owned subsidiary of Corning SciCor Inc. since April 1994. Corning SciCor Inc.
and Corning SciCor S.A. provide CPS'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.
Michael Giannetto (34) has been CPS's Controller since July 1996. From
December 1992 to March 1995, Mr. Giannetto was the Manager of Financial
Reporting and Technical Accounting for CLSI, an affiliate of CPS. From March
1995 to July 1996, Mr. Giannetto was the Business Controller for CPS. Prior to
December 1992, Mr. Giannetto was a Senior Audit Manager for Deloitte & Touche.
Charles C. Harwood, Jr. (43) has been CPS's Senior Vice President and
Chief Financial Officer since July 1996. From November 1994 to July 1996, Mr.
Harwood was the Vice President and Chief Financial Officer. From May 1993 to
November 1994, Mr. Harwood was Executive Director, Finance of CPS. From January
1993 to May 1993, Mr. Harwood was Chief Financial Officer and Vice President of
Finance with Integrated Telecom Technologies, Inc. Prior to that position, he
was the President of Pembroke Development Co., Inc., a commercial real estate
development company. Mr. Harwood is also a director of Bio-Imaging.
Jeffrey S. Hurwitz (36) has been CPS's Senior Vice President, General
Counsel and Secretary since July 1996. From October 1993 to November 1994, Mr.
Hurwitz was CPS's General Counsel and Secretary. He was promoted to Vice
President in November 1994. From May 1992 to October 1993, Mr. Hurwitz was an
Assistant Counsel and Assistant Secretary for CLSI, an affiliate of CPS. From
August 1991 to May 1992, Mr. Hurwitz was an Assistant Counsel for Corning. 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 is also a director of Bio-Imaging.
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Kim D. Lamon, M.D., Ph.D. (44) has been a Senior Vice President of CPS
since July of 1996. In addition Dr. Lamon has been the President of Corning
Besselaar Inc. and Corning PACT Inc. since May 1996. Corning Besselaar Inc. and
its European affiliates and Corning PACT Inc. provide CPS's clinical and
periapproval services. From April 1994 until May 1996, he was the Executive Vice
President, Chief Medical Officer for CCL and Senior Vice President, Science and
Technology for CLSI, affiliates of CPS. 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.
James D. Utterback (41) has been CPS's Senior Vice President,
International New Business Ventures and is also responsible for CPS's clinical
packaging operations since August 1995. From May 1994 until August 1995, Mr.
Utterback was the Senior Vice President, Human Resources and Quality for CLSI.
Prior to May 1994, Mr. Utterback served in various executive capacities,
including Chief Executive Officer in South Africa, for RPR, a pharmaceutical
company. Mr. Utterback has worked in the pharmaceutical industry since 1985,
living in Europe, Africa and the United States.
Michael G. Wokasch (45) has been a Senior Vice President of CPS since
July of 1996. In addition, Mr. Wokasch has been the President of Corning
Hazleton Inc., a wholly owned subsidiary of CPS, since July 1995. Corning
Hazleton Inc. and its affiliates provide CPS's preclinical services. From
January 1992 until July 1995, Mr. Wokasch served as Divisional Vice President of
Sales of ALI. From October 1991 to January 1992, Mr. Wokasch served as Director
for New Product/Marketing/Development & Scientific Relations at ALI. Prior to
October 1991, Mr. Wokasch was a Director, New Product Development at ALI.
Executive Compensation
Historical Compensation. The following table sets forth information
with respect to annual and long-term compensation expected to be paid by CPS and
its subsidiaries to each of the chief executive officer and the four other most
highly compensated executive officers (the "named executive officers") of CPS
for services to be rendered in all capacities in fiscal year 1996 and such
compensation paid or accrued during the years ended December 31, 1995 and
December 31, 1994 for services rendered by each of the named executive officers.
All references in the following tables to stock and stock options relate to
awards of, and options to purchase, Corning Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Securities Incentive
Name and Other Annual Stock Underlying Plan All Other
Principal Position Year Salary Bonus Compensation(1) Awards(2) Options Payouts Compensation(3)
- ------------------ ---- ------ ----- --------------- --------- ------- ------- ---------------
<S> <C>
Christopher A. Kuebler, 1996
President and Chief 1995
Executive Officer 1994
Kim D. Lamon, Senior 1996
Vice President; President,1995
Corning Besselaar, Inc. 1994
and Corning PACT Inc.
</TABLE>
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<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Securities Incentive
Name and Other Annual Stock Underlying Plan All Other
Principal Position Year Salary Bonus Compensation(1) Awards(2) Options Payouts Compensation(3)
- ------------------ ---- ------ ----- --------------- --------- ------- ------- ---------------
<S> <C>
Richard J. Andrews, 1996
Senior Vice President; 1995
President, Corning 1994
SciCor, Inc.
Michael Wokasch, 1996
Senior Vice President; 1995
President, Corning
Hazleton, Inc.
[Name], Executive Vice 1996
President, Administration
</TABLE>
(1) Includes dividends on shares of restricted stock granted but not earned
within one year from date of grant and tax gross-up -- payments.
(2) Messrs. Kuebler, Lamon and Wokasch held an aggregate of _______, _______
and _______ shares of restricted stock, respectively, having an aggregate
value on ___________, 1996 of $_________, $_________ and $_________,
respectively. Certain of such shares, net of forfeitures, were subject to
performance-based conditions on vesting and are subject to forfeiture upon
termination and restrictions on transfer prior to stated dates. Certain
other shares ("Career Shares") are subject to restrictions on transfer
until the executive officer retires at or after age 60 and are subject to
forfeiture prior to age 60 in whole if such officer voluntarily terminates
employment with CPS and in part if such officer's employment is terminated
by CPS. On or prior to the Distribution Date (a) all forfeiture conditions
and transfer restrictions will be removed from performance-based shares,
(b) all restrictions on transfer will be removed from shares which are no
longer subject to forfeiture and (c) Career Shares which are subject to
forfeiture conditions and transfer restrictions will be forfeited, and
restricted shares and/or options to purchase shares of CPS Common Stock
will thereafter be granted pursuant to the terms of the CPS Incentive Stock
Plan (as defined below). Dividends are paid to such individuals on all
shares of restricted Corning Common Stock held by them.
(3) Includes the following amounts to be contributed by CPS to the CPS
Retirement Savings Plan (as defined below) for 1995: $______ for Mr.
Kuebler, $______ for Mr. Lamon, $______ for Mr. Andrews, $______ for Mr.
_______ and $______ for Mr. Wokasch. Also includes $_____ automobile
allowance to be received by each of Messrs. Kuebler and Lamon and $________
to be received by each of Messrs. Andrews and Wokasch. Also includes 20% of
interest-free loans made by CPS to the following individuals in the
following amounts, together with imputed interest thereon: $_______ for Mr.
Kuebler and $________ for Mr. Lamon, which loans are to be forgiven over a
five-year period provided they continue to be employed by CPS and were made
to assist such individuals in relocating to the New Jersey area.
Option Grants. The following table sets forth certain information
regarding options granted in 1995 (except for Mr. Andrews whose options were
granted on April 25, 1996) to the named executive officers pursuant to Corning
stock option plans. No other options were granted to the named executive
officers in 1996. Employees of CPS who hold at the Distribution Date Corning
stock options, including a portion of those granted on December 6, 1995, will
receive new options of CPS ("New Options") under the CPS Stock Option Plan (as
defined below) in exchange for the surrender of such Corning options. The
remainder of the options granted on December 6, 1995 will be cancelled. It is
anticipated that such cancelled options will be replaced by New Options to be
granted under the CPS Stock Option Plan.
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The exercise prices and the number of shares of CPS Common Stock
subject to New Options will be determined as of the time of the Distributions so
as to preserve the investment basis and intrinsic gain associated with the
Corning options surrendered as of the date of the CPS Spin-Off Distribution.
Generally, the expiration dates and the dates on which New Options are
exercisable will be identical to those under the corresponding Corning options
at the time of the Distributions. Certain New Options will provide that upon
exercise of such option through the surrender of previously owned shares of CPS
Common Stock, the participant will be entitled to receive options covering the
same number of shares so surrendered, with an exercise price equal to the fair
market value of the shares at the time of the exercise of the New Option.
OPTION/SAR GRANTS IN FISCAL YEAR 1995 (1)
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
- ----------------------------------------------------------------------------- -----------------------------------------
Number of % of Total
Securities Options
Underlying Granted
Options to Employees Exercise Expiration Gain at Gain at Gain at
Name (2) Granted in Fiscal Year Price Date 0% (4) 5% 10%
- ---------------------- ---------------- -------------- ---------- ----------- ------------ -------------- -------------
<S> <C>
Christopher A. Kuebler (2)
Kim D. Lamon (2)
Richard J. Andrews (2)
Michael Wokasch (2)
[Name] (2)
</TABLE>
(1) No SARs were granted.
(2) The stock option agreements with Messrs. Kuebler, Lamon and Wokasch provide
that one-half of the options will become exercisable on February 1, 1999
and all options will become exercisable on February 1, 2000. The stock
option agreement with Mr. Wokasch provides that one-half of the options
will become exercisable on October 4, 1996 and all of the options will
become exercisable on October 4, 1997. All such agreements also provide
that an additional option may be granted when the optionee uses shares of
Corning Common Stock to pay the purchase price of an option. The additional
option will be exercisable for the number of shares tendered in payment of
the option price, will be exercisable at the then fair market value of the
Corning Common Stock, will become exercisable only after the lapse of
twelve months and will expire on the expiration date of the original
option.
(3) The dollar amounts set forth under these columns are the result of
calculations at 0% and at the 5% and 10% rates established by the --
Commission and therefore are not intended to forecast future appreciation
of Corning's stock price.
(4) No gain to the optionees is possible without an appreciation in stock
price, an event which will also benefit all stockholders. If the stock
price does not appreciate, the optionees will realize no benefit.
Option Exercises and Fiscal Year-End Values. The following table sets
forth the number of shares of Corning Common Stock covered by both exercisable
and unexercisable stock options as of December 31, 1995, for the named executive
officers. The named executive officers exercised no options in 1996.
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AGGREGATED OPTION/SAR EXERCISES IN FISCAL
YEAR 1995 AND 1995 FISCAL YEAR-END OPTION/SAR VALUES (1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year End At Fiscal Year End
Shares Acquired Value --------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler
Kim D. Lamon
Richard J. Andrews
Michael Wokasch
[Name]
</TABLE>
(1) There are no SARs outstanding.
Corporate Performance Plan Activity. Awards of performance-based shares
of Corning Common Stock have been granted to CPS's executive officers pursuant
to a series of performance-based plans (the "Corporate Performance Plan"). The
Corporate Performance Plan provides the mechanisms to reward improvement in
corporate performance as measured by net income, earnings per share and/or
return on equity. Each year minimum, target and maximum goals are set and shares
awarded (at target levels) which are subject to forfeiture in whole or in part
if performance goals are not met. The percentage of awards that may be earned
ranges from 0% to 150% of target. Shares earned remain subject to forfeiture and
restrictions on transfer for two years following the end of the performance
period.
The following table sets forth the number of performance-based shares
awarded under the Corporate Performance Plan. The dollar value of shares earned
for 1995 is reflected in the "Restricted Stock Awards" column of the Summary
Compensation Table appearing on page __.
In late 1996, the Compensation Committee of the Corning Board will
assess performance against goals, determine the number of shares earned of those
granted in December 1995 and remove all possibility of forfeiture and
restrictions on transfer from such shares.
CORPORATE PERFORMANCE PLAN ACTIVITY TABLE
<TABLE>
<CAPTION>
Number Number Number Vesting
Grant of Shares Performance of Shares of Shares Date of
Name Year Date Granted Period Forfeited Earned Earned Shares
- ---------------------- ---- ----- --------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler
Kim D. Lamon
Richard J. Andrews
Michael Wokasch
[Name]
</TABLE>
Variable Compensation. CPS has adopted, effective upon the
Distributions, a variable compensation plan (the "Plan"), an annual incentive
cash compensation plan for approximately 400 supervisory, management and
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executive employees similar to an annual performance plan currently maintained
by CPS. The terms of the Plan are as follows.
The performance-based annual cash incentive awards payable under the
Plan will be grounded in financial goals such as net income, operating margin,
return on equity, or earnings per share, or a combination thereof, and
quantifiable non-financial goals. Each participant will be assigned a target
award, as a percentage of base salary in effect at the end of the performance
year for which the target is set, payable if the target is achieved. Actual
results will be compared to the scale of targets with each gradation of desired
result corresponding to a percentage which will be multiplied by the employee's
assigned target award. If the actual result is below target, awards will be less
than target, down to a point below which no awards are earned. If the desired
result is above target, awards will be greater than target, up to a stated
maximum award. The maximum award assigned to the chief executive officer may not
exceed 200% of base salary in effect on the date the CPS Compensation Committee
sets the target for the performance year. The CPS Compensation Committee retains
the right to reduce any award if it believes individual performance does not
warrant the award calculated by reference to the result.
Employee Equity Participation Program. CPS has adopted, effective upon
the Distributions, the Employee Equity Participation Program (the "Program")
consisting of two plans: (a) a stock option plan (the "CPS Stock Option Plan")
and (b) an incentive stock plan (the "CPS Incentive Stock Plan"). The Program is
designed to provide a flexible mechanism to permit key employees of CPS and of
any subsidiary to obtain significant equity ownership in CPS, thereby increasing
their proprietary interest in the growth and success of CPS.
The Program, which will be administered by the CPS Compensation
Committee, provides for the grant to eligible employees of either non-qualified
or "incentive stock" options, or both, to purchase shares of CPS Common Stock at
no less than fair market value on the date of grant. The CPS Compensation
Committee may also provide that options may not be exercised in whole or in part
for any period or periods of time; provided, however, that no option will be
exercisable until at least twelve months from the date of grant. All options
shall expire not more than ten years from the date of grant. Options will not be
assignable or transferable except for limited circumstances on death. During the
lifetime of the employee an option may be exercised only by him. The option
price must be paid to CPS by the optionee in full prior to delivery of the
stock. The optionee may pay the option price in cash or with shares of CPS
Common Stock owned by him. The optionee will have no rights as a stockholder
with respect to the shares subject to option until shares are issued upon
exercise of the option. The CPS Compensation Committee may grant options
pursuant to which an optionee who uses shares of CPS Common Stock to pay the
purchase price of an option will receive automatically on the date of exercise
an additional option to purchase shares of CPS Common Stock. Such additional
option will cover the number of shares tendered in payment of the option price,
will be exercisable at the then fair market value of CPS Common Stock, will
become exercisable only after the lapse of twelve months and will expire on the
expiration date of the original option.
The Program also authorizes the CPS Compensation Committee to award to
eligible employees shares, or the right to receive shares, of CPS Common Stock,
the equivalent value in cash or a combination thereof (as determined by the CPS
Compensation Committee). The CPS Compensation Committee shall determine the
number of shares which are to be awarded to individual employees and the number
of rights covering shares to be issued upon attainment of predetermined
performance objectives for specified periods. The shares awarded directly to
individual employees may be made subject to certain restrictions prohibiting
sale or other disposition and may be made subject to forfeiture in certain
events. Shares may be issued to recognize past performance either generally or
upon attainment of specific objectives. Shares issuable for performance (based
upon specific predetermined objectives) will be payable only to the extent that
the CPS Compensation Committee determines that an eligible employee has met such
objectives and will be valued as of the date of such determination. Upon
issuance, such shares may (but need not) be made subject to the possibility of
forfeiture or certain restrictions on transfer.
Key executive, managerial and technical employees (including officers
and employees who are directors) of CPS and of any subsidiary will be eligible
to participate in the Program and the plans thereunder. The selection
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of employees eligible to participate in any plan under the Program is within the
discretion of the CPS Compensation Committee. Approximately 350 employees would
have been eligible to participate in the plans under the Program had the Program
been in effect in 1996.
Under the Program, the maximum number of shares of CPS Common Stock
which may be optioned or granted to eligible employees will be _________. Shares
from expired or terminated options under the CPS Stock Option Plan will be
available again for option grant under the Program. Shares which are issued but
not earned because performance targets have not been satisfied, or which are
forfeited under the CPS Incentive Stock Plan, will be available again for
issuance under the Program. The Program provides for appropriate adjustments in
the aggregate number of shares subject to the Program and in the number of
shares and the price per share, or either, of outstanding options in the case of
changes in the capital stock of CPS resulting from any recapitalization, stock
or unusual cash dividend, stock distribution, stock split or any other increase
or decrease effected without receipt of consideration by CPS, or a merger or
consolidation in which CPS is the surviving corporation.
The Program has a term of five years and no shares may be optioned or
awarded and no rights to receive shares may be granted after the expiration of
the Program. The CPS Board is authorized to terminate or amend the Program,
except that it may not increase the number of shares available thereunder,
decrease the price at which options may be granted, change the class of
employees eligible to participate, or extend the term of the Program or options
granted thereunder without the approval of the holders of a majority of the
outstanding shares of CPS Common Stock.
CPS believes that the federal income tax consequences of the Program
are as follows. An optionee who exercises a non-qualified option granted under
the CPS Stock Option Plan will recognize compensation taxable as ordinary income
(subject to withholding) in an amount equal to the difference between the option
price and the fair market value of the shares on the date of exercise and CPS or
the subsidiary employing the optionee will be entitled to a deduction from
income in the same amount. The optionee's basis in such shares will be increased
by the amount taxable as compensation, and his capital gain or loss when he
disposes of the shares will be calculated using such increased basis.
If all applicable requirements of the Code with respect to incentive
stock options are met, no income to the optionee will be recognized and no
deduction will be allowable to CPS at the time of the grant or exercise of an
incentive stock option. The excess of the fair market value of the shares at the
time of exercise of an incentive stock option over the amount paid is an item of
tax preference which may be subject to the alternative minimum tax. In general,
if an incentive stock option is exercised three months after termination of
employment, the optionee will recognize ordinary income in an amount equal to
the difference between the option price and the fair market value of the shares
on the date of exercise and CPS or the subsidiary employing the optionee will be
entitled to a deduction in the same amount. If the shares acquired subject to
the option are sold within one year of the date of exercise or two years from
the date of grant, the optionee will recognize ordinary income in an amount
equal to the difference between the option price and the lesser of the fair
market value of the shares on the date of exercise or the sale price and CPS or
the employing subsidiary will be entitled to a deduction from income in the same
amount. Any excess of the sale price over the fair market value on the date of
exercise will be taxed as a capital gain.
Shares of CPS Common Stock which are not subject to restrictions and
possibility of forfeiture and which are awarded to an employee under the CPS
Incentive Stock Plan will be treated as ordinary income, subject to withholding,
to an employee at the time of the transfer of the shares to him and the value of
such awards will be deductible by CPS or by the subsidiary employing the
employee at the same time in the same amount. Shares granted subject to
restrictions and possibility of forfeiture will not be subject to tax nor will
such grant result in a tax deduction for CPS at the time of award. However, when
such shares become free of restrictions and possibility of forfeiture, the fair
market value of such shares at that time (i) will be treated as ordinary income
to the employee and (ii) will be deductible by CPS or by the subsidiary
employing the employee.
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The tax treatment upon disposition of shares acquired under the Program
will depend upon how long the shares have been held and on whether or not the
shares were acquired by exercising an incentive stock option. There are no tax
consequences to CPS upon a participant's disposition of shares acquired under
the Program, except that CPS may take a deduction equal to the amount the
participant must recognize as ordinary income in the case of the disposition of
shares acquired under incentive stock options before the applicable holding
period has been satisfied.
Pension Plans. None of the executive officers of CPS are currently
active participants in a qualified defined benefit plan of CPS.
It is anticipated that, prior to the Distribution Date, the
Compensation Committee of the Corning Board will approve, and CPS will adopt, a
nonqualified CPS Supplemental Executive Retirement Plan for the benefit of
certain executive officers of CPS, including the named executive officers, after
the Distribution Date. Once adopted, it is anticipated that such plan will be,
in whole or in part, an unfunded, unsecured obligation of CPS and administered
by the CPS Compensation Committee.
Eligible executives may commence receiving full benefits under the plan
upon attaining age 60, so long as they have completed at least fifteen years of
service with CPS or any subsidiary thereof. Retirement benefits to be provided
under the plan will be based on __% of an executive's "Final Average Pay,"
defined to mean the average of an executive's base salary plus bonus, taking
into account the highest five consecutive years of the executive's last ten
years of employment with CPS. Under the terms of the plan, executives may, with
the approval of the CPS Compensation Committee, elect to commence receiving
reduced benefits prior to age 60, provided that they have completed at least
five years of service with CPS and have attained age 55. Benefits commencing
prior to age 60 will be reduced by 5% of the amount of benefits earned for each
year prior to age 60. For example, at age 55, an executive with at least fifteen
years of service may be eligible to receive ____% of Final Average Pay so long
as the executive receives approval from the CPS Compensation Committee.
At retirement, the normal form of payment under the plan will be
monthly payments over the lifetime of the executive (or actuarially reduced
joint and survivor benefits over the joint lives of the executive and a named
beneficiary). Alternatively, the executive may elect under the plan, subject to
the approval of the CPS Compensation Committee, the right to receive an
actuarially determined lump-sum distribution from the plan.
Maximum annual benefits, based on the Final Average Pay calculated
under the straight life annuity option form of pension, payable to participants
at ages 55 to 60 are illustrated in the table set forth below. The table below
does not reflect any limitations on benefits imposed by ERISA.
- --------------------------------------------------------------------------
Age (With at least 15 Years of Service)
- --------------------------------------------------------------------------
55 56 57 58 59 60
- --------------------------------------------------------------------------
Final Average Pay
- --------------------------------------------------------------------------
$ 100,000
- --------------------------------------------------------------------------
200,000
- --------------------------------------------------------------------------
300,000
- --------------------------------------------------------------------------
400,000
- --------------------------------------------------------------------------
500,000
- --------------------------------------------------------------------------
600,000
- --------------------------------------------------------------------------
700,000
- --------------------------------------------------------------------------
800,000
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<PAGE>
- --------------------------------------------------------------------------
Age (With at least 15 Years of Service)
- --------------------------------------------------------------------------
55 56 57 58 59 60
- --------------------------------------------------------------------------
Final Average Pay
- --------------------------------------------------------------------------
900,000
- --------------------------------------------------------------------------
1,000,000
- --------------------------------------------------------------------------
1,100,000
- --------------------------------------------------------------------------
1,200,000
- --------------------------------------------------------------------------
CPS Retirement Savings Plan. Most of the employees of CPS and its
subsidiaries have been eligible to participate in a tax-qualified, defined
contribution plan known as the CPS Retirement Savings Plan (the "CPS Retirement
Savings Plan"), which provides for investment of employee contributions,
including tax-deferred contributions under Section 401(k) of the Code, and
matching contributions made by their employers, in several investment funds,
including Corning Common Stock, at the employees' discretion. Effective as of
the Distribution Date, CPS Common Stock will be added as an investment fund and
all or a portion of the employer matching contributions will automatically be
invested in CPS Common Stock. Corning Common Stock will no longer be available
as an investment fund except with respect to amounts already so invested under
the CPS Retirement Savings Plan.
Effective as of the Distribution Date, the CPS Retirement Savings Plan
will be amended to permit participating employees' employers to make
discretionary contributions, other than matching contributions, to the CPS
Retirement Savings Plan for the benefit of such employees, which contributions
may be invested in CPS Common Stock.
CPS Employee Stock Ownership Plan. CPS has adopted, as of ________, an
employee stock ownership plan, as defined in Section 4975(e)(7) of the Code and
related regulations and intended to qualify as a retirement plan under Section
401(a) of the Code, to be known as the CPS Employee Stock Ownership Plan (the
"CPS ESOP").
Individuals who are active employees of CPS and its U.S. subsidiaries
as of the Distribution Date will become participants in the CPS ESOP. To the
extent permitted under the CPS ESOP, CPS will contribute as of the Distribution
Date an amount equal to a portion of each participating employee's annual
compensation. CPS may in its discretion from time to time make additional
contributions to the CPS ESOP for the benefit of participating employees. The
assets of the CPS ESOP will be invested primarily in shares of CPS Common Stock.
Amounts contributed to the CPS ESOP for the benefit of participating
employees will be 100% vested on the earlier of death, disability or the second
anniversary of the effective date of the grant. Contributions to the CPS ESOP
will not currently be taxable income to the participating employees and will not
generally be available to them until termination of employment.
CPS Restricted Share Plan. CPS has adopted, as of __________, the CPS
Restricted Share Plan, intended to provide to CPS's foreign national employees
in its non-U.S. locations who otherwise are ineligible to participate in the CPS
ESOP benefits similar to the CPS ESOP. To the extent permitted under the plan,
CPS will award to participating employees shares of CPS Common Stock as of the
Distribution Date, the market value of which shall equal a portion of such
employee's annual compensation. CPS may in its discretion from time to time make
additional awards to participating employees. Shares of CPS Common Stock awarded
to participating employees will be 100% vested on the earlier of death,
disability or the second anniversary of the date of each grant.
Employees Stock Purchase Plan. CPS has adopted, as of ______________,
the Employees Stock Purchase Plan (the "CPS Stock Purchase Plan"), intended to
qualify as an "employee stock purchase plan" under Section 423
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<PAGE>
of the Code, pursuant to which CPS may make available for sale to employees
shares of its Common Stock at a price equal to 85% of the market value on the
first or last day of each calendar quarter, whichever is lower.
The CPS Stock Purchase Plan, which will be administered by the CPS
Compensation Committee, is designed to give eligible employees (generally,
employees of CPS and its U.S. subsidiaries) the opportunity to purchase shares
of CPS Common Stock through payroll deductions up to 10% of compensation in a
series of quarterly offerings commencing _________, 1997, and ending no later
than ____________.
Any eligible employee may elect to participate in the CPS Stock
Purchase Plan on a quarterly basis and may terminate his payroll deduction at
any time or increase or reduce prospectively the amount of his deduction at the
beginning of any calendar quarter. At the end of each calendar quarter, a
participating employee will purchase shares of CPS Common Stock with the funds
deducted. The number of shares purchased will be a number determined by dividing
the amount withheld by the lower of 85% of the closing price of a share of CPS
Common Stock as reported in The Wall Street Journal on the first or last
business day of the particular calendar quarter. An employee will have no
interest in any shares of CPS Common Stock until such shares are actually
purchased by him.
Under the CPS Stock Purchase Plan, the maximum number of shares of CPS
Common Stock which may be purchased by eligible employees will be _________,
subject to adjustment in the case of changes in the capital stock of CPS
resulting from any recapitalization, stock dividend, stock split or any other
increase or decrease effected without receipt of consideration by CPS or a
merger or consolidation in which CPS is the surviving corporation.
The CPS Stock Purchase Plan has a term of ___ years and no shares of
CPS Common Stock may be offered for sale or sold under the CPS Stock Purchase
Plan after the _____ anniversary of the effective date. The CPS Board is
authorized to terminate or amend the CPS Stock Purchase Plan, except that it may
not increase the number of shares of CPS Common Stock available thereunder,
decrease the price at which such shares may be offered for sale or extend the
term of the CPS Stock Purchase Plan without the approval of the holders of a
majority of the shares of the capital stock of CPS cast at a meeting at which
such matter is considered.
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<PAGE>
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF CPS
All of the outstanding shares of CPS Common Stock are currently held by
[CCL]. The following table sets forth the number of shares of CPS Common Stock
that are projected to be beneficially owned after the CPS Spin-Off Distribution
by the directors, by the named executive officers and by all directors and
executive officers of CPS as a group. The projections are based on the number of
shares of Corning Common Stock held by such persons and such group as of ______,
1996 (excluding shares of restricted stock that will be forfeited prior to the
Distribution Date and Corning Common Stock held in the CPS Retirement Savings
Plan) and on the number of options to acquire Corning Common Stock held as of
such date and exercisable within 60 days thereof. With respect to the shares of
CPS Common Stock, the number reflects the distribution ratio of one share of CPS
Common Stock for every four shares of Corning Common Stock and with respect to
options the number reflects the actual number of shares of Corning Common Stock
subject to options.
Number of Shares Number of
Name Beneficially Owned Exercisable Options
- ---- ------------------ -------------------
Richard J. Andrews
Van C. Campbell
Christopher A. Kuebler
Kim D. Lamon
William C. Ughetta
James D. Utterback
Michael Wokasch
All Directors and Executive
Officers as a Group
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DESCRIPTION OF CPS CAPITAL STOCK
General
The following is a brief summary of certain provisions of the CPS
Certificate, as the restated certificate of incorporation will be amended
immediately prior to the CPS Spin-Off Distribution, and does not relate to or
give effect to provisions of statutory or other law except as specifically
stated. The CPS Certificate authorizes the issuance of 140,000,000 shares of CPS
Common Stock. Approximately 57,524,322 shares of CPS Common Stock are expected
to be outstanding immediately following the CPS Spin-Off Distribution. The
rights of holders of shares of CPS Common Stock are governed by the CPS
Certificate, the CPS By-Laws and by the DGCL.
Voting Rights
Subject to the voting of any shares of CPS Series Preferred Stock (as
defined below) that may be outstanding, voting power is vested in the CPS Common
Stock, each share having one vote.
Preemptive Rights
The CPS Certificate provides that no holder of shares of CPS Common
Stock or CPS Series Preferred Stock shall have any preemptive rights except as
the CPS Board may determine from time to time. No such rights have been granted
by the CPS Board.
CPS Common Stock
Liquidation Rights. Subject to the preferential rights of any
outstanding CPS Series Preferred Stock, in the event of any liquidation of CPS,
holders of shares of CPS Common Stock then outstanding are entitled to share
ratably in the assets of CPS available for distribution to such holders.
Dividend Policy. Subject to any preferential rights of any outstanding
preferred securities of CPS, such dividends as may be determined by the CPS
Board may be declared and paid on the shares of CPS Common Stock from time to
time out of any funds legally available therefor. CPS has no present intention
to declare dividends for the foreseeable future. It is currently contemplated
that, following the Distributions, CPS will not pay cash dividends in the
foreseeable future, but will retain earnings to provide funds for the operation
and expansion of its business. Dividend decisions will be based upon a number of
factors, including the operating results and financial requirements of CPS and
such other considerations as the CPS Board deems relevant. In addition, the CPS
Credit Facility will contain covenants that limit the ability of CPS to pay
dividends on the CPS Common Stock. See "Risk Factors--Risks Relating to
CPS--Absence of Dividends" and "Description of Certain Indebtedness of CPS."
Other Provisions. The shares of CPS Common Stock have no redemption,
sinking fund or conversion privileges applicable thereto and holders of shares
of CPS Common Stock are not liable to assessments or to further call.
Listing and Trading. Prior to the Distributions, there has been no
public trading market for the CPS Common Stock although a "when issued" market
is expected to develop prior to the Distribution Date. Application will be made
to list the CPS Common Stock on the NYSE, subject to official notice of the
Distributions, under the trading symbol "___". Prices at which CPS Common Stock
may trade prior to the Distributions on a "when-issued" basis or after the
Distributions cannot be predicted. Until shares of the CPS Common Stock are
fully distributed and an orderly market develops, the prices at which trading in
such stock occurs may fluctuate significantly. The prices at which CPS Common
Stock will trade will be determined by the marketplace and may be influenced by
many factors, including, among others, the depth and liquidity of the market for
CPS Common Stock, investor
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perceptions of CPS, the contract research business, and general economic and
market conditions. CPS initially will have approximately ___ stockholders of
record, based on the expected number of holders of CCL Common Stock immediately
following the CCL Spin-Off Distribution. The Transfer Agent and Registrar for
the CPS Common Stock will be Harris Trust and Savings Bank. For certain
information regarding options to purchase CPS Common Stock that may become
outstanding after the Distributions, see "Management of CPS."
CPS Series Preferred Stock
The CPS Certificate authorizes the issuance of up to 10,000,000 shares
of CPS Series Preferred Stock, par value $___ per share (the "CPS Series
Preferred Stock"). The CPS Board 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 DGCL. Pursuant to this authority, the CPS Board has designated
1,000,000 shares of CPS Series Preferred Stock as CPS Series A Preferred Stock.
No other class of CPS Series Preferred Stock has been designated by the CPS
Board.
Preferred Share Purchase Rights
Attached to each share of CPS Common Stock is one right ("CPS Right"),
which entitles the registered holder to purchase from CPS one one-hundredth of a
share of CPS Series A Preferred Stock at a price of $[50] per one-hundredth of a
share of CPS Series A Preferred Stock (the "Exercise Price"), subject to
adjustment. The CPS Rights expire on December 31, 2006 (the "Final Expiration
Date"), unless the Final Expiration Date is extended or unless the CPS Rights
are earlier exercised.
The CPS Rights represented by the certificates for shares of CPS Common
Stock are not exercisable, and are not transferable apart from the shares of CPS
Common Stock, until the earlier of (1) ten days following the public
announcement by CPS or an Acquiring Person (as defined below) that a person or
group has acquired beneficial ownership of 20% or more of the shares of CPS
Common Stock (an "Acquiring Person") or (2) ten business days (or such later
date as the CPS Board may determine prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) after the commencement or first
public announcement of an intention to make a tender or exchange offer that
would result in a person or group beneficially owning 20% or more of the shares
of CPS Common Stock (the earlier of such dates being called the "Rights
Distribution Date"). The CPS Board has the authority to determine that a person
that has inadvertently acquired beneficial ownership of 20% of the shares of CPS
Common Stock is not an Acquiring Person if such person promptly reduces its
ownership interest to below 20%. Separate certificates for the CPS Rights will
be mailed to holders of record of the shares of CPS Common Stock as of such
date. The CPS Rights could then begin trading separately from the shares of CPS
Common Stock.
Generally, in the event that a person or group becomes an Acquiring
Person, each CPS Right (other than the CPS Rights owned by the Acquiring Person
and certain affiliated persons) will thereafter entitle the holder to receive,
upon exercise of the CPS Right, shares of CPS Common Stock having a value equal
to two times the Exercise Price of the CPS Right. In the event that a person or
group becomes an Acquiring Person (but prior to such time as such person or
group beneficially owns 50% or more of the outstanding shares of CPS Common
Stock), the CPS Board may exchange each CPS Right and each one one-hundredth of
a share of CPS Series A Preferred Stock (other than CPS Rights and CPS Series A
Preferred Stock owned by the Acquiring Person and certain affiliated persons)
for one share of CPS Common Stock. In the event that CPS is acquired in a
merger, consolidation, or other business combination transaction or more than
50% of CPS's assets, cash flow or earning power is sold or transferred, each CPS
Right (other than the CPS Rights owned by an Acquiring Person and certain
affiliated persons) will thereafter entitle the holder thereof to receive, upon
the exercise of the CPS Right, common stock of the acquiring corporation having
a value equal to two times the Exercise Price of the CPS Right.
The CPS Rights are redeemable in whole, but not in part, at $.01 per
CPS Right at any time prior to any person or group becoming an Acquiring Person.
The right to exercise the CPS Rights terminates at the time that
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the CPS Board elects to redeem the CPS Rights. Notice of redemption shall be
given by mailing such notice to the registered holders of the CPS Rights. At no
time will the CPS Rights have any voting rights. The CPS Rights Agent is ____
(the "CPS Rights Agent").
The exercise price payable, and the number of shares of CPS Series A
Preferred Stock or other securities or property issuable, upon exercise of the
CPS Rights are subject to adjustment from time to time to prevent dilution (i)
in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the shares of CPS Series A Preferred Stock, (ii) upon the
grant to holders of the shares of CPS Series A Preferred Stock of certain rights
or warrants to subscribe for or purchase shares of CPS Series A Preferred Stock
at a price, or securities convertible into shares of CPS Series A Preferred
Stock with a conversion price, less than the then current market price of the
shares of CPS Series A Preferred Stock or (iii) upon the distribution to holders
of the shares of CPS Series A Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in shares of CPS Series A Preferred
Stock) or of subscription rights or warrants (other than those referred to
above).
The number of outstanding CPS Rights and the number of one
one-hundredths of a share of CPS Series A Preferred Stock issuable upon exercise
of each CPS Right are also subject to adjustment in the event of a stock split
of, or stock dividend on, or subdivision, consolidation or combination of, the
shares of CPS Common Stock prior to the CPS Rights Distribution Date. With
certain exceptions, no adjustment in the exercise price will be required until
cumulative adjustments require an adjustment of at least 1% in such exercise
price.
Upon exercise of the CPS Rights, no fractional shares of CPS Series A
Preferred Stock will be issued (other than fractions which are integral
multiples of one one-hundredth of a share, which may, at the election of CPS, be
evidenced by depository receipts) and in lieu thereof an adjustment in cash will
be made.
The CPS Rights have certain antitakeover effects. The CPS Rights may
cause substantial dilution for a person or group that attempts to acquire CPS on
terms not approved by the CPS Board, except pursuant to an offer conditioned on
a substantial number of CPS Rights being acquired. The CPS Rights should not
interfere with any merger or other business combination approved by the CPS
Board since the CPS Rights may be redeemed by CPS at $.01 per CPS Right prior to
the acquisition by a person or group of beneficial ownership of 20% or more of
the shares of CPS Common Stock.
The shares of CPS Series A Preferred Stock purchasable upon exercise of
the CPS Rights will rank junior to all other series of CPS's preferred stock or
any similar stock that specifically provides that they shall rank prior to the
shares of CPS Series A Preferred Stock. The shares of CPS Series A Preferred
Stock will be nonredeemable. Each share of CPS Series A Preferred Stock will be
entitled to a minimum preferential quarterly dividend of $1 per share, but will
be entitled to an aggregate dividend of 100 times the dividend declared per
share of CPS Common Stock. In the event of liquidation, the holders of the
shares of CPS Series A Preferred Stock will be entitled to a minimum
preferential liquidation payment of $1 per share, but will be entitled to an
aggregate payment of 100 times the payment made per share on shares of CPS
Common Stock. Each share of CPS Series A Preferred Stock will have 100 votes,
voting together with the shares of CPS Common Stock. In the event of any merger,
consolidation or other transaction in which shares of CPS Common Stock are
exchanged, each share of CPS Series A Preferred Stock will be entitled to
receive 100 times the amount and type of consideration received per share of CPS
Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the CPS Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the interest in a share of CPS
Series A Preferred Stock purchasable upon the exercise of each CPS Right
approximates the value of one share of CPS Common Stock.
The foregoing description of the CPS Rights does not purport to be
complete and is qualified in its entirety by reference to the description of the
CPS Rights contained in the CPS Rights Agreement, dated as of ____, 1996 between
CPS and the CPS Rights Agent. Prior to the CPS Rights Distribution Date, the CPS
Rights Agreement
159
<PAGE>
may be amended in any respect. After the CPS Rights Distribution Date, the CPS
Rights Agreement may be amended in any respect that does not adversely affect
the CPS Rights holders.
Restrictions on Transfer
Shares of the CPS Common Stock distributed to CCL stockholders will be
freely transferable, except for shares received by any persons who may be deemed
to be "affiliates" of CPS as that term is defined in Rule 144 promulgated under
the Securities Act, which shares will remain subject to the resale limitations
of Rule 144. Persons who may be deemed to be affiliates of CPS after the CPS
Spin-off Distribution generally include individuals or entities that control,
are controlled by, or are under common control with CPS and may include certain
officers and directors of CPS as well as principal stockholders of CPS. Persons
who are affiliates of CPS will be permitted to sell their shares of CPS only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act, such as the
exemption provided by Section 4(1) of the Securities Act or Rule 144 thereunder.
The Section 4(1) exemption allows the sale of unregistered shares by a person
who is not an issuer, an underwriter or a dealer. Rule 144 provides persons who
are not issuers with objective standards for selling restricted securities and
securities held by affiliates without registration. The rule requires (1)
current public information be available concerning the issuer; (2) volume
limitations be placed on sales during any three-month period; and (3) compliance
with certain manner of sale restrictions. The amount of CPS Common Stock which
could be sold under Rule 144 during a three-month period cannot exceed the
greater of (1) 1% of the outstanding shares of CPS Common Stock, or (2) the
average weekly trading volume for the shares for a four-week period prior to the
date that notice of the sale is filed with the Commission.
160
<PAGE>
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CPS
CERTIFICATE OF INCORPORATION AND BY-LAWS
General
In addition to the CPS Rights, the CPS Certificate and the CPS By-Laws
contain other provisions that may discourage a third-party from seeking to
acquire CPS, or to commence a proxy contest or other takeover-related action.
These provisions, which are in all material respects identical to the provisions
contained in the certificate of incorporation and By-Laws of Corning, are
intended to enhance the likelihood of continuity and stability in the
composition of the CPS Board and in the policies formulated by the CPS Board and
to discourage certain types of transactions that may involve an actual or
threatened change of control of CPS. These provisions are designed to reduce the
vulnerability of CPS to an unsolicited acquisition proposal and also to
discourage certain tactics that may be used in proxy fights. Because such
provisions could have the effect of discouraging potential acquisition
proposals, they may consequently inhibit fluctuations in the market price of CPS
Common Stock which could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in the management of
CPS. See "Risk Factors--Risks Relating to CPS--Certain Provisions Relating to
Change in Control."
Board of Directors
The CPS Certificate provides that, effective as of the CPS Spin-Off
Distribution, the CPS Board is divided into three classes, with the classes to
be nearly as equal as possible. One class has a term expiring at the 1998 annual
meeting of stockholders of CPS; the second class has a term expiring at the 1999
annual meeting of stockholders of CPS; and the third class has a term expiring
at the 2000 annual meeting of stockholders of CPS. At each annual meeting of
stockholders, one class of the CPS Board will be elected for a three-year term.
The classification of directors has the effect of making it more difficult to
change the composition of the CPS Board. At least two annual meetings of
stockholders, instead of one, generally will be required to effect a change in
the majority of the CPS Board. The CPS Board believes that the longer time
required to elect a majority of a classified board will help ensure the
continuity and stability of CPS's management and policies, because in most cases
a majority of the directors at any given time will have had prior experience as
directors of CPS.
Under the DGCL, unless the certificate of incorporation otherwise
provides, a director on a classified board may only be removed by the
stockholders for cause. The CPS Certificate provides that a director of CPS is
only removable by the stockholders for cause. The CPS Certificate limits the
number of directors to twelve and requires that any vacancies on the CPS Board
be filled only by a majority of the entire CPS Board. The provisions of the DGCL
and the CPS Certificate relating to the removal of directors and the filling of
vacancies on the CPS Board preclude a third-party from removing incumbent
directors without cause and simultaneously gaining control of the CPS Board by
filling, with its own nominees, the vacancies created by removal. These
provisions also reduce the power of stockholders generally, even those with a
majority voting power in CPS, to remove incumbent directors and to fill
vacancies on the CPS Board without the support of the incumbent directors.
Stockholder Action and Special Meetings
The CPS Certificate provides that all stockholder actions to be
effected by written consent and not a duly called meeting must be effected by
the unanimous written consent of all stockholders entitled to consent thereto.
This provision reduces the power of the CPS stockholders and precludes a
stockholder of CPS from conducting any form of consent solicitation. The CPS
Certificate also does not permit stockholders of CPS to call special meetings of
stockholders.
161
<PAGE>
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The CPS By-Laws contain an advance notice procedure with respect to the
nomination, other than by or at the direction of the CPS Board or a committee
thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at annual meetings of stockholders.
Delivery of a notice with the required information must be delivered to the
Secretary of CPS not later than 60 days nor more than 90 days prior to the date
of the stockholders' meeting at which the nomination or other proposal is to be
considered. No matters can be considered at special meetings of the stockholders
other than such matters as are set forth in the notice of meeting. Although the
notice provisions do not give the CPS Board any power to approve or disapprove
stockholder nominations or proposals for action by CPS, they may have the effect
of (i) precluding a contest for the election of directors or the consideration
of stockholder proposals if the procedures established by the CPS By-Laws are
not followed and (ii) discouraging or deterring any third-party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
proposals, without regard to whether consideration of such nominees or proposals
might be harmful or beneficial to CPS and its stockholders. The purpose of
requiring advance notice is to afford the CPS Board an opportunity to consider
the qualifications of the proposed nominees or the merits of other stockholder
proposals and, to the extent deemed necessary or desirable by the CPS Board, to
inform stockholders about those matters.
Business Combinations with Interested Stockholders
Paragraph 6 of the CPS Certificate (the "Fair Price Amendment")
requires the approval by the holders of at least 80% of the voting power of the
outstanding capital stock of CPS entitled to vote generally in the election of
directors (the "CPS Voting Stock") as a condition for mergers and certain other
Business Combinations (as defined below) with any beneficial owner of more than
10% of such voting power (an "Interested Stockholder") unless (i) the
transaction is approved by at least a majority of the Continuing Directors (as
defined below) or (ii) certain minimum price, form of consideration and
procedural requirements are met.
An Interested Stockholder, in general, is defined as any person or
group who is, or was at any time within the two-year period immediately prior to
the date in question, the beneficial owner of more than 10% of the voting power
of the CPS Voting Stock. The term "beneficial owner" includes persons directly
or indirectly owning or having the right to acquire or vote the shares. In
certain circumstances, an Interested Stockholder could include persons or
entities affiliated or associated with the Interested Stockholder.
A Business Combination generally includes the following transactions:
(i) a merger or consolidation of CPS or any subsidiary with an Interested
Stockholder; (ii) the sale or other disposition by CPS or a subsidiary of assets
having an aggregate fair market value of $20,000,000 or more if an Interested
Stockholder is a party to the transaction; (iii) the issuance or transfer of
stock or other securities of CPS or of a subsidiary to an Interested Stockholder
in exchange for cash or property (including stock or other securities) having an
aggregate fair market value of $20,000,000 or more; (iv) the adoption of any
plan or proposal for the liquidation or dissolution of CPS proposed by or on
behalf of an Interested Stockholder; (v) any reclassification of securities,
recapitalization, merger or consolidation with a subsidiary or other transaction
which has the effect, directly or indirectly, of increasing the percentage of
the outstanding stock of any class of CPS or a subsidiary owned by an Interested
Stockholder; or (vi) any agreement, contract or other arrangement providing for
any one or more of the foregoing actions.
A Continuing Director is in general (i) any member of the CPS Board who
is not an Interested Stockholder or affiliated or associated with an Interested
Stockholder and was a director of CPS prior to the time the Interested
Stockholder became an Interested Stockholder and any successor to such a
Continuing Director who is not affiliated or associated with an Interested
Stockholder and was recommended or elected by a majority of the Continuing
Directors then on the CPS Board, or (ii) any person who was a director of CPS as
of the Distribution Date and any successor thereto who was recommended or
elected by a majority of the Continuing Directors then on the CPS Board. It is
possible that the approval of a majority of the Continuing Directors could be
obtained in circumstances where the Continuing Directors constitute less than a
quorum of the entire CPS Board.
162
<PAGE>
The 80% affirmative stockholder vote would not be required if the
Business Combination in question had been approved by a majority of the
Continuing Directors or if all the minimum price, form of consideration and
procedural requirements described below are satisfied.
Minimum Price and Form of Consideration Requirements. In a Business
Combination involving cash or other consideration being paid to CPS's
stockholders, the consideration required, in the case of each class of CPS
Voting Stock, would be either cash or the same type of consideration used by the
Interested Stockholder in acquiring the largest portion of its shares of that
class of CPS Voting Stock prior to the first public announcement of the proposed
Business Combination. In addition, such consideration would be required to meet
the minimum price requirements described below.
In the case of payments to holders of CPS Common Stock, the fair market
value per share of such payments would be at least equal in value to the higher
of (i) the highest per share price paid by the Interested Stockholder in
acquiring any shares of CPS Common Stock during the two years prior to the first
public announcement of the proposed Business Combination (the "Announcement
Date") or in the transaction in which it became an Interested Stockholder,
whichever is higher, and (ii) the fair market value per share of CPS Common
Stock on the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder, whichever is higher.
In the case of payments to holders of any series of voting CPS Series
Preferred Stock, if any, the fair market value per share of such payments would
have to be at least equal to the higher of (i) the price per share determined
with respect to shares of such series in the same manner as described in the
preceding paragraph with respect to shares of CPS Common Stock and (ii) the
highest preferential amount per share to which the holders of such series of CPS
Series Preferred Stock are entitled in the event of a voluntary or involuntary
liquidation of CPS.
If the transaction does not involve any cash or other property being
received by any of the other stockholders, such as a sale of assets or an
issuance of CPS's securities to an Interested Stockholder, then the minimum
price, form of consideration and procedural requirements would not apply, but an
80% vote of stockholders would still be required unless the transaction was
approved by a majority of the Continuing Directors.
Procedural Requirements. An 80% stockholder vote would be required to
authorize a Business Combination with an Interested Stockholder if CPS, after
the Interested Stockholder became an Interested Stockholder, had failed to pay
full quarterly dividends on its Preferred Stock, if any, or reduced the rate of
dividends paid on its Common Stock, unless such failure or reduction was
approved by a majority of the Continuing Directors.
An 80% stockholder vote to authorize a Business Combination with an
Interested Stockholder would also be required if the Interested Stockholder had
acquired any additional shares of the CPS Voting Stock, directly from CPS or
otherwise, in any transaction subsequent to the transaction pursuant to which it
became an Interested Stockholder.
The receipt by the Interested Stockholder at any time after it became
an Interested Stockholder, whether in connection with the proposed Business
Combination or otherwise, of the benefit of any loans or other financial
assistance or tax advantages provided by CPS (other than proportionately as a
stockholder) would also trigger the 80% stockholder vote requirement to
authorize a Business Combination with an Interested Stockholder (unless the
Business Combination was approved by a majority of the Continuing Directors).
In summary, none of the minimum price, form of consideration or
procedural requirements described above would apply in the case of a Business
Combination approved by a majority of the Continuing Directors. In the absence
of such approval, all of such requirements would have to be satisfied to avoid
the 80% stockholder vote requirements.
163
<PAGE>
Amendment of the CPS Certificate
Amendment or repeal of the provisions of the CPS Certificate described
above or the adoption of any provision inconsistent therewith would require the
affirmative vote of at least 80% of the CPS Voting Stock unless the proposed
amendment or repeal or the adoption of the inconsistent provisions are approved
by two-thirds of the entire CPS Board and a majority of the Continuing
Directors.
Antitakeover Statutes
Section 203 of the DGCL prohibits transactions between a Delaware
corporation and an "interested stockholder," which is defined therein as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. This provision prohibits certain business
combinations (defined broadly to include mergers, consolidations, sales or other
dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the interested stockholder's proportionate share ownership in the
corporation) between an interested stockholder and a corporation for a period of
three years after the date the interested stockholder acquired its stock unless
(i) the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder acquired shares, (ii) the
interested stockholder acquired at least 85% of the voting stock of the
corporation in the transaction in which it becomes an interested stockholder, or
(iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of 662/3% of the votes entitled to be cast
by disinterested stockholders at an annual or special meeting. The CPS
Certificate and the CPS By-Laws do not exclude CPS from the restrictions imposed
under Section 203 of the DGCL.
Tax Sharing and Indemnification Agreements
The corporate tax liability which potentially could arise from an
acquisition of shares of CPS capital stock or assets of CPS for a period of time
following the CPS Spin-Off Distribution, together with the related
indemnification arrangements contained in the Tax Sharing and Spin-Off Tax
Indemnification Agreements, could have an antitakeover effect on the acquisition
of control of CPS. See "The Relationship Among Corning, CCL and CPS After the
Distributions--Tax Sharing Agreement" and "The Relationship Among Corning, CCL
and CPS After the Distributions--Spin-Off Tax Indemnification Agreements."
164
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS OF CPS
Prior to the Distributions, CPS expects to enter into a credit
agreement with certain banks and institutions that provide for a $250 million
revolving credit facility (the "CPS Credit Facility").
The proceeds from the CPS Credit Facility are expected to be used to
finance the repayment of $125 million of intercompany borrowings and income tax
liabilities owed to Corning and its affiliates and for general corporate
purposes. The CPS Credit Facility is expected to mature in November 2002. The
Distributions are conditioned on the receipt by CPS of a commitment letter with
respect to the CPS Credit Facility.
165
<PAGE>
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS OF CPS
Limitation on Liability of Directors
Pursuant to authority conferred by Section 102 of the DGCL, Paragraph
11 of the CPS Certificate ("Paragraph 11") eliminates the personal liability of
CPS's directors to CPS or its stockholders for monetary damages for breach of
fiduciary duty, including without limitation, directors serving on committees of
the CPS Board. Directors remain liable for (1) any breach of the duty of loyalty
to CPS or its stockholders, (2) any act or omission not in good faith or which
involves intentional misconduct or a knowing violation of law, (3) any violation
of Section 174 of the DGCL, which proscribes the payment of dividends and stock
purchases or redemptions under certain circumstances, and (4) any transaction
from which directors derive an improper personal benefit.
Indemnification and Insurance
In accordance with Section 145 of the DGCL, which provides for the
indemnification of directors, officers and employees under certain
circumstances, Paragraph 11 grants CPS's directors and officers a right to
indemnification for all expenses, liabilities and losses relating to civil,
criminal, administrative or investigative proceedings to which they are a party
(1) by reason of the fact that they are or were directors and officers of CPS or
(2) by reason of the fact that, while they are or were directors or officers of
CPS, they are or were serving at the request of CPS as directors or officers of
another corporation, partnership, joint venture, trust or enterprise. Paragraph
11 further provides for the mandatory advancement of expenses incurred by
officers and directors in defending such proceedings in advance of their final
disposition upon delivery to CPS by the indemnitee of an undertaking to repay
all amounts so advanced if it is ultimately determined that such indemnitee is
not entitled to be indemnified under Paragraph 11. CPS may not indemnify or make
advance payments to any person in connection with proceedings initiated against
CPS by such person without the authorization of the CPS Board.
In addition, Paragraph 11 provides that directors and officers therein
described shall be indemnified to the fullest extent permitted by Section 145 of
DGCL, or any successor provisions or amendments thereunder. In the event that
any such successor provisions or amendments provide indemnification rights
broader than permitted prior thereto, Paragraph 11 allows such broader
indemnification rights to apply retroactively with respect to any predating
alleged action or inaction and also allows the indemnification to continue after
an indemnitee has ceased to be a director or officer of CPS and to inure to the
benefit of the indemnitee's heirs, executors and administrators.
Paragraph 11 further provides that the right to indemnification is not
exclusive of any other right which any indemnitee may have or thereafter acquire
under any statute, the CPS By-Laws, any agreement or vote of stockholders or
disinterested directors or otherwise, and allows CPS to indemnify and advance
expenses to any person whom the corporation has the power to indemnify under the
DGCL or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors and officers and controlling persons pursuant
to the foregoing provisions, CPS has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The CPS Certificate authorizes CPS to purchase insurance for directors,
officer, employees and agents of CPS and persons who serve at the request of CPS
as directors, officers, employees or agents of another corporation against any
expense, liability or loss incurred in such capacity, whether or not CPS would
have the power to indemnify such persons against such expense or liability under
the DGCL. CPS intends to maintain insurance coverage of its officers and
directors as well as insurance coverage to reimburse CPS for potential costs of
its corporate indemnification of directors and officers.
166
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
FINANCIAL STATEMENTS OF CORNING CLINICAL LABORATORIES INC.
<S> <C>
Report of Price Waterhouse LLP -- Independent Accountants.......................................................F-2
Report of Deloitte and Touch LLP -- Independent Auditors........................................................F-3
Report of Ernst & Young LLP -- Independent Auditors.............................................................F-4
Report of Leverone and Company -- Independent Auditors..........................................................F-5
Combined Financial Statements:
Combined Balance Sheets--December 31, 1995 and 1994........................................................F-6
Combined Statements of Operations--Years ended December 31, 1995, 1994 and 1993............................F-7
Combined Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993............................F-8
Combined Statements of Stockholder's Equity--Years ended December 31, 1995, 1994
and 1993...............................................................................................F-9
Notes to Combined Financial Statements....................................................................F-10
Financial Statement Schedule II -- Valuation Accounts and Reserves........................................F-22
Quarterly Operating Results (unaudited)...................................................................F-23
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--June 30, 1996 and December 31, 1995..............................................F-24
Combined Statements of Operations--Three and Six Months ended June 30, 1996 and 1995......................F-25
Combined Statements of Cash Flows--Six Months ended June 30, 1996 and 1995................................F-26
Notes to Combined Interim Financial Statements............................................................F-27
FINANCIAL STATEMENTS OF CORNING PHARMACEUTICAL SERVICES INC.
Report of Price Waterhouse LLP -- Independent Accountants......................................................F-30
Combined Financial Statements:
Combined Balance Sheets--December 31, 1995 and 1994.......................................................F-31
Combined Statements of Income--Years ended December 31, 1995, 1994 and 1993...............................F-32
Combined Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993...........................F-33
Combined Statements of Stockholder's Equity--Years ended December 31, 1995,
1994 and 1993..........................................................................................F-34
Notes to Combined Financial Statements....................................................................F-35
Quarterly Operating Results (unaudited)...................................................................F-44
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--June 30, 1996 and December 31, 1995..............................................F-45
Combined Statements of Income--Three and Six Months ended June 30, 1996 and 1995..........................F-46
Combined Statements of Cash Flows--Six Months ended June 30, 1996 and 1995................................F-47
Notes to Combined Interim Financial Statements............................................................F-48
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Boards of Directors and Stockholders of Corning Incorporated and Corning
Pharmaceutical Services Inc.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of cash flows and of stockholder's equity
appearing on pages F-31 through F-44 present fairly, in all material respects,
the financial position of Corning Pharmaceutical Services Inc. and its
subsidiaries (an indirect wholly-owned business of Corning Incorporated) at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse
- --------------------
Price Waterhouse LLP
New York, NY
July 29, 1996
F-30
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
COMBINED BALANCE SHEETS
- -------------------------------------------------------------------------------
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
-------------- ---------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,068 $ 6,176
Accounts receivable, net 78,968 66,781
Unbilled services 18,217 13,194
Inventory 14,004 10,729
Deferred income taxes 11,337 10,033
Prepaid expenses and other assets 15,189 11,849
-------------- ---------------
Total Current Assets 145,783 118,762
Property and equipment, net 140,708 126,483
Goodwill, net 24,028 15,880
Other assets 11,991 10,867
-------------- ---------------
Total Assets $ 322,510 $ 271,992
============== ===============
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable $ 23,761 $ 16,690
Accrued payroll and benefits 20,339 15,775
Accrued expenses and other liabilities 24,701 16,243
Unearned revenue 41,879 49,135
Income taxes payable 16,631 7,958
-------------- ---------------
Total Current Liabilities 127,311 105,801
Due to Corning Incorporated and affiliates 89,836 75,178
Deferred income taxes 6,406 9,605
Other liabilities 16,440 17,500
-------------- ---------------
Total Liabilities 239,993 208,084
-------------- ---------------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital 30,816 26,528
Retained earnings 48,653 34,656
Cumulative translation adjustment 3,048 2,724
-------------- ---------------
Total Stockholder's Equity 82,517 63,908
-------------- ---------------
Total Liabilities and Stockholder's Equity $ 322,510 $ 271,992
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
------------- -------------- ----------------
<S> <C> <C> <C>
Net revenues $ 409,174 $ 319,501 $ 289,697
Cost and expenses
Cost of revenue 270,726 213,490 192,783
Selling, general and administrative expenses 64,201 48,892 42,949
Restructuring charge 4,616 -- --
Depreciation and amortization 22,070 18,520 16,984
------------- -------------- ----------------
Total 361,613 280,902 252,716
------------- -------------- ----------------
Income from operations 47,561 38,599 36,981
------------- -------------- ----------------
Other expense (income)
Interest expense, net 5,269 4,307 4,421
Foreign exchange (gain) loss (784) (712) 852
------------- -------------- ----------------
4,485 3,595 5,273
------------- -------------- ----------------
Income before taxes and equity investee loss 43,076 35,004 31,708
Taxes on income 18,445 14,924 13,506
Equity investee loss 405 435 1,391
------------- -------------- ----------------
Net income $ 24,226 $ 19,645 $ 16,811
============= ============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994 1993
------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 24,226 $ 19,645 $ 16,811
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 22,070 18,520 16,984
Restructuring reserve, net of cash paid 2,965 -- --
Deferred income tax provision (4,503) (1,502) (2,879)
Related party charges 3,288 3,504 4,443
Other 1,266 1,375 2,276
Changes in operating assets and liabilities:
Accounts receivable (10,082) (11,706) (8,814)
Unbilled services (5,023) 2,058 (1,973)
Inventory (2,576) (603) 378
Accounts payable 6,783 4,372 (898)
Accrued liabilities 11,669 7,550 3,058
Unearned revenue (7,556) 2,894 1,607
Income taxes payable 8,673 194 4,351
Other assets and liabilities, net (6,094) (3,369) 5,156
------------- -------------- ----------------
Net cash provided by operating activities 45,106 42,932 40,500
------------- -------------- ----------------
Cash flows from investing activities
Capital expenditures (34,792) (25,242) (24,893)
Acquisition of businesses (14,000) (10,789) --
Other, net 571 (2,432) 351
------------- -------------- ----------------
Net cash used in investing activities (48,221) (38,463) (24,542)
------------- -------------- ----------------
Cash flows from financing activities
Due to Corning Incorporated and affiliates 236 (4,710) (8,677)
Acquisition loan from Corning Incorporated 14,000 10,789 --
Capital contributions 1,000 -- --
Dividends paid (10,229) (9,465) (8,681)
------------- -------------- ----------------
Net cash provided by (used in) financing
activities 5,007 (3,386) (17,358)
------------- -------------- ----------------
Net change in cash and cash equivalents 1,892 1,083 (1,400)
Cash and cash equivalents, beginning of year 6,176 5,093 6,493
------------- -------------- ----------------
Cash and cash equivalents, end of year $ 8,068 $ 6,176 $ 5,093
============= ============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
- -------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Cumulative Total
Contributed Retained Translation Stockholder's
(Amounts in thousands) Capital Earnings Adjustment Equity
------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992 $ 18,581 $ 16,346 $ 2,270 $ 37,197
Net income -- 16,811 -- 16,811
Dividends paid -- (8,681) -- (8,681)
Capital contribution 4,443 -- -- 4,443
Currency translation adjustment -- -- (382) (382)
----------- ---------- ----------- -------------
Balance, December 31, 1993 23,024 24,476 1,888 49,388
Net income -- 19,645 -- 19,645
Dividends paid -- (9,465) -- (9,465)
Capital contribution 3,504 -- -- 3,504
Currency translation adjustment -- -- 836 836
----------- ---------- ----------- -------------
Balance, December 31, 1994 26,528 34,656 2,724 63,908
Net income -- 24,226 -- 24,226
Dividends paid -- (10,229) -- (10,229)
Capital contribution 4,288 -- -- 4,288
Currency translation adjustment -- -- 324 324
----------- ---------- ----------- -------------
Balance, December 31, 1995 $ 30,816 $ 48,653 $ 3,048 $ 82,517
=========== ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
1. Organization
Corning Pharmaceutical Services Inc. and its subsidiaries ("CPS") is a
leading contract research organization providing a wide range of
integrated product development services on a worldwide basis to the
biotechnology, pharmaceutical and medical device industries. In
addition, and to a lesser extent, CPS provides services such as health
economics for managed care organizations, hospitals and health care
provider networks, and early development and laboratory testing services
to the chemical, agrochemical and food industries. CPS' operations
involve a single industry segment for financial reporting purposes. At
the present time, operations are principally focused in the United
States and Europe.
CPS is an indirect wholly-owned business of Corning Incorporated
("Corning"). In May 1996, Corning's Board of Directors approved a plan
to distribute to its stockholders on a pro rata basis all of the shares
of CPS ("the CPS Spin-Off Distribution"). The result of the plan will be
the creation of an independent, publicly-owned (but as yet unnamed)
company. Corning has submitted to the Internal Revenue Service a request
for a ruling that the CPS Spin-Off Distribution will qualify as a tax
free distribution under the Internal Revenue Code of 1986, as amended.
The final terms of the CPS Spin-Off Distribution, which are subject to
approval by Corning's Board of Directors, will be set forth in a
registration statement to be filed with the Securities and Exchange
Commission and in an Information Statement to be distributed to
Corning's stockholders. The CPS Spin-Off Distribution is expected to
occur by the end of 1996.
2. Summary of Significant Accounting Policies
Basis of Presentation
The operations of Corning Bio Inc. ("Corning Bio"), a majority-owned
business of Corning which Corning intends to contribute to CPS prior to
the CPS Spin-Off Distribution, are included in the accompanying
financial statements. Accordingly, the accompanying financial statements
present the results of CPS and Corning Bio on a combined basis.
Principles of Consolidation
The combined financial statements include the accounts of all entities
controlled by CPS, including Corning Bio. All significant intercompany
accounts and transactions are eliminated. The equity method of
accounting is used for investments in affiliates in which CPS owns
between 20 and 50 percent.
F-35
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, assets and liabilities are translated to United
States dollars at year-end exchange rates. Income and expense items are
translated at average rates of exchange prevailing during the year.
Translation adjustments are accumulated in a separate component of
stockholder's equity. Transaction gains and losses are included in the
determination of income.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at date of purchase and
consist principally of amounts temporarily invested in money market
funds.
Financial Instruments
The fair value of cash, accounts receivable, trade accounts payable and
accrued expenses are not materially different than their carrying
amounts as reported at December 31, 1995 and 1994.
Accounts receivable and unbilled services from CPS customers are
concentrated primarily in the pharmaceutical and biotechnology
industries. CPS monitors the creditworthiness of its customers to which
it grants credit terms in the ordinary course of business. Although CPS
customers are concentrated primarily within these two industries,
management considers the likelihood of material credit risk exposure as
remote. CPS in some cases requires advance payment for a portion of the
contract price from its customers upon the signing of a contract for
services. Historically, bad debts have been minimal.
Inventory
Inventories, which consist principally of supplies, are valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are provided on the straight line method at rates adequate
to allocate the cost of the applicable assets over their estimated
useful lives, which range in term from three to thirty years.
F-36
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
Goodwill
Goodwill (investment costs in excess of the fair value of net tangible
assets acquired) is capitalized and amortized over the period expected
to be benefited, generally forty years.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of", ("SFAS No. 121") was adopted in 1995. Assessments of the
recoverability of long-lived assets are conducted when events or changes
in circumstances occur that indicate that the carrying value of the
asset may not be recoverable. The assessment of possible impairment is
based upon the ability to recover the asset from the expected future
undiscounted cash flows of related operations. The policy on impairment
prior to the adoption of SFAS No. 121 was not materially different.
Revenue Recognition
Revenue is recognized using the cost-to-cost type of
percentage-of-completion method of accounting for services rendered in
connection with contractual arrangements, which generally range from a
few months to two years. Revenue is recognized as costs are incurred on
the basis of the relationship between costs incurred and total estimated
costs. Most service contracts may be terminated for a variety of reasons
by CPS' customers either immediately or upon notice. The contracts often
require payments to CPS to recover costs incurred, including costs to
wind down the study and fees earned to date, and in some cases to
provide CPS with a portion of the fees or profits that would have been
earned under the contract had the contract not been terminated early.
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.
Revenue from performing clinical laboratory testing services is
recognized as tests are completed. Revenue from other activities is
recognized as services are performed or products are shipped.
Unbilled receivables are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms.
Unbilled receivables are billable to customers within one year from the
respective balance sheet date. Unearned revenue is recorded for advance
billings to customers for which revenue has not been recognized at a
given date.
CPS routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not
reflected in revenue or expense since such fees are granted by customers
on a "pass-thru basis" without risk or reward to CPS.
F-37
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process which encompass direct labor and
related benefit charges, other direct costs and allocable expenses
(including facility charges, indirect labor and information technology
costs). Selling, general and administrative expenses primarily consist
of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses
(facility charges and information technology costs).
Advertising expense is recognized as incurred.
Taxes on Income
CPS 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.
3. Property and Equipment
Property and equipment at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Property and equipment at cost:
Land $ 2,996 $ 2,746
Buildings and improvements 105,291 94,549
Equipment 101,686 90,117
Furniture, fixtures & leasehold improvements 39,622 36,393
Construction-in-progress 5,861 6,486
--------------- ---------------
255,456 230,291
Less: Accumulated depreciation and amortization (114,748) (103,808)
--------------- ---------------
Property and equipment $ 140,708 $ 126,483
=============== ===============
</TABLE>
Depreciation and amortization expense aggregated $20.8 million, $17.8
million and $16.5 million for 1995, 1994 and 1993, respectively.
4. Acquisitions and Goodwill
In April 1994, CPS acquired SciCor S.A., a provider of laboratory testing
services domiciled in Switzerland, for total consideration of
approximately $10.8 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction
aggregated $9.5 million.
In January 1995, CPS acquired National Packaging Systems, Inc. ("NPS")
for an initial cash payment of $14.0 million in a transaction accounted
for as a purchase business combination. The goodwill resulting from this
transaction aggregated $9.1 million. In accordance with the terms of the
acquisition agreement, CPS is contingently obligated to pay up to an
additional
F-38
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
$7.0 million in contingent purchase price to former NPS shareholders if
NPS achieves certain established earnings targets for the period January
1995 through September 1996.
Results of operations for these entities have been included in the
accompanying financial statements beginning on the respective dates of
acquisition. Pro forma information for these entities has not been
presented, due to their insignificance to CPS taken as a whole.
Goodwill associated with these and prior acquisitions aggregated $24.0
million and $15.9 million, net of accumulated amortization of $3.5
million and $2.6 million at December 31, 1995 and 1994, respectively.
Amortization expense aggregated $0.9 million, $0.5 million and $0.3
million for 1995, 1994 and 1993, respectively.
5. Taxes on Income
CPS has been included in the Federal income tax return filed by Corning.
CPS and its subsidiaries have a tax sharing agreement with Corning,
pursuant to which they are required to compute their provision for income
taxes on a separate return basis and pay to Corning the separate Federal
income tax return liability so computed.
The components of income before taxes and the related provision (benefit)
for taxes on income were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- ----------- -----------
<S> <C> <C> <C>
Income before taxes and equity
investee losses:
Domestic $ 32,771 $ 30,928 $ 29,455
International 10,305 4,076 2,253
---------- ----------- -----------
Total $ 43,076 $ 35,004 $ 31,708
========== =========== ===========
Federal income taxes:
Current provision $ 19,118 $ 12,167 $ 10,932
Deferred benefit (6,760) (1,742) (1,439)
International income taxes:
Current (benefit) provision (933) 602 (573)
Deferred provision 3,434 1,440 1,612
State and other income taxes:
Current provision 3,959 2,868 3,143
Deferred benefit (373) (411) (169)
---------- ----------- -----------
Total $ 18,445 $ 14,924 $ 13,506
========== =========== ===========
</TABLE>
F-39
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
The differences between the provision for income taxes and income taxes
computed using the Federal income tax rate were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Taxes at statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of
Federal benefit 5.5 4.6 6.1
Impact of international operations (0.3) 1.7 0.8
Goodwill amortization 1.1 0.5 0.4
Other, net 1.5 0.8 0.3
------------- ------------ ------------
Total 42.8% 42.6% 42.6%
============= ============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Current deferred taxes:
Liabilities not currently deductible $ 10,356 $ 9,823
Net operating losses 888 --
Other 538 210
------------- -------------
11,782 10,033
Less: valuation allowance (445) --
------------- -------------
Net $ 11,337 $ 10,033
============= =============
Noncurrent deferred taxes:
Property and equipment $ (12,263) $ (11,894)
Liabilities not currently deductible 5,857 2,289
------------- -------------
Total $ (6,406) $ (9,605)
============= =============
</TABLE>
Income taxes payable at December 31, 1995 and 1994 consists of Federal
income taxes payable to Corning of $17.0 million and $8.7 million,
respectively, state and other income taxes payable (receivable) of $1.6
million and $(0.4) million, respectively, and international income taxes
receivable of $2.0 million and $0.4 million, respectively. CPS paid
income taxes of $16.7 million, $17.0 million and $18.3 million for the
years 1995, 1994 and 1993, respectively.
6. Employee Benefit Plans
CPS has several defined contribution plans covering substantially all of
its full-time employees. Contributions to these plans aggregated $4.9
million, $4.2 million and $3.7 million for 1995, 1994 and 1993,
respectively.
F-40
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
7. Restructuring Charge
In 1995, CPS recorded a provision for restructuring charges totaling
$4.6 million as a result of management's decision to discontinue
certain nonstrategic operations. The restructuring charge included
severance costs related to approximately 90 employees, of which
approximately 50 had been terminated as of December 31, 1995. The
remaining employees were terminated and all other substantive
activities to complete the restructuring plan were completed by April
30, 1996. A summary of the restructuring charge is as follows:
<TABLE>
<CAPTION>
Charges Reserve
through balance at
Original December December
Reserve 31, 1995 31, 1995
------------ ----------- -------------
<S> <C> <C> <C>
Employee termination costs $ 1,480 $ 539 $ 941
Write-off of fixed assets 1,737 994 743
Costs of exiting leased facilities 1,399 118 1,281
------------ ----------- -------------
Total $ 4,616 $ 1,651 $ 2,965
============ =========== =============
</TABLE>
8. Commitments and Contingent Liabilities
Minimum rental commitments under noncancellable operating leases,
primarily real estate and office facilities, in effect at December 31,
1995 are as follows:
Year ended December 31,
-----------------------
1996 $ 15,332
1997 $ 18,841
1998 $ 16,578
1999 $ 15,493
2000 $ 14,394
2001 and beyond $ 31,253
Operating lease rental expense aggregated $14.1 million, $11.0 million
and $9.1 million for 1995, 1994 and 1993, respectively.
In June 1995, a CPS subsidiary ("lessee") entered into a lease
arrangement whereby a custom-designed, fully equipped facility would be
constructed for the lessee at a cost of approximately $55 million to
perform specialized research and manufacturing activities for
biotechnology and pharmaceutical companies. The lessor in this
arrangement is a subsidiary of one of the largest banks in the United
States. The lease arrangement contains purchase and cancellation options
for the lessee at any time during the ten year period covered by the
lease arrangement. Although the lease arrangement is cancelable by the
lessee at any time throughout the ten year period, an initial lease term
of five years, representing management's estimate at the lease inception
date of the period in which occupancy of the facility is reasonably
assured, has been selected for financial reporting purposes. The initial
term of the
F-41
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
lease will commence on the date of completion of construction of the
facility which is currently anticipated by the end of 1996. The annual
minimum lease payments are currently estimated at $5.5 million. The
lease arrangement will be classified as an operating lease.
A purchase price option has been established at specific dates over the
ten year period covered by the lease arrangement. Using current
estimates, the purchase price would approximate $54 million at the end
of the first year and decreases on an amortizing basis to approximately
$37 million at the end of the tenth year.
The cancellation option provisions of the lease arrangement stipulate a
residual value guarantee by CPS at specific dates over the ten year
period. Sale of the facility is stipulated in the lease arrangement at
such time that the lessee exercises the cancellation option provisions.
The lessee's residual value guarantee ("Deficiency Payment") is
unconditionally payable to the lessor in the event that the lessee
terminates the lease arrangement and the sale of the facility results in
receipt of sales proceeds by the lessor in an amount less than the
lessor's unamortized investment in the lease arrangement. The lessee's
maximum Deficiency Payment would approximate $35 million at the end of
the first year and decreases to approximately $25 million at the end of
the tenth year, assuming that the sales proceeds received by the lessor
were zero.
9. Geographic Information
United
States Europe
------------ -------------
Net revenue:
1995 $ 286,474 $ 122,700
1994 $ 242,131 $ 77,370
1993 $ 227,110 $ 62,587
Income from operations:
1995 $ 34,799(1) $ 12,762
1994 $ 32,710 $ 5,889
1993 $ 32,673 $ 4,308
Identifiable assets:
1995 $ 229,720 $ 92,790
1994 $ 202,986 $ 69,006
1993 $ 183,652 $ 46,041
(1) Excluding the impact of the 1995 restructuring provision
totaling $4,616, United States income from operations was
$39,415.
F-42
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
10. Related Party Transactions
CPS participates in Corning's centralized treasury and cash management
processes. For domestic operations, cash received from operations is
generally transferred to Corning on a daily basis. For international
operations, excess cash is periodically transferred to Corning. Cash
disbursements for operations, acquisitions and other investments are
funded as needed from Corning. Substantially all of CPS' borrowings to
date have been with Corning. The blended rate on those borrowings for
1995, 1994 and 1993 was approximately 6.0%.
Certain members of CPS management participate in various stock
compensation programs sponsored by Corning. The expenses associated with
these programs have been reflected in the accompanying financial
statements.
Corning and affiliates provide a number of administrative functions to
CPS which resulted in charges of $5.3 million, $5.7 million and $5.3
million being recorded in the CPS results of operations for 1995, 1994
and 1993, respectively. Management believes the method used to allocate
such costs is reasonable under the circumstances. The charges for these
functions are included primarily in selling, general and administrative
expenses and do not necessarily reflect the amount of expenses that
would have been incurred by CPS on a stand-alone basis. In certain
cases, related party expenses allocated to CPS have not required
reimbursement in cash and, accordingly, have been treated as a capital
contribution.
11. Subsequent Event
In March 1996, CPS acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA") for an
initial cash payment of approximately $15.0 million in a transaction
accounted for as a purchase business combination. In accordance with the
terms of the asset purchase agreement, CPS is contingently obligated to
pay up to an additional $17.0 million in contingent purchase price if
HTA achieves certain established earnings targets for the three year
period ending March 1999.
In conjunction with the CPS Spin-Off Distribution, CPS plans to record a
material non-recurring charge at the distribution date related to
establishing and funding an employee stock ownership plan, other
employee benefit plan arrangements and costs for advisors and other fees
associated with being established as a separate publicly traded entity.
In addition, CPS plans to incur significant long term bank borrowings to
repay Corning for all intercompany borrowings and income tax liabilities
at the distribution date.
Corning, Corning Clinical Laboratories Inc. ("CCL") and CPS will enter
into tax indemnification agreements that will prohibit CCL and CPS for a
period of two years after the Spin-Off Distributions from taking certain
actions that might jeopardize the favorable tax treatment of the
Distributions under Section 355 of the Internal Revenue Code of 1986, as
amended and will provide Corning and CCL with certain rights of
indemnification against CCL and CPS. The tax indemnification agreements
will also require CCL and CPS to take such actions as Corning may
request to preserve the favorable tax treatment provided for in any
rulings obtained from the Internal Revenue Service in respect of the
Distributions.
Corning, CCL and CPS will also enter into a tax sharing agreement which
will allocate among Corning, CCL and CPS responsibility for federal,
state and local taxes relating to taxable periods before and after the
Spin-Off Distributions and provide for computing and apportioning tax
liabilities and tax benefits for such periods among the parties.
F-43
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
- -------------------------------------------------------------------------------
12. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information
for 1995 and 1994:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1995 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 91,974 $ 104,813 $ 106,099 $ 106,288
Income from operations 12,983 9,665(1) 13,671 11,242
Net income 6,547 4,449(1) 7,516 5,714
Year Ended December 31, 1994
- ----------------------------------------------------------------------------------------------------------
Net revenues $ 74,223 $ 77,762 $ 82,904 $ 84,612
Income from operations 8,187 11,077 9,690 9,645
Net income 4,023 5,726 4,967 4,929
</TABLE>
(1) Excluding the impact of the 1995 restructuring provision
totaling $4,616 ($2,770 net of tax), income from operations and
net income in the second quarter of 1995 were $14,281 and
$7,219, respectively.
F-44
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Amounts in thousands) 1996 1995
--------------- ----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 13,051 $ 8,068
Accounts receivable, net 85,448 78,968
Unbilled services 28,337 18,217
Inventory 13,810 14,004
Deferred income taxes 11,515 11,337
Prepaid expenses and other assets 16,139 15,189
--------------- ----------------
Total Current Assets 168,300 145,783
Property and Equipment, net 141,429 140,708
Goodwill, net 37,094 24,028
Other assets 13,119 11,991
--------------- ----------------
Total Assets $ 359,942 $ 322,510
=============== ================
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable $ 19,797 $ 23,761
Accrued payroll and benefits 24,467 20,339
Accrued expenses and other liabilities 32,460 24,701
Unearned revenue 37,067 41,879
Income taxes payable 18,526 16,631
--------------- ----------------
Total Current Liabilities 132,317 127,311
Due to Corning Incorporated and affiliates 110,104 89,836
Deferred income taxes 6,344 6,406
Other liabilities 15,637 16,440
--------------- ----------------
Total Liabilities 264,402 239,993
--------------- ----------------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital 31,868 30,816
Retained earnings 61,429 48,653
Cumulative translation adjustment 2,243 3,048
--------------- ----------------
Total Stockholder's Equity 95,540 82,517
--------------- ----------------
Total Liabilities and Stockholder's Equity $ 359,942 $ 322,510
=============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- --------------------------------
(Amounts in thousands) 1996 1995 1996 1995
---------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 121,530 $ 104,813 $ 230,227 $ 196,787
Cost and expenses
Cost of revenue 78,197 68,913 149,624 128,763
Selling, general and administrative
expenses 19,548 16,202 36,946 30,083
Restructuring charge -- 4,616 -- 4,616
Depreciation and amortization 6,450 5,417 12,284 10,677
---------------- ---------------- --------------- -------------
Total 104,195 95,148 198,854 174,139
---------------- ---------------- --------------- -------------
Income from operations 17,335 9,665 31,373 22,648
---------------- ---------------- --------------- -------------
Other expense
Interest expense, net 1,555 1,383 2,665 2,751
Foreign exchange loss 60 261 109 327
---------------- ---------------- --------------- -------------
1,615 1,644 2,774 3,078
---------------- ---------------- --------------- -------------
Income before taxes and equity investee
losses 15,720 8,021 28,599 19,570
Taxes on income 6,861 3,423 12,480 8,376
Equity investee loss (gain) 29 149 (15) 198
---------------- ---------------- --------------- -------------
Net income $ 8,830 $ 4,449 $ 16,134 $ 10,996
================ ================ =============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
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<TABLE>
<CAPTION>
(Amounts in thousands) 1996 1995
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 16,134 $ 10,996
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,284 10,677
Restructuring reserve, net of cash paid -- 4,399
Deferred income tax provision (240) (1,950)
Related party charges 1,052 1,647
Other 645 747
Changes in operating assets and liabilities:
Accounts receivable (4,745) (2,239)
Unbilled services (7,592) (2,739)
Inventory 194 (849)
Accounts payable (4,007) (651)
Accrued liabilities 9,143 8,439
Unearned revenue (6,026) (5,996)
Income taxes payable 1,895 3,439
Other assets and liabilities, net (3,717) (3,147)
-------------- ---------------
Net cash provided by operating activities 15,020 22,773
-------------- ---------------
Cash flows from investing activities
Capital expenditures (12,210) (16,739)
Acquisition of businesses (14,890) (14,000)
Other, net 153 351
-------------- ---------------
Net cash used in investing activities (26,947) (30,388)
-------------- ---------------
Cash flows from financing activities
Due to Corning Incorporated and affiliates 5,378 1,102
Acquisition loan from Corning Incorporated 14,890 14,000
Capital contributions -- 1,000
Dividends paid (3,358) (5,006)
-------------- ---------------
Net cash provided by financing activities 16,910 11,096
-------------- ---------------
Net change in cash and cash equivalents 4,983 3,481
Cash and cash equivalents, beginning of period 8,068 6,176
-------------- ---------------
Cash and cash equivalents, end of period $ 13,051 $ 9,657
============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
CORNING PHARMACEUTICAL SERVICES INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED)
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1. Basis of Presentation
The accompanying unaudited combined financial statements reflect all
adjustments which, in the opinion of management, are necessary for a fair
statement of the results of operations for the interim periods presented.
All such adjustments are of a normal recurring nature. The combined
financial statements have been compiled without audit and are subject to
such year-end adjustments as may be considered appropriate and should be
read in conjunction with the historical combined financial statements of
CPS for the years ended December 31, 1995, 1994 and 1993 included
elsewhere herein.
2. Use of Estimates
The preparation of these unaudited combined 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.
3. Taxes on Income
Taxes on income reflect the estimated annual effective tax rates.
4. Acquisitions
In March 1996, CPS acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA") for an
initial cash payment of approximately $15.0 million in a transaction
accounted for as a purchase business combination. In accordance with the
terms of the asset purchase agreement, CPS is contingently obligated to
pay up to an additional $17.0 million in contingent purchase price if HTA
achieves certain established earnings targets during the three year
period ending March 1999.
F-48
