SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10/A
Amendment No. 2 to Form 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
COVANCE INC.
(formerly known as 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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COVANCE 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 November 19, 1996, of Corning
Incorporated. Selected pages of the Information Statement which are related to
the Registrant and the securities being registered hereunder (the "Covance
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 Covance," "Business of Covance" and "The Relationship
Among Corning, Quest Diagnostics and Covance After the Distributions" of the
Covance 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 Covance", "Pro Forma Financial Information of Covance,"
"Selected Historical Financial Data of Covance" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Covance" of the
Covance 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 Covance--Facilities" and "Business of Covance--Services--
Biomanufacturing" of the Covance 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 Covance" of
the Covance Information and such section is incorporated herein by reference.
Item 5. Directors and Executive Officers
The information required by this item is contained under the section
"Management of Covance" of the Covance 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 Covance" of the Covance 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 Covance" of the Covance 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 Covance--Legal Proceedings" of the Covance Information and such
section is incorporated herein by reference.
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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 Covance--Absence of Dividends; Restrictions Imposed
on Dividends by the Covance Credit Facility," "Risk Factors--Risks Relating to
Covance--Absence of Prior Public Market," "Risk Factors--Risks Relating to
Covance--Potential Volatility of Stock Price," "Description of Covance Capital
Stock--Covance Common Stock--Dividend Policy," "--Covance Common Stock--Listing
and Trading" and "Management of Covance" of the Covance 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 Covance Capital Stock" and "Antitakeover Effects of Certain
Provisions of the Covance Certificate of Incorporation and By-Laws" of the
Covance 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 Covance" of the
Covance 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 Covance," "Pro Forma Financial Information of Covance,"
"Selected Historical Financial Data of Covance," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Covance" and
"Financial Statements of Covance Inc." of the Covance 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 Covance Inc." of the Covance Information and such
section is incorporated herein by reference.
(b) Exhibits
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<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
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2.1 Form of Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc.,
Corning Clinical Laboratories Inc. and Covance 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 Covance Inc. and Harris Trust and Savings Bank, dated
December 31, 1996
10.1 Form of Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories
Inc. and Covance Inc., dated [ ], 1996
10.2 Form of Spin-Off Tax Indemnification Agreement between Corning Incorporated and Covance
Inc., dated [ ], 1996
10.3 Form of Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning
Clinical Laboratories Inc., dated [ ], 1996
10.4 Form of Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories,
Inc. and Covance Inc., dated [ ], 1996
10.5* Form of Credit Agreement among Covance Inc., Nationsbank, N.A., Wachovia Bank of
Georgia, N.A. and the Lenders named therein, dated [ ], 1996
10.6* Form of Covance Inc. Employee Stock Ownership Plan
10.7* Form of Covance Inc. Stock Purchase Savings Plan
10.8 Form of Covance Inc. Employees Stock Purchase Program
10.9 Form of Covance Inc. Employee Equity Participation Program
10.10* Form of Covance Inc. Executive Retirement Supplemental Plan
10.11 Form of Covance Inc. Restricted Share Plan
10.12* Form of Covance Inc. Directors' Restricted Stock Plan
10.13* Form of Covance Inc. Directors' Deferred Compensation Plan
10.14 Form of Employment Agreement between Christopher Kuebler and Covance Inc.
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 November 19, 1996 (pages 2; 28-31; 108-168; F-1; F-29-F-44)
</TABLE>
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* To be filed by amendment.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
COVANCE INC.
Dated: November 19, 1996 By: /s/ Jeffrey S. Hurwitz
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Jeffrey S. Hurwitz, Corporate Senior Vice President,
General Counsel and Secretary
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S&S DRAFT
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TRANSACTION AGREEMENT
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dated as of __________, 1996
by and among
CORNING INCORPORATED,
CORNING LIFE SCIENCES INC.,
CORNING CLINICAL LABORATORIES INC.
and
COVANCE INC.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS
SECTION 1.01. General................................................. 2
SECTION 1.02. References; Interpretation.............................. 7
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent.................................... 7
SECTION 2.02. The Distributions and Other Transactions................ 8
SECTION 2.03. Treatment of Fractional Shares.......................... 12
SECTION 2.04. Certain Intercompany Financial and Other Arrangements... 12
SECTION 2.05. Certain Indebtedness and Capital Structure.............. 13
SECTION 2.06. Further Assurances...................................... 13
SECTION 2.07. No Representations or Warranties........................ 13
SECTION 2.08. Guarantees.............................................. 13
SECTION 2.09. Certain Transactions.................................... 14
SECTION 2.10. Insurance............................................... 14
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning.............................. 14
SECTION 3.02. Indemnification by CCL.................................. 19
SECTION 3.03. Indemnification by Covance.............................. 19
SECTION 3.04. Adjustments for Indemnification Obligations............. 19
SECTION 3.05. Procedures for Indemnification - Third Party Claims..... 19
SECTION 3.06. Survival of Indemnities................................. 21
SECTION 3.07. Payments................................................ 21
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records.......................... 21
SECTION 4.02. Access to Information................................... 22
SECTION 4.03. Reimbursement........................................... 22
SECTION 4.04. Confidentiality......................................... 22
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ii
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations................................. 23
SECTION 5.02. Procedure............................................... 23
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses................................................ 24
SECTION 6.02. Notices................................................. 24
SECTION 6.03. Complete Agreement; Construction........................ 25
SECTION 6.04. Ancillary Agreements.................................... 25
SECTION 6.05. Counterparts............................................ 25
SECTION 6.06. Survival of Agreements.................................. 25
SECTION 6.07. Waiver.................................................. 25
SECTION 6.08. Amendments.............................................. 26
SECTION 6.09. Assignment.............................................. 26
SECTION 6.10. Successors and Assigns.................................. 26
SECTION 6.11. Termination............................................. 26
SECTION 6.12. Subsidiaries............................................ 26
SECTION 6.13. Third Party Beneficiaries............................... 26
SECTION 6.14. Headings................................................ 27
SECTION 6.15. Specific Performance.................................... 27
SECTION 6.16. Governing Law........................................... 27
SECTION 6.17. Public Announcements.................................... 27
SECTION 6.18. Severability............................................ 27
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iii
SCHEDULES
Schedule 2.08 Guarantees
EXHIBITS
Exhibit A Forms of Contribution Agreement, Liabilities Undertaking,
Bill of Sale and Assignment and Instrument of Assignment
and Assumption
Exhibit B Form of Plan of Liquidation and Dissolution of CLSI
Exhibit C Certificate of Ownership and Merger and Certificate of Merger,
with attached Agreement and Plan of Merger and Complete
Liquidation (CBI into Covance)
Exhibit D Form of Insurance Agreement
Exhibit E Form of Services Agreement
Exhibit F Form of Spin-off Tax Indemnification Agreements
Exhibit G Form of Tax Sharing Agreement
Exhibit H Forms of Amended Charter and By-Laws of CCL
Exhibit I Forms of Amended Charter and By-Laws of Covance
<PAGE>
TRANSACTION AGREEMENT dated as of November __, 1996, by and
among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING LIFE
SCIENCES INC., a Delaware corporation ("CLSI"), CORNING CLINICAL LABORATORIES
INC., a Delaware corporation ("CCL"), and COVANCE INC., a Delaware corporation
("Covance").
W I T N E S S E T H:
WHEREAS, Corning is the common parent of a consolidated group
which includes CLSI, CCL and Covance;
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to distribute to the holders of shares of common
stock, par value $0.50 per share, of Corning (the "Corning Common Shares") all
the outstanding shares of common stock of CCL (the "CCL Common Stock") and,
immediately following such distribution, for CCL to distribute to the holders of
CCL Common Stock all the outstanding shares of common stock of Covance (the
"Covance Common Stock");
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to set forth the principal corporate transactions
required to effect such distribution and to set forth other agreements that will
govern certain other matters following the distribution;
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to allocate and assign responsibility for those
liabilities in respect of the activities of the businesses of such entities on
the Distribution Date (as defined herein) and those liabilities in respect of
other businesses and activities of Corning and its former subsidiaries and other
matters;
WHEREAS, Corning currently owns 100% of the stock of CLSI;
WHEREAS, CLSI currently owns 100% of the stock of CCL;
WHEREAS, CCL currently owns 100% of the stock of Covance;
WHEREAS, Covance currently owns 100% of the stock of Corning
Besselaar, Inc. ("CBI"); and
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2
WHEREAS, prior to the Distribution Date, CLSI will contribute
to CCL substantially all of its assets other than the stock of CCL in exchange
for additional shares of CCL Common Stock and shares of nonvoting preferred
stock of CCL and Corning will cause CLSI to dissolve and CBI to be merged with
and into Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, will control or will be controlled by or will be under common
control with the person specified immediately following the Effective Time.
"Agent" shall have the meaning as defined in Section 2.02(g).
"Agreement Disputes" shall have the meaning as defined in
Section 5.01.
"Ancillary Agreements" shall mean the Insurance Agreement, the
Intellectual Property Agreement, the Services Agreement, the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Assignee" shall have the meaning as defined in Section
2.02(i)(ii).
"CCL" shall mean Corning Clinical Laboratories Inc., a
Delaware corporation.
"CCL Business" shall mean all businesses and operations
conducted by (i) CLSI, MRL Nucor, Inc. and all current and former subsidiaries
of CLSI (other than CORNING Bio Inc., Covance and its Subsidiaries,
Pharmaceutical Laboratory Services, Inc., Quanterra Incorporated, California
Analytical Laboratory, Chemical Research Laboratories,
<PAGE>
3
Inc., Enseco Incorporated, ERCO, Rocky Mountain Analytical Laboratory and
Wadsworth/Alert Laboratories, Inc.), including without limitation CCL (but
excluding in any event the environmental testing business previously conducted
by CCL); and (ii) any business entities acquired or established by or for CCL or
any of its Subsidiaries after the date of this Agreement.
"CCL Indemnitees" shall mean CCL, each Affiliate of CCL, each
of their respective directors and officers and each of the heirs, executors,
successors and assigns of any of the foregoing.
"CCL Liabilities" shall mean, collectively, (i) all the
Liabilities of CCL and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
CCL Business.
"CCL Record Holders" shall mean all holders of CCL Common
Stock as of the Distribution Record Date, provided that the CCL Record Holders
shall be deemed to be determined immediately following the distribution of CCL
Common Stock to all Corning Record Holders.
"CLSI" shall mean Corning Life Sciences Inc., a Delaware
corporation.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Commission" mean the Securities and Exchange Commission.
"Company Policies" shall mean all Policies, current or past,
which are or at any time were maintained by or on behalf of or for the benefit
or protection of Corning or any of its predecessors which relate to the Corning
Business, the CCL Business or the Covance Business, or current or past
directors, officers, employees or agents of any of the foregoing Businesses.
"Corning" shall mean Corning Incorporated, a New York
corporation.
"Corning Business" shall mean (i) all businesses and
operations of Corning and its subsidiaries other than the CCL Business and the
Covance Business and (ii) the environmental testing business previously
conducted by CCL and its Subsidiaries, including California Analytical
Laboratory, Chemical Research Laboratories, Inc., Enseco
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4
Incorporated, ERCO, Quanterra Incorporated, Rocky Mountain Analytical Laboratory
and Wadsworth/Alert Laboratories, Inc.
"Corning Indemnitees" shall mean Corning, each Affiliate of
Corning, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Corning Liabilities" shall mean all the Liabilities of
Corning and its Subsidiaries under this Agreement and any of the Ancillary
Agreements, and all the Liabilities of Corning and its subsidiaries that are not
CCL Liabilities or Covance Liabilities including, without limitation, all
Liabilities under any employee benefit plans maintained by Corning and any stock
option employment or consulting agreements to which Corning is a party,
including any such benefit plans or agreements covering or with persons who are
or were employees of CCL or Covance and their respective Subsidiaries.
Notwithstanding the foregoing, the remaining payment obligations under the
Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman and the
Consulting Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman
shall be CCL Liabilities and not Corning Liabilities.
"Corning Record Holders" shall mean all holders of record of
Corning Common Shares as of the Distribution Record Date.
"Covance" shall mean Corning Pharmaceutical Services Inc., a
Delaware corporation.
"Covance Business" shall mean all businesses and operations
conducted by (i) all current and former subsidiaries of Covance and by CORNING
Bio Inc. and Pharmaceutical Laboratory Services, Inc. prior to the Effective
Time; and (ii) any business entities acquired or established by or for Covance
or any of its Subsidiaries after the date of this Agreement.
"Covance Indemnitees" shall mean Covance, each Affiliate of
Covance, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Covance Liabilities" shall mean, collectively, (i) all the
Liabilities of Covance and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
Covance Business.
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5
"Distribution Date" shall mean December 31, 1996 or such later
date as may hereafter be determined by Corning's Board of Directors as the date
as of which the Distributions shall be effected.
"Distribution Record Date" shall mean December 31, 1996 or
such later date as may hereafter be determined by Corning's Board of Directors
as the record date for the Distributions.
"Distributions" shall mean the two consecutive distributions
in the following order on the Distribution Date to (i) all Corning Record
Holders of the CCL Common Stock owned by Corning and (ii) all CCL Record Holders
of the Covance Common Stock owned by CCL.
"Effective Time" shall mean 11:59 p.m., New York time, on the
Distribution Date.
"Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' fees and any and all reasonable and necessary
out-of-pocket expenses) whatsoever, including any and all losses, liabilities,
claims, damages, demands, costs or expenses reasonably incurred in
investigating, preparing for or defending against any Actions or potential
Actions, provided, however, that such Indemnifiable Losses shall not include
Taxes or other amounts indemnified against under the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Indemnifying Party" shall have the meaning as defined in
Section 3.04.
"Indemnitee" shall have the meaning as defined in Section
3.04.
"Information Statement" shall mean the Information Statement
sent to all the Record Holders in connection with the Distributions, including
any amendment or supplement thereto.
"Insurance Agreement" shall mean the Insurance Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
D.
"Intellectual Property Agreement" shall mean the Intellectual
Property and Licensing Agreement among Corning, CCL and Covance, in a form to be
agreed upon by the parties to this Agreement.
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6
"Liabilities" shall mean any and all debts, liabilities and
obligations, absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including, without limitation, those debts, liabilities and obligations arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"person" shall mean any natural person, corporation, business
trust, joint venture, association, company, partnership or government, or any
agency or political subdivision thereof.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies,
comprehensive general liability policies, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Record Holders" shall mean the CCL Record Holders and the
Corning Record Holders, collectively.
"Records" shall have the meaning as defined in Section 4.01.
"Registration Statements" shall mean the registration
statements on Form 10 in respect of the CCL Common Stock and the Covance Common
Stock required to be filed with the Commission pursuant to Rule 12(b) under the
Exchange Act.
"Rules" shall have the meaning as defined in Section 5.02.
"Services Agreement" shall mean the Services Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
E.
"Spin-off Tax Indemnification Agreement" shall mean each of
the Spin-off Tax Indemnification Agreements between or among two or more of
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
F.
"Subsidiary" shall mean any corporation, partnership or other
entity of which another entity (i) will own, immediately following the Effective
Time, directly or indirectly, ownership interests sufficient to elect a majority
of the board of directors (or persons performing similar functions)
(irrespective of whether at the time any other class or classes of ownership
interests of such corporation, partnership or other entity shall or might have
<PAGE>
7
such voting power upon the occurrence of any contingency) or (ii) will be,
immediately following the Effective Time, a general partner or an entity
performing similar functions; provided that Bio Imaging Technologies Inc. will
be deemed to be a Subsidiary of Covance and, National Imaging Associates will be
deemed to be a Subsidiary of CCL, in each case, for all purposes of this
Agreement.
"Tax" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement
among Corning, CCL and Covance, in substantially the form attached hereto as
Exhibit G.
"Third Party Claim" shall have the meaning as defined in
Section 3.05.
SECTION 1.02. References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
are, unless otherwise specified, to one of the Sections of this Agreement.
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent. Neither the Distributions
nor the related transactions set forth in this Agreement or in the Ancillary
Agreements shall become effective unless the following conditions have been
satisfied or waived by Corning on or before the Effective Time:
(a) The Registration Statements shall have been filed by
CCL and Covance, as applicable, with, and declared
effective by, the Commission and the Information
Statement shall have been mailed in a timely manner
to all holders of Corning Common Shares prior to the
Distribution Date.
(b) Corning shall have received a favorable ruling from
the Internal Revenue Service to the effect that the
Distributions qualify as tax-free distributions under
Section 355 of the Code.
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8
(c) Corning shall have received a favorable response from
the Commission to the "no-action request" letter
describing the Distributions filed by Corning with
the Commission.
(d) The New York Stock Exchange shall have approved the
CCL Common Stock and Covance Common Stock for listing
on its exchange, subject to official notice of
distribution.
(e) The financing arrangements among and between the
parties contemplated in the Information Statement
will have been consummated. CCL and Covance each
shall pay all of the expenses associated with their
respective financings.
SECTION 2.02. The Distributions and Other Transactions. (a)
Certain Transactions. Prior to the Distribution Date:
(i) CBI shall be merged with and into Covance pursuant to the
Certificate of Ownership and Merger between CBI and Covance and the
Certificate of Merger between CBI and Covance, in substantially the
forms attached hereto as Exhibit C, and in accordance with all
applicable filing requirements under the Delaware General Corporation
Law and the New Jersey Business Corporation Act. As a result of the
merger, CBI will cease to exist and Covance will acquire the assets of
CBI and assume (or take the assets of CBI subject to) the liabilities
of CBI.
(ii) CLSI will contribute to CCL all of CLSI's assets other
than the stock of CCL and CLSI's rights under certain agreements that
CLSI agrees to transfer pursuant to Section 2.02(i) in exchange for
200,000 additional shares of CCL Common Stock and 1,000 shares of
nonvoting preferred stock of CCL pursuant to (A) the Contribution
Agreement between CLSI and CCL, (B) the Liabilities Undertaking between
CLSI and CCL (C) the Instrument of Assignment and Assumption between
CLSI and CCL and (D) the Bill of Sale and Assignment between CLSI and
CCL, each in substantially the forms attached hereto as Exhibit A, and
in accordance with all applicable filing requirements under the
Delaware General Corporation Law. As a result of such transactions, CCL
will acquire the assets of CLSI and assume (or take the assets of CLSI
subject to) the liabilities of CLSI other than such obligations and
liabilities for which either Corning or Covance is responsible under
this Agreement or the Ancillary Agreements. Following such contribution
and assumption, CLSI shall adopt a plan of liquidation and dissolve
pursuant to the Plan of Liquidation and Dissolution of CLSI,
substantially in the form attached hereto as Exhibit B, and in
accordance with all applicable filing requirements under the Delaware
General Corporation Law. As a result of such liquidation and
dissolution, CLSI will distribute
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9
to Corning its remaining assets, which will consist largely of the
capital stock of CCL, and CLSI will cease to exist.
(iii) No earlier than one day following the effective date for
the transactions described in Section 2.02(a)(ii), CCL will transfer to
certain of its subsidiaries the following shares of common stock that
CCL will have received from CLSI pursuant to the transactions described
in Section 2.02(a)(ii): (A) the shares of common stock of Corning
Nichols Institute, (B) the shares of common stock of Corning Clinical
Laboratories Inc. (Mass.) and (C) the shares of common stock of Corning
Clinical Laboratories Inc. (MD).
(iv) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), CCL will transfer its Covance Common Stock, its entire
interest in Pharmaceutical Laboratory Services, Inc. and its entire
interest in Corning Bio Inc. to Covance by delivering to Covance stock
certificates representing each of CCL's share interests in such
companies, accompanied by stock powers duly endorsed by CCL and with
all required stock transfer tax stamps affixed. In connection therewith
CCL shall deliver to Covance for cancellation the share certificate
currently held by it representing Covance Common Stock and Covance
shall issue to CCL new certificates representing the total number of
newly-issued shares of Covance Common Stock sufficient in number to
allow for an orderly and pro rata distribution of such Covance Common
Stock to the CCL common shareholders.
(v) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), Corning will transfer its CCL Common Stock and its
entire interest in MRL Nucor, Inc. to CCL by delivering to CCL stock
certificates representing each of Corning's share interests in CCL and
MRL Nucor, Inc., accompanied by stock powers duly endorsed by Corning
and with all required stock transfer tax stamps affixed. In connection
therewith Corning shall deliver to CCL for cancellation the share
certificate then held by it representing CCL Common Stock and shall
receive new certificates representing the total number of newly-issued
shares of CCL Common Stock sufficient in number to allow for an orderly
and pro rata distribution of such CCL Common Stock to the Corning
common shareholders.
(b) Ancillary Agreements. On or prior to the Distribution
Date, each of Corning, CCL and Covance shall have executed and delivered to each
of the others, each of the Ancillary Agreements.
(c) Charters; By-laws. On or prior to the Distribution Date:
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10
(i) All necessary actions shall have been taken to provide for
the amendments of the Articles of Incorporation and By-laws for CCL,
such amendments to be in substantially the forms attached hereto as
Exhibit H.
(ii) All necessary actions shall have been taken to provide
for the amendments of the Articles of Incorporation and By-laws for
Covance, such amendments to be in substantially the forms attached
hereto as Exhibit I.
(d) Benefit Plans. On or prior to the Distribution Date, any
shareholder approvals deemed necessary for employee benefit plans shall have
been obtained.
(e) Directors. On or prior to the Distribution Date, Corning
as the sole shareholder of CCL, and CCL, as the sole shareholder of Covance,
shall have taken all necessary action by written consent on or prior to the
Distribution Date to elect to the Board of Directors of CCL and the Board of
Directors of Covance the individuals identified in the Information Statement as
directors of CCL and Covance, respectively.
(f) Consents. The parties hereto shall use their commercially
reasonable efforts to obtain any required consents to assignment of agreements
hereunder, if applicable.
(g) Delivery of Shares to Agent. Corning shall deliver to
Harris Trust and Savings Bank (the "Agent") the share certificates representing
the CCL Common Stock and CCL shall deliver to the Agent the share certificates
representing the Covance Common Stock and Corning and CCL shall instruct the
Agent to distribute, on or as soon as practicable following the Distribution
Date, such common stock to the Corning Record Holders and the CCL Record
Holders, as the case may be, as further contemplated by the Information
Statement and herein. CCL and Covance shall provide all share certificates that
the Agent shall require in order to effect the Distributions.
(h) Sublease. Corning shall have entered into a sublease
agreement with National Imaging Associates, Inc. with respect to the first floor
of 10 Mountainview Road, Upper Saddle River, New Jersey.
(i) Transfer of Agreements. (i) CLSI hereby agrees that on or
prior to the date on which it is dissolved, subject to the limitations set forth
in this Section 2.02(i), it will assign, transfer and convey to Covance all of
CLSI's rights and obligations under (a) the Capital Contribution Agreement and
Shareholder Agreement dated February 22, 1995 among Corning BioPro Inc., CLSI,
Richard Hawkins, Dr. John Scarlett, Robert F. Amundsen and Dr. Nona Niland, (b)
any and all existing stock option agreements between CLSI, Corning Bio Inc. and
individual employees of Corning Bio Inc., (c) the Registration Agreement dated
as of February 22, 1995 by and between Corning BioPro Inc. and CLSI, (d) the
Joint Escrow Instructions dated February 22, 1995 by and between Corning BioPro
Inc., CLSI,
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11
Robert F. Amundsen and the Escrow Agent named therein, and (e) the Joint Escrow
Instructions dated February 22, 1995 by and between Corning BioPro Inc., CLSI,
Dr. John Scarlett and the Escrow Agent named therein. CLSI hereby further agrees
that on or prior to the date on which it is dissolved, subject to the
limitations set forth in this Section 2.02(i), it will assign, transfer and
convey to Corning all of its rights and obligations under the lease agreement
dated October 5, 1995 between 2154 Trading Corporation and CLSI with respect to
10 Mountainview Road, Upper Saddle River, New Jersey. CCL hereby agrees that on
or prior to the Distribution Date or as soon as reasonably practicable
thereafter, subject to the limitations set forth in this Section 2.02(i), it
will assign, transfer and convey to Corning all of CCL's rights and obligations
under the Asset Transfer Agreement dated as of May 2, 1994, as amended, among
CCL, International Technology Corporation, IT Corporation and Quanterra
Incorporated and the related closing documents thereunder, including without
limitation the General Instrument of Assignment and Assumption dated June 28,
1994 between CCL and Quanterra Incorporated. Corning hereby agrees that on or
prior to the Distribution Date or as soon as reasonably practicable thereafter,
subject to the limitations set forth in this Section 2.02(j), it will assign,
transfer and convey to Covance all of Corning's rights and obligations under
that certain Registration Agreement dated as of February 22, 1995 by and between
Corning, Dr. Nona Niland, Dr. John Scarlett, Robert F. Amundsen and Richard
Hawkins.
(ii) The assignee of any agreement assigned, in whole or in
part, hereunder (an "Assignee") shall assume and agree to pay, perform, and
fully discharge all obligations of the assignor under such agreement or such
Assignee's related portion of such obligations as determined in accordance with
the terms of the relevant agreement, where determinable on the face thereof, and
otherwise as determined in accordance with the practice of the parties prior to
the Distribution.
(iii) Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign any
agreement, in whole or in part, or any rights thereunder if the agreement to
assign or attempt to assign, without the consent of a third party, would
constitute a breach thereof or in any way adversely affect the rights of the
Assignee thereof. Until such consent is obtained, or if an attempted assignment
thereof would be ineffective or would adversely affect the rights of any party
hereto so that the Assignee would not, in fact, receive all such rights, the
parties will cooperate with each other in any arrangement designed to provide
for the Assignee the benefits of, and to permit the Assignee to assume
liabilities under, any such agreement.
(iv) Corning understands and agrees that approximately 10,968
Corning Common Shares are held to secure certain claims of CCL under that Escrow
Agreement dated as of October 9, 1994 (the "Escrow Agreement") among Corning,
The First National Bank of Boston and former shareholders of Moran Research
Labs, as amended, and will act at CCL's direction and at CCL's expense with
respect to those shares. The remaining
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12
Corning Common Shares held under the Escrow Agreement are being held for the
benefit of Corning.
(j) Other Transactions. On or prior to the Distribution Date,
each of Corning, CCL and Covance shall have consummated those other transactions
in connection with the Distributions that are contemplated by the Information
Statement and the ruling request submission by Corning to the Internal Revenue
Service dated June 17, 1996, as supplemented, and not specifically referred to
in subparagraphs (a)-(i) above.
SECTION 2.03. Treatment of Fractional Shares. As soon as
practicable after the Distribution Date, the Agent shall determine the number of
whole shares and fractional shares of CCL and Covance allocable to each Corning
Record Holder and CCL Record Holder, respectively, as of the Distribution Record
Date, to aggregate all such fractional shares and sell the whole shares obtained
thereby, in open market transactions or otherwise, in each case at then
prevailing trading prices, and to cause to be distributed to each such holder to
which a fractional share shall be allocable such holder's ratable share of the
proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. In determining the manner and timing of selling the aggregated
fractional shares, the Agent shall use its independent judgment and shall
neither consult with nor communicate its plans to Corning, CCL or Covance.
SECTION 2.04. Certain Intercompany Financial and Other
Arrangements. (a) Intercompany Accounts. Without limiting the terms of Section
2.05, all intercompany receivables, payables and loans (other than receivables,
payables and loans otherwise specifically provided for in any of the Ancillary
Agreements or hereunder), including, without limitation, in respect of any cash
balances, any cash balances representing deposited checks or drafts for which
only a provisional credit has been allowed or any cash held in any centralized
cash management system, between Corning, CCL, Covance or any of their respective
Subsidiaries, on the one hand, and Corning, CCL, Covance or any of their
respective Subsidiaries, on the other hand, shall, as of the Effective Time, be
settled, contributed to capital or converted into ordinary trade accounts, in
each case as may be agreed in writing prior to the Effective Time by duly
authorized representatives of Corning, CCL or Covance, as applicable.
(b) Operations in Ordinary Course. Each of CCL and Covance
covenants and agrees that, except as otherwise provided in any Ancillary
Agreement, during the period from the date of this Agreement through the
Distribution Date, it will, and will cause any entity that is a Subsidiary of
such party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
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13
administration of accounts payable and the administration of accounts
receivable, the purchase of capital assets and equipment and the management of
inventories.
SECTION 2.05. Certain Indebtedness and Capital Structure.
Corning, CCL and Covance each agree to use their respective commercially
reasonable efforts to achieve both an allocation of consolidated indebtedness of
Corning and a capital structure (including cash position) of each of CCL and
Covance so as to substantially reflect the respective capital structures after
the Distributions of CCL and Covance set forth in the Information Statement
under the headings "Capitalization of CCL" and "Capitalization of Covance".
SECTION 2.06. Further Assurances. In case at any time after
the Effective Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers of each party to this Agreement shall take all such necessary
action. Without limiting the foregoing, Corning, CCL and Covance shall use their
commercially reasonable efforts to obtain all consents and approvals, to enter
into all amendatory agreements and to make all filings and applications that may
be required for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
SECTION 2.07. No Representations or Warranties. Each of the
parties hereto understands and agrees that, except as otherwise expressly
provided, no party hereto is, in this Agreement, in any Ancillary Agreement or
in any other agreement or document contemplated by this Agreement or otherwise,
making any representation or warranty whatsoever, including, without limitation,
as to title, value or legal sufficiency.
SECTION 2.08. Guarantees. (a) Except as otherwise specified in
any Ancillary Agreement, Corning, CCL and Covance shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, Corning and any of its Subsidiaries removed as guarantor
of or obligor for any CCL Liability or Covance Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(a), and to
the extent any such guarantee is not removed, CCL or Covance, as the case may
be, will indemnify Corning for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Corning a fee reflecting Corning's continuing role as guarantor.
(b) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, CCL and any of its Subsidiaries removed as guarantor of or obligor
for any Corning Liability or Covance Liability, including, without limitation,
in respect of those guarantees set forth on Schedule 2.08(b), and to the extent
any such guarantee is not removed, Corning or Covance, as the case may
<PAGE>
14
be, will indemnify CCL for all Indemnifiable Losses related to or arising from
such guarantee, in accordance with the procedures set forth in Section 3.05 and
will pay CCL a fee reflecting CCL's continuing role as guarantor.
(c) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, Covance and any of its Subsidiaries removed as guarantor of or
obligor for any Corning Liability or CCL Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(c), and to
the extent any such guarantee is not removed, Corning or CCL, as the case may
be, will indemnify Covance for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Covance a fee reflecting Covance's continuing role as guarantor.
SECTION 2.09. Certain Transactions. (a) On or prior to the
Distribution Date, and in accordance to Section 2.02(b), Corning, CCL and
Covance shall enter into (i) the Tax Sharing Agreement which shall govern, among
other things, their respective rights and obligations with respect to Taxes of
CCL and Covance and each of their respective Subsidiaries for all periods
through the Distribution Date and certain other tax-related matters; and (ii)
the Spin-off Tax Indemnification Agreements which shall, among other things,
restrict CCL and Covance from engaging in certain activities that might
jeopardize the continuing tax-free treatment of the Distributions.
(b) Following the Distribution Date, Corning, CCL and Covance
shall each comply with and otherwise not take any action inconsistent with each
representation and statement made, or to be made, to the Commission in
connection with the "no-action request" letter describing the Distributions
filed by Corning with the Commission.
SECTION 2.10. Insurance. Except as contemplated by the
Insurance Agreement, any and all coverage of CCL, Covance and their respective
Subsidiaries under Company Policies has terminated or will terminate (and will
not be replaced by Corning) no later than the Effective Time.
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning. (a) Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, Corning shall indemnify and hold harmless the CCL
Indemnitees and the Covance Indemnitees from and against any and all
Indemnifiable Losses of the CCL Indemnitees and the Covance Indemnitees,
respectively, arising out of, by reason of or otherwise in
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15
connection with (i) the Corning Liabilities or (ii) the breach by Corning of any
provision of this Agreement or any Ancillary Agreement.
(b) Corning shall indemnify and hold harmless CCL and its
Subsidiaries from and against any and all monetary payments by CCL or its
Subsidiaries (other than criminal fines or penalties imposed upon former or
current employees of CCL or its subsidiaries) to the United States government or
one of the States of the United States or any of their respective departments,
branches or agencies arising out of any investigation or claim by or on behalf
of the United States government or one of the States of the United States or any
of their respective departments, branches or agencies, whether criminal, civil
or administrative in nature which investigation or claim has been settled prior
to the Distribution Date or is pending as of the Distribution Date pursuant to
service of subpoena or other notice of such investigation to CCL or its
Subsidiaries, as well as any qui tam proceeding for which a complaint was filed
prior to the Distribution Date whether or not CCL or any Subsidiary of CCL has
been served with such complaint or otherwise been notified of the pendency of
such action, but only to the extent such investigations or claims arise out of
or are related to alleged violations of (i) the federal civil False Claims Act
(31 USC ss. 3729, et seq.) and its criminal counterpart (18 USC ss. 287), (ii)
Medicare and Medicaid fraud (42 USC ss. 1320a-7(b)(a)(1)), (iii) the Civil
Monetary Penalties Law (42 USC ss.ss. 1320a-7a and 1320a-7(b)(b)), (iv) mail
fraud and wire fraud statutes (18 USC ss.ss. 1341 and 1343), (v) false
statements (18 USC ss. 1301), (vi) conspiracy (18 USC ss. 371), (vii) money
laundering (18 USC ss. 1956, et seq.), (viii) RICO (18 USC ss. 1961), (ix) Title
II of the Health Insurance Portability and Accountability Act of 1996, (x) Title
XVIII of the Social Security Act (42 USC ss.ss. 1395- 1395ccc) (the Medicare
statute), (xi) Title XIX of the Social Security Act (42 USC ss.ss. 1396, et
seq.) (the Medicaid statute), (xii) the Programs Fraud Civil Remedies Act (31
USC ss.ss. 3801, et seq.); or (xiii) the federal Anti-Kickback Act (42 USC
ss.ss. 52, et seq.) by reason of the billing or alleged overbilling by CCL or
any past or present subsidiary of CLSI (or any of their predecessors) of any
federal program or agency, or any federally supported state health care program
or agency, or any beneficiary of any of them, for services provided to any such
beneficiary thereof by CCL, any Subsidiary of CCL or any past or present
subsidiary of CLSI (or any of their predecessors).
(c) In the event that CCL or its Subsidiaries make monetary
payments in excess of forty-two million dollars ($42,000,000) within the period
beginning on the Distribution Date and ending five (5) years thereafter in
respect of claims by nongovernmental persons actually relating to or arising out
of the investigations or claims referred to in Section 3.01(b) and alleging
overbillings of such person or any beneficiary of such person by CCL, its
Subsidiaries or any past or present subsidiary of CLSI (or any of their
predecessors) for services provided prior to the Distribution Date to such
person or beneficiary thereof by CCL, its Subsidiaries or any past or present
subsidiary of CLSI (or any of their predecessors), then Corning shall indemnify
and hold harmless CCL and its Subsidiaries from and against fifty percent (50%)
of up to fifty million dollars ($50,000,000)
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16
in the aggregate of such monetary payments actually paid by CCL or any
Subsidiary of CCL in excess of such forty-two million dollars ($42,000,000) in
respect of such alleged overbillings.
(d) (i) All payments made by Corning to CCL, or to another party for
the benefit of CCL, pursuant to Section 3.01(b) and (c) shall be treated as
nontaxable capital contributions by Corning to CCL and the parties shall report
the payments consistent with such treatment for Tax purposes.
(ii) Each amount indemnified against by Corning pursuant to Section
3.01(b) and Section 3.01(c) shall reduced by (1) the product of (x) the amount
of any Tax deduction realized by CCL, any CCL Subsidiary (CCL and the CCL
Subsidiaries shall be referred to in this Section 3.01(d) as the "CCL
Companies") or any combined or consolidated group which has as a member any of
the CCL Companies (the "CCL Group") attributable to the payment or accrual of
the underlying obligation indemnified against by Corning and (y) the maximum
marginal statutory rate at which the Tax to which such deduction relates is
imposed for the taxable year in which the underlying obligation indemnified
against by Corning is paid, and (2) the amount of any other Tax credit, benefit
or other similar item (a "Tax Benefit Item") realized by any CCL Company or the
CCL Group as a result of the payment or accrual of the underlying obligation
indemnified against by Corning.
(iii) For purposes of Section 3.01(d)(ii), a Tax deduction or Tax
Benefit Item resulting from an amount indemnified against is realized when the
calculation of any Tax of any CCL Company or the CCL Group, taking into account
the Tax deduction or Tax Benefit Item, for a Tax year is less than the
calculation of such Tax without taking such deduction or item into account
assuming, in both cases, such Tax were calculated without regard to (1) any
carryover to such year of losses, Tax deductions or Tax Benefit Items of any CCL
Company or the CCL Group, except as provided in Section 3.01(d)(vi), and (2) any
Tax deductions or Tax Benefit Items of any CCL Company or the CCL Group in
respect of any payments described in Section 3.01(b) or Section 3.01(c) that are
not indemnified against by Corning (including, without limitation, monetary
payments up to $42,000,000 which are applied towards the threshold in Section
3.01(c)).
(iv) Corning shall make estimated payments to CCL, or another party for
the benefit of CCL, pursuant to Section 3.01(b) and Section 3.01(c) (the
"Estimated Payments") which shall be calculated by Corning in accordance with
Section 3.02(d)(ii) and without reference to the ordering rules of Section
3.01(d)(iii). Estimated Payments shall be paid by Corning (1) if paid to a CCL
Company, as directed by CCL, within 30 days after written notice from CCL to
Corning indicating that the underlying obligation indemnified against by Corning
has been paid by a CCL Company (which notice shall include any documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such payment) or, (2) if paid directly by Corning for the benefit of a CCL
Company, within 30 days after
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17
written notice from CCL that the obligation has been settled (which notice shall
include to whom such payment should be made, the amount of the settlement, an
executed copy of the settlement or other agreement and any other documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such settlement). Within 90 days following the close of the Tax year in which an
Estimated Payment is made, CCL and Corning shall recompute the amount
indemnified against under Section 3.01(d)(ii) and 3.01(d)(iii) and shall make
any adjusting payment to each other resulting from such recomputation within 30
days of their agreement as to the amount of such adjusting payment.
(v) CCL shall consult with Corning and CCL and Corning shall determine
the Tax treatment by any CCL Company or the CCL Group of any obligation or
payment which is indemnified against by Corning under Section 3.01(b) or Section
3.01(c). The parties shall report the payments consistent with the treatment as
determined for Tax purposes.
(vi) If any payments are made by Corning pursuant to Section 3.01(b) or
Section 3.01(c), and calculated and paid pursuant to this Section 3.01(d), and
the amount payable by Corning pursuant to such sections could have been reduced
if the computation of such indemnification payment were made at a later time
(through the utilization in a subsequent Tax year of Tax deductions or Tax
Benefit Items by any CCL Company or the CCL Group relating to settlement
payments or other amounts indemnified against by Corning but not previously
recognized because of the ordering rules in 3.01(d)(iii) or otherwise), then the
amount of such indemnification shall be recomputed by CCL at such later time by
taking into account and carrying over such previously utilized Tax deductions or
Tax Benefit Items. The amount of reduction, if any, resulting from such
recomputation shall be calculated within 60 days of the filing of any Tax return
by any CCL Company or the CCL Group for the Tax year that causes the
computation. Any amount by which the amount previously paid would be reduced
pursuant to this Section 3.01(d)(vi) shall be paid to Corning within 30 days of
such recomputation together with interest (computed at the rate or rates at
which interest on underpayments of tax is payable to the Internal Revenue
Service under the relevant provisions of the Code in effect for such period)
from the date the Tax return of the CCL Company or the CCL Group, as the case
may be, was due (without extension) for the Tax year giving rise to the
recomputation to the date of payment to Corning.
(vii) Promptly after receipt by any CCL Company of notice of any
demand, claim or circumstances relating to the Tax treatment of an obligation or
payment which gave rise to an indemnification obligation by Corning under
Section 3.01(b) or Section 3.01(c), CCL shall give notice thereof to Corning.
Such notice shall contain factual information (to the extent known to any CCL
Company) describing the asserted tax treatment in reasonable detail and shall
include copies of any notice or other document received from any taxing
authority. At its election, Corning shall control the prosecution and
disposition (through settlement or otherwise) of any audits and any contests in
respect of any claim made by a taxing authority on audit or in a related
administrative or judicial proceeding or in respect of
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18
any refund or credit of taxes, that relates to the tax treatment by any CCL
Company of an obligation or payment which gives rise to an indemnification
obligation by Corning under Section 3.01(b) or Section 3.01(c) or the Tax
treatment of an item determined under Section 3.01(d)(v). CCL may participate in
such audits or contests at CCL's expense to the extent that Corning in its
reasonable discretion shall deem appropriate. If asserted liabilities unrelated
to the matters contemplated herein become grouped with contests arising
hereunder, the parties shall use their respective best efforts to cause the
contest arising hereunder to be the subject of a separate proceeding. With
respect to matters arising hereunder controlled by Corning, and where deemed
necessary by Corning, CCL shall itself, and shall compel any CCL Subsidiary to,
authorize by appropriate powers of attorney such persons as Corning shall
designate to represent CCL, or such CCL Subsidiary, with respect to such
matters. Corning, in its sole discretion, shall have the power to settle,
compromise, or concede such adjustment or claim without prior written notice to
or approval of CCL and any Subsidiary of CCL. If, as a result of the settlement
of or other final decision (which Corning cannot legally or determines in its
sole discretion not to contest) with respect to any audits, contests,
administrative or judicial proceedings described herein, the amount of any
payments made by Corning pursuant to Section 3.01(b) or Section 3.01(c), and
calculated and paid pursuant to this Section 3.01(d), is different from the
amount which would be paid taking into account such settlement of or other final
decision, CCL and Corning shall recompute the amount indemnified against under
this Section 3.01(d) and shall make any adjusting payment to each other
resulting from such recomputation within 30 days of their agreement as to the
amount of such adjusting payment.
(viii) If Corning and CCL are unable to agree on the proper calculation
or treatment of a payment or other obligation, a Tax deduction or Tax Benefit
Item or any other item described in this Section 3.01(d), then such disputed
item or items shall be resolved by a nationally recognized accounting or law
firm chosen and mutually acceptable to both parties. Such accounting or law firm
shall resolve the dispute within 30 days of having the item or items referred to
it and such resolution shall be binding on the parties. The costs, fees and
expenses of the accounting or law firm shall be borne equally by Corning and
CCL. In the event the parties are not able to agree on an accounting or law
firm, each party shall select its own nationally recognized law firm (and bear
the costs, fees and expenses thereof) and such law firms shall select a
nationally recognized accounting or law firm which accounting or law firm shall
be deemed to be mutually acceptable to both parties for the purpose of applying
this provision.
(e) Notwithstanding anything to the contrary in this
agreement, Corning shall not indemnify, defend or hold harmless CCL or any
Subsidiary of CCL against (x) costs and expenses relating to the investigations
or claims referred to in Sections 3.01(b) and (c) (including, without
limitation, fees and expenses of attorneys, consultants and other agents of CCL
or any Subsidiary of CCL), or (y) losses of revenues or profits that may arise
as a consequence of the claims or investigations referred to in Sections 3.01(b)
or 3.01(c) or
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19
the settlements entered into or judgments rendered as a result thereof or as a
consequence of any exclusion from participation in any federal or state health
care program, or (z) any other consequential or incidental damages that may be
incurred by CCL or any Subsidiary of CCL, in each case which relates to the
billing of any person or any beneficiary of such person by CCL, any Subsidiary
of CCL or any past or present subsidiary of CLSI (or any of their predecessors)
for services provided to any such person or beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(f) All indemnification obligations of Corning pursuant to
this Section 3.01 may be made or assumed by an Affiliate of Corning to the
extent deemed necessary or desirable by Corning in its sole discretion.
SECTION 3.02. Indemnification by CCL. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, CCL shall indemnify and hold harmless the Corning Indemnitees and the
Covance Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnitees and the Covance Indemnitees, respectively, arising out of,
by reason of or otherwise in connection with (i) the CCL Liabilities or (ii) the
breach by CCL of any provision of this Agreement or any Ancillary Agreement;
provided, however, that CCL is under no obligation to indemnify or hold harmless
Corning from and against any Indemnifiable Losses arising out of, or by reason
of or otherwise in connection with any and all monetary payments by Corning
in respect of the investigations or claims referred to in Section 3.01(b).
SECTION 3.03. Indemnification by Covance. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Covance shall indemnify and hold harmless the Corning Indemnitees and
the CCL Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnities and the CCL Indemnitees, respectively, arising out of, by
reason of or otherwise in connection with (i) the Covance Liabilities or (ii)
the breach by Covance of any provision of this Agreement or any Ancillary
Agreement.
SECTION 3.04. Adjustments for Indemnification Obligations. If
the amount that any party (an "Indemnifying Party") is or may be required to pay
to any other person (an "Indemnitee") pursuant to Section 3.01, Section 3.02 or
Section 3.03, as applicable, shall, at any time subsequent to the payment
required by this Agreement, be reduced by insurance or other recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnitee to
the Indemnifying Party, up to the aggregate amount of any payments received from
such Indemnifying Party pursuant to this Agreement in respect of such
Indemnifiable Loss.
SECTION 3.05. Procedures for Indemnification - Third Party
Claims. If a claim or demand is made against an Indemnitee by any person who is
not a party to this Agreement (a "Third Party Claim") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any
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20
event within 15 business days) after receipt by such Indemnitee of written
notice of the Third Party Claim; provided, however, that failure to give such
notification shall not affect the indemnification provided hereunder except to
the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure (except that the Indemnifying Party shall not be liable
for any expenses incurred during the period in which the Indemnitee failed to
give such notice).
If a Third Party Claim is made against an Indemnitee, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
in the case of an Indemnifying Party's obligation to indemnify the Indemnitee
pursuant to Section 3.01(a), Section 3.01(b), Section 3.02 or Section 3.03, if
the Indemnifying Party so chooses and acknowledges in writing its obligation to
indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnitee. Should the Indemnifying Party so elect
to assume the defense of a Third Party Claim, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the Indemnifying Party has failed to assume the defense
thereof. If the Indemnifying Party so elects to assume the defense of any Third
Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party
in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability
for a Third Party Claim, then in no event will the Indemnitee admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the Indemnifying Party's prior written consent; provided, however,
that the Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim without the consent of the Indemnifying Party if the
Indemnitee releases the Indemnifying Party from its indemnification obligation
hereunder with respect to such Third Party Claim and such settlement, compromise
or discharge would not otherwise adversely affect the Indemnifying Party. If the
Indemnifying Party acknowledges in writing liability for a Third Party Claim,
the Indemnitee will agree to any settlement, compromise or discharge of a Third
Party Claim that the Indemnifying Party may recommend which by its terms (i)
obligates the Indemnifying Party to pay the full amount of its indemnification
obligation in connection with such Third Party Claim and (ii) releases the
Indemnitee completely in connection with such Third Party Claim and which would
not otherwise adversely affect the Indemnitee; and provided further that the
Indemnitee may refuse to agree to any such proposed settlement, compromise or
discharge if the Indemnitee agrees that the Indemnifying Party's indemnification
obligation with respect to such Third Party Claim shall not exceed the amount
that would be required to be paid by or
<PAGE>
21
on behalf of the Indemnifying Party in connection with such proposed settlement,
compromise or discharge.
Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense of any Third Party Claim (and shall be
liable for the fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnitee which the Indemnitee reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
The provisions contained in Section 3.01(d) shall control in
the situations described particularly in that section.
SECTION 3.06. Survival of Indemnities. The obligations of
Corning, CCL and Covance under this Article III shall survive the sale or other
transfer by any of them of any assets or businesses, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets or businesses.
SECTION 3.07. Payments. All payments under this Agreement
shall be made without gross-up for Taxes.
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records. From and after
the Distribution Date, upon the prior written request by Corning, CCL or Covance
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting Corning, CCL or Covance, as
applicable, Corning, CCL or Covance, as the case may be, shall arrange, as soon
as reasonably practicable following the receipt of such request, for the
provision of appropriate copies of such Records (or other originals thereof if
the party making the request has a reasonable need for such originals) then in
the possession of Corning, CCL or Covance, as the case may be, or any of their
Subsidiaries, but only to the extent such items are not already in the
possession of the requesting party; provided, however, that nothing in this
Section 4.01 shall obligate a party to retain any records except to the extent
required by law or by an Ancillary Agreement or to provide Records if the party
reasonably determines that such provision of Records would prevent it from
claiming that the Records were privileged or otherwise not subject to disclosure
in any Action.
<PAGE>
22
SECTION 4.02. Access to Information. (a) From and after the
Distribution Date, each of Corning, CCL and Covance shall afford to the other
and its authorized accountants, counsel and other designated representatives
reasonable access during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, books and records of such party and its Subsidiaries
insofar as such access is reasonably required by the other party.
(b) For a period of five years following the Distribution
Date, each of Corning, CCL and Covance shall provide to the other, promptly
following such time at which such documents shall be filed with the Commission,
all documents that shall be filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
SECTION 4.03. Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing Records or access to
information to the other party under this Article IV shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payments
for such amounts, relating to supplies, disbursement and other out-of-pocket
expenses, as may be reasonably incurred in providing such Records or access to
information.
SECTION 4.04. Confidentiality. (a) Each of (i) Corning and its
Subsidiaries, (ii) CCL and its Subsidiaries and (iii) Covance and its
Subsidiaries shall not use or permit the use of (without the prior written
consent of the other) and shall hold, and shall cause its directors, officers,
employees, agents, consultants and advisors to hold, in strict confidence, all
information concerning the other parties in its possession, its custody or under
its control (except to the extent that (x) such information has been in the
public domain through no fault of such party, (y) such information has been
later lawfully acquired from other sources by such party or (z) this Agreement,
any Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (i) was obtained prior to or relates to periods prior to the
Effective Time, (ii) relates to any Ancillary Agreement or (iii) is obtained in
the course of performing services for the other party pursuant to any Ancillary
Agreement, and each party shall not (without the prior written consent of the
other) otherwise release or disclose such information to any other person,
except such party's auditors and attorneys, unless compelled to disclose such
information by judicial or administrative process or unless such disclosure is
required by law and such party has used commercially reasonable efforts to
consult with the other affected party or parties prior to such disclosure.
(b) To the extent that a party hereto is compelled by judicial
or administrative process to disclose otherwise confidential information under
circumstances in which any evidentiary privilege would be available, such party
agrees to assert such privilege
<PAGE>
23
in good faith prior to making such disclosure. Each of the parties hereto agrees
to consult with each relevant other party in connection with any such judicial
or administrative process, including, without limitation, in determining whether
any privilege is available, and further agrees to allow each such relevant party
and its counsel to participate in any hearing or other proceeding (including,
without limitations, any appeal of an initial order to disclose) in respect of
such disclosure and assertion of privilege.
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation
to the interpretation, performance, nonperformance, validity or breach of this
Agreement or otherwise arising out of, or in any way related to this Agreement,
including, without limitation, any claim based on contract, tort or statute
(collectively, "Agreement Disputes"), the general counsels of the relevant
parties shall negotiate in good faith for a reasonable period of time to settle
such Agreement Dispute.
SECTION 5.02. Procedure. If after such reasonable period such
general counsels are unable to settle such Agreement Dispute (and in any event
after 60 days have elapsed from the time the relevant parties began such
negotiations), such Agreement Dispute shall be determined, at the request of any
relevant party, by arbitration conducted in New York City, before and in
accordance with the then-existing Rules for Commercial Arbitration of the
American Arbitration Association (the "Rules"), and any judgment or award
rendered by the arbitrator shall be final, binding and nonappealable (except
upon grounds specified in 9 U.S.C. ss. 10(a) as in effect on the date hereof),
and judgment may be entered by any state or federal court having jurisdiction
thereof in accordance with Section 6.16 hereof. Unless the arbitrator otherwise
determines, the pre-trial discovery of the then-existing Federal Rules of Civil
Procedure and the then-existing Rules 46 and 47 of the Civil Rules for the
United States District Court for the Southern District of New York shall apply
to any arbitration hereunder. Any controversy concerning whether an Agreement
Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to the
interpretation of enforceability of this Article V shall be determined by the
arbitrator. The arbitrator shall be a retired or former judge of any United
States District Court or Court of Appeals or such other qualified person as the
relevant parties may agree to designate, provided, however, such individual has
had substantial professional experience with regard to settling sophisticated
commercial disputes. The parties intend that the provisions to arbitrate set
forth herein be valid, enforceable and irrevocable. The designation of a situs
or a governing law for this Agreement or the arbitration shall not be deemed an
election to preclude application of the Federal Arbitration Act, if it would be
applicable. In his or her award the arbitrator shall allocate, in his or her
<PAGE>
24
discretion, among the parties to the arbitration all costs of the arbitration,
including, without limitation, the fees and expenses of the arbitrator and
reasonable attorneys' fees, costs and expert witness expenses of the parties.
The undersigned agree to comply with any award made in any such arbitration
proceedings that has become final in accordance with the Rules and agree to the
entry of a judgment in any jurisdiction upon any award rendered in such
proceedings becoming final under the Rules. The arbitrator shall be entitled if
appropriate, to award any remedy in such proceedings, including, without
limitation, monetary damages, specific performance and all other forms of legal
and equitable relief; provided, however, the arbitrator shall not be entitled to
award punitive damages.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each of Corning, CCL and Covance shall
bear its own costs and expenses incurred on or prior to the Distribution Date
(whether or not paid on or prior to the Distribution Date) in connection with
the preparation, execution, delivery and implementation of this Agreement and
any Ancillary Agreement, the Information Statement, the Registration Statements
and the Distributions and the consummation of the transactions contemplated
thereby and the parties to this Agreement shall agree on an equitable allocation
of costs and expenses where any item is not clearly allocable to Corning, CCL or
Covance. Except as otherwise set forth in this Agreement or any Ancillary
Agreement, each party shall bear its own costs and expenses incurred after the
Distribution Date.
SECTION 6.02. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be given or
made (and shall be deemed to have been duly given or made upon receipt) by
delivery in person, by courier service, by cable, by telecopy, by telegram, by
telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the addresses (or at such other address
for a party as shall be specified in a notice given in accordance with this
Section 6.02) listed below (with copies to Shearman & Sterling at 599 Lexington
Avenue, New York, New York 10022, Attn: Creighton Condon):
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: General Counsel
<PAGE>
25
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: General Counsel
(c) To Covance:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy: (609) 452-9865
Attn: General Counsel
SECTION 6.03. Complete Agreement; Construction. This
Agreement, including the Exhibits and Schedules, and the Ancillary Agreements
shall constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. In the event of any inconsistency between
this Agreement and any Schedule hereto, the Schedule shall prevail.
Notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there shall be a conflict between the provisions of
this Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 6.04. Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 6.05. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
SECTION 6.06. Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date.
SECTION 6.07. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties
<PAGE>
26
contained herein or in any document delivered by the other party or parties
pursuant hereto or (c) waive compliance with any of the agreements or conditions
of the other party or parties contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
to be bound thereby. Any waiver of any term or condition shall not be construed
as a waiver of any subsequent breach or a subsequent waiver of the same term or
condition, or a waiver of any other term or condition, of this Agreement. The
failure of any party to assert any of its rights hereunder shall not constitute
a waiver of any such rights.
SECTION 6.08. Amendments. Subject to the terms of Section 6.11
hereof, this Agreement may not be amended or modified except (a) by an
instrument in writing signed by, or on behalf of, the parties or (b) by a waiver
in accordance with Section 6.07.
SECTION 6.09. Assignment. This Agreement may not be assigned
by operation of law or otherwise without the express written consent of the
other parties (which consent may be granted or withheld in the sole discretion
of the parties), and any attempt to assign any rights or obligations arising
under this Agreement without such consent shall be void.
SECTION 6.10. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
SECTION 6.11. Termination. This Agreement (including, without
limitation, Article III hereof) may be terminated and the Distributions may be
amended, modified or abandoned at any time prior to the Distributions by and in
the sole discretion of Corning without the approval of CCL or Covance or the
shareholders of Corning. In the event of such termination, no party shall have
any liability of any kind to any other party or any other person. After the
Distributions, this Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Article III shall not be
terminated or amended after the Distributions in respect of the third party
beneficiaries thereto without the consent of such persons.
SECTION 6.12. Subsidiaries. Each of the parties hereto shall
cause to be performed, and hereby guarantees the performance of, all actions,
agreements and obligations set forth herein to be performed by any Subsidiary of
such party or by any entity that is contemplated to be a Subsidiary of such
party on and after the Distribution Date.
SECTION 6.13. Third Party Beneficiaries. Except as provided in
Article III relating to Indemnitees, this Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective
Subsidiaries, Affiliates and assigns and nothing herein, express or implied, is
intended to or shall confer upon any third parties any legal or
<PAGE>
27
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 6.14. Headings. The descriptive headings contained in
this Agreement are for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
SECTION 6.15. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 6.16. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York,
applicable to contracts executed in and to be performed entirely within that
state. Without limiting the provisions of Article V, all actions and proceedings
arising out of or relating to this Agreement shall be heard and determined in
any New York state or federal court sitting in the City of New York.
SECTION 6.17. Public Announcements. (a) Prior to the Effective
Time, neither CCL nor Covance shall make, or cause to be made, any press release
or public announcement in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media without the
prior written consent of Corning.
(b) Following the Effective Time, no party to this Agreement
shall make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without prior consultation with the other
parties, and the parties shall cooperate as to the timing and contents of any
such press release or public announcement.
SECTION 6.18. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
<PAGE>
28
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED
by________________________________________
Name:
Title:
CORNING LIFE SCIENCES INC.
by________________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
by________________________________________
Name:
Title:
COVANCE INC.
by________________________________________
Name:
Title:
Exhibit A
RESTATED CERTIFICATE OF INCORPORATION
OF
COVANCE INC.
1. Name. The name of the Corporation is Covance Inc.
2. Address. The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of the Registered Agent at such address is the Corporation Trust
Company.
3. Corporate Purpose. The purpose of the Corporation is (i) to own and
operate, clinical, industrial and research laboratories, (ii) to provide
contract biopharmaceutical development services and (iii) to research,
manufacture design, construct, use, buy, sell, lease, hire and deal in and with
articles and property of all kinds, to render services of all kinds, and (iv)
generally to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
4. Capitalization. The total number of shares which the Corporation may
henceforth have is 150,000,000, of which 10,000,000 shares are to have a par
value of $1.00 each and 140,000,000 shares are to have a par value of $.01 each,
which shares shall be classified as follows:
10,000,000 shares, par value $1.00 per share, are to be Series Preferred
Stock; and
140,000,000 shares, par value $.01 per share, are to be Common Stock.
The relative voting, dividend, liquidation and other rights, preferences
and limitations of the shares of each class are as follows:
I. The Preferred Stock may be issued from time to time in one or more
series, each such series to have the number of shares and designation, and
the shares of each such series to have such relative rights, preferences or
limitations, as the Board of Directors, subject to the limitations
prescribed by law or provided herein, may from time to time fix, before
issuance, by filing an appropriate certificate ("Certificate of
Designation") with the Secretary of State pursuant to the General
Corporation Law of the State of Delaware. The authority of the Board of
Directors with respect to each series shall include, but not be limited to,
the fixing of the following:
(a) The number of shares to constitute the series and the
distinctive designation thereof;
<PAGE>
(b) The dividend rate on the shares of the series; whether
dividends shall be cumulative, and, if so, from what date or
dates;
(c) Whether or not the shares of the series shall be redeemable
and, if redeemable, the terms upon which the shares of the series
may be redeemed and the premium, if any, over and above the par
value thereof and any dividends accrued thereon which the share of
the series shall be entitled to receive upon the redemption
thereof;
(d) Whether or not the shares of the series shall be subject to
the operation of a retirement or sinking fund to be applied to the
purchase or redemption of such shares for retirement and, if such
retirement or sinking fund be established, the annual amount
thereof and the terms and provisions relative to the operation
thereof;
(e) Whether or not the shares of the series shall be convertible
into shares of any class or classes of stock of the Corporation,
with or without par value, or of any other series of the same
class and, if convertible, the conversion price or prices or the
rate at which such conversion may be made and the method, if any,
of adjusting the same; (f) The rights of the shares of the series
in the event of voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation;
(g) The restrictions, if any, on the payment of dividends upon,
and the making of the distributions to any class of stock ranking
junior to the shares of the series, and the restrictions, if any,
on the purchase or redemption of the shares of any such junior
class;
(h) Whether the series shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of such
voting rights; and
(i) Any other relative rights, preferences and limitations of the
series.
II. Holders of shares of Preferred Stock shall be entitled to receive,
when and as declared by the Board of Directors, out of funds legally
available for the payment of dividends, dividends at the rates fixed by the
Board of Directors for the respective series, before any dividends shall be
declared and paid, or set apart for payment, on any other class of stock of
the Corporation ranking junior to the Preferred Stock either as to
dividends or assets, with respect to the same dividend period.
III. Whenever, at any time, dividends on the then outstanding Preferred
Stock as may be required by the terms of the certificate creating the
series representing the shares outstanding shall have been paid or declared
and set apart for payment on the then outstanding Preferred Stock and after
complying with all the provisions with respect to
<PAGE>
any retirement or sinking fund or funds for any series of Preferred Stock,
the Board of Directors may, subject to the provisions of any certificate
creating any series of Preferred Stock with respect to the payment of
dividends on any other class or classes of stock, declare and pay dividends
on the Common Stock, and the Preferred Stock shall not be entitled to share
therein.
IV. Upon any liquidation, dissolution or winding-up of the Corporation,
after payment if any is required, shall have been made in full to the
Preferred Stock as provided in any certificate creating any series thereof,
but not prior thereto, the Common Stock shall, subject to the respective
terms and provisions, if any, of any such certificate, be entitled to
receive any and all assets remaining to be paid or distributed, and the
Preferred Stock shall not be entitled to share therein.
V. No holder of Common Stock or any series of Preferred Stock shall, as
such holder, have any(preemptive or preferential right of subscription to
any stock of any class of the Corporation or to any obligations convertible
into any such stock or to any right of subscription to, or to any warrant
or option for, the purchase of any stock, other than such, if any, as the
Board of Directors of the Corporation in its discretion may determine from
time to time.
VI. The holders of the Common Stock shall have the right to vote on all
questions to the exclusion of all other classes of stock, except as by law
expressly provided or as otherwise expressly provided with respect to the
holders of any other class or classes of stock.
4A. Series A Junior Participating Preferred Stock.
(1) Designation and Amount. An aggregate of 1,000,000 shares of Series
Preferred Stock, par value $1.00, of the Corporation are hereby constituted
as a series designated as "Series A Junior Participating Preferred Stock"
(the "Series A Preferred Stock").
(2) Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock or any similar stock ranking prior
and superior to the Series A Preferred Stock with respect to dividends, the
holders of shares of Series A Preferred Stock, in preference to the holders
of Common Stock of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in
cash on the first day of January, April, July and October in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
greater of (a) $___ or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times
<PAGE>
the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions, other than a dividend payable in shares of Common
Stock or a subdivision of the outstanding shares of Common Stock (by,
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock. In the event the
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause
(b) of the preceding sentence shall be adjusted by multiplying such amount
by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which
is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(b) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (a) of this Section
immediately after it declares a dividend or distribution of the Common
Stock (other than a dividend payable in shares of Common Stock); provided
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$__ per share on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the
date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares
shall begin to accrue from the date of issue of such shares, or unless the
date of issue is a Quarterly Dividend Payment Date or is a date after the
record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on the shares of Series A Preferred Stock in an amount less
than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holder of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
<PAGE>
(3) Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights.
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to
100 votes on all matters submitted to a vote of the shareholders of the
Corporation. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock by reclassification or otherwise than by payment of
a dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per
share to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number shares of Common Stock that were outstanding
immediately prior to such event.
(b) Except as otherwise provided herein, in any other Certificate
of Designation establishing a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class
on all matters submitted to a vote of shareholders of the Corporation.
(c) Except as otherwise set forth herein, holders of Series A
Preferred Stock shall have no voting rights.
(4) Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared on shares of Series A
Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding-up) to the
Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either
as to dividends or upon liquidation, dissolution or winding-up)
with the Series A Preferred Stock, except dividends paid ratably
on the Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
<PAGE>
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding-up) to the
Series A Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such
junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding-up) to the Series A Preferred
Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A Preferred
Stock, except in accordance with a purchase offer made in writing
or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors,
after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and
classes. shall determine in good faith will result in fair and
equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares
of stock of the Corporation unless the Corporation could, under paragraph
(a) of this Section 4, purchase or otherwise acquire such shares at such
time and in such manner.
(5) Reacquired Shares. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares
of Preferred Stock and may be reissued as part of a new series of Preferred
Stock subject to the conditions and restrictions on issuance set forth
herein, in this Restated Certificate of Incorporation, in any other
Certificate of Amendment establishing a series of Preferred Stock or any
similar stock or as otherwise required by law.
(6) Liquidation, Dissolution, or Winding-Up. Upon any liquidation,
dissolution or winding-up of the Corporation, no distribution shall be made
(i) to the holder of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding-up) to the Series A Preferred
Stock unless, prior thereto, the holders of shares of Series A Preferred
Stock shall have received $100 per share, plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to
the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares
of Common Stock, or (ii) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding-up) with the Series A Preferred Stock, except distributions made
ratably on the Series A, Preferred Stock and all such parity stock in
proportion to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or wind-up. In the event the
<PAGE>
Corporation shall at any time declare or pay any dividend on the Common
Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of
Common Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
under the provision in clause (i) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(7) Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
share of Series A Preferred Stock shall at the same time be similarly
exchanged or changed into an amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the aggregate amount
of stock, securities, cash and/or any other property, as the case may be,
into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event.
(8) Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
(9) Rank. The Series A Preferred Stock shall rank junior with respect
to the payment of dividends and the distribution of assets to all series of
any class of Preferred Stock or any similar stock that specifically provide
that they shall rank prior to the Series A Preferred Stock. Nothing herein
shall preclude the Board from creating any series of Preferred Stock or any
similar stock ranking on a parity with or prior to the Series A Preferred
Stock as to the payment of dividends or the distribution of assets.
(10) Amendment. This Restated Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect such Series adversely without the
affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting together as a single series.
<PAGE>
5. Directors. (a) The business and affairs of the Corporation shall be managed
by a Board of Directors consisting of not less than three nor more than twelve
persons. The exact number of directors within the minimum and maximum
limitations specified in the preceding sentence shall be fixed from time to time
by the Board of Directors pursuant to a resolution adopted by the affirmative
vote of a majority of the entire Board of Directors; and such exact number shall
be eight unless otherwise determined by a resolution so adopted by a majority of
the entire Board of Directors. As used in this Restated Certificate of
Incorporation, the term "entire Board of Directors" means the total authorized
number of directors which the Corporation would have if there were no vacancies.
As of the Distribution Date (as defined in the Transaction Agreement dated
as of _______, 1996 among Corning Incorporated, Corning Life Sciences Inc.,
Corning Clinical Laboratories Inc. and Corning Pharmaceutical Services Inc.)
(the "Distribution Date"), the directors shall be divided into three classes, as
nearly equal in number as possible, with the term of office of the first class
to expire at the 1998 Annual Meeting of Stockholders, the term of office of the
second class to expire at the 1999 Annual Meeting of Stockholders, and the term
of office of the third class to expire at the 2000 Annual Meeting of
Stockholders. Commencing with the 1997 Annual Meeting of Stockholders, directors
elected to succeed those directors whose terms have thereupon expired shall be
elected for a term of office to expire at the third succeeding Annual Meeting of
Stockholders after their election. If the number of directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain or
attain, if possible, the equality of the number of directors in each class, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. If such equality is not possible, the increase or decrease
shall be apportioned among the classes in such a way that the difference in the
number of directors in any two classes shall not exceed one.
(b) Subject to the rights of the holders of any series of Preferred Stock
or any other class of capital stock of the Corporation (other than the Common
Stock) then outstanding, vacancies in any class of directors resulting from a
newly created directorship, death, resignation, retirement, disqualification,
removal from office or other cause shall, if occurring prior to the expiration
of the term of office of such class, be filled only by the affirmative vote of a
majority of the remaining directors of the entire board of Directors then in
office, although less than a quorum, or by the sole remaining director. Any
director so elected shall hold office until the next election of the class for
which such directors shall have been chosen and until his successor is elected
and qualified. No decrease in the number of directors shall shorten the term of
any incumbent director.
(c) Whenever the holders of any one or more series of Preferred Stock
issued by the Corporation shall have the right, voting separately by series, to
elect directors at an annual or special meeting of stockholders, the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by this Paragraph 5 unless expressly otherwise provided by the
resolution or resolutions providing for the creation of such series.
(d) Subject to the rights of the holders of any series of Preferred Stock
or any other class of capital stock of the Corporation (other than the Common
Stock) then outstanding, (i) any
<PAGE>
director, or the entire Board of Directors, may be removed by the stockholders
from office at any time prior to the expiration of his term of office, but only
for cause, and only by the affirmative vote of the holders of record of
outstanding shares representing a majority of the voting power of all of the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors, and (ii) any director may be removed
from office by the affirmative vote of a majority of the entire Board of
Directors, at any time prior to the expiration of his term of office, but only
for cause.
(e) Notwithstanding any other provision of the Restated Certificate of
Incorporation and subject to the other provisions of this Paragraph 5, the Board
of Directors shall determine the rules and procedures that shall affect the
Directors' power to manage and direct the business and affairs of the
Corporation. Without limiting the foregoing, the Board of Directors (1) shall
designate and empower committees of the Board of Directors, (2) shall elect and
empower the officers of the Corporation, (3) may appoint and empower other
officers and agents of the Corporation, and (4) shall determine the time and
place of, and the notice requirements for, Board meetings, as well as quorum and
voting requirements for, and the manner of taking, Board actions.
6. Business Combinations. Section 1. Certain Definitions.
For the purposes of this Paragraph 6:
A. "Business Combination" shall mean:
(i) any merger or consolidation of the Corporation or any Subsidiary with
(a) an Interested Stockholder or (b) any other corporation (whether or not
itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested Stockholder;
or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with an
Interested Stockholder or an Affiliate or Associate of an Interested Stockholder
of any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value of $20,000,000 or more; or
(iii) the issuance or transfer by the Corporation or any Subsidiary (in one
transaction or a series of transactions) of any securities of the Corporation or
any Subsidiary to an interested Stockholder or an Affiliate or Associate of an
Interested Stockholder in exchange for cash, securities or other property (or a
combination thereof) having an aggregate Fair Market Value of $20,000,000 or
more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or an Affiliate or Associate of an Interested Stockholder; or
<PAGE>
(v) any reclassification of securities (including any reverse stock split),
or recapitalization of the Corporation, or any merger or consolidation of the
corporation with any Subsidiary or any other transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which has the effect,
directly, or indirectly, of increasing the percentage of the outstanding shares
of (a) any class of equity securities of the Corporation or any Subsidiary or
(b) any class of securities of the Corporation or any Subsidiary convertible
into equity securities of the Corporation or any Subsidiary, represented by
securities of such class which are directly or indirectly owned by an Interested
Stockholder and all of its Affiliates and Associates; or
(vi) any agreement, contract or other arrangement providing for any one or
more of the actions specified in clauses (i) through (v) of this Section 1A.
B. "Affiliate" or "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on January 1, 1997.
C. "Beneficial Owner" shall have the meaning ascribed to such term in Rule
13d-3 of the General Rules and Regulations under the Exchange Act, as in effect
on January 1, 1997.
D. "Continuing Director" shall mean (i) any member of the Board of
Directors of the Corporation who (a) is neither the Interested Stockholder
involved in the Business Combination as to which a vote of Continuing Directors
is provided hereunder, nor an Affiliate, Associate, employee, agent, or nominee
of such Interested Stockholder, or the relative of any of the foregoing, and (b)
was a member of the Board of Directors of the Corporation prior to the time that
such Interested Stockholder became an Interested Stockholder, (ii) any successor
of a Continuing Director described in clause (i) who is recommended or elected
to succeed a Continuing Director by the affirmative vote of a majority of
Continuing Directors then on the Board of Directors of the Corporation, and
(iii) any person who is a member of the Board of Directors of the Corporation at
the Distribution Date and any successor thereto who is recommended or elected by
the affirmative vote of a majority of the Continuing Directors then on the Board
of Directors of the Corporation.
E. "Fair Market Value" shall mean: (i) in the case of stock, the
highest closing sale price during the 30 day period immediately preceding the
date in question of a share of such stock on the Composite Tape for New York
Stock Exchange Listed Stocks, or, if such stock is not reported on the Composite
Tape on the New York Stock Exchange, or, if such stock is not listed on such
Exchange, on the principal United States securities exchange registered under
the Exchange Act on which such stock is listed, or, if such stock is not listed
on any such exchange, the highest closing bid quotation with respect to a share
of such stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations System or
any similar inter-dealer quotation system then in use, or if no such quotation
is available, the fair market value on the date in question of a share of such
stock as determined by a majority of the Continuing Directors in good faith; and
(ii) in the case of property other than cash or stock, the fair market value of
such property on the date in question as determined by a majority of the
Continuing Directors in good faith.
<PAGE>
F. "Interested Stockholder" shall mean any Person (other than the
Corporation or any Subsidiary) who or which:
(i) is, or was at any time within the two-year period immediately prior to
the date in question, the Beneficial Owner of 10% or more of the voting power of
the then outstanding Voting Stock of the Corporation; or
(ii) is an assignee of, or has otherwise succeeded to, any shares of Voting
Stock of the Corporation of which an Interested Stockholder was the Beneficial
Owner at any time within the two-year period immediately prior to the date in
question, if such assignment or succession shall have occurred in the course of
a transaction, or series of transactions, not involving a public offering within
the meaning of the Securities Act of 1933, as amended.
For the purpose of determining whether a Person is an Interested
Stockholder, the outstanding Voting Stock of the Corporation shall include
unissued shares of Voting Stock of the Corporation of which the Interested
Stockholder is the Beneficial Owner but shall not include any other shares of
Voting Stock of the Corporation which may be issuable pursuant to any agreement,
arrangement or understanding, or upon the exercise of conversion rights,
warrants or options, or otherwise, to any Person who is not the Interested
Stockholder.
G. A "Person" shall mean any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, as well as any
syndicate or group deemed to be a person under Section 14(d) (2) of the Exchange
Act.
H. "Subsidiary" shall mean any corporation of which the Corporation owns,
directly or indirectly, (i) a majority of the outstanding shares of equity
securities of such corporation, or (ii) shares having a majority of the voting
power represented by all of the outstanding shares of Voting Stock of such
corporation. For the purpose of determining whether a corporation is a
Subsidiary, the outstanding Voting Stock and shares of equity securities thereof
shall include unissued shares of which the Corporation is the Beneficial Owner
but, except for the purposes of Section IF, shall not include any other shares
which may be issuable pursuant to any agreement, arrangement or understanding,
or upon the exercise of conversion rights, warrants or options, or otherwise, to
any Person who is not the Corporation.
I. "Voting Stock" shall mean outstanding shares of capital stock of the
relevant corporation entitled to vote generally in the election of directors.
Section 2. Higher Vote for Business Combinations.
In addition to any affirmative vote required by law or by this Restated
Certificate of Incorporation, and except as otherwise expressly provided in
Section 3 of this Paragraph 6, any Business Combination shall require the
affirmative vote of the holders of record of outstanding shares representing at
least eighty percent (80%) of the voting power of the then outstanding shares of
the Voting Stock of the Corporation, voting together as a single class, it being
<PAGE>
understood that, for purposes of this Paragraph 6, each share of the Voting
Stock of the Corporation shall have the number of votes granted to it pursuant
to Paragraph 4 of this Restated Certificate of Incorporation. Such affirmative
vote shall be required notwithstanding the fact that no vote may be required, or
that a lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
Section 3. When Higher Vote is Not Required.
The provisions of Section 2 of this Paragraph 6 shall not be applicable to
any particular Business Combination, and such Business Combination shall require
only such affirmative vote, if any, of the stockholders as is required by law
and any other provision of this Restated Certificate of Incorporation, if the
conditions specified in either of the following paragraphs A and B are met:
A. Approval by Continuing Directors. The Business Combination shall have
been approved by the affirmative vote of a majority of the Continuing
Directors, even if the Continuing Directors do not constitute a quorum of
the entire Board of Directors.
B. Form of Consideration, Price and Procedure Requirements. All of the
following conditions shall have been met:
(i) With respect to each share of each class of Voting Stock of
the Corporation (including Common Stock), the holder thereof shall be
entitled to receive on or before the date of the consummation of the
Business Combination (the "Consummation Date"), consideration, in the
form specified in Section 3 (B) (ii) hereof, with an aggregate Fair
Market Value as of the Consummation Date at least equal to the highest
of the following:
(a) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder to which the Business Combination
relates, or by any Affiliate or Associate of such Interested
Stockholder, for any shares of such class of Voting Stock acquired
by it (1) within the two-year period immediately prior to the
first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (2) in the transaction in
which it became an Interested Stockholder, whichever is higher;
(b) the Fair Market Value per share of such class of Voting Stock
of the Corporation on the Announcement Date; and
(c) the highest preferential amount per share, if any, to which
the holders of shares of such class of Voting Stock of the
Corporation are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the
Corporation.
<PAGE>
(ii) The consideration to be received by holders of a particular
class of outstanding Voting Stock of the Corporation (including Common
Stock) as described in Section 3(B) (i) hereof shall be in cash or if
the consideration previously paid by or on behalf of the Interested
Stockholder in connection with its acquisition of beneficial ownership
of shares of such class of Voting Stock consisted in whole or in part
of consideration other than cash, then in the same form as such
consideration. If such payment for shares of any class of Voting Stock
of the Corporation has been made with varying forms of consideration,
the form of consideration for such class of Voting Stock shall be
either cash or the form used to acquire the beneficial ownership of the
largest number of shares of such class of Voting Stock previously
acquired by the Interested Stockholder.
(iii) After such Interested Stockholder has become an Interested
Stockholder and prior to the Consummation Date of such Business
Combination: (a) except as approved by the affirmative vote of a
majority of the Continuing Directors, there shall have been no failure
to declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on the outstanding preferred
stock of the Corporation, if any; (b) there shall have been (1) no
reduction in the annual rate of dividends paid on the Common Stock of
the Corporation (except as necessary to reflect any subdivision of the
Common Stock) except as approved by the affirmative vote of a majority
of the Continuing Directors, and (2) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of Common Stock, unless the failure so to increase such annual
rate is approved by the affirmative vote of a majority of the
Continuing Directors; and (c) such Interested Stockholder shall not
have become the Beneficial Owner of any additional shares of Voting
Stock of the Corporation except as part of the transaction which
results in such Interested Stockholder becoming an Interested
Stockholder.
(iv) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder of the Corporation), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Corporation.
(v) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Exchange Act and the General Rules and Regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall
be mailed to the stockholders of the Corporation at least 45 days prior
to the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to
such Act or subsequent provisions thereof).
<PAGE>
Section 4. Powers of Continuing Directors
A majority of the Continuing Directors shall have the power and
duty to determine, on the basis of information known to them after
reasonable inquiry, all facts necessary to determine compliance with
this Paragraph 6, including, without limitation, (A) whether a person
is an Interested Stockholder, (B) the number of shares of Voting Stock
of the Corporation beneficially owned by any person, (C) whether a
person is an Affiliate or Associate of another, (D) whether the
requirements of paragraph B of Section 3 have been met with respect to
any Business Combination, and (E) whether the assets which are the
subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation
or any Subsidiary in any Business Combination has, an aggregate Fair
Market Value of $20,000,000 or more; and the good faith determination
of a majority of the Continuing Directors on such matters shall be
conclusive and binding for all the purposes of this Paragraph 6.
Section 5. No Effect on Fiduciary Obligations
A. Nothing contained in this Paragraph 6 shall be construed to
relieve the members of the Board of Directors or an Interested
Stockholder from any fiduciary obligation imposed by law.
B. The fact that any Business Combination complies with the
provisions of Section 3 of this Paragraph 6 shall not be construed to
impose any fiduciary duty, obligation or responsibility on the Board of
Directors, or any member thereof, to approve such Business Combination
or recommend its adoption or approval to the stockholders of the
Corporation, nor shall such compliance limit, prohibit or otherwise
restrict in any manner the Board of Directors, or any member thereof,
with respect to evaluations of or actions and responses taken with
respect to such Business Combination.
7. Special Stockholder Meetings. Except as otherwise required by law, special
meetings of the stockholders may be called only by the Board of Directors.
8. Action by Unanimous Written Consent. From and after the Distribution Date,
any action which may be taken at any annual or special meeting of stockholders
may be taken without a meeting without prior notice and without a vote, if
consent in writing, setting forth the action so taken, shall be signed, in
person or by proxy, by the holders of all outstanding stock entitled to vote
thereon and no action by non-unanimous written consent shall be permitted.
9. By-Laws. The Board of Directors shall have the right to make, alter or
repeal the By-Laws of the Corporation, subject to the right of the stockholders
of the Corporation to alter or repeal any By-law made by the Board of Directors.
10. Elections. The election of directors of the Corporation need not be by
written ballot, unless the By-Laws of the Corporation otherwise provide.
<PAGE>
11. Indemnification. (a) No director of the Corporation shall have any personal
liability to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that this provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action either in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
pursuant to the Employee Retirement Income Security Act of 1974, as amended, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to be indemnified conferred in
this Paragraph 11 shall be a contract right and shall include the right to be
paid by the Corporation the expenses incurred in defending any such proceeding
in advance of its final disposition; provided, however, that, the payment of
such expenses incurred by the director or officer in his or her capacity as a
director or officer (and not in any other capacity in which service was or is to
be rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan), in advance of the final
disposition of proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Paragraph or otherwise. The
Corporation may, by action of its Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(c) The indemnification provided by this Paragraph 11 shall not limit or
exclude any rights, indemnities or limitations of liability to which any person
may be entitled, whether as a
<PAGE>
matter of law, under the By-Laws of the Corporation, by agreement, vote of the
stockholders or disinterested directors of the Corporation or otherwise.
(d) If a claim under paragraph (b) of this Paragraph 11 is not paid in full
by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard or conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall create a
presumption that the claimant has not met the applicable standard of conduct.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the General Corporation Law of the State of Delaware.
12. Amendment or Repeal. The affirmative vote of the holders of record of
outstanding shares representing at least eighty percent (80%) of the voting
power of all the outstanding Voting Stock of the Corporation shall be required
to amend, alter or repeal, or adopt any provision or provisions inconsistent
with, any provision of Paragraphs 6, 7 and 8 and this Paragraph 12; provided,
however, that this Paragraph 12 shall not apply to, and such eighty percent
(80%) vote shall not be required for, any amendment, alteration, repeal or
adoption of any inconsistent provision or provisions, declared advisable by the
Board of Directors by the affirmative vote of two-thirds of the entire Board of
Directors and a majority of the Continuing Directors.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
COVANCE INC.
Covance Inc. (the "Corporation"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: At a meeting of the Board of Directors, resolutions were duly
adopted authorizing the amendment and restatement of the Certificate of
Incorporation of the Corporation as set forth in Exhibit A hereto, declaring
said amendment to be advisable and presenting such amendment to the stockholders
of the Corporation for consideration thereof.
SECOND: That said amendment was approved by the sole stockholder of the
Corporation by unanimous written consent of such sole stockholder in accordance
with the General Corporation Law of the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by
Jeffrey S. Hurwitz, its Senior Vice President, General Counsel and Secretary and
Diana I. Faillace, its Vice President, Associate General Counsel and Assistant
Secretary, this ____ day of November, 1996.
By: ______________________________________
Jeffrey S. Hurwitz
Senior Vice President, General Counsel
and Secretary
Attest: ______________________________________
Diana I. Faillace
Vice President, Associate General
Counsel and Assistant Secretary
COVANCE INC.
A Delaware corporation (formerly known as Corning Pharmaceutical
Services Inc.)
AMENDED AND RESTATED BY-LAWS
Effective November 6, 1996
<PAGE>
COVANCE INC.
A Delaware corporation
AMENDED AND RESTATED BY-LAWS
TABLE OF CONTENTS
ARTICLE I
STOCKHOLDERS
Page
Section 1.01 Annual Meetings..................................1
Section 1.02 Special Meetings.................................1
Section 1.03 Notice of Meetings...............................1
Section 1.04 Business Transacted at Special
Meetings of Stockholders.........................1
Section 1.05 Quorum...........................................1
Section 1.06 Nominations and Stockholder
Business.........................................2
ARTICLE II
BOARD OF DIRECTORS
Section 2.01 General Powers...................................4
Section 2.02 Number and Term of Office........................4
Section 2.03 Annual and Regular Meetings......................4
Section 2.04 Special Meetings; Notice.........................4
Section 2.05 Telephonic Meetings..............................5
Section 2.06 Quorum and Vote..................................5
Section 2.07 Action Without a Meeting.........................5
Section 2.08 Manner of Acting.................................5
Section 2.09 Resignations.....................................5
Section 2.10 Reliance on Accounts and
Reports, etc.....................................5
Section 2.11 Committees.......................................5
ARTICLE III
OFFICERS
Section 3.01 Number and Designation...........................6
Section 3.02 Additional Officers..............................6
<PAGE>
Page
Section 3.03 Election.........................................6
Section 3.04 Removal and Vacancies............................6
Section 3.05 Duties of the Chairman of
the Board of Directors...........................6
Section 3.06 Duties of the President..........................6
Section 3.07 Duties of the Vice President ....................7
Section 3.08 Duties of the Secretary..........................7
Section 3.09 Duties of the Treasurer..........................7
Section 3.10 Duties of the Controller.........................7
Section 3.11 Duties of the Assistant Secretary................7
Section 3.12 Duties of the Assistant Controller...............8
Section 3.13 Duties of the Assistant Treasurer................8
ARTICLE IV
EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES
Section 4.01 General..........................................8
Section 4.02 Corporate Indebtedness...........................8
Section 4.03 Checks, Drafts, etc..............................8
Section 4.04 Deposits.........................................9
Section 4.05 Dividends........................................9
Section 4.06 Fiscal Year......................................9
ARTICLE V
CAPITAL STOCK
Section 5.01 Certificates of Stock............................9
ARTICLE VI
SEAL; OFFICES
Section 6.01 Seal.............................................9
Section 6.02 Offices.........................................10
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification.................................10
ARTICLE VIII
AMENDMENTS
Section 8.01 Amendments.......................................12
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
COVANCE INC.
ARTICLE I
STOCKHOLDERS
Section 1.01. Annual Meetings. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such other
business as properly may come before such meeting shall be held at such place
either within or outside the State of Delaware, at such time and date as shall
be fixed from time to time by resolution of the Board of Directors and as set
forth in the notice of the meeting.
Section 1.02. Special Meetings. Special meetings of the stockholders may be
called at any time by the Chairman of the Board of Directors, if any, or by the
President (or, in the absence or disability of the Chairman of the Board and the
President, by any Vice President), or by the Board of Directors. Such special
meetings of the stockholders shall be held at such places, within or outside the
State of Delaware, as shall be specified in the respective notices or waivers of
notice thereof.
Section 1.03. Notice of Meetings. The Secretary or any Assistant Secretary shall
cause written notice of the date, time and place of each meeting of the
stockholders to be given, at least ten but not more than fifty days prior to the
meeting, to each stockholder of record entitled to vote. Such notice shall be
given either personally or by mail or other means of written communication,
addressed to each stockholder at the address of such stockholder appearing on
the books of the Corporation at the time such notice is dispatched. Such further
notice shall be given as may be required by law. Notice of any meeting of
stockholders need not be given to any stockholder who shall sign a waiver of
such notice in writing, whether before or after the time of such meeting. Notice
of any adjourned meeting of the stockholders of the Corporation need not be
given.
Section 1.04. Business Transacted at Special Meetings of Stockholders. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice thereof.
Section 1.05 Quorum. Except as at the time otherwise required by statute or by
the Restated Certificate of Incorporation, the presence at any stockholders
meeting, in person or by proxy, of the holders of record of shares of stock (of
any class) entitled to vote at the meeting, aggregating a majority of the total
number of shares of stock of all classes then issued and outstanding and
entitled to vote at the meeting, shall be necessary and sufficient to constitute
a quorum for the transaction of business.
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Section 1.06. Nominations and Stockholder Business.
(a) Annual Meeting of Stockholders.
(1) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who was a stockholder
of record at the time of giving of notice provided for in this Section 1.06, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 1.06.
(2) For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this
Section 1.06, the stockholder must have given timely notice thereof in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (A) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (B) the
class and number of shares of the Corporation which are owned beneficially and
of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this
Section 1.06 to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement naming all of the nominees for Director or specifying the
size of the increased Board of Directors
2
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made by the Corporation at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this Section
1.06 shall also be considered timely, but only with respect to nominees for any
new position created by such increase, if it shall be delivered to the Secretary
at the principal executive offices of the Corporation not later than the close
of business on the 10th day following the day on which such public announcement
is first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (i) by or at the direction of the Board of Directors or (ii)
by any stockholder of the Corporation who is a stockholder of record at the time
of giving of notice provided for in this Section 1.06, who shall be entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 1.06. Nominations by stockholders of persons for election to the
Board of Directors may be made at such a special meeting of stockholders if the
stockholder's notice required by paragraph (a)(2) of this Section 1.06 shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the 90th day prior to such special meeting, and not later than
the close of business on the later of the 60th day prior to such special meeting
or the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting.
(c) General.
(1) Only such persons who are nominated in accordance with the procedures set
forth in this Section 1.06 shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 1.06. The Chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting, was made in accordance with the procedures set forth in this Section
1.06 and, if any proposed nomination or business is not in compliance with this
Section 1.06, to declare that such defective proposal shall be disregarded.
(2) For purposes of this Section 1.06, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 1.06, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth in this
Section 1.06. Nothing
3
<PAGE>
in this Section 1.06 shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.01 General Powers. The property, affairs and business of the
Corporation shall be managed by the Board of Directors. The Board of Directors
may exercise all the powers of the Corporation, whether derived from law or the
Restated Certificate of Incorporation, except such powers as are, by statute, by
the Restated Certificate of Incorporation or by these By-Laws, vested solely in
the stockholders of the Corporation. No Director need be a stockholder of the
Corporation.
Section 2.02 Number and Term of Office. The Board of Directors shall consist of
such number (but in no event less than three nor more than twelve) of Directors
as may be determined from time to time by resolution adopted by affirmative vote
of a majority of the whole Board of Directors. Each Director (whenever elected)
shall hold office until his or her successor shall have been elected and shall
have qualified, or until his or her death, or until he or she shall have
resigned in the manner provided in Section 2.09 hereof or shall have been
removed in accordance with the Restated Certificate of Incorporation.
Section 2.03 Annual and Regular Meetings. The annual meeting of the Board of
Directors, for the choosing of officers and for the transaction of such other
business as may come before the meeting, shall be held in each year as soon as
possible after the annual meeting of the stockholders at the place of such
annual meeting of the stockholders, and notice of such annual meeting of the
Board of Directors shall not be required to be given. The Board of Directors
from time to time may provide by resolution for the holding of regular meetings
and fix the time and place (which may be within or outside the State of
Delaware) thereof. Notice of such regular meetings need not be given; provided,
however, that in case the Board of Directors shall fix or change the time or
place of regular meetings, notice of such action shall be given personally or by
mail, facsimile or similar means of communication promptly to each Director who
shall not have been present at the meeting at which such action was taken.
Section 2.04 Special Meetings; Notice. Special meetings of the Board of
Directors shall be held whenever called by the Chairman of the Board, if any, or
by the President (or, in the absence or disability of the Chairman of the Board
and the President, by any Vice President), or by any two Directors, at such time
and place (which may be within or outside of the State of Delaware) as may be
specified in the respective notices or waivers of notice thereof. Special
meetings of the Board of Directors may be called on two days' notice to each
Director, personally or by telephone or facsimile or on four days' notice by
mail. Notice of any special meeting need not be given to any Director who shall
be
4
<PAGE>
present at such meeting, or to any Director who shall waive notice of such
meeting in writing, whether before or after the time of such meeting, and any
business may be transacted thereat. No notice need be given of any adjourned
meeting.
Section 2.05 Telephonic Meetings. Directors may participate in a meeting of the
Board of Directors, or a meeting of any committee designated by the Board, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this By-Law shall constitute presence in
person at such meeting.
Section 2.06 Quorum and Vote. At all meetings of the Board of Directors, the
presence of a majority of the total authorized number of Directors under Section
2.02 hereof shall be necessary and sufficient to constitute a quorum for the
transaction of business. Except when otherwise required by statute, the vote of
a majority of the total number of Directors present and acting at a meeting at
which a quorum is present shall be the act of the Board of Directors. In the
absence of a quorum, a majority of the Directors present may adjourn the meeting
from time to time, until a quorum shall be present.
Section 2.07 Action Without a Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or any meeting of a Committee of
the Board of Directors may be taken without a meeting, if written consents
thereto are signed by all members of the Board or Committee and such written
consents are filed with the minutes of proceedings of the Board.
Section 2.08 Manner of Acting. The Directors shall act only as a Board, and the
individual Directors shall have no power as such, except as permitted by
statute.
Section 2.09 Resignations. Any Director may resign at any time by delivering a
written resignation to the Chairman of the Board, if any, the President, a Vice
President, the Secretary or any Assistant Secretary. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Section 2.10 Reliance on Accounts and Reports, etc. A Director, or a member of
any committee designated by the Board of Directors, in the performance of his or
her duties, shall be fully protected in relying in good faith on the records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its officers or employees, or committees
of the Board of Directors or by any other person as to matters the Director or
member reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation.
Section 2.11 Committees. The Board may establish such committees having such
responsibilities and composition as it shall from time to time by resolution
determine.
5
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ARTICLE III
OFFICERS
Section 3.01 Number and Designation. The officers of the Corporation shall be
chosen by the Board of Directors and may include a Chairman of the Board, a
President, a Vice President, a Secretary, a Controller and a Treasurer who shall
hold office until their successors are chosen and qualify or their earlier
resignation or removal. The Board of Directors may also choose additional
Corporate Vice Presidents and Vice Presidents, and one or more Assistant
Secretaries, Assistant Controllers and Assistant Treasurers. Any one or more of
such Corporate Vice Presidents and Vice Presidents may be designated as
Corporate Executive Vice President, Executive Vice President, Corporate Senior
Vice President or Senior Vice President. Any number of offices may be held by
the same person, except that no person shall simultaneously hold the offices of
Chairman or President and Secretary, Treasurer or Controller. The Chairman shall
be a member of the Board of Directors. The Board may also designate any Vice
Presidents as Chief Financial Officer and as General Counsel.
Section 3.02 Additional Officers. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors. The Board of Directors
may also delegate its Chairman or the President to appoint and remove such
additional officers as the Chairman or the President, as the case may be, shall
designate in writing, with such limited authority as shall be set forth in
writing, and such appointments shall be reported to the Board of Directors.
Section 3.03 Election. The Board of Directors at its first meeting or such
subsequent meetings as shall be held prior to its first annual meeting, and
thereafter annually at its annual meeting, shall choose the officers of the
Corporation. If any officers are not chosen at an annual meeting, such officers
may be chosen at any subsequent regular or special meeting.
Section 3.04 Removal and Vacancies. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors, either with or without cause. Any vacancy
occurring in any office of the Corporation shall be filled by the Board of
Directors.
Section 3.05 Duties of the Chairman of the Board of Directors. The Chairman of
the Board of Directors, if present, shall preside at all stockholders' meetings
and all meetings of the Board at which he is present and shall have such other
duties as shall be assigned to him or her by the Board of Directors. The
Chairman may be the Chief Executive Officer of the Corporation.
6
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Section 3.06 Duties of the President. The President shall have direct charge of
the business of the Corporation, subject to the general control of the Board of
Directors, and may be the Chief Executive Officer and/or the Chief Operating
Officer of the Corporation. In the absence of the Chairman of the Board or if no
Chairman of the Board has been chosen, the President shall also have the duties
of the Chairman of the Board.
Section 3.07 Duties of the Vice President. In the event of the absence or
disability of the Chairman of the Board and the President, the Corporate
Executive Vice President, Executive Vice President, Corporate Senior Vice
President or Senior Vice President, if any, or if absent, any Vice President
designated by the Board of Directors, shall perform all the duties of the
President, and when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the President. Except where by law the signature of
the President is required, each of the Vice Presidents shall possess the same
power as the President to sign all certificates, contracts, obligations and
other instruments of the Corporation. Any Vice President shall perform such
other duties and may exercise such other powers as from time to time may be
assigned to him or her by these By-Laws or by the Board of Directors or the
President. An Executive Vice President may be the Chief Operating Officer of the
Corporation.
Section 3.08 Duties of the Secretary. The Secretary shall, if present, act as
Secretary of, and keep the minutes of, all the proceedings of the meetings of
the stockholders and of the Board of Directors and of any committee of the Board
of Directors in one or more books to be kept for that purpose; shall perform
such other duties as shall be assigned to him or her by the President or the
Board of Directors; and, in general, shall perform all duties incident to the
office of Secretary.
Section 3.09 Duties of the Treasurer. The Treasurer shall keep or cause to be
kept full and accurate records of all receipts and disbursements in the books of
the Corporation and shall have the care and custody of all funds and securities
of the Corporation. He or she shall disburse the funds of the Corporation as may
be ordered by the Board of Directors, shall render to the President and the
Board of Directors, whenever they request it, an account of all of his or her
transactions as Treasurer and shall perform such other duties as may be assigned
to him or her by the President or the Board of Directors; and, in general, shall
perform all duties incident to the office of Treasurer.
Section 3.10 Duties of the Controller. The Controller shall be the chief
accounting officer of the Corporation. The Controller shall keep or cause to be
kept all books of account and accounting records of the Corporation and shall
keep and maintain, or cause to be kept and maintained, adequate and correct
accounts of the properties and business transactions of the Corporation. The
Controller shall prepare or cause to be prepared appropriate financial
statements for the Corporation and shall perform such other duties as may be
assigned to him or her by the President or the Board of Directors; and, in
general, shall perform all duties incident to the office of Controller.
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Section 3.11 Duties of the Assistant Secretary. The Assistant Secretary, if any,
shall, in the absence or disability of the Secretary, exercise the powers and
perform the duties of the Secretary, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
Section 3.12 Duties of the Assistant Controller. The Assistant Controller, if
any, shall, in the absence or disability of the Controller, exercise the powers
and perform the duties of the Controller, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
Section 3.13 Duties of the Assistant Treasurer. The Assistant Treasurer, if any,
shall, in the absence or disability of the Treasurer, exercise the powers and
perform the duties of the Treasurer, and shall perform such other duties as
shall be assigned to him or her by the President or the Board of Directors.
ARTICLE IV
EXECUTION OF INSTRUMENTS; DEPOSITS; FINANCES
Section 4.01 General. Subject to the provisions of Sections 4.02, 4.03 and 4.04
hereof, all deeds, documents, transfers, contracts, and agreements and other
instruments requiring execution by the Corporation shall be signed by the
Chairman of the Board, the President, a Vice President or the Treasurer, or as
the Board of Directors may otherwise from time to time authorize by resolution.
Any such authorization may be general or confined to specific instances.
Section 4.02 Corporate Indebtedness. No loan shall be contracted on behalf of
the Corporation, and no evidences of indebtedness shall be issued in its name,
unless authorized by the Board of Directors. Such authorizations of the Board
may be general or confined to specific instances. Loans authorized by the Board
of Directors may be effected at any time for the Corporation from any bank,
trust company or other institution, or from any firm, corporation or individual.
All bonds, debentures, notes and other obligations or evidences of indebtedness
of the Corporation issued for such loans as the Board shall authorize shall be
made, executed and delivered as the Board of Directors shall authorize. All
notes and other obligations or evidences of indebtedness permitted hereunder
without authorization of the Board of Directors shall be signed by the
President, a Vice President or the Treasurer. When so authorized by the Board of
Directors, any part of or all the properties, including contract rights, assets,
business or goodwill of the Corporation, whether then owned or thereafter
acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in
trust as security for the payment of such bonds, debentures, notes and other
obligations or evidences of indebtedness to the Corporation, and of the interest
thereon, by instruments executed and delivered in the name of the Corporation.
8
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Section 4.03 Checks, Drafts, etc. All checks, drafts, bills of exchange or
orders for the payment of money, issued in the name of the Corporation, shall be
signed only by the Treasurer or such other person or persons and in such manner
as may from time to time be designated by the Board of Directors, which
designation may be general or confined to specific instances; and unless so
designated, no person shall have any power or authority thereby to bind the
Corporation or to pledge its credit or to render it liable.
Section 4.04 Deposits. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board of Directors may select. The
Board of Directors may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these By-Laws, as it
may deem expedient. For the purpose of deposit and for the purpose of collection
for the account of the Corporation, checks, drafts and other orders for the
payment of money which are payable to the order of the Corporation shall be
endorsed, assigned and delivered by the Treasurer or such other person or
persons and in such manner as may from time to time be designated by the Board
of Directors.
Section 4.05 Dividends. Dividends upon the stock of the Corporation, subject to
the provisions of the Restated Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Such declaration may be continuing or limited to a specific payment or
distribution. Dividends may be paid in cash, in property, or in shares of stock,
subject to the provisions of the Restated Certificate of Incorporation.
Section 4.06 Fiscal Year. The fiscal year of the Corporation shall be the
calendar year, unless otherwise fixed by resolution of the Board of Directors.
ARTICLE V
CAPITAL STOCK
Section 5.01 Certificates of Stock. Every holder of stock in the Corporation
shall be entitled to have a certificate signed by, or in the name of the
Corporation by, the Chairman of the Board of Directors, or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or by the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such holder in the Corporation.
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ARTICLE VI
SEAL; OFFICES
Section 6.01 Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 6.02 Offices. The Corporation may have offices at such other places both
within or outside the State of Delaware as the Board of Directors may from time
to time determine or as the business of the Corporation may require.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification. (a) No director of the Corporation shall have any
personal liability to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, provided that this provision shall
not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation Law
of the State of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he or she is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a director
or officer of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action either in an official
capacity as a director or officer or in any other capacity while serving as a
director or officer, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (but, in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liability and loss (including attorneys' fees, judgments, fines, excise taxes
pursuant to the Employee Retirement Income Security Act of 1974, as amended, or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs,
10
<PAGE>
executors and administrators; provided, however, that, the Corporation shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Corporation.
The right to be indemnified conferred in this Section 7.01 shall be a contract
right and shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, the payment of such expenses incurred by the director
or officer in his or her capacity as a director or officer (and not in any other
capacity in which service was or is to be rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan), in advance of the final disposition of proceeding, shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Article or otherwise. The Corporation may, by action of its Directors,
provide indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
(c) The indemnification provided by this Section 7.01 shall not limit or
exclude any rights, indemnities or limitations of liability to which any person
may be entitled, whether as a matter of law, under the Restated Certificate of
Incorporation of the Corporation, by agreement, vote of the stockholders or
disinterested directors of the Corporation or otherwise.
(d) If a claim under paragraph (b) of this Section 7.01 is not paid in full
by the Corporation within sixty (60) days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the General Corporation Law of the State of Delaware for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board, independent legal counsel, or its stockholders) to have
made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard or conduct set forth in the General Corporation
Law of the State of Delaware, nor an actual determination by the Corporation
(including its Board, independent legal counsel, or its stockholders) that the
claimant has not met such applicable standard of conduct, shall create a
presumption that the claimant has not met the applicable standard of conduct.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the corporation or
another corporation,
11
<PAGE>
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the General
Corporation Law of the State of Delaware.
ARTICLE VIII
AMENDMENTS
Section 8.01 Amendments. These By-Laws may only be altered or repealed and new
By- Laws adopted by resolution of the Board of Directors.
12
================================================================================
RIGHTS AGREEMENT
----------------
COVANCE INC.
and
HARRIS TRUST AND SAVINGS BANK
Rights Agent
----------------
Dated as of December 31, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Certain Definitions...................................1
Section 2. Appointment of Rights Agent...........................3
Section 3. Issue of Right Certificates...........................3
Section 4. Form of Right Certificates............................5
Section 5. Countersignature and Registration.....................5
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates.........................6
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights.........................7
Section 8. Cancellation and Destruction of
Right Certificates................................7
Section 9. Availability of Preferred Shares......................8
Section 10. Preferred Shares Record Date..........................8
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights........................8
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares...............................14
<PAGE>
Page
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power........................14
Section 14. Fractional Rights and Fractional Shares...............15
Section 15. Rights of Action......................................16
Section 16. Agreement of Right Holders............................17
Section 17. Right Certificate Holder Not Deemed a
Stockholder.......................................17
Section 18. Concerning the Rights Agent...........................17
Section 19. Merger or Consolidation or Change of
Name of Rights Agent..............................18
Section 20. Duties of Rights Agent................................18
Section 21. Change of Rights Agent................................20
Section 22. Issuance of New Right Certificates....................21
Section 23. Redemption............................................21
Section 24. Exchange..............................................21
Section 25. Notice of Certain Events..............................23
Section 26. Notices...............................................23
Section 27. Supplements and Amendments............................24
Section 28. Successors............................................24
Section 29. Benefits of this Agreement............................24
<PAGE>
Page
Section 30. Severability..........................................25
Section 31. Governing Law.........................................25
Section 32. Counterparts..........................................25
Section 33. Descriptive Headings..................................25
Signatures...................................................................25
Exhibit A - Form of Right Certificate
Exhibit B - Form of Summary of Rights to Purchase Preferred Shares
<PAGE>
AGREEMENT, dated as of December 31, 1996, between Covance Inc., a
Delaware corporation (the "Company"), and Harris Trust and Savings Bank (the
"Rights Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Company outstanding on December 31, 1996 (the
"Record Date"), each Right representing the right to purchase one one-hundredth
of a Preferred Share (as hereinafter defined), upon the terms and subject to the
conditions herein set forth, and has further authorized and directed the
issuance of one Right with respect to each Common Share that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are hereinafter
defined).
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates and Associates
(as such terms are hereinafter defined) of such Person, shall be the Beneficial
Owner (as such term is hereinafter defined) of 20% or more of the Common Shares
of the Company then outstanding, but shall not include the Company, any
Subsidiary (as such term is hereinafter defined) of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as
the result of an acquisition of Common Shares by the Company which, by reducing
the number of shares outstanding, increases the proportionate number of shares
beneficially owned by such Person to 20% or more of the Common Shares of the
Company then outstanding; provided, however, that if a Person shall become the
Beneficial Owner of 20% or more of the Common Shares of the Company then
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
"Acquiring Person". Notwithstanding the foregoing, if the Board of Directors of
the Company determines in good faith that a Person who would otherwise be an
"Acquiring Person", as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, and such Person divests as
promptly as practicable a sufficient number of Common Shares so that such Person
would no longer be an "Acquiring Person," as defined pursuant to the foregoing
provisions of this paragraph (a), then such Person shall not be deemed to be an
"Acquiring Person" for any purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
<PAGE>
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or Associates
beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or Associates
has (A) the right to acquire (whether such right is exercisable immediately
or only after the passage of time) pursuant to any agreement, arrangement
or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights,
exchange rights, rights (other than these Rights), warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
Beneficial Owner of, or to beneficially own, securities tendered pursuant
to a tender or exchange offer made by or on behalf of such Person or any of
such Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however, that a Person
shall not be deemed the Beneficial Owner of, or to beneficially own, any
security if the agreement, arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant
to, and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act and (2) is not also then reportable on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates or
Associates has any agreement, arrangement or understanding (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) for the
purpose of acquiring, holding, voting (except to the extent contemplated by
the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the
Company.
Notwithstanding anything in this definition of Beneficial Ownership to
the contrary, the phrase "then outstanding," when used with reference to a
Person's Beneficial Ownership of securities of the Company, shall mean the
number of such securities then issued and outstanding together with the number
of such securities not then actually issued and outstanding which such Person
would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday,
or a day on which banking institutions in State of Delaware are authorized or
obligated by law or executive order to close.
<PAGE>
(e) "Close of business" on any given date shall mean 5:00 P.M., Chicago
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., Chicago time, on the next succeeding Business Day.
(f) "Common Shares" when used with reference to the Company shall mean
the shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section
7 hereof.
(i) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Series A Junior
Participating Preferred Stock, par value $1.00 per share, of the Company.
(k) "Redemption Date" shall have the meaning set forth in Section 7
hereof.
(l) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(m) "Subsidiary" of any Person shall mean any corporation or other
entity of which a majority of the voting power of the voting equity securities
or equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier of (i)
the tenth day after the Shares Acquisition Date or (ii) the tenth business day
(or such later date as may be determined by action of the Board of Directors
prior to such time as any Person becomes an Acquiring Person) after the date of
the commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) of, or of the first public announcement of the intention of any
Person
<PAGE>
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company or any entity holding
Common Shares for or pursuant to the terms of any such plan) to commence, a
tender or exchange offer the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 20% or more of the
then outstanding Common Shares (including any such date which is after the date
of this Agreement and prior to the issuance of the Rights; the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Right Certificates) and not by
separate Right Certificates, and (y) the right to receive Right Certificates
will be transferable only in connection with the transfer of Common Shares. As
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or cause
to be sent (and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares as of the
close of business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Right Certificate, in substantially the form of
Exhibit A hereto (a "Right Certificate"), evidencing one Right for each Common
Share so held. As of the Distribution Date, the Rights will be evidenced solely
by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit B hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earlier of the Redemption Date or the Final Expiration
Date), the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement between Covance Inc. and Harris
Trust and Savings Bank, dated as of December 31, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive offices of
Covance Inc. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and will
no
<PAGE>
longer be evidenced by this certificate. Covance Inc. will mail to the
holder of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain circumstances,
as set forth in the Rights Agreement, Rights issued to any Person who
becomes an Acquiring Person (as defined in the Rights Agreement) may become
null and void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of such
one one-hundredths of a Preferred Share and the Purchase Price shall be subject
to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right Certificates
shall be executed on behalf of the Company by its Chairman of the Board, its
Vice Chairman, its Chief Executive Officer, its President, any of its Vice
Presidents, or its Treasurer, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of
<PAGE>
the Company to sign such Right Certificate, although at the date of the
execution of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to
be kept, at its principal office, books for registration and transfer of the
Right Certificates issued hereunder. Such books shall show the names and
addresses of the respective holders of the Right Certificates, the number of
Rights evidenced on its face by each of the Right Certificates and the date of
each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the close of business
on the Distribution Date, and at or prior to the close of business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon, the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights. (a) The registered holder of any Right Certificate may exercise the
Rights evidenced thereby (except as otherwise provided herein) in whole or in
part at any time after the Distribution Date upon surrender of the Right
Certificate, with the form of election to purchase on the reverse side thereof
duly executed, to the Rights Agent at the principal office of the Rights Agent,
together with payment of the Purchase Price for each one one-hundredth of a
Preferred Share as to which the Rights are exercised, at or prior to the
earliest of (i) the close of business on December 31, 2006 (the "Final
Expiration Date"), (ii) the time at which the Rights are
<PAGE>
redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the
time at which such Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $100, and
shall be subject to adjustment from time to time as provided in Section 11 or 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the shares to be purchased and an amount equal
to any applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from the depositary agent depositary receipts
representing such number of one one-hundredths of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with Section
14 hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt, deliver such cash to or
upon the order of the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Right Certificate or to his
duly authorized assigns, subject to the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
<PAGE>
Section 9. Availability of Preferred Shares. The Company covenants and
agrees that it will cause to be reserved and kept available out of its
authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Shares payable in
Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine
the outstanding Preferred Shares into
<PAGE>
a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.
From and after the occurrence of such event, any Rights that are or
were acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii), the
Company shall take all such action as may be necessary to authorize additional
Common Shares for issuance upon exercise of the Rights. In the event the Company
shall, after good faith effort, be unable to take all such
<PAGE>
action as may be necessary to authorize such additional Common Shares, the
Company shall substitute, for each Common Share that would otherwise be issuable
upon exercise of a Right, a number of Preferred Shares or fraction thereof such
that the current per share market price of one Preferred Share multiplied by
such number or fraction is equal to the current per share market price of one
Common Share as of the date of issuance of such Preferred Shares or fraction
thereof.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
(for a period expiring within 45 calendar days after such record date) to
subscribe for or purchase Preferred Shares (or shares having the same rights,
privileges and preferences as the Preferred Shares ("equivalent preferred
shares")) or securities convertible into Preferred Shares or equivalent
preferred shares at a price per Preferred Share or equivalent preferred share
(or having a conversion price per share, if a security convertible into
Preferred Shares or equivalent preferred shares) less than the then current per
share market price of the Preferred Shares (as defined in Section 11(d)) on such
record date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of Preferred
Shares which the aggregate offering price of the total number of Preferred
Shares and/or equivalent preferred shares so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price and the denominator of which shall be the
number of Preferred Shares outstanding on such record date plus the number of
additional Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market
<PAGE>
price of the Preferred Shares on such record date, less the fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the assets or evidences of indebtedness so to be distributed or
of such subscription rights or warrants applicable to one Preferred Share and
the denominator of which shall be such current per share market price of the
Preferred Shares; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other
system then in use, or, if on any such date the Security is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Security selected by the
Board of Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security is listed
or admitted to trading is open for the transaction of business or, if the
Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current
per share market price" of the Preferred Shares shall be determined in
accordance with the method set forth in Section 11(d)(i). If the Preferred
Shares are not publicly traded, the "current per share
<PAGE>
market price" of the Preferred Shares shall be conclusively deemed to be the
current per share market price of the Common Shares as determined pursuant to
Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof), multiplied by
one hundred. If neither the Common Shares nor the Preferred Shares are publicly
held or so listed or traded, "current per share market price" shall mean the
fair value per share as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten- thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
<PAGE>
(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a Preferred Share issuable upon the exercise
of the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the Preferred Shares and other capital stock or securities of the Company, if
any, issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the
<PAGE>
basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power. In the event, directly or indirectly, at any time after a Person
has become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in
<PAGE>
connection with such merger, all or part of the Common Shares shall be changed
into or exchanged for stock or other securities of any other Person (or the
Company) or cash or any other property, or (c) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person other than the Company or one or more of
its wholly-owned Subsidiaries, then, and in each such case, proper provision
shall be made so that (i) each holder of a Right (except as otherwise provided
herein) shall thereafter have the right to receive, upon the exercise thereof at
a price equal to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The Company
shall not be required to issue fractions of Rights or to distribute Right
Certificates which evidence fractional Rights. In lieu of such fractional
Rights, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional Rights would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
Right. For the purposes of this Section 14(a), the current market value of a
whole Right shall be the closing price of the Rights for the Trading Day
immediately prior to the date on which such fractional Rights would have been
otherwise issuable. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or
<PAGE>
admitted to trading on the New York Stock Exchange or, if the Rights are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by NASDAQ or such other system then in use or, if on any
such date the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions which are integral multiples of one one-hundredth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions which are
integral multiples of one one-hundredth of a Preferred Share). Fractions of
Preferred Shares in integral multiples of one one-hundredth of a Preferred Share
may, at the election of the Company, be evidenced by depositary receipts,
pursuant to an appropriate agreement between the Company and a depositary
selected by it; provided, that such agreement shall provide that the holders of
such depositary receipts shall have all the rights, privileges and preferences
to which they are entitled as beneficial owners of the Preferred Shares
represented by such depositary receipts. In lieu of fractional Preferred Shares
that are not integral multiples of one one-hundredth of a Preferred Share, the
Company shall pay to the registered holders of Right Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one Preferred Share. For the purposes of
this Section 14(b), the current market value of a Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement.
<PAGE>
Without limiting the foregoing or any remedies available to the holders of
Rights, it is specifically acknowledged that the holders of Rights would not
have an adequate remedy at law for any breach of this Agreement and will be
entitled to specific performance of the obligations under, and injunctive relief
against actual or threatened violations of the obligations of any Person subject
to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office of the Rights Agent, duly endorsed or accompanied by a
proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Shares certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Shares
certificate made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to
the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the administration
and execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and
<PAGE>
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises.
The Rights Agent shall be protected and shall incur no liability for,
or in respect of any action taken, suffered or omitted by it in connection with,
its administration of this Agreement in reliance upon any Right Certificate or
certificate for the Preferred Shares or Common Shares or for other securities of
the Company, instrument of assignment or transfer, power of attorney,
endorsement, affidavit, letter, notice, direction, consent, certificate,
statement, or other paper or document believed by it to be genuine and to be
signed, executed and, where necessary, verified or acknowledged, by the proper
person or persons, or otherwise upon the advice of counsel as set forth in
Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
Any corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided, that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
In case at any time the name of the Rights Agent shall be changed and
at such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Right Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete
<PAGE>
authorization and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by any one of the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company and delivered to the Rights Agent; and such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Vice Chairman, the Chief Executive
Officer, the President, any Vice President, the
<PAGE>
Secretary or the Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered by it in good faith in accordance with
instructions of any such officer or for any delay in acting while waiting for
those instructions.
(h) The Rights Agent and any stockholder, director, officer or employee
of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from acting
in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of Illinois (or of any other state of the United States so long as
such corporation is authorized to do business as a banking institution in the
State of Illinois, in good standing, having an office in the State of Illinois,
which is authorized under such laws to exercise corporate trust or stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50 million. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by
<PAGE>
it hereunder, and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Not later than the effective date of any such
appointment the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Shares or
Preferred Shares, and mail a notice thereof in writing to the registered holders
of the Right Certificates. Failure to give any notice provided for in this
Section 21, however, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Right Certificates made in
accordance with the provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the Company may,
at its option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $.01 per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price").
The redemption of the Rights by the Board of Directors may be made effective at
such time, on such basis and with such conditions as the Board of Directors in
its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights pursuant to paragraph (a) of this
Section 23, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price. The Company shall promptly
give public notice of any such redemption; provided, however, that the failure
to give, or any defect in, any such notice shall not affect the validity of such
redemption. Within 10 days after such action of the Board of Directors ordering
the redemption of the Rights, the Company shall mail a notice of redemption to
all the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem, acquire
or purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or in Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the Distribution
Date.
Section 24. Exchange. (a) The Board of Directors of the Company may, at
its option, at any time after any Person becomes an Acquiring Person, exchange
all or part of the
<PAGE>
then outstanding and exercisable Rights (which shall not include Rights that
have become void pursuant to the provisions of Section 11(a)(ii) hereof) for
Common Shares at an exchange ratio of one Common Share per Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the date hereof (such exchange ratio being hereinafter referred
to as the "Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Shares for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to paragraph (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of Common Shares equal to the
number of such Rights held by such holder multiplied by the Exchange Ratio. The
Company shall promptly give public notice of any such exchange; provided,
however, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange will state the
method by which the exchange of the Common Shares for Rights will be effected
and, in the event of any partial exchange, the number of Rights which will be
exchanged. Any partial exchange shall be effected pro rata based on the number
of Rights (other than Rights which have become void pursuant to the provisions
of Section 11(a)(ii) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with this Section 24, the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exchange of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such action as may be necessary to
authorize such additional Common Shares, the Company shall substitute, for each
Common Share that would otherwise be issuable upon exchange of a Right, a number
of Preferred Shares or fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or fraction is equal to
the current per share market price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares. In
lieu of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common
<PAGE>
Share. For the purposes of this paragraph (d), the current market value of a
whole Common Share shall be the closing price of a Common Share (as determined
pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company shall
propose (i) to pay any dividend payable in stock of any class to the holders of
its Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall
occur, then the Company shall as soon as practicable thereafter give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice of
the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
<PAGE>
Covance Inc.
210 Carnegie Center
Princeton, New Jersey 08540
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
Harris Trust and Savings Bank
311 West Monroe, 11th Floor
P.O. Box 755
Chicago, Illinois 60690
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. The Company may from time to
time supplement or amend this Agreement without the approval of any holders of
Right Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or equitable right, remedy
or claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Right Certificates (and, prior to the Distribution Date, the Common Shares).
<PAGE>
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be governed by and construed in
accordance with the laws of such State applicable to contracts to be made and
performed entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: COVANCE INC.
By:______________________________ By______________________________
Title: Title:
Attest: HARRIS TRUST AND SAVINGS BANK
By:______________________________ By:______________________________
Title: Title:
<PAGE>
Exhibit A
Form of Right Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER DECEMBER 31, 2006 OR EARLIER IF
REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT
TO REDEMPTION AT $.01 PER RIGHT AND TO EXCHANGE ON THE
TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
COVANCE INC.
This certifies that , or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of December 31, 1996 (the "Rights Agreement"), between
Covance Inc., a Delaware corporation (the "Company"), and Harris Trust and
Savings Bank (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M., New York time, on December 31, 2006 at the principal
office of the Rights Agent, or at the office of its successor as Rights Agent,
one one-hundredth of a fully paid non-assessable share of Series A Junior
Participating Preferred Stock, par value $1.00 per share (the "Preferred
Shares"), of the Company, at a purchase price of $100 per one one-hundredth of a
Preferred Share (the "Purchase Price"), upon presentation and surrender of this
Right Certificate with the Form of Election to Purchase duly executed. The
number of Rights evidenced by this Right Certificate (and the number of one
one-hundredths of a Preferred Share which may be purchased upon exercise hereof)
set forth above, and the Purchase Price set forth above, are the number and
Purchase Price as of December 31, 1996, based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase
Price and the number of one one-hundredths of a Preferred Share which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned offices of the Rights Agent.
<PAGE>
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate (i) may be redeemed by the Company at a redemption price of
$.01 per Right or (ii) may be exchanged in whole or in part for Preferred Shares
or shares of the Company's Common Stock, no par value.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of .
ATTEST: COVANCE INC.
______________________________ By ______________________________
Name: Name:
Title: Title:
A-6
<PAGE>
Countersigned:
HARRIS TRUST AND SAVINGS BANK
By ______________________________
Name:
Title:
A-6
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and
transfers unto
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint Attorney, to transfer the within
Right Certificate on the books of the within-named Company, with full power of
substitution.
Dated: ________________________
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered national
securities exchange, a member of the National Association of Securities Dealers,
Inc., or a commercial bank or trust company having an office or correspondent in
the United States.
- -------------------------------------------
The undersigned hereby certifies that the Rights evidenced by this
Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
- -------------------------------------------
A-6
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To: COVANCE INC.
The undersigned hereby irrevocably elects to exercise Rights
represented by this Right Certificate to purchase the Preferred Shares issuable
upon the exercise of such Rights and requests that certificates for such
Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated:
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
A-6
<PAGE>
Form of Reverse Side of Right Certificate -- continued
- ------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
- ------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to
Purchase, as the case may be, must conform to the name as written upon the face
of this Right Certificate in every particular, without alteration or enlargement
or any change whatsoever.
In the event the certification set forth above in the Form of
Assignment or the Form of Election to Purchase, as the case may be, is not
completed, the Company and the Rights Agent will deem the beneficial owner of
the Rights evidenced by this Right Certificate to be an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement) and such
Assignment or Election to Purchase will not be honored.
A-6
<PAGE>
Exhibit B
DRAFT of November 15, 1996
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (this "Agreement") is dated as of [ ], 1996,
by and among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING
CLINICAL LABORATORIES INC., a Delaware corporation ("CCL"), and CORNING
PHARMACEUTICAL SERVICES INC., a Delaware corporation ("CPS").
W I T N E S S E T H
WHEREAS, Corning is the common parent of an affiliated group
of corporations which includes CCL and CPS and which group and the members
thereof file consolidated federal income tax returns as well as certain
consolidated, combined or unitary state tax returns;
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to effect the Distributions as defined in and
pursuant to a Transaction Agreement dated as of even date herewith between
Corning, Corning Life Sciences Inc., a Delaware corporation ("CLSI"), CCL, and
CPS (the "Transaction Agreement"), subject to the satisfaction or waiver of the
conditions set forth in the Transaction Agreement; and
WHEREAS, the parties hereto desire to set forth their
agreements with regard to their respective liabilities for federal, state, local
and foreign taxes for periods before and after the Distributions and to provide
for certain other tax matters.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
<PAGE>
"Affiliate" shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
will control, or will be controlled by or will be under common control with the
person specified immediately following the Distribution Date.
"Agreement" shall have the meaning described in the above preamble.
"Carryback Item" shall have the meaning as described in Section
5.01(b) below.
"CCL" shall have the meaning as described in the preamble to this
Agreement.
"CCL Companies" shall mean, collectively, CCL and each Subsidiary of
CCL, other than CPS and any Subsidiary of CPS.
"CCL Distribution" shall mean the distribution by Corning to the
Corning shareholders of the stock of CCL as more particularly described in the
Transaction Agreement.
"CCL Domestic Companies" shall mean, collectively, each CCL Company
incorporated or organized under the laws of one of the respective States of the
United States.
"CCL Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which CCL is the common parent, not including
CPS or any member of the CPS Group and determined as if the capital stock of CCL
is widely held.
"CCL Returns" shall have the meaning as described in Section 2.03
below.
"CCL Return Period" shall mean a taxable period to which this Agreement
applies and for which a CCL Return is filed.
"CCL Separate Liability" shall have the meaning as described in
Section 4.01.
"CI Consolidated Return" shall mean any consolidated federal income tax
return or amendment thereof of the CI Group which includes one or more of the
CCL Domestic Companies or the CPS Domestic Companies.
"CI Consolidated Return Period" shall mean a taxable period to which
this Agreement applies and for which a CI Consolidated Return is filed.
"CI Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which Corning is the common parent.
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"CI Group Benefit Amount" shall have the meaning as described in
Section 4.04(b) hereof.
"CI State, Local and Foreign Returns" shall have the meaning as
described in Section 2.02 below.
"CI State, Local and Foreign Return Period" shall mean a taxable period
to which this Agreement applies and for which a CI State, Local and Foreign
Return is filed.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Corning" shall have the meaning as described in the preamble to this
Agreement.
"Corning Subsidiary" shall mean any subsidiary of Corning other than
any of the CPS Companies and the CCL Companies.
"CPS" shall have the meaning as described in the preamble to this
Agreement.
"CPS Companies" shall mean, collectively, CPS and each Subsidiary of
CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL
shareholders of the stock of CPS as more particularly described in the
Transaction Agreement.
"CPS Domestic Companies" shall mean, collectively, each CPS Company
incorporated or organized under the laws of one of the respective States of the
United States. "CPS Group" shall mean the affiliated group of corporations as
defined in Section 1504(a) of the Code of which CPS is the common parent and
determined as if the capital stock of CPS is widely held.
"CPS Returns" shall have the meaning as described in Section 2.04
below.
"CPS Return Period" shall mean a taxable period to which this Agreement
applies and for which a CPS Return is filed.
"CPS Separate Liability" shall have the meaning as described in Section
4.01 below.
"Distributions" shall mean the CCL Distribution, the CPS Distribution
and any transfers relating to the CCL Distribution or the CPS Distribution.
"Distribution Date" shall have the meaning as described in the
Transaction Agreement.
"IRS" shall mean the Internal Revenue Service.
"IRS Penalty Rate" small mean the rate of interest imposed from time to
time on underpayments of income tax pursuant to Code section 6621.
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"IRS Ruling" shall mean the ruling issued by the IRS which states the
tax treatment of the Distributions and related transactions.
"person" shall mean any natural person, corporation, business trust,
joint venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Separate CPS/CCL Liability" shall have the meaning as described in
Section 4.02 below.
"Separate Returns" shall have the meaning as described in Section 2.04
below.
"Spin-Off Tax Indemnification Agreements" shall mean the Spin-Off Tax
Indemnification Agreements dated of even date herewith between or among two or
more of Corning, CCL and CPS.
"Subsidiary" shall have the meaning as described in the Transaction
Agreement.
"Tax" or "Taxes" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Temporary Differences" attributable to any entity shall mean (a) any
single item of income or deduction in a CI Consolidated Return in respect of any
tax period that should reverse in one or more subsequent tax periods assuming
proper tax treatment and no change in law or in the tax accounting policies of
such entity (each an "Originating Temporary Difference") or (b) the partial or
complete reversal of an Originating Temporary Difference.
"Transaction Agreement" shall have the meaning as described on page 1
of this Agreement.
SECTION 1.02. CLSI. For all tax periods ending before or on the
Distribution Date, references herein to CCL shall include CLSI, which will be
merged into CCL prior to the Distribution Date pursuant to the Transaction
Agreement.
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ARTICLE 2
TAX RETURN FILING
SECTION 2.01. CI Consolidated Returns. Corning shall prepare and file
with the IRS all CI Consolidated Returns and amendments thereto required to be
filed by the CI Group for all tax periods beginning before or on the
Distribution Date. Such returns shall include all income, gains, losses,
deductions and credits of the CCL Domestic Companies and the CPS Domestic
Companies. Corning shall make all decisions relating to the preparation and
filing of such returns, subject to the approval of CCL and CPS, which approval
shall not be withheld unless no reasonable basis exists for the decisions made
by Corning in respect of such return. CCL and CPS further agree to, and
respectively agree to compel the CCL Domestic Companies and the CPS Domestic
Companies to, file or join in the filing of such authorizations, elections,
consents and other documents, and take such other actions as may be necessary or
appropriate, in the opinion of Corning, to carry out the purposes and intent of
this Section 2.01, provided that such actions are not inconsistent with this
Agreement or the Spin-Off Tax Indemnification Agreements. CCL and CPS each shall
furnish Corning at least sixty (60) days before the due date (including
extensions) of any such CI Consolidated Return with its completed section of
such CI Consolidated Return, prepared in accordance with this Agreement, in
accordance with instructions from Corning and in a manner consistent with prior
returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CCL and CPS each shall also furnish Corning work
papers and other such information and documentation as is reasonably requested
by Corning with respect to the CCL Companies and the CPS Companies. At Corning's
request, major items of income, deduction, gain and loss selected by Corning for
inclusion in the CI Consolidated Returns and relating to CCL Domestic Companies
and CPS Domestic Companies shall have been reviewed and approved prior to
submission to Corning by a nationally recognized accounting firm or law firm
with expertise sufficient to address the issues presented mutually acceptable to
Corning and the party or parties submitting such information. Corning and the
other party or parties submitting such information shall each pay an equal share
of the cost of such review.
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SECTION 2.02. CI State, Local and Foreign Returns. For any taxable
period beginning before or on the Distribution Date, Corning will prepare and
file all combined, consolidated or unitary state, local or foreign income or
franchise tax returns which are required to be filed by Corning or a Corning
Subsidiary and which include the operations conducted before or as of the
Distribution Date by (i) any of the CCL Companies or the CPS Companies, and (ii)
Corning or any Corning Subsidiary (herein, together with such returns filed for
previous periods, "CI State, Local and Foreign Returns"). Corning will timely
advise CCL and CPS of the inclusion of any of the CCL Companies and the CPS
Companies in any CI State, Local and Foreign Returns and the jurisdictions in
which such returns will be filed, which inclusion will not be inconsistent with
prior CI State, Local and Foreign Returns unless required by applicable law. CCL
and CPS will, and respectively will compel each of the CCL Companies and CPS
Companies whose tax information is included in any CI State, Local and Foreign
Return to, evidence its agreement to be included in such return on the
appropriate form and take such other action as may be appropriate, in the
opinion of Corning, to carry out the purposes and intent of this Section 2.02,
provided that such actions are not inconsistent with this Agreement or the
Spin-Off Tax Indemnification Agreements. CCL and CPS each shall furnish Corning
at least sixty (60) days before the due date (including extensions) of any such
CI State, Local and Foreign Return with a final copy of the information
necessary for Corning to complete such CI State, Local and Foreign Return,
prepared in accordance with instructions from Corning and in a manner consistent
with prior returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CCL and CPS each shall also furnish Corning work
papers and other such information and documentation as is reasonably requested
by Corning.
2.03 CCL Returns. For any taxable period beginning before or on the
Distribution Date, CCL will prepare and file all combined, consolidated or
unitary state, local or foreign income or franchise tax returns which are
required to be filed separately by CCL or any Subsidiary of CCL, and which
include the operations conducted before or as of the
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Distribution Date by any of the CCL Companies and any of the CPS Companies
(herein, together with such returns filed for previous periods, "CCL Returns").
CCL will timely advise CPS of the inclusion of any of the CPS Companies in any
CCL Returns and the jurisdictions in which such returns will be filed, which
inclusion will not be inconsistent with prior CCL Returns unless required by
applicable law. CPS will, and will compel each of the CPS Companies whose tax
information is included in any CCL Return to, evidence its agreement to be
included in such return on the appropriate form and take such other action as
may be appropriate, in the opinion of CCL, to carry out the purposes and intent
of this Section 2.03, provided that such actions are not inconsistent with this
Agreement or the Spin-Off Tax Indemnification Agreements. CPS shall furnish CCL
at least sixty (60) days before any CCL Return is due (with extensions) with a
final copy of the information necessary for CCL to complete such CCL Return,
prepared in accordance with instructions from CCL and in a manner consistent
with prior returns, except to the extent otherwise required by the Spin-Off Tax
Indemnification Agreements. CPS shall also furnish CCL work papers and other
such information and documentation as is requested by CCL.
2.04 Separate Returns. For any taxable period ending before, on or
after the Distribution Date, each of Corning, CCL and CPS will prepare and file
all respective separate combined, consolidated or unitary state, local or
foreign income or franchise tax returns which are required to be filed
separately by such party and not otherwise described in Section 2.01, 2.02 or
2.03 above (herein, together with such returns filed for previous periods,
"Separate Returns").
ARTICLE 3
TAX LIABILITY
SECTION 3.01. Corning Liability. Except to the extent otherwise
provided herein and in the Spin-Off Tax Indemnification Agreements, for each CI
Consolidated Return Period and each CI State, Local and Foreign Return Period,
Corning shall be liable for and indemnify
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CCL and CPS against all taxes due in respect of all CI Consolidated Returns and
all CI State, Local and Foreign Returns, subject to reimbursement from CCL and
CPS respectively as contemplated by Article 4.
SECTION 3.02. State, local and foreign and separate return liability.
Except to the extent otherwise provided herein and in the Spin-Off Tax
Indemnification Agreements, (a) Corning will pay all taxes due on CI State,
Local and Foreign Returns, subject to appropriate reimbursement by CCL and CPS
respectively for liabilities for state, local and foreign returns as
contemplated by Article 4; (b) CCL will pay all taxes due on returns required to
be filed by CCL by Sections 2.03 and 2.04 hereof, subject to appropriate
reimbursement by CPS as contemplated by Article 4; and (c) CPS will pay all
taxes due on returns required to be filed by CPS by Section 2.04 hereof.
SECTION 3.03. Taxes resulting from the failure of either Distribution.
In the event that either the CCL Distribution or the CPS Distribution shall fail
to qualify for the tax treatment stated in the IRS Ruling, for reasons other
than those indemnified against in the Spin-Off Tax Indemnification Agreements,
any and all Taxes imposed upon or incurred by Corning, CCL or CPS as a result of
such failure (including any liability of Corning, CCL or CPS arising from Taxes
imposed on shareholders of Corning, CCL or CPS to the extent any such
shareholders successfully seek recourse against Corning, CCL or CPS on account
of such failure, or any liability for such Taxes which Corning, CCL or CPS may
assume or otherwise provide for) shall be allocated among Corning, CCL and CPS
in such a manner as will take into account the extent to which the actions or
inactions before, on or after the Distribution Date of each of Corning, CCL, CPS
and their respective Affiliates may have contributed to such failure, and
Corning, CCL and CPS each shall indemnify and hold harmless the other from and
against the Taxes so allocated to Corning, CCL and CPS, respectively. In
determining the extent to which Corning, CCL and CPS may have contributed to
such failure, all facts and circumstances shall be taken into account. If it is
determined that none of Corning, CCL or CPS contributed to the failure of such
Distribution to qualify for the tax
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treatment stated in the IRS Ruling, the liability of Corning, CCL and CPS under
this Section 3.03 shall be borne by each corporation in proportion to their
relative average market capitalization as determined by the average closing
price for each of Corning, CCL and CPS common stock during the 20 trading-day
period immediately following the Distribution Date. Any payments to be made by
any of Corning, CCL or CPS to another pursuant to this Section 3.03 shall be
made in immediately available funds within ten (10) days of the receipt of
notice that a payment requiring indemnification under this Section 3.03 has been
made (or is required to be made), or if there is disagreement among the parties
as to the amount or existence of liability under this Section 3.03, within ten
(10) days of the resolution of such disagreement.
ARTICLE 4
SEPARATE LIABILITY
SECTION 4.01. Separate Federal Liability Computation. For all tax
periods beginning after December 31, 1995, for which CI Consolidated Returns
have not been filed by Corning as of the Distribution Date and in respect of
which Corning is required to file a CI Consolidated Return, CCL and CPS
respectively shall compute the CCL Separate Liability and the CPS Separate
Liability for the portion of such periods in which the CCL Domestic Companies
and the CPS Domestic Companies respectively are members of the CI Group. "CCL
Separate Liability" in respect of any CI Consolidated Return Period means the
federal income tax liability (including CCL's share of Corning's alternative
minimum tax if Corning is subject to alternative minimum tax for such CI
Consolidated Return Period, not to exceed Corning's consolidated alternative
minimum tax for such period) computed as of December 31, 1996, as if CCL had
filed a consolidated federal income tax return for the CCL Group in respect of
such CI Consolidated Return Period. "CPS Separate Liability" in respect of any
CI Consolidated Return Period means the federal income tax liability (including
CPS's share of Corning's alternative minimum tax if Corning is subject to
alternative minimum tax for such CI Consolidated Return Period, not to exceed
Corning's consolidated alternative minimum tax for such period) computed as of
December 31, 1996, as if CPS had filed a consolidated federal
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income tax return for the CPS Group in respect of such CI Consolidated Return
Period. If, in computing the CCL Separate Liability or the CPS Separate
Liability, CCL or CPS calculates that the CCL Group or the CPS Group,
respectively, would experience a net operating loss resulting in no federal
income tax liability as of December 31, 1996, the CCL Separate Liability or the
CPS Separate Liability, as the case may be, shall be equal to a credit amount
calculated by Corning and equal to the reduction in the Federal income tax
liability of the CI Group by reason of the use of such net operating loss of the
CCL Group or the CPS Group, as the case may be, in the CI Consolidated Return
that Corning projects to be filed in respect of such period. Except as may
otherwise be required by the Spin-Off Tax Indemnification Agreements,
computations in respect of the CCL Separate Liability and the CPS Separate
Liability shall be consistent with prior CI Group returns, shall follow the tax
elections and other tax positions adopted or prescribed by Corning and shall
take into account the adjustments and modifications set forth in Section 4.03;
provided, however, that the Tax Director and/or General Counsel of each of
Corning and CCL or CPS, as the case may be, shall negotiate reasonable
modifications or alternatives to such requirements in the event that either CCL
or CPS, as the case may be, reasonably determines that such elections,
positions, adjustments or modifications would have a materially detrimental
effect on the tax obligations of CCL or CPS, as the case may be, in respect of
the current or any subsequent tax period.
SECTION 4.02. Separate CPS/CCL Liability Computation. For all tax
periods beginning after December 31, 1995, for which CCL Returns have not been
filed by CCL as of the Distribution Date and in respect of which CCL is required
to prepare and file a CCL Return, CPS shall compute the Separate CPS/CCL
Liability for the portion of such periods in which the CPS Companies
respectively are subsidiaries of CCL. "Separate CPS/CCL Liability" in respect of
any tax period means the state, local and foreign tax liability computed as of
December 31, 1996, as if CPS had filed consolidated combined or unitary state,
local and foreign tax returns with the CPS Companies in respect of such tax
period. Except as may otherwise be required by the Spin-Off Tax Indemnification
Agreements, computations in respect of the Separate CPS/CCL Liability shall be
consistent with any prior CCL Returns,
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shall follow the tax elections, positions, adjustments and modifications adopted
or prescribed by CCL and take into account adjustments and modifications similar
to those set forth in Section 4.03; provided, however, that the Tax Director
and/or General Counsel of each of CCL and CPS shall negotiate reasonable
modifications or alternatives to such requirements in the event that CPS
reasonably determines that such elections, positions, adjustments or
modifications would have a materially detrimental effect on the tax obligations
of CPS in respect of the current or any subsequent tax period.
SECTION 4.03. Adjustments. In computing the liabilities under
Sections 4.01 and 4.02, CCL and CPS respectively shall take into account the
following adjustments and modifications:
(i) Dividends from any member of the CI Group shall be
eliminated;
(ii) Gains or losses on intercompany transactions and
intercompany distributions between any members of the CI Group shall be
deferred and recognized pursuant to Treas. Reg. ss. 1.1502-13 and
1.1502-14 and Code Section 267 and the regulations thereunder;
(iii) All carryforwards of tax credits (except the minimum tax
credit), net operating losses, capital losses, charitable contributions
and other similar items shall be determined consistent with prior CI
Consolidated Returns;
(iv) All ordinary income shall be subject to tax at the
highest tax rate applicable to taxable ordinary income of corporations;
(v) Any exemption or similar item that must be prorated or
apportioned among the component members of a controlled group of
corporations shall not be taken into account; and
(vi) Other adjustments specified by Corning shall be made.
SECTION 4.04. Payments. In respect of each period for which liabilities
are required to be calculated pursuant to Section 4.01, CCL and Corning shall
provide for payments in respect of the CCL Separate Liability and CPS and
Corning shall provide for payments in
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respect of the CPS Separate Liability, in each case effective as of December 31,
1996. In respect of each period for which liabilities are required to be
calculated pursuant to Section 4.02, CPS and CCL shall provide for payments in
respect of the Separate CPS/CCL Liability, effective as of December 31, 1996.
SECTION 4.05. Discrepancies. (a) To the extent that the liabilities
calculated pursuant to Section 4.01 are not equal to the liabilities reported on
the actual tax returns filed in respect of the periods contemplated therein: (i)
Corning shall be liable for and shall indemnify and hold harmless the other
parties hereto against all liabilities and claims and shall receive all benefits
and refunds arising in respect of such differences that do not relate to
Temporary Differences attributable to CCL or CPS and (ii) CCL or CPS, as the
case may be, shall be liable for, make payment to Corning in respect of, and
indemnify and hold harmless the other parties hereto against all liabilities and
claims and shall receive all benefits and refunds arising in respect of such
differences that relate to Temporary Differences attributable to CCL or CPS,
respectively, in accordance with Section 7.01(b).
(b) To the extent that the liabilities calculated pursuant to Section
4.02 are not equal to the liabilities reported on the actual tax returns filed
in respect of the periods contemplated therein, CPS shall be liable for, make
payment to CCL in respect of, and indemnify and hold harmless the other parties
hereto against all liabilities and claims where such actual liabilities are
greater than the liabilities calculated under Section 4.02 and shall receive all
benefits and refunds arising in respect of such differences attributable to CPS
where such actual liabilities are less than the liabilities calculated under
Section 4.02.
(c) Payments to be made to Corning ,CCL or CPS in respect of
obligations arising under this Section 4.04 shall be made no later than five
days before the due date (without extensions) of the actual return to be filed.
SECTION 4.06. State and local returns. The liabilities of CCL and the
CCL Companies and CPS and the CPS Companies with respect to CI State, Local and
Foreign Returns in respect of tax periods beginning before or on the
Distribution Date shall be computed as of December 31, 1996, under the
principles set forth in Section 4.01 and
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compensation in respect to such liabilites shall be provided to Corning in
accordance with the principles of Sections 4.04 and 4.05.
ARTICLE 5
POST-DISTRIBUTION CARRYBACKS OF TAX BENEFITS
SECTION 5.01(a). CI Consolidated Returns; Net Operating Losses. If for
any taxable period beginning on or after the Distribution Date, a CCL Company or
a CPS Company incurs a net operating loss that may be carried back to a CI
Consolidated Return Period, the CCL Company or the CPS Company shall make an
election to relinquish the entire carryback period with respect to any such net
operating loss. If for any taxable period beginning on or after the Distribution
Date, a CCL Company or a CPS Company is entitled to a foreign tax credit or a
deduction in respect of such foreign taxes, such CCL Company or CPS Company must
take the deduction in lieu of the foreign tax credit, unless the foreign tax
credit can be fully utilized on a return other than a CI Consolidated Return.
(b) Other Tax Benefits. If for any taxable period beginning on
or after the date of the CCL Distribution, a CCL Company or a CPS Company incurs
a net capital loss, business credit or other Tax attribute that must be carried
back to a CI Consolidated Return (each a "Carryback Item"), such CCL Company or
CPS Company may file a refund claim reflecting such Carryback Item only after
having obtained a written consent from Corning. In the event that such CCL
Company or CPS Company does not obtain such written consent or shall not be
eligible to file such claim under applicable law, Corning may, at the written
request and expense of such CCL Company or CPS Company, file amended returns or
refund claims reflecting such Carryback Item. Such CCL Company or CPS Company
shall be compensated for the use of such Carryback Item as follows:
(i) Corning shall, within thirty (30) days after
receipt thereof, pay to such CCL Company or CPS Company respectively any refunds
actually received by Corning resulting from the filing of an amended return or
refund claim with respect to such Carryback Item attributable to such company,
whether such amended return or refund claim was filed by
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Corning or the CCL Company or the CPS Company, together with interest received
net of taxes with respect thereto. With respect to CCL, in the event that
Corning would have received a refund (including interest) with respect to such
claim had such refund not been offset against deficiencies, interest, or
penalties assessed against the CI Group or any member thereof (other than
deficiencies, interest or penalties (A) attributable to the operations of such
CCL Company and with respect to which such entity would otherwise be responsible
under the terms of this Agreement, (B) attributable to a taxable period of the
CI Group for which the statute of limitations has expired, (C) against which CCL
is obligated to indemnify Corning pursuant to the Spin-Off Tax Indemnity
Agreements or (D) in respect of which CCL is obligated to share payment pursuant
to Section 3.03 hereof), Corning shall pay to such CCL Company, within thirty
(30) days after receipt of notice of such offset, an amount equal to the amount
of such offset, together with interest that would have been paid to Corning if
such refund had not been offset. With respect to CPS, in the event that Corning
would have received a refund (including interest) with respect to such claim had
such refund not been offset against deficiencies, interest, or penalties
assessed against the CI Group or any member thereof (other than deficiencies,
interest or penalties (A) attributable to the operations of such CPS Company and
with respect to which such entity would otherwise be responsible under the terms
of this Agreement, (B) attributable to a taxable period of the CI Group for
which the statute of limitations has expired, (C) against which CPS is obligated
to indemnify Corning pursuant to the Spin-Off Tax Indemnity Agreements or (D) in
respect of which CPS is obligated to share payment pursuant to Section 3.03
hereof), Corning shall pay to such CPS Company, within thirty (30) days after
receipt of notice of such offset, an amount equal to the amount of such offset,
together with interest that would have been paid to Corning if such refund had
not been offset.
(ii) If, for any taxable period, Corning is required
to and does make a repayment to the IRS of any portion of a refund described in
this Article 5 attributable to the denial of the CCL Company or CPS Company
Carryback Item, then such CCL Company or CPS Company shall pay to Corning in
immediately available funds within ten (10) days
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following the date Corning notifies such CCL Company or CPS Company of such
repayment, the amount of such repayment including interest thereon.
(iii) If Corning elects not to file amended returns
or refund claims reflecting a Carryback Item as to which CCL or CPS might
receive a tax benefit, Corning shall notify such CCL Company or CPS Company of
its decision and state the amount including interest which it has determined to
be the appropriate compensation for its claim, and Corning shall pay such CCL
Company or CPS Company within ten (10) days of the receipt by Corning of written
notification that the CCL Company or the CPS Company agrees with its
determination, or upon irreconcilable disagreement between such parties, upon
receipt by Corning of a written determination of a nationally recognized
accounting firm or law firm with expertise sufficient to address the issues
presented and mutually agreeable to such parties.
(iv) Notwithstanding anything to the contrary in this Article,
before Corning files a claim for refund or a CCL Company or a CPS Company is
permitted to file a claim for refund which reflects a Carryback Item and which
would affect a CI Consolidated Return, the validity and amount of any such
Carryback Item shall be reviewed and approved by Corning and such CCL Company or
CPS Company, as applicable, and, upon irreconcilable disagreement between such
parties, by a nationally recognized accounting firm or law firm with expertise
sufficient to address the issues presented and mutually agreeable to such
parties. Each CCL Company and each CPS Company, as applicable, agrees to
reimburse Corning for its reasonable expenses incurred in reviewing, filing and
securing any refund claim made at the request of such CCL Company or CPS
Company.
ARTICLE 6
POST-DISTRIBUTION CARRYOVERS OF TAX BENEFITS
SECTION 6.01. CI Group items. Corning shall notify CCL and CPS as soon
as practicable after the Distribution Date of any consolidated carryover item
which may be partially or totally attributed to and carried over by a CCL
Company or a CPS Company and will notify CCL and CPS of subsequent adjustments
which may affect such carryover item.
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SECTION 6.02. CCL Group Items. CCL shall notify Corning and CPS as soon
as practicable after the Distribution Date of any consolidated carryover item
which may be partially or totally attributed to and carried over by a CPS
Company and will notify Corning and CPS of subsequent adjustments which may
affect such carryover item.
ARTICLE 7
AUDIT ADJUSTMENTS
SECTION 7.01. CI Consolidated, State, Local and Foreign Returns. Except
as provided in the Spin-Off Tax Indemnification Agreements and in Section 3.03
hereof, if any tax liability or refund in respect of the CI Group arises as a
result of an audit by the IRS or other taxing authority and such tax liability
or refund relates to a CI Consolidated Return or a CI State, Local and Foreign
Return filed in respect of any period commencing before or on the Distribution
Date and such liability:
(a) does not relate to Temporary Differences attributable to CCL or
CPS, Corning shall be liable for and shall pay any tax liabilities and
any interest and underpayment penalties associated therewith and
Corning shall receive any such tax refunds and any interest associated
therewith. Any penalties or additions to tax associated with tax
liabilities that are not underpayment penalties shall be allocated
among Corning, CCL and CPS in the proportion to which such penalties
are assessed to Corning, CCL and CPS, respectively, or in the event
such penalties are not clearly assessed to any individual party or
parties, in such a manner as will take into account the extent to which
each may have contributed to such penalties. Corning, CCL and CPS each
shall indemnify and hold harmless the other from and against the
penalties so allocated to Corning, CCL and CPS, respectively; or
(b) does relate to Temporary Differences attributable to CCL or CPS,
and such taxing authority:
(i) acknowledges directly or indirectly to Corning's sole
satisfaction that Corning may utilize such Temporary
Differences in computing tax liability,
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benefit or refunds in respect of post-Distribution Date tax
periods, Corning shall be liable for and shall pay any such
tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; or
(ii) does not acknowledge directly or indirectly to Corning's
sole satisfaction that Corning may utilize such Temporary
Differences in computing tax liability, benefit or refunds in
respect of post-Distribution Date tax periods, the party
hereto against which the issue giving rise to such tax
liability is directed shall be liable for and shall pay any
such tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; and
any liability and any penalties or additions to tax associated with
such tax liability that are not underpayment penalties shall be
allocated among Corning, CCL and CPS in the proportion to which such
penalties have been assessed by such taxing authority to Corning, CCL
and CPS, respectively, or in the event such penalties have not been
clearly assessed to any individual party or parties, in such a manner
as will take into account the extent to which each may have contributed
to such penalties, and Corning, CCL and CPS each shall indemnify and
hold harmless the other from and against the penalties so allocated to
Corning, CCL and CPS, respectively.
SECTION 7.02. Non-CI Consolidated, State, Local and Foreign Returns. If
any tax liability or refunds arise in respect of any member of the CI Group
(determined before giving effect to the Distributions) as a result of an audit
by the IRS or other taxing authority and such tax liability or refund does not
relate to a CI Consolidated Return or a CI State, Local and Foreign Return, the
party hereto against which the issue giving rise to such tax liability is
directed or in favor of which such return is applicable shall be liable for and
shall pay any such tax liability and any interest and penalties associated
therewith and shall receive any such refund and any interest associated
therewith, and shall indemnify and hold harmless the other parties hereto from
and against all such liabilities and any interest and penalties related thereto.
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SECTION 7.03. Other Audit Liabilities and Refunds. Except as otherwise
provided in this Article 7 or Articles 3 or 4 hereof or in the Spin-Off Tax
Indemnification Agreements, (a) CCL or CPS, as the case may be, shall be liable
for and shall pay all tax liabilities and any interest and penalties associated
therewith, and shall receive any tax refunds and any interest associated
therewith, that arise as a result of an audit by the IRS or other taxing
authority and that relate to the business or operations of CCL or Subsidiaries
of CCL and CPS or Subsidiaries of CPS, respectively, and CCL and CPS each shall
indemnify and hold harmless Corning and each other from and against the
penalties so allocated to CCL and CPS, respectively; and (b) Corning shall be
liable for and shall pay all tax liabilities and any interest and penalties
associated therewith, and shall receive any tax refunds and any interest
associated therewith, that arise as a result of an audit by the IRS or other
taxing authority and that relate to the business or operations of Corning or
Corning Subsidiaries.
SECTION 7.04. Expenses. Any out-of-pocket expenses (e.g., travel
expenses, accountants' fees, attorneys' fees, experts' fees, etc.) incurred by
the CI Group in connection with proposed or actual liabilities or refunds of the
type contemplated in this Article 7 shall be paid by the entities to which such
liabilities or refunds are allocated hereunder. In cases where such expenses
relate to more than one member of the CI Group or more than one party hereto,
the parties affected shall determine how such expenses shall be allocated.
ARTICLE 8
CONTESTS
SECTION 8.01. CI Group Contests; Notification and communication. If a
notice of audit is given, an audit is begun, an audit adjustment is (or has
been) proposed, or any other claim is (or has been) made by any taxing authority
with respect to a tax liability that, pursuant to the terms hereof, may be
attributable to a CCL Company or a CPS Company with regard to a CI Consolidated
Return or a CI State, Local and Foreign Return, Corning shall promptly
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notify CCL and CPS of such event (unless a CCL Company and a CPS Company
previously was notified directly by the relevant tax authority). Thereafter,
Corning or CCL or CPS, as the case may be, shall keep the others, on a timely
basis, informed of all material developments in connection with audits,
administrative proceedings, litigation and other similar matters that may affect
their respective tax liabilities. Failure or delay in providing notification
hereunder shall not relieve any party hereto of any obligation hereunder in
respect of any particular tax liability, except to the extent that such failure
or delay restricts the ability of such party to contest such liability
administratively or in the courts and otherwise materially and adversely
prejudices such party.
SECTION 8.02. Group Contests; Control and Management of Claims. (a) As
among the parties hereto, Corning shall control the prosecution of any audits
and any contests in respect of any claim made by a taxing authority on audit or
in a related administrative or judicial proceeding or in respect of any refund
or credit of taxes, and shall make and prosecute other claims for refunds with
respect to any tax liability, that relates to a CI Consolidated Return Period or
a CI State, Local and Foreign Return Period. CCL or CPS, as the case may be, may
participate in such audits or contests to the extent that Corning in its sole
discretion shall deem appropriate, provided, however, that Corning shall have
the sole right to control, at Corning's expense, the prosecution of any audit,
refund claim or related administrative or judicial proceeding with respect to
those matters which could affect the CI Group's tax liability.
(b) With respect to a tax liability or refund that, pursuant to the
provisions hereof, may be attributable to a CCL Company or a CPS Company
relating to a CI Consolidated Return Period or a CI State, Local and Foreign
Return Period, if Corning elects not to exercise its rights of control under
subsection (a) hereof, and if CCL or CPS so requests, Corning shall contest,
control and allow CCL or CPS, as the case may be, to participate to the extent
that Corning in its sole discretion shall deem appropriate, all at CCL's or
CPS's respective expense, or in the alternative shall permit CCL or CPS at its
own expense to contest and control a claim made by a taxing authority on audit
or in a related administrative or judicial
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proceeding or by appropriate claim for refund or credit of taxes (or to make and
prosecute other claims for refund. CCL or CPS, as the case may be, shall pay all
out-of-pocket and other costs relating to such contests, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants.
(c) If asserted liabilities unrelated to the matters contemplated
herein become grouped with contests arising hereunder, the parties shall use
their respective best efforts to cause the contest arising hereunder to be the
subject of a separate proceeding.
(d) With respect to matters arising hereunder controlled by Corning,
and where deemed necessary by Corning, CCL and CPS respectively shall compel the
relevant CCL Company or CPS Company to authorize by appropriate powers of
attorney such persons as Corning shall designate to represent such CCL Company
or CPS Company with respect to such matters. The parties hereto shall reasonably
cooperate with one another in a timely manner with respect to any matter arising
hereunder.
(e) With respect to a particular adjustment or claim made with respect
to a CCL Company or a CPS Company that, pursuant to the provisions hereof, may
be attributable to a CCL Company or a CPS Company, to the extent, and for so
long as, Corning, in the exercise of its reasonable judgment, is satisfied that
CCL and the CCL Companies or CPS and the CPS Companies can and will meet all
their obligations under this Agreement, Corning shall not settle, compromise, or
concede such adjustment or claim without the written consent of CCL or CPS, as
the case may be, which consent shall not be unreasonably withheld.
(f) Group contests and the control and management of matters hereunder
relating solely to CCL Returns shall be subject to the provisions of this
Section 8.02, applied as if CCL was Corning and CPS was CCL for purposes
thereof.
ARTICLE 9
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INFORMATION AND COOPERATION; BOOKS AND RECORDS
SECTION 9.01(a). Each of CCL and CPS shall deliver to Corning, as soon
as practicable after Corning's request, and CPS shall deliver to CCL, as soon as
practicable after CCL's request, such information and data concerning the
operations conducted before or as of the Distribution Date by the CCL Companies
and the CPS Companies respectively and make available such knowledgeable
employees of the CCL Companies and CPS Companies respectively as Corning or CCL,
as the case may be, may reasonably request, including providing the information
and data required by Corning's, CCL's or CPS's customary internal tax and
accounting procedures, in order to enable each of Corning or CCL, as the case
may be, to complete and file all tax forms or reports that it may be required to
file with respect to the activities of the CCL Companies and the CPS Companies
for taxable periods ending on, prior to or including the Distribution Date, to
respond to audits by any taxing authorities with respect to such activities, to
prosecute or defend any administrative or judicial proceeding and to otherwise
enable Corning or CCL, as the case may be, to satisfy its accounting and tax
requirements. CCL and CPS shall provide office space to IRS and other tax
auditors when they are conducting on-site audits, and to employees and
representatives of Corning or CCL, as the case may be, as long as a CI
Consolidated Return Period or a CI State, Local and Foreign Return Period or a
CCL Return Period, as the case may be, is open to assessment of additional taxes
or an assessment with respect to such period is being contested. Corning shall
deliver to CCL or CPS as soon as practical after CCL's or CPS's request, and CCL
shall deliver to CPS as soon as practical after CPS's request, such information
and data concerning any tax attributes which were allocated to a CCL Company or
a CPS Company that is reasonably necessary in order to enable CCL or CPS to
complete and file all tax forms or reports that it may be required to file with
respect to such activities of the CCL Companies or the CPS Companies from and
after the Distribution Date, to respond to audits by any tax authorities with
respect to such activities, to prosecute or defend claims for taxes in any
administrative or judicial proceeding, and to otherwise enable CCL or CPS to
satisfy its
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accounting and tax requirements. In addition, Corning shall make available to
CCL and CPS, and CCL shall make available to CPS, its knowledgeable employees
for such purpose.
(b). Each CCL Company and each CPS Company shall retain all books,
records, documentation or other information relating to any CI Consolidated
Return or CI State, Local and Foreign Return, and each CPS Company shall retain
all books, records, documentation or other information relating to any CCL
Return Period, until the expiration of the applicable statute of limitations
(including any extension or waiver thereof). Upon the expiration of any statute
of limitations, the foregoing information may be destroyed or disposed of
provided that (i) the CCL Company or the CPS Company provides sixty (60) days
prior written notice to Corning or CCL, as the case may be, describing in
reasonable detail the documentation to be destroyed or disposed of and (ii)
Corning or CCL, as the case may be, agrees in writing to such destruction or
disposal. If Corning or CCL, as the case may be, objects to the proposed
destruction or disposal, then the CCL Company or the CPS Company shall promptly
deliver such materials to Corning or CCL, as the case may be, or continue to
retain such materials.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.01. Effectiveness. The effectiveness of this Agreement and
the obligations and rights created hereunder are subject and conditioned upon
the completion of the Distributions pursuant to the terms of the Transaction
Agreement.
SECTION 10.02. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be
given or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, by courier service (including overnight
delivery), by cable, by telecopy confirmed by
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return telecopy, by telegram, by telex or by registered or certified
mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall
be specified in a notice given in accordance with this Section 10.01)
listed below:
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: each of the General Counsel and Tax Director
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: each of the General Counsel and Tax Director
(c) To CPS:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:(609) 452-9865
Attn: each of the General Counsel and Tax Director
SECTION 10.03. Complete Agreement; Construction. This Agreement is
intended to provide rights, obligations and covenants in respect of Taxes and,
together with the Spin-Off Tax Indemnification Agreements, shall supersede all
prior agreements and undertakings, both written and oral, between the parties
with respect to the subject matter hereof and thereof. In the event provisions
of this Agreement are inconsistent with provisions in a Spin-Off Tax
Indemnification Agreement, the provisions in the Spin-Off Tax Indemnification
Agreement shall control, except in cases where this construction would provide a
duplicate benefit.
SECTION 10.04. Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when
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<PAGE>
executed shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
SECTION 10.05. Waiver. The parties to this Agreement may (a) extend the
time for the performance of any of the obligations or other acts of the other
party or parties, (b) waive any inaccuracies in the representations and
warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 10.06. Amendments. This Agreement may not be amended or
modified except (a) by an instrument in writing signed by, or on behalf of, the
parties or (b) by a waiver in accordance with Section 10.05.
SECTION 10.07. Successors and Assigns. The provisions of this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and permitted assigns. This Agreement cannot be
assigned by Corning, CCL or CPS, in each case without the consent of the other
two parties hereto.
SECTION 10.08. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any subsidiary of such party
or by any entity that is contemplated to be a subsidiary of such party on and
after the Distribution Date.
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SECTION 10.09. Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
respective subsidiaries, and nothing herein, express or implied, is intended to
or shall confer upon any third parties any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 10.10. Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 10.11. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 10.12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, applicable to
contracts executed in and to be performed entirely within that state.
SECTION 10.13. Arbitration. Any conflict or disagreement arising out of
the interpretation, implementation, or compliance with the provisions of this
Agreement shall be finally settled pursuant to the provisions of Article V
(Dispute Resolution) of the Transaction Agreement, which provisions are
incorporated herein by reference.
SECTION 10.14. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
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<PAGE>
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
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IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED,
by ____________________________________
Name:
Title:
CORNING CLINICAL LABORATORIES INC.,
by ____________________________________
Name:
Title:
CORNING PHARMACEUTICAL SERVICES INC.,
by ____________________________________
Name:
Title:
MPE
taxshar.009
27
Draft of August 23, 1996
CORNING/CPS SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING
INCORPORATED, a New York corporation ("Corning") and CORNING PHARMACEUTICAL
SERVICES INC., a Delaware corporation ("CPS").
WITNESSETH
WHEREAS, Corning is the common parent of an affiliated group
of corporations within the meaning of Code1 Section 1504 which includes CPS;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement and Plan of Reorganization (the "Transaction
Agreement") dated of even date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify Corning as hereinafter provided in the event the Distributions or
the Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CPS.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CPS has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CPS's knowledge, these materials, including, without limitation, any
statements and representations concerning CPS, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CPS shall, and shall cause each member of the CPS Group, to comply
with each such representation and statement concerning CPS and the CPS Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee compensation
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
plans by CPS. With respect to any representation or statement made by or on
behalf of CPS in connection with the IRS Ruling and any subsequent IRS ruling
and to the extent such representation or statement relates to future actions or
events under their control, neither CPS nor any member of the CPS Group will
take any action during the Restricted Period that would have caused such
representation or statement to be untrue if CPS had planned or intended to take
such action at the time such representation or statement was made by or on
behalf of CPS.
(b) CPS hereby represents and warrants to Corning that CPS has
no present intention to undertake any of the transactions set forth in Section
1.02 (a) (iii) or to cease to engage in the active conduct of the trade or
business (within the meaning of Section 355(b)(2) of the Code) of providing
pharmaceutical services.
SECTION 1.02. Covenants. (a) CPS covenants and agrees with
Corning that during the Restricted Period:
(i) CPS will continue to engage in the pharmaceutical services
business in the U.S. and will continue to maintain in the U.S. a substantial
portion of its assets and business operations as they existed prior to the
Distributions, provided that the foregoing shall not be deemed to prohibit CPS
from entering into or acquiring other businesses or operations which may or may
not be consistent with its business and operations as they existed prior to the
Distributions so long as CPS continues to engage in such pharmaceutical services
business in the U.S. and continues to so maintain such substantial portion in
the U.S.;
(ii) CPS will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CPS managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CPS owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CPS, nor
any of its Affiliates 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, warrants,
rights or securities exercisable for, or convertible into, CPS Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CPS Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CPS
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CPS Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
2
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"Disqualified CPS Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CPS Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CPS in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CPS immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CPS and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CPS immediately following the
Distributions, (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 in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CPS.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, CPS and the CPS Group will
take, or refrain from taking, as the case may be, such actions as Corning may
reasonably request during the Ruling Period as necessary to insure that the
Distributions and the Other Transactions qualify for the tax treatment stated in
the IRS Ruling, including, without limitation, such actions as Corning
determines may be necessary to obtain and preserve the IRS Ruling or any
subsequent IRS ruling on which the parties can rely. Without limiting the
generality of the foregoing, CPS and the CPS Group shall cooperate with Corning
if Corning determines to obtain additional IRS rulings pertaining to whether any
actual or proposed change in facts and circumstances affects the tax status of
the Distributions or the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, CPS and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, Corning or CPS receives (A) a ruling from the IRS in form and
substance reasonably satisfactory to Corning and upon which Corning can rely to
the effect that the proposed action or conduct, as the case may be, will not
cause the Distributions or the Other Transactions to fail to qualify for the tax
treatment stated in the IRS Ruling or otherwise to be taxable for federal income
tax purposes, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to Corning and upon which Corning can rely to the effect that the
proposed action or conduct, as the case may be, will not cause the Distributions
or the Other Transactions to fail to qualify for the tax treatment stated in the
IRS Ruling or otherwise to be taxable for federal income tax purposes.
3
<PAGE>
ARTICLE 2: CPS Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CPS, or another member
of the CPS Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and either of the Distributions or any of the Other Transactions
shall fail to qualify for the tax treatment stated in the IRS Ruling primarily
as a result of such action or violation, then the Indemnifying Party shall
(jointly or severally) indemnify and hold harmless Corning and each member of
the Corning Group (collectively the "Indemnified Party") against any and all
Taxes imposed upon or incurred by the Indemnified Party as a result of the
failure, including, without limitation, any liability of the Indemnified Party
arising from Taxes imposed on shareholders of Corning to the extent any
shareholder or shareholders of Corning successfully seek recourse against the
Indemnified Party on account of any such failure, or any liability for such
Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CPS Common Stock (or any other class of outstanding CPS stock)
or commences a tender or other purchase offer for the capital stock of CPS upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CPS Common Stock (or any other class of outstanding CPS stock) and either of
the Distributions or any of the Other Transactions shall fail to qualify for the
tax treatment stated in the IRS Ruling primarily as a result of such acquisition
or tender or other purchase offer; then the Indemnifying Party shall indemnify
and hold harmless the Indemnified Party against any and all Taxes imposed upon
or incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held
harmless under Section 2.01(a) without regard to the fact that the Indemnified
Party may have received a supplemental ruling from the IRS or an Opinion of
Counsel as contemplated by Section 1.02(c). The Indemnified Party shall be
indemnified and held harmless under Section 2.01(b) without regard to whether an
acquisition of Beneficial Ownership results from a transaction which is not
prohibited under Article 1.
4
<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability.
The amount indemnified against under Article 2 ("Indemnified Liability") for a
tax based on or determined with reference to income shall be deemed to be the
amount of the tax computed by multiplying (i) the taxing jurisdiction's highest
marginal tax rate applicable to taxable income of corporations such as the
Indemnified Party on income of the character subject to tax and indemnified
against under Article 2 for the taxable period in which the Distributions occur,
times (ii) the gain or income of the Indemnified Party which is subject to tax
in the taxing jurisdiction and indemnified against under Article 2. In the case
of an Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of Corning, the amount of the Indemnified Liability shall be equal
to the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
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all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
6
<PAGE>
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The
Indemnifying Party shall pay to the Indemnified Party the amount of the
Indemnified Liability and any expenses or other costs indemnified against (less
any amount paid directly by the Indemnifying Party to the taxing authority) no
less than (7) business days prior to the date payment of the Indemnified
Liability is to be made by any party to the taxing authority. Such payment shall
be paid by wire transfer of immediately available funds to an account designated
by the Indemnified Party by written notice to the Indemnifying Party prior to
the due date of such payment. If the Indemnifying Party delays making payment
beyond the due date hereunder, such party shall pay interest on the amount
unpaid at the IRS Penalty Rate for each day and the actual number of days for
which any amount due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
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<PAGE>
To Corning:
One Riverfront Plaza
Corning, New York 14831
Telecopy:
Attn: General Counsel
To CPS:
Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CPS shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of Corning.
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<PAGE>
SECTION 5.05. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or equity.
SECTION 5.06. Governing Law and Severability.
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of New York, applicable to contracts executed in and to be
performed entirely within that state. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED CORNING PHARMACEUTICAL
SERVICES INC.
By__________________________________ By_________________________________
Name: Name:
Title: Title:
9
<PAGE>
Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
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<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
3
Draft of September 30, 1996
CPS/CCL SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING
PHARMACEUTICAL SERVICES INC., a Delaware corporation ("CPS") and CORNING
CLINICAL LABORATORIES INC., a Delaware corporation ("CCL").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning"), is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes CPS and CCL;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify CPS as hereinafter provided in the event the CPS Distribution or
the Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CCL.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CCL has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CCL's knowledge, these materials, including, without limitation, any
statements and representations concerning CCL, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CCL shall, and shall cause each member of the CCL Group, to comply
with each such representation and statement concerning CCL and the CCL Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
compensation plans by CCL. With respect to any representation or statement made
by or on behalf of CCL in connection with the IRS Ruling and any subsequent IRS
ruling and to the extent such representation or statement relates to future
actions or events under their control, neither CCL nor any member of the CCL
Group will take any action during the Restricted Period that would have caused
such representation or statement to be untrue if CCL had planned or intended to
take such action at the time such representation or statement was made by or on
behalf of CCL.
(b) CCL hereby represents and warrants to CPS that CCL has no
present intention to undertake any of the transactions set forth in Section 1.02
(a) (iii) or to cease to engage in the active conduct of the trade or business
(within the meaning of Section 355(b)(2) of the Code) of providing clinical
laboratory testing services.
SECTION 1.02. Covenants. (a) CCL covenants and agrees with CPS
that during the Restricted Period:
(i) CCL will continue to engage in the clinical laboratory
testing business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit CCL from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as CCL continues to engage in such
clinical business in the U.S. and continues to so maintain such substantial
portion in the U.S.;
(ii) CCL will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CCL managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CCL owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CCL, nor
any of its Affiliates 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, warrants,
rights or securities exercisable for, or convertible into, CCL Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CCL Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CCL
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CCL Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
2
<PAGE>
"Disqualified CCL Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CCL Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CCL in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CCL immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CCL and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CCL immediately following the
Distributions, (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 in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CCL.
(b) Following the six-month anniversary of the Distribution
Date, CCL and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, Corning or CCL receives (A) a ruling from the IRS in form and
substance reasonably satisfactory to Corning to the effect that the proposed
action or conduct, as the case may be, will not cause the CPS Distribution or
the Other Transactions to fail to qualify for the tax treatment stated in the
IRS Ruling or otherwise to be taxable for federal income tax purposes, or (B) an
Opinion of Counsel in form and substance reasonably satisfactory to Corning to
the effect that the proposed action or conduct, as the case may be, will not
cause the CPS Distribution or the Other Transactions to fail to qualify for the
tax treatment stated in the IRS Ruling or otherwise to be taxable for federal
income tax purposes.
ARTICLE 2: CCL Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CCL, or another member
of the CCL Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and the CPS Distribution or any of the Other Transactions shall
fail to qualify for the tax treatment stated in the IRS Ruling primarily as a
result of such action or violation, then the Indemnifying Party shall (jointly
or severally) indemnify and hold harmless CPS and each member of the CPS Group
(collectively the "Indemnified Party") against any and all Taxes imposed upon or
incurred by the Indemnified Party as a result of the failure, including, without
limitation, any liability of the
3
<PAGE>
Indemnified Party arising from Taxes imposed on shareholders of CPS to the
extent any shareholder or shareholders of CPS successfully seek recourse against
the Indemnified Party on account of any such failure, or any liability for such
Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CCL Common Stock (or any other class of outstanding CCL stock)
or commences a tender or other purchase offer for the capital stock of CCL upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CCL Common Stock (or any other class of outstanding CCL stock) and the CPS
Distribution or any of the Other Transactions shall fail to qualify for the tax
treatment stated in the IRS Ruling primarily as a result of such acquisition or
tender or other purchase offer; then the Indemnifying Party shall indemnify and
hold harmless the Indemnified Party against any and all Taxes imposed upon or
incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held harmless under
Section 2.01(a) without regard to the fact that the Indemnified Party may have
received a supplemental ruling from the IRS or an Opinion of Counsel as
contemplated by Section 1.02(c). The Indemnified Party shall be indemnified and
held harmless under Section 2.01(b) without regard to whether an acquisition of
Beneficial Ownership results from a transaction which is not prohibited under
Article 1.
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of CPS, the amount of the Indemnified Liability shall be equal to
the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
4
<PAGE>
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at all meetings with such taxing
authority or any representative thereof pertaining to such investigation or
inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
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<PAGE>
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall
6
<PAGE>
pay interest on the amount unpaid at the IRS Penalty Rate for each day and the
actual number of days for which any amount due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
To CPS:
210 Carnegie Center
Princeton, New Jersey 08540
Telecopy:
Attn: General Counsel
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which
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<PAGE>
taken together shall constitute one and the same agreement. This Agreement may
not be amended or modified except (a) by an instrument in writing signed by, or
on behalf of, the parties or (b) by a waiver in accordance with Section 5.03.
This Agreement shall be binding upon and inure solely to the benefit of the
parties hereto and their respective subsidiaries, and nothing herein, express or
implied, is intended to or shall confer upon any third parties any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CCL shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of CPS.
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING PHARMACEUTICAL CORNING CLINICAL
SERVICES LABORATORIES INC.
By__________________________________ By_________________________________
Name: Name:
Title: Title:
9
<PAGE>
Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
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"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
3
Draft of August 23, 1996
CCL/CPS SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this __ day of ______, 1996, by and among CORNING CLINICAL
LABORATORIES INC., a Delaware corporation ("CCL") and CORNING PHARMACEUTICAL
SERVICES INC., a Delaware corporation ("CPS").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning") is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes CPS;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify CCL as hereinafter provided in the event the Distributions or the
Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by CPS.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CPS has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CPS's knowledge, these materials, including, without limitation, any
statements and representations concerning CPS, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CPS shall, and shall cause each member of the CPS Group, to comply
with each such representation and statement concerning CPS and the CPS Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee compensation
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
plans by CPS. With respect to any representation or statement made by or on
behalf of CPS in connection with the IRS Ruling and any subsequent IRS ruling
and to the extent such representation or statement relates to future actions or
events under their control, neither CPS nor any member of the CPS Group will
take any action during the Restricted Period that would have caused such
representation or statement to be untrue if CPS had planned or intended to take
such action at the time such representation or statement was made by or on
behalf of CPS.
(b) CPS hereby represents and warrants to CCL that CPS has no
present intention to undertake any of the transactions set forth in Section 1.02
(a) (iii) or to cease to engage in the active conduct of the trade or business
(within the meaning of Section 355(b)(2) of the Code) of providing
pharmaceutical services.
SECTION 1.02. Covenants. (a) CPS covenants and agrees with CCL
that during the Restricted Period:
(i) CPS will continue to engage in the pharmaceutical services
business in the U.S. and will continue to maintain in the U.S. a substantial
portion of its assets and business operations as they existed prior to the
Distributions, provided that the foregoing shall not be deemed to prohibit CPS
from entering into or acquiring other businesses or operations which may or may
not be consistent with its business and operations as they existed prior to the
Distributions so long as CPS continues to engage in such pharmaceutical services
business in the U.S. and continues to so maintain such substantial portion in
the U.S.;
(ii) CPS will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CPS managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CPS owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CPS, nor
any of its Affiliates 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, warrants,
rights or securities exercisable for, or convertible into, CPS Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CPS Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CPS
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CPS Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
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<PAGE>
"Disqualified CPS Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CPS Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CPS in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CPS immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CPS and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CPS immediately following the
Distributions, (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 in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CPS.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, CPS and the CPS Group will
take, or refrain from taking, as the case may be, such actions as CCL may
reasonably request during the Ruling Period as necessary to insure that the
Distributions and the Other Transactions qualify for the tax treatment stated in
the IRS Ruling, including, without limitation, such actions as CCL determines
may be necessary to obtain and preserve the IRS Ruling or any subsequent IRS
ruling on which the parties can rely. Without limiting the generality of the
foregoing, CPS and the CPS Group shall cooperate with CCL if CCL determines to
obtain additional IRS rulings pertaining to whether any actual or proposed
change in facts and circumstances affects the tax status of the Distributions or
the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, CPS and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, CCL or CPS receives (A) a ruling from the IRS in form and substance
reasonably satisfactory to CCL and upon which CCL can rely to the effect that
the proposed action or conduct, as the case may be, will not cause the
Distributions or the Other Transactions to fail to qualify for the tax treatment
stated in the IRS Ruling or otherwise to be taxable for federal income tax
purposes, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to CCL and upon which CCL can rely to the effect that the proposed
action or conduct, as the case may be, will not cause the Distributions or the
Other Transactions to fail to qualify for the tax treatment stated in the IRS
Ruling or otherwise to be taxable for federal income tax purposes.
3
<PAGE>
ARTICLE 2: CPS Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CPS, or another member
of the CPS Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and either of the Distributions or any of the Other Transactions
shall fail to qualify for the tax treatment stated in the IRS Ruling primarily
as a result of such action or violation, then the Indemnifying Party shall
(jointly or severally) indemnify and hold harmless CCL and each member of the
CCL Group (collectively the "Indemnified Party") against any and all Taxes
imposed upon or incurred by the Indemnified Party as a result of the failure,
including, without limitation, any liability of the Indemnified Party arising
from Taxes imposed on shareholders of CCL to the extent any shareholder or
shareholders of CCL successfully seek recourse against the Indemnified Party on
account of any such failure, or any liability for such Taxes which the
Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CPS Common Stock (or any other class of outstanding CPS stock)
or commences a tender or other purchase offer for the capital stock of CPS upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CPS Common Stock (or any other class of outstanding CPS stock) and either of
the Distributions or any of the Other Transactions shall fail to qualify for the
tax treatment stated in the IRS Ruling primarily as a result of such acquisition
or tender or other purchase offer; then the Indemnifying Party shall indemnify
and hold harmless the Indemnified Party against any and all Taxes imposed upon
or incurred by the Indemnified Party and/or its shareholders as a result of the
failure of either Distribution or the Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held harmless
under Section 2.01(a) without regard to the fact that the Indemnified Party may
have received a supplemental ruling from the IRS or an Opinion of Counsel as
contemplated by Section 1.02(c). The Indemnified Party shall be indemnified and
held harmless under Section 2.01(b) without regard to whether an acquisition of
Beneficial Ownership results from a transaction which is not prohibited under
Article 1.
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<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of CCL, the amount of the Indemnified Liability shall be equal to
the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
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all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
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(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall pay interest on the amount unpaid at the
IRS Penalty Rate for each day and the actual number of days for which any amount
due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
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To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
To CPS:
Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CPS shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of CCL.
8
<PAGE>
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING CLINICAL CORNING PHARMACEUTICAL
LABORATORIES INC. SERVICES INC.
By__________________________________ By_________________________________
Name: Name:
Title: Title:
<PAGE>
Draft of August 12, 1996
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding CPS and the other members of the CPS Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of __________, 1996, between CCL and
____________________, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and CPS and other members of the CPS Group.
<PAGE>
"CPS Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CPS.
"CPS Distribution" shall mean the distribution by CCL to the CCL shareholders of
the CPS Common Stock.
"CPS Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CPS (or any successor thereto) is the
common parent.
"CPS Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CPS as
governed by the Rights Agreement, dated as of __________, 1996, between CPS and
____________________, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the CPS
Distribution, including any transfers relating to the CCL Distribution or the
CPS Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
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<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or CPS to such counsel.
3
COVANCE INC.
EMPLOYEE STOCK PURCHASE PLAN
The Covance Inc. Employee Stock Purchase Plan (the "Plan") is
intended to provide the eligible employees of Covance Inc. (the "Company") a
convenient means of purchasing shares of the Company's [Class A] common stock,
par value $.__ per share (the "Stock"). As initially adopted, the Plan is not
intended to qualify as an "employee stock purchase plan" under section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Company may in
the future determine that the Plan should qualify under section 423 of the Code.
At such time, the Company shall re-adopt the Plan as a Code section 423 Plan and
the Plan will then be administered, interpreted and construed in a manner
consistent with the requirements of section 423 of the Code. Specifically,
Article X of the Plan shall not become effective until the Company re-adopts the
Plan as a Code section 423 Plan.
ARTICLE I
DEFINITIONS
1.1 "Account" means the bookkeeping account established on behalf of
each Participant by the Committee to record payroll deduction contributions made
by such Participant and shares of Stock purchased on his behalf.
1.2 "Board" means the Board of Directors of the Company.
1.3 "Business Day" means each day on which the New York Stock Exchange
is open for business.
1.4 "Compensation" means all regular salary, wages or earnings,
including overtime, commissions and bonuses and amounts that would have been
treated as taxable wages but for their exclusion under Code section 401(k) or
125, but excluding amounts realized from the exercise of qualified or
non-qualified stock options, severance payments and reimbursement of expenses.
1.5 "Committee" means the committee appointed pursuant to Article VIII
to administer the Plan.
1.6 "Employee" means any person who is employed by the Company on a
full-time basis or a part-time basis consisting of at least 20 regularly
scheduled hours per week. For the purpose of determining whether an individual
is an Employee, the definition of Company shall also include the Company's
subsidiaries, if any, as defined under Code section 424(f).
1.7 "Effective Date" means January 1, 1997.
1.8 "Entry Date" means the first date of any Offering Period.
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<PAGE>
1.9 "Offering Commencement Date" means the first Business Day of each
Offering Period.
1.10 "Offering Period" means each calendar quarter, or such shorter
period that the Committee may prescribe.
1.11 "Offering Termination Date" means the last Business Day of each
Offering Period.
1.12 "Participant" means an Employee who has met the eligibility
requirements of Article II and who has elected to participate pursuant to an
election under Section 3.1.
1.13 "Plan Year" means the 12-month period ending December 31.
1.14 "Shares" means shares of Stock that have been allocated to a
Participant's Account.
ARTICLE II
ELIGIBILITY
2.1 Eligibility. Except as provided in Section 2.2, all individuals who
are Employees shall be eligible to participate in the Plan as of the Entry Date
which coincides with or next follows the date on which the individual became an
Employee.
2.2 Eligibility Restrictions. An Employee shall not be eligible to
participate in the Plan for any period of time during which he is employed by
the Company or any subsidiary outside of the United States if he is not paid
from the Company's United States payroll during that time.
ARTICLE III
PARTICIPATION
3.1 Commencement of Participation. An eligible Employee may become a
Participant in the Plan on any Entry Date by completing an enrollment and
payroll deduction form and delivering it to the Company in accordance with
procedures established by the Committee.
3.2 Payroll Deduction. At the time a Participant files his enrollment
and payroll deduction form, he shall elect to have after-tax deductions made
from his Compensation in an amount stated as a whole percentage of his
Compensation, ranging from one percent (1%) to ten percent (10%).
3.3 Participants' Accounts. All payroll deductions made from a
Participant's Compensation shall be credited to his Account and used to purchase
shares of Stock in accordance with Article V. Contributions credited to a
Participant's Account shall not accrue interest or earnings during the period
prior to being used to purchase shares of Stock in accordance with Article V.
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<PAGE>
3.4 Changes in Payroll Deductions. The percentage designated by a
Participant as his rate of contribution under Section 3.2 shall automatically
apply to increases and decreases in his Compensation. A Participant may elect to
change the rate of his contributions to any rate permissible under Section 3.2
at any time in accordance with the procedures established by the Committee.
ARTICLE IV
OFFERINGS
4.1 Offerings. The Plan shall be implemented through offerings of the
Company's Stock made at the beginning of each Offering Period. Each Offering
Period shall begin on the Offering Commencement Date and shall end on the
Offering Termination Date.
4.2 Purchase Price. The "Purchase Price" per share of Stock with
respect to each Offering Period shall be the lesser of:
4.2.1 Eighty-five (85) percent of the mean between the
highest and lowest quoted selling prices of the Stock
on the New York Stock Exchange (or on such other
national securities exchange upon which the Stock may
then be listed, hereinafter referred to as the
"Exchange") on the Offering Termination Date, or if
no sale of Stock occurred on such date, the official
closing price on the preceding Business Day; or
4.2.2. Eighty-five (85) percent of the mean between the
highest and lowest quoted selling prices of the Stock
on the Exchange on the Offering Commencement Date, or
if no sale of Stock occurred on such date, the
official closing price on the preceding Business Day.
4.3 Maximum Offering. The maximum number of shares of Stock which shall
be issued under the Plan, subject to adjustment upon changes in capitalization
of the Company as provided in Section 9.3, shall be 1,000,000 shares. If the
total number of shares which would be purchased during any Offering Period
exceeds the maximum number of available shares, the Committee shall make a pro
rata allocation of the available shares in a manner that it determines to be
equitable and the balance of payroll deductions credited to the Accounts of
Participants shall be returned to such Participants as soon as administratively
practicable.
ARTICLE V
PURCHASE OF STOCK
5.1 Automatic Exercise. On each Offering Termination Date, each
Participant shall automatically and without any act on his part be deemed to
have purchased Stock to the full extent of the payroll deductions credited to
his Account during the Offering Period ending on such Offering Termination Date.
5.2 Fractional Shares. Fractional shares of Stock may be purchased
under the Plan.
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<PAGE>
5.3 Acquisition of Stock. The Company may acquire Stock for use under
the Plan from authorized but unissued shares, treasury shares, in the open
market or in privately negotiated transactions.
5.4 Accounting for Purchased Stock. All shares of Stock purchased
pursuant to Section 5.1 shall be allocated as Shares to the appropriate
Participant's Account as of the Offering Termination Date on which such shares
are purchased.
ARTICLE VI
ACCOUNTING
6.1 General. The Committee shall establish procedures to account for
payroll deductions made by a Participant, the number of Shares of Stock
purchased on a Participant's behalf and the number of Shares allocated to a
Participant's Account.
6.2 Allocation of Stock. Shares of Stock allocated to a Participant's
Account shall be registered in the name of the Company or its nominee for the
benefit of the Participant on whose behalf such shares were purchased.
6.3 Accounting for Distributions. Shares of Stock distributed or sold
from a Participant's Account shall be debited from his Account on a first-in
first-out basis.
6.4 Account Statements. Each Participant shall receive at least
quarterly statements of all payroll deductions and shares of Stock allocated to
his Account together with all other transactions affecting his Account.
ARTICLE VII
WITHDRAWALS AND DISTRIBUTIONS
7.1 Withdrawal of Shares. A Participant may elect to withdraw any
number of Shares allocated to his Account by providing notification to the
Company in accordance with procedures established by the Committee. As soon as
administratively practicable following notification of a Participant's election
to withdraw Shares, the Committee shall cause a certificate representing the
number of Shares to be withdrawn to be delivered to the Participant.
7.2 Distribution Upon Termination. When a Participant terminates his
employment with the Company, any payroll deductions allocated to his Account and
not yet applied to purchase Stock in accordance with Section 5.1 shall be used
to purchase Stock on the next Offering Termination Date that immediately follows
his termination of employment. As soon as administratively practicable following
that Offering Termination Date, a certificate representing all of the
Participant's Shares shall be distributed to him (or his executor, in the event
that he is not alive on the date of distribution).
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<PAGE>
ARTICLE VIII
ADMINISTRATION
8.1 Appointment of Committee. The Board shall appoint a Committee to
administer the Plan, which shall consist of no fewer than three members. The
Board may from time to time appoint members to the Committee in substitution for
or in addition to members previously appointed and may fill vacancies, however
caused, in the Committee.
8.2 Authority of Committee. The Committee shall have the exclusive
power and authority to administer the Plan, including without limitation the
right and power to interpret the provisions of the Plan and make all
determinations deemed necessary or advisable for the administration of the Plan.
All such actions, interpretations and determinations which are done or made by
the Committee in good faith shall be final, conclusive and binding on the
Company, the Participants and all other parties and shall not subject the
Committee to any liability.
8.3 Committee Procedures. The Committee may select one of its members
as its Chairman and shall hold its meetings at such times and places as it shall
deem advisable and may hold telephone meetings. A majority of its members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.
8.4 Expenses. The Company will pay all expenses incident to the
operation of the Plan, including the costs of recordkeeping, accounting fees,
legal fees and the costs of delivery of stock certificates to Participants.
ARTICLE IX
MISCELLANEOUS
9.1 Transferability. Neither payroll deductions credited to a
Participant's Account nor any rights with regard to the purchase of Stock under
the Plan may be assigned, transferred, pledged or otherwise disposed of in any
way by the Participant other than by will or the laws of descent and
distribution.
9.2 Status as Owner. Each Participant shall be deemed to legally own
all shares of Stock allocated to his Account and shall be entitled to exercise
all rights associated with ownership of the shares, including, without
limitation, the right to vote such shares in all matters for which Stock is
entitled to vote, receive dividends, if any, and tender such shares in response
to a tender offer.
9.3 Adjustment Upon Changes in Capitalization. In the event of a
reorganization, recapitalization, stock split, spin-off, split-off, split-up,
stock dividend, combination of shares, merger, consolidation or any other change
in the corporate structure of the Company, or a sale by the Company of all or
part of its assets, the Board may make appropriate adjustments in the number and
kind of
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<PAGE>
shares which are subject to purchase under the Plan and in the exercise
price applicable to outstanding options.
9.4 Amendment and Termination. The Board shall have complete power and
authority to terminate or amend the Plan, including without limitation, the
power and authority to make any amendment that may be deemed to affect the
interests of any Participant adversely. The Plan and all rights of Employees
hereunder shall terminate: (i) at any time, at the discretion of the Board, in
which case any cash balance in Participants' Accounts shall be refunded to such
Participants as soon as administratively possible; or (ii) on the Offering
Termination Date on which Participants become entitled to purchase a number of
shares of Stock that exceeds the maximum number of shares available under the
Plan.
9.5 No Employment Rights. The Plan does not, directly or indirectly,
create in any Employee any right with respect to continuation of employment by
the Company and it shall not be deemed to interfere in any way with the
Company's right to terminate, or otherwise modify, an Employee's terms of
employment at any time.
9.6 Withholding. To the extent any payments or distributions under this
Plan are subject to Federal, state or local taxes, the Company is authorized to
withhold all applicable taxes. The Company may satisfy its withholding
obligation by (i) withholding shares of Stock allocated to a Participant's
Account, (ii) deducting cash from a Participant's Account, or (iii) deducting
cash from a Participant's other compensation. A Participant's election to
participate in the Plan authorizes the Company to take any of the actions
described in the preceding sentence.
9.7 Holding of Funds. The Company shall not be obligated to hold
payroll deductions made under the Plan in trust or to otherwise segregate such
amounts.
9.8 Choice of Law. Except to the extent superseded by Federal law, the
laws of the State of New Jersey will govern all matters relating to the Plan.
ARTICLE X
CODE SECTION 423
This Article X shall become effective only if the Board adopts a
resolution providing that this Plan is intended to qualify as an "employee stock
purchase plan" under Code section 423. Such resolution shall state the date that
this Section shall become effective.
10.1 Restrictions on Participation. Notwithstanding any provisions of
the Plan to the contrary, no Employee shall be granted an option to participate
in the Plan under the following conditions:
10.1.1 No Employee shall be granted an option if,
immediately after the grant, such Employee
would own stock, and/or hold outstanding
options to purchase stock, possessing 5%
or more of the total combined voting power
or value of all
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<PAGE>
classes of stock of the
Company (for purposes of this paragraph,
the rules of Section 424(d) of the Code
shall apply in determining stock ownership
of any Employee); or
10.1.2 No Employee shall be granted an option
which permits his rights to purchase Stock
under the Plan and all other employee
stock purchase plans (as described in
section 423 of the Code) of the Company to
accrue at a rate which exceeds $25,000 of
fair market value of such Stock
(determined at the time such option is
granted) for each calendar year in which
such option is outstanding at any time.
For purposes of this Section 10.1.2:
10.1.2.1 the right to purchase stock under
an option accrues when the option (or any
portion thereof) first becomes exercisable
during the calendar year;
10.1.2.2 the right to purchase stock under
an option accrues at the rate provided in
the option, but in no case may such rate
exceed $25,000 of fair market value of
such stock (determined at the time such
option is granted) for any one calendar
year; and
10.1.2.3 a right to purchase stock which
has accrued under one option granted
pursuant a plan may not be carried over to
any other option.
10.2 Amendment of Plan. The Board shall not, without the approval of
the shareholders of the Company (i) increase the maximum number of shares which
may be offered under the Plan (except pursuant to Section 9.3); (ii) modify the
requirements as to eligibility for participation in the Plan; or (iii) in any
other way cause the Plan to fail the requirements of section 423 of the Code.
10.3 Shareholder Approval. The Plan must be approved by a majority of
the shareholders of the Company within 12 months following the date that the
Board re-adopts the Plan as a Plan intended to qualify as an "employee stock
purchase plan" under Code section 423.
* * * * *
To record the adoption of the Plan, Covance Inc. has caused its
authorized officers to affix its Corporate name and seal this _____ day of
_____________, 1996.
[CORPORATE SEAL] COVANCE INC.
Attest:______________________________ By:___________________________________
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COVANCE INC.
EMPLOYEE EQUITY PARTICIPATION PROGRAM
<PAGE>
COVANCE INC.
EMPLOYEE EQUITY PARTICIPATION PROGRAM
1. Purpose
The Employee Equity Participation Program (the "Program") is intended to
encourage executive, managerial, technical and other employees of (i) Covance
Inc. (the "Corporation"), (ii) any "subsidiary corporation" of the Corporation
within the meaning of Section 424 of the Internal Revenue Code of 1986, as
amended (the "Code") or of any successor section, or (iii) any other entity in
which the Corporation holds beneficially at least one-half of the ownership
interest (such entity or "subsidiary corporation" being referred to herein as a
"Subsidiary") to become owners of stock of the Corporation in order to increase
their proprietary interest in the Corporation's success; to stimulate the
efforts of certain key executive, managerial, technical and other employees by
giving suitable recognition to services which contribute materially to the
Corporation's success; and to provide such employees with additional incentive
and reward opportunity based, in part, upon the attainment of predetermined
goals over specified periods. The Program shall consist of two plans: (a) the
Stock Option Plan and (b) the Incentive Stock Plan.
2. Administration
The Program shall be administered by a committee appointed by the Board of
Directors of the Corporation, to be known as the "Compensation Committee" (the
"Committee"), consisting of not less than three members of the Corporation's
Board of Directors, each member of which shall be a "non-employee director"
within the meaning of Rule 16b-3(d)(1) promulgated under the Securities Exchange
Act of 1934 (the "1934 Act") or any successor thereto and an "outside director"
within the meaning set forth in regulations promulgated under Section 162(m) of
the Code. Without limiting the foregoing, unless and to the extent those
definitions are amended, no member of the Committee shall be an officer or
employee of the Corporation or a subsidiary thereof, a former officer of the
Corporation, a former employee of the Corporation who receives compensation for
prior services (other than benefits under a tax-qualified retirement plan)
during the taxable year or any other person who receives directly or indirectly
in any capacity (other than as a director) remuneration in excess of the lesser
of $60,000 or 5 percent of the gross income realized by the entity employing
such member during such entity's taxable year ending with or within the
Corporation's taxable year or any person who is a member of a law firm retained
by, or a partner or executive officer of an investment banking firm that
performs services for, the Corporation. No member of the Committee shall have
been eligible to participate in the Program in the preceding year nor be
eligible to participate in the Program while serving on the Committee. The
Committee shall select periodically the executive, managerial, technical and
other employees who shall participate in the Program and the extent of their
participation in any particular Plan under the Program and shall report such
selections and levels of participation to the Board of Directors.
1
<PAGE>
The Committee's interpretation and construction of any provisions of this
Program or any Plan or any right, option or award granted or contract executed
under it shall be final unless otherwise determined by the Board of Directors,
which determination shall be final. No member of the Board of Directors or the
Committee shall be liable for any action or determination made in good faith.
3. Eligibility
The Committee shall from time to time select the executive, managerial,
technical and other employees (including officers and employees who are
directors) of the Corporation and of any Subsidiary who shall be eligible to
participate in any Plan under the Program.
4. Stock
The shares subject to options, grants or incentive stock rights under the
Program shall be shares of the Corporation's Common Stock par value $.50 per
share, either authorized but unissued or issued and held in treasury or such
other securities as may be issued by the Corporation in substitution therefor.
The total amount of the Common Stock of the Corporation which may be (i) sold
pursuant to options granted under the Stock Option Plan and (ii) granted, or
issued pursuant to incentive stock rights awarded, under the Incentive Stock
Plan shall not exceed 4,725,000 shares. There may be awarded under the Incentive
Stock Plan in lieu of shares the cash equivalent thereof valued at the date that
the Committee determines whether, or to what extent, performance objectives have
been met. In each case, the number of shares shall be subject to adjustment in
accordance with the provisions of Section 5.
Shares from the unexercised portion of the options which expire or of the
options which are terminated during the period when options may be granted and
shares forfeited or not earned under the Incentive Stock Plan may again either
(i) be the subject of an option under the Stock Option Plan or (ii) be awarded
or be the subject of rights granted under the Incentive Stock Plan. Shares of
the Common Stock of the Corporation used by an optionee as full or partial
payment to the Corporation for the purchase price of shares subject to an option
agreement, the terms of which explicitly provide for the grant of an additional
option as contemplated by Section 6(a)(i) hereof, shall again be made available
for use under the Program. Shares otherwise surrendered upon the exercise of
stock options may not again be the subject of options or awards granted under
the Program. Shares surrendered under the Program in payment of taxes due upon
the exercise of stock options or upon the recognition of income for shares
issued under the Incentive Stock Plan may not be issued again under the Program.
No single eligible employee under the Stock Option Plan may receive grants of
stock options covering in excess of 472,500, or 10% of the total, shares
authorized under the Program.
5. Recapitalization
The number of shares of Common Stock which may be granted, awarded or earned
under the Incentive Stock Plan or made subject to options granted under the
Stock Option Plan in the
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<PAGE>
aggregate and to any single eligible employee, the number of shares covered by
each outstanding option, and the price per share thereunder, and the number of
shares granted or subject to incentive stock rights under the Incentive Stock
Plan shall all be proportionally adjusted for any increase or decrease in the
number of issued shares of Common Stock of the Corporation resulting from a
subdivision or consolidation of shares or other capital adjustment, the
distribution of shares of capital stock to stockholders of the Corporation, the
payment of a stock dividend or other increase or decrease in such shares
effected without receipt of consideration by the Corporation, or any
distribution or spin-off of assets (other than a normal cash dividend) to the
stockholders of the Corporation.
Subject to any required action by the stockholders, if the Corporation shall be
the surviving corporation in any merger or consolidation, any option granted
under the Stock Option Plan and any incentive stock right granted under the
Incentive Stock Plan shall apply to the securities to which a holder of the
number of shares of Common Stock subject to the option or such right, as the
case may be, would have been entitled before the occurrence of such event. A
dissolution or liquidation of the Corporation, or a merger or consolidation in
which the Corporation is not the surviving corporation, shall cause every option
outstanding under the Stock Option Plan to terminate, except that the surviving
corporation may, in its absolute and uncontrolled discretion, tender an option
or options to purchase its shares on terms and conditions, both as to number of
shares and otherwise, which will substantially preserve the rights and benefits
of any option then outstanding under the Stock Option Plan. Upon the dissolution
or liquidation of the Corporation, or upon the effective date of any merger or
consolidation in which the Corporation is not the survivor and in which the
survivor has not tendered options as provided in the preceding sentence, the
Corporation shall deliver to each optionee whose incentive stock options are
being terminated an amount in cash equal to the difference between the option
price and the fair market value of a share of the Corporation's Common Stock
determined in good faith by the Committee. In the case of such a merger or
consolidation in which the Corporation is not the survivor, the Corporation
shall also deliver to each person whose incentive stock options are being
terminated and to each person who had exercised an incentive stock option and
who was holding the shares so purchased for long-term capital gains treatment an
amount equal to the difference between the federal income tax which the person
would be required to pay as a result of being unable to hold such shares for
long-term capital gains purposes (assuming a sale price equal to the fair market
value as provided above) and the tax such person is required to pay as a result
of having to dispose of shares on account of such merger or consolidation.
In the event of a change in the Corporation's presently authorized Common Stock
which is limited to a change of authorized shares with par value into the same
number of shares with a different par value or into the same number of shares
without par value, the shares resulting from any such change shall be deemed to
be Common Stock within the meaning of the Program.
6. Stock Option Plan
(a) The Committee may from time to time grant options, including but not
limited to performance-based stock options and to incentive stock options
permitted by Section 422 of the Code, to purchase shares of Common Stock,
evidenced by agreements in such form
3
<PAGE>
as the Committee may, from time to time, approve, containing in substance
the following terms and conditions:
(i) The option price shall be payable in full upon the exercise of the
option and may be paid either in United States dollars, or under rules
established and maintained from time to time by the Committee, in
shares of the Common Stock of the Corporation owned by the optionee,
or a combination of cash and shares. Under such rules, an optionee
paying the purchase price of an option in already-owned, freely
transferable, unencumbered shares of Common Stock of the Corporation
may receive new options to purchase shares of Common Stock of the
Corporation at the then current market price (being the mean between
the high and low selling prices of the Corporation's Common Stock on
the New York Stock Exchange on the date of exercise) for the same
number of shares surrendered upon exercise of the original option. In
no circumstance will the total number of shares subject to the new
option granted exceed the number of shares surrendered upon exercise
of the original option, will the new option be exercisable within
twelve months of the date of exercise or will the new option have a
life beyond that of the original option.
Shares of the Corporation's Common Stock shall be valued at the mean
between the high and low selling prices of the Corporation's Common
Stock on the New York Stock Exchange on the date of exercise.
(ii) The option shall state the total number of shares to which it
pertains.
(iii) The option price shall be not less than 100% of the fair market value
of the shares on the date of the granting of the option.
(iv) Each option granted under the Stock Option Plan shall expire on the
date designated by the Committee but in no event more than ten years
from the date the option is granted.
(v) The Committee may in its discretion provide that an option may not be
exercised in whole or in part for any period or periods of time
specified by the Committee. Except as may be so provided by the
Committee and except as otherwise provided herein, any option may be
exercised in whole at any time or in part from time to time after the
option has vested in accordance with the terms of the applicable
agreement and during its term; provided, however, that in no
circumstance will an option under the Stock Option Plan become
exercisable in less than twelve months from the date of grant.
(vi) The aggregate fair market value (determined as of the time the option
is granted) of the stock for which any employee may be granted
incentive stock options under this Plan or any other plans of the
Corporation or any subsidiary of the Corporation shall not exceed
$100,000 (or such other limit as may be in effect from time to time
under Section 422 of the Code or any statutory successor thereto) in
any calendar year in
4
<PAGE>
which such option or any portion thereof first becomes exercisable
pursuant to the terms of the agreement between such employee and the
Corporation.
(vii) If, in the opinion of counsel for the Corporation, the listing,
registration or qualification of the shares subject to option under
any securities exchange or under any state or Federal law, or the
consent or approval of any governmental regulatory body, or an
exemption from registration, is necessary or desirable, each option
shall be subject to the requirement that such option may not be
exercised in whole or in part unless such listing, registration,
qualification, consent, approval or exemption shall have been effected
or obtained free of any conditions not acceptable to the Committee.
(viii) An optionee shall have no rights as a stockholder with respect to
shares covered by his option to purchase until the date of the
issuance or transfer of the shares to him and only after such shares
are fully paid. No adjustment will be made for dividends or other
rights for which the record date is prior to the date of such issuance
or transfer, except as provided in Section 5.
(ix) The option agreements authorized under the Stock Option Plan shall
contain such other provisions not inconsistent with this Program as
the Committee may deem advisable.
(b) Options may be granted under the Stock Option Plan from time to time in
substitution for stock options held by consultants to or directors or
employees of other corporations who are about to become and who do
concurrently with the grant of such options become consultants to or
directors or employees of the Corporation or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Corporation
or a Subsidiary, or the acquisition by the Corporation or a Subsidiary of
the assets of the employing corporation, or the acquisition by the
Corporation or a Subsidiary of stock of the employing corporation as the
result of which it becomes a Subsidiary. The terms and conditions of the
substitute options so granted may vary from the terms and conditions set
forth in Section 6 of this Program to such extent as the Committee at the
time of grant may deem appropriate to conform, in whole or in part, to the
provisions of the stock options in substitution for which they are granted.
Options granted under this paragraph (b) or pursuant to the terms of the
agreements contemplated by Section 6(a)(i) hereof shall not reduce the
shares available for options, grants or incentive stock rights under the
Program as set forth in Section 4 hereof.
(c) If the optionee's employment by the Corporation or a Subsidiary shall
terminate, his option shall terminate unless otherwise determined by the
Committee, or specific provision has been otherwise made as evidenced by
the terms of the option agreement approved by the Committee. The Committee
shall have full power and authority to determine whether, to what extent
and under what circumstances any option shall be exercisable, suspended or
canceled in the event of an optionee's termination of employment.
5
<PAGE>
If an optionee dies while in the employ of the Corporation or a Subsidiary,
or within three months after termination of employment with options
exercisable pursuant to action taken by the Committee or otherwise in
accordance with the preceding sentences, the optionee's estate, personal
representative or beneficiary shall have the right to exercise such option
in accordance with the terms of the option agreement with respect to all
shares subject to option on the date of death.
If an optionee shall be transferred from the Corporation to a Subsidiary or
from a Subsidiary to the Corporation or from a Subsidiary to another
Subsidiary, his employment shall not be deemed to have terminated. If an
optionee shall be employed by a corporation or an entity which ceases to be
a Subsidiary, the Committee may, subject to the provisions of clauses (iv)
and (v) of Paragraph (a) of this Section 6, permit the participant to
exercise options held for such period of time as it determines with respect
to all shares which were available for purchase by the optionee on the date
the corporation or entity ceased to be a Subsidiary.
7. Incentive Stock Plan
The Committee may from time to time award shares of Incentive Stock and grant
incentive stock rights, or either, to eligible employees on the terms set forth
herein.
(a) "Incentive Stock" shall be shares of the Corporation's Common Stock awarded
pursuant to the terms of the Incentive Stock Plan.
(b) An "incentive stock right" shall, subject to the terms, conditions and
limitations of this Section 7, give the holder thereof the right to receive
in consideration of services performed for, but without payment of cash to,
the Corporation such shares of Common Stock, cash or a combination of the
two as the Committee may determine.
(c) Subject to the limitations of Section 4, the Committee shall from time to
time select, and report to the Board of Directors, (i) the individual
employees who are to receive shares of Incentive Stock or incentive stock
rights, or a combination thereof, (ii) the number of shares of Incentive
Stock a designated employee is to receive, either directly or upon
maturation of an incentive stock right, (iii) whether ownership of, or any
portion of, such shares of Incentive Stock is to be vested in the
designated employee without the possibility of forfeiture or other
restrictions at the time of the Committee's action or at one or more
specified dates in the future, (iv) whether ownership of such, or any
portion of such, shares of Incentive Stock is to be vested in the
designated employee at the time of the Committee's action, but subject to
the possibility of forfeiture or other restrictions, and (v) the specific
dates from the date of the Committee's award over which the possibility of
forfeiture or other restrictions are to lapse.
Shares of Incentive Stock shall be issued in the name of, and distributed
to, those employees from time to time designated by the Board as recipients
of Incentive Stock as follows:
6
<PAGE>
(1) Each employee designated as a recipient of shares of Incentive Stock
shall receive, promptly after the date or dates the Committee
determines the number of such shares which such employee is to receive
not subject to the possibility of forfeiture and other restrictions,
one or more stock certificates registered in the name of the
designated employee for such number of shares, the ownership of which
is vested non-forfeitably and without restriction in such employee;
and
(2) Certificates covering shares of Incentive Stock subject to the
possibility of forfeiture and other restrictions shall be issued
promptly after the date or dates the Committee determines the number
of such shares to be issued in the name of the designated employee but
held by the Corporation as provided in clause (e) below.
(d) The shares which are granted subject to restrictions and the possibility of
forfeiture (and all shares issued or distributed by means of dividends,
splits, combinations, reclassifications, or other capital changes thereon)
(i) may not be sold, assigned, transferred, pledged or otherwise
encumbered, except (a) for gifts to a spouse, ancestors, or descendants, or
to trusts for their benefit and (b) pursuant to the qualified domestic
relations orders referred to in Section 9 hereof, subject, however, in each
such case to the restrictions and possibility of forfeiture applicable to
such shares and (ii) except as otherwise provided in an agreement approved
by the Committee are to be forfeitable to the Corporation upon termination
of employment for any reason other than death, disability approved by the
Corporation or retirement with the consent of the Corporation. The
restrictions and possibility of forfeiture imposed by this clause (d) shall
lapse at such time and in such proportions as the Committee shall, subject
to limitations of clause (c) above, determine.
(e) Each certificate issued in respect of shares granted under the Incentive
Stock Plan subject to restrictions on transfer and the possibility of
forfeiture shall be registered in the name of the employee but shall be
held by the Corporation in safekeeping for the employee and until such
restrictions and the possibility of forfeiture shall lapse. Such
certificates shall bear a legend substantially as follows:
"The transferability of this certificate and the shares of stock
represented hereby are restricted and the shares are subject to the further
terms and conditions (including forfeiture) contained in the Incentive
Stock Plan of Covance Inc. and an agreement executed pursuant thereto. A
copy of such Plan and such agreement are on file in the office of the
Secretary of Covance Inc., Princeton, New Jersey."
(f) An employee who is to receive shares of Incentive Stock only upon the
expiration of certain specified periods or who is the holder of an
incentive stock right shall have no rights as a stockholder with respect to
any shares which may become vested in, or be awarded to, him, as the case
may be, until such shares have been actually issued.
(g) The value of shares of the Incentive Stock or the value of the shares of
Common Stock granted by the Corporation to the holder of an incentive stock
right shall be the mean between the high and low selling prices of the
Corporation's Common Stock on the New
7
<PAGE>
York Stock Exchange on the date the Committee determines that the
applicable performance objectives were met or the date the possibility of
forfeiture shall terminate, as the case may be.
(h) At the time an incentive stock right is granted, the Committee shall
establish with respect to each holder one or more performance periods and
performance objectives. If the objectives have been met and are being
maintained at the end of the applicable performance period to the
satisfaction of the Committee, the holder of the incentive stock right
shall receive promptly the shares and/or cash which are subject to the
agreement referred to below.
(i) Any provisions hereof the contrary notwithstanding, the Committee shall
have the authority and the power to adjust performance periods, performance
objectives and the number of shares which may be awarded pursuant to an
incentive stock right if it determines that conditions so warrant. Such
conditions may include, but need not be limited to, changes in functional
responsibilities of a holder of an incentive stock right, changes in laws
or government regulations, changes in accounting treatment or in generally
accepted accounting principles, acquisitions, dispositions or distributions
deemed to be material, or extraordinary events which significantly impact
consolidated financial performance.
(j) Incentive stock rights shall be evidenced by agreements in such form and
not inconsistent with the Incentive Stock Plan as the Committee shall
approve from time to time, which agreements shall, among other things,
contain in substance the following terms, conditions and provisions:
(i) The number of shares to which the incentive stock right relates and
whether such rights are to be paid in shares, in cash or in a
combination or the two;
(ii) The length of the performance period or periods;
(iii) The performance objectives applicable to an individual granted an
incentive stock right, which objectives may relate, but shall not be
limited, to overall corporate performance measures, such as earnings
per share, return on stockholders' equity and return on capital, or to
divisional, subsidiary or other business unit performance measures, or
to a combination of each; and
(iv) Such other rules, as determined by the Committee, governing the
continuation of an incentive stock right after the holder terminates,
either voluntarily or involuntarily, his employment with the
Corporation.
(k) Unless otherwise determined by the Committee or set forth in the agreement
contemplated by subsection (j) above, if the holder of an incentive stock
right shall cease to be employed by the Corporation or a Subsidiary, his
incentive stock right shall terminate immediately. However, if employment
is terminated on account of death, retirement or termination of employment
with the consent of the Corporation (including termination by reason of
retirement, disability or a Subsidiary ceasing to be such), the Committee
may award to such
8
<PAGE>
employee such shares or cash at such time and under such conditions as it
shall in its sole discretion determine.
8. Amendment and Administration of the Program
The Board of Directors may, upon the recommendation of the Committee, from time
to time alter, amend, suspend, or discontinue the Program or either Plan
thereunder, except that no alteration or amendment shall, without the approval
of the holders of a majority of the outstanding shares entitled to vote thereon,
increase the total number of shares which may be sold or awarded under the
Program, decrease the price at which options may be granted, change the
standards of eligibility of employees eligible to participate, materially
increase the benefits of the Program or either Plan thereunder to participants,
or extend the term of the Program or of options granted thereunder. Adjustments
in the total number of shares purchasable or awardable under the Program or
optioned to any individual and adjustments of the option price may be made,
however, without stockholder approval pursuant to the adjustment provisions
described under the provisions of Section 5 hereof. No amendment or modification
shall apply to affect adversely any employee with respect to incentive stock or
incentive stock rights already awarded to him or an option already granted.
Anything to the contrary in this Section 8 notwithstanding, should the
provisions of Rule 16b-3, or any successor rule, under the 1934 Act be amended,
the Board may amend the Program in accordance with any modifications to such
Rule.
With respect to persons subject to Section 16 of the 1934 Act, transactions
under the Program are intended to comply with all applicable conditions of Rule
16b-3, or any successor rule, under the 1934 Act. To the extent any provision of
the Program or action by the Committee, the Board of Directors or any
administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee or the Board of
Directors.
9. Assignability
No option or right granted under the Program shall be assignable or transferable
except by Will, by the laws of descent and distribution, or except for an
incentive stock option pursuant to domestic relations orders as defined in or
meeting the requirements of the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended. During the lifetime of an optionee, an
option shall be exercisable only by him and any shares purchased upon the
exercise of an option shall be issued in the name of the optionee alone.
10. Effective Date and Term of Program.
The Program shall become effective when approved by a majority of the votes cast
at a meeting of the Corporation's stockholders by stockholders entitled to vote
thereon. No shares may be optioned or awarded (except upon the attainment of
performance goals contemplated by Section 7(h) hereof) and no incentive stock
rights may be granted under the Program after the fifth anniversary, plus 60
calendar days, of the Program's effective date.
11. Use of Proceeds
Proceeds from the sale of stock under the Program shall constitute general funds
of the Corporation.
9
<PAGE>
12. Withholding
Whenever under the Program shares are to be issued in satisfaction of options,
awards or rights granted thereunder, the Corporation shall have the right to
require the employee to remit to it an amount in cash, in shares of the
Corporation's Common Stock, or though the reduction of options, awards or rights
to be issued thereof, necessary to satisfy federal, state and local withholding
tax requirements prior to the delivery of any certificate or certificates for
shares. Whenever under the Program payments are to be made in cash, such payment
shall be net of an amount necessary to satisfy federal, state and local
withholding tax requirements.
10
COVANCE INC.
- --------------------------------------------------------------------------------
RULES
of the
COVANCE RESTRICTED SHARE PLAN
- --------------------------------------------------------------------------------
Established by the Company in General Meeting
on [ ]
<PAGE>
Rules
of the
Covance Restricted Share Plan
CONTENTS
Rule Page No.
1. Definitions...................................................... 1
2. Grant of Awards.................................................. 4-6
3. Conditions relating to the grant of Awards....................... 6-7
4. Rights of Award Holder during Vesting Period..................... 7-8
5. Lapse of Awards.................................................. 8
6. Termination of Vesting Period and Lapse of Awards................ 8-9
7. Release of Restricted Shares..................................... 9
8. Issue of Shares.................................................. 9
9. Discretion As to Form of Payment................................. 9-10
10. Adjustments...................................................... 10
11. Administration................................................... 10-11
12. Alterations...................................................... 12
13. General.......................................................... 12
<PAGE>
Rules of the Covance Restricted Share Plan
1. Definitions
-----------
In this Plan, the following words and expressions shall, where the
context so permits, have the meanings set forth below:
"the Auditors" the auditors for the time being of the
Company acting as experts and not as
arbitrators;
"Award" an award of Restricted Shares pursuant to
the Plan;
"Award Certificate" a certificate issued under Rule 2.4;
"Award Holder" a person to whom an Award has been granted
(or, as the context requires, his personal
representatives);
"Base Compensation" the annual rate of salary of an Eligible
Employee, excluding bonuses and benefits in
kind
"the Company" Covance Inc. (Covance)
"Date of Grant" the date as of which an Award is granted
under the Plan pursuant to Rule 2;
"the Directors" the board of directors of the Company, or a
duly authorized committee thereof;
<PAGE>
"Eligible Employee" any person who is a US Eligible Employee or
an International Eligible Employee
"Group" the Company and its Subsidiaries and `member
of the Group' shall be construed
accordingly;
International Eligible any person who is a director or employee of
Employee an International Participating Company.
International a member of the Group, which the Board has
Participating Company designated to participate in the Plan as an
International Participating Company --
Appendix A(1) lists the International
Participating Companies at the date of
establishment of the Plan.
"Market Value" in relation to a Share on any day is the
middle market quotation for such Share on
the [New York Stock Exchange];
"Participating Company" Any US Participating Company or
International Participating Company.
"Restricted Shares" Shares which are the subject of an extant
Award under the Plan in relation to which
the Vesting Period has not terminated;
2
<PAGE>
"Rules" the Rules of the Plan and "Rule" shall be
construed accordingly;
"the Plan" the Covance Restricted Share Plan in its
present form, or as from time to time
altered in accordance with the Rules;
"Share" a share in the Company;
"Subsidiary" has the meaning ascribed by Section 424f of
the US Internal Revenue Code of 1986;
"the Trustees" the trustees from time to time of the
Covance Employee Share Trust;
"US Eligible Employee" any person who is a director or employee of
a US Participating Company and who is
eligible to receive a contribution under
Section 2.1 of the Covance Employee Stock
Ownership plan (without regard to the
limitations imposed by Section 4.04,
thereof).
"US Participating a member of the Group which the Board has
Company" designated to participate in the Plan as a
US Participating Company -- Appendix A(2)
lists the US Participating Companies at the
date of establishment of the Plan.
"Vesting Period" the period of time from the Grant Date until
the date when the restrictions placed on the
Restricted Shares lapse.
3
<PAGE>
References to any statutory provision are to that provision as amended
or re-enacted from time to time, and, unless the context otherwise
requires, words in the singular shall include the plural (and vice
versa) and words importing the masculine the feminine (and vice versa).
2. Grant of Awards
---------------
2.1 (a) Subject to Rule 2.2, the Directors may, at their
absolute discretion, grant Awards under the Plan to
Eligible Employees.
(b) The Directors may adopt such procedure as they think
fit for granting Awards, whether by invitation to
Eligible Employees to apply for Awards or by granting
Awards without issuing invitations.
2.2 (a) 1996 Award to International Eligible Employees. The
Directors shall grant an Award to each Person who is
an International Eligible Employee on 31 December
1996. For purposes of the Plan, 31 December 1996
shall be deemed to be the Grant Date with respect to
such award. The total number of Shares available for
award in 1996 shall be determined in accordance with
Appendix B. Such award shall be allocated pro rata to
all International Eligible Employees, based on their
Annualized Base Compensation.
(b) 1996 Award to US Eligible Employees. The directors
shall grant an Award to the US Eligible Employees in
accordance with Appendix B.
(c) 1997 and 1998 Awards to Eligible Employees. Any
amounts that lapse in 1997 or 1998 in accordance with
Rules 5 and 6, shall be allocated to individuals who
first become Eligible Employees in the year of lapse
(i.e., those Eligible Employees hired in that year).
Such awards shall be allocated pro rata, based on
Annualized Base Compensation; provided, however, that
the Award to any US Eligible Employee shall be
reduced (not below 0) by the value of any similar
reallocation of forfeitures under the Covance
Employee Stock Ownership Plan.
4
<PAGE>
(d) 1999 and 2000 Awards to Eligible Employees. Any
amounts that lapse in 1999 or 2000 in accordance with
Rule 5, shall be allocated to all Eligible Employees
pro rata based on Annualized Base Compensation
provided, however, that the Awards to any US Eligible
Employee shall be reduced (not below 0) by the value
of any similar reallocation of forfeitures under the
Covance Employee Stock Ownership Plan.
2.3 The terms attaching to an Award may include, without
limitation, a condition that the granting of an Award is
subject to the surrender for cancellation of any or all
outstanding Awards held by the Eligible Employee.
2.4 The Company shall issue to each Eligible Employee to whom it
has granted an Award an Award Certificate which shall be
executed under seal (or in such other manner as shall take
effect as a deed of the Company) and which shall be in such
form as the Directors shall from time to time determine. The
Award Certificate shall include details of:
(a) the Date of Grant of the Award;
(b) the number of Restricted Shares.
2.5 Each Eligible Employee to whom an Award is granted may by
notice in writing within 30 days of the Date of Grant disclaim
in whole or in part his rights under the Award in which case
the Award shall for all purposes be deemed never to have been
granted.
2.6 Every Award shall be personal to the Eligible Employee to whom
it is granted and
5
<PAGE>
shall not be capable of being transferred, assigned or
charged. Each Award Certificate shall carry a statement to
this effect.
3. Conditions relating to the grant of Awards
------------------------------------------
3.1 The Directors may determine that any Award shall be subject to
additional and/or modified terms and conditions relating to
the grant and terms of exercise as may be necessary to comply
with or take account of any securities, exchange control or
taxation laws, regulations or practice of any territory which
may have application to the relevant Eligible Employee, Award
Holder or Member of the Group.
3.2 In exercising their discretion under Rule 3.1 the Directors
may:
(a) require an Award Holder to make such declarations or
take such other action (if any) as may be required
for the purpose of any securities, taxes or other
laws of any territory which may be applicable to him
at the Date of Grant or at the end of the Vesting
Period; and
(b) adopt any supplemental rules or procedures governing
Awards as may be required for the purpose of any
securities, tax or other laws of any territory which
may be applicable to an Eligible Employee or Award
Holder.
3.3 When events have happened which cause the Directors to
consider that any existing constraints and/or conditions (as
the case may be) have become unfair or impractical, they may,
in their discretion (provided such discretion is exercised
fairly and reasonably), amend, relax, waive or substitute such
constraints or conditions so that such constraints or
conditions so amended, relaxed, waived or substituted would,
in the reasonable opinion of the Directors, be no more or less
difficult to abide by or satisfy than when they were
originally imposed or last amended or relaxed (as the case may
be). After any such amendment, relaxation, waiver or
substitution the Directors shall issue to the Award Holder a
replacement Award Certificate or other notice including the
details specified in Rule 2.4.
6
<PAGE>
4. Rights of Award Holder during Vesting Period
--------------------------------------------
4.1 During the Vesting Period, the Award Holder shall not sell,
transfer, pledge, assign or otherwise dispose of all or any of
the Restricted Shares or any interest therein. Any attempt by
the Award Holder to sell, transfer, pledge, assign or
otherwise dispose of such Restricted Shares, or any interest
therein shall result in immediate forfeiture of such Award.
4.2 During the Vesting Period:
(a) the Trustees shall exercise (or refrain from
exercising) the voting rights attaching to the
Restricted Shares subject to Awards made to those
Award Holders in such manner as they shall in their
absolute discretion think fit, and
(b) all dividends and other distributions with respect to
such Restricted Shares shall be used to acquire
further Restricted Shares which will be held subject
to the Awards to which they relate, and
(c) any scrip dividends shall be held subject to the
Awards to which they relate.
5. Lapse of Awards
---------------
Where any Award made under the Plan lapses, the Shares subject to that
Award shall be allocated in accordance with Rule 2.2.
7
<PAGE>
6. Termination of Vesting Period and Lapse of Awards
-------------------------------------------------
6.1 The Vesting Period shall terminate on the January 1 following
the second anniversary of the Date of Grant or, if earlier,
the date on which the Award Holder dies or ceases to be an
Eligible Employee by reason of what the Trustees consider, in
their absolute discretion, to be total and permanent
disability; provided, however, that any individual who is an
Eligible Employee on January 1, 2001 shall be fully vested.
6.2 To the extent that a vesting period has not expired, the Award
shall lapse on the date on which an Award Holder ceases to be
an Eligible Employee by reason of a termination of employment.
7. Release of Restricted Shares
----------------------------
When the Vesting Period in relation to an Award ends, the relevant
Restricted Shares shall be allotted or transferred (as the case may be)
to the Award Holder as soon as possible and, accordingly in cases where
Restricted Shares are to be transferred, the Company shall use its best
endeavours to ensure due transfer thereof.
8. Issue of Shares
---------------
8.1 All Shares issued pursuant to Awards under the Plan shall as
to voting, dividend, transfer and other rights (including
those arising on a liquidation) rank pari passu in all
respects with the Shares then in issue, except that they shall
not rank for any dividend or other rights declared by
reference to a record date preceding the date of issue.
8.2 If and so long as the Shares are listed on the [New York Stock
Exchange] the Company shall use its best endeavours to procure
that as soon as practicable after
8
<PAGE>
the allotment of any Shares pursuant to the Plan application
shall be made to the [New York Stock Exchange] for admission
of the Shares to dealing.
9. Discretion as to Form of Payment
--------------------------------
9.1 On termination of the Vesting Period in relation to an Award,
any Award shall be paid in Shares, except that, in their
discretion, the Directors may in lieu of allotting or
procuring the transfer of any or all Restricted Shares in
accordance with Rule 7 pay to such Award Holder a cash sum
equal to the value of such Restricted Shares (being the middle
market quotation on the [New York Stock Exchange] for the
first Dealing Day following the end of the Vesting Period).
9.2 If payment is made pursuant to this Rule to an Award Holder,
he shall have no further rights in respect of such Restricted
Shares. The Company may make any deductions in respect of such
payment which it is required to make under the laws of any
territory which laws are applicable to the Award Holder and/or
his employing Member of the Group.
10. Adjustments
-----------
10.1 The number of Restricted Shares subject to an Award may be
adjusted in such manner as the Directors shall determine (and
which the Auditors shall confirm in writing to be in their
opinion fair and reasonable) following any capitalisation
issue, subdivision, consolidation or reduction of share
capital and in respect of any discount element in any rights
issue or other variation of share capital to the intent that
(as nearly as may be possible without involving fractions of a
Share the value of the Award shall remain unchanged.
9
<PAGE>
10.2 The Directors may take such steps as they may consider
necessary to notify Award Holders of any adjustments made
under Rule 10.1 and to call in, cancel, endorse, issue or
re-issue any Award Certificate consequent upon such
adjustment.
11. Administration
--------------
11.1 Notices or documents required to be given to an Eligible
Employee or to an Award Holder shall either be delivered to
him by hand or sent to him by first class post pre-paid at his
last known home or business address according to the
information provided by him. Notices sent by mail shall be
deemed to have been given on the seventh day following the
date of posting.
11.2 The Company may distribute to Award Holders copies of any
notice or document sent by the Company to its shareholders
generally.
11.3 The Company shall at all times either keep available
sufficient unissued Shares to satisfy all extant Awards
(taking account of any other obligations of the Company to
allot unissued Shares) or shall ensure that sufficient issued
Shares will be available to satisfy the exercise of such
Awards.
11.4 The Directors may make such regulations for he administration
of the Plan as they deem fit, provided that no regulation
shall be valid to the extent it is inconsistent with the
Rules.
11.5 The decision of the Directors in any dispute relating to an
Award, or the due exercise thereof, or any other matter in
respect of the Plan, shall be final and conclusive, subject to
the determination of the Auditors, when so required by Rule
10
<PAGE>
11.6 The costs of establishing and administering the Plan and the
associated costs of making Awards shall be borne by the
Participating Employers in such proportions as the Directors
think fit.
11.7 Any stamp duty chargeable on the instruments of transfer
entered into pursuant to each Award Agreement shall be borne
by the Company, or where relevant, any Participating Employer
of Award Holders employed by it.
12. Alterations
-----------
12.1 Subject to Rule 12.2, the Directors may in their discretion
alter the Rules.
12.2 No alteration may be made which would abrogate or adversely
affect the subsisting rights of Award Holders.
12.3 Written notice of any amendment made in accordance with this
Rule 12 shall be given to all Award Holders.
13. General
-------
13.1 The Plan shall terminate on the tenth anniversary of the date
on which it is approved by the Company in general meeting or
at any earlier time by the passing of a resolution by the
Directors. Termination of the Plan shall be without prejudice
to the subsisting rights of Award Holders.
13.2 If an Award Holder shall cease for any reason to be in the
employment of a Participating Employer, he shall not be
entitled, by way of compensation for loss of office or
otherwise howsoever, to any sum or any benefit to compensate
him for the loss of any right or benefit accrued or in
prospect under the Plan.
11
<PAGE>
13.3 This Plan and all Awards shall be governed by and construed in
accordance with English law.
12
<PAGE>
APPENDIX A1
International Participating Companies
CORNING Bessalear Limited (England)
CORNING Bessalear Limited (Ireland)
GHBA A.G.
CORNING Bessalear AG
G.H. Bessalear Associates GmbH
CORNING Bessalear Pty. Ltd.
CORNING Bessalear S.A.
CORNING Bessalear SARL
CORNING Hazleton GmbH
CORNING SciCor S.A.
CORNING Pharmaceutical Services Ltd.
CORNING Bessalear Ltd.
CORNING Bessalear CRU Ltd.
CORNING Hazleton Ltd.
CRS Pacmed A.G.
13
<PAGE>
APPENDIX A2
U.S. Participating Companies
COVANCE INC. (f/k/a Corning Pharmaceutical Services Inc.)(Delaware)
Covance Clinical and Periapproval Services Inc. (f/k/a Corning
Besselaar Inc.)(New Jersey)
Covance Clinical Research Unit Inc. (f/k/a Corning Besselaar Clinical
Research Units Inc.)(Florida)
Covance Periapproval Services Inc. (f/k/a Corning Pact Inc.)(Delaware)
Covance Preclinical Corporation (f/k/a Hazleton Corporation)
(Washington)
Covance Laboratories Inc. (f/k/a/ Corning Hazleton Inc.)(Delaware)
Covance Research Products Inc. (f/k/a HRP Inc.)(Pennsylvania)
Covnace Central Laboratory Services Inc. (f/k/a Corning SciCor Inc.)
Covance Central Laboratory Limited Partnership dba Covance Central
Laboratory Services Inc. (f/k/a/ Corning SciCor Limited
Partnership)(Indiana)
Covance Pharmaceutical Packaging Services Inc. (f/k/a Corning National
Packaging Inc.)(Connecticut)
Covance Health Economics and Outcome Services Inc. (f/k/a Corning HTA
Inc.)(Delaware)
Covance Biotechnology Srvices Inc. (f/k/a Corning Bio Inc.)(Delaware)
Pharmaceutical Laboratory Services Inc.
14
<PAGE>
APPENDIX B: 1996 ALLOCATION
The 1996 Total allocation shall be determined as follows:
1. 1996 Total Allocation: The 1996 total allocation shall be
determined as follows: The total allocation of shares to the
Covance Employee Stock Ownership Plan ("ESOP") and the Plan shall
equal to 1.5% of the Shares outstanding on 31 December 1996, with
such determination being made before such allocation.
2. Aggregate International Base Compensation and Aggregate US Base
Compensation. Aggregate International Base Compensation shall equal
the sum of the Annualized Base Compensation (converted to US
dollars) for each individual who is an International Eligible
Employee on 31 December 1996. The Aggregate US Base Compensation
shall equal the sum of the Annualized Base Compensation for each
individual who is a US Eligible Employee on 31 December 1996. Total
Aggregate Base Compensation shall be the sum of the Aggregate
International Base Compensation and the Aggregate US Base
Compensation.
3. Allocation Between Plans. The portion of the 1996 Total Allocation
shall be divided into the International Portion and the US Portion
as follows: (i) first, shares having a value equal to 1% of
Aggregate International Compensation shall be allocated to the
International Portion and (ii) next, the remainder of the 1996
Total Allocation shall be allocated to the International Portion
and the US portion in the proportions represented by Aggregate
International Compensation and Aggregate US Compensation
respectively.
4. Award to International Eligible Employees Under this Plan. The
International Portion shall be allocated to International Eligible
Employees under this Plan in accordance with Rule 2.2 (a) hereof.
15
<PAGE>
5. Award to US Eligible Employees. The Awards to US Employees under
this Plan shall be determined as follows:
(a) For each US Eligible Employee, determine the amount of Award,
based on the US Portion (as determined above) that would be
provided under the ESOP, without regard to the limitations
imposed by Sections 415 and 401(a)(17) of the Code.
(b) For each US Eligible Employee, determine the amount of award,
based on the US Portion (as determined above) that would be
provided under the ESOP, after application of the limitations
imposed by Sections 415 and 401(a)(17) of the Code. This
amount shall be awarded under the ESOP to such individuals.
(c) The difference between (a) and (b) above shall be awarded to
each US Eligible Employee under this Plan.
16
Employment Agreement
between
Christopher Kuebler
&
Covance Inc.
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into between
COVANCE INC. (formerly Corning Pharmaceutical Services Inc.) (the "Company"), a
Delaware corporation having its principal place of business at 210 Carnegie
Center, Princeton, NJ 08540- 6233, and CHRISTOPHER KUEBLER (the "Executive"),
with a residence at 9 Woodland Road, Newtown, PA 18940 as of November 1, 1996
(the "Effective Date").
WHEREAS, Executive has been employed by the Company as President and
Chief Executive Officer; and
WHEREAS, the Company considers the services of the Executive to be
unique and essential to the success of the Company's business; and
WHEREAS, the Company and the Executive now wish to enter into an
agreement of employment that will constitute the sole and exclusive agreement
relating to the employment of Executive by the Company on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, terms and conditions set forth herein, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed between the Corporation and the Executive as follows:
I. Employment: The Company shall continue to employ the Executive in a
full-time capacity in the position set forth in this paragraph, and
the Executive shall continue to accept such employment upon the terms
and conditions set forth herein. Such
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 2
employment shall be in the capacity of President and Chief Executive
Officer of the Company, and Chairman of the Board of Directors of the
Company.
II. Term: Unless earlier terminated pursuant to Section IX hereof, the
term of employment under the agreement shall commence on the
Effective Date and shall continue through the third anniversary of
the Effective Date (such initial term, as it may be extended from
time to time in accordance with Section XVI or shortened pursuant to
Section IX hereof being, the "Employment Term").
III. Duties: During the Employment Term, the Executive shall accept and
diligently perform to the reasonable satisfaction of the Company,
those executive services for the Company as may be commensurate with
his position and title and as may be designated from time to time by
the Company's Board of Directors in connection with any aspect of the
Company's business. The Executive agrees to devote his undivided time
and attention to the business of the Company. The Executive shall
not, without the prior written consent of the Company's Board of
Directors, be directly or indirectly engaged in any other trade,
business or occupation for compensation requiring his personal
services during the Employment Term. Nothing in this agreement shall
preclude the Executive from: (i) engaging in charitable and community
activities or from managing his personal investments, or (ii) serving
as a member of the board of directors of an unaffiliated company not
in competition with the Company, subject however in each such case of
board membership, to approval by the Company's Board of Directors
(which approval shall not be unreasonably withheld).
2
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 3
IV. Cash Compensation: Executive shall be compensated for services
rendered during the Employment Term as follows:
(a) Base Salary: Effective from and after the consummation of the
spin-off described in Section XIX of this Agreement, Executive shall
be compensated at an annual base salary of no less than $450,000 for
the period during which he serves as President and Chief Executive
Officer of the Company. The Company's Board of Directors shall review
and may, if appropriate, at its discretion, increase (but not
decrease) this annual base salary effective the first day of any
future new year during the Employment Term to reflect ordinary salary
actions generally granted to other Company employees.
(b) Variable (bonus) Pay: In addition to the Base Salary provided for
in Section IV(a) above, Executive will participate in the Company's
Variable Compensation Plan (the "Bonus Plan"). The Bonus Plan
provides that upon satisfaction of certain goals for the Company
established by the Company's Board of Directors, Executive shall
receive an annual incentive equal to 65% of Executive's annual base
salary in effect at the time the goals are established; provided,
however, that Executive's payout, if any, under the Bonus Plan for
1997 shall be computed using his salary specified in Section IV (a)
hereof.
The Bonus Plan also provides that Executive may earn up to 130% of
Executive's annual base salary in effect at the time the goals are
established if the Company has outstanding results, again as
determined by the Company's Board of Directors. At the discretion of
the Company's Board of Directors, any annual incentive compensation
in excess of 65% of Executive's annual base salary may be paid to
Executive in non-qualified stock options, the terms of which would be
specified in a Stock Option Agreement entered into pursuant to the
Company's Employee Equity Participation Program. Actual awards would
be determined by the Company's Board
3
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 4
of Directors after the end of the applicable performance year and
would be granted to Executive shortly thereafter. The annual
incentive percentage targets may be increased, but not decreased,
during the Employment Term.
V. Equity /Awards: Executive may be awarded, from time to time,
additional compensation (such as stock options or restricted stock)
pursuant to the Company's Employee Equity Participation Program or
any additional or replacement incentive compensation or long-term
compensation program established for the senior officers of the
Company. Any awards under such programs, except as provided below,
shall be at such levels or in such amounts as the Company's Board of
Directors deems, in its sole discretion, appropriate for the position
occupied by Executive and his performance therein. The terms,
conditions and rights with respect to any such grants will be subject
to the actual provisions and conditions applicable to such plans.
In conjunction with the Executive's first year participation in the
Company's Employee Equity Participation Program, the Company shall
grant to the Executive, on the terms set forth below, that number of
shares of the Company's common stock, subject to certain restrictions
(the "Restricted Stock"), and options to purchase the Company's
common stock (the "Stock Options"), that have in the aggregate a
present value equal to not less than $1,619,982 (the "First Grant
Value"). The First Grant Value shall consist of Stock Options and
Restricted Stock in the ratio of three Stock Options for every share
of Restricted Stock. Each Stock Option shall be worth a present value
amount equal to the product of (i) the fair market value of the
Company's common stock and (ii) .33. The fair market value of the
Company's common stock shall be determined based on the weighted
average per share price of each trade of the Company's common stock
occurring during normal trading hours of the first five days of
"regular way" trading after completion of the spin-off described in
Section XIX hereof. The rights, obligations and other conditions of
the Restricted Stock and Stock
4
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 5
Options shall be as specified in that certain Incentive Stock
Agreement and Stock Option Agreement, in each case, between Executive
and the Company.
VI. Employee Benefits:
(a) General Provisions: Except as expressly provided in this
Agreement, Executive shall be eligible to participate in all employee
benefit plans offered by the Company (e.g. Life Insurance, Medical &
Dental Insurance, Travel Accident Insurance, Short Term Disability
Insurance, Long Term Disability Insurance, Flexible Spending
Accounts, Regular and Supplemental Accidental Death and Disability
Insurance, Optional/Supplemental Life Insurance, Stock Purchase
Savings Plan (401(k)), Employee Stock Purchase Program, Employee
Stock Ownership Plan, and other personal benefit plans of the
Company) on a basis which is no less favorable to the Executive than
the Company may make available to other senior officers of the
Company; provided, however, that in all events the eligibility and
other terms of any such plans shall govern the participation of the
Executive therein.
(b) Supplemental Executive Retirement Plan: Executive will be
eligible to participate in the Company's Supplemental Executive
Retirement Plan (SERP). Under the terms of the SERP, Executive will
be entitled to receive a nonqualified retirement benefit in
accordance with the terms and provisions thereof, as administered by
the Company's Board of Directors.
(c) Vacation and Sick Leave: Executive shall be entitled to vacation
and sick leave in accordance with the vacation and sick leave
policies adopted by the Company from time to time, provided that the
Executive shall be entitled to no less than five (5) weeks of
vacation each calendar year. Any vacation shall be at such times and
for such
5
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 6
periods as shall be mutually agreed upon between the Executive and
the Company. The Executive shall be entitled to all public holidays
observed by the Company.
VII. Applicable Taxes: There shall be deducted from any compensation
payments made under this Agreement any Federal, state and local taxes
or other amounts required to be withheld by any entity having
jurisdiction over the matter.
VIII. Miscellaneous:
(a) Business Travel and Expenses: Executive shall be reimbursed by
the Company for reasonable travel and other business expenses, as
approved by the Company, which are incurred and shall be accounted
for in accordance with the Company's normal practices and procedures
for reimbursement of expenses.
(b) Housing Loan: There will be no change in the terms of Executive's
outstanding housing loan arrangement with the Company.
(c) Automobile Expenses: The Company will provide Executive with a
gross automobile allowance of $1,070 per month (or other such monthly
amount as is provided to other senior executives of the Company in
accordance with the provisions of the Company's auto allowance
program). Such amounts will be disclosed for purposes of Securities
and Exchange Commission filings as appropriate or required.
(d) Financial Counseling and Legal Services: The Company will provide
an annual allowance of $10,000 (grossed-up for tax purposes using an
incremental income tax rate of 45%) for the Executive to use for
financial counseling, tax preparation and legal
6
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 7
services. Such amounts will be disclosed for purposes of Securities
and Exchange Commission filings as appropriate or required.
(e) Ongoing Non-Exclusivity: Nothing in this Agreement shall prevent
the Executive from being entitled to receive any additional
compensation or benefits as approved by the Company's Board of
Directors and which would amend or supplement the compensation or
benefits specified in this Agreement.
IX. Termination of Employment: Notwithstanding any other provision of
this Agreement, the employment of the Executive pursuant to this
Agreement may be terminated by the Company's Board of Directors as
follows:
(a) Termination For Cause: Executive may be terminated at any time
during the Employment Term for "Cause". As used herein, the term
"Cause" shall mean (i) conviction of the Executive of a felony or
conviction of a misdemeanor if such misdemeanor involves moral
turpitude; (ii) Executive's committing any act of gross negligence or
intentional misconduct in the performance or non-performance of his
duties as an employee of the Company, including any such actions
which constitute sexual harassment under applicable laws, rules or
regulations; (iii) if Executive is not disabled (as defined below), a
failure or refusal to perform the duties and services specified
herein for a period of not less than thirty (30) days; (iv) any
material breach by the Executive of any material provision of this
Agreement (other than for reasons related only to the business
performance of the Company or business results achieved by the
Executive); or (v) misappropriation of Company assets or personal
dishonesty which causes financial or reputational harm with respect
to the Company.
7
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 8
For purposes of this section, no act or failure to act on Executive's
part shall be considered to be reason for termination for Cause if
done, or omitted to be done, by
Executive in good faith and with the reasonable belief that the
action or omission was in the best interests of the Company.
(b) Termination For Disability: At the sole discretion of the
Company's Board of Directors, Executive may be terminated if the
Executive is disabled (as defined below) and shall have been absent
from his duties with the Company on a full-time basis for one hundred
and twenty (120) consecutive days, and within thirty (30) days after
written notice by the Company to do so, the Executive shall not have
returned to the performance of his duties hereunder on a full-time
basis. In the event of such termination, the Company shall make to
Executive the payments specified in Section IX(c). As used herein,
the term "disabled" shall (i) mean that the Executive is unable, as a
result of a medically determinable physical or mental impairment, to
perform the duties and services of his position, or (ii) have the
meaning specified in any disability insurance policy maintained by
the Company, whichever is more favorable to the Executive.
(c) Severance Benefits: Executive's employment may be terminated
without Cause if the Company's Board of Directors, upon assessment of
the general business performance of the Company and the specific
performance of the Executive, determines that the business needs of
the Company require the replacement of the Executive, provided that
in such event:
(i) Executive shall be entitled to receive three (3) years base
salary (at the Executive's effective annual rate on the date of
termination) which amount shall be paid in a lump-sum (net of
appropriate withholdings) within sixty (60) days of the date of
termination; and
8
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 9
(ii) Executive shall be entitled to receive an amount equal to the
product of (A) three (3), (B) the Executive's annual base salary
in effect at the time of termination, and (C) the higher of 65%
and the then applicable annual incentive percentage specified in
the Bonus Plan, which amount shall be paid in a lump-sum (net of
appropriate withholdings) within sixty (60) days of the date of
termination; and
(iii) Executive shall be entitled to continue participation in the
Company's health and benefit plans (to the extent allowable in
accordance with the administrative provisions of those plans and
applicable federal and state law) for a period of up to three (3)
years or until Executive is covered by a successor employer's
benefit plans, whichever is sooner.
(d) Change-of-Control: Should Executive's employment be terminated by
the Company (for reasons other than Cause), or should Executive's
duties as President and Chief Executive Officer of the Company be
diminished in any respect (a "Constructive Termination") (either
event being referred to herein as an "Event of Termination"), within
twelve (12) months following a "Change-Of-Control" (as defined
below), Executive will be entitled to receive all of the "Severance
Benefits" described in paragraph (c) above, and, in addition:
(i) All stock options (including the Stock Options), restricted
stock (including the Restricted Stock), deferred compensation and
similar benefits which have not become vested on the date of an
Event of Termination shall become vested upon such Event.
(ii) The Executive shall be entitled to receive any payments
calculated pursuant to Section XVIII hereof.
9
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 10
For purposes of this Agreement, a Change-Of-Control is defined to be:
(i) any person (including as such term is used in Section 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
beneficial owner, directly or indirectly, of Company securities
representing 20% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or
in the aggregate), a majority of the individuals elected to serve
on the Company's Board of Directors are different then the
individuals who served on the Company's Board of Directors at any
time within the two years prior to such proxy contest or contests
or other forms of contested shareholder votes; or
(iii) the Company's shareholders approve a merger or consolidation
(where in each case the Company is not the survivor thereof), or a
sale or disposition of all or substantially all of the Company's
assets or a plan of partial or complete liquidation; or
(iv) an offerer (other than the Company) purchases shares of the
Company's common stock pursuant to a tender or exchange offer for
such shares.
(e) Except as may be otherwise provided in applicable Company
compensation & benefit plans, the Company shall not be liable for any
salary or benefit payments to Executive beyond the date of
Executive's voluntary termination of employment with the Company. In
the event of a termination of employment under Sections IX(a) or
IX(b) above, the Executive shall not be entitled to any compensation
or other benefits
10
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Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 11
not already earned and owing to the Executive on account of his
services on the date of such termination of employment.
(f) Outplacement Assistance: In the event Executive is involuntarily
terminated or Constructively Terminated as a result of a Change of
Control or for other reasons that do not constitute Cause, the
Company shall provide for Executive, at the Company's cost, executive
outplacement support for one-year following such termination.
X. Arbitration: In the event of any difference of opinion or dispute
between the Executive and the Company with respect to the
construction or interpretation of this Agreement or the alleged
breach thereof, which cannot be settled amicably by agreement of the
parties, then such dispute shall be submitted to and determined by
arbitration by a single arbiter in the city of Trenton, New Jersey in
accordance with the rules then in effect, of the AMERICAN ARBITRATION
ASSOCIATION, and judgment upon the award rendered shall be final,
binding and conclusive upon the parties and may be entered in the
highest court, state or federal, having jurisdiction.
The Company shall reimburse Executive for all expenses incurred by
Executive in connection with any arbitration, including the
reasonable costs and expenses of legal counsel, to the extent the
arbitration is concluded in the Executive's favor.
XI. Confidentiality: The Company possesses and will continue to possess
trade secrets or other information which has been crafted,
discovered, developed by or otherwise become known to the Company, or
in which property rights have been assigned or otherwise conveyed to
the Company, which information has commercial value with respect to
the business and operations of the Company or the business and
operations of
11
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 12
its subsidiaries or its affiliates, including, but not limited to,
information regarding sales, costs, customers, employees,
products, services, apparatus, equipment, processes, formulae,
marketing, or the organization, business or finances of the
Company or its subsidiaries or its affiliates, or any information
the Executive has reason to know the Company would like to treat
as confidential for any purpose, such as maintaining a competitive
advantage or avoiding undesirable publicity, whether or not
developed by the Executive ("Confidential Information"). Unless
previously authorized in writing or instructed in writing by the
Company, the Executive will not, from and after the date of
employment with the Company, directly or indirectly, use for his
own benefit or purposes, or disclose to, or use for the benefit or
purposes of, anyone other than the Company or its subsidiaries or
affiliates, any Confidential Information, unless and until, and
then only to the extent that, such Confidential Information has
(a) been or becomes published, or is or becomes generally known in
the trade through no fault of the Executive, or (b) such
information is made known and available to the Executive by a
third party, who, by such disclosure to the Executive does not
breach any duty or obligation to the Company or its subsidiaries
or affiliates.
In the event the Executive become legally compelled to disclose any
of the Confidential Information, the Executive will provide the
Company with prompt notice so that the Company may seek a protective
order or other appropriate remedy and/or waive compliance with the
provisions of this Agreement. If, in the absence of a protective
order or the receipt of a waiver hereunder, the Executive is
nonetheless legally required to disclose Confidential Information to
any tribunal or else stand liable for contempt or suffer other
censure or penalty, the Executive may disclose such Confidential
Information to such tribunal without liability hereunder.
Upon termination of the Executive's employment with the Company, he
will deliver to the Company all written embodiments of the
Confidential Information, including all
12
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Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 13
notes, drawings, records, and reports pertaining to work done by the
Executive during the Employment Term and all other matters of secret
or confidential nature relating to the Company's business.
XII. Non-Competition. The Executive acknowledges that the services to be
rendered by the Executive to the Company are of a special and unusual
character, with a unique value to the Company, the loss of which
cannot adequately be compensated by damages or an action at law. In
view of the unique value to the Company of such services for which
the Executive is employed at the Company, because of the Confidential
Information obtained by, or disclosed to the Executive, and as a
material inducement to the Company to compensate the Executive as
well as provide him with additional benefits and other good and
valuable consideration, the Executive covenants and agrees that:
(a) Unless authorized by the Company's Board of Directors in writing,
Executive shall not, during the Employment Term and for one year
after the expiration of the Employment Term (the "Post Employment
Term", the Employment Term and the Post Employment Term, being
collectively, the "Period"), become employed by, become a director,
officer, shareholder or partner of, or to otherwise enter into,
conduct, or advise any business, whether directly or indirectly,
which offers services or products in the United States and any other
geographical regions where the Company, or its subsidiaries or its
affiliates, is then offering its services or products in competition
with services or products sold by the Company, or its subsidiaries or
its affiliates at any time during the Period in the United States or
such region, including, without limitation, the conduct of contract
pre-clinical toxicology laboratory services, contract
biopharmaceutical clinical laboratory services, contract
bioprocessing or manufacturing services, contract drug packaging
services, Phase I, II, III or IV clinical studies or
13
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 14
outcomes or disease management studies (collectively, the "Company
Services"); provided that the Executive shall not be bound by the
restrictions contained in this Section XII(a) unless the Company has
made all payments to the Executive which are due and owing to the
Executive under this Agreement or any plan of the Company, including
any equity incentive plan or bonus incentive plan of the Company, or
otherwise; provided, further, that if Executive has been dismissed by
the Company for Cause, or Executive has voluntarily terminated his
employment with Covance for any reason or no reason, Executive shall
not be bound by the provisions of this Section XII(a) during the Post
Employment Term unless the Company has made to the Executive the
payments specified in Section IX(c) of this Agreement. Nothing herein
shall restrict Executive in his employment in any capacity by a
corporation or entity engaged substantially in the manufacture or
sale of pharmaceuticals, or any other business which does not offer
the Company Services. Ownership of not more than 1% of the issued and
outstanding shares of any class of securities of a corporation, the
securities of which are traded on a national securities exchange or
in the over-the-counter market, shall not cause Executive to be
deemed a shareholder under this provision.
(b) During the Period, the Executive shall not, directly or
indirectly, solicit, divert or accept any business from any customer
of the Company, its subsidiaries or affiliates to the detriment of
any of the foregoing or seek to cause any such customers to refrain
from doing business with or patronizing the Company, its subsidiaries
or its affiliates.
(c) During the Period, the Executive shall not, directly or
indirectly, solicit or induce for employment any employee of the
Company, its subsidiaries or affiliates or otherwise encourage any
employee of the Company, its subsidiaries or affiliates to leave the
Company, or any of its subsidiaries or affiliates. For purposes of
this Agreement, advertisements in trade magazines, use of executive
search firms and other conventional
14
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 15
means of obtaining employees shall not be construed as solicitation,
inducements or encouragement unless the party utilizing such
conventional means specifically directs the efforts at employee(s)
with whom the party may not have contact pursuant to the terms of
this Agreement.
(d) For purposes of this Agreement, the term "directly or indirectly"
shall be construed in its broadest sense and shall include the
activities of the members of the Executive's immediate family or any
partnership, or as otherwise specified above, and the term "customer"
shall mean any person or entity to which the Company has sold
services during the one-year period prior to the date the Executive
ceased employment with the Company or any persons or entities
targeted by the Company or contacted for the purpose of selling such
services during such one-year period which Executive knew about or
reasonably should have known about.
XIII. Ownership of Know-How, Inventions and Other Intellectual Property:
All the know-how, innovations, inventions, discoveries, improvements,
procedures, programs, formulae and specifications which have been or
may be either, directly or indirectly, developed, conceived or made
by the Executive in connection with the Executive's employment with
the Company, whether or not in concert with other employees or shown
or delivered to the Company, or any of its subsidiaries or its
affiliates, and whether or not they are eligible for patent,
copyright, trademark, trade secret or other legal protection, shall
be the exclusive property of the Company and the Executive shall, at
the Company's request and expense, promptly execute any and all
documents or instruments which may be necessary to evidence such
ownership.
Obligations of this Agreement cover any and all inventions,
discoveries or improvements, directly or indirectly, conceived or
made by the Executive in connection
15
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Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 16
with the Executive's employment with the Company prior to the date of
this Agreement.
The Executive will communicate to the Company promptly and fully all
improvements and inventions he makes or conceives (either solely or
jointly with others) during the period of the Executive's employment
with the Company and conceived by the Executive, during the Post
Employment Term if based on or related to his employment at the
Company.
XIV. Patents: The Executive will, during and after the Period at the
Company's request and expense but without additional compensation,
assist the Company and its nominees in every proper way to obtain and
to vest in the Company or its nominees, title to patents on such
improvements and inventions in all countries, by executing all
necessary or desirable documents, including applications for patents
and assignments thereof.
XV. Records and Documents: Except in the performance of his duties as an
Executive of the Company, the Executive will not at any time or in
any manner make or cause to be made any copies, pictures, duplicates,
facsimiles, or other reproductions, recordings, abstracts, or
summaries of any reports, studies, memoranda, correspondence,
manuals, customer lists, software, records, formulae, plans or other
written, printed, or otherwise recorded material of any kind whatever
belonging to or in the possession of the Company or its subsidiaries
or affiliates, which may be produced or created by the Executive or
others or which may come into the Executive's possession in the
course of his employment, or which relate in any manner to the then
current or prospective business of the Company, its subsidiaries or
its affiliates. The Executive shall have no right, title or interest
in any such materials, and the Executive agrees that he has not
16
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 17
removed and will not remove such materials without the prior written
consent of the Company or its subsidiaries or affiliates, and that he
will surrender all such material to the Company immediately upon
expiration of the Employment Term, or at any time prior thereto upon
the request of the Company.
XVI. Renewal: At the expiration of the initial term or any subsequent
term, the term of the Agreement may be extended for a period as
determined by the mutual agreement of the Executive and the Company's
Board of Directors. Notice of any such extension shall be provided to
the other party not earlier than six months and not later than three
months prior to the expiration of the existing term. The Company
shall be under no obligation to extend the term of this Agreement if
the Executive has engaged in actions or inactions which would
constitute reasons to dismiss the Executive for Cause. If the Company
decides not to renew the term of this Agreement (including any
renewal after initial the term and any subsequent or successor term
or terms) for any reason other than Cause, the Company shall make to
the Executive all of the payments specified in Section IX(c) and on
the terms of such Section.
XVII. Other Matters:
(a) Entire Agreement: This Agreement constitutes the entire agreement
between the Company and the Executive relating to the subject matter
hereof, and supersedes any previous agreements, commitments and
understandings, written or oral, with respect to the matters provided
herein, except as expressly provided in Section XI hereof. As used in
this Agreement, terms such as "herein", "hereof", "hereto" and
similar language shall be construed to refer to this entire
instrument and not merely the paragraph or sentence in which they
appear, unless so limited by express language.
17
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Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 18
(b) Assignment: Except as set forth below, this Agreement and the
rights and obligations contained herein shall not be assignable or
otherwise transferable by either party to this Agreement without the
prior written consent of the other party to this Agreement.
Notwithstanding the foregoing, any amounts owing to the Executive
upon his death with respect to a portion of the Employment Term prior
to the executive's death shall inure to the benefit of his heirs,
legatees, personal representatives, executor or administrator.
(c) Notices: Any and all notices provided for under this Agreement
shall be in writing and hand delivered or sent by first class
registered or certified mail, postage prepaid, return receipt
requested, or by reputable overnight courier, or by telecopier (with
return telecopy), addressed to the Executive at his residence or to
the Company at its usual place of business or at any other address
specified in writing and provided to the other party hereto, and all
such notices shall be deemed effective at the time of delivery or at
the time delivery is refused by the addressee upon presentation.
(d) Amendments/Waiver: No provision of this Agreement may be amended,
waived, modified, extended or discharged unless such amendment,
waiver, extension or discharge is agreed to in writing signed by both
the Company and the Executive.
(e) Applicable Law: This Agreement and the rights and obligations of
the parties hereunder shall be construed, interpreted, and enforced
in accordance with the laws of the State of New Jersey.
(f) Severability: The Executive hereby expressly agrees that all of
the covenants in this Agreement are reasonable and necessary in order
to protect the Company and its business. If any provision or any part
of any provision of this Agreement shall be
18
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 19
invalid or unenforceable under applicable law, such part shall be
ineffective only to the extent of such invalidity or unenforceability
and shall not affect in any way the validity or enforceability of the
remaining provisions of this Agreement, or the remaining parts of
such provision.
(g) Successor of Interests: In the event the Company merges or
consolidates with or into any other corporation or corporations where
the Company is not the survivor thereof, or sells or otherwise
transfers substantially all its assets to another corporation, the
provisions of this Agreement shall be binding upon and inure to the
benefit of the corporation surviving or resulting from the merger or
consolidation or to which the assets are sold or transferred and,
upon any such event, the Company shall obtain the assumption of this
Agreement by the other corporation. All references herein to the
Company refer with equal force and effect to any corporate or other
successor of the corporation that acquires directly or indirectly by
merger, consolidation, purchase or otherwise, all or substantially
all of the assets of the Company.
(h) Injunctive Relief: The Executive agrees that the remedies
available to the Company at law for any breach of any of these
obligations hereunder may be inadequate, and the Executive
accordingly agrees and consents that temporary or permanent
injunctive relief, and/or an order of specific performance, may be
granted in any proceeding which may be brought to enforce any
provision hereof, without the necessity of proof of actual damage, in
addition to any other remedies available to the Company at law.
(i) Release: In the event Executive is terminated or Constructively
Terminated without Cause, the obligation of the Company to make to
Executive any or all of the payments specified under this Agreement
(including, without limitation, the payments specified in Section IX)
shall be subject to Executive's execution and delivery to the Company
of
19
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 20
a release in form and substance reasonably satisfactory to the
Company of all claims, demands, suits or actions, whether in law or
at equity, Executive has or may have relating to or giving rise from
such termination or Constructive Termination.
XVIII. Certain Additional Payments by the Company:
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by,
to or for the benefit of the Executive, whether made under this
Agreement or otherwise (a "Payment"), would be subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount
such that after payment by the Executive of all taxes (including any
Excise Tax) imposed upon the Gross-Up Payment, the Executive retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed
upon the Payments.
(b) All determinations required to be made under this Section XVIII,
including whether a Gross-Up Payment is required and the amount of
such Gross-Up Payment, shall be made by the accounting firm utilized
by the Company for the preparation of its annual external financial
statements (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within
30 days of the Event of Termination, if applicable, or such earlier
time as is requested by the Company. The Gross-Up Payment, if any, as
determined pursuant to this Section XVIII(b), shall be paid to the
Executive within 10 days of the receipt of the Accounting Firm's
determination. Any determination by the Accounting Firm shall be
binding upon the Company and the Executive. If subsequent final
determinations of the Excise Tax made by the Internal Revenue Service
give rise to additional Excise Tax, then
20
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 21
additional Gross-Up Payments shall be made by the Company to the
Executive within 10 days after notice is received by the Company of
such final determination.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification shall
be given as soon as practicable but no later than 10 business days
after the Executive knows of such claim. The Executive shall not pay
such claim prior to the expiration of the thirty-day period following
the date on which he gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with
respect to such claim is due). If the Company notifies the Executive
in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably requested
by the Company relating to such claim,
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing
from time to time, including, without limitation,
accepting legal representation with respect to such claim
by an attorney selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
21
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 22
provided, however, that the Company shall bear all costs and expenses
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax imposed as a result of such contest or representation and
payment of costs and expenses. The Company shall control all
proceedings taken in connection with such contest. The Company may,
at its sole option, either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive on
an interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
imposed with respect to such advance.
(d) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to subsection (c), the Executive
becomes entitled to receive any refund with respect to such claim,
the Executive shall promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of
an amount advanced by the Company pursuant to subsection (c), a final
determination is made that the Executive shall not be entitled to any
refund with respect to such claim, then such advance shall be
forgiven and shall not be required to be repaid and the amount of
such advance shall offset the amount of Gross-Up Payment required to
be paid.
22
<PAGE>
Employment Agreement Between
Corning Pharmaceutical Services, Incorporated & Christopher Kuebler
Draft #3 (Printed: 11/18/96 - 2:10 PM)
Page 23
XIX. Condition Subsequent: This Agreement shall be null and void and of no
force or effect if the proposed spin-off of the Company from Corning
Incorporated described in the Company's Form F10 dated September 20,
1996 and filed with the Securities & Exchange Commission is not
consummated.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its own behalf and has caused its corporate seal to be affixed, and
the Executive has executed this Agreement on his own behalf intending to be
legally bound, as of the date first written above.
COVANCE INC.
By: ________________________________
Van C. Campbell
Chairman
ATTEST:
___________________________
Secretary
EXECUTIVE:
________________________________
Christopher Kuebler
23
COVANCE SUBSIDIARIES
Covance Clinical and Periapproval Services Inc. (f/k/a Corning Besselaar Inc.)
(New Jersey)
Covance Clinical Research Unit Inc. f/k/a Corning Besselaar
Clinical Research Units Inc.) (Florida)
Covance Periapproval Services Inc. (f/k/a Corning Pact Inc.) (Delaware)
Covance Clinical and Periapproval Services Limited (f/k/a Corning Besselaar
Limited) (Ireland)
Covance AG (f/k/a GHBA AG) (Switzerland)
Covance Clinical and Periapproval
Services AG (f/k/a Corning Besselaar AG) (Switzerland)
Covance Clinical and Periapproval Services GmbH (f/k/a G.H. Besselaar Associates
GmbH) (Germany)
Covance Pty. Ltd. (f/k/a Corning Besselaar Pty. Ltd.) (Australia)
Covance Clinical and Periapproval Services SA (f/k/a Corning Besselaar S.A.)
(Belgium)
Covance Clinical and Periapproval Services SARL (f/k/a Corning Besselaar SARL)
(France)
Covance Preclinical Corporation (f/k/a Hazleton Corporation) (Washington)
Covance Laboratories GmbH (f/k/a Corning Hazleton GmbH) (Germany)
Covance Laboratories Inc. (f/k/a Corning Hazleton Inc.) (Delaware)
Covance Research Products Inc. (f/k/a HRP Inc.) (Pennsylvania)
Covance Central Laboratory Services Inc. (f/k/a Corning SciCor Inc.) (Delaware)
Covance Central Laboratory Limited Partnership d/b/a Covance Central Laboratory
Services Inc. (f/k/a Corning SciCor Limited Partnership) (Indiana)
Covance Central Laboratories SA (f/k/a Corning SciCor S.A. (Switzerland)
Covance Ltd. (f/k/a Corning Pharmaceutical Services Ltd.) (UK)
Covance Clinical and Periapproval Services Ltd. (f/k/a Corning Besselaar Ltd.)
(UK)
Covance Clinical Research Unit Ltd. (f/k/a Corning Besselaar CRU Ltd.) (UK)
Covance Laboratories Ltd. (f/k/a Corning Hazleton Ltd.) (UK)
Hazpen Trustees Ltd. (UK)
Corning Microtest Research Ltd. (UK)
Covance Pharmaceutical Packaging Services Inc. (f/k/a Corning National Packaging
Inc.) (Pennsylvania)
Covance Health Economics and Outcomes Services Inc. (f/k/a Corning HTA Inc.)
(Delaware)
Covance Biotechnology Services Inc. (f/k/a Corning Bio Inc.) (Delaware)
Covance Pharmaceutical Packaging Services AG (f/k/a CRS Pacamed AG)
(Switzerland)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023131
<NAME> Covance Inc. Covance Inc.
<MULTIPLIER> 1,000 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-1-1995 JAN-1-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 8,068 13,551
<SECURITIES> 0 0
<RECEIVABLES> 78,968 95,690
<ALLOWANCES> 0 0
<INVENTORY> 14,044 14,718
<CURRENT-ASSETS> 145,783 201,981
<PP&E> 140,708 143,956
<DEPRECIATION> 114,748 128,713
<TOTAL-ASSETS> 322,510 402,592
<CURRENT-LIABILITIES> 127,311 154,328
<BONDS> 0 0
0 0
0 0
<COMMON> 30,816 32,368
<OTHER-SE> 51,701 73,504
<TOTAL-LIABILITY-AND-EQUITY> 322,510 402,592
<SALES> 409,174 357,406
<TOTAL-REVENUES> 409,174 357,406
<CGS> 270,726 232,828
<TOTAL-COSTS> 361,613 308,531
<OTHER-EXPENSES> (784) (212)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,269 4,536
<INCOME-PRETAX> 43,076 44,551
<INCOME-TAX> 18,445 19,411
<INCOME-CONTINUING> 24,226 25,208
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 24,226 25,208
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
COVANCE INC.
RISK FACTORS 108
CAPITALIZATION OF Covance 114
SELECTED HISTORICAL FINANCIAL DATA OF Covance 115
PRO FORMA FINANCIAL INFORMATION OF Covance 117
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF Covance 122
BUSINESS OF Covance 129
MANAGEMENT OF Covance 147
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF Covance 158
DESCRIPTION OF Covance CAPITAL STOCK 159
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE Covance CERTIFICATE OF
INCORPORATION AND BY-LAWS 162
DESCRIPTION OF CERTAIN INDEBTEDNESS OF Covance 166
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF Covance 168
INDEX TO FINANCIAL STATEMENTS F-1
</TABLE>
<PAGE>
THE RELATIONSHIP AMONG CORNING, QUEST DIAGNOSTICS AND COVANCE
AFTER THE DISTRIBUTIONS
After the Distributions, Quest Diagnostics Incorporated ("Quest
Diagnostics") and Covance Inc. ("Covance") will be independent public
companies and Corning Incorporated ("Corning") will not have any ownership
interest in either Quest Diagnostics or Covance other than shares of Quest
Diagnostics' voting cumulative preferred stock. Corning, Quest Diagnostics
and Covance 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 have been 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, Quest Diagnostics and Covance 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, Quest Diagnostics and Covance 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 Quest Diagnostics and its subsidiaries, (ii) the
contract research business to Covance and its subsidiaries and (iii) all
other business conducted by Corning prior to the Distribution Date to Corning
and its subsidiaries other than Quest Diagnostics and Covance.
The Transaction Agreement will provide that Corning, Quest Diagnostics and
Covance 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, Quest
Diagnostics and Covance as contemplated in the discussion under
"Capitalization of Quest Diagnostics" and "Capitalization of Covance." In
addition to the specific indemnity described below, Corning, Quest
Diagnostics and Covance are obligated under the Transaction Agreement to
indemnify and hold harmless each other in respect of Indemnifiable Losses (as
defined therein) arising out of or otherwise relating to the management or
conduct of their respective businesses or the breach of any provision of the
Transaction Agreement; provided, however, that Quest Diagnostics will have no
obligation to indemnify or hold harmless Corning in respect of Indemnifiable
Losses arising out of any governmental claims or investigations described in
the next paragraph.
As discussed under "Business of Quest Diagnostics--Government
Investigations and Related Claims," Quest Diagnostics is subject to several
governmental investigations. Any amounts paid by Quest Diagnostics to settle
these investigations, or as a result of a judgment relating to these
investigations, will be indemnified by Corning under the Transaction Agreement.
Under the Transaction Agreement Corning will agree to indemnify Quest
Diagnostics against all monetary penalties, fines or settlements arising out of
any governmental criminal, civil or administrative investigations or claims that
have been settled prior to or are pending as of the Distribution Date, pursuant
to service of subpoena or other notice of such investigation to Quest
Diagnostics, as well as any qui tam proceeding for which a complaint was filed
prior to the Distribution Date whether or not Quest Diagnostics has been served
with such complaint or otherwise been notified of the pendency of such action,
to the extent that such investigations or claims arise out of or are related to
alleged violations of federal laws by reason of Quest Diagnostics or any company
acquired by Quest Diagnostics billing any federal program or agency for services
rendered to beneficiaries of such program or agency. Corning will also indemnify
Quest Diagnostics for 50% of the aggregate of all judgment or settlement
payments made by Quest Diagnostics that are in excess of $42.0 million in
respect of claims by private parties (i.e., nongovernmental parties such as
private insurers) that relate to indemnified or previously settled governmental
claims and that allege overbillings by Quest Diagnostics or any existing
subsidiaries of Quest Diagnostics for services provided prior to the
Distribution Date; provided, however, such indemnification for private claims
will terminate five years after the Distribution Date (whether or not settled)
and will not exceed $25.0 million in the aggregate (reduced by certain tax
benefits as described below). Quest Diagnostics' aggregate reserve with respect
to all governmental and private claims, including litigation costs, was $215
million at September 30, 1996 and is estimated to be reduced to $85 million at
the Distribution Date as a result of the payment of settled claims, primarily
the Damon Settlement of $119 million.
28
<PAGE>
Corning will not indemnify Quest Diagnostics against any governmental
claims that arise after the Distribution Date, even though relating to events
prior to the Distribution Date, or to any private claims that do not relate
to the indemnified or previously settled governmental claims or
investigations or investigations that relate to post- Distribution Date
billings. Corning will not indemnify Quest Diagnostics against consequential
or incidental damages relating to the billing claims, including losses of
revenues and profits as a consequence of any exclusion from participation in
federal or state health care programs or the fees and expenses of the
litigation, including attorneys' fees and expenses. All amounts indemnified
against by Corning for the benefit of Quest Diagnostics will be calculated on
a net after-tax basis by taking into account any deductions and other tax
benefits realized by Quest Diagnostics (or a consolidated group of which
Quest Diagnostics is a member after the Distributions (the "Quest Diagnostics
Group")) in respect of the underlying settlement, judgment payment, or other
loss (or portion thereof) indemnified against by Corning generally at the
time and to the extent such deductions or tax benefits are deemed to reduce
the tax liability of Quest Diagnostics or the Quest Diagnostics Group under
the Transaction Agreement.
The Transaction Agreement provides that, in the case of any claims for
which Corning, Quest Diagnostics or Covance are entitled to indemnification,
the indemnified party will control the defense of any claim unless the
indemnifying party elects to assume such defense. However, in the case of all
private claims related to indemnified governmental claims related to alleged
overbillings, Quest Diagnostics will control the defense. Disputes under the
Transaction Agreement are subject to binding arbitration. 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 Quest Diagnostics will enter into a tax indemnification
agreement (the "Corning/Quest Diagnostics Spin-Off Tax Indemnification
Agreement") pursuant to which (1) Quest Diagnostics will represent to Corning
that, to the best of its knowledge, the materials relating to Quest
Diagnostics submitted to the Internal Revenue Service ("IRS") in connection
with the request for ruling submitted to the IRS are complete and accurate in
all material respects, (2) Quest Diagnostics will represent that it has no
present intention to undertake the transactions described in part (3)(iii)
hereafter or cease to engage in the active conduct of providing clinical
laboratory testing services, (3) Quest Diagnostics will covenant and agree
that for a period of two years following the Distribution Date (the
"Restricted Period"), (i) Quest Diagnostics will continue to engage in the
clinical laboratory testing business, (ii) Quest Diagnostics 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 Quest
Diagnostics, 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 Quest
Diagnostics Common Stock (including options and other instruments convertible
into Quest Diagnostics Common Stock) which would exceed fifty percent (50%)
of the outstanding shares of Quest Diagnostics Common Stock immediately after
the Distribution Date; (B) the issuance of any other instrument that would
constitute equity for federal tax purposes ("Disqualified Quest Diagnostics
Stock"); (C) the issuance of options and other instruments convertible into
Disqualified Quest Diagnostics Stock; (D) any repurchases of Quest
Diagnostics Common Stock, unless such repurchases satisfy certain
requirements; (E) the dissolution, merger, or complete or partial liquidation
of Quest Diagnostics or any announcement of such action; or (F) the waiver,
amendment, termination or modification of any provision of the Quest
Diagnostics Rights Plan (as defined therein) in connection with, or in order
to permit or facilitate, any acquisition of Quest Diagnostics Common Stock or
other equity interest in Quest Diagnostics, and (4) Quest Diagnostics will
agree to indemnify Corning for Taxes (as defined below) arising from
violations of (1), (2) or (3) above and for Taxes arising as a result of (A)
an acquisition of 20% or more of the stock of Quest Diagnostics by a person
or related persons during the Restricted Period or (B) the commencement of a
tender or purchase offer by a third party for 20% or more of Quest
Diagnostics stock. If obligations of Quest Diagnostics 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 ruling Corning requested from the IRS
(the "IRS Ruling"), Quest Diagnostics would be required to indemnify Corning
for Taxes imposed and such indemnification obligations could exceed the net
asset value of Quest Diagnostics at such time.
Corning and Covance will enter into a tax indemnification agreement (the
"Corning/Covance Spin-Off Tax Indemnification Agreement") pursuant to which
(1) Covance will represent to Corning that to the best of its knowledge,
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the materials relating to Covance submitted to the IRS in connection with the
request for ruling submitted to the IRS are complete and accurate in all
material respects, (2) Covance 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) Covance will covenant and agree that during the Restricted
Period, (i) Covance will continue to engage in the contract research
business, (ii) Covance 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 Covance, 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 Covance Common Stock (including options and other instruments convertible
into Covance Common Stock) which would exceed fifty percent (50%) of the
outstanding shares of Covance Common Stock immediately after the Distribution
Date; (B) the issuance of any other instrument that would constitute equity
for federal tax purposes ("Disqualified Covance Stock"); (C) the issuance of
options and other instruments convertible into Disqualified Covance Stock;
(D) any repurchases of Covance Common Stock, unless such repurchases satisfy
certain requirements; (E) the dissolution, merger, or complete or partial
liquidation of Covance or any announcement of such action; or (F) the waiver,
amendment, termination or modification of any provision of the Covance Rights
Plan (as defined therein) in connection with, or in order to permit or
facilitate, any acquisition of Covance Common Stock or other equity interest
in Covance and (4) Covance will agree to indemnify Corning for Taxes arising
from violations of (1), (2) or (3) above and for Taxes arising as a result of
(A) an acquisition of 20% or more of the stock of Covance by a person or
related persons during the Restricted Period or (B) the commencement of a
tender or purchase offer by a third party for 20% or more of Covance stock.
If obligations of Covance 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, Covance would be required to indemnify Corning for
Taxes imposed and such indemnification obligations could exceed the net asset
value of Covance at such time.
Quest Diagnostics and Covance will enter into a tax indemnification
agreement (the "Quest Diagnostics/ Covance Spin-Off Tax Indemnification
Agreement") which will be essentially the same as the Corning/Covance
Spin-Off Tax Indemnification Agreement except that Covance will make
representations to and indemnify Quest Diagnostics as opposed to Corning. If
obligations of Covance 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, Covance would be required to indemnify Quest
Diagnostics for Taxes imposed and such indemnification obligations could
exceed the net asset value of Covance at such time. Quest Diagnostics and
Covance will enter into a second tax indemnification agreement (the
"Covance/Quest Diagnostics Spin-Off Tax Indemnification Agreement") which
will be essentially the same as the Corning/Quest Diagnostics Spin-Off Tax
Indemnification Agreement except that Quest Diagnostics will make
representations to and indemnify Covance as opposed to Corning. If
obligations of Quest Diagnostics 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, Quest Diagnostics would be required to
indemnify Covance for Taxes imposed and such indemnification obligations
could exceed the net asset value of Quest Diagnostics at such time.
The Spin-Off Tax Indemnification Agreements will also require (i) Quest
Diagnostics to take such actions as Corning may reasonably request and (ii)
Covance to take such actions as Corning and Quest Diagnostics 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, Quest Diagnostics and Covance will enter into a tax sharing
agreement (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 Quest Diagnostics and Covance and their
subsidiaries, provided, however, that Quest Diagnostics and Covance are
required to reimburse Corning for taxes for periods beginning after December
31, 1995 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 Quest Diagnostics and Covance, 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
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consolidated federal income tax or certain other tax returns prepared by
Corning which includes Quest Diagnostics or Covance, then, subject to certain
exceptions, Corning is liable for and will pay any tax assessments, and is
entitled to any tax refunds, resulting from such audit.
The Tax Sharing Agreement further 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, Quest Diagnostics or Covance as a result of such failure are to be
allocated among Corning, Quest Diagnostics and Covance in such a manner as
will take into account the extent to which the actions or inactions of each
may have contributed to such failure, and Corning, Quest Diagnostics and
Covance each will indemnify and hold harmless the other from and against the
taxes so allocated. If it is determined that none of the companies
contributed to the failure of such distribution to qualify for the tax
treatment stated in the IRS Ruling, the liability for taxes will be borne by
each 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, Quest Diagnostics and Covance, the
liability so allocated to Quest Diagnostics or Covance could exceed the net
asset value of Quest Diagnostics or Covance, respectively.
Voting Cumulative Preferred Stock of Quest Diagnostics
After the Distributions, Corning will retain 1,000 shares of Quest
Diagnostics' voting cumulative preferred stock, with an aggregate liquidation
preference of $1.0 million. Corning is the sole holder of such shares. For a
description of the terms of the Quest Diagnostics voting cumulative preferred
stock, see "Description of Quest Diagnostics Capital Stock--Voting Cumulative
Preferred Stock."
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COVANCE INC.
RISK FACTORS
Corning shareholders should be aware that the Distributions and ownership of
the Covance Common Stock involve certain risks, including those described
below, which could adversely affect the value of their holdings. Neither
Corning nor Covance makes, nor is any other person authorized to make, any
representations as to the future market value of Covance 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, Quest
Diagnostics Common Stock and Covance 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 Covance
Financial Impact of the Distributions on Covance. While Covance has a
substantial operating history, it has not operated as a separate independent
company. As a Corning subsidiary, Covance 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 Quest Diagnostics and Covance. Subsequent
to the Distributions, Covance will not have the benefit of Corning's cash
flow or assets. This may impact, among other things, Covance's ability to
expand, through acquisitions or otherwise, and could thereby have an adverse
effect on Covance's operating earnings and cash flow.
Dependence on and Effect of Government Regulation. Covance'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 Covance.
The failure on the part of Covance 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 Covance or its clients based upon a material violation by Covance of
Good Clinical Practices ("GCP"), Good Laboratory Practices ("GLP") or Current
Good Manufacturing Practices ("GMP") requirements could have a material
adverse effect on Covance. See "Business of Covance--CRO Industry Overview"
and "Business of Covance--Government Regulation."
Fixed Price Nature of Contracts; Loss or Delay of Large Contracts. Most of
Covance's contracts for the provision of its services are fixed price or
fee-for-service with a cap. Approximately 75% of Covance's net revenues are
earned under contracts which generally range in duration from a few months to
two years. For the fiscal year ended 1995, fixed price and fee-for-service
contracts with a cap accounted for 65% of contract generated net revenues,
with fixed price accounting for 40% and fee-for-service with a cap accounting
for 25% of contract generated net revenues. The balance of the net revenues
generated under contracts in 1995 were pursuant to fee- for-service contracts
without a cap. Since Covance's contracts are predominantly structured as
fixed price or fee- for-service with a cap, Covance bears the risks of cost
overruns. Underpricing of such contracts or significant cost overruns could
have a material adverse effect on Covance.
Most of Covance'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
Covance's failure to properly discharge its obligations thereunder. Although
the contracts often require payment to Covance 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
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multiple contracts could have a material adverse effect on Covance. See
"Business of Covance--Contractual Arrangements."
Biomanufacturing--New Business Venture. Covance holds a majority interest
in Covance Biotechnology Services Inc. ("Covance Biotechnology," formerly
known as Corning Bio Inc.), 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 Covance--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, Covance Biotechnology 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, Covance Biotechnology
will be able to market successfully its biomanufacturing services. Covance
Biotechnology'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 Covance Biotechnology has submitted proposals to a number of
prospective biopharmaceutical clients, it has been awarded only one contract,
but has signed a number of letters of intent for the provision of services.
For the period ended December 31, 1995, Covance Biotechnology reported a net
loss of approximately $1.9 million, and for the nine months ended September
30, 1996, Covance Biotechnology reported a net loss of approximately $2.3
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"). 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, Covance Biotechnology is liable for the unamortized balance of
the cost of the facility, currently estimated to be $37 million. Covance
Biotechnology may also choose to purchase the facility at specific dates over
the 10 year period. Using current estimates, the purchase price would be
approximately $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. Covance'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 Covance'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 Covance's revenues are generated by its international operations,
exchange rate fluctuations may also influence these results. Covance 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 Covance Common Stock in a manner unrelated to the longer
term operating performance of Covance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of
Covance--Quarterly Results."
Dependence on Certain Industries and Clients. Revenues of Covance are
highly dependent on research and development expenditures by the
pharmaceutical and biotechnology industries. Accordingly, Covance'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, Covance 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 Covance.
Covance believes that concentrations of business in the contract research
organization ("CRO") industry are not uncommon. Covance 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 Covance's
net revenues in 1993, 1994 or 1995. None
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of Covance's clients accounted for greater than 5% of Covance'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 Covance's net revenue. In
fiscal 1993, 1994 and 1995 and the nine months ended September 30, 1996,
Covance's top five clients accounted for approximately 17%, 20%, 21% and 21%,
respectively, of Covance's net revenue. The loss of business from a
significant client or group of clients could have a material adverse effect
on Covance. See "Business of Covance--Trends Affecting the CRO Industry" and
"Business of Covance--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. Covance 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 time- saving
accurate manner, the ability to manage large-scale clinical trials both
domestically and internationally, expertise and experience in health
economics and size. While Covance has competed effectively in these areas,
there can be no assurance that Covance 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 Covance. See "Business of Covance--Competition."
Potential Liability. In connection with many clinical trials, Covance
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 Covance does not believe it is legally
accountable for the medical care rendered by third-party investigators, it is
possible that Covance 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. Covance 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,
Covance 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, Covance 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 Covance's preclinical laboratories also
conduct tests for the agrochemical and food industries, Covance could be held
liable for errors or omissions that result in unsafe products entering the
marketplace. Finally, although Covance's animal breeding facilities maintain
procedures in accordance with applicable government regulations and the
preventive measures contained in its 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 such a case, Covance may be subject to claims by
employees, or persons who come in contact with employees, who were exposed to
such infectious diseases. In 1996 Covance, with the approval of the Texas
Department of Health and the Centers for Disease Control, destroyed a
shipment of monkeys from the Philippines because some had been infected with
a substrain of the Ebola- Reston virus, which is lethal to monkeys. Covance
does not believe that it will have any liability resulting from such incident
because all of Covance's employees who may have had any exposure to the
monkeys who may have been infected by the virus were carefully monitored and
have shown no sign of unexplained illness.
Covance 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 Covance; and various regulatory requirements, including
the use of institutional review boards in the clinical area and the
procurement
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of each volunteer's informed consent to participate in the clinical study.
The contractual indemnifications generally do not protect Covance against
liability arising from certain of its own actions such as negligence. Covance
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 Covance will be
able to maintain such insurance coverage on terms acceptable to Covance.
Risks Associated with Acquisitions; Integration of Acquired
Operations. During the last three fiscal years Covance completed three
acquisitions. Covance reviews many acquisition candidates in the ordinary
course of business and, in addition to acquisitions already made, Covance 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, Covance may be required to restructure the
acquired business or write off the value of some or all of the assets of the
acquired business. Further, to the extent that any future acquisitions are
effected through the issuance of stock to the shareholders of the acquired
company, the interest of shareholders holding shares of Covance prior to the
acquisition could be diluted. There can be no assurance that acquisition
candidates will be available on terms and conditions acceptable to Covance
or, despite Covance's success with prior acquisitions, that any past or
future acquisition will be successfully integrated into Covance's operations,
or that they will contribute favorably to Covance's results of operations or
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Covance."
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 Covance in the
United States and abroad. Covance is unable to predict the likelihood of such
or similar legislation being enacted into law or the effects such legislation
would have on Covance.
Loss of Brand Names. In connection with the Covance Spin-Off Distribution,
Covance will change the trade names under which it conducts its business.
Covance believes that its business has benefitted from the use of the
"Corning," "Besselaar," "SciCor," "Hazleton," "PACT," "HTA," "National
Packaging," "CRS Pacamed" and "HRP" brand names. The impact of the change in
trade names on Covance's business and operations cannot be fully predicted.
Absence of Dividends; Restrictions on Dividends Imposed by the Covance
Credit Facility. It is currently contemplated that, following the
Distributions, Covance 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, other than with respect to stock dividends, and
certain purchases, repurchases or other distributions made pursuant to the
Benefits Plans and the Rights Plan (each as defined in the Covance Credit
Facility) the Covance Credit Facility prohibits Covance from paying cash
dividends on the Covance Common Stock during a Default or an Event of
Default, or if after giving effect to the payment of such dividends Covance
would not be in compliance with the financial covenants contained therein.
See "Description of Capital Stock of Covance--Covance Common Stock--Dividend
Policy," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Covance-- Liquidity and Capital Resources" and
"Description of Certain Indebtedness of Covance."
Potential Liability under the Spin-Off Tax Indemnification
Agreements. Covance will enter into the Corning/ Covance Spin-Off Tax
Indemnification Agreement that will prohibit Covance 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 Covance 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 Covance. Covance
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may also have indemnification obligations under the Spin-Off Tax
Indemnification Agreements in the case of the acquisition of, or tender or
purchase offer by another person for, 20% or more of the outstanding Covance
Common Stock. The Corning/Covance Spin-Off Tax Indemnification Agreement will
also require Covance 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. Covance will also enter into
the Quest Diagnostics/Covance Spin-Off Tax Indemnification Agreement that
will prohibit Covance 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
Covance or engaging in certain equity or financing transactions, that might
jeopardize the favorable tax treatment of the Covance Spin-Off Distribution
under Code section 355 and will provide Quest Diagnostics with certain rights
of indemnification against Covance. The Quest Diagnostics/Covance Spin-Off
Tax Indemnification Agreement will also require Covance to take such actions
as Quest Diagnostics 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 Covance under either the Corning/Covance
Spin-Off Tax Indemnification Agreement or the Quest Diagnostics/Covance
Spin-Off Tax Indemnification Agreement were breached and primarily as a
result thereof either of the Distributions do not receive favorable tax
treatment under Code section 355, Covance would be required to indemnify
Corning and Quest Diagnostics for Taxes imposed and such indemnification
obligations could exceed the net asset value of Covance at such time. See
"The Relationship Among Corning, Quest Diagnostics and Covance After the
Distributions-- Spin-Off Tax Indemnification Agreements."
Potential Adverse Effect of Exchange Rate Fluctuations on
Results. Approximately 22%, 24% and 30% of Covance's net revenues for the
years ended December 31, 1993, 1994, and 1995, respectively, were derived
from Covance's operations outside of the United States. Contracts between
Covance's foreign subsidiaries and its clients are frequently denominated in
currencies other than the applicable subsidiary's local currency.
Accordingly, payments received for services rendered under such contracts are
denominated in a currency different than the currency used for the payment of
the subsidiary's expenses. Therefore, the subsidiary's net revenues, expenses
and earnings are affected by fluctuations in exchange rates. To the extent
Covance is unable to shift to its clients the effects of currency
fluctuations, these fluctuations could have a material adverse effect on
Covance's results of operations. Covance does not currently hedge against the
risk of exchange rate fluctuations. In addition, Covance'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 Covance's combined financial results.
Absence of a Prior Public Market. Prior to the Distributions, there has
been no public market for the Covance Common Stock. Although it is expected
that the Covance Common Stock will be approved for listing on the NYSE, there
is no existing market for the Covance Common Stock and there can be no
assurance as to the liquidity of any markets that may develop, the ability of
Covance stockholders to sell their shares of Covance Common Stock or at what
price Covance stockholders will be able to sell their shares of Covance
Common Stock. Future trading prices will depend on many factors including,
among other things, prevailing interest rates, Covance's operating results
and the market for similar securities.
Potential Volatility of Stock Price. The market price of Covance 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 particular companies. Moreover, Covance 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 Covance 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
Covance 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 Covance 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 Covance." These market fluctuations could
have an adverse effect on the market price of Covance Common Stock. Covance
stockholders should be aware, and must be willing to bear the risk, of such
fluctuations in earnings and stock price.
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<PAGE>
Dependence on Key Employees. Covance's affairs are managed by a small
number of key management personnel, the loss of any of whom could have an
adverse impact on Covance. Covance has separation agreements with such
persons. There can be no assurance that Covance 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 Covance."
Certain Antitakeover Effects. Covance's amended and restated certificate
of incorporation (the "Covance Certificate") and by-laws (the "Covance
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 Covance in a transaction not approved by the board of
directors of Covance (the "Covance Board"), or, in certain circumstances, by
the disinterested members of the Covance Board. In addition, an acquisition
of certain securities or assets of Covance within two years after the
Distribution Date might jeopardize the tax treatment of the Distributions and
could result in Covance being required to indemnify Corning and Quest
Diagnostics. See "-- Potential Liability under the Spin-Off Tax
Indemnification Agreements" and "Antitakeover Effects of Certain Provisions
of the Covance Certificate of Incorporation and the Covance By-Laws."
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<PAGE>
CAPITALIZATION OF COVANCE
The following table sets forth Covance's capitalization as of September 30,
1996 giving effect to the estimated initial borrowing under the Covance
Credit Facility and the Covance Spin-Off Distribution as if such transactions
occurred on such date. This table should be read in conjunction with the
Covance Financial Statements (as defined below) and notes thereto, and the
Covance Pro Forma Financial Information (as defined below) and notes thereto
included elsewhere herein. Historical and pro forma capitalization may not be
indicative of Covance's future capitalization as an independent company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Covance" and "Business of Covance."
Pro Forma
Historical Adjustments Pro Forma
---------- ------------ -----------
(in thousands)
Long-Term Debt:
Due to banks $ $ 128,165 (a) $128,165
Due to Corning and affiliates 118,165 (118,165)(a)
-------- ----------- ---------
Total Long-Term Debt 118,165 10,000 128,165
-------- ----------- ---------
Stockholder's Equity:
Contributed capital 32,368 22,500 (b) 54,868
Retained earnings 70,505 (17,822)(b) 52,683
Cumulative translation adjustment 2,999 2,999
-------- ----------- ---------
Total Stockholder's Equity 105,872 4,678 110,550
-------- ----------- ---------
Total Capitalization $224,037 $ 14,678 $238,715
======== =========== =========
- -------------
(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 Covance Spin-Off Distribution. Immediately prior to
the Covance Spin-Off Distribution, Covance will incur long-term bank
borrowings to repay Corning and affiliates for all intercompany
borrowings and income tax liabilities. Assuming the Covance Spin-Off
Distribution occurred on September 30, 1996, such borrowings would
aggregate approximately $128.2 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 Covance Spin-Off Distribution
expected to be incurred during the fourth quarter of 1996. Such costs
consist of direct costs of the Covance 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 COVANCE
The following table presents selected historical financial data of Covance
at the dates and for each of the periods indicated. The selected financial
data as of and for each of the years ended December 31, 1995, 1994 and 1993
have been derived from the audited combined financial statements of Covance
(the "Audited Covance Financial Statements") and the notes thereto included
elsewhere herein. The selected financial data as of and for the nine months
ended September 30, 1996 and 1995 and the years ended December 31, 1992 and
1991 have been derived from the unaudited combined financial statements of
Covance (the "Covance Interim Financial Statements" and, together with the
Audited Covance Financial Statements, the "Covance Financial Statements"). 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 nine months ended September 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 Covance
Financial Statements and notes thereto, and the Covance Pro Forma Financial
Information included elsewhere herein. Historical combined financial data may
not be indicative of Covance's future performance as an independent company.
See the Covance Financial Statements and notes thereto and Covance Pro Forma
Financial Information and notes thereto. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Covance" and
"Business of Covance."
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- -----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- ---------- ---------- -------- -------- -------- ----------
(in thousands)
<C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues $357,406 $302,886 $409,174 $319,501 $289,697 $270,871 $246,949
Costs and expenses:
Cost of revenue 232,828 198,820 270,726 213,490 192,783 192,375 176,860
Selling, general and
administrative 57,573 46,965 64,201 48,892 42,949 41,230 37,106
Restructuring charge 4,616 4,616 3,373
Depreciation and
amortization 18,130 16,166 22,070 18,520 16,984 15,212 14,621
------ -------- -------- ------ ------ ------ --------
Total 308,531 266,567 361,613 280,902 252,716 252,190 228,587
------ -------- -------- ------ ------ ------ --------
Income from operations 48,875 36,319(a) 47,561(a) 38,599 36,981 18,681 18,362
------ -------- -------- ------ ------ ------ --------
Other expense (income)
Interest expense, net 4,536 3,918 5,269 4,307 4,421 5,686 4,388
Foreign exchange (gain)
loss (212) (609) (784) (712) 852 1,258
------ -------- -------- ------ ------ ------ --------
4,324 3,309 4,485 3,595 5,273 6,944 4,388
------ -------- -------- ------ ------ ------ --------
Income before taxes and equity
investee loss (gain) 44,551 33,010(a) 43,076(a) 35,004 31,708 11,737 13,974
Taxes on income 19,411 14,147 18,445 14,924 13,506 6,834 6,835
Equity investee loss (gain) (68) 351 405 435 1,391 303 394
------ -------- -------- ------ ------ ------ --------
Net income before cumulative
effect of change in
accounting method 25,208 18,512 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 $ 25,208 $ 18,512(a) $ 24,226(a) $ 19,645 $ 16,811 $ 266 $ 6,745
====== ======== ======== ====== ====== ====== ========
Balance Sheet Data
(at end of period):
Working capital $ 47,453 $ 27,362 $ 18,472 $ 12,961 $ 12,076 $ 15,451 $ 12,817
Total assets 402,592 332,257 322,510 271,992 229,693 225,337 183,174
Long-term debt 118,165 97,711 89,836 75,178 69,239 77,916 88,801
Stockholder's equity 105,872 78,361 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 nine months
ended September 30, 1995 was $40,935, $37,626 and $21,282, 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 COVANCE
The unaudited pro forma combined statements of income for the nine months
ended September 30, 1996 and the year ended December 31, 1995 present the
results of operations of Covance assuming that the Covance Spin-Off
Distribution had been completed as of January 1, 1995. The unaudited pro
forma combined balance sheet as of September 30, 1996 presents the combined
financial position of Covance assuming that the Covance Spin-Off Distribution
had been completed on that date. In the opinion of Covance management, the
unaudited pro forma combined financial information of Covance ("Covance Pro
Forma Financial Information") includes all material adjustments necessary to
restate Covance's historical results. The adjustments required to reflect
such assumptions are described in the Notes to the Covance Pro Forma
Financial Information and are set forth in the "Pro Forma Adjustments"
column.
The Covance Pro Forma Financial Information should be read in conjunction
with the Covance Financial Statements and notes thereto included elsewhere
herein. The Covance 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 Covance Spin-Off Distribution
occurred as assumed herein, or had Covance been operated as an independent
company during the periods shown.
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<PAGE>
COVANCE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments As Adjusted
---------- ----------- ---------------
(in thousands, except share and per share data)
<C> <C> <C> <C>
Net revenues $357,406 $ $ 357,406
Cost and expenses
Cost of revenue 232,828 232,828
Selling, general and administrative expenses 57,573 1,500 (a) 59,073
Depreciation and amortization 18,130 18,130
-------- ---------- -------------
Total 308,531 1,500 310,031
-------- ---------- -------------
Income from operations 48,875 (1,500) 47,375
-------- ---------- -------------
Other expense
Interest expense, net 4,536 (b) 4,536
Foreign exchange loss (212) (212)
-------- ---------- -------------
4,324 4,324
-------- ---------- -------------
Income before taxes and equity investee loss 44,551 (1,500) 43,051
Taxes on income 19,411 (593)(c) 18,818
Equity investee (gain) (68) (68)
-------- ---------- -------------
Net income $ 25,208 $ (907) $ 24,301
======== ========== =============
Pro forma shares outstanding 56,903,469(d)
Net income per share $ 0.43(e)
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
118
<PAGE>
COVANCE 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)
<C> <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 56,903,469(d)
Net income per share $ 0.40(e)
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
119
<PAGE>
COVANCE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1996
<TABLE>
<CAPTION>
Pro Forma As
Historical Adjustments Adjusted
---------- ------------ ----------
(in thousands)
<C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 13,551 $ $ 13,551
Accounts receivable, net 95,690 95,690
Unbilled services 43,110 43,110
Inventory 14,718 14,718
Deferred income taxes 14,273 14,273
Prepaid expenses and other assets 20,639 20,639
-------- ----------- --------
Total Current Assets 201,981 201,981
Property and equipment, net 143,956 143,956
Goodwill, net 43,443 43,443
Other assets 13,212 13,212
-------- ----------- --------
Total Assets $402,592 $ $402,592
======== =========== ========
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable $ 23,627 $ 23,627
Accrued payroll and benefits 30,058 30,058
Accrued expenses and other liabilities 36,410 $ 5,000 (f) 41,410
Unearned revenue 46,025 46,025
Income taxes payable 18,408 (10,000)(g) 8,408
-------- ----------- --------
Total Current Liabilities 154,528 (5,000) 149,528
-------- ----------- --------
Long-term debt 128,165 (g) 128,165
Due to Corning Incorporated and affiliates 118,165 (118,165)(g)
Deferred income taxes 9,583 (9,678)(f) (95)
Other liabilities 14,444 14,444
-------- ----------- --------
Total Liabilities 296,720 (4,678) 292,042
-------- ----------- --------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital 32,368 22,500 (f) 54,868
Retained earnings 70,505 (17,822)(f) 52,683
Cumulative translation adjustment 2,999 2,999
-------- ----------- --------
Total Stockholder's Equity 105,872 4,678 110,550
-------- ----------- --------
Total Liabilities and
Stockholder's Equity $402,592 $ $402,592
======== =========== ========
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
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<PAGE>
COVANCE 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 Covance Spin-Off Distribution, Covance 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
Covance Spin-Off Distribution. Assuming the Covance Spin-Off Distribution
occurred on September 30, 1996, such borrowings would aggregate
approximately $128.2 million. Since the assumed interest rate on these
borrowings of 6.0% approximates the blended rate on Covance'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 $160,000 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 Covance management's
current estimate of the number of shares to be outstanding after the
Covance Spin-Off Distribution. Management's estimate includes (a) the
issuance of approximately 56.0 million shares of Covance Common Stock at
an exchange ratio of one share of Covance Common Stock issued for every
four shares of Corning Common Stock outstanding and (b) the issuance of
an estimated 900,000 shares into the employee stock ownership and other
benefit plans. Covance 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 Covance Spin-Off
Distribution and finalization of the proposed structure of the employee
stock ownership plan.
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 Covance's historical capital structure is not comparable to
periods subsequent to the Covance 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 Covance Spin-Off Distribution
expected to be incurred during the fourth quarter of 1996. Such amounts,
which consist of direct costs of the Covance Spin-Off Distribution
(estimated at $5.0 million) and one-time charges associated with the
issuance of shares into the employee stock ownership (estimated at $21.0
million) and other benefit plans (estimated at $1.5 million), which
amounts represent the estimated fair market value of such shares at the
expected date of issuance, have not been reflected in the Unaudited Pro
Forma Combined Statements of Income because they are non-recurring. The
amount of the charges associated with the issuance of shares into the
employee stock ownership and other benefit plans is subject to change
based on the market price of the Covance Common Stock on the Distribution
Date.
(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 Covance Spin-Off Distribution. Immediately prior
to the Covance Spin-Off Distribution, Covance will incur long-term bank
borrowings to repay Corning and affiliates for all intercompany
borrowings and income tax liabilities. Assuming the Covance Spin-Off
Distribution occurred on September 30, 1996 such borrowings would
aggregate approximately $128.2 million.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF COVANCE
Overview
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology,
pharmaceutical and medical device industries. In addition, and to a lesser
extent, Covance provides services such as health economics for managed care
organizations, hospitals and health care provider networks, and early
development and laboratory testing services to the chemical, agrochemical and
food industries. The foregoing services can be broadly classified into six
lines of business: preclinical, biomanufacturing, clinical and periapproval,
central laboratory, clinical packaging, and health economics. These six lines
of business can be further categorized as non-clinical (preclinical and
biomanufacturing) and clinical (clinical and periapproval, central
laboratory, clinical packaging and health economics). Covance believes it is
one of the largest biopharmaceutical CROs, based on estimated 1995 annual net
revenue, and one of only a few that are capable of providing comprehensive
global product development services. Covance offers its clients high quality
services designed to reduce product development time, allowing them to
introduce their products into the marketplace faster and, thus, maximize the
period of marketing exclusivity and monetary return on their investments.
Additionally, Covance's comprehensive services and broad experience provide
clients with a variable cost alternative to fixed cost internal development
capabilities.
The businesses that today constitute Covance were acquired by Corning,
starting in 1987, as part of a strategy to create a global, integrated and
full service product development company. In keeping with this strategy,
during the period 1994 through the present, Covance has purchased the
remaining interest in a jointly owned company, acquired a significant
minority interest in a complementary service business, acquired two new
businesses and formed a major new business venture. Specifically, in April
1994, Covance acquired the remaining interest in SciCor S.A., a provider of
central laboratory testing services based in Switzerland. The transaction was
accounted for as a purchase business combination. In October 1994, Covance
acquired a significant minority equity position in Bio- Imaging Technologies,
Inc. ("Bio-Imaging"), which uses proprietary imaging technology to quantify
the diagnostic and therapeutic effectiveness of experimental drugs and
devices. Covance expanded its offering of value added product development
services in January 1995 with the acquisition of National Packaging Systems,
Inc., a leading clinical packaging company. The transaction was accounted for
as a purchase business combination. In February 1995, Covance formed Covance
Biotechnology, a majority-owned company which will enable Covance to engage
in biomanufacturing. In recognition of the rapid changes in the
biopharmaceutical industry's marketplace, particularly the need for the
industry to further demonstrate the benefits and cost effectiveness of their
products to payors, Covance purchased in March 1996 all the assets and
substantially all of the liabilities of Health Technology Associates, Inc.
("HTA"), a leading health economics company, in a transaction accounted for
as a purchase business combination. In October 1996, Covance expanded its
clinical packaging capabilities to Europe with the purchase of Swiss based
CRS Pacamed AG (now known as Covance Pharmaceutical Packaging Services AG).
In addition, Covance acquired an 81,000 square foot facility in Horsham,
England, which will be used, among other things, to provide clinical
packaging services in Europe.
During the fiscal year ended December 31, 1995, approximately
three-quarters of Covance's net revenues were earned under contracts, which
generally range in duration from a few months to two years. Revenue from
these contracts is recognized as costs are incurred on the basis of the
relationship between costs incurred and estimated total costs. Typically,
Covance's contracts in the preclinical, central laboratory, clinical
packaging and health economics areas are fixed price or fee-for-service and
in the clinical and periapproval areas are fee-for-service with a cap. To a
lesser extent, some of the contracts in the clinical and periapproval areas
are fixed price or fee-for-service without a cap. The contracts may contain
provisions for renegotiation for cost overruns arising from changes in the
level of work scope. Renegotiated amounts are included in net revenues when
earned and realization is assured. In some cases, for multi-year contracts
involving preclinical and clinical and periapproval trials, a portion of the
contract fee is paid at the time the trial is initiated, with
performance-based installments payable over the contract duration, in some
cases on a milestone achievement basis. Covance routinely subcontracts with
independent physician investigators in connection with multi-site clinical
trials. Investigator fees are not reflected in net revenues or expenses since
such fees are granted by customers on a "pass-thru basis" without risk or
reward to Covance. While most contracts are terminable either immediately or
upon notice by the client, they typically require payment
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<PAGE>
of expenses to wind down a study and fees earned to date, and, in some cases,
a termination fee or a payment of some portion of the fees or profit that
could have been earned under the contract if it had not been terminated
early.
Covance's cost of revenue includes appropriate amounts necessary to
complete the net revenues and earnings process and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These
costs, as a percentage of net revenues, tend to fluctuate from one period to
another (generally within a range of up to 2% in either direction)
principally as a result of changes in labor utilization and the mix of
service offerings involving hundreds of studies conducted during any period
of time. Accordingly, changes in cost of revenue as a percentage of net
revenues plus or minus 2% are expected from one period to another.
Results of Operations
Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995. Net revenues increased 19.9% to $127.2 million for the
three months ended September 30, 1996 from $106.1 million for the
corresponding 1995 period. Excluding the impact of the 1996 acquisition of
HTA, growth in net revenues was 14.3%. Net revenues from Covance's combined
clinical lines of business, excluding the recently acquired health economics
business, grew in excess of 15% benefitting from the continuing trend in
outsourcing of clinical development activities, while net revenues from
Covance's preclinical business grew in excess of 10%.
Cost of revenue increased 18.8% to $83.2 million for the three months
ended September 30, 1996 from $70.1 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 65.4% for the three months ended September 30,
1996 from 66.0% 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 22.2% to $20.6
million for the three months ended September 30, 1996 from $16.9 million for
the corresponding 1995 period. As a percentage of net revenues, selling,
general and administrative expense increased to 16.2% for the quarter ended
September 30, 1996 from 15.9% for the corresponding 1995 period. Contributing
to the increase in selling, general and administrative expense were a
continuing increase in Covance's corporate center function, administrative
costs associated with the establishment of Covance's new Singapore operation
and the evaluation of further geographic expansion opportunities, partially
offset by a reduction in certain administrative costs allocated by Corning
and affiliates.
Depreciation and amortization increased 6.5% to $5.8 million or 4.6% of
net revenues for the three months ended September 30, 1996 from $5.5 million
or 5.2% 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 28.0% to $17.5 million or 13.8% of net
revenues for the quarter ended September 30, 1996 from $13.7 million or 12.9%
of net revenues for the corresponding 1995 period.
Other expense increased $1.3 million for the three months ended September
30, 1996 to $1.6 million from $0.2 million for the corresponding 1995 period,
due to an increase in interest expense, net of $0.7 million and to larger
foreign exchange gains recognized during the 1995 three-month period.
Covance's effective tax rate for the three months ended September 30, 1996
increased to 43.4% from 42.9% for the comparable period in 1995. Since
Covance operates on a global basis, its effective tax rate is subject to
variation from year to year as the geographic dispersion of its pre-tax
earnings changes.
Net income increased $1.6 million to $9.1 million for the quarter ended
September 30, 1996 from $7.5 million for the corresponding 1995 period.
Nine Months Ended September 30, 1996 Compared with Nine Months Ended
September 30, 1995. Net revenues increased 18.0% to $357.4 million for the
nine months ended September 30, 1996 from $302.9 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 Covance's combined
clinical lines of business, excluding the newly acquired health economics
business, grew nearly 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 8.0%.
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<PAGE>
Cost of revenue increased 17.1% to $232.8 million for the nine months
ended September 30, 1996 from $198.8 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 65.1% for the nine months
ended September 30, 1996 from 65.6% for the corresponding 1995 period.
Overall, selling, general and administrative expense increased 22.6% to
$57.6 million for the nine months ended September 30, 1996 from $47.0 million
for the corresponding 1995 period. As a percentage of net revenues, selling,
general and administrative expense increased to 16.1% for the nine months
ended September 30, 1996 from 15.5% for the corresponding 1995 period.
Contributing to the increase in selling, general and administrative expenses
were increasing pre-operating costs relative to Covance's biomanufacturing
business, an increase in Covance's corporate center function, administrative
costs associated with the establishment of Covance's new Singapore operation
and the evaluation of further geographic expansion opportunities, partially
offset by a reduction in certain administrative costs allocated by Corning
and affiliates.
Depreciation and amortization increased 12.1% to $18.1 million or 5.1% of
net revenues for the nine months ended September 30, 1996 from $16.2 million
or 5.3% 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 34.6% to $48.9 million for the nine
months ended September 30, 1996 from $36.3 million for the corresponding 1995
period. During the second quarter of 1995, Covance 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.
Excluding the impact of the 1995 restructuring provision, income from
operations increased 19.4% to 13.7% of net revenues for the nine months ended
September 30, 1996 from 13.5% of net revenues for the corresponding 1995
period.
Other expense increased $1.0 million for the nine months ended September
30, 1996 to $4.3 million from $3.3 million for the corresponding 1995 period,
due to an increase in interest expense, net of $0.6 million and to larger
foreign exchange gains recognized during the first nine months of 1995.
Covance's effective tax rate for the nine months ended September 30, 1996
increased to 43.6% from 42.9% for the comparable period in 1995. Since
Covance operates on a global basis, its effective tax rate is subject to
variation from year to year as the geographic dispersion of its pre-tax
earnings changes.
Net income increased $6.7 million to $25.2 million for the nine months
ended September 30, 1996 from $18.5 million for the corresponding 1995
period. Excluding the impact of the 1995 restructuring provision, net income
increased $3.9 million or 18.4% for the nine months ended September 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
Covance's combined clinical lines of business, excluding the newly acquired
clinical packaging business, grew in excess of 35%, generally as a result of
the growth in outsourcing of clinical development activities in 1995 as
compared to 1994 and more specifically because of Covance's central
laboratory's effort to complete development work on several large protease
inhibitor studies by the end of 1995. Net revenues from Covance's preclinical
business grew nearly 10%, largely as a result of particularly strong growth
in Europe, fueled by new service offerings, overall volume increases and
favorable foreign exchange rates in 1995 compared to 1994.
Cost of revenue increased 26.8% to $270.7 million or 66.2% of net revenues
for 1995 from $213.5 million or 66.8% of net revenues for 1994, as a result
of the increase in net revenues.
Overall, selling, general and administrative expense increased 31.3% to
$64.2 million for 1995 from $48.9 million for 1994. As a percentage of net
revenues these costs increased to 15.7% for 1995 from 15.3% for 1994. Largely
contributing to the increase in selling, general and administrative expenses
were administrative costs associated with the establishment of Covance's new
biomanufacturing business, an increase in Covance's corporate center
function, strategic consulting expenses incurred to reorganize a large
portion of Covance's clinical operations into customer teams to better manage
large scale clinical trials and increased marketing initiatives such as the
establishment of a Lotus Notes(R) based centralized client contact database
for use by Covance's sales force, partially
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offset by a non-recurring charge incurred in 1994 in connection with a
separation payment made to Covance's then chief executive officer upon his
resignation.
During 1995, Covance 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.
Covance's effective tax rate for 1995 increased slightly to 42.8% from
42.6% for 1994.
Net income increased 23.3% to $24.2 million for 1995 from $19.6 million
for 1994. Excluding the impact of the 1995 restructuring provision, the
increase in net income was $7.4 million or 37.4% for 1995.
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 Covance'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 Covance'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
Covance'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.
Covance'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
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such
as delays in initiating or completing significant preclinical and clinical
and
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periapproval trials, termination of preclinical and clinical and periapproval
trials, acquisitions and exchange rate fluctuations. Delays and terminations
of studies or trials are often the result of actions taken by clients or
regulatory authorities and are not typically controllable by Covance. Since a
large amount of Covance's operating costs are relatively fixed while revenue
is subject to fluctuation, minor variations in the commencement, progress or
completion of preclinical and clinical and periapproval trials may cause
significant variations in quarterly operating results.
The following table presents unaudited quarterly operating results of
Covance for each of the ten most recent fiscal quarters in the period ended
September 30, 1996. In the opinion of Covance, this information has been
prepared on the same basis as the Audited Covance Financial Statements and
reflects all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of results of operations for those periods.
This quarterly financial data should be read in conjunction with the Audited
Covance Financial Statements and notes thereto included 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 Covance--Volatility of Quarterly Operating Results."
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------------------------------
June Sept. Dec. Mar. Sept.
30, 30, 31, 31, June 30, 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996
------- -------- ------- ------- --------- -------- -------- -------- -------- ---------
(in thousands)
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ... $77,762 $82,904 $84,612 $91,974 $104,813 $106,099 $106,288 $108,697 $121,530 $127,179
Operating
expenses ...... 66,685 73,214 74,967 78,991 95,148 92,428 95,046 94,659 104,195 109,677
-------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Income from
operations ... 11,077 9,690 9,645 12,983 9,665(a) 13,671 11,242 14,038 17,335 17,502
Other expense,
net ............ 876 1,030 897 1,434 1,644 231 1,176 1,159 1,615 1,550
-------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Pre-tax income
.................. 10,201 8,660 8,748 11,549 8,021(a) 13,440 10,066 12,879 15,720 15,952
Income taxes ... 4,335 3,693 3,732 4,953 3,423 5,771 4,298 5,619 6,861 6,931
Equity investee
loss (gain) .. 140 -- 87 49 149 153 54 (44) 29 (53)
-------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Net income ..... $ 5,726 $ 4,967 $ 4,929 $ 6,547 $ 4,449(a) $ 7,516 $ 5,714 $ 7,304 $ 8,830 $ 9,074
===== ====== ===== ===== ======= ====== ====== ====== ====== ========
</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, Covance 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 Covance,
generally for specific cash requirements.
Covance is currently negotiating with several banks concerning the
establishment of the Covance Credit Facility. Covance expects that the
Covance Credit Facility will provide for borrowings of up to $250 million on
an unsecured basis, carry interest at LIBOR plus approximately 37.5 basis
points and mature in five years. Covance intends to borrow under the Covance
Credit Facility before the Covance Spin-Off Distribution to repay Corning and
affiliates for all of its intercompany borrowings and income tax liabilities.
Assuming the borrowing and Covance Spin-Off Distribution both occurred on
September 30, 1996, Covance would borrow approximately $128.2 million for
such purpose. This would result in Covance's debt to equity and debt to
capital ratios being 1.16:1 and 0.54:1, respectively. In addition, the
Covance Credit Facility prohibits Covance from paying cash dividends on the
Covance Common Stock. See "Risk Factors--Risks Relating to Covance--Absence
of Dividends; Restrictions on Dividends Imposed by the Covance Credit
Facility" and "Description of Certain Indebtedness of Covance."
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
In
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October 1996, Covance acquired CRS Pacamed AG, a Swiss entity providing
clinical packaging services for a cash payment of $14.4 million. Also in
October 1996, Covance acquired a new facility to house its clinical
packaging, clinical and periapproval services and health economics operations
in Europe for a cash payment of approximately $9.0 million. Furthermore,
Covance expects to spend approximately $9.0 million on capital expenditures
between October 1 and December 31, 1996 for maintenance and upgrade of
existing equipment, outfitting of new facilities and computer equipment and
software for newly hired employees and to fund an additional payment of
approximately $6.6 million relating to a 1995 acquisition. Assuming these
expenditures occur prior to the Covance Spin-Off Distribution, Covance
estimates that its debt at the Distribution Date will be approximately $135
million to $145 million.
Covance's management believes that the Covance Credit Facility will
provide it with sufficient financial flexibility and ready access to cash on
both a short-term and a long-term basis to fund, as required, capital
expenditures, potential future acquisitions and other longer-term growth
opportunities.
During the nine months ended September 30, 1996, Covance's operations
provided net cash of $14.9 million, a decrease of $17.5 million from the
corresponding 1995 amount. This reduction is attributable to a larger
increase in working capital during the first nine months of 1996 as compared
to the first nine months of 1995. During the year ended December 31, 1995,
Covance's operations provided net cash of $45.1 million, an increase of $2.2
million from 1994's level.
Investing activities for the nine months ended September 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. Annually, cash provided by
operations has historically been sufficient to fund capital expenditures.
Working capital was $47.5 million at September 30, 1996, an increase of
$29.0 million from the December 31, 1995 level of $18.5 million. This
increase was attributable to an increase in aggregate accounts receivable and
unbilled services of $41.6 million or 42.8% to $138.8 million at September
30, 1996 from $97.2 million at December 31, 1995. Covance has initiated
collection and contract management efforts to reduce the percentage increase
in aggregate accounts receivable and unbilled services to a level consistent
with the increase in net revenues. Covance's ratio of current assets to
current liabilities was 1.31 at September 30, 1996 and 1.15 at December 31,
1995.
As described in Note 8 to the Audited Covance Financial Statements, a
Covance subsidiary, Covance Biotechnology, entered into an operating lease
arrangement in June 1995 whereby a custom-designed, fully equipped facility
would be constructed. The lease 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
Covance--Biomanufacturing-- New Business Venture" and "Business of
Covance--Services--Biomanufacturing."
In the fourth quarter of 1996, Covance plans to record a one-time charge
of approximately $27.5 million associated with the Covance 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 Covance 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. Covance 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 Covance's foreign subsidiaries and its clients are
frequently denominated in currencies other than the applicable subsidiary's
local currency. Accordingly, payments received for services rendered under
such
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contracts are denominated in a currency different than the currency used for
the payment of the subsidiary's expenses. Therefore, the subsidiary's net
revenues, expenses and earnings are affected by fluctuations in exchange
rates. In addition, Covance's 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 Covance'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 Covance's financial statements.
Taxes
Since Covance conducts operations on a global basis, Covance's effective tax
rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of Covance's pre-tax earnings among various
tax jurisdictions changes, Covance's effective tax rate may vary from period
to period. See Note 5 to the Audited Covance Financial Statements.
Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an
inflation or cost of living adjustment for the portion of the services to be
performed beyond one year from the contract date. As a result Covance
believes that the effects of inflation generally do not have a material
adverse effect on its operations or financial condition.
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BUSINESS OF COVANCE
General
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology,
pharmaceutical and medical device industries. In addition, and to a lesser
extent, Covance provides services such as health economics for managed care
organizations, hospitals and health care provider networks and early
development and laboratory testing services to the chemical, agrochemical and
food industries. The foregoing services can be broadly classified into six
lines of business: preclinical, biomanufacturing, clinical and periapproval,
central laboratory, clinical packaging and health economics. These six lines
of business can be further categorized as non-clinical (preclinical and
biomanufacturing) and clinical (clinical and periapproval, central
laboratory, clinical packaging and health economics). Covance believes it is
one of the largest biopharmaceutical CROs, based on estimated 1995 annual net
revenue, and one of a few that are capable of providing comprehensive global
product development services. Covance offers its clients high quality
services designed to reduce product development time, allowing them to
introduce their products into the marketplace faster and, thus, maximize the
period of marketing exclusivity and monetary return on their investments.
Additionally, Covance's comprehensive services and broad experience provide
clients with a variable cost alternative to fixed cost internal development
capabilities.
History
The businesses that today constitute Covance 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 and now known as Covance Laboratories), 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 now known as
Covance Clinical and Periapproval Services), and expanded its clinical trials
expertise in 1990 with the purchase of PACT Inc. (recently known as Corning
PACT and now known as Covance Clinical and Periapproval Services), a leading
periapproval studies company. In 1991 Corning purchased SciCor Inc. (recently
known as Corning SciCor and now known as Covance Central Laboratories), 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 Covance,
acquired 100% of this company in 1994. Focusing on innovative ways to
accelerate the drug development cycle, Covance 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. Covance 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.
and now known as Covance Pharmaceutical Packaging Services), a leading
clinical packaging company. In 1995 Covance also formed Covance
Biotechnology, a majority-owned company which will enable Covance to engage
in biomanufacturing. In recognition of the rapid changes in the
biopharmaceutical industry's marketplace, particularly the need for the
industry to further demonstrate the benefits and cost effectiveness of their
products to payors, Covance purchased in early 1996 HTA (now known as Covance
Health Economics and Outcomes Services), a leading health economics company
serving at the date of acquisition over 100 clients. In October 1996, Covance
expanded its clinical packaging capabilities to Europe with the purchase of
Swiss based CRS Pacamed AG (now known as Covance Pharmaceutical Packaging
Services). In addition, Covance acquired an 81,000 square foot facility in
Horsham, England, which will be used, among other things, to provide clinical
packaging services in Europe.
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
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Application ("IND"), whereupon the FDA may grant permission to begin human
trials (also known as "clinical trials").
Preclinical studies may continue after the start of clinical trials to
determine the longer term effects of a product. 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).
(bullet) 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.
(bullet) 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.
(bullet) 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 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
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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. Covance 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, Covance 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
Covance estimates $20 billion was spent on drug development activities of the
type offered by the CRO industry. Covance believes that approximately $3
billion of such spending was outsourced to CROs primarily for preclinical
testing and clinical development.
Covance 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. Covance believes that the pharmaceutical industry is
responding to these pressures by downsizing its research and development
infrastructure and converting the fixed costs of maintaining such
infrastructure to variable costs by outsourcing drug development activities
to CROs. The downsizing of development capabilities also creates demand for
CROs as biopharmaceutical companies experience internal development resource
shortages when a large number of compounds emerge from the research process
and need to undergo development. Moreover, many of these companies are
attempting to decrease the new drug development 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. Covance 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
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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. Covance 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.
Covance believes that CROs, by providing specialized development services,
are often able to perform the needed services with a higher level of
expertise or specialization, and more quickly, than a pharmaceutical or
biotechnology company could perform such services internally. In addition,
Covance 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. Covance 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 biotechnology industries are outsourcing to global CROs to take advantage
of their capabilities and geographic presence.
In addition to increasingly stringent regulatory requirements, Covance
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.
Covance 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. Covance 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. Covance 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
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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, Covance 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
Covance believes that significant growth opportunities exist for CROs with an
international presence. Further, Covance believes that the biotechnology
companies will enter into single multi-year master agreements with CROs, as
pharmaceutical companies have done. Covance 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, two of the largest CROs, Applied Bioscience
International Inc. ("APBI") and Pharmaceutical Product Development Inc.
("PPD"), recently completed their merger. 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. Covance
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 Covance will
benefit from this trend.
Business Strategy
Covance believes it is one of the largest CROs serving the biotechnology and
pharmaceutical industries, based on estimated 1995 net revenues, and has a
focused strategy to provide high quality, cost effective, integrated,
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. Covance 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. Covance expects that these
improvements or additions will occur as the result of internal expansion and
development activity, through continued linking of Covance's various services
and through strategic acquisitions.
Personnel. Covance 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 Covance, providing them insight into what Covance's
clients need and expect from a full service CRO. Moreover, Covance 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,
Covance seeks to retain and hire the best-qualified individuals for all
aspects of its operations, emphasizing the need for experience and a customer
focus. Covance 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. Covance 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, Covance provides
services such as health economics for managed care organizations, hospitals
and health care provider networks and early development and laboratory
testing services to the chemical, agrochemical and food industries. Covance
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.
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As part of its strategy, Covance both continually improves its existing
services and endeavors to create new ones. Covance has implemented a total
quality management system throughout its operations which assists the company
in its goal of producing error-free services on time and within the client's
budget. This management system is overseen by a quality team comprised of
Covance's most senior executives, including its chief executive officer. 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 Covance's
quality management system, certain of Covance'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 Covance's efforts to continuously improve its existing
services is the Expanded Access Program ("EAP"), one of Covance's
periapproval offerings. EAP is a mechanism that allows innovative new
therapies for life threatening diseases to be given to expanded populations
prior to FDA approval pursuant to a TIND. See "-- Services--Clinical and
Periapproval Services--Treatment Investigational New Drug Applications." In
addition to improving its existing services, Covance 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 Covance operating units or divisions. For instance, Covance is
duplicating in the United States a Strategic Product Development ("SPD")
program developed in Europe that has successfully reduced the estimated time
from preclinical testing to the first human studies. See
"--Services--Preclinical Services."
Covance's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions. With respect to the former, in
addition to SPD, Covance has invested in the creation of a multi-use
biomanufacturing facility, Covance Biotechnology. See
"--Services--Biomanufacturing." With respect to the latter, Covance added
domestic clinical packaging capabilities through the acquisition of National
Packaging Systems, Inc. in January 1995, European clinical packaging
capabilities through the acquisition of CRS Pacamed in October 1996 and
enhanced its health economics services by acquiring HTA in March 1996.
Covance expects to continue developing services internally and making
strategic acquisitions that are complementary to its existing services and
that will expand its ability to serve its clients.
Streamlining the Drug Development Process. Covance 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, Covance 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 Covance.
Currently, Covance has over 300 information systems professionals working in
12 regional information system centers (nine in the United States and three
in Europe) and nine satellite centers (five in the United States and four in
Europe). All of Covance's employees at its 33 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 Covance's ability to provide integrated services and
connect Covance to its clients. For instance, Covance'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, Covance'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. Covance believes that it will become increasingly
important to provide its full range of drug research and development services
in all major and developing biotechnology and pharmaceutical markets,
especially given industry trends to conduct research on new drugs outside the
United States first and to conduct
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clinical trials in multiple countries simultaneously. Covance has a tradition
of serving its clients throughout the world. Through its offices, regional
monitoring sites, laboratories and manufacturing sites in over 33 locations
in 15 different countries and field work in 11 other countries, Covance
believes it is a leader among CROs in its ability to deliver services
globally. Currently, approximately 30% of Covance's 5,000 - person work force
is based outside of the United States.
Covance will continue its strategy of establishing new or enhancing
existing operations in significant biotechnology and pharmaceutical markets.
Covance expects this will occur as the result of internal growth and through
strategic acquisitions. For instance, Covance opened its Singapore office in
April 1996. Singapore will serve as Covance's center for conducting clinical
trials in Asia, a region that Covance believes will be increasingly important
for the research, development and therapeutic use of drugs. 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, Covance 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. Covance
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.
Services
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology,
pharmaceutical and medical device industries. In addition, and to a lesser
extent, Covance provides services such as health economics for managed care
organizations, hospitals and health care provider networks and early
development and laboratory testing services to the chemical, agrochemical and
food industries. The foregoing services constitute six lines of business:
preclinical, biomanufacturing, clinical and periapproval, central laboratory,
clinical packaging and health economics.
Preclinical Services
Covance 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, Covance 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. Covance's preclinical group also works closely
with its Phase I and II groups to minimize product development time and to
provide clients with early data on the safety and efficacy of new molecules.
This data allows clients to make a decision about whether to continue, cease
or modify their development program. See "--Business Strategy--Services."
As part of its preclinical services, Covance is duplicating in the United
States an SPD program developed in Europe that has successfully reduced the
time from preclinical testing to the first human studies. SPD involves an
integrated process and team drawn from Covance's preclinical and Phase I and
II areas. In an SPD program, the compound is researched from initial
preclinical evaluation through its first dosing in humans, including the
filing and attainment of 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, Covance 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 41/2 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 Covance believes that an SPD program will reduce the drug
development time in the United States.
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Covance also provides animals, including purpose-bred animals, for
biomedical research. These animals are used by biopharmaceutical companies,
university research centers and CROs, like Covance, as part of their
preclinical in vivo safety and efficacy testing. 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, Covance is able to provide both purpose-bred and
specific pathogen free animals that will meet the clients' rigorous control
requirements. Covance is also a provider 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 Covance's animal breeding facilities maintain procedures in
accordance with applicable government regulations and company policies for
the quarantine and handling of imported animals, including primates, there is
a risk that these animals may be infected with diseases that may be harmful
and even lethal to themselves and humans. In 1996 Covance, with the approval
of the Texas Department of Health and the Centers for Disease Control,
destroyed a shipment of monkeys from the Philippines because some had been
infected with a sub-strain of the Ebola-Reston virus, which is lethal to
monkeys.
Outside the area of biopharmaceutical development, Covance also provides
early development and laboratory testing services to the chemical,
agrochemical and food industries. For instance, Covance offers a complete
range of services to agrochemical manufacturers to determine the potential
risk to humans, animals and the environment from plant protection products.
Further, Covance offers a broad range of services to the food industries
including nutritional analysis and nutritional content fact labels.
Biomanufacturing
Covance holds a majority interest in Covance Biotechnology, a company
formed in 1995 to manufacture peptides and recombinant proteins for
biotechnology and pharmaceutical clients in accordance with GMP for
preclinical and clinical trials as well as for commercial sales. Covance
Biotechnology's services will include process development services, GMP
manufacturing by microbial and mammalian cell expression, laboratory testing,
quality assurance and quality control and regulatory affairs assistance.
Covance Biotechnology expects to lease and commence operations by the end of
1996 in a biomanufacturing facility located in Research Triangle Park, North
Carolina. Covance Biotechnology will be able to process multiple compounds
for multiple clients simultaneously and on a scale, Covance believes, greater
than any other contract bioprocessor. Covance Biotechnology provides an
alternative for clients who might otherwise need to design, finance and
construct their own facility to manufacture a compound for preclinical or
clinical trials or commercial sale. By hiring Covance Biotechnology, a client
can avoid the expense, time delay and risk of making additional investments
for a compound whose safety, efficacy and commercial opportunities are
uncertain. This allows clients to preserve their capital and lower their
risks. See "Risk Factors--Risk Factors Relating to Covance--Covance
Biotechnology--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, Covance Biotechnology has hired personnel from the
biopharmaceutical industry experienced in biomanufacturing.
As a start-up venture, Covance Biotechnology 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, Covance Biotechnology will be
able to market successfully its biomanufacturing services. Covance
Biotechnology'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 Covance Biotechnology has submitted proposals to a number of
prospective biopharmaceutical clients, it has been awarded only one contract,
but has signed a number of letters of intent for the provision of services.
For the period ended December 31, 1995, Covance Biotechnology reported a net
loss of approximately $1.9 million, and for the nine months ended September
30, 1996, Covance Biotechnology reported a net loss of approximately $2.3
million.
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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. 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 Covance Biotechnology is liable for the unamortized balance of
the cost of the facility, currently estimated to be approximately $37
million. Covance Biotechnology may also choose to purchase the facility at
specific dates over the 10 year period. Using current estimates, the purchase
price would be approximately $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.
Covance owns 76% of the voting capital stock of Covance Biotechnology in
the form of convertible preferred stock (the "Covance Biotechnology Preferred
Stock"). The remaining 24% of Covance Biotechnology's capital stock is owned
by certain minority stockholders (the "Minority Stockholders") in the form of
common stock. Covance's ownership in Covance Biotechnology could be reduced
to as much as 68% of the voting capital stock if certain options granted to
key Covance Biotechnology executives to acquire Covance Biotechnology common
stock owned by Covance are exercised in full. The Covance Biotechnology
Preferred Stock held by Covance entitles Covance to a 12% annual cumulative
dividend. No dividend has been paid on the Covance Biotechnology Preferred
Stock. Dividends on the Covance Biotechnology Preferred Stock become payable
only if Covance Biotechnology has profits and to the extent that the Covance
Biotechnology board of directors declares the payment of dividends. Covance
currently does not anticipate the receipt of any such dividend until and
unless Covance Biotechnology becomes profitable.
Covance Biotechnology, Covance 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 Covance Biotechnology common stock, grants Covance a right of
first refusal with respect to the transfer of Covance Biotechnology common
stock held by the Minority Stockholders, grants Covance the right to purchase
up to one third of the Covance Biotechnology 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 Covance chooses not
to exercise this right, obligates Covance Biotechnology 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 Covance Biotechnology to the extent that the Minority
Stockholders own, in the aggregate, greater than 50% of their initial equity
position in Covance Biotechnology. The Agreement also contains certain
provisions which restrict the circumstances and set forth the terms and
conditions upon which Covance may provide additional capital or funds to
Covance Biotechnology. Covance has no affirmative obligation to provide
further funds or financial assistance of any kind to Covance Biotechnology.
Clinical and Periapproval Services
Covance offers a comprehensive range of clinical trial services, including
Phase I through III clinical studies and periapproval studies including Phase
IIIb and Phase IV clinical studies, TINDs, post-marketing surveillance
studies and prescription to over-the-counter switch studies ("Rx to O-T-C
Switch"). Covance also has extensive experience in a number of therapeutic
areas, including diseases of the cardiovascular and central nervous systems,
endocrinology and respiratory systems, infectious diseases (including AIDS),
and significant experience in other areas including oncology, bone metabolism
immunology, gastroenterology, urology, dermatology and hematology. Covance
has extensive experience in managing both small, medium and large trials in
the United States and in many parts of the world, including Australia,
Canada, Western, Central and Eastern Europe, Israel, Mexico and Russia. These
trials may be conducted separately or simultaneously as part of a
multinational development plan. In 1995 Covance 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, Covance has cumulatively
been involved in 14 TINDs involving over 2,600 investigational sites and over
25,000 patients. In addition, Covance 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.
Covance 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
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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 Covance provides,
either on an individual or integrated basis depending on client needs, as
part of conducting clinical trials:
Study Design. Covance serves its clients in the critical area of study
design by applying its 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. Covance solicits the participation in the study
of investigators who contract directly with either Covance 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. Covance maintains and continually expands and
refines its computerized database of approximately 30,000 investigators.
Information regarding Covance's experience with these investigators,
including factors relevant to rapid study initiation, are contained in the
database. This information allows project managers to choose the
appropriate investigators for a particular study in an efficient manner.
In addition, Covance has worked with approximately 25,000 general
practitioners in connection with the conduct of Phase III and IV studies.
Study Monitoring. Covance provides study monitoring services which
include investigational site initiation, patient enrollment assistance and
data collection through subsequent site visits. These visits also serve to
assure that data are gathered according to GCP, the requirements of the
client, as specified in the study protocol or otherwise, and applicable
regulations. 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 expected timeliness for completion based
on meeting deadlines during the first few months of study initiation.
Therefore, Covance focuses at an early stage on identifying and quickly
completing the critical rate-limiting steps of screening and selecting
investigators, processing pre-study regulatory paperwork, obtaining
institutional review board approvals and scheduling investigational site
initiation visits. 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. Covance's data
management and biostatistical analysis operations are managed by
professionals with extensive pharmaceutical and biotechnology industry
experience in the design and construction of local and multinational
clinical trial databases. Data management and biostatistical analysis
services are offered as discrete products and as part of an integrated
drug
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development program. During the design of development plans and protocols,
Covance offers consulting services relating to, and the determination of,
sample size parameters for patient enrollment, development of data
analysis plans and randomization schemes. During the conduct of clinical
trials, Covance assists in the rapid acquisition of clean and accurate
data. Following completion of the clinical trials, Covance assists in
report preparation and regulatory submissions. Covance's biostatisticians
may participate with clients in meetings with the FDA to present and
discuss biostatistical analyses prepared by Covance. Covance has expertise
in electronically capturing and integrating geographically diverse data.
Covance employs a variety of software, which may be specified by clients
or combined with customized programs developed by Covance.
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, Covance 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 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, Covance was able to decrease the per patient study cost
by approximately 60%.
Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients in a manner designed to
complement parallel development processes to reduce overall development
time. 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 Covance'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, Covance has prepared a total of 79 INDs or
their equivalent. In addition, through 1995, Covance 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 and abroad. Further, Covance believes it was one of the
first CROs to develop CANDAs and CAPLAs, and Covance worked on two such
applications in 1995 and has completed nine such applications since their
inception in 1987.
Although Covance'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 Covance's
regulatory affairs group. Hired by an intermediary, Covance 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 Covance's head of
European clinical regulatory affairs was listed as a co-author of the
report. In another example, Covance 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
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or cancer, for which no comparable or satisfactory therapy is available.
This treatment is provided during the clinical trial phase of development
but does not typically use controlled clinical trials. Covance 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.
Covance's EAP, which is conducted pursuant to a TIND, is a mechanism
that allows innovative new therapies for life-threatening diseases to be
given to expanded populations prior to FDA approval. In one recent
situation, a pharmaceutical company contacted Covance 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 Covance'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, Covance 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, Covance 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, Covance performs other types of periapproval
studies such as post-marketing surveillance studies and Rx to O-T-C Switch
studies. Post- marketing surveillance studies are epidemiologically based
evaluations of the use of products in actual medical practice using a
broad range of patients. 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, Covance gathers, on behalf of a sponsor, the necessary safety
data to obtain regulatory permission for the sale of its drug without the
need of a prescription. These studies are also large, well- controlled
programs.
Central Laboratory Services
Covance believes that the ability to conduct high quality and
sophisticated central laboratory services is an integral aspect of what
constitutes a full service CRO. Covance's two facilities (one located in
the United States and the other in Switzerland) provide central laboratory
services dedicated exclusively to biopharmaceutical studies. These
facilities, 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.
Covance also employs a proprietary clinical trials management system,
which Covance believes is unique, that enables it to enter a sponsor's
protocol requirements directly into its own database. This system, based
on protocol requirements, constructs the drug kits that will go to the
investigational sites and the requisition forms therefor, allows for
proper laboratory specimen collection from the investigational site,
sequencing of study participants visits and investigator test ordering of
additional tests and ensures that all demographic data is complete and
accurate and will produce for the client reports that are customized to
their specifications.
The laboratories provide a comprehensive audit trail by ensuring that all
laboratory data are traceable to source documents, are capable of
delivering customized data electronically within 24 hours and provide
safety test results within 48 hours from most locations. As the need for
central laboratory services expands geographically, Covance has expanded
the reach of its central laboratories business through a contractual
arrangement with a leading South African laboratory that allows Covance to
combine the testing capability of this laboratory with its own proprietary
systems. Covance expects to continue to investigate other opportunities
for geographical expansion of its central laboratory service offerings.
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Clinical Packaging
Covance offers full service contract packaging for the pharmaceutical
industry in the United States and Europe including package development and
design, coldformed and thermoformed blister units, blister packaging,
multi-dose bottle filling, clinical labeling, storage and site
distribution of clinical supplies and return services for unused supplies.
With the addition of Covance Pharmaceutical Packaging Services AG, Covance
packaging services and products have been expanded to include software
inventory and validation controls and processes and the manufacturing of
robotic packaging machines. Covance believes that by integrating packaging
services with its other clinical and periapproval services it can
accelerate the drug development process through operational efficiencies
that arise from coordinating at the outset the design of a clinical trial.
Health Economics
Covance offers a wide range of health economic services for managed care
organizations, hospitals, health care provider networks and pharmaceutical
and device manufacturers. These services include outcomes and
pharmacoeconomic studies, reimbursement planning services and disease
management services.
Outcomes and Pharmacoeconomic Studies. In this area, Covance offers its
clients a full range of strategic and analytic services, including
strategic planning, quality-of-life assessment, and economic studies,
including feasibility studies, protocol and instrument design and data
analysis. Outcomes studies may be prospective, often conducted in
conjunction with clinical trials, or retrospective. Many
cost-effectiveness studies employ economic modeling techniques to evaluate
the full financial impact of new medical technologies. For example, among
the studies undertaken by Covance in 1995, Covance 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. Covance 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), Covance designed the measures for evaluating how treatment
affected a patient's ability to function on a daily basis. Through 1995,
Covance has designed over 100 outcomes and pharmacoeconomic studies.
When planning studies, Covance 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.
Covance typically involves academic and clinical experts to ensure that
appropriate techniques are used and to enhance study credibility and
acceptance. Covance designs most studies with a goal of publishing its
findings in respected, peer-reviewed journals.
Covance believes that given the changing competitive pressures affecting
the pharmaceutical industry and the rising need to more rigorously
demonstrate the value of particular drugs, both in their own right and
compared to other drugs and treatment regimes, the ability to perform
outcomes and pharmacoeconomic studies will become increasingly important.
Reimbursement Planning. Covance offers its customers strategic
reimbursement and market planning services. These services enable clients
to enhance the commercial success of their medical products. Covance
analyzes, on behalf of the customer, who will pay for a medical product
(e.g., third-party payors such as private insurance companies or federal
programs like Medicare) and what economic barriers or opportunities exist
for the product (e.g., claims coding, coverage policy, or payment
amounts). This work typically involves evaluating government policies and,
sometimes, leads to changes in those policies. In addition, Covance often
offers its reimbursement planning activities in conjunction with its other
services that evaluate existing and potential market size, pricing,
distribution, and economic impact.
Through its Medical Technology Hotlines(R) division, Covance also
provides full service reimbursement case management, including: (1)
contacting insurers to investigate specific coverage and benefit matters,
resolving denied claims and educating insurers; (2) assisting
manufacturers in designing and effectively running their indigent patient
programs, pursuant to which costly new products are made available to
patients who cannot afford them because of inadequate insurance coverage
or other cost reasons; (3) designing and administering transition programs
for manufacturers, which includes obtaining third-party payment for a
product for patients who had previously received it free as part of a
clinical trial; and (4) conducting reimbursement training seminars for
clients and their customers.
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All of these services are supported by a dedicated information services
group that provides a range of data products, services and information
systems, including customized hospital cost reports, patient average
lengths of stay or mortality rates at the federal, state, local or
individual hospital level. The extensive economic and epidemiologic
databases Covance maintains are used to perform market research, determine
the economics of a disease or inform government authorities about the need
for potential policy changes.
Disease Management Services. Working for a variety of customers,
including pharmaceutical and device manufacturers, managed care
organizations, hospitals, provider networks and computerized medical
record companies, Covance designs and implements systems that track
patterns of care, patient outcomes, and costs, and develops programs and
tools designed to improve quality and decrease costs of care. Such
programs and tools include medical practice guidelines and computerized
decision support tools. For example, Covance 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, Covance has
started a national database to track practice patterns and outcomes
concerning eye care provided by ophthalmologists. Covance is analyzing the
national data and providing reports to individual ophthalmologists
regarding their performance.
Clients and Marketing
Covance provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. Specifically,
Covance 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 Covance
serves, 45 are Japanese. The Japanese biopharmaceutical companies are served
by Covance's U. S. and European operations. For the years ended December 31,
1995, 1994 and 1993, approximately 70%, 76% and 78%, respectively, of
Covance'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 Covance's net revenue during
1995, 1994 and 1993, respectively, was attributed to Covance's clinical lines
of business. Approximately 41%, 48% and 52% of Covance's net revenues during
1995, 1994 and 1993, respectively, were attributed to Covance's nonclinical
lines of business. No client accounted for 10% or more of Covance's net
revenues in 1995, 1994, or 1993. None of Covance's clients accounted for
greater than 5% of Covance'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 Covance's net revenues. In fiscal 1993, 1994 and 1995 and
the nine months ended September 30, 1996, Covance's top five clients
accounted for approximately 17%, 20%, 21% and 21%, respectively, of Covance's
net revenues. See "Risk Factors--Risks Relating to Covance-- Dependence on
Certain Industries and Clients."
Covance's sales activities are conducted by more than 90 business
development people based in Covance's operations in the United States,
Europe, Australia, Japan and Singapore. Most of Covance business development
personnel have technical or scientific backgrounds.
To strengthen its sales and marketing activities, Covance introduced in
1995 a Lotus Notes based large account management process ("LAMP") that
allows Covance business development personnel in all locations to promptly
ascertain the status of any new client activity with any Covance operation
and is an important tool in managing Covance's key account program. Through
LAMP, the key account program and dedicated resources, Covance believes it
can better coordinate and unite the efforts of its sales and marketing
personnel and strengthen relationships with pivotal biopharmaceutical
clients. Covance believes that this will allow it to improve its
understanding of its clients' organizational structure, management practices
and product pipeline, and, thus, better serve its clients' needs. Conversely,
LAMP also enables clients, across different business functions, to better
understand the full range of Covance's services.
Contractual Arrangements
Most of Covance's contracts in the preclinical, central laboratory, clinical
packaging and health economics areas are fixed price or fee-for-service and
in the clinical and periapproval areas are fee-for-service with a cap. To a
lesser extent, some of the contracts in the clinical and periapproval areas
are fixed price or fee-for-service without a cap. In cases where the
contracts are fixed price, Covance bears the cost of overruns, with certain
exceptions, but benefits if the costs are lower than anticipated. In cases
where the contracts are fee-for-service with a cap, the
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contracts contain an overall budget for the trial based on time and cost
estimates. If costs are lower than anticipated, the client keeps the savings,
but if costs are higher than estimated, then Covance is responsible for the
overrun unless the increased cost is a result of a change requested by the
client, such as an increase in the number of patients to be enrolled or the
type or amount of data to be collected. Contracts may range from a few months
to several years depending on the nature of the work performed. In some
cases, for multiyear contracts involving either preclinical or clinical and
periapproval trials, a portion of the contract fee is paid at the time the
study or trial is started with the balance of the contract fee payable in
installments over the study or trial duration and may be performance based.
For instance, in clinical and periapproval trials, installment payments may
be related to investigator recruitment, patient enrollment or delivery of the
database.
Most of Covance's contracts for the provision of its services are
terminable by the client either immediately or upon notice. Contracts may be
terminated for a variety of reasons, including the failure of a product to
satisfy safety requirements, unexpected or undesired results of the product,
the client's decision to forego or terminate a particular study, insufficient
enrollment or investigator recruitment, or Covance'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 Covance. See "Risk
Factors--Risks Relating to Covance--Fixed Price Nature of Contracts; Loss or
Delay of Large Contracts."
Backlog
Certain of Covance's studies and projects are performed over an extended
period of time which may be as long as several years. With respect to such
studies or projects, Covance maintains an order backlog to track anticipated
net revenues for such work that has yet to be earned. Covance does not
maintain an order backlog for all the services it provides because such
services are performed within a short period of time or for other reasons
where it is not practical or feasible to maintain an order backlog.
Additionally, services appropriate for backlog measurement do not correspond
exactly with any particular line of business.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of
intent or contract commences, net revenue is recognized over the life of the
contract. In certain cases, however, Covance will work on a project prior to
executing a letter of intent and the backlog may include the net revenue
expected from such project.
No assurance can be given that Covance 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), Covance believes that its aggregate backlog
as of any date is not necessarily a meaningful indicator of future results
for a variety of reasons, including the following: First, studies vary in
duration. For instance, some studies that are included in 1995 backlog may be
completed in 1996, while others may be completed in later years. Second, the
scope of studies may change, which may either increase or decrease their
value. Third, studies included in backlog may be subject to bonus or penalty
payments. Fourth, trials under letters of intent or contracts included in
backlog are subject to termination or delay at any time by the client or
regulatory authorities. Termination or delays can result from a number of
reasons. See "--Contractual Arrangements." Delayed contracts remain in
Covance'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, Covance'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. Covance primarily competes against in-house departments
of pharmaceutical companies, full-service CROs and, to a lesser extent,
universities and teaching hospitals. Covance believes, based on 1995
revenues, that the five largest CROs after itself include PPD (after its
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
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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
Covance has competed effectively in these areas, there can be no assurance
that Covance 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 Covance.
See "--CRO Industry Overview."
Government Regulation
The laboratory and manufacturing services performed by Covance 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"). Covance's central laboratories also, in limited
circumstances and when required by a client, follow GLP. Covance's central
laboratory in Geneva has also been certified by 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, Covance 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. Covance must also maintain
reports for each study for specified periods for inspection by the study
sponsor and the FDA during audits. As with GLP and GMP, noncompliance with
GCP can result in the disqualification of data collection during the clinical
trial.
Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where
they will be used. Within Europe, all work is carried out in accordance with
the European Community Note for Guidance "Good Clinical Practice for Trials
on Medicinal Products in the European Community" and the requirements of the
applicable country. In addition, FDA regulations and guidelines serve as a
basis for Covance's North American and Asian/Pacific standard operating
procedures. From an international perspective, when applicable, Covance has
implemented common standard operating procedures across regions to assure
consistency whenever it is feasible and appropriate to do so.
Covance's animal import and breeding facilities are also subject to a
variety of federal and state laws and regulations, including The Animal
Welfare Act and the rules and regulations promulgated thereunder by the
United States Department of Agriculture ("USDA"). These regulations establish
the standards for the humane treatment, care and handling of animals by
dealers and research facilities. Covance's breeding and import animal
facilities maintain detailed standard operating procedures and the
documentation necessary to assure compliance with
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applicable regulations for the humane treatment of the animals in its
custody. Besides being licensed by the USDA as both a dealer and research
facility, this business is also accredited by the American Association for
the Accreditation of Laboratory Animal Care and has registered assurance with
the 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 Covance
laboratories using controlled substances for testing purposes are licensed by
the DEA.
Covance'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 Covance laboratories are operated in
material compliance with applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens including
the regulations of the Environmental Protection Agency, the Nuclear
Regulatory Commission, the Department of Transportation, the National Fire
Protection Agency and the Resource Conservation and Recovery Act. Although
Covance believes that it is currently in compliance in all material respects
with such federal, state and local laws, failure to comply could subject
Covance to denial of the right to conduct business, fines, criminal penalties
and other enforcement actions.
In addition to its comprehensive regulation of safety in the workplace,
the Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis
B virus. These regulations, among other things, require work practice
controls, protective clothing and equipment, training, medical follow-up,
vaccinations and other measures designed to minimize exposure to chemicals,
and transmission of blood-borne and airborne pathogens. Furthermore, relevant
Covance employees receive initial and periodic training to ensure compliance
with applicable hazardous materials regulations and health and safety
guidelines.
The regulations of the Department of Transportation, the Public Heath
Service and the Postal Service apply to the surface and air transportation of
laboratory specimens. Covance's laboratories also comply with the
International Air Transport Association regulations, which govern
international shipments of laboratory specimens. Furthermore, when the
materials are sent to a foreign country, the transportation of such materials
becomes subject to the laws, rules and regulations of such foreign country.
Intellectual Property
Covance has developed certain computer software and technically derived
procedures that provide separate services and are intended to maximize the
quality and effectiveness of its services. Although Covance's intellectual
property rights are important to its results of operations, Covance believes
that such factors as the technical expertise, knowledge, ability and
experience of Covance's professionals are more important, and that, overall,
these technological capabilities provide significant benefits to its clients.
Employees
At September 1996 Covance had approximately 5,000 employees, approximately
30% of whom are employed outside of the United States. Approximately 32 of
Covance'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. Covance believes that its relations with its
employees are good.
Covance'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. Covance
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 Covance. While Covance has not experienced any
significant problems in attracting or retaining qualified staff, there can be
no assurance that Covance will be able to avoid such problems in the future.
Facilities
Covance both owns and leases its facilities. Covance's principal executive
offices are located in Princeton, New Jersey where it leases approximately
157,000 square feet of space. The lease expires in 2004. Because its
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existing space is approximately 95% occupied and to accommodate its growth,
Covance 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. Covance owns its 397,000 square-foot preclinical laboratory located
in Madison, Wisconsin and its 205,000 square-foot preclinical laboratory in
Harrogate, England. Covance leases most of its 201,000 square-foot
preclinical laboratory in Vienna, Virginia. It also owns several of the
buildings. The leases expire in 1999 and have a 10-year renewal option.
Covance also leases its 152,000 square-foot pharmaceutical laboratory in
Indianapolis, Indiana, which expires in 2000. Covance is investigating
extensions of both leases and other options with respect to such facilities.
Covance leases its 51,000 square-foot pharmaceutical laboratory in Geneva,
Switzerland, which lease expires in 2000. Covance's domestic packaging
operations are conducted from several leased facilities. The principal
packaging facility is in Allentown, Pennsylvania. The leases are for
approximately 100,000 square feet of space and they all expire in 1999.
Covance is currently reviewing facility needs for its domestic packaging
operations. Covance's Swiss based packaging operation currently conducts
business in a 20,000 sq. ft. leased facility, but has plans to construct a
new, purpose designed 37,000 sq. ft. facility. The new facility is expected
to be completed in early 1998. In addition, in October 1996, Covance
purchased an 81,000 sq. ft. former pharmaceutical manufacturing facility in
Horsham, England. After its renovation is completed by mid-1997, this
facility will be used to provide clinical packaging, clinical and
periapproval services and health economics services and also serve as
Covance's European headquarters. Covance Biotechnology's facility in North
Carolina is leased. See "Risk Factors--Risks Relating to Covance--
Biomanufacturing--New Business Venture." Covance also owns or leases other
facilities in the United States, England, Ireland, Belgium, France, Germany,
Switzerland, Sweden, Australia, Singapore and Japan.
Legal Proceedings
Covance is party to lawsuits and administrative proceedings incidental to
the normal course of its business. Covance does not believe that any
liabilities related to such lawsuits or proceedings will have a material
effect on its financial condition or results of operations.
146
<PAGE>
MANAGEMENT OF COVANCE
Management
Directors. Certain information with respect to the persons who will serve as
directors of Covance following the Distributions is set forth below. Prior to
the closing of the Covance Spin-Off Distribution, certain current directors
will resign and the prospective directors listed below will be elected. As
provided in the Covance Certificate, the Covance Board will be divided into
three classes effective upon the Distributions and one class of the Covance
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. The Covance Board will
be comprised of eight directors, one of whom will be an officer of Covance
and two of whom will be officers of Corning. Covance 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
J. Randall MacDonald 48
Nigel Morris 37
Robert M. Baylis 58
Irwin Lerner 66
Christopher A. Kuebler has been Covance's President and Chief Executive
Officer, and an Executive Vice President of CLSI, an affiliate of Covance,
since November 1994. From March 1993 through November 1994, he was the
Corporate Vice President, European Operations for Abbott Laboratories Inc.
("ALI"), a diversified health care company. From January 1991 until March
1993, Mr. Kuebler was the Vice President, Sales and Marketing for ALI's
Pharmaceutical Division. Mr. Kuebler has been a member of the Covance Board
since November 1994. Mr. Kuebler also serves in various executive officer and
director capacities of Covance'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 Covance
Board since May 1995. He is a director of Armstrong World Industries, Inc.
and General Signal Corporation.
William C. Ughetta is the 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 Covance Board since July 1996. He is a
director of Siecor Corporation and Chemung Canal Trust Company.
J. Randall MacDonald has been the Senior Vice President-Human Resources
and Administration for the GTE Corporation, a telecommunications company,
since April 1995. Prior to April 1995, Mr. MacDonald held various senior
positions with GTE, including Vice President-Employee Relations and
Organizational Development (from 1988) and Vice President of Organizational
Development (from 1986). Mr. MacDonald joined GTE in 1983 as a Director of
Employee Relations.
Nigel W. Morris has been the President and Chief Operating Officer of
Capital One Financial Corporation ("Capital One"), a financial services
company, from July 1994 to the present. Mr. Morris was the Executive Vice
President, Credit Card Division, of the Signet Banking Corporation
("Signet"), from May 1993 to November 1994. From October 1988 until April
1993, Mr. Morris was the Senior Vice President-Policy/Strategy-Credit Card
Business for Signet. He is also a director of Capital One.
Robert M. Baylis was the Vice Chairman of CS First Boston Corporation
("First Boston"), a financial services company, from March 1992 to March
1996. Prior to March 1992, Mr. Baylis held a variety of positions with First
Boston, including Chairman and Chief Executive Officer of CS First Boston
Pacific, Inc./Hong Kong, Managing Director-Investment Banking Group and
Managing Director-Equity Security Department. Prior to his retirement, Mr.
Baylis was with First Boston for over 33 years. He is also a director of the
following corporations: Host Marriott Corporation, Gryphon Holdings, Inc.,
Home State Holdings, Inc. and New York Life Insurance Company.
147
<PAGE>
Irwin Lerner was the Chairman of the Board of Directors and Executive
Committee of Hoffmann-La Roche, Inc. ("Roche"), a pharmaceutical company,
from January to September 1993. From April 1980 to January 1993, Mr. Lerner
was the President and Chief Executive Officer of Roche. He is also a director
of the following corporations: Humana, Inc., Medarex, Inc., Public Service
Enterprise Group Incorporated and Sequence Therapeutics, Inc.
Directors' Compensation. Each director of Covance, other than a director
who is an employee of Covance, will receive $15,000 annually for service as a
director and will also be paid $1,000 for each meeting of the Covance Board
and $500 for each meeting of any committee thereof which he attends.
Covance 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 base rate of Citibank, N.A. in effect on certain specified
dates, (ii) a market value account, the value of which will be based upon the
market value of Covance Common Stock from time to time, or (iii) a
combination of such accounts. As of the Distribution Date, it is anticipated
that there will be seven non-employee directors eligible to participate in
the deferred compensation plan.
Covance has adopted, effective the Distribution Date, a restricted stock
plan for non-employee directors, pursuant to which Covance will issue to each
non-employee director elected 200 shares of Covance 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
Covance Board is expected to establish and designate specific functions and
areas of oversight to an Audit Committee and a Compensation Committee (the
"Covance Compensation Committee"). The Audit Committee will examine and
consider matters relating to the financial affairs of Covance, including
reviewing Covance's annual financial statements, the scope of the independent
and internal audits and the independent auditor's letter to management
concerning the effectiveness of Covance's internal financial and accounting
controls. The Covance Compensation Committee will make recommendations to the
Covance Board with respect to programs for human resource development and
management organization and succession, determine senior executive
compensation, consider and make recommendations to the Covance Board with
respect to compensation matters and policies and employee benefit and
incentive plans, administer such plans, and administer Covance's stock option
and equity based plans and grant stock options and other rights under such
plans.
Executive Officers of Covance. In addition to Mr. Kuebler, the following
persons will serve as executive officers of Covance after the Distributions:
Richard J. Andrews (49) has been a Corporate Senior Vice President of
Covance since July of 1996. In addition, Mr. Andrews has served as the
President of Covance Central Laboratory Services Inc., a wholly owned
subsidiary of Covance, since June 1994. From January 1993, Mr. Andrews has
served as the President of Covance Central Laboratory Services S.A., a wholly
owned subsidiary of Covance Central Laboratory Services Inc. since April
1994. Covance Central Laboratory Services Inc. and Covance Central Laboratory
Services S.A. provide Covance's central laboratory services. Prior to January
1993. Mr. Andrews served in various executive capacities in Europe, including
Worldwide Business Director, for Dupont International S.A., a multinational
chemical and pharmaceutical company. Mr. Andrews serves as a director of several
of Covance's subsidiaries.
Michael Giannetto (34) has been Covance's Controller since July 1996 and a
Vice President since November 1996. From December 1992 to March 1995, Mr.
Giannetto was the Manager of Financial Reporting and Technical Accounting for
CLSI, an affiliate of Covance. From March 1995 to July 1996, Mr. Giannetto
was the Business Controller for Covance. Prior to December 1992, Mr.
Giannetto was a Senior Audit Manager for Deloitte & Touche.
Charles C. Harwood, Jr. (43) has been Covance's Corporate 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 Covance. From January 1993 to May 1993, Mr. Harwood was Chief Financial
Officer and Vice President of Finance with Integrated Telecom Technologies,
Inc. Prior to that position, he was the President of Pembroke Development
Co., Inc., a commercial real estate development company. Mr. Harwood also
serves as a director of Bio-Imaging, Covance Biotechnology and several of
Covance's other subsidiaries.
148
<PAGE>
Jeffrey S. Hurwitz (36) has been Covance's Corporate Senior Vice
President, General Counsel and Secretary since July 1996. From November 1994
to July 1996, Mr. Hurwitz was Covance's Vice President, General Counsel and
Secretary. From October 1993 to November 1994, Mr. Hurwitz was Covance's
General Counsel and Secretary. From May 1992 to October 1993, Mr. Hurwitz was
an Assistant Counsel and Assistant Secretary for CLSI, an affiliate of
Covance. 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 also
serves as a director of Bio-Imaging, Covance Biotechnology and several of
Covance's other subsidiaries.
Kim D. Lamon, M.D., Ph.D. (44) has been a Corporate Senior Vice President
of Covance since July of 1996. In addition, Dr. Lamon has been the President
of Covance Clinical and Periapproval Services Inc. and Covance Periapproval
Services Inc. since May 1996. Covance Clinical and Periapproval Services
Inc., Covance Periapproval Services Inc. and their European affiliates
provide Covance's clinical and periapproval services. From April 1994 until
May 1996, he was the Executive Vice President, Chief Medical Officer for
Quest Diagnostics and Senior Vice President, Science and Technology for CLSI,
affiliates of Covance. From July 1992 until April 1994, Dr. Lamon was Senior
Vice President, Clinical Research and Development and Executive Medical
Director for Rhone-Poulenc Rorer ("RPR"), a pharmaceutical company. Prior to
July 1992, Dr. Lamon was Senior Vice President, Clinical Research and
Regulatory Affairs at RPR. Dr. Lamon received his M.D. and Ph.D. in
Pharmacology from Thomas Jefferson University. Since 1989, Dr. Lamon has been
an Adjunct Assistant Professor of Pharmacology at Thomas Jefferson
University. Dr. Lamon serves as a director of several of Covance's subsidiaries.
James D. Utterback (41) has been Covance's Corporate Senior Vice
President, International New Business Ventures and is also responsible for
Covance'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. Mr. Utterback serves as a director of several of Covance's subsidiaries.
Michael G. Wokasch (45) has been a Corporate Senior Vice President of
Covance since July of 1996. In addition, Mr. Wokasch has been the President of
Covance Laboratories Inc., a wholly owned subsidiary of Covance, since July
1995. Covance Laboratories Inc. and its affiliates provide Covance's preclinical
services. From January 1992 until July 1995, Mr. Wokasch served as Divisional
Vice President of Sales of ALI. From October 1991 to January 1992, Mr. Wokasch
served as Director for New Product/Marketing/Development & Scientific Relations
at ALI. Prior to October 1991, Mr. Wokasch was a Director, New Product
Development at ALI. Mr. Wokasch serves as a director of several of Covance's
subsidiaries.
Executive Compensation
Historical Compensation. The following table sets forth information with
respect to annual and long-term compensation at rates expected to be paid by
Covance and its subsidiaries to each of the chief executive officer and the
four other most highly compensated executive officers (the "named executive
officers") of Covance 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.
149
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards
----------------------------------- ----------------------
Restricted Securities
Name and Salary Bonus Other Annual Stock Underlying All Other
Principal Position Year (1) (2) Compensation(3) Awards(4) Options Compensation(5)
------------------------------------ ---- ------- ------- ------------- --------- --------- -------------
<C> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler, 1996 350,000 192,500 42,447 -- -- 72,043
Chairman, President and 1995 322,567 303,958 39,927 326,926 81,000 68,680
Chief Executive Officer 1994 51,667 101,679 -- -- 20,000 2,140
Richard J. Andrews, Corporate Senior 1996 232,960 93,184 -- -- 4,000 15,997
Vice President; President, Corporate 1995 222,833 176,512 -- -- -- 17,445
Covance Central
Laboratory Services Inc. 1994 197,635 41,000 -- -- 12,000 10,466
Kim D. Lamon, Corporate Senior 1996 323,800 178,090 31,745 -- -- 56,012
Vice President; President, 1995 309,417 160,265 29,225 89,524 60,000 58,060
Covance Clinical and 1994 200,000 175,625 -- -- 23.000 18,534
Periapproval Services Inc.
and Covance Periapproval
Services Inc.
James D. Utterback, 1996 245,758 135,167 19,244 -- -- 43,876
Corporate Senior Vice President, 1995 237,167 104,826 19,244 70,499 24,000 41,595
International New Business Ventures 1994 153,333 134,646 -- -- 18,000 17,509
Michael Wokasch, 1996 208,000 93,600 3,600 -- -- 17,730
Corporate Senior Vice President; 1995 100,000 76,500 -- -- 38,000 4,740
President, Covance
Laboratories, Inc.
</TABLE>
- -------------
(1) Reflects for 1996 current salaries on an annualized basis.
(2) Reflects for 1996 projected performance-based annual cash compensation
awards at target levels.
(3) Includes dividends on shares of restricted stock granted but not earned
within one year from date of grant and tax gross-up payments.
(4) Messrs. Kuebler, Utterback, Wokasch and Dr. Lamon held an aggregate of
44,240, 16,316, 8,000 and 27,941 shares of restricted stock,
respectively, having an aggregate value on September 30, 1996 of
$1,725,360, $636,324, $312,000 and $1,089,699, 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 Covance and in part if such officer's
employment is terminated by Covance. On or prior to the Distribution Date
(a) all restrictions on transfer will be removed from Career Shares which
are no longer subject to forfeiture, except such shares held by Mr.
Kuebler, and all Career Shares which are subject to forfeiture conditions
and transfer restrictions will be forfeited; and (b) performance-based
shares which remain subject to forfeiture conditions and transfer
restrictions and Career Shares which are no longer subject to forfeiture
held by Mr. Kuebler will be forfeited, and in lieu thereof restricted
shares of Covance Common Stock will thereafter be granted pursuant to the
terms of the Covance Incentive Stock Plan (as defined below), which
shares will be subject to forfeiture conditions and transfer restrictions
until July 1, 1997. Dividends are paid to such individuals on all shares
of restricted Corning Common Stock held by them.
(5) Includes the following amounts to be contributed by Covance to the
Covance Retirement Savings Plan (as defined below) for 1996: $6,531 for
Mr. Kuebler, $6,517 for Mr. Andrews, $6,000 for Dr. Lamon, $6,750 for Mr.
Utterback and $8,250 for Mr. Wokasch. Also includes a $12,840 automobile
allowance to be received by each of Messrs. Kuebler, Utterback and Dr.
Lamon and $9,480 to be received by each of Messrs. Andrews and Wokasch.
Also includes 20% of interest-free loans made by Covance to the following
individuals in the following amounts, together with imputed interest
thereon: $200,000 for Mr. Kuebler, $150,000 for Dr. Lamon
150
<PAGE>
and $100,000 for Mr. Utterback, which loans are to be forgiven over a
five-year period provided they continue to be employed by Covance 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 Covance who hold at the Distribution Date Corning stock
options, including a portion of those granted on December 6, 1995, will
receive new options of Covance ("New Options") under the Covance 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 Covance Stock Option Plan.
The exercise prices and the number of shares of Covance 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 Covance 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 Covance 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 Gain
Granted in Fiscal Exercise Expiration at Gain at Gain at
Name (2) Year Price Date 0% (4) 5% 10%
- ----------------------- --------- ------------ ------- --------- ------ ---------- ------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler 81,000 2.4% 31.25 12/5/2005 0 1,591,890 4,034,161
Richard J. Andrews 4,000 0.1% 34.44 4/24/2006 0 86,637 219,554
Kim D. Lamon 60,000 1.8% 31.25 12/5/2005 0 1,179,177 2,988,267
James D. Utterback 24,000 0.7% 31.25 12/5/2005 0 471,671 1,195,307
Michael Wokasch 30,000 0.9% 31.25 12/5/2005 0 589,589 1,494,134
8,000 0.2% 27.50 10/3/2005 0 138,357 350,623
All Optionees as a
Group (4) 3,389,100 100.0% 31.34 2005 0 66,797,662 169,278,390
</TABLE>
- -------------
(1) No SARs were granted.
(2) The stock option agreements with Messrs. Kuebler, Utterback and Wokasch
(with respect to the 30,000 share grant) and Dr. Lamon 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. Andrews provides that one-half of the options become
exercisable on April 24, 1997 and all of the options will become
exercisable on April 24, 1998. The stock option agreement with Mr.
Wokasch (with respect to the 8,000 share grant) provides that one-half of
the options 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.
151
<PAGE>
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.
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
- ------------------------ ------------ -------- ----------- ------------- ----------- ---------------
<C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler 0 0 10,000 91,000 0 0
Richard J. Andrews 0 0 2,000 14,000 0 0
Kim D. Lamon 0 0 10,000 73,000 0 13,812
James D. Utterback 0 0 10,000 32,000 0 8,500
Michael Wokasch 0 0 0 38,000 0 28,501
</TABLE>
- -------------
(1) There are no SARs outstanding.
Corporate Performance Plan Activity. Awards of performance-based shares of
Corning Common Stock have been granted to Covance'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 137.
In late 1996, the Compensation Committee of the board of directors of
Corning (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
of Number of Vesting
Grant Shares Performance of Shares Shares Date of
Number Year Date Granted Period Forfeited Earned Earned Shares
- ------------------------ ---- ----- -------- ---------- --------- -------- ---------------
<C> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler 1996 12/95 13,500 1996 2/99
1995 12/94 10,000 1995 10,740 2/98
1994 0
Richard J. Andrews 1996 0
1995 0
1994 0
Kim D. Lamon 1996 12/95 10,000 1996 2/99
1995 12/94 6,500 1995 3,559 2,941 2/98
1994 0
James D. Utterback 1996 12/95 4,000 1996 2/99
1995 12/94 4,000 1995 1,684 2,316 2/98
1994 0
Michael Wokasch 1996 12/95 5,000 1996 2/99
1995 0
</TABLE>
152
<PAGE>
Variable Compensation. Covance has adopted, effective upon the
Distributions, a variable compensation plan (the "Plan"), an annual incentive
cash compensation plan for approximately 400 supervisory, management and
executive employees similar to an annual performance plan currently
maintained by Covance. 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 Covance Compensation Committee sets the target for the performance year.
The Covance 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. Covance has adopted, effective upon
the Distributions, the Employee Equity Participation Program (the "Program")
consisting of two plans: (a) a stock option plan (the "Covance Stock Option
Plan") and (b) an incentive stock plan (the "Covance Incentive Stock Plan").
The Program is designed to provide a flexible mechanism to permit key
employees of Covance and of any subsidiary to obtain significant equity
ownership in Covance, thereby increasing their proprietary interest in the
growth and success of Covance.
The Program, which will be administered by the Covance Compensation
Committee, provides for the grant to eligible employees of either
non-qualified or "incentive stock" options, or both, to purchase shares of
Covance Common Stock at no less than fair market value on the date of grant.
The Covance 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 Covance by the
optionee in full prior to delivery of the stock. The optionee may pay the
option price in cash or with shares of Covance 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
Covance Compensation Committee may grant options pursuant to which an
optionee who uses shares of Covance 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 Covance 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 Covance 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 Covance Compensation Committee to award to
eligible employees shares, or the right to receive shares, of Covance Common
Stock, the equivalent value in cash or a combination thereof (as determined
by the Covance Compensation Committee). The Covance 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 Covance 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 Covance and of any subsidiary will be
eligible to participate in the Program and the plans thereunder. The
selection of employees eligible to participate in any plan under the Program
is within the discretion of the Covance
153
<PAGE>
Compensation Committee. Approximately 400 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 Covance Common Stock
which may be optioned or granted to eligible employees will be 6,000,000.
Shares from expired or terminated options under the Covance Stock Option Plan
will be available again for option grant under the Program. Shares which are
issued but not earned, or which are forfeited under the Covance 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 Covance 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 Covance, or a merger
or consolidation in which Covance 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 Covance 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 Covance Common Stock.
Covance believes that the U.S. federal income tax consequences of the
Program are as follows. An optionee who exercises a non-qualified option
granted under the Covance 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 Covance 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 Covance 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 Covance 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 Covance 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 Covance Common Stock which are not subject to restrictions and
possibility of forfeiture and which are awarded to an employee under the
Covance 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 Covance 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 Covance 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 Covance or by the subsidiary employing the employee.
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 Covance upon a participant's disposition of shares
acquired under the Program, except that Covance 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.
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Pension Plans. None of the executive officers of Covance are currently
active participants in a qualified defined benefit plan of Covance.
It is anticipated that, prior to the Distribution Date, the Compensation
Committee of the Corning Board will approve, and Covance will adopt, a
nonqualified Covance Supplemental Executive Retirement Plan for the benefit
of certain executive officers of Covance, 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
Covance and administered by the Covance Compensation Committee.
Eligible executives may commence receiving full benefits under the plan upon
attaining age 60, so long as they have completed at least twenty years of
service with Corning or any subsidiary thereof. Retirement benefits to be
provided under the plan will be based on 40% of an executive's "Final Average
Pay," defined to mean the average of an executive's base salary plus bonus,
taking into account the highest five consecutive years of the executive's
last ten years of employment with Corning or any subsidiary thereof. Under
the terms of the plan, executives may, with the approval of the Covance
Compensation Committee, elect to commence receiving reduced benefits prior to
age 60, provided that they have completed at least five years of service with
Corning or any subsidiary thereof and have attained age 55. Benefits
commencing prior to age 60 will be reduced by 5% of the amount of benefits
earned for each year prior to age 60. For example, at age 55, an executive
with at least twenty years of service may be eligible to receive 30% of Final
Average Pay so long as the executive receives approval from the Covance
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 Covance Compensation Committee, the right to receive
an actuarially determined lump-sum distribution from the plan.
Maximum annual benefits, based on at least twenty years of service and the
Final Average Pay calculated under the straight life annuity option form of
pension, payable to participants at ages 55 to 60 are illustrated in the
table set forth below. The table below does not reflect any limitations on
benefits imposed by ERISA.
<TABLE>
<CAPTION>
Age (With at least 20 Years of Service)
--------------------------------------------------------------
Final Average Pay 55 56 57 58 59 60
----------------- ------- ------- ------- ------- ------- ---------
<C> <C> <C> <C> <C> <C> <C>
$ 100,000 30,000 32,000 34,000 36,000 38,000 40,000
200,000 60,000 64,000 68,000 72,000 76,000 80,000
300,000 90,000 96,000 102,000 108,000 114,000 120,000
400,000 120,000 128,000 136,000 144,000 152,000 160,000
500,000 150,000 160,000 170,000 180,000 190,000 200,000
600,000 180,000 192,000 204,000 216,000 228,000 240,000
700,000 210,000 224,000 238,000 252,000 266,000 280,000
800,000 240,000 256,000 272,000 288,000 304,000 320,000
900,000 270,000 288,000 306,000 324,000 342,000 360,000
1,000,000 300,000 320,000 340,000 360,000 380,000 400,000
1,100,000 330,000 352,000 374,000 396,000 418,000 440,000
1,200,000 360,000 384,000 408,000 432,000 456,000 480,000
</TABLE>
Covance Retirement Savings Plan. Most of the employees of Covance and its
subsidiaries have been eligible to participate in a tax-qualified, defined
contribution plan known as the Covance Retirement Savings Plan (the "Covance
Retirement Savings Plan" to be renamed the "Covance Stock Purchase Savings
Plan" prior to the Distribution Date), 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, Covance Common Stock will
be added as an investment fund and all or a portion of the employer matching
contributions will automatically be invested in Covance Common Stock. Corning
Common Stock will no longer be available as an investment fund except with
respect to amounts already so invested under the Covance Retirement Savings
Plan.
Effective as of the Distribution Date, the Covance Retirement Savings Plan
will be amended to permit participating employees' employers to make
discretionary contributions, other than matching contributions, to the
Covance Retirement Savings Plan for the benefit of such employees, which
contributions may be invested in Covance Common Stock.
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Covance Employee Stock Ownership Plan. Covance has adopted, effective upon
the Distributions, 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 Covance
Employee Stock Ownership Plan (the "Covance ESOP").
Individuals who are active employees of Covance and its U.S. subsidiaries as
of the Distribution Date will become participants in the Covance ESOP. To the
extent permitted under the Covance ESOP, Covance will contribute as of the
Distribution Date an amount equal to a portion of each participating
employee's annual compensation. Covance may in its discretion from time to
time make additional contributions to the Covance ESOP for the benefit of
participating employees. The assets of the Covance ESOP will be invested
primarily in shares of Covance Common Stock.
Amounts contributed to the Covance 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
Covance ESOP will not currently be taxable income to the participating
employees and will not generally be available to them until termination of
employment.
Covance Restricted Share Plan. Covance has adopted, effective upon the
Distributions, the Covance Restricted Share Plan, intended to provide to
Covance's foreign national employees in its non-U.S. locations who otherwise
are ineligible to participate in the Covance ESOP and to domestic employees
whose participation therein is subject to limitations imposed by ERISA
benefits similar to the Covance ESOP. To the extent permitted under the plan,
Covance will award to participating employees shares of Covance Common Stock
as of the Distribution Date, the market value of which shall equal a portion
of such employee's annual compensation. Covance may in its discretion from
time to time make additional awards to participating employees. Shares of
Covance Common Stock awarded to participating employees will be 100% vested
on the earlier of death, disability or the second anniversary of the date of
each grant.
Covance Stock Purchase Plan. Covance has adopted, effective upon the
Distributions, the Covance Stock Purchase Plan (the "Covance Stock Purchase
Plan") pursuant to which Covance may make available for sale to employees
shares of its Common Stock at a price equal to 85% of the market value on the
first or last day of each calendar quarter, whichever is lower.
The Covance Stock Purchase Plan, which will be administered by the Covance
Compensation Committee, is designed to give eligible employees (generally,
employees of Covance and its U.S. subsidiaries) the opportunity to purchase
shares of Covance Common Stock through payroll deductions up to 10% of
compensation in a series of quarterly offerings commencing January 1, 1997,
and ending no later than December 31, 2006.
Any eligible employee may elect to participate in the Covance 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 Covance 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 Covance 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 Covance Common Stock until such shares
are actually purchased by him.
Under the Covance Stock Purchase Plan, the maximum number of shares of
Covance Common Stock which may be purchased by eligible employees will be
1,000,000, subject to adjustment in the case of changes in the capital stock
of Covance resulting from any recapitalization, stock dividend, stock split
or any other increase or decrease effected without receipt of consideration
by Covance or a merger or consolidation in which Covance is the surviving
corporation.
The Covance Stock Purchase Plan has a term of ten years and no shares of
Covance Common Stock may be offered for sale or sold under the Covance Stock
Purchase Plan after the tenth anniversary of the effective date. The Covance
Board is authorized to terminate or amend the Covance Stock Purchase Plan,
except that it may not increase the number of shares of Covance Common Stock
available thereunder, decrease the price at which such shares may be offered
for sale or extend the term of the Covance Stock Purchase Plan without the
approval of the holders of a majority of the shares of the capital stock of
Covance cast at a meeting at which such matter is considered.
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<PAGE>
Employment Agreements; Severance and Change in Control Arrangements. It is
anticipated that Mr. Kuebler will enter into an employment agreement with
Covance. The agreement will expire on or before the third anniversary of the
Distribution Date. The agreement will include provisions for an annual salary
of no less than $450,000, with increases subject to the discretion of the
Covance Board; annual target participation in the Variable Compensation Plan
of Covance in amounts no less than 65% of annual salary in effect at the time
performance goals are established; and severance payments following a
termination or a change in control in accordance with the severance policy
described below, except that Mr. Kuebler will receive three times his base
annual salary and three times his annual award of variable compensation in
the event of termination for reasons other than cause.
On or before the Distribution Date, Covance will adopt a severance policy
pursuant to which it will provide to each executive officer, including the
named executive officers, compensation equal to two times the executive
officer's base annual salary at the annual rate in effect on the date of
termination and two times the annual award of variable compensation at the
most recent target level in the event that such executive officer has been
terminated for reasons other than cause. Such executive officer will also be
entitled to participate in Covance's health and benefits plans (to the extent
permitted by the administrative provisions of such plans and applicable
federal and state law) for a period of up to two years or until such officer
is covered by a successor employer's benefit plans, whichever first occurs.
Pursuant to such policy, Covance will also provide to each executive officer
upon the termination of employment by Covance other than for cause following
a change in control of Covance compensation equal to three times base annual
salary in effect on the termination date and three times the annual variable
compensation at the most recent target level and such officer will be
entitled to participate in Covance's health and benefits plans for a period
of up to three years. A "change in control" is defined in the policy to
include the following: the acquisition by a person of 20% or more of the
voting stock of Covance; as a result of a contested election a majority of
the Covance Board members are different than the individuals who served on
Covance's Board in the two years prior to such contested election; or
approval by Covance's shareholders of a merger or consolidation in which
Covance is not the survivor thereof, or a sale or disposition of all or
substantially all of Covance's assets or a plan of partial or complete
liquidation.
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<PAGE>
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF COVANCE
All of the outstanding shares of Covance Common Stock are currently held by
Quest Diagnostics. The following table sets forth the number of shares of
Covance Common Stock that are projected to be beneficially owned after the
Covance Spin-Off Distribution by the directors, by the named executive
officers and by all directors and executive officers of Covance 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 September 30, 1996 (excluding
Career Shares that will be forfeited prior to the Distribution Date and
Corning Common Stock held in the Covance Retirement Savings Plan and the
Corning Investment Plans) 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 Covance Common Stock, the number reflects the
distribution ratio of one share of Covance 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. The stock
options held by the directors and executive officers of Covance will not
affect the security ownership of Covance unless (i) such options are
exercised prior to the Record Date and the underlying shares of Corning
Common Stock are held on the Record Date or (ii) such options are converted
into options to purchase shares of Covance Common Stock.
Number of Shares Number of
Name Beneficially Owned (1) Exercisable Options
- --------------------------- ----------------------- -------------------
Richard J. Andrews 4,000
Robert M. Baylis 0
Van C. Campbell 132,457
Christopher A. Kuebler 20,000
Kim D. Lamon 10,000
Irwin Lerner 0
J. Randall MacDonald 0
Nigel Morris 0
William C. Ughetta 44,000
James D. Utterback 10,000
Michael Wokasch 4,000
All Directors and Executive
Officers as a Group 227,957
- -------------
(1) Does not include shares owned by the spouses and minor children of
certain executive officers and directors as to which such officers and
directors disclaim beneficial ownership.
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<PAGE>
DESCRIPTION OF COVANCE CAPITAL STOCK
General
The following is a brief summary of certain provisions of the Covance
Certificate, as the restated certificate of incorporation will be amended
immediately prior to the Covance Spin-Off Distribution, and does not relate
to or give effect to provisions of statutory or other law except as
specifically stated. The Covance Certificate authorizes the issuance of
140,000,000 shares of Covance Common Stock. Approximately 56,903,469 shares
of Covance Common Stock are expected to be outstanding immediately following
the Covance Spin-Off Distribution. The rights of holders of shares of Covance
Common Stock are governed by the Covance Certificate, the Covance By-Laws and
by the DGCL.
Voting Rights
Subject to the voting of any shares of Covance Series Preferred Stock (as
defined below) that may be outstanding, voting power is vested in the Covance
Common Stock, each share having one vote.
Preemptive Rights
The Covance Certificate provides that no holder of shares of Covance Common
Stock or Covance Series Preferred Stock shall have any preemptive rights
except as the Covance Board may determine from time to time. No such rights
have been granted by the Covance Board.
Covance Common Stock
Liquidation Rights. Subject to the preferential rights of any outstanding
Covance Series Preferred Stock, in the event of any liquidation of Covance,
holders of shares of Covance Common Stock then outstanding are entitled to
share ratably in the assets of Covance available for distribution to such
holders.
Dividend Policy. Subject to any preferential rights of any outstanding
preferred securities of Covance, such dividends as may be determined by the
Covance Board may be declared and paid on the shares of Covance Common Stock
from time to time out of any funds legally available therefor. Covance has no
present intention to declare dividends for the foreseeable future. It is
currently contemplated that, following the Distributions, Covance 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 Covance and such other considerations
as the Covance Board deems relevant. In addition, other than with respect to
stock dividends, and certain purchases, repurchases or other distributions
made pursuant to the Benefits Plans and the Rights Plan (each as defined in
the Covance Credit Facility) the Covance Credit Facility prohibits Covance
from paying cash dividends on the Covance Common Stock during a Default or an
Event of Default or if after giving effect to the payment of such dividends
Covance would not be in compliance with the financial covenants contained
therein. See "Risk Factors--Risks Relating to Covance--Absence of Dividends"
and "Description of Certain Indebtedness of Covance."
Other Provisions. The shares of Covance Common Stock have no redemption,
sinking fund or conversion privileges applicable thereto and holders of
shares of Covance 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 Covance Common Stock although a "when issued" market
is expected to develop prior to the Distribution Date. Application will be
made to list the Covance Common Stock on the NYSE, subject to official notice
of the Distributions, under the trading symbol "CVD". Prices at which Covance
Common Stock may trade prior to the Distributions on a "when-issued" basis or
after the Distributions cannot be predicted. Until shares of the Covance
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 Covance 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 Covance Common Stock, investor
perceptions of Covance, the contract research business, and general economic
and market conditions. Covance initially will have approximately 18,000
stockholders of record, based on the expected number of holders of Quest
Diagnostics Common Stock immediately following the Quest Diagnostics Spin-Off
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<PAGE>
Distribution. The Transfer Agent and Registrar for the Covance Common Stock
will be Harris Trust and Savings Bank. For certain information regarding
options to purchase Covance Common Stock that may become outstanding after
the Distributions, see "Management of Covance."
Covance Series Preferred Stock
The Covance Certificate authorizes the issuance of up to 10,000,000 shares
of Covance Series Preferred Stock, par value $1.00 per share (the "Covance
Series Preferred Stock"). The Covance 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 Covance
Board has designated 1,000,000 shares of Covance Series Preferred Stock as
Covance Series A Preferred Stock. No other class of Covance Series Preferred
Stock has been designated by the Covance Board.
Preferred Share Purchase Rights
Attached to each share of Covance Common Stock is one right ("Covance
Right"), which entitles the registered holder to purchase from Covance one
one-hundredth of a share of Covance Series A Preferred Stock at a price of
$100 per one-hundredth of a share of Covance Series A Preferred Stock (the
"Exercise Price"), subject to adjustment. The Covance Rights expire on
December 31, 2006 (the "Final Expiration Date"), unless the Final Expiration
Date is extended or unless the Covance Rights are earlier exercised.
The Covance Rights represented by the certificates for shares of Covance
Common Stock are not exercisable, and are not transferable apart from the
shares of Covance Common Stock, until the earlier of (1) ten days following
the public announcement by Covance or an Acquiring Person (as defined below)
that a person or group has acquired beneficial ownership of 20% or more of
the shares of Covance Common Stock (an "Acquiring Person") or (2) ten
business days (or such later date as the Covance 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 Covance Common Stock (the
earlier of such dates being called the "Rights Distribution Date"). The
Covance Board has the authority to determine that a person that has
inadvertently acquired beneficial ownership of 20% of the shares of Covance
Common Stock is not an Acquiring Person if such person promptly reduces its
ownership interest to below 20%. Separate certificates for the Covance Rights
will be mailed to holders of record of the shares of Covance Common Stock as
of such date. The Covance Rights could then begin trading separately from the
shares of Covance Common Stock.
Generally, in the event that a person or group becomes an Acquiring
Person, each Covance Right (other than the Covance Rights owned by the
Acquiring Person and certain affiliated persons) will thereafter entitle the
holder to receive, upon exercise of the Covance Right, shares of Covance
Common Stock having a value equal to two times the Exercise Price of the
Covance 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 Covance Common Stock), the Covance Board
may exchange each Covance Right and each one one-hundredth of a share of
Covance Series A Preferred Stock (other than Covance Rights and Covance
Series A Preferred Stock owned by the Acquiring Person and certain affiliated
persons) for one share of Covance Common Stock. In the event that Covance is
acquired in a merger, consolidation, or other business combination
transaction or more than 50% of Covance's assets, cash flow or earning power
is sold or transferred, each Covance Right (other than the Covance Rights
owned by an Acquiring Person and certain affiliated persons) will thereafter
entitle the holder thereof to receive, upon the exercise of the Covance
Right, common stock of the acquiring corporation having a value equal to two
times the Exercise Price of the Covance Right.
The Covance Rights are redeemable in whole, but not in part, at $.01 per
Covance Right at any time prior to any person or group becoming an Acquiring
Person. The right to exercise the Covance Rights terminates at the time that
the Covance Board elects to redeem the Covance Rights. Notice of redemption
shall be given by mailing such notice to the registered holders of the
Covance Rights. At no time will the Covance Rights have any voting rights.
The Covance Rights Agent is Harris Trust and Savings Bank (the "Covance
Rights Agent").
The exercise price payable, and the number of shares of Covance Series A
Preferred Stock or other securities or property issuable, upon exercise of
the Covance Rights are subject to adjustment from time to time to prevent
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<PAGE>
dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the shares of Covance Series A Preferred
Stock, (ii) upon the grant to holders of the shares of Covance Series A
Preferred Stock of certain rights or warrants to subscribe for or purchase
shares of Covance Series A Preferred Stock at a price, or securities
convertible into shares of Covance Series A Preferred Stock with a conversion
price, less than the then current market price of the shares of Covance
Series A Preferred Stock or (iii) upon the distribution to holders of the
shares of Covance 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 Covance Series A
Preferred Stock) or of subscription rights or warrants (other than those
referred to above).
The number of outstanding Covance Rights and the number of one
one-hundredths of a share of Covance Series A Preferred Stock issuable upon
exercise of each Covance 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 Covance Common Stock prior to the Covance
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 Covance Rights, no fractional shares of Covance
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 Covance, be evidenced by depository receipts) and in lieu thereof
an adjustment in cash will be made.
The Covance Rights have certain antitakeover effects. The Covance Rights
may cause substantial dilution for a person or group that attempts to acquire
Covance on terms not approved by the Covance Board, except pursuant to an
offer conditioned on a substantial number of Covance Rights being acquired.
The Covance Rights should not interfere with any merger or other business
combination approved by the Covance Board since the Covance Rights may be
redeemed by Covance at $.01 per Covance Right prior to the acquisition by a
person or group of beneficial ownership of 20% or more of the shares of
Covance Common Stock.
The shares of Covance Series A Preferred Stock purchasable upon exercise
of the Covance Rights will rank junior to all other series of Covance's
preferred stock or any similar stock that specifically provides that they
shall rank prior to the shares of Covance Series A Preferred Stock. The
shares of Covance Series A Preferred Stock will be nonredeemable. Each share
of Covance 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 Covance
Common Stock. In the event of liquidation, the holders of the shares of
Covance 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 Covance Common
Stock. Each share of Covance Series A Preferred Stock will have 100 votes,
voting together with the shares of Covance Common Stock. In the event of any
merger, consolidation or other transaction in which shares of Covance Common
Stock are exchanged, each share of Covance Series A Preferred Stock will be
entitled to receive 100 times the amount and type of consideration received
per share of Covance Common Stock. These rights are protected by customary
antidilution provisions. Because of the nature of the Covance Series A
Preferred Stock's dividend, liquidation and voting rights, the value of the
interest in a share of Covance Series A Preferred Stock purchasable upon the
exercise of each Covance Right approximates the value of one share of Covance
Common Stock.
The foregoing description of the Covance Rights does not purport to be
complete and is qualified in its entirety by reference to the description of
the Covance Rights contained in the Covance Rights Agreement, dated as of
December 31, 1996 between Covance and the Covance Rights Agent, which
agreement has been filed as an exhibit to Covance's registration statement on
Form 10 (the "Covance Form 10") that Covance has filed with the Commission.
Prior to the Covance Rights Distribution Date, the Covance Rights Agreement
may be amended in any respect. After the Covance Rights Distribution Date,
the Covance Rights Agreement may be amended in any respect that does not
adversely affect the Covance Rights holders.
Restrictions on Transfer
Shares of the Covance Common Stock distributed to Quest Diagnostics
stockholders will be freely transferable, except for shares received by any
persons who may be deemed to be "affiliates" of Covance 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 Covance after the Covance Spin-off Distribution
generally include individuals or entities that control, are controlled by, or
are under common control with Covance and may include certain officers and
directors of Covance as well as principal stockholders of Covance. Persons
who are affiliates of Covance
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will be permitted to sell their shares of Covance 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 Covance 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 Covance 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.
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COVANCE
CERTIFICATE OF INCORPORATION AND BY-LAWS
General
In addition to the Covance Rights, the Covance Certificate and the Covance
By-Laws contain other provisions that may discourage a third-party from
seeking to acquire Covance, 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 Covance Board and in the policies
formulated by the Covance Board and to discourage certain types of
transactions that may involve an actual or threatened change of control of
Covance. These provisions are designed to reduce the vulnerability of Covance
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 Covance 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 Covance. See "Risk
Factors--Risks Relating to Covance--Certain Antitakeover Effects."
Board of Directors
The Covance Certificate provides that, effective as of the Covance Spin-Off
Distribution, the Covance 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 Covance; the second class has a
term expiring at the 1999 annual meeting of stockholders of Covance; and the
third class has a term expiring at the 2000 annual meeting of stockholders of
Covance. At each annual meeting of stockholders, one class of the Covance
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
Covance Board. At least two annual meetings of stockholders, instead of one,
generally will be required to effect a change in the majority of the Covance
Board. The Covance Board believes that the longer time required to elect a
majority of a classified board will help ensure the continuity and stability
of Covance'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
Covance.
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 Covance Certificate provides that a director of
Covance is only removable by the stockholders for cause. The Covance
Certificate limits the number of directors to twelve and requires that any
vacancies on the Covance Board be filled only by a majority of the entire
Covance Board. The provisions of the DGCL and the Covance Certificate
relating to the removal of directors and the filling of vacancies on the
Covance Board preclude a third-party from removing incumbent directors
without cause and simultaneously gaining control of the Covance 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 Covance, to remove incumbent directors and to fill
vacancies on the Covance Board without the support of the incumbent
directors.
Stockholder Action and Special Meetings
The Covance 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.
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This provision reduces the power of the Covance stockholders and precludes a
stockholder of Covance from conducting any form of consent solicitation. The
Covance Certificate also does not permit stockholders of Covance to call
special meetings of stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The Covance By-Laws contain an advance notice procedure with respect to the
nomination, other than by or at the direction of the Covance 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 Covance 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
Covance Board any power to approve or disapprove stockholder nominations or
proposals for action by Covance, 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 Covance 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 Covance and its stockholders. The
purpose of requiring advance notice is to afford the Covance 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 Covance Board, to inform stockholders about those matters.
Business Combinations with Interested Stockholders
Paragraph 6 of the Covance 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 Covance entitled to vote generally in the
election of directors (the "Covance 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 Covance 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 Covance or any subsidiary with an Interested
Stockholder; (ii) the sale or other disposition by Covance 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 Covance 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 Covance 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 Covance 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 Covance Board
who is not an Interested Stockholder or affiliated or associated with an
Interested Stockholder and was a director of Covance 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 Covance Board, or (ii) any person who was a
director of Covance as of the Distribution Date and any successor thereto who
was recommended or elected by a majority of the Continuing Directors then on
the Covance 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 Covance Board.
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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 Covance's
stockholders, the consideration required, in the case of each class of
Covance 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 Covance 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 Covance 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 Covance 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 Covance 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 Covance 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 Covance Common
Stock and (ii) the highest preferential amount per share to which the holders
of such series of Covance Series Preferred Stock are entitled in the event of
a voluntary or involuntary liquidation of Covance.
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 Covance'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 Covance,
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 Covance Voting Stock, directly from
Covance 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 Covance (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.
Amendment of the Covance Certificate
Amendment or repeal of the provisions of the Covance Certificate described
above or the adoption of any provision inconsistent therewith would require
the affirmative vote of at least 80% of the Covance Voting Stock unless the
proposed amendment or repeal or the adoption of the inconsistent provisions
are approved by two-thirds of the entire Covance Board and a majority of the
Continuing Directors.
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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 Covance
Certificate and the Covance By-Laws do not exclude Covance 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 Covance capital stock or assets of Covance for a
period of time following the Covance 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 Covance. See "The Relationship Among Corning,
Quest Diagnostics and Covance After the Distributions--Tax Sharing Agreement"
and "The Relationship Among Corning, Quest Diagnostics and Covance After the
Distributions--Spin-Off Tax Indemnification Agreements."
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF COVANCE
Covance is currently negotiating with several banks and financial
institutions (the "Covance Lenders") for a five year $250,000,000 Senior
Revolving Credit Facility (the "Covance Credit Facility") to be entered into
prior to the Covance Spin-Off Distribution, with the Covance Lenders,
NationsBank N.A. ("NationsBank"), as administrative agent, and Wachovia Bank
of Georgia, N.A., as syndication agent (collectively, the "Agents"). A copy
of the proposed form of the Covance Credit Facility will be filed as an
exhibit to the Covance Form 10. This summary of the terms and conditions of
the Covance Credit Facility does not purport to be complete and is qualified
in its entirety by reference to such proposed form, including the definitions
contained therein.
The Covance Credit Facility will be guaranteed by certain material U.S.
subsidiaries (i.e., U.S. subsidiaries whose assets represent individually at
least 5% of the total assets of Covance and its subsidiaries) and, in certain
circumstances, other subsidiaries. Additionally, the Covance Credit Facility
will be secured by 65% of the voting stock of each of the material (and, in
certain circumstances, other) first-tier foreign subsidiaries, and by
intercompany notes evidencing loans made by U.S. material subsidiaries to
U.S. non-material subsidiaries of Covance. The proceeds of the Covance Credit
Facility will be used to effect the Covance Spin-Off Distribution (including
(i) the refinancing of certain intercompany indebtedness and taxes owed to
Corning of approximately $150 million to $160 million and (ii) the payment of
approximately $5.0 million in transaction costs), and to provide financing
for Covance's and its subsidiaries' working capital needs (including the
issuance by NationsBank letters of credit not to exceed $25 million), capital
expenditures, acquisitions and other lawful corporate purposes.
Covance may borrow U.S. Dollars, British Pounds Sterling, German
Deutschmarks, Swiss Francs or Japanese Yen under the Covance Credit Facility
until the fifth anniversary thereof, at which time all outstanding loans and
other amounts must be paid in full. Covance may prepay the loans under the
Covance Credit Facility in whole or in part (subject to reimbursement of
breakage costs associated with loans based on the Eurocurrency Rate, as
defined below) and may permanently reduce or terminate the Covance Lenders'
commitments.
Interest
Under the Covance Credit Facility, Covance may choose to obtain
"Revolving Loans," "Competitive Bid Loans" or "Swing Line Loans." A Revolving
Loan bears interest, at Covance's option, at either (i) the "Base Rate" (defined
as the higher of (a) the NationsBank prime rate and (b) the federal funds rate
plus .50%), payable quarterly, or (ii) the "Eurocurrency Rate" plus the
"Applicable Percentage", payable at the end of each one, two, three or six month
interest period selected by Covance (and also quarterly, in the case of a six
month interest period). The Eurocurrency Rate is the average rate per annum
appearing on Telerate Page 3750 (or any successor page, or if not published on
Telerate Page 3750 then the rate or the arithmetic mean of any rates per annum
specified on Reuters Screen LIBO page) for deposits in U.S. Dollars or any other
applicable currency two business days prior to the first day of any applicable
interest period for a term comparable to such interest period, as adjusted for
reserve requirements. The Applicable Percentage is a percentage per annum, which
will be .25% until the fifth business day following March 31, 1997 and
thereafter will be determined quarterly (and depending on such determination,
may vary between .17% and .45%) based, at Covance's option, upon either (i) the
lowest debt rating as of each quarterly calculation date announced by Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., as the case may be, for
any class of long-term senior unsecured debt issued by the Covance or (ii)
Covance's Leverage Ratio as defined below (as adjusted). A Competitive Bid Loan
bears interest, at Covance's option, at either (i) a fixed rate offered by a
Covance Lender and accepted by Covance, payable at the end of the interest
period selected by Covance, which interest period may not exceed 180 days (and
also quarterly, in the case of a period longer than three months), or (ii) the
Eurocurrency Rate plus the margin offered by such Covance Lender and accepted by
Covance, payable at the end of each one, two, three or six month interest period
selected by Covance (and also, quarterly in the case of a six month interest
period). Swing Line Loans (made by NationsBank and limited to $10,000,000) may
at Covance's option, bear interest at either (i) the Base Rate, payable
quarterly or (ii) a rate quoted by NationsBank as the "Quoted Rate", payable at
the end of the interest period selected by Covance (and also quarterly, in the
case of an interest period greater than three months).
Fees
Covance will pay quarterly as a percentage of the aggregate amount of
letters of credit issued and outstanding (a) an issuing lender fee of 1/8%
and (b) a letter of credit fee of .25% until the fifth business day following
March
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31, 1997 and thereafter at a rate equal to the Applicable Percentage, ranging
between .17% and .45%. Covance will also pay quarterly, based on the
aggregate amount of commitments under the Covance Credit Facility, a facility
fee of .125% until the fifth business day following March 31, 1997 and
thereafter at a rate equal to the Applicable Percentage, ranging between .08%
and .20%.
Covenants
The Covance Credit Facility will contain covenants which place
restrictions on Covance and/or the guarantors (subject to certain exceptions),
including with respect to (i) the incurrence of additional indebtedness, (ii)
the incurrence of additional liens, (iii) material changes in the nature of the
business of Covance or the guarantors, (iv) mergers and consolidations, (v)
entry into certain sale/leaseback transactions, (vi) investments and (vii) the
payment of dividends.
Covance will be required to maintain, for each fiscal quarter, (i) a
minimum ratio for the 12 month period ending with such fiscal quarter (the
"Fixed Charge Coverage Ratio") of (A) EBIT plus all rent expense payable
under operating leases to (B) Interest Expense plus such rent expense, of 2.0
to 1.0 until December 31, 1997, and 2.25 to 1.0 thereafter and (ii) a maximum
ratio (the "Leverage Ratio") of Funded Debt, as of the end of such fiscal
quarter, to EBITDA for the 12 month period ending with such fiscal quarter,
of 3.30 to 1.0 until March 31, 1997, 3.25 to 1.0 until September 30, 1997,
3.0 to 1.0 until March 31, 1998 and 2.75 to 1.0 thereafter. EBIT is the sum
of consolidated net income (net of extraordinary gains and losses, including
the one-time restructuring charge associated with the Covance Spin-Off
Distribution), and income tax expense and interest expense. Funded Debt means
(i) indebtedness with respect to borrowed money, (ii) purchase money
indebtedness, (iii) capital lease obligations, (iv) letter of credit
obligations and (v) guarantees. EBITDA is EBIT plus depreciation and
amortization expense.
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LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS OF COVANCE
Limitation on Liability of Directors
Pursuant to authority conferred by Section 102 of the DGCL, Paragraph 11 of
the Covance Certificate ("Paragraph 11") eliminates the personal liability of
Covance's directors to Covance or its stockholders for monetary damages for
breach of fiduciary duty, including without limitation, directors serving on
committees of the Covance Board. Directors remain liable for (1) any breach
of the duty of loyalty to Covance 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 Covance'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 Covance or (2) by reason of the fact that, while they are or were
directors or officers of Covance, they are or were serving at the request of
Covance 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 Covance 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. Covance may not indemnify or make advance payments to any
person in connection with proceedings initiated against Covance by such
person without the authorization of the Covance 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 Covance 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 Covance By-Laws, any agreement or vote of
stockholders or disinterested directors or otherwise, and allows Covance 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, Covance 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 Covance Certificate authorizes Covance to purchase insurance for
directors, officer, employees and agents of Covance and persons who serve at
the request of Covance as directors, officers, employees or agents of another
corporation against any expense, liability or loss incurred in such capacity,
whether or not Covance would have the power to indemnify such persons against
such expense or liability under the DGCL. Covance intends to maintain
insurance coverage of its officers and directors as well as insurance
coverage to reimburse Covance for potential costs of its corporate
indemnification of directors and officers.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
FINANCIAL STATEMENTS OF COVANCE INC.
Report of Price Waterhouse LLP--Independent Accountants F-29
Combined Financial Statements:
Combined Balance Sheets--December 31, 1995 and 1994 F-30
Combined Statements of Income--Years ended December 31, 1995, 1994 and 1993 F-31
Combined Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993 F-32
Combined Statements of Stockholder's Equity--Years ended December 31, 1995, 1994 and 1993 F-33
Notes to Combined Financial Statements F-34
Quarterly Operating Results (unaudited) F-40
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--September 30, 1996 and December 31, 1995 F-41
Combined Statements of Income--Three and Nine Months ended September 30, 1996 and 1995 F-42
Combined Statements of Cash Flows--Nine Months ended September 30, 1996 and 1995 F-43
Notes to Combined Interim Financial Statements F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors and Stockholders of Corning Incorporated and
Covance 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-30 through F-40 present fairly, in all material
respects, the financial position of Covance 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 LLP
Price Waterhouse LLP
New York, NY
July 29, 1996
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(Amounts in thousands) 1995 1994
----------- -----------
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
======== ========
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
COVANCE 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-31
<PAGE>
COVANCE 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-32
<PAGE>
COVANCE 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-33
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, unless otherwise indicated)
1. Organization
Covance Inc. (formerly Corning Pharmaceutical Services Inc.) and its
subsidiaries ("Covance") is a leading contract research organization
providing a wide range of integrated product development services on a
worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition, and to a lesser extent, Covance provides services
such as health economics for managed care organizations, hospitals and health
care provider networks, and early development and laboratory testing services
to the chemical, agrochemical and food industries. Covance's operations
involve a single industry segment for financial reporting purposes. At the
present time, operations are principally focused in the United States and
Europe.
Covance 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
Covance (the "Covance 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 Covance Spin-Off Distribution will qualify as a tax free
distribution under the Internal Revenue Code of 1986, as amended. The final
terms of the Covance 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 Covance Spin-Off
Distribution is expected to occur by the end of 1996.
2. Summary of Significant Accounting Policies
Basis of Presentation
The operations of Covance Biotechnology Services Inc. (formerly Corning
Bio Inc.), a majority-owned business of Corning which Corning intends to
contribute to Covance prior to the Covance Spin-Off Distribution, are
included in the accompanying financial statements. Accordingly, the
accompanying financial statements present the results of Covance and Covance
Biotechnology on a combined basis.
Principles of Consolidation
The combined financial statements include the accounts of all entities
controlled by Covance, including Covance Biotechnology. All significant
intercompany accounts and transactions are eliminated. The equity method of
accounting is used for investments in affiliates in which Covance owns
between 20 and 50 percent.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, 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.
F-34
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Accounts receivable and unbilled services from Covance customers are
concentrated primarily in the pharmaceutical and biotechnology industries.
Covance monitors the creditworthiness of its customers to which it grants
credit terms in the ordinary course of business. Although Covance customers
are concentrated primarily within these two industries, management considers
the likelihood of material credit risk exposure as remote. Covance in some
cases requires advance payment for a portion of the contract price from its
customers upon the signing of a contract for services. Historically, bad
debts have been minimal.
Inventory
Inventories, which consist principally of supplies, are valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight line method at rates adequate to allocate the
cost of the applicable assets over their estimated useful lives, which range
in term from three to thirty years.
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 Covance's
customers either immediately or upon notice. The contracts often require
payments to Covance to recover costs incurred, including costs to wind down
the study and fees earned to date, and in some cases to provide Covance with
a portion of the fees or profits that would have been earned under the
contract had the contract not been terminated early. 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. In
general, amounts become billable upon the achievement of milestones or in
accordance with predetermined payment schedules. Unbilled receivables are
billable to customers within one year from the respective balance sheet date.
Unearned revenue is recorded for advance billings to customers for which
revenue has not been recognized at a given date.
Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not
reflected in revenue or expense since such fees are granted by customers on a
"pass-thru basis" without risk or reward to Covance.
F-35
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process 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
Covance uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases using
enacted tax rates in effect for the year in which the temporary differences
are expected to reverse. The effect on deferred taxes of a change in enacted
tax rates is recognized in income in the period when the change is effective.
3. Property and Equipment
Property and equipment at December 31, 1995 and 1994 consist of the
following:
1995 1994
--------- ---------
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
========= =========
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, Covance 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, Covance acquired National Packaging Systems, Inc. ("NPS",
now known as Covance Pharmaceutical Packaging Services Inc.) for an initial
cash payment of $14.0 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction aggregated
$9.1 million. In accordance with the terms of the acquisition agreement,
Covance is contingently obligated to pay up to an additional $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 Covance 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.
F-36
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
5. Taxes on Income
Covance has been included in the Federal income tax return filed by
Corning. Covance 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:
1995 1994 1993
------- ------- -------
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
======= ======= =======
The differences between the provision for income taxes and income taxes
computed using the Federal income tax rate were as follows:
1995 1994 1993
-------- -----------------
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%
==== ==== ====
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:
1995 1994
-------- --------
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)
======== ========
F-37
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
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. Covance 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
Covance 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.
7. Restructuring Charge
In 1995, Covance recorded a provision for restructuring charges totaling
$4.6 million as a result of management's decision to discontinue certain
nonstrategic operations. The restructuring charge 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:
Charges Reserve
through balance at
Original December December
Reserve 31, 1995 31, 1995
-------- -------- ----------
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
====== ====== ======
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, Covance Biotechnology ("lessee") entered into a lease
arrangement whereby a custom-designed, fully equipped facility would be
constructed for the lessee at a cost of approximately $55 million to perform
specialized research and manufacturing activities for biotechnology and
pharmaceutical companies. The lessor in this arrangement is a subsidiary of
one of the largest banks in the United States. The lease arrangement contains
purchase and cancellation options for the lessee at any time during the ten
year period covered by the lease arrangement. Although the lease arrangement
is cancelable by the lessee at any time throughout the ten year period, an
initial lease term of five years, representing management's estimate at the
lease inception date of the period in
F-38
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
which occupancy of the facility is reasonably assured, has been selected for
financial reporting purposes. The initial term of the 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 Covance at specific dates over the ten year
period. Sale of the facility is stipulated in the lease arrangement at such
time that the lessee exercises the cancellation option provisions. The
lessee's residual value guarantee ("Deficiency Payment") is unconditionally
payable to the lessor in the event that the lessee terminates the lease
arrangement and the sale of the facility results in receipt of sales proceeds
by the lessor in an amount less than the lessor's unamortized investment in
the lease arrangement. The lessee's maximum Deficiency Payment would
approximate $35 million at the end of the first year and decreases to
approximately $25 million at the end of the tenth year, assuming that the
sales proceeds received by the lessor were zero.
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.
10. Related Party Transactions
Covance 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 Covance's 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 Covance 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
Covance which resulted in charges of $5.3 million, $5.7 million and $5.3
million being recorded in the Covance 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
F-39
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
and do not necessarily reflect the amount of expenses that would have been
incurred by Covance on a stand-alone basis. Covance management believes that
these costs would have been approximately $2.0 million higher on an annual
basis had Covance operated as a stand alone company during this period. In
certain cases, related party expenses allocated to Covance have not required
reimbursement in cash and, accordingly, have been treated as a capital
contribution.
11. Subsequent Event
In March 1996, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash
payment of approximately $15.0 million in a transaction accounted for as a
purchase business combination. In accordance with the terms of the asset
purchase agreement, Covance is contingently obligated to pay up to an
additional $17.0 million in contingent purchase price if HTA achieves certain
established earnings targets for the three year period ending March 1999.
In conjunction with the Covance Spin-Off Distribution, Covance plans to
record a material nonrecurring 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,
Covance plans to incur significant long term bank borrowings to repay Corning
for all intercompany borrowings and income tax liabilities at the
distribution date. The credit facility governing such borrowings prohibits
Covance from paying cash dividends on the Covance stock.
Corning, Corning Clinical Laboratories Inc. ("CCL") and Covance will enter
into tax indemnification agreements that will prohibit CCL and Covance for a
period of two years after the 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
Covance. The tax indemnification agreements will also require CCL and Covance
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 Covance will also enter into a tax sharing agreement
which will allocate among Corning, CCL and Covance 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.
12. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information
for 1995 and 1994:
First Second Third Fourth
Year Ended December 31, 1995 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
Net revenues $91,974 $104,813 $106,099 $106,288
Income from operations 12,983 9,665(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
(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-40
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (UNAUDITED)
(Amounts in thousands) 1996 1995
-------- --------
Assets
Current Assets:
Cash and cash equivalents $ 13,551 $ 8,068
Accounts receivable, net 95,690 78,968
Unbilled services 43,110 18,217
Inventory 14,718 14,004
Deferred income taxes 14,273 11,337
Prepaid expenses and other assets 20,639 15,189
-------- --------
Total Current Assets 201,981 145,783
Property and Equipment, net 143,956 140,708
Goodwill, net 43,443 24,028
Other Assets 13,212 11,991
-------- --------
Total Assets $402,592 $322,510
======== ========
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable $ 23,627 $ 23,761
Accrued payroll and benefits 30,058 20,339
Accrued expenses and other liabilities 36,410 24,701
Unearned revenue 46,025 41,879
Income taxes payable 18,408 16,631
-------- --------
Total Current Liabilities 154,528 127,311
Due to Corning Incorporated and affiliates 118,165 89,836
Deferred income taxes 9,583 6,406
Other liabilities 14,444 16,440
-------- --------
Total Liabilities 296,720 239,993
-------- --------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital 32,368 30,816
Retained earnings 70,505 48,653
Cumulative translation adjustment 2,999 3,048
-------- --------
Total Stockholder's Equity 105,872 82,517
-------- --------
Total Liabilities and Stockholder's Equity $402,592 $322,510
======== ========
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- --------------------
(Amounts in thousands) 1996 1995 1996 1995
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $127,179 $106,099 $357,406 $302,886
Cost and expenses
Cost of revenue 83,204 70,057 232,828 198,820
Selling, general and administrative
expenses 20,627 16,882 57,573 46,965
Restructuring charge -- -- -- 4,616
Depreciation and amortization 5,846 5,489 18,130 16,166
-------- --------- -------- --------
Total 109,677 92,428 308,531 266,567
-------- --------- -------- --------
Income from operations 17,502 13,671 48,875 36,319
-------- --------- -------- --------
Other expense
Interest expense, net 1,871 1,167 4,536 3,918
Foreign exchange loss (321) (936) (212) (609)
-------- --------- -------- --------
1,550 231 4,324 3,309
-------- --------- -------- --------
Income before taxes and equity investee
losses 15,952 13,440 44,551 33,010
Taxes on income 6,931 5,771 19,411 14,147
Equity investee loss (gain) (53) 153 (68) 351
-------- --------- -------- --------
Net income $ 9,074 $ 7,516 $ 25,208 $ 18,512
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
INTERIM COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
(Amounts in thousands) 1996 1995
-------- --------
Cash flows from operating activities
Net income $ 25,208 $ 18,512
Adjustments to reconcile net income to net cash
provided by operating activities: Depreciation
and amortization 18,130 16,166
Restructuring reserve, net of cash paid -- 3,749
Deferred income tax provision 241 (3,867)
Related party charges 1,552 2,406
Other 162 901
Changes in operating assets and liabilities:
Accounts receivable (14,987) (8,741)
Unbilled services (22,365) (10,738)
Inventory (714) (2,069)
Accounts payable (177) (4,208)
Accrued liabilities 12,084 15,923
Unearned revenue 2,932 2,419
Income taxes payable 1,777 5,948
Other assets and liabilities, net (8,922) (3,987)
-------- --------
Net cash provided by operating activities 14,921 32,414
-------- --------
Cash flows from investing activities
Capital expenditures (19,977) (25,209)
Acquisition of businesses (14,890) (14,000)
Other, net 458 398
-------- --------
Net cash used in investing activities (34,409) (38,811)
-------- --------
Cash flows from financing activities
Due to Corning Incorporated and affiliates 13,439 8,111
Acquisition loan from Corning Incorporated 14,890 14,000
Capital contributions -- 1,000
Dividends paid (3,358) (10,257)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,971 12,854
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,483 6,457
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,068 6,176
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,551 $ 12,633
======== ========
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
COVANCE INC. AND SUBSIDIARIES
(an indirect wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
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 Covance 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, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash
payment of approximately $15.0 million in a transaction accounted for as a
purchase business combination. In accordance with the terms of the asset
purchase agreement, Covance is contingently obligated to pay up to an
additional $17.0 million in contingent purchase price if HTA achieves certain
established earnings targets during the three year period ending March 1999.
5. Subsequent Event
In October 1996, Covance acquired the stock of CRS Pacamed AG (now known
as Covance Pharmaceutical Packaging Services Inc.) for a cash payment of
approximately $14.4 million in a transaction to be accounted for as a
purchase business combination.
F-44
