SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10/A
Amendment No. 1 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)
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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)
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Securities to be registered pursuant to Section 12(b) of the Act:
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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
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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 5, 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, CCL 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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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 [ ], dated [ ], 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 the Stock Purchase Savings Plan of Covance Inc.
10.8* Form of Covance Inc. Employees Stock Purchase Program
10.9* Form of Covance Inc. Employee Equity Participation Program
10.10* Form of the 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
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 5, 1996 (pages 2; 28-30; 101-162; F-29-F-44)
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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 5, 1996 By: /s/ Jeffrey S. Hurwitz
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Jeffrey S. Hurwitz, Senior Vice President,
General Counsel and Secretary
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TABLE OF CONTENTS
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THE RELATIONSHIP AMONG CORNING, CCL AND COVANCE AFTER THE DISTRIBUTIONS 28
COVANCE INC.
RISK FACTORS 101
CAPITALIZATION OF COVANCE 107
SELECTED HISTORICAL FINANCIAL DATA OF COVANCE 108
PRO FORMA FINANCIAL INFORMATION OF COVANCE 110
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF COVANCE 115
BUSINESS OF COVANCE 122
MANAGEMENT OF COVANCE 140
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
COVANCE 151
DESCRIPTION OF COVANCE CAPITAL STOCK 152
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COVANCE CERTIFICATE OF
INCORPORATION AND BY-LAWS 155
DESCRIPTION OF CERTAIN INDEBTEDNESS OF COVANCE 159
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF COVANCE 161
AVAILABLE INFORMATION 162
INDEX TO FINANCIAL STATEMENTS F-1
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THE RELATIONSHIP AMONG CORNING, CCL AND COVANCE
AFTER THE DISTRIBUTIONS
After the Distributions, Corning Clinical Laboratories Inc. ("CCL") and
Covance Inc. ("Covance") will be independent public companies and Corning
Incorporated ("Corning") will not have any ownership interest in either CCL
or Covance other than shares of CCL's nonvoting cumulative preferred stock.
Corning, CCL 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 are filed as exhibits to the
Registration Statements of which this Information Statement is a part. The
following description summarizes the material terms of such agreements, but
is qualified by reference to the texts of such agreements as filed.
Transaction Agreement
Corning, CCL and 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,
CCL 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 CCL 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 CCL and Covance.
The Transaction Agreement will provide that Corning, CCL 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, CCL and Covance as
contemplated in the discussion under "Capitalization of CCL" and
"Capitalization of Covance." Each of Corning, CCL and Covance will agree to
indemnify the other parties to the Transaction Agreement in connection with
losses that may result from certain liabilities or the breach of any
provision of the Transaction Agreement.
As discussed under "Business of CCL--OIG Investigations and Related
Claims," CCL is subject to several governmental investigations. Any amounts
paid by CCL 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 CCL against all monetary penalties, fines or settlements arising
out of any governmental criminal, civil or administrative investigations or
claims that are pending as of the Distribution Date to the extent that such
investigations or claims arise out of or are related to alleged violations of
federal laws by reason of CCL or any company acquired by CCL billing any
federal program or agency for services rendered to beneficiaries of such
program or agency. Corning will also indemnify CCL for 50% of the aggregate
of all judgment or settlement payments made by CCL that are in excess of
$42.0 million in respect of claims by nongovernmental parties (including,
without limitation, private insurers) alleging overbillings by CCL or any
existing subsidiaries of CCL for services provided prior to the Distribution
Date; provided, however, such indemnification for nongovernmental claims will
terminate five years after the Distribution Date and will not exceed $25.0
million in the aggregate. CCL's aggregate reserve with respect to all
governmental and nongovernmental claims, including litigation costs, was $215
million at September 30, 1996 and is estimated to be $85 million at the
Distribution Date.
Corning will not indemnify CCL against any governmental claims that arise
after the Distribution Date, even though relating to events prior to the
Distribution Date, or to any nongovernmental claims that do not relate to
alleged overbillings prior to the Distribution Date. Corning will not
indemnify CCL 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 CCL
will be calculated on a net after-tax basis by taking into account deductions
and, if any, other tax benefits in respect of the underlying settlement or
judgment payment or other loss that gives rise to the indemnification
obligation of Corning, which deductions or other tax benefits are or would be
available to CCL or other indemnitee or the consolidated tax group
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of which CCL is a member and by assuming such deductions or other tax
benefits can be utilized by CCL or such group, as the case may be, in the tax
period in which the underlying payment or other loss occurs to reduce taxes
at the highest marginal corporate tax rate applicable for the period in which
such payment or loss occurred.
The Transaction Agreement will also provide that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution Date in connection with the Distributions will be
allocated among the parties. Except as set forth in the Transaction Agreement
or any related agreement, each party shall bear its own costs and expenses
incurred after the Distribution Date.
Spin-Off Tax Indemnification Agreements
Corning and CCL will enter into a tax indemnification agreement (the
"Corning/CCL Spin-Off Tax Indemnification Agreement") pursuant to which (1)
CCL will represent to Corning that, to the best of its knowledge, the
materials relating to CCL submitted to the Internal Revenue Service ("IRS")
in connection with the request for ruling submitted to the IRS are complete
and accurate in all material respects, (2) CCL will represent that it has no
present intention to undertake the transactions described in part (3)(iii)
hereafter or cease to engage in the active conduct of providing clinical
laboratory testing services, (3) CCL will covenant and agree that for a
period of two years following the Distribution Date (the "Restricted
Period"), (i) CCL will continue to engage in the clinical laboratory testing
business, (ii) CCL will continue to manage and own at least 50% of the assets
which it owns directly and indirectly immediately after the Distribution Date
and (iii) neither CCL, nor any related corporation nor any of their
respective directors, officers or other representatives will undertake,
authorize, approve, recommend, permit, facilitate, or enter into any
contract, or consummate any transaction with respect to: (A) the issuance of
CCL Common Stock (including options and other instruments convertible into
CCL Common Stock) which would exceed fifty percent (50%) of the outstanding
shares of CCL Common Stock immediately after the Distribution Date; (B) the
issuance of any other instrument that would constitute equity for federal tax
purposes ("Disqualified CCL Stock"); (C) the issuance of options and other
instruments convertible into Disqualified CCL Stock; (D) any repurchases of
CCL Common Stock, unless such repurchases satisfy certain requirements; (E)
the dissolution, merger, or complete or partial liquidation of CCL or any
announcement of such action; or (F) the waiver, amendment, termination or
modification of any provision of the CCL Rights Plan (as defined therein) in
connection with, or in order to permit or facilitate, any acquisition of CCL
Common Stock or other equity interest in CCL, and (4) CCL will agree to
indemnify Corning for Taxes (as defined below) arising from violations of
(1), (2) or (3) above and for Taxes arising as a result of an acquisition of
20% or more of the stock of CCL by a person or related persons during the
Restricted Period. If obligations of CCL under this agreement were breached
and as a result thereof one or both of the Distributions do not qualify for
the treatment stated in the ruling Corning requested from the IRS (the "IRS
Ruling"), CCL would be required to indemnify Corning for Taxes imposed and
such indemnification obligations could exceed the net asset value of CCL at
such time.
Corning and 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, 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
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as a result of an acquisition of 20% or more of the stock of Covance by a
person or related persons during the Restricted Period. 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.
CCL and Covance will enter into a tax indemnification agreement (the
"CCL/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 CCL
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 CCL for Taxes imposed and such indemnification obligations could
exceed the net asset value of Covance at such time. CCL and Covance will
enter into a second tax indemnification agreement (the "Covance/CCL Spin-Off
Tax Indemnification Agreement") which will be essentially the same as the
Corning/CCL Spin-Off Tax Indemnification Agreement except that CCL will make
representations to and indemnify Covance as opposed to Corning. If
obligations of CCL under this agreement were breached and as a result thereof
one or both of the Distributions do not qualify for the treatment stated in
the IRS Ruling, CCL would be required to indemnify Covance for Taxes imposed
and such indemnification obligations could exceed the net asset value of CCL
at such time.
The Spin-Off Tax Indemnification Agreements will also require (i) CCL to
take such actions as Corning may reasonably request and (ii) Covance to take
such actions as Corning and CCL may reasonably request to preserve the
favorable tax treatment provided for in any rulings obtained from the IRS in
respect of the Distributions.
Tax Sharing Agreement
Corning, CCL and 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 CCL
and Covance and their subsidiaries, provided, however, that CCL 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 CCL 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 consolidated federal income tax or certain other tax returns
prepared by Corning which includes CCL 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, CCL or Covance as a result of such failure are to be allocated among
Corning, CCL 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, CCL 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, CCL and
Covance, the liability so allocated to CCL or Covance could exceed the net
asset value of CCL or Covance, respectively.
Nonvoting Cumulative Preferred Stock of CCL
After the Distributions, Corning will retain 1,000 shares of CCL's
nonvoting 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 CCL nonvoting cumulative preferred stock, see
"Description of CCL Capital Stock--CCL Nonvoting 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,
CCL 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 CCL 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 multiple contracts could have a material
adverse effect on Covance. See "Business of Covance--Contractual
Arrangements."
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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 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.
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<PAGE>
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.
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 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
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<PAGE>
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 will 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, the Covance Credit Facility prohibits Covance from paying cash
dividends on the Covance Common Stock. 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. 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 CCL/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
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section 355 and will provide CCL with certain rights of indemnification
against Covance. The CCL/Covance Spin- Off Tax Indemnification Agreement will
also require Covance to take such actions as CCL may reasonably request to
preserve the favorable tax treatment provided for in any rulings obtained from
the IRS in respect of the Distributions. If obligations of Covance under either
the Corning/Covance Spin-Off Tax Indemnification Agreement or the CCL/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 CCL for
Taxes imposed and such indemnification obligations could exceed the net asset
value of Covance at such time. See "The Relationship Among Corning, CCL 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.
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
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<PAGE>
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 CCL. 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."
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ------------ -----------
(in thousands)
<S> <C> <C> <C>
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
======== =========== =========
</TABLE>
- -------------
(a) The pro forma adjustment to long-term debt due to banks and due to
Corning and affiliates reflect the borrowings to be incurred in
connection with the 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."
108
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------ ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ------------ ------------ ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues $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.
110
<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)
<S> <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.
111
<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)
<S> <C> <C> <C>
Net revenues $409,174 $ $ 409,174
Cost and expenses
Cost of revenue 270,726 270,726
Selling, general and administrative expenses 64,201 2,000 (a) 66,201
Restructuring charge 4,616 4,616
Depreciation and amortization 22,070 22,070
---------- ----------- --------------
Total 361,613 2,000 363,613
---------- ----------- --------------
Income from operations 47,561 (2,000) 45,561
---------- ----------- --------------
Other expense (income)
Interest expense, net 5,269 (b) 5,269
Foreign exchange (gain) (784) (784)
---------- ----------- --------------
4,485 4,485
Income before taxes and equity investee loss 43,076 (2,000) 41,076
Taxes on income 18,445 (790)(c) 17,655
Equity investee loss 405 405
---------- ----------- --------------
Net income $ 24,226 $(1,210) $ 23,016
========== =========== ==============
Pro forma shares outstanding 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.
112
<PAGE>
COVANCE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1996
<TABLE>
<CAPTION>
Pro Forma As
Historical Adjustments Adjusted
------------ -------------- ----------
(in thousands)
<S> <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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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.
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Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such
as delays in initiating or completing significant preclinical and clinical
and periapproval trials, termination of preclinical and clinical and
periapproval trials, acquisitions and exchange rate fluctuations. Delays and
terminations of studies or trials are often the result of actions taken by
clients or regulatory authorities and are not typically controllable by
Covance. Since a large amount of Covance's operating costs are relatively
fixed while revenue is subject to fluctuation, minor variations in the
commencement, progress or completion of preclinical and clinical and
periapproval trials may cause significant variations in quarterly operating
results.
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 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996
--------------------- ---------- ---------- ------------ ---------------------- ----------- ----------- ----------
(in thousands)
<S> <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 Imposed on
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Dividends for the Covance Credit Facility" and "Description of Certain
Indebtedness of Covance--Description of Covance Credit Facility."
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 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
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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 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 sq. ft. 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 Application ("IND"), whereupon the FDA may grant permission to begin
human trials (also known as "clinical trials").
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Preclinical studies may continue after the start of clinical trials to
determine the longer term effects of a product. For instance, a preclinical
study might focus on the possible side effects, metabolism and/or
pharmacokinetic disposition of a drug.
Clinical Trials (3.5 to 6 years).
(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 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,
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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 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
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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 the necessary
internal resources and experience (capital, equipment or people) to conduct
preclinical studies and
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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 is also one of the largest providers of animals, including
purpose-bred animals, for biomedical research. These animals are used by
biopharmaceutical companies, university research centers and CROs, like
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 for
on-time quality performance, expertise and experience in specific therapeutic
areas, scope of service offerings,
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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 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
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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 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
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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.
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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 to fill the vacancies created by such resignations. 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. [Covance is contemplating the selection
of additional directors which selection may occur prior to the
Distributions.] 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.
<TABLE>
<CAPTION>
Name Age Year Term Expires
- ----------------------- --- -----------------
<S> <C> <C>
Christopher A. Kuebler 43
Van C. Campbell 58
William C. Ughetta 63
J. Randall MacDonald
Nigel Morris 37
Robert M. Baylis 57
Irwin Lerner 65
</TABLE>
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 and Vice President of Organizational Development.
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 1995 to the present. Mr. Morris was the Executive Vice
President, Credit Card Division, of the Signet Banking Corporation
("Signet"), a company, from 1993 to 1995. From 1988 until 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 19 to 1994. Prior to
19 , 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 years. He is also a director of the following
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corporations: Host Marriott Corporation, Gryphon Holdings, Inc., Home State
Holdings, Inc. and New York Life Insurance Company.
Irwin Lerner has been the Chairman of the Board of Directors and Executive
Committee of Hoffmann-La Roche, Inc. ("Hoffmann"), a pharmaceutical company,
since 1993. From 1993 until 19 , Mr. Lerner was the President and Chief
Executive Officer of Hoffmann, and prior to , Mr. Lerner was . He is also a
director of the following corporations: Humana, Inc., Medarex, Inc., Zurn
Industries, Inc., Public Service Enterprise Group Incorporated and Hoffmann.
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 prime rate of Citibank, N.A. in effect on certain specified
dates, (ii) a market value account, the value of which will be based upon the
market value of 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 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 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.
Michael Giannetto (34) has been Covance's Controller since July 1996. From
December 1992 to March 1995, Mr. Giannetto was the Manager of Financial
Reporting and Technical Accounting for CLSI, an affiliate of 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 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
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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.
Jeffrey S. Hurwitz (36) has been Covance's 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 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 CCL 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.
James D. Utterback (41) has been Covance's 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.
Michael G. Wokasch (45) has been a 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.
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.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------
Annual Compensation Awards
------------------------------------ ------------------------
Restricted Securities
Name and Salary Other Annual Stock Underlying All Other
Principal Position Year (1) Bonus (2) Compensation(3) Awards(4) Options Compensation(5)
- ---------------------------- ----- --------- --------- --------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler,
Chairman, President and 1996 350,000 192,500 42,447 -- -- 72,043
Chief Executive Officer 1995 322,567 303,958 39,927 326,926 81,000 68,680
1994 51,667 101,679 -- -- 20,000 2,140
Richard J. Andrews, Senior 1996 232,960 93,184 -- -- 4,000 15,997
Vice President; President, 1995 222,833 176,512 -- -- -- 17,445
Covance Central Laboratory
Services Inc. 1994 197,635 41,000 -- -- 12,000 10,466
Kim D. Lamon, 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
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
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 forfeiture conditions and transfer restrictions will be removed
from performance-based shares, (b) all restrictions on transfer will be
removed from shares which are no longer subject to forfeiture and (c)
Career Shares which are subject to forfeiture conditions and transfer
restrictions will be forfeited, and restricted shares and/or options to
purchase shares of Covance Common Stock will thereafter be granted
pursuant to the terms of the Covance Incentive Stock Plan (as defined
below). 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 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.
143
<PAGE>
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 Exercise Expiration Gain at Gain at Gain at
Name Granted (2) in Fiscal Year Price Date 0% (4) 5% 10%
----------------------- ----------- -------------- --------- ----------- ------- ------------ -------------
<S> <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.
144
<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
------------------------ -------------- ---------- ------------- --------------- ------------- ----------------
<S> <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 Number Vesting
Grant of Shares Performance of Shares of Shares Date of
Number Year Date Granted Period Forfeited Earned Earned Shares
------------------------ ----- ------ ---------- ------------ ----------- ---------- ----------------
<S> <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>
145
<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
146
<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 4,725,000.
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 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.
147
<PAGE>
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
- --------------------- ------- ------- ------- ------- ------- ---------
<S> <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.
148
<PAGE>
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.
149
<PAGE>
Severance and Change in Control Arrangements. On or before the
Distribution Date, Covance will adopt a severance policy pursuant to which it
will provide to each named executive officer (other than Mr. Kuebler)
compensation equal to two times the named 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 named executive officer has been terminated for reasons
other than cause. Such named 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 named 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 immediately 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.
150
<PAGE>
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF COVANCE
All of the outstanding shares of Covance Common Stock are currently held
by CCL. 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.
<TABLE>
<CAPTION>
Number of Shares Number of
Name Beneficially Owned (1) Exercisable Options
- -------------------------------- ------------------------- ------------------------
<S> <C> <C>
Richard J. Andrews
Robert M. Baylis
Van C. Campbell
Christopher A. Kuebler
Kim D. Lamon
Irwin Lerner
J. Randall MacDonald
Nigel Morris
William C. Ughetta
James D. Utterback
Michael Wokasch
All Directors and Executive
Officers as a Group
</TABLE>
- -------------
(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.
151
<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, 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" 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 " ". 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
stockholders of record, based on the expected number of holders of CCL Common
Stock immediately following the CCL Spin-Off Distribution. The Transfer Agent
and Registrar for the 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."
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Covance Series Preferred Stock
The Covance Certificate authorizes the issuance of up to 10,000,000 shares
of Covance Series Preferred Stock, par value $ 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
$[50] 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 (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
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
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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
, 1996 between Covance and the Covance Rights Agent, which agreement will
be 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 CCL 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 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
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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 Provisions Relating to Change in
Control."
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. 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.
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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.
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.
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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.
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.
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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,
CCL and Covance After the Distributions--Tax Sharing Agreement" and "The
Relationship Among Corning, CCL 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 "Lenders") for a five year $250,000,000 Senior Revolving
Credit Facility (the "Covance Credit Facility") due November 2001,
pursuant to a credit agreement (the "Credit Agreement") to be entered into
prior to the Covance Spin-Off Distribution, with the 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 Credit Agreement will be filed as an exhibit to the
Covance Form 10. This summary of the terms and conditions of the Covance
Credit Facility and the Credit Agreement does not purport to be complete and
is qualified in its entirety by reference to such proposed form of Credit
Agreement, including the definitions therein of certain terms.
The Covance Credit Facility will be unsecured and will be guaranteed by
certain U.S. Subsidiaries (the "Guarantors") which are Material Subsidiaries
(defined as Subsidiaries who, individually have assets equal to at least 10%
the assets of the Borrower and its Subsidiaries, and which together with the
assets of the Borrower must aggregate 90% of the total assets of the Borrower
and its U.S. Subsidiaries). The proceeds of the Covance Credit Facility will
be used to effect the Covance Spin-Off Distribution, including the
refinancing of certain intercompany indebtedness and taxes owed to Corning
and to provide financing for Covance's working capital needs, capital
expenditures and permitted lawful acquisitions after the Covance Spin-Off
Distribution. The Covance Credit Facility will have a letter of credit
subfacility of $10 million, with NationsBank as Issuing Bank.
Principal is not scheduled to be repaid until the termination of the
Covance Credit Facility and the Borrower may prepay amounts owed in whole or
in part, subject to reimbursement of the Lender's breakage costs associated
with Eurocurrency borrowings. Borrowings may be made in a minimum amount of
(i) $5,000,000 and in integral multiples of $1,000,000 in excess thereof with
respect to Eurocurrency Loans, and (ii) $1,000,000 and in integral multiples
of $100,000 in excess thereof with respect to Base Rate Loans. The Borrower
has the option of one, two, three or six month Interest Periods with respect
to Eurocurrency Loans.
Interest and Fees
Borrowings under the Covance Credit Facility may be made in U.S. Dollars,
British Pounds Sterling, German Deutschemarks, Swiss Francs or Japanese Yen,
and will bear interest at a rate per annum equal to (i) the Base Rate
(defined as the higher of (a) the NationsBank prime rate and (b) the Federal
Funds Rate plus .50%), or (ii) the Eurocurrency Rate plus the Applicable
Margin. The Eurocurrency Rate is the average rate per annum at which deposits
in U.S. Dollars, or any other applicable currency, are offered by reference
banks in the London interbank market for amounts approximately equal to such
Lender's pro rata share of the Loan for the applicable Interest Period, as
adjusted for reserve requirements. The Applicable Margin is a percentage per
annum which will vary after March 31, 1997 and, at the Borrower's option,
will be based upon either (i) the lowest debt rating announced by Standard &
Poor's Ratings Group or Moody's Investors Service, Inc., as the case may be
(the "Public Debt Rating"), as of the Calculation Date [or, at the Borrower's
option, an interim date], for any class of long-term senior unsecured debt
without credit enhancement issued by the Borrower or (ii) the Borrower's
Leverage Ratio (defined as the Ratio of Funded Debt to EBITDA (see below for
definitions of each) for the twelve month period ending on the preceding
quarter as calculated on the Calculation Date [or, at the Borrower's option,
an interim date]). The Applicable Margin will initially be .25% through March
31, 1997, but may vary between .17% and .45% thereafter. The credit agreement
also provides that the Borrower may alternatively, at its option, solicit
competitive bids from the Lenders. Such Competitive Bid Loans would bear
interest at either the Fixed Rate offered by a Lender and accepted by the
Borrower, or the Eurocurrency Rate for the applicable Interest Period plus
the margin offered by a Lender and accepted by the Borrower.
The Borrower will pay the Issuing Lender a fee of 1/8% on the aggregate
outstanding of all Letters of Credit issued, plus, for the pro rata benefit
of the Lenders, Letter of Credit Fees calculated and paid in the same manner
and at the same percentages as Eurocurrency Loans which are not Competitive
Bid Loans. The Credit Agreement also requires the quarterly payment of a
Facility Fee based on the Applicable Percentage multiplied by the aggregate
Commitment. The Facility Fee will initially be .125% through March 31, 1997
but may range between .08% and .20% thereafter.
Covenants and Conditions
The Credit Agreement has covenants which place restrictions on the
Borrower and the Guarantors (the "Credit Parties") with respect to (i) the
incurrence of additional indebtedness (subject to limitations, including
limitations
159
<PAGE>
on dollar amount, except for working capital indebtedness incurred in the
ordinary course of business which is not overdue or is being disputed in good
faith, intercompany indebtedness, indebtedness incurred in connection with
permitted liens, guaranties, certain sale/leaseback transactions and certain
capital expenditures), (ii) the incurrence of additional liens (other than
certain permitted statutory liens and liens on permitted indebtedness), (iii)
material changes in the nature of the Credit Parties' business, (iv) mergers
and consolidations (other than between Credit Parties, subject to
restrictions), (v) entry into certain sale/leaseback transactions, (vi)
investments (subject to limitations, including limitations on dollar amount,
other than in cash or cash equivalents, working capital investment in
receivables and inventory, intercompany investment in other Credit Parties
and their Subsidiaries and capital expenditures), (vii) the payment of
dividends except pursuant to benefits plans and the Rights Plan and (viii)
the incurrence of restrictions on the ability to pay dividends, repay debt
under the credit agreement or make intercompany loans and advances (except as
imposed or incurred pursuant to the Covance Spin-Off Distribution).
The Credit Agreement will have financial covenants which require Covance
to maintain a ratio (the "Fixed Charge Coverage Ratio") of EBIT plus all rent
payable under operating leases ("Rent Expense") to cash Interest Expense plus
Rent Expense of 1.50 to 1.0 and not exceed a maximum ratio (the "Leverage
Ratio") of Funded Debt to EBITDA of 3.50 to 1.0. For purposes of the Fixed
Charge Coverage Ratio, EBIT is defined as consolidated net income (net of the
one-time restructuring charge associated with the Covance Spin-Off
Distribution), plus income tax expense and interest expense. For purposes of
the Leverage Ratio, Funded Debt is defined as obligations maturing or
extendable for more than one year after they arise for (i) indebtedness
respect to borrowed money, (ii) purchase money indebtedness, (iii) capital
lease obligations, and (iv) letter of credit obligations incurred by the
Credit Parties and its Subsidiaries and any partnership or joint venture to
which they are obligated, and EBITDA is defined as EBIT plus depreciation and
amortization expense.
The Covance Credit Facility is subject to a number of conditions,
including among other things (i) execution of the Credit Documents in form
acceptable to the Agents, (ii) the completion of due diligence by the Agents,
(iii) receipt by the Agent of certain documents in connection with the
Covance Spin-Off Distribution, including receipt of the IRS Ruling and
executed employment agreements, and within months, copies of the
Transaction Agreement, the Tax Sharing Agreement, the relevant Spin-Off Tax
Indemnification Agreements, evidence of repayment of intercompany loans and a
copy of the Covance Form 10 which has been declared effective by the
Commission, (iv) the expiration of all waiting periods in connection with the
Covance Spin-Off Distribution, (v) the absence of any disruption or adverse
change in the financial or capital markets which the Agents deem material in
connection with the syndication of the credit facility and (vi) there shall
have occurred no material adverse change in the Borrower's financial
condition or results of operations.
The proceeds of the Covance Credit Facility will be used to effect the
Covance Spin-Off Distribution, including the refinancing of certain
indebtedness and taxes owed to Corning (of, assuming the Covance Spin-Off
Distribution and borrowing occurred on September 30, 1996, approximately
$128.2 million) and to provide financing for Covance's working capital needs,
capital expenditures and permitted lawful acquisitions after the Covance
Spin-Off Distribution. Covance estimates that its debt at the Distribution
Date will be approximately $135 million to $145 million. The Covance Credit
Facility is expected to mature in November 2002. The Distributions are
conditioned on the closing of the Covance Credit Facility.
160
<PAGE>
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.
161
<PAGE>
AVAILABLE INFORMATION
CCL and Covance have filed with the Commission the CCL Form 10 and the
Covance Form 10, respectively (together, the "Forms 10") under the Exchange
Act with respect to the CCL Common Stock and Covance Common Stock,
respectively, described herein. This Information Statement does not contain
all of the information set forth in the Forms 10 and the respective exhibits
thereto. For further information, reference is made to the CCL Form 10 and
the Covance Form 10, including the exhibits thereto. When the Forms 10 become
effective, CCL and Covance will be subject to the reporting requirements of
the Exchange Act and, in accordance therewith, will file reports, proxy
statements and other information with the Commission. Copies of the Forms 10,
including the exhibits thereto, and the reports, proxy statements and other
information filed by Corning, CCL and Covance with the Commission can be
inspected and copies made at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's Regional Offices: 7 World Trade Center, 13th Floor, New
York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically, such as CCL and Covance. The address of the Commission's Web
site is http://www.sec.gov. Following the listing of the CCL Common Stock and
Covance Common Stock on the NYSE, CCL and Covance will be required to file
with that exchange copies of such reports, proxy statements and other
information which then can be inspected at the offices of such exchange at 20
Broad Street, New York, New York 10005.
162
<PAGE>
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.
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
<TABLE>
<CAPTION>
(Amounts in thousands) 1995 1994
---------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,068 $ 6,176
Accounts receivable, net 78,968 66,781
Unbilled services 18,217 13,194
Inventory 14,004 10,729
Deferred income taxes 11,337 10,033
Prepaid expenses and other assets 15,189 11,849
-------- ---------
Total Current Assets 145,783 118,762
Property and equipment, net 140,708 126,483
Goodwill, net 24,028 15,880
Other assets 11,991 10,867
-------- ---------
Total Assets $322,510 $271,992
======== =========
Liabilities and Stockholder's Equity
Current Liabilities:
Trade accounts payable $ 23,761 $ 16,690
Accrued payroll and benefits 20,339 15,775
Accrued expenses and other liabilities 24,701 16,243
Unearned revenue 41,879 49,135
Income taxes payable 16,631 7,958
-------- ---------
Total Current Liabilities 127,311 105,801
Due to Corning Incorporated and affiliates 89,836 75,178
Deferred income taxes 6,406 9,605
Other liabilities 16,440 17,500
-------- ---------
Total Liabilities 239,993 208,084
-------- ---------
Commitments and Contingent Liabilities
Stockholder's Equity:
Contributed capital 30,816 26,528
Retained earnings 48,653 34,656
Cumulative translation adjustment 3,048 2,724
-------- ---------
TOTAL STOCKHOLDER'S EQUITY 82,517 63,908
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $322,510 $271,992
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-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 (formerly Corning Bio), 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:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Property and equipment at cost:
Land $ 2,996 $ 2,746
Buildings and improvements 105,291 94,549
Equipment 101,686 90,117
Furniture, fixtures & leasehold improvements 39,622 36,393
Construction-in-progress 5,861 6,486
--------- ----------
255,456 230,291
Less: Accumulated depreciation and amortization (114,748) (103,808)
--------- ----------
Property and equipment $ 140,708 $ 126,483
========= ==========
</TABLE>
Depreciation and amortization expense aggregated $20.8 million, $17.8
million and $16.5 million for 1995, 1994 and 1993, respectively.
4. Acquisitions and Goodwill
In April 1994, 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) 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:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Income before taxes and equity
investee losses:
Domestic $32,771 $30,928 $29,455
International 10,305 4,076 2,253
------- ------- --------
Total $43,076 $35,004 $31,708
======= ======= ========
Federal income taxes:
Current provision $19,118 $12,167 $10,932
Deferred benefit (6,760) (1,742) (1,439)
International income taxes:
Current (benefit) provision (933) 602 (573)
Deferred provision 3,434 1,440 1,612
State and other income taxes:
Current provision 3,959 2,868 3,143
Deferred benefit (373) (411) (169)
------- ------- --------
Total $18,445 $14,924 $13,506
======= ======= ========
</TABLE>
The differences between the provision for income taxes and income taxes
computed using the Federal income tax rate were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Taxes at statutory rate 35.0 % 35.0 % 35.0 %
State and local taxes, net of
Federal benefit 5.5 4.6 6.1
Impact of international operations (0.3) 1.7 0.8
Goodwill amortization 1.1 0.5 0.4
Other, net 1.5 0.8 0.3
------ ------ -------
Total 42.8 % 42.6 % 42.6 %
====== ====== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Current deferred taxes:
Liabilities not currently deductible $ 10,356 $ 9,823
Net operating losses 888 --
Other 538 210
--------- ----------
11,782 10,033
Less: valuation allowance (445) --
--------- ----------
Net $ 11,337 $ 10,033
========= ==========
Noncurrent deferred taxes:
Property and equipment $(12,263) $(11,894)
Liabilities not currently deductible 5,857 2,289
--------- ----------
Total $ (6,406) $ (9,605)
========= ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Charges Reserve
through balance at
Original December December
Reserve 31, 1995 31, 1995
---------- ---------- -------------
<S> <C> <C> <C>
Employee termination costs $1,480 $ 539 $ 941
Write-off of fixed assets 1,737 994 743
Costs of exiting leased facilities 1,399 118 1,281
-------- -------- -----------
Total $4,616 $1,651 $2,965
======== ======== ===========
</TABLE>
8. Commitments and Contingent Liabilities
Minimum rental commitments under noncancellable operating leases,
primarily real estate and office facilities, in effect at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ended December 31,
1996 $15,332
1997 $18,841
1998 $16,578
1999 $15,493
2000 $14,394
2001 and beyond $31,253
</TABLE>
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
<TABLE>
<CAPTION>
United
States Europe
------------- ----------
<S> <C> <C>
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
</TABLE>
(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) 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 giving 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:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1995 Quarter Quarter Quarter Quarter
- ---------------------------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $91,974 $104,813 $106,099 $106,288
Income from operations 12,983 9,665 (1) 13,671 11,242
Net income 6,547 4,449 (1) 7,516 5,714
Year Ended December 31, 1994
- ----------------------------
Net revenues $74,223 $ 77,762 $ 82,904 $ 84,612
Income from operations 8,187 11,077 9,690 9,645
Net income 4,023 5,726 4,967 4,929
</TABLE>
(1) Excluding the impact of the 1995 restructuring provision totaling
$4,616 ($2,770 net of tax), income from operations and net income in
the second quarter of 1995 were $14,281 and $7,219, respectively.
F-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)
<TABLE>
<CAPTION>
(Amounts in thousands) 1996 1995
---------- ----------
<S> <C> <C>
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
======== =========
</TABLE>
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)
<TABLE>
<CAPTION>
(Amounts in thousands) 1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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) 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) for a cash payment of
approximately $14.4 million in a transaction to be accounted for as a
purchase business combination.
F-44
