UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 1-12213
COVANCE INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-3265977
(State of Incorporation) (I.R.S. Employer Identification No.)
210 Carnegie Center, Princeton, New Jersey 08540
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (609) 452-4440
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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As of February 10, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,178,971,297 (based on the closing price
of the Company's Common Stock on the New York Stock Exchange on February 10,
1998 of $20.50).
As of February 10, 1998, the Registrant had 57,698,663 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement is incorporated by reference into Items
10, 11, 12 and 13 of Part III of this Form 10-K.
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PART I
Item 1. Business
General
Covance Inc. ("Covance" or the "Company") is a leading contract research
organization ("CRO") providing a wide range of integrated product development
services on a worldwide basis to the biotechnology, pharmaceutical and medical
device industries. In addition and to a lesser extent, Covance also provides
services such as health economics and outcomes for managed care organizations,
hospitals and other health care providers and laboratory testing services to the
chemical, agrochemical and food industries. The services Covance provides
constitute two lines of business: early development services (preclinical, Phase
I and biomanufacturing services), and late-stage development services (clinical
and periapproval, central laboratory, pharmaceutical packaging and health
economics and outcomes services). Covance believes it is one of the largest
biopharmaceutical CROs, based on 1997 annual net revenues, and one of a few that
are capable of providing comprehensive global product development services.
On May 13, 1996, the Board of Directors of Corning Incorporated ("Corning"),
the Company's former indirect parent, approved a plan to distribute (the
"Distributions"), in a tax free distribution to all Corning stockholders of
record as of 11:59 PM on December 31, 1996, all of the Company's outstanding
Common Stock, and that of Quest Diagnostics Inc. ("Quest"). The Distributions
were effected as of the close of December 31, 1996 (the "Distribution Date") and
the Company (as well as Quest) became an independent, publicly-traded company on
such date.
The service offerings that constitute Covance's business were initially
acquired by its former parent, Corning, as part of a strategy to create a global
and full service product development company. In 1987, Corning acquired Hazleton
Corporation (now known as Covance Laboratories Inc.), owner of preclinical drug
safety assessment laboratories and Phase I clinical research units. In 1989,
Phase II and Phase III clinical trials expertise was added with G.H. Besselaar
Associates (now known as Covance Clinical and Periapproval Services Inc.).
Covance further expanded its clinical trials expertise in 1990 with the purchase
of PACT Inc. (now known as Covance Periapproval Services Inc.), a periapproval
studies company. In 1991, SciCor Inc. (now known as Covance Central Laboratories
Inc.), a clinical laboratory dedicated to the drug development process was
purchased. Covance's pharmaceutical laboratory capabilities were expanded in
1992 with the creation in Switzerland of a jointly owned company, SciCor S.A.
Covance acquired 100% of this company in 1994. Also in 1994, the Company
acquired a significant minority equity interest in Bio-Imaging Technologies Inc.
("Bio-Imaging"), which uses proprietary imaging technology to quantify the
diagnostic and therapeutic effectiveness of experimental drugs and devices. In
1995, Covance acquired National Packaging Systems, Inc. ("National Packaging")
(now known as Covance Pharmaceutical Packaging Services Inc.), a pharmaceutical
packaging company. Also in 1995, Covance formed Covance Biotechnology Services
Inc. ("Covance Biotechnology"), a majority-owned company which has enabled
Covance to engage in the manufacture of biologics.
In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics and outcomes company. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of Swiss-based
CRS Pacamed AG ("CRS Pacamed") (now known as Covance Pharmaceutical Packaging
Services AG). In addition, in connection with the acquisition of CRS Pacamed,
Covance acquired a 91,000 square-foot facility in Horsham, United Kingdom, which
is used, among other things, to enhance the Company's ability to provide
pharmaceutical packaging services in Europe. The Horsham facility became fully
operational with the completion of its substantial renovation in June 1997. Also
in 1997, Covance began construction on a 45,000 square-foot facility in
Allschwil, Switzerland, expected to be ready for occupancy by mid-1998, to
further enhance its packaging capabilities in Europe. Covance is also building
an additional 160,000 square-foot facility at its Princeton location. The
Princeton facility, to be leased, will further support the Company's clinical
services and corporate functions, and permit increased employee capacity. The
Princeton facility is expected to be ready for occupancy in late 1998. Covance
is also increasing its Indianapolis, Indiana facility by 112,000 square feet to
expand its pharmaceutical laboratory operations. The Indianapolis additional
space, also to be leased, will be ready for occupancy by mid-1998.
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The Company maintains offices in 17 countries, including offices in Montreal,
Canada, Buenos Aires, Argentina, Warsaw, Poland and Prague, Czech Republic, all
of which opened in 1997.
CRO Industry Overview
The CRO industry provides independent product development services to the
pharmaceutical, biotechnology and medical device industries. In general, CROs
derive substantially all of their revenue from the research and development
expenditures of such industries. Full-service CROs design and manage preclinical
and clinical and periapproval studies and trials, provide health economics and
outcomes services and provide packaging, central laboratory and other services
required to develop and market new products in accordance with applicable
government regulations in the jurisdictions where the services are provided,
including the regulations of the Food and Drug Administration ("FDA") in the
United States. Today, there are only a few full-service CROs.
Trends Affecting the CRO Industry
Covance believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as a result of a number of factors, as further described below.
Cost Containment Pressures. Market forces and governmental initiatives have
placed significant downward pressure on pharmaceutical and biotechnology
companies' drug prices. Covance believes that the pharmaceutical industry is
responding to these pressures by converting some of the fixed costs of
maintaining research and development infrastructure to variable costs by
outsourcing drug development activities to CROs. Demand for CROs is also driven
by internal development resource shortages experienced when a large number of
compounds emerge from the research process and need to undergo development.
Management also believes that many of these companies are attempting to shorten
new drug development cycle time by using CROs, which may have greater expertise
in a therapeutic area, while offering greater efficiency at a lower cost.
Marketplace Globalization. Pharmaceutical and biotechnology companies are
increasingly attempting to expand the market for new drugs by pursuing
regulatory approvals in multiple countries simultaneously rather than
sequentially as they have in the past. Covance believes that CROs with a global
presence will continue to benefit from these trends, and that the Company is
well-positioned to benefit from such trends.
Revenue Enhancement Through Faster Drug Development. Covance believes that
CROs, by providing specialized development services, are often able to perform
the needed services with a higher level of expertise or specialization, and more
quickly than a pharmaceutical or biotechnology company could perform such
services internally.
Pharmaceutical Company Consolidation. Business combinations in the
pharmaceutical industry present an opportunity for Covance, as such companies
generally seek to obtain cost reduction synergies. Once combined, many
pharmaceutical companies aggressively manage costs by reducing jobs,
decentralizing the research and development process and outsourcing to CROs in
an effort to reduce the fixed costs associated with internal drug development.
Increasingly Stringent Regulation. Increasingly stringent regulatory
requirements throughout the world and their standardization have increased the
need for broader, global regulatory expertise. Covance believes that the
pharmaceutical and biotechnology industries are outsourcing to global CROs to
take advantage of their capabilities and geographic presence.
Therapeutic Focus. Management believes that the economics of the marketplace
require increased research and development expenditures as biopharmaceutical
companies become focused on innovative new products, including drugs for an
aging population, and drugs for the treatment of chronic disorders and life
threatening conditions. The development of therapies for chronic disorders, such
as Alzheimer's disease or arthritis, requires complex clinical trials to
demonstrate the therapies' effectiveness and to determine whether the drugs
cause any long-term side effects. Management believes that CROs with the
requisite therapeutic experience and the ability to manage complex trials will
present an attractive development alternative for biopharmaceutical companies.
Biotechnology Industry Growth. The United States biotechnology industry has
grown rapidly over the last 10 years and is introducing new therapies which
require regulatory approval. Many biotechnology companies do not have the
necessary
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internal resources and experience (capital, equipment or people) to conduct
preclinical studies and clinical trials. Accordingly, many biotechnology
companies have chosen to outsource to CROs rather than expend significant time
and resources to develop an internal preclinical or clinical development or
biomanufacturing capability.
The New Drug Development Process--Overview
Before a new drug may be marketed to the public, it must undergo extensive
testing and regulatory review to determine that the drug is both safe and
effective for its intended purpose. The developmental process and typical
corresponding time periods are as set forth below. Similar extensive testing and
regulatory reviews are required in Europe and some Asian countries to determine
that a new drug is safe and effective for its intended purpose before it can be
marketed to the public.
Preclinical Research (6 months to 3 years). In vitro ("test tube") and in
vivo ("animal") studies are conducted to establish the basic pharmacokinetic
effect and safety of a drug including the toxicity of the drug over a wide range
of doses. Initially, acute toxicology studies are conducted. In the United
States, if results warrant continuing development of the drug, the manufacturer
(also known as the "sponsor") will file an Investigational New Drug ("IND")
application, whereupon the FDA may grant permission to begin human trials (also
known as "clinical trials"). Preclinical studies may continue after the start of
clinical trials to determine the longer term effects of a product.
Clinical Trials (3.5 to 6 years).
o Phase I (6 months to 1 year). This phase involves the initial basic safety
and pharmacology testing in approximately 20 to 100 human subjects,
usually healthy volunteers in a closely monitored setting, including
studies to determine the side effect profile of the drug, how the drug
works, how it is affected by other drugs, where it goes in the body, how
long it remains active and how it is broken down and eliminated from the
body.
o Phase II (1 to 2 years). This phase involves basic efficacy
(effectiveness) and dose-range testing in approximately 100 to 400
carefully selected patients suffering from the disease or condition under
study to help determine the best effective dose, confirm that the drug
works as expected and provide additional safety data. The trials are
typically well controlled and usually involve a placebo, also known as a
"sugar pill." A placebo is an identical tablet or solution which lacks the
active substance under investigation.
o Phase III (2 to 3 years). This phase involves efficacy and safety studies
in broader populations of hundreds or thousands of patients at many
investigational sites (hospitals and clinics) and may involve
placebo-controlled trials, in which the new drug is compared with a
placebo; studies comparing the new drug with one or more drugs with
established safety and efficacy profiles in the same therapeutic category
("controlled trials"); or studies where there is no comparison to a
placebo or another drug ("uncontrolled trials"). Generally, Phase III
studies are intended to provide additional information on drug safety and
efficacy, an evaluation of the risk-benefit relationship for the drug, and
information for the adequate labeling of the product.
NDA Preparation and Submission. Upon completion of Phase III trials, the
sponsor or CRO assembles the tabulated and statistically analyzed data from all
phases of development into a single large document, the New Drug Application
("NDA"), 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 are 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.
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Post-Marketing Surveillance and Phase IV Studies (Periapproval). Federal
regulation requires the sponsor to collect and periodically report to the FDA
additional safety and effectiveness data on the drug for as long as the sponsor
markets the drug (post-marketing surveillance). If the drug is marketed outside
the United States, these reports must include data from all countries in which
the drug is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the drug or to test new dosage formulations. All
of these studies are types of "periapproval" studies.
Business Strategy
Based on 1997 annual net revenues, Covance believes it is one of the largest
CROs serving the biotechnology and pharmaceutical industries. The Company has a
focused strategy to provide high quality, cost effective, integrated,
comprehensive and innovative services to assist its pharmaceutical and
biotechnology clients to develop, produce, obtain approval for and enhance the
commercial success of their new therapeutic products worldwide. As this strategy
unfolds, Covance will focus increased attention on customers who are biased
towards development approaches that are flexible, innovative and more likely to
yield optimal outcomes.
Services. Covance believes that CROs capable of offering a full range of
biopharmaceutical drug development and manufacturing services are better able to
compete for three reasons: (1) a full range of services provides a client with
the choice of using just one provider to secure all of the client's development
needs; (2) an integrated provider of these services can provide economies of
scale and accelerate the development of the client's product through more
comprehensive planning of the development process; and (3) early stage
development provides the CRO with access to the client sooner in the development
cycle and may promote the client's use of later stage development services.
As part of its strategy, Covance both continually improves its existing
services and endeavors to create new ones. Covance has implemented a total
quality management system throughout its operations which assists the Company in
its goal of producing error-free services on time and within the client's
budget. This management system is overseen by a quality team comprised of
Covance's most senior executives, including its chief executive officer.
Furthermore, certain of Covance's United States and European subsidiaries have
received ISO 9000 and 9001 certifications based on quality standards established
by the International Organization for Standardization. The ISO 9000 standards
define the international requirements for creating a quality assurance system
that will result in providing consistent service.
Covance also developed its own Expanded Access Program ("EAP"), one of
Covance's periapproval offerings. EAP is a mechanism that allows innovative new
therapies for life threatening diseases to be given to expanded populations
prior to FDA approval pursuant to a TIND application. In January 1998, the
Company initiated the Covance Center for Central Nervous System ("CNS") Research
("CNS Research Center"). Management believes that CNS is a key therapeutic area,
with over 1,000 products in development and more than $2.5 billion spent in
research and development by the United States pharmaceutical industry alone. The
CNS Research Center focuses a core group of employees with CNS experience to
service and develop this capability. In addition, Covance created a CNS advisory
board, comprised of six leading experts in CNS research, to further its
expertise in this area and better serve its clients. In January 1998, the
Company opened an office in Tampa, Florida to further support the development of
the CNS Research Center. In addition to improving its existing services, Covance
also focuses on providing its clients new market oriented, value-added services,
including those that involve integrated services relying on multidisciplinary
teams drawn from various Covance operating units or divisions. For instance,
Covance is duplicating in the United States a Strategic Product Development
("SPD") program developed in Europe that has successfully reduced the estimated
time from preclinical testing to the first human studies.
Covance's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions and alliances. With respect to the
former, in addition to the programs noted above, Covance has invested in the
creation of a multi-use biomanufacturing facility which became operational in
January 1997. With respect to the latter, Covance added domestic pharmaceutical
packaging capabilities through the acquisition of National Packaging in January
1995, European pharmaceutical packaging capabilities through the acquisition of
CRS Pacamed in October 1996, and enhanced its health economics and outcomes
services by acquiring HTA in March 1996. Covance expects to continue developing
services internally and making strategic acquisitions that are complementary to
its existing services and that will expand its capability to serve its clients.
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Streamlining the Drug Development Process. In recognition of its clients'
needs with respect to cost containment, reduced testing time frames and global
trials, Covance has also created the Accelerated Clinical Trial ("ACT") team
focused exclusively on continually examining and redesigning the drug
development process with the objective of reducing the time required to develop
a new compound. The mandate of the ACT team is to examine every significant
process, system and information technology used in product development, with the
objective of applying the considerable experience and technical resources
available throughout the Company. ACT's integrated and streamlined processes
reduce redundancies and permit optimal use of shared data. ACT was used in seven
client programs in 1997, reducing by approximately fifty (50%) percent the
average time from last patient completing a trial to the preparation of a
clinical trial report. Based on preliminary results, management intends to
expand ACT to additional clinical trials in 1998.
In early 1997, the Company created the Covance Investigator Alliance ("CIA").
The CIA's purpose is to identify and form alliances with leading investigators
throughout North America and Europe to facilitate expeditious study approvals,
patient and data access and to improve the timeliness and quality of data. Over
40 investigative sites in North America are currently part of the CIA. Based on
preliminary results, management intends to continue to expand the number of CIA
sites in North America and Europe.
With respect to technical resources, Covance has over 300 information systems
professionals working in 13 regional information system centers (nine in the
United States, three in Europe and one in Australia) and nine satellite centers
(five in the United States and four in Europe). Most of the Company's employees
at its 39 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 the Company's
ability to provide integrated services and connect the Company to its clients.
For instance, Covance's development of its Trial Tracker(SM) Information Access
System ("Trial Tracker(SM)") provides clients real time access to their study
data and its drug supply management system based on Integrated Voice Response
technology allows clients to more efficiently manage the distribution of their
experimental compounds to investigational sites. In continually examining ways
to improve the drug developmental process, Covance's information technology
strategy is to capitalize on its existing heterogeneous, flexible and
proprietary computer systems, and to both customize them where appropriate for
particular client needs and incorporate new systems and technologies to meet
changing demands in a timely and cost effective manner.
Geographic Expansion. Covance believes that it will become increasingly
important to provide its full range of drug research and development services in
all major and developing biotechnology and pharmaceutical markets, especially
given industry trends to conduct research on new drugs outside the United States
first and to conduct clinical trials in multiple countries simultaneously.
Through its offices, regional monitoring sites, laboratories and manufacturing
sites in over 39 locations in 17 different countries and field work in over 30
other countries, Covance believes it is a leader among CROs in its ability to
deliver services globally. Currently, approximately 35% of Covance's 6,000
employees are based outside of the United States.
Covance will continue its strategy of establishing new or enhancing existing
operations in significant biotechnology and pharmaceutical markets. Covance
expects this will occur as a result of internal growth and through strategic
acquisitions. In February 1997, Covance opened an office in Montreal, Canada.
The Montreal office serves the Company's Canadian clients and those North
American customers who are developing their products in Canada. In March 1997,
Covance opened its Buenos Aires, Argentina office. Buenos Aires serves as
Covance's center for conducting clinical research in Latin America, in a region
that Covance believes will be a significant contributor of clinical and central
laboratory data for global regulatory dossiers. In October 1997, Covance opened
its Warsaw, Poland office. Warsaw presents an opportunity for Covance to conduct
clinical trials in a region which provides previously untapped sources for new
patient populations and investigator networks. Also in October 1997, Covance
opened an office in Prague, Czech Republic. Prague serves as additional support
to expand the Company's central laboratory project management services in
Eastern Europe and to support studies in Eastern Europe.
Covance also continues to collaborate in the Asia-Pacific region (from Japan
through Australia) with various science and technology boards and ministries to
assist in the improvement of the regulatory environment necessary to attract
more international trials. Covance is also continuing its collaboration with the
Singapore National Science and Technology Board concerning the Singapore
government's initiative to form the Asia Pacific Economic Cooperation
Coordinating Center for Good Clinical Practice. In July 1997, Covance signed a
collaboration agreement with the Chinese State Science and
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Technology Commission - China Innovation Center for Life Sciences ("Chinese
Science Commission") to enhance multinational pharmaceutical development in the
Chinese market. Covance is currently teaching Good Clinical Practice ("GCP") to
key physicians and investigators in select Chinese hospitals and clinical
pharmacology centers. The training is expected to be expanded in future years to
include Good Laboratory Practices ("GLP") and Good Manufacturing Practices
("GMP"). Covance and the Chinese Science Commission will also be evaluating the
possible development of alternative alliances and joint venture strategies.
Services
Covance provides a wide range of integrated product development services on a
worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition and to a lesser extent, Covance provides services such
as health economics and outcomes for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. The services Covance provides constitute two
lines of business: early development (preclinical, Phase I and biomanufacturing
services) and late-stage development (clinical and periapproval, central
laboratory, pharmaceutical packaging and health economics and outcomes
services).
Early Development Line of Business
Preclinical Services
Covance has four major laboratories, employing over 2,000 people, located in
Madison, Wisconsin and Vienna, Virginia in the United States and Harrogate,
United Kingdom and Munster, Germany. The Company also has an administrative and
sales office in Tokyo, Japan. The preclinical services offered are wide-ranging,
including in vivo toxicology studies (such as acute, subchronic and
carcinogenicity studies), genetic toxicology studies (such as in vitro
cytotoxicity, cytogenetics and gene mutation studies and transgenic mouse
models) and chemistry services (such as in vitro metabolism, pharmacokinetics
and bioequivalence studies).
The preclinical area has also been a source of innovation by introducing new
technologies for client access to data, electronic animal identification,
multimedia study reports and data tables and in vivo and in vitro measures of
induced cell proliferation. Covance's preclinical group also works closely with
the Phase I and II groups to minimize product development time and to provide
clients with early data on the safety and efficacy of new molecules. This data
allows clients to make a decision about whether to continue, modify or cease
their development programs.
As part of its preclinical services, Covance is duplicating in the United
States the SPD program developed in Europe. This program has successfully
reduced in Europe the time from preclinical testing to the first human studies.
SPD involves an integrated process and team drawn from Covance's preclinical and
Phase I and II areas. In an SPD program, the compound is researched from initial
preclinical evaluation through its first dosing in humans, including the filing
and attainment of an IND application. Specific elements of the process include
formulation and dose delivery testing, product metabolism, chemistry,
pharmacology, toxicology and safety testing. The preclinical testing phase in
the United States typically takes six months to three years and Phase I studies
typically take six months to one year. Because IND applications are required in
the United States to be filed before human clinical trials start, it is
uncertain whether SPD trial completion speeds in the United States will be as
swift as the Company's experiences with clients in the United Kingdom (where
IND applications are not required to commence Phase I clinical trials), but
Covance believes that an SPD program can reduce the typical drug development
time in the United States. Several SPD trials in the United States are
continuing, with the program scheduled to be expanded in 1998.
In early 1997, Covance launched the Compound Appraisal and Selection Service
("CASS") to its clients. CASS is an integrated labs service which combines
several preclinical service offerings and is particularly directed to small and
start-up companies. CASS offers consultancy, in vitro screens and in vivo
animals tests to determine the viability of compounds for future development.
Covance also provides animals, including purpose-bred animals, for biomedical
research. These animals are used by biopharmaceutical companies, university
research centers and CROs, like Covance, as part of their preclinical in vivo
safety
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and efficacy testing. Through a variety of processes, technology and
specifically constructed facilities, Covance is able to provide both
purpose-bred and specific pathogen free animals that meet clients' rigorous
control requirements. Covance is also a provider of custom polyclonal and
monoclonal antibody services and owns and operates a state-of-the-art antisera
production facility that complies with both GMP and GLP. 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.
Covance also provides laboratory testing services to the chemical,
agrochemical and food industries. Covance offers a complete range of services to
agrochemical manufacturers to determine the potential risk to humans, animals
and the environment from plant protection products. Covance also offers a broad
range of services to the food industries, including nutritional analysis and
nutritional content fact labels.
Biomanufacturing Services
Covance holds a majority interest in Covance Biotechnology, a company formed
in 1995 to manufacture peptides and recombinant proteins for biotechnology and
pharmaceutical clients in accordance with GMP for preclinical and clinical
trials as well as for commercial sales. Covance Biotechnology's services include
process development services, GMP manufacturing by microbial and mammalian cell
expression, laboratory testing, quality assurance and quality control and
regulatory affairs assistance. Covance Biotechnology is able to process multiple
compounds for multiple clients simultaneously and on a scale, Covance believes,
greater than any other contract bioprocessor. Covance Biotechnology provides an
alternative for clients who might otherwise need to design, finance and
construct their own facility to manufacture a compound for preclinical or
clinical trials or commercial sale. By retaining Covance Biotechnology, a client
can avoid the expense, time delay and risk of making additional investments for
a compound whose safety, efficacy and commercial opportunities are uncertain.
This allows clients to preserve their capital and lower their risks.
The 109,000 square-foot biomanufacturing facility, located in Research
Triangle Park, North Carolina, became "mechanically complete" in December 1996
and operational in January 1997. The biomanufacturing facility is financed
through several tax retention operating leases provided by a commercial lending
institution ("Bank"). The lease expires in December 2006. The annual minimum
lease payments are approximately $5.7 million. At the expiration of the lease
term, Covance Biotechnology is liable for the unamortized balance of the cost of
the facility, currently estimated to be approximately $37.0 million. Covance
Biotechnology may also choose to purchase the facility at specific dates over
the 10 year period. Using current estimates, the purchase price would be
approximately $52.0 million at the end of the first year, decreasing on an
amortizing basis to approximately $37.0 million at the end of the tenth year.
Covance owns 78% of the voting capital stock of Covance Biotechnology in the
form of convertible preferred stock. The remaining 22% of Covance
Biotechnology's capital stock is owned by certain minority stockholders (the
"Minority Stockholders") in the form of common stock. Covance's ownership in
Covance Biotechnology may be reduced to approximately 68% if certain options
granted to key Covance Biotechnology executives are exercised in full.
The Company, Covance Biotechnology and the Minority Stockholders are also
party to a capital contribution and stockholder agreement (the "Stockholders'
Agreement"), which, among other things, limits certain Minority Stockholders'
common stock transfers, grants Covance a right of first refusal on shares of
Minority Stockholders' common stock, and grants Covance the right to purchase up
to one-third of the common stock held by the Minority Stockholders on certain
dates. If Covance chooses not to exercise its purchase right, the Stockholders'
Agreement obligates Covance Biotechnology to use its best efforts to arrange for
the sale of such shares on certain specified terms, and certain other
conditions. Supplementing the Stockholders' Agreement, in October 1997, the
Company and the Minority Stockholders entered into an agreement by which,
subject to the satisfaction of certain conditions, the Company and the Minority
Stockholders are obligated to make, upon request by Covance Biotechnology,
additional capital contributions to Covance Biotechnology not to exceed an
aggregate amount of $12.0 million.
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Late-Stage Development Line of Business
Clinical and Periapproval Services
Covance offers a comprehensive range of clinical trial services, including
Phase II 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 CNS, endocrinology and respiratory
systems, oncology, infectious diseases (including AIDS), and significant
experience in other areas including bone metabolism immunology,
gastroenterology, urology, dermatology and hematology. Covance has extensive
experience in managing small, medium and large trials in the United States and
in many parts of the world. These trials may be conducted separately or
simultaneously as part of a multinational development plan.
Covance can manage every aspect of clinical trials by providing its clients
the following services: clinical development plans and protocol design,
consulting services (clinical and data management, regulatory advice and
filings, information systems and drug development strategy), site, investigator
and patient enrollment, preparation and submission of TIND and IND applications,
European study submissions, NDAs, electronic regulatory submissions also known
as computer assisted NDAs ("CANDAs") and computer assisted PLAs ("CAPLAs"),
product license applications ("PLAs"), European submission dossiers,
computerized patient randomization and dose assignment and tracking, Phase II -
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 experience in the preparation of study protocols and case report
forms ("CRFs"). The study protocol defines the medical issues to be examined in
evaluating the safety and efficacy of the drug under study, the number of
patients required to produce statistically valid results, the clinical tests to
be performed in the study, the time period over which the study will be
conducted, the frequency and dosage of drug administration and the exact
inclusion and exclusion criteria to be met for the patients enrolled in the
study. The success of the study depends not only on the ability of the protocol
to accurately reflect requirements of regulatory authorities, but also on the
ability of the protocol to fit coherently with the other aspects of the
development process and the ultimate marketing strategy for the drug. This
includes outcomes and pharmacoeconomic concerns and reimbursement planning. With
study protocol finalization, CRFs must be developed to record the desired
information and ensure that valid data are acquired in a form that is most
efficient for the investigator. The various other disciplines involved in the
drug development process, including data management, statistics and regulatory
affairs, must work closely with the clinical trial management project team to
assure that the right data are acquired in a form which is most efficient for
subsequent data entry, management analyses and reporting.
Investigator Recruitment. During 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. The success of a clinical trial depends, in large part, on the
performance of these investigators. Covance solicits the participation in the
study of investigators who contract directly with either Covance or its client.
Covance maintains and continually expands and refines its computerized database
of approximately 30,000 investigators. Information regarding Covance's
experience with these investigators, including factors relevant to rapid study
initiation, are contained in the database. Covance has worked with approximately
25,000 general practitioners in connection with the conduct of Phase III and IV
studies.
Study Monitoring. Covance provides study monitoring services which include
investigational site initiation, patient enrollment assistance and data
collection through subsequent site visits. These visits also serve to assure
that data are gathered according to GCP, the requirements of the client, as
specified in the study protocol or otherwise, and applicable regulations.
Covance focuses at an early stage on identifying and quickly completing the
critical rate-limiting steps of screening and
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selecting investigators, processing pre-study regulatory paperwork, obtaining
institutional review board approvals and scheduling investigational site
initiation visits.
Clinical Data Management and Biostatistical Analysis. Covance's data
management and biostatistical analysis services are managed by professionals
with extensive pharmaceutical and biotechnology industry experience in the
design and construction of local and multinational clinical trial databases.
Data management and biostatistical analysis services are offered as discrete
products and as part of an integrated drug development program. During the
design of development plans and protocols, Covance offers consulting services
relating to, and the determination of, sample size parameters for patient
enrollment, development of data analysis plans and randomization schemes. During
the conduct of clinical trials, Covance assists in the rapid acquisition of
clean and accurate data. Following completion of the clinical trials, Covance
assists in report preparation and regulatory submissions. Covance's
biostatisticians may participate with clients in meetings with the FDA to
present and discuss biostatistical analyses prepared by Covance. Covance has
expertise in electronically capturing and integrating geographically diverse
data. Covance employs a variety of software, which may be specified by clients
or combined with customized programs developed by Covance.
Clinical Development Technologies. To expedite the drug development process
and to help reduce costs, Covance created a proprietary drug management system
utilizing an array of interfaces, one of which is based on an Interactive Voice
Response System ("IVRS") and the Trial Tracker(SM) system, 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. Trial Tracker(SM), based on Lotus Notes(R) software,
provides clients with 24-hour access to study data, such as study patient
enrollment progress, patient visit information, CRF status, serious adverse
event experiences and other pertinent clinical trial information. Covance
continues to technologically update IVRS, launching a new computer "platform"
for IVRS in early 1997, further improving quality, shortening development
timeframes and doubling system programmers' productivity.
Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients in a manner designed to
complement parallel development processes to reduce overall development time.
These services are fully integrated with Covance's other services to accelerate
development speed consistent with good service and regulatory compliance.
Services in this area include integrated clinical/statistical reports,
manuscripts, risk/benefit assessment reports, package inserts, quality assurance
and environmental risk assessments. Covance believes it was one of the first
CROs to develop CANDAs and CAPLAs.
Treatment Investigational New Drug Applications. The TIND is an application
by a pharmaceutical or biotechnology sponsor and the associated procedure to
allow broader populations of patients to receive treatment with an
investigational new drug for a serious or immediate life-threatening disease,
such as AIDS or cancer, for which no comparable or satisfactory therapy is
available. This treatment is provided during the clinical trial phase of
development but does not typically use controlled clinical trials. The Company
is experienced with TINDs and has developed specialized systems for prompt
initiation and effective operation of TIND programs, such as computerized
patient screening, optical scanning of CRFs and drug management systems. Other
special TIND programs or systems involve providing project specific information
to physicians, patients and patient advocacy groups, and data processing,
management, analyses and reporting systems. Covance's EAP, which is conducted
pursuant to a TIND, is a mechanism that allows innovative new therapies for
life-threatening diseases to be given to expanded populations prior to FDA
approval.
Other Periapproval Studies. Besides TINDs, Phase IIIb studies (involving
studies conducted after NDA submission but before regulatory approval is issued)
and Phase IV studies, Covance performs other types of periapproval studies such
as post-marketing surveillance studies and Rx to O-T-C Switch studies.
Post-marketing surveillance studies are epidemiologically based evaluations of
the use of products in actual medical practice using a broad range of patients.
These studies use practicing physicians to evaluate primarily the safety profile
of the product under actual medical practice conditions. Post-marketing
surveillance studies are large, typically involving over 1,000 physicians and
thousands of patients, and usually focus on evaluating just a limited number of
key clinical outcomes, such as a particular side effect. In Rx to O-T-C Switch
studies, Covance gathers, on behalf of a sponsor, the necessary safety data to
obtain regulatory permission for the sale of its drug without the need of a
prescription. These studies are also large, well-controlled programs.
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Health Economics and Outcomes Services
Covance offers a wide range of health economics and outcomes services for
managed care organizations, hospitals, other health care providers and
pharmaceutical and device manufacturers. These services include outcomes and
pharmacoeconomic studies, reimbursement planning services and disease management
services, as discussed below.
Outcomes and Pharmacoeconomic Studies. Covance offers its clients a full
range of strategic and analytic services, including strategic planning,
quality-of-life assessment and economic studies (including feasibility studies,
protocol and instrument design and data analysis). Outcomes studies may be
prospective, often conducted in conjunction with clinical trials, or
retrospective. Many cost-effectiveness studies employ economic modeling
techniques to evaluate the full financial impact of new medical technologies.
When planning studies, the Company examines the audience for the study's
findings to determine which of the client's concerns (such as regulatory
approval, clinical acceptance, insurer coverage or insurer payment) might be
more fully informed by the availability of outcomes data, and then determines
how such data can be efficiently collected and communicated. Covance typically
involves academic and clinical experts to ensure that appropriate techniques are
used and to enhance study credibility and acceptance. Covance also designs most
studies with a goal of publishing its findings in respected, peer-reviewed
journals.
Covance believes that given the changing competitive pressures affecting the
pharmaceutical industry and the rising need to more rigorously demonstrate the
value of particular drugs, both in their own right and compared to other drugs
and treatment regimes, the ability to perform outcomes and pharmacoeconomic
studies will become increasingly important.
Reimbursement Planning. Covance offers its customers strategic reimbursement
and market planning services. These services enable clients to enhance the
commercial success of their medical products. Covance analyzes, on behalf of the
customer, who will pay for a medical product (e.g., third-party payors such as
private insurance companies or federal programs like Medicare) and what economic
barriers or opportunities exist for the product (e.g., claims coding, coverage
policy, or payment amounts). In addition, Covance often offers its reimbursement
planning activities in conjunction with its other services that evaluate
existing and potential market size, pricing, distribution and economic impact.
Through its Medical Technology Hotlines(R) division, Covance also provides
full service reimbursement case management, including: (1) contacting insurers
to investigate specific coverage and benefit matters, resolving denied claims
and educating insurers; (2) assisting manufacturers in designing and effectively
running their indigent patient programs, pursuant to which costly new products
are made available to patients who cannot afford them because of inadequate
insurance coverage or other cost reasons; (3) designing and administering
transition programs for manufacturers, which includes obtaining third-party
payment for a product for patients who had previously received it free as part
of a clinical trial; and (4) conducting reimbursement training seminars for
clients and their customers.
All of these services are supported by a dedicated information services group
that provides a range of data products, services and information systems,
including customized hospital cost reports, patient average lengths of stay or
mortality rates at the federal, state, local or individual hospital level. The
extensive economic and epidemiologic databases Covance maintains are used to
perform market research, determine the economics of a disease or inform
government authorities about the need for potential policy changes.
Disease Management Services. Working for a variety of customers, including
pharmaceutical and device manufacturers, managed care organizations, hospitals,
provider networks and computerized medical record companies, Covance designs and
implements systems that track patterns of care, patient outcomes and costs, and
develops programs and tools designed to improve quality and decrease costs of
care. Such programs and tools include medical practice guidelines and
computerized decision support tools.
Central Laboratory Services
Covance believes that the ability to provide high quality and sophisticated
central laboratory services is an integral aspect of what constitutes a full
service CRO. Covance has three facilities (located in the United States,
Switzerland and the United Kingdom) that provide central laboratory services,
two of which (the United States and Switzerland) are dedicated exclusively to
biopharmaceutical studies. The United States and Swiss facilities provide
clients with combinable data in studies that can be conducted separately, or
multinationally and simultaneously.
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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 sites, sequencing of
study participants visits and investigator ordering of additional tests and
ensures that all demographic data is complete and accurate and will produce for
the client reports that are customized to their specifications. The laboratories
provide a comprehensive audit trail by ensuring that all laboratory data are
traceable to source documents, are capable of delivering customized data
electronically within 24 hours of test completion and provide safety test
results within 48 hours of test completion from most locations. As the need for
central laboratory services expands geographically, the Company has expanded the
reach of its central laboratories services through contractual arrangements with
a leading South African laboratory and a leading Australian laboratory, each of
which allows Covance to combine the testing capabilities of such laboratory with
its own proprietary systems. In July 1997, Covance began a 112,000 square-foot
"build-to-suit" expansion of its 152,000 square-foot Indianapolis facility to
further accommodate expanding operations and future requirements. Management
expects that the Indianapolis facility expansion will be ready for occupancy by
mid-1998.
Pharmaceutical Packaging Services
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, wallet packaging, storage and site
distribution of clinical supplies and return services for unused supplies. With
the addition, in 1996, of Covance Pharmaceutical Packaging Services AG, Covance
further expanded its packaging capabilities. Management 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. In
1997, Covance completed its substantial renovation and upgrade to the 91,000
square-foot packaging facility in Horsham, United Kingdom which Covance had
purchased in 1996. The facility, which became fully operational with the
completion of its substantial renovation in June 1997, provides modern
pharmaceutical packaging operations at one of the largest packaging facilities
in Europe. Also in 1997, Covance began construction on a new, purpose designed,
"build-to-suit" 45,000 square-foot facility in Allschwil, Switzerland. This new
facility will replace Covance's existing 20,000 square-foot facility in Basel,
Switzerland to further increase European operations and capabilities. The new
Allschwil facility is expected to be ready for occupancy by mid-1998.
Customers and Marketing
Covance provides its product development services on a global basis to, among
others, the pharmaceutical and biotechnology industries. In 1997, Covance served
over 290 biopharmaceutical companies, including all 50 of the world's largest
pharmaceutical companies and 20 of the world's 25 largest biotechnology
companies. Of the 290 biopharmaceutical companies Covance serves, 45 are
Japanese. The Japanese biopharmaceutical companies are served by Covance's
United States and European operations.
For the year ended December 31, 1997, approximately 69% of Covance's net
revenues, 74% of Covance's operating income and 62% of Covance's identifiable
assets were attributed principally to United States operations, while
approximately 31% of Covance's net revenues, 26% of Covance's operating income
and 38% of Covance's identifiable assets were attributed to non-United States
operations. Approximately 61% of Covance's net revenues during 1997 were
attributed to the Company's late-stage development line of business.
Approximately 39% of Covance's net revenues during 1997 were attributed to the
Company's early development line of business. In 1997, no customer accounted for
more than 10% of the Company's net revenues, and only one customer accounted for
more than 5% of the Company's net revenues. In 1997, Covance's top five
customers accounted for approximately 20% of Covance's net revenues.
Covance's sales activities (including client contact and support) are
conducted by more than 120 sales and business development people based in
Covance's operations in the United States, Europe, Australia, Japan, Argentina
and Singapore. Most of Covance's business development personnel have technical
or scientific backgrounds.
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During 1997, Covance introduced a strategic business initiative to increase
its commercial success by reorganizing its marketing department. Covance has
moved from service specific marketing (which focused on one type of service
offering) to business segment-based or integrated capability-based marketing
(which focuses on the Company's many services). Further, the Company created a
consolidated sales force of key account directors, strategic account managers
and business opportunity managers, each responsible for optimizing business
opportunities (whether multi-capability or service specific) throughout the
Company's operations. Such individuals are focused upon marketing the Company's
services to new and existing clients, including multi-capability services, core
competencies, global capabilities, and the ability to adapt to client region
specific needs. Although centralized, the new marketing initiative will still
permit the Company to adapt its services/products to regional market differences
and specific client needs. Management believes that this strategic business
initiative has the potential to create greater awareness among clients of the
Company's range of services and to optimize the sale of large global drug
development programs.
Contractual Arrangements
Most of Covance's contracts are either fixed price, fee-for-service or
fee-for-service with a cap. To a lesser extent, some of the contracts are
fee-for-service without a cap. In cases where the contracts are fixed price,
Covance bears the cost of overruns, with certain exceptions, but benefits if the
costs are lower than anticipated. In cases where the contracts are
fee-for-service with a cap, the contracts contain an overall budget for the
trial based on time and cost estimates. If costs are lower than anticipated, the
customer keeps the savings, but if costs are higher than estimated, then Covance
is responsible for the overrun unless the increased cost is a result of a change
requested by the customer, such as an increase in the number of patients to be
enrolled or the type or amount of data to be collected. Contracts may range from
a few months to several years depending on the nature of the work performed. In
some cases, for multi-year contracts a portion of the contract fee is paid at
the time the study or trial is started with the balance of the contract fee
payable in installments 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 a
database.
Most of Covance's contracts for the provision of its services are terminable
by the customer either immediately or upon notice. Contracts may be terminated
for a variety of reasons, including the failure of a product to satisfy safety
requirements, unexpected or undesired results of the product, the customer's
decision to forego or terminate a particular study, insufficient enrollment or
investigator recruitment, or the Company's failure to properly discharge its
obligations thereunder.
Backlog
Certain of Covance's studies and projects are performed over an extended
period of time, which may be as long as several years. With respect to such
studies or projects, Covance maintains an order backlog to track anticipated net
revenues for such work that has yet to be earned. However, Covance does not
maintain an order backlog for certain services it provides because such services
are performed within a short period of time or where it is not otherwise
practical or feasible to maintain an order backlog.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however, Covance will work on a project prior to executing a
letter of intent and the backlog may include the net revenue expected from such
project.
No assurance can be given that the Company will be able to realize all or any
net revenues included in backlog. Although backlog can be meaningful to
management with respect to a particular study where study-specific information
is known (for example, study duration, performance clauses and other
study-specific contract terms), Covance believes that its aggregate backlog as
of any date is not necessarily a meaningful indicator of future results for a
variety of reasons, including the following: first, studies vary in duration.
For instance, some studies that are included in 1997 backlog may be completed in
1998, 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
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verbal approvals, letters of intent or contracts included in backlog are subject
to termination or delay at any time by the client or regulatory authorities.
Termination or delays can result from a number of reasons. Delayed contracts
remain in Covance's backlog pending determination of whether to continue, modify
or cancel the study.
Based upon the above discussion, Covance's aggregate backlog at December 31,
1997 and 1996 was in excess of $625 million and $500 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 1997 net
revenues, that the five largest CROs besides itself include Quintiles
Transnational Corporation, PPD/Pharmaco Inc., Huntington International Holdings
PLC, Parexel International Corporation and ClinTrials Research Inc.
There is competition among the larger CROs for both customers and acquisition
candidates. Companies may also choose to limit the CROs with whom they are
willing to work. In addition, there are few barriers to entry for small,
limited-service providers considering entering the CRO industry. CROs compete on
the basis of several factors, including reputation for on-time quality
performance, expertise and experience in specific therapeutic areas, scope of
service offerings, how well such services are integrated, strengths in various
geographic markets, price, technological expertise and efficient drug
development processes, the ability to acquire, process, analyze and report data
in a time-saving and accurate manner, the ability to manage large-scale clinical
trials both domestically and internationally, expertise and experience in health
economics and outcomes and size. The Company believes that it competes favorably
in all of these areas.
Relationship With Corning and Quest
Effective as of the Distribution Date, Corning, Quest and Covance entered
into certain agreements to provide for an orderly transition to the status of
three separate independent companies, to govern their relationship subsequent to
the Distributions and to provide for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Distributions.
Transaction Agreement. The Transaction Agreement between Corning, Quest and
the Company provided for, among other things, certain conditions precedent to
the Distributions, certain corporate transactions required to effect the
Distributions and other arrangements between Corning, Quest and Covance
subsequent to the Distributions. The Transaction Agreement provided for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate generally, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
business of the Company, Quest and Corning.
In addition to the specific indemnity described below, Corning, Quest and
Covance are obligated under the Transaction Agreement to indemnify and hold
harmless each other in respect of Indemnifiable Losses (as defined therein)
arising out of or otherwise relating to the management or conduct of their
respective businesses or the breach of any provision of the Transaction
Agreement. The Transaction Agreement also provided that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution Date in connection with the Distributions are to be
allocated among the parties. Except as set forth in the Transaction Agreement or
any related agreement, each party shall bear its own costs and expenses incurred
after the Distribution Date.
Spin-Off Tax Indemnification Agreements. Corning and Covance entered into a
tax indemnification agreement (the "Corning/Covance Spin-Off Tax Indemnification
Agreement") pursuant to which, among other things, Covance agreed with Corning
that during the period from December 31, 1996 to December 31, 1998 (the
"Restricted Period") (i) it would continue active conduct in its CRO business,
(ii) it would continue to own and manage at least 50% of the assets which it
owned immediately after the Distribution Date, and (iii) it would refrain from
certain stock issuances, mergers or liquidations, or any revisions to its Rights
Plan (as defined therein). Covance also agreed to indemnify Corning for Taxes
(as defined therein)
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arising from certain violations of the Corning/Covance Spin-Off Tax
Indemnification Agreement and for Taxes arising as a result of the purchase of
20% or more of Covance Stock during the Restricted Period or the commencement of
a tender or purchase offer by a third party for 20% or more of Covance stock. If
the Company's obligations under the Corning/Covance Spin-Off Tax Indemnification
Agreement were breached and, as a result thereof, one or both of the
Distributions do not qualify for the treatment stated in the Private Letter
Ruling issued by the Internal Revenue Service (the "IRS Ruling"), the Company
would be required to indemnify Corning for Taxes imposed, and such
indemnification obligations could exceed the Company's net asset value at such
time.
Quest and Covance also entered into a tax indemnification agreement which was
essentially the same as the Corning/Covance Spin-Off Tax Indemnification
Agreement, except that Covance made representations and covenants to and
indemnified Quest, as opposed to Corning. Quest and Covance also entered into a
second tax indemnification agreement which is essentially the same as the
spin-off tax indemnification agreement between Corning and Quest, except that
Quest made representations and covenants to and indemnified Covance as opposed
to Corning.
The various tax indemnification agreements described above also require
Covance to take such actions as Corning and Quest may reasonably request to
preserve the favorable tax treatment provided for in the rulings obtained from
the IRS in respect of the Distributions.
Tax Sharing Agreement. Corning, Quest and Covance entered into a tax sharing
agreement (the "Tax Sharing Agreement") which allocated responsibility for
federal income and various other taxes ("Taxes") among the three companies. The
Tax Sharing Agreement provides that, except for Taxes arising as a result of the
failure of either or both of the Distributions to qualify for the treatment
stated in the IRS Ruling (which Taxes are allocated either pursuant to the tax
indemnification agreements described above or as described below), Corning is
liable for and will pay the federal income taxes of the consolidated group that
includes Quest and Covance and their subsidiaries, provided, however, that Quest
and Covance were required to reimburse Corning for taxes for periods beginning
after December 31, 1995 in which they were members of the Corning consolidated
group and for which tax returns have not been filed as of the Distribution Date.
This reimbursement obligation is based on the hypothetical separate federal tax
liability of Quest and Covance, calculated on a separate consolidated basis,
subject to certain adjustments. Under the Tax Sharing Agreement, in the case of
adjustments by a taxing authority of a consolidated federal income tax or
certain other tax returns prepared by Corning which includes Quest or Covance,
then, subject to certain exceptions, Corning is liable for and will pay any tax
assessments, and is entitled to any tax refunds, resulting from such audit.
The Tax Sharing Agreement further provided that, if either of the
Distributions fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the tax
indemnification agreements described above), Taxes imposed upon or incurred by
Corning, Quest or Covance as a result of such failure are to be allocated among
Corning, Quest and Covance in such a manner as will take into account the extent
to which the actions or inactions of each may have contributed to such failure,
and Corning, Quest and Covance each will indemnify and hold harmless the other
from and against the taxes so allocated. If it is determined that none of the
companies contributed to the failure of such Distribution to qualify for the tax
treatment stated in the IRS Ruling, the liability for taxes will be borne by
each company in proportion to its relative average market capitalization as
determined by the average closing price for the common stock of each company
during the 20 trading-day period immediately following the Distribution Date. In
the event that either of the Distributions fails to qualify for the tax
treatment stated in the IRS Ruling and the liability for taxes as a result of
such failure is allocated among Corning, Quest and the Company, the liability so
allocated to the Company could exceed the net asset value of Covance.
Government Regulation
The laboratory, manufacturing and packaging services performed by Covance are
subject to various regulatory requirements designed to ensure the quality and
integrity of the testing, manufacturing and packaging processes. The industry
standards for conducting preclinical laboratory testing are embodied in the GLP
and GMP regulations and for central laboratory operations in the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"). Covance's central laboratory
in Geneva has also been certified by the College of American Pathologists
("CAP"). GMP sets forth the requirements for manufacturing facilities. The
standards of GLP and GMP are required by the FDA, by the Department of Health in
the United
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Kingdom and by similar regulatory authorities in other parts of the world. GLP
and GMP stipulate requirements for facilities, equipment and professional staff.
The regulations require standardized procedures for studies, for recording and
reporting data and for retaining appropriate records. To help satisfy its
compliance obligations, Covance has established quality assurance controls at
its laboratory and manufacturing facilities which monitor ongoing compliance
with GLP and GMP regulations and CLIA, as applicable, by auditing test data and
conducting inspections of testing and manufacturing procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. The FDA and many other
regulatory authorities require that test results submitted to such authorities
be based on studies conducted in accordance with GCP. These regulations require,
but are not limited to, the following: (1) complying with specific requirements
governing the selection of qualified investigators; (2) obtaining specific
written commitments from the investigators; (3) verifying that patient informed
consent is obtained; (4) ensuring adverse drug reactions are medically evaluated
and reported; (5) monitoring the validity and accuracy of data; (6) verifying
drug or device accountability; (7) instructing investigators and studies staff
to maintain records and reports; and (8) permitting appropriate governmental
authorities access to data for their review. Covance must also maintain reports
for each study for specified periods for auditing by the study sponsor and by
the FDA. As with GLP and GMP, noncompliance with GCP can result in the
disqualification of data collection during the clinical trial.
Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
International Conference on Harmonization-Good Clinical Practice Guidelines
("ICH-GCP Guidelines"), and the requirements of the applicable country. Although
the U.S. is a signatory to the ICH-GCP Guidelines, the FDA has not formally
adopted all of the guidelines as statutory regulations, but has currently
adopted them only as guidelines. In addition, FDA regulations and guidelines
serve as a basis for Covance's North American and Asian/Pacific standard
operating procedures. From an international perspective, when applicable,
Covance has implemented common standard operating procedures across regions to
assure consistency whenever it is feasible and appropriate to do so.
Covance's animal import and breeding facilities are also subject to a variety
of federal and state laws and regulations, including The Animal Welfare Act and
the rules and regulations promulgated thereunder by the United States Department
of Agriculture ("USDA"). These regulations establish the standards for the
humane treatment, care and handling of animals by dealers and research
facilities. Covance's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to comply with
applicable regulations for the humane treatment of the animals in its custody.
Besides being licensed by the USDA as both a dealer and research facility, this
business is also accredited by the American Association for the Accreditation of
Laboratory Animal Care and has registered assurance with the United States
National Institutes of Health Office of Protection for Research Risks.
The use of controlled substances in testing for drugs with a potential for
abuse is regulated by the Drug Enforcement Administration (the "DEA"). All
Covance laboratories and packaging sites using controlled substances for testing
or packaging purposes are licensed by the DEA.
Covance's United States laboratories are subject to licensing and regulation
under federal, state and local laws relating to hazard communication and
employee right-to-know regulations, the handling and disposal of medical
specimens and hazardous waste and radioactive materials, as well as to the
safety and health of laboratory employees. All Covance laboratories are 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
15
<PAGE>
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 Health
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.
Information Technology
Information systems are an integral part of the services and products the
Company provides. The Company has formed a group, led by its Chief Information
Officer, to assess the Year 2000 issue from an internal, supplier and customer
perspective and remediate any issues discovered. Although the Company believes
at this time that neither the costs nor expenses of the Year 2000 issue will be
material to the Company, the ultimate costs and expenses are currently unknown
and such costs or the consequences of failure to correct any Year 2000 issues
could have a material impact on the Company's financial condition, business or
operations.
Employees
At January 15, 1998, Covance had approximately 6,000 employees,
approximately 35% of whom are employed outside of the United States.
Approximately 31 of Covance's employees hold M.D. degrees, 188 hold Ph.D.
degrees, 14 hold Pharm.D. degrees, 36 hold D.V.M. degrees and 603 hold masters
or other postgraduate degrees. Management believes that its relations with its
employees are good.
Item 2. Properties
Covance both owns and leases its facilities. Covance's principal executive
offices are located in Princeton, New Jersey where it leases approximately
216,000 square feet of space in three buildings. The primary lease expires in
2004. In addition, in late 1997, Covance contracted with the landlord of its
Princeton facility for the lease of a "build to suit" 160,000 square-foot
facility. This new space will accommodate the growth of the Princeton corporate
office and clinical and periapproval operations. The building is expected to be
ready for occupancy in late 1998, and will be leased for a 15-year period. Also
in mid-1997, Covance leased a 32,000 square-foot office facility in Walnut
Creek, California to accommodate the growth of its clinical and periapproval
operations on the West Coast. The lease is for a 5-year term. In early 1997, the
Company also leased an additional 18,000 square feet at its Radnor, Pennsylvania
periapproval facility, for a total of approximately 60,000 square feet. The
Radnor lease expires in 2002 and has one three-year renewal term. Covance also
leases an aggregate of 42,500 square feet in several buildings in Maidenhead,
United Kingdom for its clinical and periapproval operations, and in late 1997
added an additional 27,000 square feet to accommodate expanding operations in
that location. Covance owns its 397,000 square-foot preclinical laboratory
located in Madison, Wisconsin, its 279,000 square-foot preclinical laboratory in
Harrogate, United Kingdom and its 50,000 square-foot preclinical laboratory in
Munster, Germany. Covance leases most of its 201,000 square-foot preclinical
laboratory in Vienna, Virginia. The leases expire in 1999 and have a 10-year
renewal option. It also owns several of the buildings in Vienna, Virginia.
Covance also leases its 152,000 square-foot pharmaceutical laboratory in
16
<PAGE>
Indianapolis, Indiana, which lease was recently extended to 2013, with renewal
options, in connection with the lease of an additional 112,000 square-foot,
"build-to-suit" adjoining facility, expected to be available for occupancy by
mid-1998. Covance leases its 51,000 square-foot pharmaceutical laboratory in
Geneva, Switzerland, which lease expires in 2000. Covance's domestic packaging
operations are conducted from its principal packaging facility in Allentown,
Pennsylvania. The packaging leases are for approximately 100,000 square feet of
space and they all expire in 1999. In addition, in October 1996, Covance
purchased a 91,000 square-foot former pharmaceutical manufacturing facility in
Horsham, United Kingdom. With its renovation completed in June 1997, the Horsham
facility is used to provide pharmaceutical packaging, clinical and periapproval
services and health economics and outcomes services. Also in 1997, Covance began
construction on a new, purpose-designed, "build-to-suit" 45,000 square-foot
facility in Allschwil, Switzerland to further enhance its packaging capabilities
in Europe, and to replace its existing 20,000 square-foot facility, located in
Basel, Switzerland. The new Allschwil facility is expected to be completed by
mid-1998. Covance Biotechnology's 109,000 square-foot facility in North Carolina
is leased. Covance also owns or leases other facilities in the United States,
Canada, Europe, Asia and Latin America.
Item 3. Legal Proceedings
Covance is party to lawsuits and administrative proceedings incidental to the
normal course of its business. Covance does not believe that any liabilities
related to such lawsuits or proceedings will have a material effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange (symbol:
CVD). The following table sets forth the high and low sales prices on the New
York Stock Exchange since the Company's Common Stock began trading on a "when
issued" basis on December 17, 1996. The Company's Common Stock began trading
"regular way" on January 14, 1997.
Quarter Ended High Low
- ------------- ---- ---
Fourth Quarter 1996(1) $25.00 $20.875
First Quarter 1997 $22.875 $15.50
Second Quarter 1997 $20.625 $14.625
Third Quarter 1997 $23.1875 $18.125
Fourth Quarter 1997 $22.75 $17.0625
- -----------
(1) December 17, 1996 through December 31, 1996
As of February 10, 1998, there were 9,826 holders of record of the Company's
Common Stock.
The Company has not paid any dividends during 1997 or 1996 (except dividends
paid to Corning in 1996). The Company does not currently intend to pay dividends
in the foreseeable future, but rather, intends to reinvest earnings in the
Company's business. The Company is also restricted (subject to certain
exceptions) from paying dividends on its Common Stock by certain covenants
contained in a credit agreement to which the Company is a party.
17
<PAGE>
Item 6. Selected Financial Data
The following table presents selected historical consolidated financial data
of Covance as of and for each of the years ended December 31, 1997, 1996, 1995,
1994 and 1993. This data has been derived from the audited consolidated
financial statements of Covance.
The selected historical consolidated financial data should be read in
conjunction with the audited Covance consolidated financial statements and notes
thereto ("Audited Covance Consolidated Financial Statements") filed elsewhere
herein. Historical consolidated financial data may not be indicative of
Covance's future performance. See the Audited Covance Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------- ---------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues.................. $590,651 $ 494,828 $ 409,174 $ 319,501 $289,697
Costs and expenses:
Cost of revenue ............. 389,785 324,345 270,726 213,490 192,783
Selling, general and
administrative .......... 92,329 80,014 64,201 48,892 42,949
Depreciation and
amortization ............ 30,877 25,204 22,070 18,520 16,984
Spin-off related charge ..... 27,404
Restructuring charge ........ 4,616
------- ---------- --------- --------- ---------
Total ................... 512,991 456,967 361,613 280,902 252,716
------- ---------- --------- --------- ---------
Income from operations ........ 77,660 37,861(a) 47,561(b) 38,599 36,981
------- ---------- --------- --------- ---------
Other expense, net
Interest expense, net ....... 8,314 6,791 5,269 4,307 4,421
Other expense (income) ...... 167 1,116 (784) (712) 852
------- ---------- --------- --------- ---------
8,481 7,907 4,485 3,595 5,273
------- ---------- --------- --------- ---------
Income before taxes and
equity investee results ..... 69,179 29,954 (a) 43,076(b) 35,004 31,708
Taxes on income ............... 29,367 17,377 18,445 14,924 13,506
Equity investee loss (gain) ... 58 (139) 405 435 1,391
------- ---------- --------- --------- ---------
Net income .................... $ 39,754 $ 12,716 (a) $ 24,226(b) $19,645 $16,811
======= ========== ========= ========= =========
Basic earnings per share....... $ 0.69 $ 0.22 N/A N/A N/A
Diluted earnings per share..... $ 0.69 N/A (c) N/A N/A N/A
Balance Sheet Data:
Working capital ............. $ 59,488 $ 65,946 $ 18,472 $ 12,961 $ 12,076
Total assets ................ 484,014 451,047 322,510 271,992 229,693
Long-term debt .............. 132,423 163,000 89,836 75,178 69,239
Stockholders' equity......... 157,057 110,704 82,517 63,908 49,388
Other Financial Data:
Gross margin................. 34.0% 34.5% 33.8% 33.2% 33.5%
Operating margin............. 13.1% 13.2%(d) 12.8%(e) 12.1% 12.8%
Net margin................... 6.7% 6.6%(d) 6.6%(e) 6.1% 5.8%
Current ratio................ 1.35 1.43 1.15 1.12 0.98
Debt to capital.............. 0.46 0.60 0.52 0.54 0.58
Book value per share......... 2.74 1.94 N/A N/A N/A
Net days sales outstanding... 48 50 47 33 30
</TABLE>
- ------------
(a) Excluding the impact of the fourth quarter 1996 one-time spin-off related
charge totaling $27,404 ($19,725 net of tax), income from operations,
income before taxes and equity investee results and net income for the
year ended December 31, 1996 was $65,265, $57,358 and $32,441,
respectively, and basic earnings per share ("EPS") was $0.57.
(b) Excluding the impact of the second quarter 1995 restructuring charge
totaling $4,616 ($2,770 net of tax), income from operations, income before
taxes and equity investee results and net income for the year ended
December 31, 1995 was $52,177, $47,692 and $26,996, respectively.
(c) Since Covance common stock began "regular way" trading on the NYSE on
January 14, 1997, computation of diluted EPS for 1996 is not possible.
(d) Operating margin and net margin exclude the income statement impact of
the fourth quarter 1996 one-time spin-off related charge. Including the
impact of this charge, operating income and net margin were 7.7% and
2.6%, respectively.
(e) Operating margin and net margin exclude the income statement impact of
the second quarter 1995 restructuring charge. Including this charge,
operating income and net margin were 11.6% and 5.9%, respectively.
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, Covance also
provides services such as health economics and outcomes for managed care
organizations, hospitals and other health care providers and laboratory testing
services to the chemical, agrochemical and food industries. The foregoing
services can be broadly classified into two lines of business: early development
services (preclinical, Phase I and biomanufacturing) and late-stage development
services (clinical and periapproval, central laboratory, pharmaceutical
packaging and health economics and outcomes). Covance believes it is one of the
largest biopharmaceutical CROs, based on 1997 annual net revenues, 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.
The operations 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 1995 through the present, Covance has acquired three new operations and
formed a major new business venture. Specifically, in January 1995, Covance
expanded its offering of value added product development services with the
acquisition of National Packaging Systems, Inc., a pharmaceutical packaging
company, in a transaction accounted for as a purchase business combination. In
February 1995, Covance formed Covance Biotechnology, a majority-owned company
which has enabled Covance to engage in the manufacture of biologics since the
facility began operations in December 1996. 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 of the assets and
substantially all of the liabilities of Health Technology Associates, Inc.
("HTA"), a health economics and outcomes company, in a transaction accounted for
as a purchase business combination. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of Swiss-based
CRS Pacamed AG, in a transaction accounted for as a purchase business
combination. In addition, Covance acquired a 91,000 square foot facility in
Horsham, United Kingdom, which is used to provide, among other things,
pharmaceutical packaging services in Europe.
Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is recognized as costs are incurred on the basis of
the relationship between costs incurred and estimated total costs. Typically,
Covance's contracts are either fixed price, fee-for-service or fee-for-service
with 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 a portion of the contract fee is paid at the
time the trial is initiated, with performance-based installments payable over
the contract duration as milestones are achieved. Covance routinely subcontracts
with independent physician investigators in connection with multi-site clinical
trials. Investigator fees are not reflected in net revenues or expenses since
such fees are granted by customers on a "pass-through basis" without risk or
reward to Covance. While most contracts are terminable either immediately or
upon notice by the client, they typically require payment of expenses to wind
down a study, payment of fees earned to date, and, in some cases, a termination
fee or a payment of some portion of the fees or profit that could have been
earned under the contract if it had not been terminated early.
Covance's cost of revenue includes appropriate amounts necessary to complete
the revenue and earnings process, and includes direct labor and related
benefit charges, other direct costs and allocable expenses (including indirect
labor, facility charges and information technology costs). These costs, as a
percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 200 basis points in either direction),
principally as a result of changes in labor utilization and the mix of service
offerings involving hundreds of studies conducted during any period of time.
Accordingly,
20
<PAGE>
changes in cost of revenue as a percentage of net revenues plus or minus 200
basis points can be experienced from one period to another.
Results of Operations
Year ended December 31, 1997 Compared with Year Ended December 31, 1996. Net
revenues increased 19.4% to $590.7 million for 1997 from $494.8 million for
1996. Excluding the impact of 1996 acquisitions and the impact on net revenues
of foreign exchange differences between both years, growth in net revenues was
18.1%. Net revenues from Covance's late-stage development services, excluding
the impact of acquisitions and the impact on net revenues of foreign exchange
rate differences between both years, grew in excess of 20%, benefiting from the
continuing trend in outsourcing of clinical development activities. Net revenues
from Covance's early development services grew in excess of 10%.
Cost of revenue increased 20.2% to $389.8 million for 1997 from $324.3
million for 1996 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.0% for 1997 from 65.5% for
1996. This increase is primarily attributable to Covance's biomanufacturing
operations. During the first eleven months of 1996, all costs incurred in
Covance's biomanufacturing operations were of an administrative nature as the
biomanufacturing facility was being prepared for revenue producing operations
(which began in December 1996). Once the biomanufacturing operations began
generating revenue, many expenses shifted from administrative to cost of
revenue.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 15.4% to $92.3 million for
1997 from $80.0 million for 1996. As a percentage of net revenues, selling,
general and administrative expense decreased to 15.6% for 1997 from 16.2% for
1996. The decrease in selling, general and administrative expense as a
percentage of net revenues is primarily a result of two factors. The shift in
expenses in Covance's biomanufacturing operations, as discussed above, accounts
for most of the reduction in selling, general and administrative expense as a
percentage of net revenues for 1997 compared to 1996. Second, as a wholly-owned
business of Corning, certain administrative activities were historically
performed on Covance's behalf by Corning. Charges incurred for these services
totaled $3.4 million, or 0.7% of net revenues, in 1996. While these charges are
no longer incurred as a result of Covance's spin-off from Corning, they have
been substantially, but not entirely, replaced by internal costs as additional
resources continue to be added to perform the services previously provided by
Corning, as well as to perform functions new to Covance as a separate publicly
traded company.
Depreciation and amortization increased 22.5% to $30.9 million or 5.2% of net
revenues for 1997 from $25.2 million or 5.1% of net revenues for 1996 as the
growth in these non-cash charges outpaced the increase in net revenues.
Inclusive of a special non-recurring charge in 1996, income from operations
increased $39.8 million to $77.7 million for 1997 from $37.9 million for 1996.
During the fourth quarter of 1996, Covance recorded a large one-time charge
totaling $27.4 million ($19.7 million after tax) associated with its spin-off
from Corning. This charge consisted of the cost to establish and fund two
employee stock ownership plans ($16.7 million) and the direct expenses incurred
to establish Covance as a separate publicly traded company ($10.7 million).
Excluding the impact of the 1996 spin-off related charge, income from operations
increased $12.4 million or 19.0% to $77.7 million for 1997 as compared to $65.3
million for 1996. Income from operations as a percentage of net revenues
decreased from 13.2% for 1996 to 13.1% for 1997.
Other expense (net) increased $0.6 million to $8.5 million for 1997 from $7.9
million for 1996, due to an increase in net interest expense of $1.5 million,
partially offset by a decrease in net foreign exchange transaction losses of
$0.9 million, in 1997 as compared to 1996.
Covance's effective tax rate, excluding the special non-recurring charge in
1996, decreased to 42.5% for 1997 from 43.7% for 1996. Since Covance operates on
a global basis, its effective tax rate is subject to variation from year to year
as the geographic distribution of its pre-tax earnings changes.
Net income increased to $39.8 million for 1997 from $12.7 million for 1996.
Excluding the after tax impact of the 1996 spin-off related charge, net income
increased $7.3 million or 22.5%.
21
<PAGE>
Year ended December 31, 1996 Compared with Year Ended December 31, 1995. Net
revenues increased 20.9% to $494.8 million for 1996 from $409.2 million for
1995. Excluding the impact of 1996 acquisitions, growth in net revenues was
16.4%. Net revenues from Covance's late-stage development services, excluding
the recently acquired health economics and outcomes and Swiss packaging
operations, grew approximately 20%, benefiting from the continuing trend in
outsourcing of clinical development activities, while net revenues from
Covance's early development operations grew approximately 10%.
Cost of revenue increased 19.8% to $324.3 million for 1996 from $270.7
million for 1995 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, decreased to 65.5% for 1996 from 66.2% for
1995.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 24.6% to $80.0 million for
1996 from $64.2 million for 1995. As a percentage of net revenues, selling,
general and administrative expense increased to 16.2% for 1996 from 15.7% for
1995. Contributing to the increase in selling, general and administrative
expense were a continuing increase in Covance's corporate center function,
increasing pre-operating costs relative to Covance's biomanufacturing
operations, investment in a Covance-wide global sales force initiative,
administrative costs associated with the establishment of Covance's new
Singapore operation and the evaluation of further geographic expansion
opportunities, partially offset by a reduction in certain administrative costs
allocated by Corning and affiliates.
Depreciation and amortization increased 14.2% to $25.2 million or 5.1% of net
revenues for 1996 from $22.1 million or 5.4% of net revenues for 1995 as the
growth in net revenues outpaced the increase in these non-cash charges.
Inclusive of special non-recurring charges in both years, income from
operations decreased $9.7 million to $37.9 million for 1996 from $47.6 million
for 1995. During the fourth quarter of 1996, Covance recorded a large one-time
charge totaling $27.4 million ($19.7 million after tax) associated with its
spin-off from Corning. During the second quarter of 1995, Covance recorded a
restructuring provision totaling $4.6 million ($2.8 million after tax) as a
result of management's decision to discontinue certain nonstrategic operations.
Excluding the impact of the 1996 spin-off related charge and the 1995
restructuring provision, income from operations increased 25.1% to $65.3 million
or 13.2% of net revenues for 1996 from $52.2 million or 12.8% of net revenues
for 1995.
Other expense (net) increased $3.4 million to $7.9 million for 1996 from $4.5
million for 1995, due to net foreign exchange transaction losses of $1.1 million
incurred in 1996 as compared to net gains of $0.8 million recorded in 1995 and
to an increase in net interest expense of $1.5 million.
Covance's effective tax rate, excluding the special non-recurring charges in
both years, increased to 43.7% for 1996 from 42.5% for 1995. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic distribution of its pre-tax earnings changes.
Net income decreased to $12.7 million for 1996 from $24.2 million for 1995.
Excluding the after tax impact of the 1996 spin-off related charge and 1995
restructuring provision, net income increased $5.4 million or 20.2% to $32.4
million from $27.0 million for 1995.
Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant drug development trials,
termination of drug development trials, acquisitions and exchange rate
fluctuations. Delays and terminations of studies or trials are often the result
of actions taken by clients or regulatory authorities and are not typically
controllable by Covance. Since a large amount of Covance's operating costs are
relatively fixed while revenue is subject to fluctuation, minor variations in
the commencement, progress or completion of drug development trials may cause
significant variations in quarterly operating results.
The following table presents unaudited quarterly operating results of Covance
for each of the eight most recent fiscal quarters during the period ended
December 31, 1997. In the opinion of Covance, this information has been prepared
on the same basis
22
<PAGE>
as the Audited Covance Consolidated Financial Statements and reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for those periods. This quarterly
financial data should be read in conjunction with the Audited Covance
Consolidated Financial Statements included elsewhere herein. Operating results
for any quarter are not necessarily indicative of the results to be expected in
any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- --------- ---------- --------- --------- -------- ---------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 108,697 $ 121,530 $ 127,179 $137,422 $ 135,723 $ 145,392 $ 151,464 $ 158,072
Operating expenses.............. 94,659 104,195 109,677 148,436 118,584 125,170 130,562 138,675
--------- --------- ---------- --------- --------- -------- ---------- ---------
Income (loss) from operations 14,038 17,335 17,502 (11,014)(a) 17,139 20,222 20,902 19,397
Other expense, net.............. 1,156 1,615 1,550 3,586 2,489 1,648 2,127 2,217
--------- --------- ---------- --------- --------- -------- ---------- ---------
Income before taxes and equity
investee results.............. 12,882 15,720 15,952 (14,600)(a) 14,650 18,574 18,775 17,180
Taxes on income.................. 5,619 6,861 6,931 (2,034) 6,153 7,940 8,058 7,216
Equity investee loss (gain)..... (44) 29 (53) (71) (130) 115 (142) 215
--------- --------- ---------- --------- --------- --------- ---------- ---------
Net income (loss)............... $ 7,307 8,830 $ 9,074 $ (12,495)(a) $8,627 $ 10,519 $ 10,859 $ 9,749
========= ========= ========== ========= ========= ========= ========== =========
Basic earnings per share........ $ 0.13 $ 0.15 $ 0.16 $ (0.22)(a) $ 0.15 $ 0.18 $ 0.19 $ 0.17
Diluted earnings per share....... N/A N/A N/A N/A (b) $ 0.15 $ 0.18 $ 0.19 $ 0.17
- -----------
</TABLE>
- -----------
(a)Excluding the impact of the fourth quarter 1996 spin-off related charge
totaling $27,404 ($19,725 net of tax), income from operations, income before
taxes and equity investee results and net income were $16,390, $12,804 and
$7,230,respectively, and basic earnings per share was $0.13.
(b)Since Covance's common stock began "regular way" trading on the NYSE on
January 14, 1997, computation of diluted earnings per share for 1996 is not
possible.
Liquidity and Capital Resources
Covance has a centralized domestic cash management function whereby cash
received from operations is generally swept daily to a centrally managed
concentration account. Cash disbursements for operations are funded as needed
from the concentration account. From time to time excess cash balances are
maintained at Covance, generally for specific cash requirements.
In November 1996, Covance borrowed $160 million under a newly established
five-year $250 million senior revolving credit facility ("the Credit Facility")
to repay Corning and affiliates for all intercompany borrowings and income tax
liabilities existing at that time. At December 31, 1997, there was $120.0
million of outstanding borrowings and $11.2 million in outstanding letters of
credit, resulting in a remaining availability of $119.8 million under the Credit
Facility. Covance has several different interest rate options available to it
under the Credit Facility. Interest on all outstanding borrowings under the
Credit Facility during 1997 was computed based upon the London Interbank Offered
Rate plus a margin and approximated 6.0% per annum. The Credit Facility expires
in November 2001 and contains various covenants which, among other things, may
restrict Covance from engaging in certain financing activities and prohibits
Covance from paying cash dividends on the Covance Common Stock during a default
or an event of default, as defined in the Credit Facility, or if after giving
effect to the payment of such dividends Covance would not be in compliance with
the financial covenants of the Credit Facility. At December 31, 1997, Covance
was in compliance with the terms of the Credit Facility.
As of December 31, 1997, Covance Biotechnology had $3.0 million in long-term
debt outstanding with the North Carolina Biotechnology Center. This debt matures
in December 1999 and is guaranteed by Covance. In addition, Covance
23
<PAGE>
Biotechnology has a $10.0 million short-term revolving credit facility with a
bank, of which $10.0 million of borrowings were outstanding as of December 31,
1997. This short-term revolving credit facility carries interest at a rate
substantially equivalent to the rate in effect on Covance's borrowings under the
Credit Facility and is guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss
Francs from a bank. This loan bears interest at a fixed rate of 2.9% per annum
and matures in three years. In connection with the loan, Covance provided a
letter of credit in favor of the lender which may be drawn upon in event of
default. This letter of credit carries a variable cost which is presently 37.5
basis points per annum. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Management believes that the Credit Facility will provide Covance with
sufficient financial flexibility and ready access to cash on both a short-term
and a long-term basis to fund, as required, capital expenditures, potential
future acquisitions and other longer-term growth opportunities.
During the year ended December 31, 1997, Covance's operations provided net
cash of $76.6 million, an increase of $46.8 million from the corresponding 1996
amount. Cash flows from net earnings adjusted for non-cash activity provided
$84.7 million during 1997, up $31.0 million or 57.7% from the corresponding 1996
amount of $53.7 million. The change in net operating assets used $8.1 million in
cash during 1997 while this net change used $23.8 million in cash during 1996,
primarily due to an increase in accounts and unbilled receivables. Covance's
ratio of current assets to current liabilities was 1.35 at December 31, 1997 and
1.43 at December 31, 1996.
Investing activities for the years ended December 31, 1997 and 1996 included
capital spending to expand existing operations and purchase equipment to enhance
scientific technology capabilities. Investing activities for the year ended
December 31, 1996 also included acquisitions. In March 1996, Covance acquired
Health Technology Associates, Inc. for a cash payment of approximately $14.9
million. In October 1996, Covance acquired CRS Pacamed AG for a cash payment of
approximately $14.4 million. In October 1996, Covance also acquired a new
facility which is used to provide, among other things, pharmaceutical packaging
services in Europe for a cash payment of approximately $9.0 million. Also in
October 1996, Covance paid $7.0 million in contingent purchase price in
connection with its 1995 acquisition of National Packaging Systems, Inc. During
1997 and 1996, Covance spent approximately $56.5 million and $37.9 million
(excluding the October 1996 facility purchase of $9.0 million), respectively, on
capital expenditures for maintenance and upgrade of existing equipment,
outfitting of new facilities and computer equipment and software for newly hired
employees.
As described in Note 10 to the Audited Covance Consolidated Financial
Statements, a Covance subsidiary, Covance Biotechnology, entered into an
operating lease arrangement in June 1995 whereby a custom-designed,
fully-equipped facility was constructed. The lease, which commenced in December
1996 upon completion of construction of the facility, requires minimum annual
lease payments of approximately $5.7 million.
Foreign Currency
Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical and periapproval services. The first risk occurs
as revenue recognized for services rendered is denominated in a currency
different from the currency in which the subsidiary's expenses are incurred. As
a result, the subsidiary's net revenues and resultant earnings can be affected
by fluctuations in exchange rates. While some contracts provide that currency
fluctuations from the rates in effect at the time the contract is executed are
the responsibility of the customer and others provide that currency fluctuations
from the rates in effect at the time the contract is executed up to a specified
threshold (generally plus or minus a few percentage points) are absorbed by
Covance while fluctuations in excess of the threshold are the customer's
responsibility, most contracts do not specifically address responsibility for
currency fluctuations. Historically, fluctuations in exchange rates from those
in effect at the time contracts were executed have not had a material effect
upon Covance's consolidated financial results.
24
<PAGE>
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, Covance recognizes a receivable at the
time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
and payment from the customer is received will result in Covance receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. This difference is recognized by Covance as a foreign currency
transaction gain or loss, as applicable, and is reported in other expense
(income) in Covance's Consolidated Statements of Income.
Finally, Covance's consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
Covance's consolidated financial results. The process by which each foreign
subsidiary's financial results are translated into U.S. dollars is as follows:
income statement accounts are translated at average exchange rates for the
period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical exchange
rates. Translation of the balance sheet in this manner affects the stockholders'
equity account, referred to as the cumulative translation adjustment account.
This account exists only in the foreign subsidiary's U.S. dollar balance sheet
and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. To date such cumulative translation adjustments have not been material
to Covance's consolidated financial position.
Taxes
Since Covance conducts operations on a global basis, Covance's effective tax
rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. See
Note 5 to the Audited Covance Consolidated Financial Statements.
Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result, Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
Year 2000
Information systems are an integral part of the services and products Covance
provides. The Company has formed a group, led by its Chief Information Officer,
to assess the Year 2000 issue from an internal, supplier and customer
perspective. Presently, this group consists of thirteen individuals who are
dedicated full-time to the Year 2000 project. Covance plans to add six
individuals to this group during 1998. Covance's Year 2000 plan will have risk
assessment, evaluation and remediation schedules finalized during 1998. For
business critical systems, remediation, validation and implementation is already
underway. This plan is being executed under the guidance of Covance's senior
management, who will receive periodic progress reports from the group. Although
the Company believes at this time that neither the costs nor expenses of the
Year 2000 issue will be material to the Company, the ultimate costs and expenses
are currently unknown and such costs or the consequences of failure to correct
any Year 2000 issues could have a material impact on Covance's financial
conditions, business or operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). This Statement
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. This Statement shall be effective for
financial statements for periods
25
<PAGE>
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods presented for comparative purposes is required. Covance is in
the process of evaluating the disclosure requirements. This Statement, by its
nature, will not impact Covance's consolidated results of operations, financial
position or cash flows.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement shall be
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. Covance is in the process of evaluating the disclosure requirements.
This Statement, by its nature, will not impact Covance's consolidated results of
operations, financial position or cash flows.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
None.
26
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Price Waterhouse LLP--Independent Accountants ................................................................ 28
Consolidated Balance Sheets--December 31, 1997 and 1996 ................................................................ 29
Consolidated Statements of Income--Years ended December 31, 1997, 1996 and 1995......................................... 30
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995..................................... 31
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996 and 1995........................... 32
Notes to Consolidated Financial Statements ............................................................................. 33
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Covance Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of stockholders' equity
appearing on pages 29 through 45 present fairly, in all material respects, the
financial position of Covance Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Morristown, NJ
January 16, 1998
28
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in thousands) 1997 1996
----- -----
Assets
Current Assets:
Cash and cash equivalents............... $ 28,027 $ 25,416
Accounts receivable, net................ 104,789 93,700
Unbilled services....................... 40,980 39,313
Inventory............................... 18,088 16,410
Deferred income taxes................... 10,474 17,529
Prepaid expenses and other assets....... 28,120 25,526
-------- --------
Total Current Assets................ 230,478 217,894
Property and equipment, net................. 193,129 167,809
Goodwill, net............................... 50,979 53,271
Other assets................................ 9,428 12,073
-------- --------
Total Assets........................ $484,014 $451,047
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable........................ $ 24,344 $ 26,652
Accrued payroll and benefits............ 39,647 28,212
Accrued expenses and other liabilities.. 30,702 35,840
Unearned revenue........................ 62,099 57,794
Short-term debt......................... 10,000 --
Income taxes payable.................... 4,198 3,450
-------- --------
Total Current Liabilities........... 170,990 151,948
Long-term debt.............................. 132,423 163,000
Deferred income taxes....................... 10,758 9,957
Other liabilities........................... 12,786 15,438
-------- --------
Total Liabilities................... 326,957 340,343
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock - Par value $0.01 per share;
140,000,000 shares authorized;
57,678,977 and 57,063,644 shares
issued and outstanding at December 31,
1997 and 1996, respectively 577 571
Paid-in capital......................... 58,276 48,970
Retained earnings....................... 97,764 58,010
Cumulative translation adjustment....... 440 3,153
-------- --------
Total Stockholders' Equity.......... 157,057 110,704
-------- --------
Total Liabilities and Stockholders'
Equity............................ $484,014 $451,047
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1997 1996 1995
----- ------ ------
<S> <C> <C> <C>
Net revenues...................................... $ 590,651 $ 494,828 $409,174
Cost and expenses:
Cost of revenue................................. 389,785 324,345 270,726
Selling, general and administrative expenses.... 92,329 80,014 64,201
Depreciation and amortization................... 30,877 25,204 22,070
Spin-off related charge......................... -- 27,404 --
Restructuring charge............................ -- -- 4,616
-------- -------- --------
Total....................................... 512,991 456,967 361,613
-------- -------- --------
Income from operations............................ 77,660 37,861 47,561
-------- -------- --------
Other expense, net:
Interest expense, net........................... 8,314 6,791 5,269
Other expense (income).......................... 167 1,116 (784)
-------- -------- --------
Other expense, net......................... 8,481 7,907 4,485
-------- -------- --------
Income before taxes and equity investee results... 69,179 29,954 43,076
Taxes on income................................... 29,367 17,377 18,445
Equity investee loss (gain)....................... 58 (139) 405
-------- -------- --------
Net income........................................ $ 39,754 $ 12,716 $ 24,226
======== ======== ========
Basic earnings per share.......................... $ 0.69 $ 0.22 N/A
Weighted average shares outstanding - basic....... 57,254,042 57,063,644 N/A
Diluted earnings per share........................ $ 0.69 N/A N/A
Weighted average shares outstanding - diluted..... 57,463,587 N/A N/A
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 39,754 $ 12,716 $ 24,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............................. 30,877 25,204 22,070
Stock issued under employee benefit and stock
compensation plans...................................... 5,523 -- --
Deferred income tax provision.............................. 7,856 (3,188) (4,503)
ESOP component of spin-off related charge.................. -- 16,673 --
Restructuring reserve, net of cash paid.................... -- -- 2,965
Related party charges...................................... -- 2,052 3,288
Other...................................................... 673 237 1,266
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable..................................... (11,089) (12,444) (10,082)
Unbilled services....................................... (1,667) (18,568) (5,023)
Inventory............................................... (1,678) (1,911) (2,576)
Accounts payable........................................ (2,308) 2,327 6,783
Accrued liabilities..................................... 6,297 15,800 11,669
Unearned revenue........................................ 4,305 14,701 (7,556)
Income taxes payable.................................... 748 (13,606) 8,673
Other assets and liabilities, net....................... (2,662) (10,135) (6,094)
-------- --------- --------
Net cash provided by operating activities...................... 76,629 29,858 45,106
-------- --------- --------
Cash flows from investing activities:
Capital expenditures....................................... (56,538) (46,941) (34,792)
Acquisition of businesses, net of cash acquired............ -- (33,883) (14,000)
Other, net................................................. 196 34 571
-------- --------- --------
Net cash used in investing activities.......................... (56,342) (80,790) (48,221)
-------- --------- --------
Cash flows from financing activities:
Repayments of long-term debt............................... (40,000) -- --
Proceeds from short-term debt.............................. 10,000 -- --
Proceeds from long-term debt............................... 9,423 160,000 --
Stock issued under employee stock purchase and stock
option plans............................................. 2,901 -- --
Capital contributions...................................... -- -- 1,000
Due to Corning Incorporated and affiliates................. -- (88,361) 14,236
Dividends paid to Corning.................................. -- (3,359) (10,229)
-------- --------- --------
Net cash provided by (used in) financing activities............ (17,676) 68,280 5,007
-------- --------- --------
Net change in cash and cash equivalents........................ 2,611 17,348 1,892
Cash and cash equivalents, beginning of year................... 25,416 8,068 6,176
-------- --------- --------
Cash and cash equivalents, end of year......................... $ 28,027 $ 25,416 $ 8,068
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Cumulative Total
Common Paid-in Retained Translation Stockholders'
(Dollars in thousands) Stock Capital Earnings Adjustment Equity
-------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994............ -- $ 26,528 $ 34,656 $ 2,724 $ 63,908
Net income............................ -- -- 24,226 -- 24,226
Dividends paid to Corning............. -- -- (10,229) -- (10,229)
Capital contribution.................. -- 4,288 -- -- 4,288
Currency translation adjustment....... -- -- -- 324 324
-------- -------- ------- ------- ---------
Balance, December 31, 1995............ -- 30,816 48,653 3,048 82,517
Net income............................ -- -- 12,716 -- 12,716
Dividends paid to Corning............. -- -- (3,359) -- (3,359)
Capital contribution.................. -- 2,052 -- -- 2,052
Adjustment to reflect par value
of shares issued in spin-off
(56,208,644 shares).................. $ 562 (562) -- -- --
ESOP contribution..................... 9 16,664 -- -- 16,673
Currency translation adjustment....... -- -- -- 105 105
-------- -------- -------- -------- ---------
Balance, December 31, 1996............ 571 48,970 58,010 3,153 110,704
Net income............................ -- -- 39,754 -- 39,754
Capital contribution.................. -- 888 -- -- 888
Shares issued under various employee
benefit and stock compensation plans 6 8,245 -- -- 8,251
Stock option exercises................ -- 173 -- -- 173
Currency translation adjustment....... -- -- -- (2,713) (2,713)
-------- -------- -------- -------- ---------
Balance, December 31, 1997............ $ 577 $ 58,276 $ 97,764 $ 440 $ 157,057
======== ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
1. Organization and Spin-off
Organization
Covance Inc. and its subsidiaries ("Covance") is a leading contract research
organization providing a wide range of integrated product development services
on a worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition and to a lesser extent, Covance provides services such
as health economics and outcomes for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. Covance's operations involve a single industry
segment for financial reporting purposes. At the present time, operations are
principally focused in the United States and Europe.
Spin-off
Prior to December 31, 1996, Covance was an indirect wholly-owned business of
Corning Incorporated ("Corning"). In May 1996, Corning's Board of Directors
approved a plan to distribute to its stockholders on a pro rata tax-free basis
all of its ownership interest in Covance (the "Spin-Off Distribution"). The
intent of the plan was to create an independent, publicly-owned company
(Covance). The Spin-Off Distribution was complete on December 31, 1996. Under
the terms of the Spin-Off Distribution, shareholders of record of Corning common
stock on December 31, 1996 received one share of Covance common stock for each
four shares of Corning common stock held, resulting in Covance issuing
approximately 56.2 million shares of its common stock.
In connection with the Spin-Off Distribution, Covance recorded a one-time
charge totaling $27.4 million ($19.7 million net of tax), consisting of the cost
of establishing and funding two employee stock ownership plans (collectively,
the "ESOP") and the direct costs incurred to effect the Spin-Off Distribution.
The ESOP component of the charge, which totaled $16.7 million, represents the
fair market value of the shares (approximately 855,000) issued into the ESOP.
The direct costs consist primarily of accounting, legal and other professional
fees associated with Covance being established as a separate publicly traded
entity.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Covance, including Covance Biotechnology Services Inc. ("Covance
Biotechnology"), a majority owned business. All significant intercompany
accounts and transactions are eliminated. The equity method of accounting is
used for investments in affiliates in which Covance owns between 20 and 50
percent.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, income and expense items are translated to United States
dollars at average rates of exchange prevailing during the year, assets and
liabilities are translated at year-end exchange rates and equity accounts are
translated at historical exchange rates. Translation adjustments are
33
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
accumulated in a separate component of stockholders' equity. Transaction gains
and losses are included in the determination of income.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at date of purchase and consist
principally of amounts temporarily invested in money market funds.
Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and long and short-term debt are not materially
different than their carrying amounts as reported at December 31, 1997 and 1996.
Accounts receivable and unbilled services represent amounts due from Covance
customers who are concentrated primarily in the pharmaceutical and biotechnology
industries. Covance monitors the creditworthiness of its customers to which it
grants credit terms in the ordinary course of business. Although Covance
customers are concentrated primarily within these two industries, management
considers the likelihood of material credit risk exposure as remote. In
addition, in some cases Covance requires advance payment for a portion of the
contract price from its customers upon the signing of a contract for services.
Historically, bad debts have been minimal.
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 on a straight-line basis over the period
expected to be benefited, which ranges from twenty to forty years.
Impairment of Long-Lived Assets
Assessments of the recoverability of long-lived assets are conducted when
events or changes in circumstances occur that indicate that the carrying value
of the asset may not be recoverable. The assessment of possible impairment is
based upon the ability to recover the asset from the expected future
undiscounted cash flows of related operations.
Revenue Recognition
Revenue is recognized using the cost-to-cost type percentage-of-completion
method of accounting for services rendered in connection with contractual
arrangements, which generally range from a few months to two years. Revenue is
recognized as costs are incurred on the basis of the relationship between costs
incurred and total estimated costs. Contracts may contain provisions for
renegotiation in the event of cost overruns due to changes in the level of work
scope. Renegotiated amounts are included in revenue when earned and realization
is assured. Provisions for losses to be incurred on contracts are recognized in
full in the period in which it is determined that a loss will result from
performance of the contractual arrangement. Most service contracts may be
terminated for a variety of reasons by Covance's customers either immediately or
upon notice. The contracts often require payments to Covance to recover costs
incurred, including costs to wind down the study, and payment of fees earned
34
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
to date, and in some cases to provide Covance with a portion of the fees or
profits that would have been earned under the contract had the contract not been
terminated early.
Revenue from performing clinical laboratory testing services is recognized as
tests are completed. Revenue from other activities is recognized as services are
performed or products are shipped.
Unbilled services are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms. In general,
amounts become billable upon the achievement of milestones or in accordance with
predetermined payment schedules. Unbilled services are billable to customers
within one year from the respective balance sheet date. Unearned revenue is
recorded for cash received from customers for which revenue has not been
recognized at the balance sheet date.
Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not reflected
in revenue or expense since such fees are granted by customers on a
"pass-through basis" without risk or reward to Covance.
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to complete
the revenue earning process and encompasses direct labor and related benefit
charges, other direct costs and allocable expenses (including facility charges,
indirect labor and information technology costs). Selling, general and
administrative expenses primarily consist of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative travel and
allocable expenses (facility charges and information technology costs).
Advertising expense is recognized as incurred.
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.
Supplemental Cash Flow Information
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
totaled $9.1 million, $6.5 million and $5.8 million, respectively. Cash paid for
income taxes for the years ended December 31, 1997, 1996 and 1995 totaled $27.9
million, $25.5 million and $16.7 million, respectively.
Earnings per share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 128, Earnings Per Share ("SFAS 128"), which supersedes
existing standards found in APB Opinion No. 15. This Statement specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, and for entities
with a complex capital structure requires the additional presentation of diluted
EPS on the face of the income statement. Basic EPS is computed by dividing net
income available to common stockholders by the weighted average number of shares
outstanding during the period. The computation of diluted EPS is similar to the
computation of basic EPS, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. This Statement is effective
for Covance's fiscal year ended December 31, 1997.
35
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
In computing diluted earnings per share for the year ended December 31, 1997,
the denominator was increased by 209,545 shares, representing the dilution of
stock options outstanding at December 31, 1997 with exercise prices less than
the average market price of Covance's Common Stock during 1997. Excluded from
the computation of diluted earnings per share were options to purchase 1,474,585
shares of common stock at prices ranging from $19.00 to $20.56 per share because
the exercise prices of such options were greater than the average market price
of Covance's Common Stock during 1997. Since Covance's Common Stock began
"regular way" trading on the NYSE on January 14, 1997, computation of diluted
earnings per share for 1996 is not possible.
Basic earnings per share has been presented for 1996 based upon the number of
Covance shares issued and outstanding as a result of the Spin-Off Distribution.
Historical EPS has not been presented for periods prior to 1996 because
Covance's status as an indirect wholly-owned business of Corning for such
periods does not permit a determination of the number of shares outstanding on a
comparable or consistent basis.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("SFAS 130"). This Statement establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
This Statement shall be effective for financial statements for periods beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods presented for comparative purposes is required. Covance is in the
process of evaluating the disclosure requirements. This Statement, by its
nature, will not impact Covance's consolidated results of operations, financial
position or cash flows.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement shall be
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. Covance is in the process of evaluating the disclosure requirements.
This Statement, by its nature, will not impact Covance's consolidated results of
operations, financial position or cash flows.
3. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consist of the
following:
1997 1996
-------- --------
Property and equipment at cost:
Land........................................ $ 6,859 $ 6,859
Buildings and improvements.................. 126,594 116,176
Equipment................................... 156,872 136,711
Furniture, fixtures & leasehold
improvements............................... 50,994 41,116
Construction-in-progress.................... 14,492 4,025
-------- --------
355,811 304,887
Less: Accumulated depreciation and amortization (162,682) (137,078)
-------- --------
Property and equipment, net.................... $ 193,129 $ 167,809
======== ========
Depreciation and amortization expense aggregated $28.0 million, $23.2 million
and $20.8 million for 1997, 1996 and 1995, respectively.
36
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
4. Acquisitions and Goodwill
In October 1996, Covance acquired the stock of CRS Pacamed AG (now known as
Covance Pharmaceutical Packaging Services AG) for a cash payment of
approximately $14.4 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction aggregated
$10.3 million.
In March 1996, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash payment
of approximately $14.9 million in a transaction accounted for as a purchase
business combination. In accordance with the terms of the asset purchase
agreement, Covance is contingently obligated to pay up to an additional $17.2
million in contingent purchase price if HTA achieves certain established
earnings targets for the three year period ending March 1999. The goodwill
resulting from the initial cash payment on this transaction aggregated $13.7
million.
In January 1995, Covance acquired National Packaging Systems, Inc. ("NPS",
now known as Covance Pharmaceutical Packaging Services Inc.) for an initial cash
payment of $14.0 million in a transaction accounted for as a purchase business
combination. In October 1996, Covance paid, pursuant to the terms of the
acquisition agreement, an additional $7.0 million in contingent purchase price
to former NPS shareholders as NPS achieved certain established earnings targets
for the period January 1995 through September 1996. The goodwill resulting from
this transaction aggregated $16.1 million.
Results of operations for these entities have been included in the
accompanying consolidated financial statements beginning on the respective dates
of acquisition. Pro forma information for these entities has not been presented,
due to their insignificance to Covance taken as a whole.
Goodwill associated with these and prior acquisitions aggregated $51.0
million and $53.3 million, net of accumulated amortization of $7.5 million and
$5.2 million at December 31, 1997 and 1996, respectively. Amortization expense
aggregated $2.3 million, $1.7 million and $0.9 million for 1997, 1996 and 1995,
respectively.
5. Taxes on Income
The components of income before taxes and the related provision (benefit) for
taxes on income for 1997, 1996 and 1995 are as follows:
1997 1996 1995
------- ------- -------
Income before taxes and equity
investee results:
Domestic............... $ 48,927 $ 23,259 $ 32,771
International.......... 20,252 6,695 10,305
------- ------- -------
Total................ $ 69,179 $ 29,954 $ 43,076
======= ======= =======
Federal income taxes:
Current provision...... $ 14,968 $ 17,108 $ 19,118
Deferred provision
(benefit)............. 2,700 (6,311) (6,760)
International income taxes:
Current provision (benefit) 3,987 1,248 (933)
Deferred provision..... 2,387 1,635 3,434
State and other income taxes:
Current provision...... 5,840 4,174 3,959
Deferred benefit....... (515) (477) (373)
------- ------- -------
Net income tax
provision......... $ 29,367 $ 17,377 $ 18,445
======= ======= =======
37
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
The differences between the provision for income taxes and income taxes
computed using the Federal statutory income tax rate for 1997, 1996 and 1995 are
as follows:
1997 1996 1995
----- ----- -----
Taxes at statutory rate........ 35.0% 35.0% 35.0%
State and local taxes, net of
Federal benefit............... 5.1 8.0 5.5
Non-deductible spin-off related
charge........................ -- 7.1 --
Goodwill amortization.......... 1.1 2.1 1.1
Impact of international
operations.................... (1.0) 1.8 (0.3)
Other, net..................... 2.3 4.0 1.5
---- ---- ----
Total.................. 42.5% 58.0% 42.8%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
1997 1996
----- -----
Current deferred tax assets:
Liabilities not currently
deductible.................... $ 8,007 $ 15,571
Net operating losses........... 3,793 2,332
Other.......................... 592 792
------- -------
Gross current deferred tax
assets........................ 12,392 18,695
Less: Valuation allowance...... (1,918) (1,166)
------- -------
Net current deferred tax assets $ 10,474 $ 17,529
======= =======
1997 1996
----- -----
Noncurrent deferred tax assets:
Liabilities not currently
deductible.................... $ 5,842 $ 5,256
Less: Valuation allowance...... (1,212) (1,212)
------- -------
Net noncurrent deferred tax
assets........................ 4,630 4,044
Noncurrent deferred tax liabilities:
Property and equipment......... (15,388) (14,001)
------- -------
Net noncurrent deferred tax
liabilities................... $ (10,758) $ (9,957)
======= =======
Covance currently provides income taxes on the earnings of foreign
subsidiaries to the extent they are taxable or expected to be remitted. Taxes
have not been provided on $33.6 million of accumulated foreign unremitted
earnings because those earnings are expected to remain invested indefinitely. It
is not practical to estimate the amount of additional tax that might be payable
if such accumulated earnings were remitted. Additionally, if such accumulated
earnings were remitted, certain countries impose withholding taxes that, subject
to certain limitations, are available for use as a tax credit against any
Federal income tax liability arising from such remittance.
38
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
Historically, Covance and its subsidiaries operated under a tax sharing
agreement with Corning, pursuant to which they were required to compute their
provision for income taxes on a separate return basis and pay to Corning the
separate Federal income tax return liability so computed. Covance's operations
through December 31, 1996 were included in the Federal income tax return filed
by Corning. As a result of the Spin-Off Distribution, Covance will file its own
separate Federal income tax return beginning in 1997.
In connection with the Spin-Off Distribution, Covance entered into a tax
indemnification agreement with Corning and a former affiliate of Corning that
prohibits Covance for a period of two years after the date of the Spin-Off
Distribution from taking certain actions that might jeopardize the favorable tax
treatment of the Spin-Off Distribution under Section 355 of the Internal Revenue
Code of 1986, as amended, and will provide Corning and the former affiliate of
Corning with certain rights of indemnification against Covance. The tax
indemnification agreement will also require Covance to take such actions as
Corning and the former affiliate of Corning may request to preserve the
favorable tax treatment provided for in any rulings obtained from the Internal
Revenue Service in respect of the Spin-Off Distribution.
Covance also entered into a tax sharing agreement with Corning and a former
affiliate of Corning which allocates responsibility for federal, state and local
taxes relating to taxable periods before the Spin-Off Distribution and provides
for computing and apportioning tax liabilities and tax benefits for such
periods.
6. Short and Long-Term Debt
In connection with being established as a separate publicly traded company,
Covance negotiated a five-year $250 million senior revolving credit facility
(the "Credit Facility") with a syndicate of banks in November 1996 and borrowed
$160.0 million thereunder to repay Corning and affiliates for intercompany
borrowings and income tax liabilities. Under the Credit Facility, borrowings can
be made in a number of different currencies until the fifth anniversary thereof
at which time all outstanding loans must be paid in full. In addition, Covance
has several different interest rate options under the Credit Facility. Interest
on all outstanding borrowings during 1997 was computed based upon the London
Interbank Offered Rate ("LIBOR") plus an applicable margin and approximated 6.0%
per annum. Covance has the option to prepay the loans outstanding under the
Credit Facility in whole or in part at any time, subject to payment of breakage
costs, in certain circumstances. The Credit Facility contains certain covenants
and requires the maintenance of key ratios, as defined in the Credit Facility.
At December 31, 1997, there was $120.0 million of outstanding borrowings and
$11.2 million in outstanding letters of credit under the Credit Facility.
As of December 31, 1997, Covance Biotechnology had $3.0 million in long-term
debt outstanding with the North Carolina Biotechnology Center. This debt matures
in December 1999 and is guaranteed by Covance. In addition, Covance
Biotechnology has a $10.0 million short-term revolving credit facility with a
bank, of which $10.0 million of borrowings were outstanding as of December 31,
1997. This short-term revolving credit facility carries interest at a rate
substantially equivalent to the rate in effect on Covance's borrowings under the
Credit Facility and is guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss
Francs from a bank. This loan bears interest at a fixed rate of 2.9% per annum
and matures in three years. In connection with the loan, Covance provided a
letter of credit in favor of the lender which may be drawn upon in event of
default. This letter of credit carries a variable cost which is presently 37.5
basis points per annum. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.
7. Employee Benefit Plans
Covance has several defined contribution plans covering substantially all of
its full-time employees. Contributions to these plans aggregated $8.1 million,
$6.6 million and $4.9 million for 1997, 1996 and 1995, respectively.
39
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
8. Stockholders' Equity
Preferred Stock
Covance is authorized to issue up to 10.0 million shares of Series Preferred
Stock, par value $1.00 per share (the "Covance Series Preferred Stock"). The
Covance Board of Directors has the authority to issue such shares from time to
time, without stockholder approval, and to determine the designations,
preferences, rights, including voting rights, and restrictions of such shares,
subject to the Delaware General Corporate Laws. Pursuant to this authority, the
Covance Board of Directors has designated 1.0 million shares of the Covance
Series Preferred Stock as Covance Series A Preferred Stock. No other class of
Covance Series Preferred Stock has been designated by the Board. As of December
31, 1997 no Covance Series Preferred Stock has been issued or is outstanding.
Dividends - Common Stock
Covance's Board of Directors may declare dividends on the shares of Covance
Common Stock out of legally available funds (subject to any preferential rights
of any outstanding Covance Series Preferred Stock). However, Covance has no
present intention to declare dividends for the foreseeable future, but instead
intends to retain earnings to provide funds for the operation and expansion of
its business. In addition, the Credit Facility prohibits Covance from paying
cash dividends on the Covance Common Stock during a default or event of default,
as defined in the Credit Facility, or after giving effect to the payment of such
dividends Covance would not be in compliance with the financial covenants of the
Credit Facility. While owned by Corning, Covance paid to Corning dividends of
$3.4 million and $10.2 million during 1996 and 1995, respectively.
Stock Compensation Plans
In December 1996, Covance adopted, in connection with the Spin-Off
Distribution, the Employee Equity Participation Program ("EEPP"). The EEPP
consists of two plans: (a) a stock option plan (the "Covance Stock Option
Plan"); and (b) an incentive stock plan (the "Covance Incentive Stock Plan").
The Covance Stock Option Plan of the EEPP, which is administered by the Covance
Compensation and Organization Committee of the Board of Directors, provides for
the grant to eligible employees of either non-qualified or incentive stock
options, or both, to purchase shares of Covance Common Stock at no less than
fair market value on the date of grant. Options granted are not exercisable for
at least twelve months and expire no more than ten years from date of grant. The
Covance Incentive Stock Plan of the EEPP authorizes the Covance Compensation and
Organization Committee to award eligible employees shares, or the right to
receive shares, of Covance Common Stock. The shares awarded may be subject to
certain restrictions prohibiting sale or other disposition and may be subject to
forfeiture, in certain circumstances. A maximum of 6.0 million shares may be
optioned or granted to eligible employees under the EEPP.
Covance also established in December 1996 a stock purchase plan (the "Covance
Stock Purchase Plan") pursuant to which Covance may make available for sale to
employees shares of its common stock at a price equal to 85% of the lower of the
market value on the first or last day of each calendar quarter. The Covance
Stock Purchase Plan, which is administered by the Covance Compensation and
Organization Committee, is intended to give Covance employees the opportunity to
purchase shares of Covance Common Stock through payroll deductions. A maximum of
1.0 million shares may be purchased by Covance employees under the Covance Stock
Purchase Plan. During 1997, a total of 190,928 shares of common stock were
issued under the Covance Stock Purchase Plan.
From 1990 through 1996, certain employees of Covance were granted incentive
stock awards or options, or a combination thereof, to purchase shares of Corning
common stock, under existing Corning stock award and option plans. In connection
with the Spin-Off Distribution, options outstanding under the Corning stock
option plans held by Covance employees and incentive share awards made to
Covance employees were replaced by substitute awards under a newly established
conversion plan (the "Covance Conversion Plan"). The Covance Conversion Plan has
essentially all of the same characteristics as the EEPP. The replacement stock
awards have the same terms and conditions as the Corning stock awards they
replaced. The replacement stock options have the same vesting provisions, option
periods and other terms and conditions and retain the same
40
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
ratio of exercise price per share to market value per share and the same
aggregate difference between market value and exercise price as the Corning
stock options they replaced.
During 1997, Covance recorded compensation expense of $1.1 million in
connection with stock issued to certain members of Covance's executive
management under the Covance Incentive Stock Plan. During 1996 and 1995, certain
members of Covance management participated in various stock compensation
programs sponsored by Corning resulting in Covance recognizing compensation
expense of $1.5 million and $0.4 million, respectively.
Covance has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and accordingly, applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Had Covance elected to recognize compensation expense in accordance
with the provisions of SFAS No. 123 for the stock option awards and for the
stock purchased by Covance employees under the Covance Stock Purchase Plan or
Corning employee stock purchase program, as applicable, its net income in 1997,
1996 and 1995 would have been $35.9 million, $10.8 million and $23.8 million,
respectively, its basic and diluted earnings per share would both have been
$0.63 in 1997 and its basic earnings per share would have been $0.19 in 1996.
The fair value of the Covance stock options used to compute the net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: expected volatility of 33.3%,
24.5% and 24.5%; risk free interest rate of 6.50%, 6.34% and 5.67%; and an
expected holding period of seven years, five years and five years.
41
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
The following table sets forth Covance's stock option activity during 1997
and on a pro forma basis during 1996 and 1995, the stock option activity for
the Covance stock options issued in replacement of the Corning stock options
under the Covance Conversion Plan (grant dates are original Corning option grant
dates):
Number Weighted
of Shares Average
(in thousands) Price
-------------- ---------
Options outstanding, January 1, 1995 496.6 $15.43
Granted................................ 306.0 $15.81
Exercised.............................. (0.3) $11.66
--------------
Options outstanding, December 31, 1995 802.3 $15.58
Granted................................ 268.6 $17.61
Exercised.............................. (8.4) $13.43
--------------
Options outstanding, December 31, 1996 1,062.5 $16.11
Granted................................ 1,763.1 $19.49
Exercised.............................. (11.8) $14.62
Forfeited.............................. (66.6) $18.63
--------------
Options outstanding, December 31, 1997 2,747.2 $18.01
==============
The weighted average fair value of the stock options granted during 1997,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $9.33 per share.
The following table sets forth the status of all options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
-------------------------------------------- --------------------------
Weighted
Option Number Average Weighted Number Weighted
Price of Shares Remaining Average of Shares Average
Range (in thousands) Contractual Life Price (in Thousands) Price
- --------------- -------------- ------------------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$11.66 - $16.49 869.5 7.1 years $15.07 439.6 $14.34
$16.50 - $20.56 1,877.7 9.0 years $19.38 138.2 $17.65
</TABLE>
In connection with the Spin-Off Distribution, Covance established two
employee stock ownership plans (collectively, the "ESOP") for the benefit of all
active Covance employees as of December 31, 1996. Covance contributed
approximately 855,000 shares of its common stock into the ESOP. The shares
contributed were allocated among the plan participants based upon a percentage
of each employee's annual compensation. As a result of this contribution,
Covance recorded a one-time charge of $16.7 million, representing the fair
market value of the shares issued into the ESOP.
9. Restructuring Charge
In 1995, Covance recorded a $4.6 million restructuring provision in
connection with management's decision to discontinue certain nonstrategic
operations. The restructuring charge consisted of employee termination costs of
$1.5 million (relating to approximately 90 employees), the write-off of fixed
assets of $1.7 million and costs of exiting leased facilities of $1.4 million.
During 1995 and 1996, the affected employees were terminated and all other
activities to complete the restructuring plan were substantially completed.
42
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
10. Commitments and Contingent Liabilities
Minimum annual rental commitments under noncancellable operating leases,
primarily office and laboratory facilities (including the Covance Biotechnology
facility), in effect at December 31, 1997 are as follows:
Year ended December 31,
1998............................................ $ 25,439
1999............................................ $ 25,209
2000............................................ $ 22,551
2001............................................ $ 20,709
2002............................................ $ 12,720
2003 and beyond................................. $ 59,082
Operating lease rental expense aggregated $26.0 million, $16.1 million and
$14.1 million for 1997, 1996 and 1995, respectively.
In June 1995, Covance Biotechnology ("lessee") entered into a lease
arrangement whereby a custom-designed, fully equipped facility would be
constructed for the lessee at a cost of approximately $55 million to perform
specialized research and manufacturing activities for biotechnology and
pharmaceutical companies. The lessor in this arrangement is a subsidiary of one
of the largest banks in the United States. The lease arrangement contains
purchase and cancellation options for the lessee at any time during the ten year
period covered by the lease arrangement. Although the lease arrangement is
cancelable by the lessee at any time throughout the ten year period, an initial
lease term of five years, representing management's estimate at the lease
inception date of the period in which occupancy of the facility is reasonably
assured, has been selected for financial reporting purposes. The initial term of
the lease commenced in December 1996, upon completion of construction of the
facility. The annual minimum lease payments total approximately $5.7 million.
The lease arrangement is classified as an operating lease.
A purchase price option has been established at specific dates over the ten
year period covered by the lease arrangement. Using current estimates, the
purchase price would approximate $52 million at the end of the first year and
decreases on an amortizing basis to approximately $37 million at the end of the
tenth year.
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.
43
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
11. Geographic Information
United Europe &
States Other
------ -------
Net revenues:
1997................................. $406,100 $184,551
1996................................. $348,996 $145,832
1995................................. $286,474 $122,700
Income from operations:
1997................................. $ 57,342 $ 20,318
1996................................. $ 29,244(1) $ 8,617(1)
1995................................. $ 34,799(2) $ 12,762
Identifiable assets:
1997................................. $298,786 $185,228
1996................................. $297,386 $153,661
1995................................. $229,720 $ 92,790
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404, United States and Europe & Other income from
operations was $48,848 and $16,417, respectively.
(2) Excluding the impact of the 1995 restructuring provision totaling $4,616,
United States income from operations was $39,415.
12. Related Party Transactions
Historically, Covance had participated in Corning's centralized treasury and
cash management processes. For domestic operations, cash received from
operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was periodically transferred to Corning.
Cash disbursements for operations, acquisitions and other investments were
funded as needed from Corning. Substantially all of Covance's borrowings during
1996 (prior to the establishment of the Credit Facility) and 1995 were from
Corning. The blended rate on those borrowings for 1996 and 1995 was
approximately 6%.
During 1996 and 1995, Corning and affiliates provided a number of
administrative functions to Covance which resulted in charges of $3.4 million
and $5.3 million being recorded in Covance's results of operations for 1996 and
1995, respectively. Management believes the method used to allocate these costs
is reasonable under the circumstances. The charges for these functions are
included primarily in selling, general and administrative expenses and do not
necessarily reflect the amount of expenses that would have been incurred by
Covance on a stand-alone basis. In certain cases, related party expenses
allocated to Covance have not required reimbursement in cash and, accordingly,
have been treated as capital contributions.
44
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
13. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information for
1997 and 1996:
First Second Third Fourth
Year Ended December 31, 1997 Quarter Quarter Quarter Quarter
- ------------------------------ -------- -------- -------- --------
Net revenues.................. $135,723 $145,392 $151,464 $158,072
Income from operations........ 17,139 20,222 20,902 19,397
Net income.................... 8,627 10,519 10,859 9,749
Basic and diluted earnings
per share................... $0.15 $0.18 $0.19 $0.17
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- ------------------------------ -------- -------- -------- --------
Net revenues.................. $108,697 $121,530 $127,179 $137,422
Income (loss) from operations. 14,038 17,335 17,502 (11,014)(1)
Net income (loss)............. 7,307 8,830 9,074 (12,495)(1)
Basic earnings per share...... $0.13 $0.15 $0.16 $(0.22)(1)
Diluted earnings per share.... N/A N/A N/A N/A
- ---------------------
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404 ($19,725 net of tax), income from operations and net
income in the fourth quarter of 1996 were $16,390 and $7,230,
respectively, and basic earnings per share was $0.13.
45
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors.
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on April 28, 1998,
which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended.
(b) Identification of Officers.
Christopher A. Kuebler, 44, has been Covance's President and Chief Executive
Officer since November 1994. From March 1993 through November 1994, he was the
Corporate Vice President, European Operations for Abbott Laboratories Inc.
("ALI"), a diversified health care company. From January 1991 until March 1993,
Mr. Kuebler was the Vice President, Sales and Marketing for ALI's Pharmaceutical
Division. Mr. Kuebler has been a member of the Covance Board since November
1994, and was elected Chairman in November 1996. Mr. Kuebler also serves in
various executive officer and director capacities of Covance's subsidiaries.
Richard J. Andrews, 50, has been a Corporate Senior Vice President of Covance
since July 1996. In addition, Mr. Andrews has served as the Group President,
Central Laboratory Services ("Central Labs") since June 1994 and served as
President of Central Laboratory's Swiss operations ("CLS") since January 1993.
Central Labs and CLS provide the Company's central laboratory services. Prior to
January 1993, Mr. Andrews served in various executive capacities in Europe,
including Worldwide Business Director, for Dupont International S.A., a
multinational chemical and pharmaceutical company. Mr. Andrews also serves as a
director of several of Covance's subsidiaries.
Michael Giannetto, 35, has been the Company's Controller since July 1996 and
a Vice President since November 1996. From March 1995 to July 1996, Mr.
Giannetto was the Business Controller for Covance. From December 1992 to March
1995, Mr. Giannetto was the Manager of Financial Reporting and Technical
Accounting for Corning Life Sciences Inc. ("CLSI"), an affiliate of the Company
prior to the Distribution Date. Prior to December 1992, Mr. Giannetto was a
Senior Audit Manager for Deloitte & Touche.
Charles C. Harwood, Jr., 44, has been the Company's Corporate Senior Vice
President and Chief Financial Officer since July 1996. From November 1994 to
July 1996, Mr. Harwood was the Company's Vice President and Chief Financial
Officer. From May 1993 to November 1994, Mr. Harwood was Executive Director,
Finance of Covance. From January 1993 to May 1993, Mr. Harwood was Chief
Financial Officer and Vice President of Finance with Integrated Telecom
Technologies, Inc. Prior to January 1993, Mr. Harwood worked seven years in the
field of commercial real estate development and six years with the
Hewlett-Packard Company in its Medical Products Division. Mr. Harwood also
serves as a director of several of Covance's subsidiaries.
Jeffrey S. Hurwitz, 37, has been the Company's Corporate Senior Vice
President, General Counsel and Secretary since July 1996. From November 1994 to
July 1996, Mr. Hurwitz was Covance's Vice President, General Counsel and
Secretary. From October 1993 to November 1994, Mr. Hurwitz was Covance's General
Counsel and Secretary. From May 1992 to October 1993, Mr. Hurwitz was an
Assistant Counsel and Assistant Secretary for CLSI, an affiliate of the Company
prior to the Distribution Date. From August 1991 to May 1992, Mr. Hurwitz was an
Assistant Counsel for Corning, an affiliate of the Company prior to the
Distribution Date. From February 1991 to June 1991, Mr. Hurwitz was an Associate
with the law firm of Luskin & Stern. Prior to February 1991, Mr. Hurwitz was an
Associate with the law firm of Shearman & Sterling. Mr. Hurwitz also serves as a
director of Bio-Imaging, and several of Covance's subsidiaries.
Kim D. Lamon, M.D., Ph.D., 45, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Dr. Lamon has been the Group President,
Clinical and Periapproval Services ("CAPS") since May 1996. CAPS and its
European affiliates provide the Company's clinical and
46
<PAGE>
periapproval services. From April 1994 until May 1996, he was the Executive Vice
President, Chief Medical Officer for Quest Diagnostics Incorporated, and Senior
Vice President, Science and Technology for CLSI, in each case an affiliate of
the Company prior to the Distribution Date. From July 1992 until April 1994, Dr.
Lamon was Senior Vice President, Clinical Research and Development and Executive
Medical Director for Rhone-Poulenc Rorer ("RPR"), a pharmaceutical company.
Prior to July 1992, Dr. Lamon was Senior Vice President, Clinical Research and
Regulatory Affairs at RPR. Dr. Lamon received his M.D. and Ph.D. in Pharmacology
from Thomas Jefferson University. Since 1989, Dr. Lamon has been an Adjunct
Assistant Professor of Pharmacology at Thomas Jefferson University. Dr. Lamon
also serves as a director of several of Covance's subsidiaries.
James D. Utterback, 42, has been a Corporate Senior Vice President of Covance
since July 1996 and Group President, Global Ventures since August 1995. Global
Ventures is responsible for the Company's international expansion plans in Asia
Pacific, Latin America and Africa. Mr. Utterback has also been responsible for
Covance's global pharmaceutical packaging operations since August 1995. From May
1994 until August 1995, Mr. Utterback was the Senior Vice President, Human
Resources and Quality for CLSI, an affiliate of the Company prior to the
Distribution Date. Prior to May 1994, Mr. Utterback served in various executive
capacities, including Chief Executive Officer in South Africa, for RPR, a
pharmaceutical company. Mr. Utterback has worked in the pharmaceutical industry
since 1985, living in Europe, Africa and the United States. Mr. Utterback also
serves as a director of several of Covance's subsidiaries.
Kathleen A. Weslock, 42, has been the Company's Corporate Senior Vice
President, Human Resources since April 1997. From May 1995 until April 1997, Ms.
Weslock was the Senior Vice President, Human Resources and Development, Private
Client Services at Lehman Brothers Inc., a financial services firm. Prior to May
1995, Ms. Weslock was a principal with William M. Mercer, Inc. a consulting
firm.
Michael G. Wokasch, 46, has been a Corporate Senior Vice President of Covance
since July 1996. In addition, Mr. Wokasch has been the Group President,
Laboratory Services ("Labs"), since July 1995. Labs and its affiliates provide
the Company's preclinical services. From January 1992 until July 1995, Mr.
Wokasch served as Divisional Vice President of Sales of ALI. From October 1991
to January 1992, Mr. Wokasch served as Director for New Product/Marketing/
Development & Scientific Relations at ALI. Prior to October 1991, Mr. Wokasch
was a Director, New Product Development at ALI. Mr. Wokasch also serves as a
director of several of Covance's subsidiaries.
Item 11. Executive Compensation
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership by Certain Beneficial Owners and Management of
Covance
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
47
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report.
1. Financial Statements. The financial statements filed as part of this
report are listed on the Index to Consolidated Financial Statements on page 27.
2. Financial Statement Schedules. Schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed as
part of, or incorporated by reference in, this report are listed in (c) below
and in the accompanying Exhibit Index.
(b) Reports on Form 8-K.
None.
(c) Item 601 Exhibits.
2.1 Transaction Agreement among Corning Incorporated, Corning Life Science
Inc., Corning Clinical Laboratories Inc. (Delaware), Covance Inc. and
Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
3.1 Certificate of Incorporation. Incorporated by reference to Registrant's
filing on Amendment No. 2 on Form 10, filed with the SEC on November 19,
1996.
3.2 By-Laws. Incorporated by reference to Registrant's filing on Amendment No.
2 on Form 10, filed with the SEC on November 19, 1996.
4.1 Form of Common Stock Certificate. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the SEC on
November 25, 1996.
4.2 Rights Agreement between Covance Inc. and Harris Trust and Savings Bank,
dated December 31, 1996. Filed herewith.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated and
Covance Inc., dated December 31, 1996. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning
Clinical Laboratories Inc., December 31, 1996. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of
Georgia, N.A. and Lenders named therein, dated November 26,1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
48
<PAGE>
10.6 Employee Stock Ownership Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.9 Employee Equity Participation Plan. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the SEC on
November 25, 1996.
10.10 Executive Retirement Supplemental Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
10.12 Directors' Restricted Stock Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.13 Directors' Deferred Compensation Plan, as amended. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
10.15 Executive Employment Letters and Schedule. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's filing
on a Registration Statement on Form S-8, Registration No. 333-29467, filed
with the SEC on June 18, 1997.
21 Subsidiaries. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
23 Consent of Price Waterhouse LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).
(d) Financial Statement Schedules.
None.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COVANCE INC.
Dated: February 27, 1998 By: /s/ Christopher A. Kuebler
--------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Christopher A. Kuebler
- -------------------------
Christopher A. Kuebler Chairman of the Board, February 27, 1998
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- --------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President February 27, 1998
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ---------------------
Michael Giannetto Vice President and Controller February 27, 1998
(Principal Accounting Officer)
/s/ Robert M. Baylis
- --------------------
Robert M. Baylis Director February 27, 1998
/s/ Van C. Campbell
- ------------------
Van C. Campbell Director February 27, 1998
/s/ Irwin Lerner
- ----------------
Irwin Lerner Director February 27, 1998
/s/ J. Randall MacDonald
- ------------------------
J. Randall MacDonald Director February 27, 1998
/s/ Nigel W. Morris
- -------------------
Nigel W. Morris Director February 27, 1998
/s/ William C. Ughetta
- ----------------------
William C. Ughetta Director February 27, 1998
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ---- --------------------------------------------------------------------
2.1 Transaction Agreement among Corning Incorporated, Corning Life
Science Inc., Corning Clinical Laboratories Inc. (Delaware), Covance
Inc. and Corning Clinical Laboratories Inc. (Michigan), dated
November 22, 1996. Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
3.1 Certificate of Incorporation. Incorporated by reference to
Registrant's filing on Amendment No. 2 on Form 10, filed with the
SEC on November 19, 1996.
3.2 By-Laws. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
4.1 Form of Common Stock Certificate. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the
SEC on November 25, 1996.
4.2 Rights Agreement between Covance Inc. and Harris Trust and Savings
Bank, dated December 31, 1996. Filed herewith.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated
and Covance Inc., dated December 31, 1996. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and
Corning Clinical Laboratories Inc., December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia
Bank of Georgia, N.A. and Lenders named therein, dated November
26,1996. Incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
10.6 Employee Stock Ownership Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.9 Employee Equity Participation Plan. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the
SEC on November 25, 1996.
10.10 Executive Retirement Supplemental Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
10.12 Directors' Restricted Stock Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
<PAGE>
Exhibit
Number Description
- --------- --------------------------------------------------------------------
10.13 Directors' Deferred Compensation Plan, as amended. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.15 Executive Employment Letters and Schedule. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's
filing on a Registration Statement on Form S-8, Registration No.
333-29467, filed with the SEC on June 18, 1997.
21 Subsidiaries. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
23 Consent of Price Waterhouse LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).
================================================================================
RIGHTS AGREEMENT
----------------
COVANCE INC.
and
HARRIS TRUST AND SAVINGS BANK
Rights Agent
----------------
Dated as of December 31, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
----
Section 1. Certain Definitions........................................ 1
Section 2. Appointment of Rights Agent................................ 3
Section 3. Issue of Right Certificates................................ 3
Section 4. Form of Right Certificates................................. 5
Section 5. Countersignature and Registration.......................... 5
Section 6. Transfer, Split Up, Combination and
Exchange of Right Certificates;
Mutilated, Destroyed, Lost or
Stolen Right Certificates.............................. 6
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights.............................. 7
Section 8. Cancellation and Destruction of
Right Certificates..................................... 7
Section 9. Availability of Preferred Shares........................... 8
Section 10. Preferred Shares Record Date............................... 8
Section 11. Adjustment of Purchase Price, Number of
Shares or Number of Rights............................. 8
Section 12. Certificate of Adjusted Purchase Price
or Number of Shares.................................... 14
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power............................. 14
Section 14. Fractional Rights and Fractional Shares.................... 15
Section 15. Rights of Action........................................... 16
Section 16. Agreement of Right Holders................................. 17
<PAGE>
Section 17. Right Certificate Holder Not Deemed a
Stockholder............................................ 17
Section 18. Concerning the Rights Agent................................ 17
Section 19. Merger or Consolidation or Change of
Name of Rights Agent................................... 18
Section 20. Duties of Rights Agent..................................... 18
Section 21. Change of Rights Agent..................................... 20
Section 22. Issuance of New Right Certificates......................... 21
Section 23. Redemption................................................. 21
Section 24. Exchange................................................... 21
Section 25. Notice of Certain Events................................... 23
Section 26. Notices.................................................... 23
Section 27. Supplements and Amendments................................. 24
Section 28. Successors................................................. 24
Section 29. Benefits of this Agreement................................. 24
Section 30. Severability............................................... 25
Section 31. Governing Law.............................................. 25
Section 32. Counterparts............................................... 25
Section 33. Descriptive Headings....................................... 25
Signatures............................................................... 25
Exhibit A - Form of Right Certificate
Exhibit B - Form of Summary of Rights to Purchase Preferred Shares
<PAGE>
AGREEMENT, dated as of December 31, 1996, between Covance Inc., a Delaware
corporation (the "Company"), and Harris Trust and Savings Bank (the "Rights
Agent").
The Board of Directors of the Company has authorized and declared a
dividend of one preferred share purchase right (a "Right") for each Common Share
(as hereinafter defined) of the Company outstanding on December 31, 1996 (the
"Record Date"), each Right representing the right to purchase one one-hundredth
of a Preferred Share (as hereinafter defined), upon the terms and subject to the
conditions herein set forth, and has further authorized and directed the
issuance of one Right with respect to each Common Share that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are hereinafter
defined).
Accordingly, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is hereinafter
defined) who or which, together with all Affiliates and Associates (as such
terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as
such term is hereinafter defined) of 20% or more of the Common Shares of the
Company then outstanding, but shall not include the Company, any Subsidiary (as
such term is hereinafter defined) of the Company, any employee benefit plan of
the Company or any Subsidiary of the Company, or any entity holding Common
Shares for or pursuant to the terms of any such plan. Notwithstanding the
foregoing, no Person shall become an "Acquiring Person" as the result of an
acquisition of Common Shares by the Company which, by reducing the number of
shares outstanding, increases the proportionate number of shares beneficially
owned by such Person to 20% or more of the Common Shares of the Company then
outstanding; provided, however, that if a Person shall become the Beneficial
Owner of 20% or more of the Common Shares of the Company then outstanding by
reason of share purchases by the Company and shall, after such share purchases
by the Company, become the Beneficial Owner of any additional Common Shares of
the Company, then such Person shall be deemed to be an "Acquiring Person".
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a Person who would otherwise be an "Acquiring
Person", as defined pursuant to the foregoing provisions of this paragraph (a),
has become such inadvertently, and such Person divests as promptly as
practicable a sufficient number of Common Shares so that such Person would no
longer be an "Acquiring Person," as defined pursuant to the foregoing provisions
of this paragraph (a), then such Person shall not be deemed to be an "Acquiring
Person" for any purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date of this Agreement.
1
<PAGE>
(c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed
to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly;
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is
exercisable immediately or only after the passage of time) pursuant to
any agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities), or upon the
exercise of conversion rights, exchange rights, rights (other than
these Rights), warrants or options, or otherwise; provided, however,
that a Person shall not be deemed the Beneficial Owner of, or to
beneficially own, securities tendered pursuant to a tender or exchange
offer made by or on behalf of such Person or any of such Person's
Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; or (B) the right to vote pursuant to any
agreement, arrangement or understanding; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to beneficially
own, any security if the agreement, arrangement or understanding to
vote such security (1) arises solely from a revocable proxy or consent
given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable
rules and regulations promulgated under the Exchange Act and (2) is not
also then reportable on Schedule 13D under the Exchange Act (or any
comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by any
other Person with which such Person or any of such Person's Affiliates
or Associates has any agreement, arrangement or understanding (other
than customary agreements with and between underwriters and selling
group members with respect to a bona fide public offering of
securities) for the purpose of acquiring, holding, voting (except to
the extent contemplated by the proviso to Section 1(c)(ii)(B)) or
disposing of any securities of the Company.
Notwithstanding anything in this definition of Beneficial
Ownership to the contrary, the phrase "then outstanding," when used with
reference to a Person's Beneficial Ownership of securities of the Company, shall
mean the number of such securities then issued and outstanding together with the
number of such securities not then actually issued and outstanding which such
Person would be deemed to own beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a
day on which banking institutions in State of Delaware are authorized or
obligated by law or executive order to close.
2
<PAGE>
(e) "Close of business" on any given date shall mean 5:00 P.M., Chicago
time, on such date; provided, however, that if such date is not a Business Day
it shall mean 5:00 P.M., Chicago time, on the next succeeding Business Day.
(f) "Common Shares" when used with reference to the Company shall mean the
shares of common stock, par value $.01 per share, of the Company. "Common
Shares" when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(g) "Distribution Date" shall have the meaning set forth in Section 3
hereof.
(h) "Final Expiration Date" shall have the meaning set forth in Section 7
hereof.
(i) "Person" shall mean any individual, firm, corporation or other entity,
and shall include any successor (by merger or otherwise) of such entity.
(j) "Preferred Shares" shall mean shares of Series A Junior Participating
Preferred Stock, par value $1.00 per share, of the Company.
(k) "Redemption Date" shall have the meaning set forth in Section 7 hereof.
(l) "Shares Acquisition Date" shall mean the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such.
(m) "Subsidiary" of any Person shall mean any corporation or other entity
of which a majority of the voting power of the voting equity securities or
equity interest is owned, directly or indirectly, by such Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Shares) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such co-Rights Agents as it may deem necessary or
desirable.
Section 3. Issue of Right Certificates. (a) Until the earlier of (i) the
tenth day after the Shares Acquisition Date or (ii) the tenth business day (or
such later date as may be determined by action of the Board of Directors prior
to such time as any Person becomes an Acquiring Person) after the date of the
commencement by any Person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary of the
Company or any entity holding Common Shares for or pursuant to the terms of any
such plan) of, or of the first public announcement of the intention of any
Person
3
<PAGE>
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company or any entity holding
Common Shares for or pursuant to the terms of any such plan) to commence, a
tender or exchange offer the consummation of which would result in any Person
becoming the Beneficial Owner of Common Shares aggregating 20% or more of the
then outstanding Common Shares (including any such date which is after the date
of this Agreement and prior to the issuance of the Rights; the earlier of such
dates being herein referred to as the "Distribution Date"), (x) the Rights will
be evidenced (subject to the provisions of Section 3(b) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Right Certificates) and not by
separate Right Certificates, and (y) the right to receive Right Certificates
will be transferable only in connection with the transfer of Common Shares. As
soon as practicable after the Distribution Date, the Company will prepare and
execute, the Rights Agent will countersign, and the Company will send or cause
to be sent (and the Rights Agent will, if requested, send) by first-class,
insured, postage-prepaid mail, to each record holder of Common Shares as of the
close of business on the Distribution Date, at the address of such holder shown
on the records of the Company, a Right Certificate, in substantially the form of
Exhibit A hereto (a "Right Certificate"), evidencing one Right for each Common
Share so held. As of the Distribution Date, the Rights will be evidenced solely
by such Right Certificates.
(b) On the Record Date, or as soon as practicable thereafter, the Company
will send a copy of a Summary of Rights to Purchase Preferred Shares, in
substantially the form of Exhibit B hereto (the "Summary of Rights"), by
first-class, postage-prepaid mail, to each record holder of Common Shares as of
the close of business on the Record Date, at the address of such holder shown on
the records of the Company. With respect to certificates for Common Shares
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced by such certificates registered in the names of the holders thereof
together with a copy of the Summary of Rights attached thereto. Until the
Distribution Date (or the earlier of the Redemption Date or the Final Expiration
Date), the surrender for transfer of any certificate for Common Shares
outstanding on the Record Date, with or without a copy of the Summary of Rights
attached thereto, shall also constitute the transfer of the Rights associated
with the Common Shares represented thereby.
(c) Certificates for Common Shares which become outstanding (including,
without limitation, reacquired Common Shares referred to in the last sentence of
this paragraph (c)) after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date shall have
impressed on, printed on, written on or otherwise affixed to them the following
legend:
This certificate also evidences and entitles the holder hereof to certain
rights as set forth in a Rights Agreement between Covance Inc. and Harris
Trust and Savings Bank, dated as of December 31, 1996 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by reference
and a copy of which is on file at the principal executive offices of Covance
Inc. Under certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and will no
4
<PAGE>
longer be evidenced by this certificate. Covance Inc. will mail to the
holder of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain circumstances, as
set forth in the Rights Agreement, Rights issued to any Person who becomes
an Acquiring Person (as defined in the Rights Agreement) may become null and
void.
With respect to such certificates containing the foregoing legend, until the
Distribution Date, the Rights associated with the Common Shares represented by
such certificates shall be evidenced by such certificates alone, and the
surrender for transfer of any such certificate shall also constitute the
transfer of the Rights associated with the Common Shares represented thereby. In
the event that the Company purchases or acquires any Common Shares after the
Record Date but prior to the Distribution Date, any Rights associated with such
Common Shares shall be deemed cancelled and retired so that the Company shall
not be entitled to exercise any Rights associated with the Common Shares which
are no longer outstanding.
Section 4. Form of Right Certificates. The Right Certificates (and the
forms of election to purchase Preferred Shares and of assignment to be printed
on the reverse thereof) shall be substantially the same as Exhibit A hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 22 hereof, the Right Certificates shall entitle the
holders thereof to purchase such number of one one-hundredths of a Preferred
Share as shall be set forth therein at the price per one one-hundredth of a
Preferred Share set forth therein (the "Purchase Price"), but the number of such
one one-hundredths of a Preferred Share and the Purchase Price shall be subject
to adjustment as provided herein.
Section 5. Countersignature and Registration. The Right Certificates shall
be executed on behalf of the Company by its Chairman of the Board, its Vice
Chairman, its Chief Executive Officer, its President, any of its Vice
Presidents, or its Treasurer, either manually or by facsimile signature, shall
have affixed thereto the Company's seal or a facsimile thereof, and shall be
attested by the Secretary or an Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Right Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Right Certificates had not ceased to be such officer
of the Company; and any Right Certificate may be signed on behalf of the Company
by any person who, at the actual date of the execution of such Right
Certificate, shall be a proper officer of
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the Company to sign such Right Certificate, although at the date of the
execution of this Rights Agreement any such person was not such an officer.
Following the Distribution Date, the Rights Agent will keep or cause to be
kept, at its principal office, books for registration and transfer of the Right
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Right Certificates, the number of Rights evidenced
on its face by each of the Right Certificates and the date of each of the Right
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject
to the provisions of Section 14 hereof, at any time after the close of business
on the Distribution Date, and at or prior to the close of business on the
earlier of the Redemption Date or the Final Expiration Date, any Right
Certificate or Right Certificates (other than Right Certificates representing
Rights that have become void pursuant to Section 11(a)(ii) hereof or that have
been exchanged pursuant to Section 24 hereof) may be transferred, split up,
combined or exchanged for another Right Certificate or Right Certificates,
entitling the registered holder to purchase a like number of one one-hundredths
of a Preferred Share as the Right Certificate or Right Certificates surrendered
then entitled such holder to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Right Certificate or Right
Certificates shall make such request in writing delivered to the Rights Agent,
and shall surrender the Right Certificate or Right Certificates to be
transferred, split up, combined or exchanged at the principal office of the
Rights Agent. Thereupon, the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Right Certificates.
Upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Right Certificate if mutilated, the Company will make and deliver a new
Right Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Right Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
(a) The registered holder of any Right Certificate may exercise the Rights
evidenced thereby (except as otherwise provided herein) in whole or in part at
any time after the Distribution Date upon surrender of the Right Certificate,
with the form of election to purchase on the reverse side thereof duly executed,
to the Rights Agent at the principal office of the Rights Agent, together with
payment of the Purchase Price for each one one-hundredth of a Preferred Share as
to which the Rights are exercised, at or prior to the earliest of (i) the close
of business on December 31, 2006 (the "Final Expiration Date"), (ii) the time at
which the Rights are
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redeemed as provided in Section 23 hereof (the "Redemption Date"), or (iii) the
time at which such Rights are exchanged as provided in Section 24 hereof.
(b) The Purchase Price for each one one-hundredth of a Preferred Share
purchasable pursuant to the exercise of a Right shall initially be $100, and
shall be subject to adjustment from time to time as provided in Section 11 or 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Right Certificate representing exercisable Rights,
with the form of election to purchase duly executed, accompanied by payment of
the Purchase Price for the shares to be purchased and an amount equal to any
applicable transfer tax required to be paid by the holder of such Right
Certificate in accordance with Section 9 hereof by certified check, cashier's
check or money order payable to the order of the Company, the Rights Agent shall
thereupon promptly (i) (A) requisition from any transfer agent of the Preferred
Shares certificates for the number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) requisition from the depositary agent depositary receipts
representing such number of one one-hundredths of a Preferred Share as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company hereby directs the depositary agent to comply with such
request, (ii) when appropriate, requisition from the Company the amount of cash
to be paid in lieu of issuance of fractional shares in accordance with Section
14 hereof, (iii) after receipt of such certificates or depositary receipts,
cause the same to be delivered to or upon the order of the registered holder of
such Right Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt, deliver such cash to or
upon the order of the registered holder of such Right Certificate.
(d) In case the registered holder of any Right Certificate shall exercise
less than all the Rights evidenced thereby, a new Right Certificate evidencing
Rights equivalent to the Rights remaining unexercised shall be issued by the
Rights Agent to the registered holder of such Right Certificate or to his duly
authorized assigns, subject to the provisions of Section 14 hereof.
Section 8. Cancellation and Destruction of Right Certificates. All Right
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Right Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all cancelled Right Certificates to the Company, or shall, at the written
request of the Company, destroy such cancelled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
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Section 9. Availability of Preferred Shares. The Company covenants and
agrees that it will cause to be reserved and kept available out of its
authorized and unissued Preferred Shares or any Preferred Shares held in its
treasury, the number of Preferred Shares that will be sufficient to permit the
exercise in full of all outstanding Rights in accordance with Section 7. The
Company covenants and agrees that it will take all such action as may be
necessary to ensure that all Preferred Shares delivered upon exercise of Rights
shall, at the time of delivery of the certificates for such Preferred Shares
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable shares.
The Company further covenants and agrees that it will pay when due and
payable any and all federal and state transfer taxes and charges which may be
payable in respect of the issuance or delivery of the Right Certificates or of
any Preferred Shares upon the exercise of Rights. The Company shall not,
however, be required to pay any transfer tax which may be payable in respect of
any transfer or delivery of Right Certificates to a person other than, or the
issuance or delivery of certificates or depositary receipts for the Preferred
Shares in a name other than that of, the registered holder of the Right
Certificate evidencing Rights surrendered for exercise or to issue or to deliver
any certificates or depositary receipts for Preferred Shares upon the exercise
of any Rights until any such tax shall have been paid (any such tax being
payable by the holder of such Right Certificate at the time of surrender) or
until it has been established to the Company's reasonable satisfaction that no
such tax is due.
Section 10. Preferred Shares Record Date. Each person in whose name any
certificate for Preferred Shares is issued upon the exercise of Rights shall for
all purposes be deemed to have become the holder of record of the Preferred
Shares represented thereby on, and such certificate shall be dated, the date
upon which the Right Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and any applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the Preferred Shares transfer books of the Company are closed, such person
shall be deemed to have become the record holder of such shares on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Shares transfer books of the Company are open. Prior to the exercise
of the Rights evidenced thereby, the holder of a Right Certificate shall not be
entitled to any rights of a holder of Preferred Shares for which the Rights
shall be exercisable, including, without limitation, the right to vote, to
receive dividends or other distributions or to exercise any preemptive rights,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number of Shares or Number of
Rights. The Purchase Price, the number of Preferred Shares covered by each Right
and the number of Rights outstanding are subject to adjustment from time to time
as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of this
Agreement (A) declare a dividend on the Preferred Shares payable in Preferred
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into
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a smaller number of Preferred Shares or (D) issue any shares of its capital
stock in a reclassification of the Preferred Shares (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation), except as otherwise
provided in this Section 11(a), the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so that the
holder of any Right exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if such Right had
been exercised immediately prior to such date and at a time when the Preferred
Shares transfer books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right.
(ii) Subject to Section 24 of this Agreement, in the event any Person
becomes an Acquiring Person, each holder of a Right shall thereafter have a
right to receive, upon exercise thereof at a price equal to the then current
Purchase Price multiplied by the number of one one-hundredths of a Preferred
Share for which a Right is then exercisable, in accordance with the terms of
this Agreement and in lieu of Preferred Shares, such number of Common Shares of
the Company as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a Preferred Share
for which a Right is then exercisable and dividing that product by (y) 50% of
the then current per share market price of the Company's Common Shares
(determined pursuant to Section 11(d) hereof) on the date of the occurrence of
such event. In the event that any Person shall become an Acquiring Person and
the Rights shall then be outstanding, the Company shall not take any action
which would eliminate or diminish the benefits intended to be afforded by the
Rights.
From and after the occurrence of such event, any Rights that are or were
acquired or beneficially owned by any Acquiring Person (or any Associate or
Affiliate of such Acquiring Person) shall be void and any holder of such Rights
shall thereafter have no right to exercise such Rights under any provision of
this Agreement. No Right Certificate shall be issued pursuant to Section 3 that
represents Rights beneficially owned by an Acquiring Person whose Rights would
be void pursuant to the preceding sentence or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
preceding sentence or any Associate or Affiliate thereof or to any nominee of
such Acquiring Person, Associate or Affiliate; and any Right Certificate
delivered to the Rights Agent for transfer to an Acquiring Person whose Rights
would be void pursuant to the preceding sentence shall be cancelled.
(iii) In the event that there shall not be sufficient Common Shares issued
but not outstanding or authorized but unissued to permit the exercise in full of
the Rights in accordance with the foregoing subparagraph (ii), the Company shall
take all such action as may be necessary to authorize additional Common Shares
for issuance upon exercise of the Rights. In the event the Company shall, after
good faith effort, be unable to take all such
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<PAGE>
action as may be necessary to authorize such additional Common Shares, the
Company shall substitute, for each Common Share that would otherwise be issuable
upon exercise of a Right, a number of Preferred Shares or fraction thereof such
that the current per share market price of one Preferred Share multiplied by
such number or fraction is equal to the current per share market price of one
Common Share as of the date of issuance of such Preferred Shares or fraction
thereof.
(b) In case the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Shares entitling them (for a
period expiring within 45 calendar days after such record date) to subscribe for
or purchase Preferred Shares (or shares having the same rights, privileges and
preferences as the Preferred Shares ("equivalent preferred shares")) or
securities convertible into Preferred Shares or equivalent preferred shares at a
price per Preferred Share or equivalent preferred share (or having a conversion
price per share, if a security convertible into Preferred Shares or equivalent
preferred shares) less than the then current per share market price of the
Preferred Shares (as defined in Section 11(d)) on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of Preferred Shares
outstanding on such record date plus the number of Preferred Shares which the
aggregate offering price of the total number of Preferred Shares and/or
equivalent preferred shares so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price and the denominator of which shall be the number of
Preferred Shares outstanding on such record date plus the number of additional
Preferred Shares and/or equivalent preferred shares to be offered for
subscription or purchase (or into which the convertible securities so to be
offered are initially convertible); provided, however, that in no event shall
the consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent. Preferred Shares owned by or held for the account
of the Company shall not be deemed outstanding for the purpose of any such
computation. Such adjustment shall be made successively whenever such a record
date is fixed; and in the event that such rights, options or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) of evidences of indebtedness
or assets (other than a regular quarterly cash dividend or a dividend payable in
Preferred Shares) or subscription rights or warrants (excluding those referred
to in Section 11(b) hereof), the Purchase Price to be in effect after such
record date shall be determined by multiplying the Purchase Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the then current per share market
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price of the Preferred Shares on such record date, less the fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the assets or evidences of indebtedness so to be distributed or
of such subscription rights or warrants applicable to one Preferred Share and
the denominator of which shall be such current per share market price of the
Preferred Shares; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Purchase
Price shall again be adjusted to be the Purchase Price which would then be in
effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder, the "current per
share market price" of any security (a "Security" for the purpose of this
Section 11(d)(i)) on any date shall be deemed to be the average of the daily
closing prices per share of such Security for the 30 consecutive Trading Days
(as such term is hereinafter defined) immediately prior to such date; provided,
however, that in the event that the current per share market price of the
Security is determined during a period following the announcement by the issuer
of such Security of (A) a dividend or distribution on such Security payable in
shares of such Security or securities convertible into such shares, or (B) any
subdivision, combination or reclassification of such Security and prior to the
expiration of 30 Trading Days after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the current per share market
price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low asked
prices in the over-the-counter market, as reported by the National Association
of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other
system then in use, or, if on any such date the Security is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Security selected by the
Board of Directors of the Company. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the Security is listed
or admitted to trading is open for the transaction of business or, if the
Security is not listed or admitted to trading on any national securities
exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "current per share
market price" of the Preferred Shares shall be determined in accordance with the
method set forth in Section 11(d)(i). If the Preferred Shares are not publicly
traded, the "current per share
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<PAGE>
market price" of the Preferred Shares shall be conclusively deemed to be the
current per share market price of the Common Shares as determined pursuant to
Section 11(d)(i) (appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof), multiplied by
one hundred. If neither the Common Shares nor the Preferred Shares are publicly
held or so listed or traded, "current per share market price" shall mean the
fair value per share as determined in good faith by the Board of Directors of
the Company, whose determination shall be described in a statement filed with
the Rights Agent.
(e) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least 1% in the Purchase
Price; provided, however, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest one one-millionth of a
Preferred Share or one ten- thousandth of any other share or security as the
case may be. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three years from the date of the transaction which requires such
adjustment or (ii) the date of the expiration of the right to exercise any
Rights.
(f) If as a result of an adjustment made pursuant to Section 11(a) hereof,
the holder of any Right thereafter exercised shall become entitled to receive
any shares of capital stock of the Company other than Preferred Shares,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Shares contained in Section 11(a) through (c), inclusive, and the
provisions of Sections 7, 9, 10 and 13 with respect to the Preferred Shares
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided in
Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
Preferred Share (calculated to the nearest one one-millionth of a Preferred
Share) obtained by (i) multiplying (x) the number of one one-hundredths of a
share covered by a Right immediately prior to this adjustment by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
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(i) The Company may elect on or after the date of any adjustment of the
Purchase Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a Preferred Share purchasable
upon the exercise of a Right. Each of the Rights outstanding after such
adjustment of the number of Rights shall be exercisable for the number of one
one-hundredths of a Preferred Share for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement of its election to adjust the number of
Rights, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. This record date may be the date
on which the Purchase Price is adjusted or any day thereafter, but, if the Right
Certificates have been issued, shall be at least 10 days later than the date of
the public announcement. If Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Right Certificates on such record date Right Certificates evidencing, subject
to Section 14 hereof, the additional Rights to which such holders shall be
entitled as a result of such adjustment, or, at the option of the Company, shall
cause to be distributed to such holders of record in substitution and
replacement for the Right Certificates held by such holders prior to the date of
adjustment, and upon surrender thereof, if required by the Company, new Right
Certificates evidencing all the Rights to which such holders shall be entitled
after such adjustment. Right Certificates so to be distributed shall be issued,
executed and countersigned in the manner provided for herein and shall be
registered in the names of the holders of record of Right Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or the
number of one one-hundredths of a Preferred Share issuable upon the exercise of
the Rights, the Right Certificates theretofore and thereafter issued may
continue to express the Purchase Price and the number of one one-hundredths of a
Preferred Share which were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing the
Purchase Price below one one-hundredth of the then par value, if any, of the
Preferred Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Preferred Shares at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an adjustment
in the Purchase Price be made effective as of a record date for a specified
event, the Company may elect to defer until the occurrence of such event the
issuing to the holder of any Right exercised after such record date of the
Preferred Shares and other capital stock or securities of the Company, if any,
issuable upon such exercise over and above the Preferred Shares and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the
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basis of the Purchase Price in effect prior to such adjustment; provided,
however, that the Company shall deliver to such holder a due bill or other
appropriate instrument evidencing such holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it in its sole discretion shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Shares, issuance
wholly for cash of any Preferred Shares at less than the current market price,
issuance wholly for cash of Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, dividends on
Preferred Shares payable in Preferred Shares or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the Company
to holders of its Preferred Shares shall not be taxable to such stockholders.
(n) In the event that at any time after the date of this Agreement and
prior to the Distribution Date, the Company shall (i) declare or pay any
dividend on the Common Shares payable in Common Shares or (ii) effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares)
into a greater or lesser number of Common Shares, then in any such case (A) the
number of one one-hundredths of a Preferred Share purchasable after such event
upon proper exercise of each Right shall be determined by multiplying the number
of one one-hundredths of a Preferred Share so purchasable immediately prior to
such event by a fraction, the numerator of which is the number of Common Shares
outstanding immediately before such event and the denominator of which is the
number of Common Shares outstanding immediately after such event, and (B) each
Common Share outstanding immediately after such event shall have issued with
respect to it that number of Rights which each Common Share outstanding
immediately prior to such event had issued with respect to it. The adjustments
provided for in this Section 11(n) shall be made successively whenever such a
dividend is declared or paid or such a subdivision, combination or consolidation
is effected.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Section 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment,
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Common Shares or the
Preferred Shares a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Right Certificate in accordance with Section 25 hereof.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power. In the event, directly or indirectly, at any time after a Person has
become an Acquiring Person, (a) the Company shall consolidate with, or merge
with and into, any other Person, (b) any Person shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such merger and, in
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connection with such merger, all or part of the Common Shares shall be changed
into or exchanged for stock or other securities of any other Person (or the
Company) or cash or any other property, or (c) the Company shall sell or
otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise
transfer), in one or more transactions, assets or earning power aggregating 50%
or more of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person other than the Company or one or more of
its wholly-owned Subsidiaries, then, and in each such case, proper provision
shall be made so that (i) each holder of a Right (except as otherwise provided
herein) shall thereafter have the right to receive, upon the exercise thereof at
a price equal to the then current Purchase Price multiplied by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable, in
accordance with the terms of this Agreement and in lieu of Preferred Shares,
such number of Common Shares of such other Person (including the Company as
successor thereto or as the surviving corporation) as shall equal the result
obtained by (A) multiplying the then current Purchase Price by the number of one
one-hundredths of a Preferred Share for which a Right is then exercisable and
dividing that product by (B) 50% of the then current per share market price of
the Common Shares of such other Person (determined pursuant to Section 11(d)
hereof) on the date of consummation of such consolidation, merger, sale or
transfer; (ii) the issuer of such Common Shares shall thereafter be liable for,
and shall assume, by virtue of such consolidation, merger, sale or transfer, all
the obligations and duties of the Company pursuant to this Agreement; (iii) the
term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such
issuer shall take such steps (including, but not limited to, the reservation of
a sufficient number of its Common Shares in accordance with Section 9 hereof) in
connection with such consummation as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to the Common Shares thereafter deliverable upon the exercise of
the Rights. The Company shall not consummate any such consolidation, merger,
sale or transfer unless prior thereto the Company and such issuer shall have
executed and delivered to the Rights Agent a supplemental agreement so
providing. The Company shall not enter into any transaction of the kind referred
to in this Section 13 if at the time of such transaction there are any rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights. The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares. (a) The Company shall
not be required to issue fractions of Rights or to distribute Right Certificates
which evidence fractional Rights. In lieu of such fractional Rights, there shall
be paid to the registered holders of the Right Certificates with regard to which
such fractional Rights would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Right. For the purposes
of this Section 14(a), the current market value of a whole Right shall be the
closing price of the Rights for the Trading Day immediately prior to the date on
which such fractional Rights would have been otherwise issuable. The closing
price for any day shall be the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
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admitted to trading on the New York Stock Exchange or, if the Rights are not
listed or admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and low asked prices in the over-the-counter
market, as reported by NASDAQ or such other system then in use or, if on any
such date the Rights are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Rights selected by the Board of Directors of the Company. If on
any such date no such market maker is making a market in the Rights, the fair
value of the Rights on such date as determined in good faith by the Board of
Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
Preferred Shares (other than fractions which are integral multiples of one
one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute
certificates which evidence fractional Preferred Shares (other than fractions
which are integral multiples of one one-hundredth of a Preferred Share).
Fractions of Preferred Shares in integral multiples of one one-hundredth of a
Preferred Share may, at the election of the Company, be evidenced by depositary
receipts, pursuant to an appropriate agreement between the Company and a
depositary selected by it; provided, that such agreement shall provide that the
holders of such depositary receipts shall have all the rights, privileges and
preferences to which they are entitled as beneficial owners of the Preferred
Shares represented by such depositary receipts. In lieu of fractional Preferred
Shares that are not integral multiples of one one-hundredth of a Preferred
Share, the Company shall pay to the registered holders of Right Certificates at
the time such Rights are exercised as herein provided an amount in cash equal to
the same fraction of the current market value of one Preferred Share. For the
purposes of this Section 14(b), the current market value of a Preferred Share
shall be the closing price of a Preferred Share (as determined pursuant to the
second sentence of Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly waives
his right to receive any fractional Rights or any fractional shares upon
exercise of a Right (except as provided above).
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Right Certificate (or, prior to
the Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Agreement.
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Without limiting the foregoing or any remedies available to the holders of
Rights, it is specifically acknowledged that the holders of Rights would not
have an adequate remedy at law for any breach of this Agreement and will be
entitled to specific performance of the obligations under, and injunctive relief
against actual or threatened violations of the obligations of any Person subject
to, this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable only in
connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Right Certificates are transferable
only on the registry books of the Rights Agent if surrendered at the principal
office of the Rights Agent, duly endorsed or accompanied by a proper instrument
of transfer; and
(c) the Company and the Rights Agent may deem and treat the person in whose
name the Right Certificate (or, prior to the Distribution Date, the associated
Common Shares certificate) is registered as the absolute owner thereof and of
the Rights evidenced thereby (notwithstanding any notations of ownership or
writing on the Right Certificates or the associated Common Shares certificate
made by anyone other than the Company or the Rights Agent) for all purposes
whatsoever, and neither the Company nor the Rights Agent shall be affected by
any notice to the contrary.
Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder,
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the Preferred Shares or any other
securities of the Company which may at any time be issuable on the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent. The Company agrees to pay to the
Rights Agent reasonable compensation for all services rendered by it hereunder
and, from time to time, on demand of the Rights Agent, its reasonable expenses
and counsel fees and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and
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administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises. The indemnification
provided for hereunder shall survive the expiration of the Rights and the
termination of this Agreement . The costs and expenses incurred in enforcing
this right of indemnification (subject to the Rights Agent having acted in
accordance with this Agreement and without negligence, bad faith or willful
misconduct) shall be paid by the Company.
The Rights Agent may conclusively rely upon, and shall be protected from,
and shall incur no liability for, or in respect of any action taken, suffered or
omitted by it in connection with, its administration of this Agreement in
reliance upon any Right Certificate or certificate for the Preferred Shares or
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons, or otherwise upon the advice of
counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any
corporation into which the Rights Agent or any successor Rights Agent may be
merged or with which it may be consolidated, or any corporation resulting from
any merger or consolidation to which the Rights Agent or any successor Rights
Agent shall be a party, or any corporation succeeding to the stock transfer or
corporate trust powers of the Rights Agent or any successor Rights Agent, shall
be the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto; provided, that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of the
predecessor Rights Agent and deliver such Right Certificates so countersigned;
and in case at that time any of the Right Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Right
Certificates either in the name of the predecessor Rights Agent or in the name
of the successor Rights Agent; and in all such cases such Right Certificates
shall have the full force provided in the Right Certificates and in this
Agreement.
In case at any time the name of the Rights Agent shall be changed and at
such time any of the Right Certificates shall have been countersigned but not
delivered, the Rights Agent may adopt the countersignature under its prior name
and deliver Right Certificates so countersigned; and in case at that time any of
the Right Certificates shall not have been countersigned, the Rights Agent may
countersign such Right Certificates either in its prior name or in its changed
name; and in all such cases such Right Certificates shall have the full force
provided in the Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties
and obligations imposed by this Agreement upon the following terms and
conditions, by all of
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which the Company and the holders of Right Certificates, by their acceptance
thereof, shall be bound:
(a) Before the Rights Agent acts or refrains from acting, it may consult
with legal counsel (who may be legal counsel for the Company), and the opinion
of such counsel shall be full and complete authorization and protection to the
Rights Agent as to any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter, including the identity of an Acquiring Person or
any Associate, Affiliate or nominee thereof (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by any one of the Chairman of the
Board, the Chief Executive Officer, the President, any Vice President, the
Treasurer or the Secretary of the Company and delivered to the Rights Agent; and
such certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any other
Person only for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 11(a)(ii) hereof) or any adjustment in
the terms of the Rights (including the manner, method or amount thereof)
provided for in Section 3, 11, 13, 23 or 24, or the ascertaining of the
existence of facts that would require any such change or adjustment (except with
respect to the exercise of Rights evidenced by Right Certificates after actual
notice that such change or adjustment is required); nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Shares to be issued pursuant to
this Agreement or any Right Certificate or as to whether any Preferred Shares
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and
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other acts, instruments and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Vice Chairman, the Chief Executive
Officer, the President, any Vice President, the Secretary or the Treasurer of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and it shall not be liable for any action taken or
suffered by it in good faith in accordance with instructions of any such officer
or for any delay in acting while waiting for those instructions.
(h) The Rights Agent and any stockholder, director, officer or employee of
the Rights Agent may buy, sell or deal in any of the Rights or other securities
of the Company or become pecuniarily interested in any transaction in which the
Company may be interested, or contract with or lend money to the Company or
otherwise act as fully and freely as though it were not Rights Agent under this
Agreement. Nothing herein shall preclude the Rights Agent from acting in any
other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon 30 days' notice in writing mailed to the Company and to each transfer agent
of the Common Shares or Preferred Shares by registered or certified mail, and to
the holders of the Right Certificates by first-class mail. The Company may
remove the Rights Agent or any successor Rights Agent upon 30 days' notice in
writing, mailed to the Rights Agent or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares or Preferred Shares by
registered or certified mail, and to the holders of the Right Certificates by
first-class mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. If the Company shall fail to make such appointment within a
period of 30 days after giving notice of such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Rights Agent or by the holder of a Right Certificate (who shall,
with such notice, submit his Right Certificate for inspection by the Company),
then the registered holder of any Right Certificate may apply to any court of
competent jurisdiction for the appointment of a new Rights Agent. Any successor
Rights Agent, whether appointed by the Company or by such a court, shall be a
corporation organized and doing business under the laws of the United States or
of the State of Illinois (or of any other state of the United States so long as
such corporation is authorized to do business as a banking institution in the
State of Illinois, in good standing, having an office in the State of Illinois,
which is authorized under such laws to
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exercise corporate trust or stock transfer powers and is subject to supervision
or examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least $50
million. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Shares
or Preferred Shares, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of the
provisions of this Agreement or of the Rights to the contrary, the Company may,
at its option, issue new Right Certificates evidencing Rights in such form as
may be approved by its Board of Directors to reflect any adjustment or change in
the Purchase Price and the number or kind or class of shares or other securities
or property purchasable under the Right Certificates made in accordance with the
provisions of this Agreement.
Section 23. Redemption. (a) The Board of Directors of the Company may, at
its option, at any time prior to such time as any Person becomes an Acquiring
Person, redeem all but not less than all the then outstanding Rights at a
redemption price of $.01 per Right, appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price").
The redemption of the Rights by the Board of Directors may be made effective at
such time, on such basis and with such conditions as the Board of Directors in
its sole discretion may establish.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the redemption of the Rights pursuant to paragraph (a) of this Section
23, and without any further action and without any notice, the right to exercise
the Rights will terminate and the only right thereafter of the holders of Rights
shall be to receive the Redemption Price. The Company shall promptly give public
notice of any such redemption; provided, however, that the failure to give, or
any defect in, any such notice shall not affect the validity of such redemption.
Within 10 days after such action of the Board of Directors ordering the
redemption of the Rights, the Company shall mail a notice of redemption to all
the holders of the then outstanding Rights at their last addresses as they
appear upon the registry books of the Rights Agent or, prior to the Distribution
Date, on the registry books of the transfer agent for the Common Shares. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of redemption
will state the method by which the payment of the Redemption Price will be made.
Neither the Company nor any of its Affiliates or Associates may redeem,
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acquire or purchase for value any Rights at any time in any manner other than
that specifically set forth in this Section 23 or in Section 24 hereof, and
other than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. Exchange. (a) The Board of Directors of the Company may, at its
option, at any time after any Person becomes an Acquiring Person, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights that have become void pursuant to the provisions of Section 11(a)(ii)
hereof) for Common Shares at an exchange ratio of one Common Share per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any such Subsidiary, or any entity
holding Common Shares for or pursuant to the terms of any such plan), together
with all Affiliates and Associates of such Person, becomes the Beneficial Owner
of 50% or more of the Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors of the Company
ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24
and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied by the Exchange Ratio. The Company
shall promptly give public notice of any such exchange; provided, however, that
the failure to give, or any defect in, such notice shall not affect the validity
of such exchange. The Company promptly shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Shares for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 11(a)(ii)
hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares issued
but not outstanding or authorized but unissued to permit any exchange of Rights
as contemplated in accordance with this Section 24, the Company shall take all
such action as may be necessary to authorize additional Common Shares for
issuance upon exchange of the Rights. In the event the Company shall, after good
faith effort, be unable to take all such action as may be necessary to authorize
such additional Common Shares, the Company shall substitute, for each Common
Share that would otherwise be issuable upon exchange of a Right, a number of
Preferred Shares or fraction thereof such that the current per share market
price of one Preferred Share multiplied by such number or fraction is equal to
the current per share market price of one Common Share as of the date of
issuance of such Preferred Shares or fraction thereof.
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(d) The Company shall not be required to issue fractions of Common Shares
or to distribute certificates which evidence fractional Common Shares. In lieu
of such fractional Common Shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such fractional Common
Shares would otherwise be issuable an amount in cash equal to the same fraction
of the current market value of a whole Common Share. For the purposes of this
paragraph (d), the current market value of a whole Common Share shall be the
closing price of a Common Share (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. Notice of Certain Events. (a) In case the Company shall propose
(i) to pay any dividend payable in stock of any class to the holders of its
Preferred Shares or to make any other distribution to the holders of its
Preferred Shares (other than a regular quarterly cash dividend), (ii) to offer
to the holders of its Preferred Shares rights or warrants to subscribe for or to
purchase any additional Preferred Shares or shares of stock of any class or any
other securities, rights or options, (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), (iv) to effect any consolidation or merger
into or with, or to effect any sale or other transfer (or to permit one or more
of its Subsidiaries to effect any sale or other transfer), in one or more
transactions, of 50% or more of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to, any other Person, (v) to effect the
liquidation, dissolution or winding up of the Company, or (vi) to declare or pay
any dividend on the Common Shares payable in Common Shares or to effect a
subdivision, combination or consolidation of the Common Shares (by
reclassification or otherwise than by payment of dividends in Common Shares),
then, in each such case, the Company shall give to each holder of a Right
Certificate, in accordance with Section 26 hereof, a notice of such proposed
action, which shall specify the record date for the purposes of such stock
dividend, or distribution of rights or warrants, or the date on which such
reclassification, consolidation, merger, sale, transfer, liquidation,
dissolution, or winding up is to take place and the date of participation
therein by the holders of the Common Shares and/or Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least 10 days prior to the record date
for determining holders of the Preferred Shares for purposes of such action, and
in the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of the Common Shares and/or Preferred Shares, whichever shall be the
earlier.
(b) In case the event set forth in Section 11(a)(ii) hereof shall occur,
then the Company shall as soon as practicable thereafter give to each holder of
a Right Certificate, in accordance with Section 26 hereof, a notice of the
occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to be
given or made by the Rights Agent or by the holder of any Right Certificate to
or on the
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Company shall be sufficiently given or made if sent by registered or certified
mail, and deemed given upon receipt, addressed (until another address is filed
in writing with the Rights Agent) as follows:
Covance Inc.
210 Carnegie Center
Princeton, New Jersey 08540
Attention: Corporate Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Right Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by registered or certified mail, and deemed given upon receipt,
addressed (until another address is filed in writing with the Company) as
follows:
Harris Trust and Savings Bank
311 West Monroe, 11th Floor
P.O. Box 755
Chicago, Illinois 60690
Attention: Deborah J. Hokinson
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company, and deemed received by such party three days after
mailing.
Section 27. Supplements and Amendments. The Company may from time to time
supplement or amend this Agreement without the approval of any holders of Right
Certificates in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provisions herein, or to make any other provisions with respect to the Rights
which the Company may deem necessary or desirable, any such supplement or
amendment to be evidenced by a writing signed by the Company and the Rights
Agent; provided, however, that from and after such time as any Person becomes an
Acquiring Person, this Agreement shall not be amended in any manner which would
adversely affect the interests of the holders of Rights.
Section 28. Successors. All the covenants and provisions of this Agreement
by or for the benefit of the Company or the Rights Agent shall bind and inure to
the benefit of their respective successors and assigns hereunder.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company, the
Rights Agent and
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the registered holders of the Right Certificates (and, prior to the Distribution
Date, the Common Shares) any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the Common Shares).
Section 30. Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Section 31. Governing Law. This Agreement and each Right Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State of
Delaware and for all purposes shall be governed by and construed in accordance
with the laws of such State applicable to contracts to be made and performed
entirely within such State.
Section 32. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested, all as of the day and year first above written.
Attest: COVANCE INC.
By: By:
-------------------------- -----------------------------
Title: Title:
Attest: HARRIS TRUST AND SAVINGS BANK
By: By:
-------------------------- -----------------------------
Title: Title:
25
<PAGE>
Exhibit A
Form of Right Certificate
Certificate No. R- Rights
NOT EXERCISABLE AFTER DECEMBER 31, 2006 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.01 PER RIGHT AND
TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
Right Certificate
COVANCE INC.
This certifies that , or registered assigns, is the registered
owner of the number of Rights set forth above, each of which entitles the owner
thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of December 31, 1996 (the "Rights Agreement"), between
Covance Inc., a Delaware corporation (the "Company"), and Harris Trust and
Savings Bank (the "Rights Agent"), to purchase from the Company at any time
after the Distribution Date (as such term is defined in the Rights Agreement)
and prior to 5:00 P.M., New York time, on December 31, 2006 at the principal
office of the Rights Agent, or at the office of its successor as Rights Agent,
one one-hundredth of a fully paid non-assessable share of Series A Junior
Participating Preferred Stock, par value $1.00 per share (the "Preferred
Shares"), of the Company, at a purchase price of $100 per one one-hundredth of a
Preferred Share (the "Purchase Price"), upon presentation and surrender of this
Right Certificate with the Form of Election to Purchase duly executed. The
number of Rights evidenced by this Right Certificate (and the number of one
one-hundredths of a Preferred Share which may be purchased upon exercise hereof)
set forth above, and the Purchase Price set forth above, are the number and
Purchase Price as of December 31, 1996, based on the Preferred Shares as
constituted at such date. As provided in the Rights Agreement, the Purchase
Price and the number of one one-hundredths of a Preferred Share which may be
purchased upon the exercise of the Rights evidenced by this Right Certificate
are subject to modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates. Copies of
the Rights Agreement are on file at the principal executive offices of the
Company and the above-mentioned offices of the Rights Agent.
<PAGE>
This Right Certificate, with or without other Right Certificates, upon
surrender at the principal office of the Rights Agent, may be exchanged for
another Right Certificate or Right Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
Preferred Shares as the Rights evidenced by the Right Certificate or Right
Certificates surrendered shall have entitled such holder to purchase. If this
Right Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Right Certificate or Right Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate (i) may be redeemed by the Company at a redemption price of
$.01 per Right or (ii) may be exchanged in whole or in part for Preferred Shares
or shares of the Company's Common Stock, no par value.
No fractional Preferred Shares will be issued upon the exercise of any
Right or Rights evidenced hereby (other than fractions which are integral
multiples of one one-hundredth of a Preferred Share, which may, at the election
of the Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate shall be entitled to vote or receive
dividends or be deemed for any purpose the holder of the Preferred Shares or of
any other securities of the Company which may at any time be issuable on the
exercise hereof, nor shall anything contained in the Rights Agreement or herein
be construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors or
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action, or to receive notice of meetings or
other actions affecting stockholders (except as provided in the Rights
Agreement), or to receive dividends or subscription rights, or otherwise, until
the Right or Rights evidenced by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of .
ATTEST: COVANCE INC.
By
- --------------------------- -------------------------------
Name: Name:
Title: Title:
A-2
<PAGE>
Countersigned:
HARRIS TRUST AND SAVINGS BANK
By
------------------------
Name:
Title:
A-3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Right Certificate.)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Right Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint Attorney, to transfer the within
Right Certificate on the books of the within-named Company, with full power of
substitution.
Dated:
----------------------
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
- ------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
- -------------------------------------------------------------
A-4
<PAGE>
Form of Reverse Side of Right Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Right Certificate.)
To: COVANCE INC.
The undersigned hereby irrevocably elects to exercise __________
Rights represented by this Right Certificate to purchase the Preferred Shares
issuable upon the exercise of such Rights and requests that certificates for
such Preferred Shares be issued in the name of:
Please insert social security
or other identifying number
(Please print name and address)
If such number of Rights shall not be all the Rights evidenced by this Right
Certificate, a new Right Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
(Please print name and address)
Dated:
Signature
Signature Guaranteed:
Signatures must be guaranteed by a member firm of a registered
national securities exchange, a member of the National Association of Securities
Dealers, Inc., or a commercial bank or trust company having an office or
correspondent in the United States.
A-5
<PAGE>
Form of Reverse Side of Right Certificate -- continued
- -------------------------------------------------------------
The undersigned hereby certifies that the Rights evidenced by
this Right Certificate are not beneficially owned by an Acquiring Person or an
Affiliate or Associate thereof (as defined in the Rights Agreement).
Signature
- -------------------------------------------------------------
NOTICE
The signature in the Form of Assignment or Form of Election to Purchase, as
the case may be, must conform to the name as written upon the face of this Right
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
In the event the certification set forth above in the Form of Assignment or
the Form of Election to Purchase, as the case may be, is not completed, the
Company and the Rights Agent will deem the beneficial owner of the Rights
evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or
Associate thereof (as defined in the Rights Agreement) and such Assignment or
Election to Purchase will not be honored.
A-6
<PAGE>
Exhibit B
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On December 3, 1996, the Board of Directors of Covance Inc. (the "Company")
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of common stock, par value $.50 per share (the "Common
Shares"), of the Company. The dividend is payable on December 31, 1996 (the
"Record Date") to the stockholders of record on that date. Each Right entitles
the registered holder to purchase
B-1
<PAGE>
from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $1.00 per share (the "Preferred Shares"), of the
Company at a price of $100 per one one-hundredth of a Preferred Share (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between the
Company and Harris Trust and Savings Bank, as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") have acquired beneficial ownership of 20% or more of the outstanding
Common Shares or (ii) 10 business days (or such later date as may be determined
by action of the Board of Directors prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding Common Shares (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate with a copy of this Summary of Rights
attached thereto.
The Rights Agreement provides that, until the Distribution Date (or earlier
redemption or expiration of the Rights), the Rights will be transferred with and
only with the Common Shares. Until the Distribution Date (or earlier redemption
or expiration of the Rights), new Common Share certificates issued after the
Record Date upon transfer or new issuance of Common Shares will contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption or expiration of the Rights), the surrender for
transfer of any certificates for Common Shares outstanding as of the Record
Date, even without such notation or a copy of this Summary of Rights being
attached thereto, will also constitute the transfer of the Rights associated
with the Common Shares represented by such certificate. As soon as practicable
following the Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Common Shares
as of the close of business on the Distribution Date and such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on December 31, 2006 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by the Company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the 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 Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then-current market price of the Preferred Shares or (iii) upon the
distribution to holders
B-2
<PAGE>
of the Preferred Shares of evidences of indebtedness or assets (excluding
regular periodic cash dividends paid out of earnings or retained earnings or
dividends payable in Preferred Shares) or of subscription rights or warrants
(other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the Common Shares or a stock
dividend on the Common Shares payable in Common Shares or subdivisions,
consolidations or combinations of the Common Shares occurring, in any such case,
prior to the Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $10 per share but will be entitled to an aggregate
dividend of 100 times the dividend declared per Common Share. In the event of
liquidation, the holders of the Preferred Shares will be entitled to a minimum
preferential liquidation payment of $100 per share but will be entitled to an
aggregate payment of 100 times the payment made per Common Share. Each Preferred
Share will have 100 votes, voting together with the Common Shares. Finally, in
the event of any merger, consolidation or other transaction in which Common
Shares are exchanged, each Preferred Share will be entitled to receive 100 times
the amount received per Common Share. These rights are protected by customary
antidilution provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-hundredth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
Common Share.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of Common Shares having a market value of
two times the exercise price of the Right.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Common Shares, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which will have become void),
in whole or in part, at an exchange ratio of one Common Share, or one
one-hundredth of a Preferred
B-3
<PAGE>
Share (or of a share of a class or series of the Company's preferred stock
having equivalent rights, preferences and privileges), per Right (subject to
adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-hundredth of a Preferred
Share, which may, at the election of the Company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Common Shares, the Board of Directors of the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the Board of Directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the Board of Directors of the
Company without the consent of the holders of the Rights, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an Exhibit to a Registration Statement on Form 10 dated
November 26, 1996. A copy of the Rights Agreement is available free of charge
from the Company. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is hereby incorporated herein by reference.
B-4
COVANCE INC.
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
Effective December 3, 1996
-----------------------------------------------
This is the Covance Inc. Deferred Compensation Plan for Directors, effective
December 3, 1996 (the "Plan"), established by Covance Inc. to provide its
non-employee directors with an additional method of planning for their
retirement. The Plan is intended to be an unfunded plan maintained for the
purpose of providing deferred compensation to the non-employee directors of
Covance Inc.
Section 1. Effective Date
The effective date of the Plan is December 3, 1996.
Section 2. Eligibility
Any Director of Covance Inc. (the "Company") who is not an officer or employee
of the Company or a subsidiary thereof is eligible to participate in the Plan.
Section 3. Deferred Compensation Accounts
There shall be established for each participant a deferred compensation account
or accounts in the participant's name.
Section 4. Amount of Deferral
A participant may elect to defer receipt for any year of either (a) all of the
compensation payable to the participant for serving on the Board of Directors of
the Company and Committees of the Board of Directors or (b) only the retainer
(basic annual fee) payable to the participant for membership on such Board.
Section 5. Investment of Deferred Amounts
(a) General. A participant may designate, in increments of 10%, the
compensation to be deferred or compensation already deferred to be
allocated to a cash account and a market value account or any combination
of such accounts. Any change in such designation of future deferrals under
the Plan may be made no later than the 15th day of each March, June,
September and December during the deferral period to be effective on the
date next following such notification that compensation would have been
paid in accordance with the Company's normal practice but for the election
to defer. Any change in such designation of
<PAGE>
amounts already deferred under the Plan may be made no later than December
15th of any Plan Year and shall become effective as of January 1st of the
next Plan Year.
(b) Cash Account. The amount, if any, in the participant's deferred
compensation cash account shall be credited with interest, to be compounded
quarterly, calculated prospectively at a rate equal to the prime rate in
effect on the date compensation would have been paid in accordance with
such practice on the first day of each January, April, July and October
during the deferral period.
(c) Market Value Account. The amount, if any, in or allocated to the
participant's deferred compensation market value account on each date
compensation would have been paid in accordance with the Company's normal
practice but for the election to defer shall be expressed in units, the
number of which shall be equal to such amount divided by the closing price
of shares of the Company's Common Stock on the New York Stock Exchange
(hereinafter referred to as "Market Value") on such date or on the trading
day next preceding such date if such date is not a trading day. On each
date that the Company pays a regular cash dividend on shares of its Common
Stock outstanding, the participant's account shall be credited with a
number of units equal to the amount of such dividend per share multiplied
by the number of units in the participant's account on such date divided by
the Market Value on such dividend date or on the trading day next preceding
such date if the dividend payment date is not a trading day. The value of
the units in the participant's market value account on any given date shall
be determined by reference to the Market Value on such date.
(d) Recapitalization. The number of units in the participant's market value
account shall be proportionally adjusted for any increase or decrease in
the number of issued shares of Common Stock of the Company resulting from a
subdivision or consolidation of shares or other capital adjustment, or the
payment of a stock dividend or other increase or decrease in such shares
effected without receipt of consideration by the Company, or any
distribution or spin-off of assets (other than cash) to the stockholders of
the Company.
Section 6. Period of Deferral
A participant may elect to defer receipt of compensation either (a) until a
specified year in the future or (b) until the participant's termination of
service as a Director of the Company. If alternative (a) is elected, actual
payment will be made or will commence within sixty days after the beginning of
the year specified. If alternative (b) is elected, payment will be made or will
commence within sixty days after termination of services as a Director of the
Company. In addition, at any point prior to a year in which a distribution of
any or all of a participant's account is scheduled for distribution pursuant to
this Section 6, the participant shall have the option to further defer all or
part of the
2
<PAGE>
scheduled distribution to a later year. A scheduled distribution or portion
thereof may, however, be further deferred only once.
Section 7. Accelerated Distributions
(a) Hardship Distributions. A participant may elect to receive a distribution of
amounts credited to his account prior to the date or dates originally elected
under Section 6 without penalty if such distribution is necessary as a result of
an unforeseen hardship and the amount of the distribution is limited to an
amount reasonably necessary to satisfy the unforeseen hardship. For this
purpose, an "unforeseen hardship" is defined as severe financial hardship to a
participant resulting from a sudden and unexpected illness or accident of the
participant or of a participant's dependent, loss of a participant's property
due to casualty, or other similar extraordinary and unforeseeable circumstances
arising as a result of events beyond the participant's control. In addition, an
unforeseen hardship will not be considered to have occurred if such hardship is
or may be relieved through reimbursement by insurance or liquidation of the
participant's assets, to the extent the liquidation of such assets would not
itself cause severe hardship.
(b) Other Accelerated Distributions. A participant may elect to receive a
distribution of all or a portion of his account for any reason prior to the date
or dates originally elected under Section 6, subject to the following forfeiture
and suspension provisions.
(i) Forfeiture. A participant shall forfeit 10% of his account balance
under the Plan if he elects an accelerated distribution under this Section
7(b). Any amounts forfeited under this Section 7(b) shall not be
distributed or allocated to any other account in the Plan.
(ii) Suspension of Participation. If a participant elects to accelerate a
distribution under this Section 7(b), he will not be entitled to defer any
additional compensation under the Plan for the Plan Year in which he
elected the accelerated distribution and the Plan Year immediately
following the Plan Year in which the participant elected to accelerate a
distribution.
Section 8. Form of Payment
On the participant's deferral election form, the participant shall elect to
receive the compensation deferred under the Plan in either (a) a lump sum or (b)
a number of annual installments as specified by the participants. All amounts in
the participant's cash and market value accounts shall be paid in cash.
Section 9. Death or Disability Prior to Receipt
In the event that a participant dies or becomes totally and permanently disabled
prior to receipt of any or all of the amounts payable to the participant
pursuant to the Plan, any
3
<PAGE>
amounts remaining in the participant's deferred compensation account may be paid
to the beneficiary so designated on his election form in a lump sum within sixty
(60) days following the Company's notification of the participant's death or
disability.
Section 10. Time of Election of Deferral
Effective January 1, 1997 the period commencing January 1 and ending December 31
of each year shall be the Plan Year.
An election to defer compensation may be made by a nominee for election as a
Director prior to, or concurrently with the nominee's election for, the term for
which the nominee is being elected, and may be made by a person then currently
serving as a Director for the next succeeding Plan Year no later than the
preceding December 15th.
Section 11. Manner of Electing Deferral
A participant may elect to defer compensation by giving written notice to the
Secretary of the Company on a form provided by the Company, which notice shall
include the amount to be deferred, the accounts to which such amounts are to be
allocated and the percentage (in increments of 10%) of such amounts to be
allocated to each account, the period of deferral, and the form of payment,
including the number of installments.
Section 12. Effect of Election
An election to defer compensation shall be irrevocable once the Plan Year to
which it applies has commenced, and may be revoked or modified only upon
demonstration of unforeseen hardship, as defined in Section 7 of the Plan, and
with the concurrence of the Compensation Committee of the Board of the Company.
An election covering more than one Plan Year may be revoked or modified with
respect to Plan Years not yet begun by notifying the Secretary of the Company in
writing at least fifteen (15) days prior to the commencement of such Plan Year.
Section 13. Participant's Rights Unsecured
The Plan is an unfunded plan and the right of any participant to receive future
payments under the provisions of the Plan shall be an unsecured claim against
the general assets of the Company.
Section 14. Statement of Accounts
Statements will be sent to each participant each year as to the value of the
participant's deferred compensation accounts as of the end of the preceding
December.
4
<PAGE>
Section 15. Assignability
No right to receive payments hereunder shall be transferable or assignable by a
participant, except by will or by the laws of descent and distribution. The
participant may not sell, assign, transfer, pledge or otherwise encumber any
interest in the participant's deferred compensation account and any attempt to
do so shall be void against, and shall not be recognized by, the Company.
Section 16. Administration
The Compensation Committee of the Board will determine the plan administrator,
who together shall have the authority to adopt rules and regulations for
carrying out the Plan and interpret, construe and implement the provisions of
the Plan.
Section 17. Amendment
The Plan may at any time or from time to time be amended, modified or terminated
by the Company. No amendment, modification or termination shall, without the
consent of the participant, adversely affect accruals in such participant's
deferred compensation account.
Section 18. Claims Procedure
(a) Denial of Claim for Benefits. Any denial by the Compensation Committee of
any claim for benefits under the Plan by a participant shall be stated in
writing by the Compensation Committee and delivered or mailed to the
participant. The Compensation Committee shall furnish the participant with
notice of the decision not later than 90 days after receipt of the claim,
unless special circumstances require an extension of time for processing
the claim. If such an extension of time for processing is required, written
notice of the extension shall be furnished to the participant prior to the
termination of the initial 90 day period. In no event shall such extension
exceed a period of 90 days from the end of such initial period. The
extension notice shall indicate the special circumstances requiring an
extension of time and the date by which the Compensation Committee expects
to render the final decision. The notice of the Compensation Committee
decision shall be written in a manner calculated to be understood by the
participant and shall include (i) the specific reasons for the denial,
including, where appropriate, references to the Plan, (ii) any additional
information necessary to perfect the claim with an explanation of why the
information is necessary, and (iii) an explanation of the procedure for
perfecting the claim.
(b) Appeal of Denial. The participant shall have 60 days after receipt of
written notification of denial of his or her claim in which to file a
written appeal with the Compensation Committee. As a part of any such
appeal, the participant may submit issues and comments in writing and
shall, on request, be afforded an
5
<PAGE>
opportunity to review any documents pertinent to the perfection of his or
her claim. The Compensation Committee shall render a written decision on
the participant's appeal ordinarily within 60 days of receipt of notice
thereof but, in no case, later than 120 days.
Section 19. Miscellaneous
(a) Limited Purpose of Plan. The establishment or existence of the Plan shall
not confer upon any individual the right to be continued as a Director.
(b) Non-alienation. No amounts payable under the Plan shall be subject in any
manner to anticipation, assignment, or voluntary or involuntary alienation.
(c) Facility of Payment If the Compensation Committee, in its sole discretion,
deems a participant who is eligible to receive any payment hereunder to be
incompetent to receive the same by reason of age, illness or any infirmity
or incapacity of any kind, the Compensation Committee may direct the
Company to apply such payment directly for the benefit of such person, or
to make payment to any person selected by the Compensation Committee to
disburse the same for the benefit of the participant. Payments made
pursuant to this Section 11(c) shall operate as a discharge, to the extent
thereof, of all liabilities of the Company and the Compensation Committee
to the person for whose benefit the payments are made.
(d) Governing Law. This Plan shall be governed by and construed in accordance
with the laws of the state of New Jersey, to the extent not preempted by
federal law.
6
COVANCE INC.
VARIABLE COMPENSATION PLAN
1. Purpose. The purpose of the Variable Compensation Plan (the "Plan") is to
reward participating employees of Covance Inc. ("Covance") and its subsidiaries1
(collectively, the "Company") for the attainment of superior performance. The
Plan does not constitute an amendment, supplement or modification of any
individual employment agreement between the Company and an employee or to that
certain Asset Purchase Agreement dated as of March 15, 1996 among Covance and
the parties specified therein with respect to the earning or payment of variable
or bonus compensation.
2. Eligibility. Variable compensation awards under the Plan may be made to
executives or managers (as designated by senior executives of Covance) who are
full-time employees of the Company provided, that (1) the employee is employed
with the Company on or before October 1 of the performance year in question,
except as specified below, and (2) the employee is employed by the Company both
as of December 31 of the performance year in question and on the date that the
variable compensation award for the performance year in question is actually
paid, except as specified below; provided, further, that (a) with respect to
clause (1) above, in the event an individual is employed by the Company (i) on
or after October 1 for the performance year in question but otherwise satisfies
the eligibility or performance requirements of the Plan, then the Committee may
approve a variable compensation award for such individual based on the chief
executive officer's recommendation or (ii) after January 1 of the performance
year in question but before October 1 of such year and otherwise satisfies the
eligibility or performance requirements of the Plan, then such employee's
variable compensation award, if any, shall be prorated based on the actual
service provided by the employee for the performance year in question based
either on time worked or base pay earned and (b)
- -------------------------------------
(1) For 1997, Covance Biotechnology Services Inc. will not participate in the
Plan, but will in subsequent years.
<PAGE>
with respect to clause (2) above, in the event any employee who leaves the
Company during the performance year in question or prior to the date the
variable compensation award for such performance year is paid, in each case as a
result of death, disability or retirement with the consent of Covance, any such
award or payment shall be prorated based on actual service provided by the
employee for the performance year in question based on time worked or base pay
earned in the performance year in question. The term "subsidiary" means any
corporation in an unbroken chain descending from the parent company, where each
corporation, other than the last in the chain, owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in the chain.
3. Administration/Disputes. The Compensation Committee of the Covance Board of
Directors (the "Committee"), or a subcommittee of such committee, consisting of
at least two members who qualify as outside directors under applicable Internal
Revenue Code and Securities and Exchange Commission (the "SEC") rules, codes and
regulations, shall manage and administer the Plan. No member of the Committee
shall be eligible for awards under the Plan. The Committee may adopt policies,
rules and regulations that it deems necessary for governing, managing or
administering the Plan. It may take action either by a majority vote of its
members in attendance provided there is a quorum, or by an instrument in writing
signed by all members without a meeting. Members of the Committee shall not be
liable for any act or omission in their capacities as such members, except for
bad faith, gross negligence or intentional misconduct or inaction. Any dispute
or disagreement which shall arise under, or as a result of, or pursuant to, this
Plan shall be finally determined by the Committee in its absolute and
uncontrolled discretion, and any such determination or any other determination
by the Committee under or pursuant to this Plan and any interpretation by the
Committee of the terms of this Plan, shall be final, binding and conclusive on
all persons affected thereby.
2
<PAGE>
4. Performance Year. Each consecutive twelve month period from January 1 through
December 31 shall be treated as a separate performance year for the purpose of
the Plan.
5. Performance Goals.
(a) Goal Setting. The Committee shall establish at the beginning of each
performance year, or soon as practicable thereafter, but in no event, later than
the date that is 90 days after the beginning of the performance year, objective
performance goal or goals, including, but not limited to, stock price, market
share, sales, earnings per share, return on equity, net profit after tax or
costs. Such performance goal may be based on one or more business criteria that
apply to the individual, a division, a business unit or operating group or the
Company.
(b) Measurement. The Committee shall certify in writing before the payment of
any variable compensation under the Plan whether the performance goal(s) have
been satisfied for the performance year in question. Approved minutes of the
Committee shall satisfy the forgoing requirement. In assessing whether the
performance goal(s) have been satisfied, in whole or in part, or exceeded on a
basis consistent with circumstances existing when such goals were established,
the Committee may include or exclude, as applicable, the financial effect on the
performance goal(s) arising from any acquisition of the stock or assets of any
other person or entity, the divestiture of all or any of the Company's
businesses, strategic expenditures by the Company identified to the Covance
Board of Directors as such, force majure events, material litigation, changes in
tax laws or accounting practices, or any other unexpected or unforeseen
extraordinary event or
3
<PAGE>
occurrence during the performance year; provided, however, that with respect to
Company employees who meet the definition of "covered employee" under Section
162(m) of the Internal Revenue Code, as amended from time to time and the
regulations thereunder the Committee shall not increase the amount of
compensation payable to such employee that would otherwise be paid based upon
attainment of the performance goal(s) in question.
6. Variable Compensation Targets. The Committee will establish a variable
compensation target for each level of participating employee by name or category
of position reflected as a percentage of an employee's base pay in effect at the
end of the performance year in question.
7. Variable Compensation Components Weightings. For all employees of the Company
eligible to participate in the Plan, the relative weightings of each component
of the Plan shall be established by the Committee.
8. Maximum Variable Compensation Award Payout. In no event shall any individual
receive more than the percent of such individual's variable compensation target
established by the Committee.
9. Payment of Awards. Variable compensation awards earned under the terms of the
Plan in excess of specified base levels may at the discretion of the Committee,
after consultation with Covance's management, be paid in cash, or in stock
options through the
4
<PAGE>
Employee Equity Participation Plan, or both. Payment will be made no later than
each February 28th following the close of the applicable performance year. The
Committee, in its discretion, may provide that individuals may elect to defer
payment of the variable compensation awards in the event the Company has
established a deferred compensation plan for employees.
10. Governing Law; Binding Effect. THIS PLAN SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY (WITHOUT REGARD TO THE
CONFLICT OF LAW PROVISIONS THEREOF) AND ALL QUESTIONS CONCERNING THE VALIDITY
AND CONSTRUCTION THEREOF SHALL BE GOVERNED IN ACCORDANCE WITH THE LAWS OF SAID
STATE; PROVIDED, HOWEVER, THAT ALL MATTERS OF CORPORATE GOVERNANCE AND OTHER
CORPORATE MATTERS CONCERNING DELAWARE CORPORATIONS SHALL BE GOVERNED BY THE
DELAWARE GENERAL CORPORATION LAW. Except as otherwise expressly provided herein,
this Plan shall be binding upon and inure to the benefit of the parties hereto,
their legal representatives, successors and assigns.
11. Termination of Employment. Participation in the Plan does not create a
contract of employment, nor grant any employee of the Company the right to be
retained in the service of, or otherwise employed by, the Company. Individuals
will not receive a variable compensation award under this Plan for the
performance year in which their employment terminates for any reason, except as
otherwise provided in Paragraph 2 hereof. Without limitating the foregoing or
Paragraph 2 hereof, any individual whose employment is terminated for
wrongdoing, including, but not limited to, a violation of the Company's Code of
Conduct, will forfeit all rights to payment under this Plan.
5
<PAGE>
12. Effective Date. The Plan will take effect as of January 1, 1997.
13. Amendment, Suspension, or Termination. The Board or Committee may, at any
time, suspend, terminate or amend the Plan, in such respects as the Board or
Committee deems to be in the best interest of the Company. No amendment will
adversely affect any right of any grantee, or his successors in interest, to
keep any variable compensation award actually made hereunder before the
effective date of the amendment. Plan deferrals, if any, in effect at the Plan's
termination remain in effect according to their original terms.
6
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 333-18485, 333-18487, 333-18493, 333-29467,
333-33185 and 333-36469) of Covance Inc. of our report dated January 16, 1998
appearing on page 28 of this Annual Report on Form 10-K.
Price Waterhouse LLP
Morristown, New Jersey
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Covance
consolidated financial statements for the year ended December 31, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001023131
<NAME> Covance Inc.
<MULTIPLIER> 1
<CURRENCY> US$
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 28,027,000
<SECURITIES> 0
<RECEIVABLES> 145,769,000
<ALLOWANCES> 0
<INVENTORY> 18,088,000
<CURRENT-ASSETS> 230,478,000
<PP&E> 355,811,000
<DEPRECIATION> 162,682,000
<TOTAL-ASSETS> 484,014,000
<CURRENT-LIABILITIES> 170,990,000
<BONDS> 0
0
0
<COMMON> 577,000
<OTHER-SE> 156,480,000
<TOTAL-LIABILITY-AND-EQUITY> 484,014,000
<SALES> 0
<TOTAL-REVENUES> 590,651,000
<CGS> 389,785,000
<TOTAL-COSTS> 512,991,000
<OTHER-EXPENSES> 167,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,314,000
<INCOME-PRETAX> 69,179,000
<INCOME-TAX> 29,367,000
<INCOME-CONTINUING> 39,754,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,754,000
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
