<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from
________________________ to ________________________
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
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 22, 1999, the Registrant had 58,380,554 shares of Common Stock
outstanding.
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COVANCE INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--September 30, 1999 and December 31, 1998............................... 3
Consolidated Statements of Income--Three and Nine months ended September 30, 1999 and 1998.......... 4
Consolidated Statements of Cash Flows--Nine months ended September 30, 1999 and 1998................ 5
Notes to Consolidated Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
SIGNATURE PAGE....................................................................................... 18
</TABLE>
2
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
1999 1998
----- -----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 12,398 $ 19,263
Accounts receivable, net................................... 144,266 139,145
Unbilled services.......................................... 64,806 41,589
Inventory.................................................. 25,840 26,726
Deferred income taxes...................................... 9,814 9,671
Prepaid expenses and other assets.......................... 43,733 38,095
-------- --------
Total Current Assets.................................... 300,857 274,489
Property and equipment, net.................................... 290,907 237,587
Goodwill, net.................................................. 85,699 71,999
Other assets................................................... 13,496 9,340
-------- --------
Total Assets............................................ $690,959 $593,415
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 26,722 $ 33,381
Accrued payroll and benefits............................... 35,137 41,505
Accrued expenses and other liabilities..................... 52,124 39,117
Unearned revenue........................................... 57,557 60,226
Short-term debt............................................ 13,000 13,000
Income taxes payable....................................... 2,575 5,772
-------- --------
Total Current Liabilities............................... 187,115 193,001
Long-term debt................................................. 209,167 149,909
Deferred income taxes.......................................... 14,083 12,416
Other liabilities.............................................. 12,440 13,074
-------- --------
Total Liabilities....................................... 422,805 368,400
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock - Par value $0.01 per share; 140,000,000 shares
authorized 58,875,554 and 58,417,536 shares issued and outstanding
at September 30, 1999 and December 31, 1998,
respectively............................................... 589 584
Paid-in capital............................................ 92,006 75,853
Retained earnings.......................................... 179,433 146,372
Accumulated other comprehensive income--
Cumulative translation adjustment.................... (3,874) 2,206
-------- --------
Total Stockholders' Equity.............................. 268,154 225,015
-------- --------
Total Liabilities and Stockholders' Equity.............. $690,959 $593,415
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues................................. $ 198,920 $ 182,187 $ 624,612 $ 532,785
Cost and expenses:
Cost of revenue.......................... 134,643 119,366 416,979 351,433
Selling, general and administrative...... 28,912 29,058 97,106 85,395
Depreciation and amortization............ 12,243 9,488 35,035 27,066
Restructuring charge..................... 7,719 -- 7,719 --
Merger-related costs..................... -- -- 5,249 --
----------- ---------- ---------- ----------
Total................................ 183,517 157,912 562,088 463,894
----------- ---------- ---------- ----------
Income from operations....................... 15,403 24,275 62,524 68,891
----------- ---------- ---------- ----------
Other expense, net:
Interest expense, net.................... 2,682 1,787 7,087 5,290
Other expense............................ (22) 16 59 203
----------- ---------- ---------- ----------
Other expense, net................... 2,660 1,803 7,146 5,493
----------- ---------- ---------- ----------
Income before taxes and equity investee
results.................................. 12,743 22,472 55,378 63,398
Taxes on income.............................. 5,037 9,329 22,317 26,577
Equity investee loss......................... -- 80 -- 438
----------- ---------- ---------- ----------
Net income................................... $ 7,706 $ 13,063 $ 33,061 $ 36,383
=========== ========== ========== ==========
Basic earnings per share..................... $ 0.13 $ 0.22 $ 0.56 $ 0.63
Weighted average shares outstanding - basic.. 58,946,003 58,154,402 58,753,481 57,961,092
Diluted earnings per share................... $ 0.13 $ 0.22 $ 0.56 $ 0.62
Weighted average shares outstanding - diluted 59,033,962 59,010,297 59,332,078 58,539,706
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------
(DOLLARS IN THOUSANDS) 1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 33,061 $ 36,383
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 35,035 27,066
Restructuring reserve, net of cash paid............. 7,282 --
Stock issued under employee benefit and stock
compensation plans................................ 6,501 5,843
Deferred income tax provision....................... 1,524 1,145
Other............................................... 94 454
Changes in operating assets and liabilities:
Accounts receivable............................... (5,121) (25,496)
Unbilled services................................. (23,217) (16,629)
Inventory......................................... 886 (5,678)
Accounts payable.................................. (6,659) 5,645
Accrued liabilities............................... (643) 520
Unearned revenue.................................. (2,669) (1,268)
Income taxes payable.............................. (3,197) 9,534
Other assets and liabilities, net................ (9,230) (8,209)
--------- --------
Net cash provided by operating activities............... 33,647 29,310
--------- --------
Cash flows from investing activities:
Capital expenditures................................ (90,091) (46,037)
Acquisition of businesses........................... (16,830) --
Other, net.......................................... 635 122
--------- --------
Net cash used in investing activities................... (106,286) (45,915)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt........................ 60,000 --
Repayments of long-term debt........................ -- (5,000)
Stock issued under employee stock purchase and
option plans...................................... 5,774 5,053
--------- --------
Net cash provided by financing activities............... 65,774 53
--------- --------
Net change in cash and cash equivalents................. (6,865) (16,552)
Cash and cash equivalents, beginning of period.......... 19,263 28,027
--------- --------
Cash and cash equivalents, end of period................ $ 12,398 $ 11,475
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair statement of the results of operations for the interim periods
presented. The consolidated financial statements have not been audited and are
subject to such year-end adjustments as may be considered appropriate. You
should read these consolidated financial statements together with the historical
consolidated financial statements of Covance Inc. and subsidiaries ("Covance")
for the years ended December 31, 1998, 1997 and 1996 included in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1998. Operating
results for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
These unaudited consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. Generally accepted
accounting principles require 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.
PREPAID EXPENSES AND OTHER ASSETS
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. Amounts receivable from
customers in connection with billed and unbilled investigator fees and
out-of-pocket pass-through costs are included in prepaid expenses and other
current assets in the accompanying Consolidated Balance Sheets and totaled $29.3
million and $27.3 million at September 30,1999 and December 31, 1998,
respectively.
EARNINGS PER SHARE
Earnings per share has been calculated in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 128, EARNINGS PER SHARE. In
computing diluted earnings per share for the three months ended September 30,
1999 and 1998, the denominator was increased by 87,959 shares and 855,895
shares, respectively, and for the nine months ended September 30, 1999 and 1998,
the denominator was increased by 578,597 shares and 578,614 shares,
respectively, representing the dilution of stock options outstanding at
September 30, 1999 and 1998 with exercise prices less than the average market
price of Covance's Common Stock during each respective period.
COMPREHENSIVE INCOME
Comprehensive income has been calculated in accordance with FASB Statement
No. 130, REPORTING COMPREHENSIVE INCOME. Covance has determined total
comprehensive income to be $10.0 million and $15.9 million for the three months
ended September 30, 1999 and 1998, respectively, and $27.0 million and $38.0
million for the nine months ended September 30, 1999 and 1998, respectively.
Covance's total comprehensive income represents net income plus the change in
the cumulative translation adjustment equity account for the periods presented.
SEGMENT REPORTING
Covance reports information about its operating segments and related
disclosures about products, services, geographic areas and major customers in
accordance with FASB Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. See Note 7 for segment disclosure.
6
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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest for the nine months ended September 30, 1999 and
1998 totaled $4.8 million and $5.8 million, respectively. Cash paid for income
taxes for the nine months ended September 30, 1999 and 1998 totaled $22.0
million and $18.1 million, respectively.
4. ACQUISITIONS
During the nine month period ended September 30, 1999, Covance paid
approximately $16.8 million in contingent purchase price associated with two of
its 1996 acquisitions, consisting primarily of payments totaling approximately
$15.8 million in connection with its purchase of Health Technology Associates,
Inc. The goodwill associated with this acquisition aggregated $29.5 million.
5. MERGER COSTS
Covance entered into an Agreement and Plan of Merger as of April 28, 1999
(the "Proposed Merger") with Parexel International Corporation ("Parexel"). On
June 25, 1999, Covance and Parexel mutually agreed to terminate the Proposed
Merger. In connection with the termination, Covance and Parexel entered into a
termination agreement whereby, among other things, each party agreed to release
the other from any claims relating to the Proposed Merger and each party agreed
to bear its own expenses incurred in connection with the Proposed Merger. During
the three months ended June 30, 1999, Covance incurred one-time, out-of-pocket
transaction and integration related costs (primarily professional fees for
investment banking, attorneys, accountants and consultants) of $5.2 million
($3.1 million, net of tax) in connection with the Proposed Merger.
6. RESTRUCTURING
In order to improve its global competitiveness, better optimize capacity
utilization and enhance quality and service worldwide, Covance has consolidated
its regionally based Phase III clinical services under one global management
structure and formed a unified sales force for its clinical development, central
laboratory, packaging and other related clinical support services. Primarily in
connection with these actions, in the third quarter of 1999, Covance recorded a
pre-tax restructuring charge of $7.7 million ($4.6 million net of tax)
consisting primarily of $6.5 million in severance and related benefits arising
from the elimination of approximately 165 managerial and staff positions. As of
September 30, 1999 approximately $0.4 million has been paid, while the remaining
$7.3 million has been accrued and is included in accrued expenses and other
liabilities in the Consolidated Balance Sheet.
7. SEGMENT INFORMATION
Covance has two reportable segments: early development and late-stage
development. Early development services, which includes Covance's preclinical
and Phase I clinical service capabilities, involve evaluating a new compound for
safety and early effectiveness as well as evaluating the absorption,
distribution, metabolism and excretion of the compound in the human body. It is
at this stage that a pharmaceutical company, based on available data, will
generally decide whether to continue further development of a drug. Late-stage
development services, which include Covance's clinical development, clinical
support, biomanufacturing and product launch capabilities, are geared toward
demonstrating the clinical effectiveness of a compound in treating certain
diseases or conditions, obtaining regulatory approval and maximizing the drug's
commercial potential.
7
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
The accounting policies of the reportable segments are the same as those
described in Note 2. Segment net revenues and operating income for the three and
nine months ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
EARLY LATE-STAGE
DEVELOPMENT DEVELOPMENT TOTAL
----------- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues from external customers $ 67,971 $ 130,949 $ 198,920
Operating income 12,068 (a) 11,054 (a) 23,122 (a)
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues from external customers 61,362 120,825 182,187
Operating income 10,035 14,240 24,275
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net revenues from external customers 202,863 421,749 624,612
Operating income 31,355 (a) 44,137 (a) 75,492 (a)
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net revenues from external customers 180,048 352,737 532,785
Operating income 27,702 41,189 68,891
</TABLE>
-----------------
(a) Excludes special charges recorded during the three and nine months
ended September 30, 1999, as follows: (1) Third quarter restructuring
charge totaling $7,719 ($4,631 after tax); (2) Second quarter 1999 merger
related charge totaling $5,249 ($3,150 after tax).
8. SUBSEQUENT EVENT
During September 1999, the Board of Directors authorized the repurchase of
up to 5% or 3.0 million shares of Covance's outstanding common stock in open
market transactions, subject to business and market conditions and other
factors. In early October 1999, Covance repurchased a total of 495,000 shares at
a total cost of approximately $4.2 million.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion together with the unaudited
Covance consolidated financial statements and the accompanying notes included in
this Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
OVERVIEW
Covance is a leading contract research organization providing a wide range
of integrated product development services on a worldwide basis to the
pharmaceutical, biotechnology and medical device industries. In addition, and to
a lesser extent, Covance provides services such as health economics and outcomes
for managed care organizations, hospitals and other health care providers and
laboratory testing to the chemical, agrochemical and food industries. The
foregoing services comprise two segments for financial reporting purposes: early
development services (includes preclinical and Phase I clinical); and late-stage
development services (includes clinical development, clinical support,
biomanufacturing and product launch). Covance believes it is one of the largest
biopharmaceutical contract research organizations, based on 1998 annual net
revenues, and one of a few that is capable of providing comprehensive global
product development services. Covance offers its clients high quality services
designed in part to reduce product development time. This enables Covance's
customers to introduce their products into the marketplace faster and as a
result, maximize the period of market exclusivity and monetary return on their
research and development investments. Additionally, Covance's comprehensive
services and broad experience provide its customers with a variable cost
alternative to fixed cost internal development capabilities.
Historically, a majority of Covance's net revenues have been earned under
contracts. These contracts generally range in duration from a few months to two
years. Revenue from these contracts is generally recognized under either the
percentage of completion method of accounting or as services are rendered or
products are delivered. The contracts may contain provisions for renegotiation
for cost overruns arising from changes in the scope of work. Renegotiated
amounts are included in net revenues when earned and realization is assured. In
some cases, for multi-year contracts a portion of the contract fee is paid at
the time the trial is initiated. Additional payments are made based upon the
achievement of performance based milestones over the contract duration. Covance
routinely subcontracts with independent physician investigators in connection
with either single or multi-site clinical trials. Investigator fees are not
reflected in net revenues or expenses since these investigator fees are paid by
the customers to Covance on a "pass-through basis" (i.e., without risk or reward
to Covance). Most contracts are terminable either immediately or upon notice by
the client. These contracts typically require payment to Covance of expenses to
wind down a study, payment to Covance of fees earned to date, and, in some
cases, a termination fee or a payment to Covance of some portion of the fees or
profit that could have been earned by Covance under the contract if it had not
been terminated early.
Covance segregates its recurring operating expenses among three categories:
cost of revenue; selling, general and administrative expenses; and depreciation
and amortization. Cost of revenue consists of appropriate amounts necessary to
complete the revenue and earnings process, and includes direct labor and related
benefit charges, other direct costs, and an allocation of facility charges and
information technology costs. Cost of revenue, as a percentage of net revenues,
tends and is expected to fluctuate from one period to another, generally within
a range of up to 200 basis points in either direction. This variability is
principally a result of changes in labor utilization and the mix of service
offerings involving hundreds of studies conducted during any period of time.
Selling, general and administrative expenses consist primarily of administrative
payroll and related benefit charges, advertising and promotional expenses,
administrative travel and an allocation of facility charges and information
technology costs.
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
(1) delays in initiating or completing significant drug development trials, (2)
termination of drug development trials, (3) acquisitions and (4) exchange rate
fluctuations. Delays and terminations of trials are often the result of actions
taken by Covance's customers 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.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 1998. Net revenues increased 9.2% to $198.9 million for the three months
ended September 30, 1999 from $182.2 million for the corresponding 1998 period.
Excluding the impact of acquisitions and foreign exchange rate variances between
both periods, net revenues increased 8.2%. Net revenues from Covance's
late-stage development services grew 8.4%, or 8.0% excluding the impact of
acquisitions and foreign exchange rate variances between both periods. The
slowdown in growth in the late-stage development segment was the result of a
slowdown in large clinical orders, the impact of a major contract cancellation
due to molecule performance and a significant reduction in scope of another
large program due to sponsor funding pressures. The slowdown in clinical
development was compounded by a leveling off of growth in central laboratory
services. Net revenues from Covance's more mature early development services
grew 10.8%, or 8.6% excluding the impact of acquisitions and foreign exchange
rate variances between both periods.
Cost of revenue increased 12.8% to $134.6 million for the three months
ended September 30, 1999 from $119.4 million for the corresponding 1998 period
primarily as a result of the increase in net revenues. Cost of revenue, as a
percentage of net revenues, was 67.7% and 65.5% for the three month periods
ended September 30, 1999 and 1998, respectively. The increase in cost of revenue
as a percentage of net revenues is due to the softness in revenue discussed
above coupled with the relative fixed nature of certain costs.
Overall, selling, general and administrative expense decreased 0.5% to
$28.9 million for the three months ended September 30, 1999 from $29.1 million
for the corresponding 1998 period. As a percentage of net revenues, selling,
general and administrative expense decreased to 14.5% for the three months ended
September 30, 1999 from 15.9% for the corresponding 1998 period. This decrease
is attributable to a reduction in certain variable administrative expenses,
including recruitment, relocation and variable compensation.
Depreciation and amortization increased 29.0% to $12.2 million or 6.2% of
net revenues for the three months ended September 30, 1999 from $9.5 million or
5.2% of net revenues for the corresponding 1998 period, due to the goodwill
amortization associated with the November 1998 acquisitions of Berkeley Antibody
Company, Inc. and GDXI, Inc. and the contingent purchase price payments made in
1999 for two acquisitions completed in 1996, and increased depreciation expense
associated with capital expenditures.
In order to improve its global competitiveness, better optimize capacity
utilization and enhance quality and service worldwide, Covance has consolidated
its regionally based Phase III clinical services under one global management
structure and formed a unified sales force for its clinical development, central
laboratory, packaging and other related clinical support services. Primarily in
connection with these actions, in the third quarter of 1999, Covance recorded a
pre-tax restructuring charge of $7.7 million ($4.6 million net of tax)
consisting primarily of $6.5 million in severance and related benefits arising
from the elimination of approximately 165 managerial and staff positions.
Severance payments have begun and will continue into 2000.
Inclusive of the $7.7 million restructuring charge recorded in September
1999, income from operations decreased 36.5% to $15.4 million for the three
months ended September 30, 1999 from $24.3 million for the corresponding 1998
period. Excluding the impact of the restructuring charge, income from operations
decreased 4.7% to $23.1 million, or 11.6% of net revenues, from $24.3 million,
or 13.3% of net revenues for the corresponding 1998 period. The reduction in
operating income as a percentage of net revenues is primarily attributable to
the increase in cost of sales as a percentage of net revenues and the increase
in depreciation and amortization. Excluding the impact of the restructuring
charge, income from operations from Covance's early development segment
increased $2.1 million or 20.3% to $12.1 million for the three months ended
September 30, 1999 from $10.0 million for the corresponding 1998 period.
Excluding the impact of the restructuring charge, income from operations from
Covance's late-stage development segment declined $3.1 million or 22.4% to $11.1
million for the three months ended September 30, 1999 from $14.2 million for the
corresponding 1998 period. The reduction in late-stage development operating
income was due to the softness in clinical development and central laboratory
services discussed above.
Other expense increased $0.9 million to $2.7 million for the three months
ended September 30, 1999 from $1.8 million for the corresponding 1998 period,
primarily due to an increase in interest expense.
Covance's effective tax rate for the three months ended September 30, 1999
decreased to 39.5% from 41.5% for the corresponding 1998 period. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
period to period due to the changes in the geographic distribution of its
pre-tax earnings.
10
<PAGE>
Inclusive of the $7.7 million after tax impact of the restructuring charge,
net income decreased 41.0% to $7.7 million for the three months ended September
30, 1999 from $13.1 million for the corresponding 1998 period. Excluding the
after tax impact of the restructuring charge, net income decreased 5.6% or $0.7
million to $12.3 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998. Net revenues increased 17.2% to $624.6 million for the nine months
ended September 30, 1999 from $532.8 million for the corresponding 1998 period.
Excluding the impact of acquisitions and foreign exchange rate variances between
both periods, net revenues increased 15.2%. Net revenues from Covance's
late-stage development services grew 19.6%, or 18.0% excluding the impact of
acquisitions and foreign exchange rate variances between both periods. The
slowdown in growth in the late-stage development segment was the result of a
slowdown in large clinical orders, the impact of a major contract cancellation
due to molecule performance and a significant reduction in scope of another
large program due to sponsor funding pressures. The slowdown in clinical
development was compounded by a leveling off of growth in central laboratory
services. Net revenues from Covance's more mature early development services
grew 12.7%, or 9.9% excluding the impact of acquisitions and foreign exchange
rate variances between both periods.
Cost of revenue increased 18.7% to $417.0 million for the nine months ended
September 30, 1999 from $351.4 million for the corresponding 1998 period,
primarily as a result of the increase in net revenues. Cost of revenue, as a
percentage of net revenues, was 66.8% and 66.0% for the nine months ended
September 30, 1999 and 1998, respectively.
Overall, selling, general and administrative expense increased 13.7% to
$97.1 million for the nine months ended September 30, 1999 from $85.4 million
for the corresponding 1998 period. As a percentage of net revenues, selling,
general and administrative expense was 15.5% and 16.0% for the nine months ended
September 30, 1999 and 1998, respectively. The decrease in selling, general and
administrative expense as a percentage of net revenues is a result of a
reduction in certain variable administrative expenses.
Depreciation and amortization increased 29.4% to $35.0 million or 5.6% of
net revenues for the nine months ended September 30, 1999 from $27.1 million or
5.1% of net revenues for the corresponding 1998 period, due to the goodwill
amortization associated with the November 1998 acquisitions of Berkeley Antibody
Company, Inc. and GDXI, Inc. and the contingent purchase price payments made in
1999 for two acquisitions completed in 1996, and increased depreciation expense
associated with capital expenditures.
In order to improve its global competitiveness, better optimize capacity
utilization and enhance quality and service worldwide, Covance has consolidated
its regionally based Phase III clinical services under one global management
structure and formed a unified sales force for its clinical development, central
laboratory, packaging and other related clinical support services. Primarily in
connection with these actions, in the third quarter of 1999, Covance recorded a
pre-tax restructuring charge of $7.7 million ($4.6 million net of tax)
consisting primarily of $6.5 million in severance and related benefits arising
from the elimination of approximately 165 managerial and staff positions.
Severance payments have begun and will continue into 2000.
Inclusive of a $5.2 million one-time merger-related charge incurred in
connection with the termination of the proposed merger with Parexel in June
1999, and the $7.7 million restructuring charge recorded in September 1999,
income from operations decreased 9.2% to $62.5 million for the nine months ended
September 30, 1999 from $68.9 million for the corresponding 1998 period.
Excluding the impact of the one-time merger-related charge and the restructuring
charge, income from operations increased 9.6% to $75.5 million, or 12.1% of net
revenues, from $68.9 million or 12.9% of net revenues for the corresponding 1998
period. The reduction in operating income as a percentage of net revenues is
attributable to the increase in cost of sales as a percentage of net revenues
and the increase in depreciation and amortization. Excluding the impact of the
one-time merger-related charge and the restructuring charge, income from
operations from Covance's early development segment increased $3.7 million or
13.2% to $31.4 million for the nine months ended September 30, 1999 from $27.7
million for the corresponding 1998 period. Excluding the impact of the one-time
merger-related charge and the restructuring charge, income from operations from
Covance's late-stage development segment increased $2.9 million or 7.2% to $44.1
million for the nine months ended September 30, 1999 from $41.2 million for the
corresponding 1998 period. The reduction in the growth of late-stage development
operating income was due to the softness in clinical development and central
laboratory services discussed above.
Other expense increased $1.7 million to $7.1 million for the nine months
ended September 30, 1999 from $5.5 million for the corresponding 1998 period,
due to an increase in interest expense.
11
<PAGE>
Covance's effective tax rate for the nine months ended September 30, 1999
decreased to 40.3% from 41.9% for the corresponding 1998 period. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
period to period due to the changes in the geographic distribution of its
pre-tax earnings.
Inclusive of the after tax impact of both the $5.2 million one-time
merger-related charge and the $7.7 million restructuring charge, net income
decreased 9.1% to $33.1 million for the nine months ended September 30, 1999
from $36.4 million for the corresponding 1998 period. Excluding the after tax
impact of the one-time merger-related charge and the restructuring charge, net
income increased 12.3% or $4.5 million to $40.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Management believes that a combination of borrowing under its long-term
revolving credit facility, cash generated from operations and capital that
Covance believes could be made available to it from other credit sources if
required, 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. At September 30, 1999, there was $200.0 million of outstanding
borrowings and $11.3 million of outstanding letters of credit, with a remaining
availability of $38.7 million under Covance's long-term revolving credit
facility. Interest on all outstanding borrowings under Covance's long-term
revolving credit facility during the first nine months of 1999 was computed
based upon the London Interbank Offered Rate plus a margin and approximated
5.35% per annum.
At September 30, 1999, Covance Biotechnology Services Inc. ("Covance
Biotechnology") had $3.0 million in short-term debt outstanding with the North
Carolina Biotechnology Center. This debt matures in December 1999 and is
guaranteed by Covance. In addition, Covance Biotechnology has a $10.0 million
short-term revolving credit facility with a bank, of which $10.0 million of
borrowings were outstanding as of September 30, 1999. This short-term revolving
credit facility carries interest at a rate substantially equivalent to the rate
in effect on Covance's borrowings under its long-term credit facility and is
guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million
Swiss Francs from a bank. This loan bears interest at a fixed rate of 2.9% per
annum and matures in October 2000. 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.
During the nine months ended September 30, 1999, Covance's operations
provided net cash of $33.6 million, an increase of $4.3 million from the
corresponding 1998 period. Cash flows from net earnings adjusted for non-cash
activity provided $83.5 million for the nine months ended September 30, 1999, up
$12.6 million or 17.8% from the corresponding 1998 period. The change in net
operating assets used $49.8 million and $41.6 million in cash during the nine
months ended September 30, 1999 and 1998, respectively, primarily due to an
increase in accounts receivable and unbilled services during both periods.
Working capital was $113.7 million at September 30, 1999, an increase of
$32.3 million from December 31, 1998. Aggregate accounts receivable and unbilled
services at September 30, 1999 of $209.1 million were up $28.3 million or 15.7%
from the December 31, 1998 level of $180.7 million. Covance's ratio of current
assets to current liabilities was 1.61 at September 30, 1999 and 1.42 at
December 31, 1998.
Investing activities for the nine months ended September 30, 1999 used
$106.3 million compared to $45.9 million for the corresponding 1998 period.
Investing activities for the nine months ended September 30, 1999 included cash
payments of contingent purchase price totaling approximately $16.8 million in
connection with two of Covance's 1996 acquisitions. Capital spending for the
first nine months of 1999 totaled $90.1 million, primarily for outfitting of new
facilities, purchase of new equipment, upgrade of existing equipment and
computer equipment and software for newly hired employees, as well as the
purchase of Covance's new North American packaging facility, compared to $46.0
million for the corresponding 1998 period.
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
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<PAGE>
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical services. The first risk occurs as revenue
recognized for services rendered is denominated in a currency different from the
currency in which the subsidiary's expenses are incurred. As a result, the
subsidiary's net revenues and resultant earnings can be affected by fluctuations
in exchange rates. Some contracts provide that currency fluctuations from the
rates in effect at the time the contract is executed are the responsibility of
the customer. Other contracts provide that currency fluctuations from the rates
in effect at the time the contract is executed up to a specified threshold
(generally plus or minus a few percentage points) are absorbed by Covance while
fluctuations in excess of the threshold are the customer's responsibility. Most
contracts do not specifically address responsibility for currency fluctuations.
Historically, fluctuations in exchange rates from those in effect at the time
contracts were executed have not had a material effect upon Covance's
consolidated financial results.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, Covance recognizes a receivable at the
time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
and payment from the customer is received will result in Covance receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. This difference is recognized by Covance as a foreign currency
transaction gain or loss, as applicable, and is reported in other expense
(income) in Covance's Consolidated Statements of Income.
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 taxing
jurisdictions. In particular, as the geographic mix of Covance's pre-tax
earnings among various tax jurisdictions changes, Covance's effective tax rate
may vary from period to period.
INFLATION
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result, Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
YEAR 2000 ISSUES
Information systems are an integral part of the services and products
Covance provides. Covance has formed a group, led by its Year 2000 Project
Director, working periodically with a steering committee of executives from
Covance and individually with members of such committee, to implement Covance's
Year 2000 assessment and remediation plan. This plan approached the Year 2000
problem from an internal, supplier and customer perspective. Presently, there
are approximately 52 full-time employee equivalents who are dedicated to the
Year 2000 project. This Year 2000 plan is being executed under the guidance of
Covance's senior management, including the Chief Executive Officer and the Board
of Directors. Specifically, the General Manager and Group President of each
applicable business location manage the Year 2000 plan at an operational level.
In addition, other executives of Covance, including the Chief Executive Officer,
the Chief Financial Officer and/or Controller and the General Counsel
periodically review each business location concerning the Year 2000 readiness of
the location. The Board of Directors also periodically reviews with Covance's
management the progress under the Year 2000 plan.
STATE OF READINESS. The Year 2000 plan is intended to provide a
comprehensive and rigorous methodology for identifying and addressing the risks
of Year 2000 problems to Covance. Its goal is to minimize the number and
seriousness of any defects and related disruptions or problems stemming from
Year 2000 issues and to quickly repair any that do occur. Covance's Year
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<PAGE>
2000 plan has been divided into six phases: inventory, risk assessment,
evaluation, remediation, validation and implementation.
The inventory is intended to cover all of Covance's systems and processes
that involve the use of dates, whether or not the system is deemed Year 2000
compliant, including:
- - computer related hardware;
- - computer related software;
- - internally developed systems;
- - devices, equipment and scientific instrumentation;
- - outsourced services;
- - outsourced products; and
- - client systems that Covance interacts with
We also assess systems interrelationships to minimize the adverse effects
non-compliant data or systems could have on remediated systems. During the risk
assessment we determine the potential impact to Covance's operations because of
Year 2000 non-compliance. Specifically, the most business critical systems are
prioritized and potential material liabilities identified. Evaluation involves
determining whether a system is Year 2000 compliant. The inventory, risk
assessment and evaluation phases of the Year 2000 plan commenced in October 1997
and were substantially completed for internal systems in May 1998.
In conjunction with the inventory, risk assessment and evaluations phases,
Covance has undertaken a company-wide and operation specific Year 2000 awareness
campaign for purposes of employee awareness and involvement. Covance believes
that employee awareness will maximize the completeness of its Year 2000
inventory and enhance the effectiveness of the Year 2000 plan generally.
Also as part of the inventory, assessment and evaluation phases, Covance is
conducting an assessment of material third-party relationships for Year 2000
compliance. These third parties include investigational sites, utility
companies, telecommunications companies, business specific product suppliers,
such as software, animal feed and reagent suppliers or providers, transportation
companies, and payroll and benefit services companies. Important vendors,
suppliers and service providers are being requested to supply Covance with
certification that their systems are Year 2000 compliant, or to tell us that
they are not. Generally, where certification cannot be obtained, or even when
certification is obtained but the risk of disruption to Covance's business is
considered so potentially severe, Covance is investigating alternative sources
and considering stockpiling supplies to guard against potential shortages.
However, we cannot assure you that Covance's suppliers, vendors and service
providers will attain Year 2000 compliance or that suitable alternative
suppliers, vendors and service providers can be engaged. It is possible that
delays, increased costs or supplier, vendor or service provider failures could
have a material adverse impact on Covance's business, financial condition,
results of operations and cash flows, by, for example, negatively effecting
Covance's ability to meet its contractual or regulatory obligations or service
its customers.
While Covance is taking steps to raise awareness of the Year 2000 issue
among its customers, Covance does not believe it is appropriate to require
clients to certify their Year 2000 readiness and compliance. For the fiscal year
ended December 31, 1998, Covance had no single customer which accounted for
greater than 10% of its net revenues and only one customer which accounted for
more than 5% of its net revenues. However, if a significant customer or group of
customers were adversely effected by Year 2000 related problems, Covance's
business and revenue could be reduced and a material adverse effect on our
business, financial condition, results of operations and cash flows could
result.
Remediation is defined as the phase of the Year 2000 plan where systems are
fixed to maximize Year 2000 compliance so that they are able to properly
calculate dates without interfering with the proper operation of other
components of the system. Remediation includes the repair, replacement or
removal of non-compliant systems. Covance is presently in the process of
remediating its systems and will continue to do so, as necessary, for the
duration of the Year 2000 plan.
In the validation phase of the Year 2000 plan, remediated systems are
required to be tested and the testing to be documented. In addition, systems
deemed compliant in the evaluation phase are required to be documented as are
vendor and
14
<PAGE>
supplier systems. The validation phase has been substantially completed for
business critical systems.
The final phase of the Year 2000 plan is the implementation phase where
remediated systems, which have undergone and completed validation, are put into
operational use and observed for interaction with other aspects and components
of systems that may or may not be related to the Year 2000 issue to ensure that
they function as intended. This phase is 98% completed for internal business
critical systems and is scheduled to be completed for business critical systems
by December 1999.
COSTS OF YEAR 2000 PROJECT. Beginning in early 1998, Covance began to incur
costs and make expenditures related to the Year 2000 project. Covance expects to
continue to incur costs and make expenditures relating to the Year 2000 project
through the end of the year 2000. These costs and expenditures can be broadly
classified into two categories:
(1) amounts that will be expensed as incurred. These amounts consist of
internal payroll relating to employees newly hired or redeployed to
work on the Year 2000 project, external consultants and the net book
value of non-Year 2000 compliant equipment to be replaced; and
(2) amounts that will be capitalized and depreciated over the useful lives
of the associated assets. These amounts consist of the purchase price
of new hardware, software and other equipment acquired to replace
existing hardware, software and other equipment that is not Year 2000
compliant.
Covance currently estimates that the costs of internal payroll, external
consultants and the net book value of equipment to be replaced, amounts that
have and will be expensed as incurred, will total between $9.0 million and $10.0
million over the three year period ending December 31, 2000. Of these amounts, a
total of $1.5 million and $4.8 million has been incurred and expensed during the
three and nine month periods ended September 30, 1999, respectively, while a
total of $2.3 million was incurred and expensed during the year ended December
31, 1998.
Covance currently estimates that the cost of new hardware, software and
other equipment to be acquired in replacement of existing non-Year 2000
compliant hardware, software and other equipment, will total between $7.1
million and $8.0 million. These amounts will be capitalized and depreciated over
the useful lives of the related assets and will primarily be incurred over the
two year period ending December 31, 1999. Of these amounts, capitalizable
expenditures totaling $0.6 million and $3.7 million have been made during the
three and nine month period ended September 30, 1999, respectively, while a
total of $1.6 million in expenditures were made during the year ended December
31, 1998.
The primary source of funds for all costs to be incurred and expenditures
to be made is expected to be provided by Covance's operating cash flows.
RISKS OF YEAR 2000 PROBLEMS. Worst-case scenarios resulting from Year 2000
problems deemed by Covance to be most reasonably likely include the following:
- - loss of power and other utility services which could result in
disruption to existing and future studies generally;
- - harm to specimens and test samples used in studies and an adverse
impact on the health and well being of the animals;
- - inability to obtain timely and sufficient supplies of reagents, lab
ware or animal feed, which could result in the inability to perform
existing and future laboratory and central laboratory studies and an
adverse impact on the health and well being of the animals;
- - computer hardware, software and embedded technology failure which could
disrupt Covance's equipment, systems and networks resulting in an
inability to perform existing and future studies and/or an adverse
impact on the health and well being of patients;
- - the loss of voice and data telecommunications capabilities, which could
result in an inability for Covance to internally communicate or to
communicate with, among others, its clients and investigational sites;
and
- - the inability of Covance's third party investigational sites to become
Year 2000 compliant, which could result in the loss to Covance of their
services.
Any one or more of these or other events could result in business slowdowns
or suspensions, subject Covance to liability for breach of contract or personal
injury and have a material adverse effect on our business, financial condition,
results of operations and cash flows could result.
Deferrals of scheduled information technology projects as a result of the
need to remediate Year 2000 problems are not presently expected to have a
material adverse effect on Covance's business, financial condition, results of
operations and cash
15
<PAGE>
flows. However, in the event the implementation of the Year
2000 plan requires greater expenditures or more qualified employees than
presently estimated or qualified information technology workers become more
difficult or expensive to attract and retain, certain significant projects may
be subject to deferral. If such deferrals occur, they may have a material
adverse effect on Covance's business, financial condition, results of operations
and cash flows.
CONTINGENCY YEAR 2000 PLANS. Covance has developed contingency plans for
handling these critical areas in the event remediation is unsuccessful.
Contingency plans include:
- - the utilization of back-up generators for power supply;
- - identifying alternative suppliers for reagents, animal feed and other
supplies as well as stockpiling significant quantities of such supplies
in advance of the year 2000;
- - porting from one long distance carrier to another and utilizing cell
phones and call access cards when available; and
- - manning interactive voice response system phones with staff and
manually randomizing systems on paper to ensure the continued validity
of studies.
While the development of contingency plans has been substantially
completed, contingency plans themselves are subject to variables and
uncertainties. Therefore, we cannot assure you that Covance will correctly
anticipate the level, impact or duration of non-compliance of computer hardware,
software, systems or suppliers. We also cannot assure you that we will correctly
anticipate the vendors or service providers which may supply inaccurate
information to Covance or otherwise be unable to provide their service or
product free of defect or disruption arising from Year 2000 problems. We also
cannot assure you that our contingency plans will be adequate. Thus, there can
be no assurance that the Year 2000 problem, even after giving effect to the
implementation of applicable contingency plans, will not happen and this
occurrence could have a material adverse impact on Covance's business, financial
condition, results of operations and cash flows.
FORWARD LOOKING STATEMENTS. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS WELL AS IN CERTAIN
OTHER PARTS OF THIS QUARTERLY REPORT ON FORM 10-Q CONTAIN STATEMENTS THAT LOOK
FORWARD IN TIME. THESE STATEMENTS ARE FORWARD LOOKING STATEMENTS MADE UNDER THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FORWARD LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES,
GOALS, STRATEGIES, FUTURE EVENTS OR PERFORMANCE, EXPECTATIONS, PREDICTIONS, AND
ASSUMPTIONS AND OTHER STATEMENTS WHICH ARE NOT STATEMENTS OF HISTORICAL FACTS.
ALL OUR FORWARD LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS AND MAY
BE EFFECTED BY RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY THOSE STATEMENTS. THESE RISKS AND
UNCERTAINTIES INCLUDE:
- COVANCE'S ABILITY TO IDENTIFY AND CORRECT ALL RELEVANT COMPUTER CODES
AND EMBEDDED CHIPS;
- COVANCE'S ABILITY TO ATTRACT AND RETAIN QUALIFIED INFORMATION
TECHNOLOGY PERSONNEL TO ADDRESS AND REMEDIATE YEAR 2000 PROBLEMS;
- THE AVAILABILITY OR AFFORDABILITY OF ALTERNATIVE SOURCES FOR CRITICAL
SUPPLIES AND SERVICES;
- THE EFFECT OF THE YEAR 2000 PROBLEM ON COVANCE'S SUPPLIERS, CUSTOMERS
AND OTHER THIRD PARTIES;
- COVANCE'S ABILITY TO ESTIMATE COSTS OF YEAR 2000 REMEDIATION AND
PREDICT PROBLEMS AND COSTS THAT MIGHT ARISE WITH RESPECT TO YEAR 2000
ISSUES; AND
- COVANCE'S ABILITY TO ADDRESS OTHER YEAR 2000 ISSUES, AND RISKS AND
UNCERTAINTIES SET FORTH IN COVANCE'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION INCLUDING WITHOUT LIMITATION ITS ANNUAL REPORT ON
FORM 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Exhibit 10A - Severance Agreement and Release between Covance
Inc. and James D. Utterback dated as of September 1, 1999.
(2) Exhibit 10B - Employment Agreement between Christopher A.
Kuebler and Covance Inc. dated as of May 13, 1999.
(3) Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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: November 8,1999 By: /S/ CHRISTOPHER A. KUEBLER
-------------------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ CHRISTOPHER A. KUEBLER
- -------------------------------
Christopher A. Kuebler Chairman of the Board, President November 8,1999
and Chief Executive Officer
(Principal Executive Officer)
/s/ CHARLES C. HARWOOD, JR.
- -------------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President November 8,1999
and Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL GIANNETTO
- -------------------------------
Michael Giannetto Corporate Vice President November 8,1999
and Controller
(Principal Accounting Officer)
</TABLE>
18
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10A Severance Agreement and Release between Covance Inc. and James D.
Utterback dated as of September 1, 1999.
10B Employment Agreement between Christopher A. Kuebler and Covance Inc.
dated as of May 13, 1999.
27 Financial Data Schedule (for SEC use only)
<PAGE>
Exhibit 10A
SEVERANCE AGREEMENT AND RELEASE
-------------------------------
This Severance Agreement and Release ("Agreement") dated as of September
1, 1999 by and between Covance Inc. ("Covance") and James D. Utterback,
residing at [address] ("Employee").
WHEREAS, Covance and the Employee heretofore had an employment
relationship whereby Employee was employed by Covance pursuant to that
certain Employment Letter Agreement dated November 20, 1996 between Employee
and Covance (such Employment Letter Agreement as amended, modified and
supplemented from time to time, including as amended by that certain
Amendment Letter dated November 20, 1998 between Covance and Employee, being
the "EMPLOYEE LETTER AGREEMENT").
WHEREAS, Covance has eliminated Employee's position and desires to
terminate such relationship.
NOW, THEREFORE, in consideration of the foregoing premises and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. TERMINATION. Employee's employment with Covance will terminate
as of October 5, 1999 (the "Termination Date"). In accordance with the terms
of this Agreement, Employee's employment with Covance is permanently and
irrevocably severed as of such date. Employee waives any claim of right to
reinstatement of employment with Covance or any of its affiliates or
subsidiaries from and after the Termination Date.
2. SEVERANCE AND BENEFITS.
(a) Employee will continue to be paid under this Section 2(a)
at Employee's current base salary of $276,640, less usual withholding
taxes, for a period commencing on the Termination Date and ending
August 31, 2001 (such period being the "Payment Period"). Such payments
will be made on the dates during the Payment Period that Covance makes
its regular payroll payments. Employee acknowledges that the Company's
obligation under the Employee Letter Agreement to continue Employee's
base salary for two years after his termination will be satisfied in
full pursuant to this Section 2(a) as a result of deferring Employee's
termination from September 1, 1999 to the Termination Date.
(b) In addition to the sum specified in Section 2(a), Covance
will, in accordance with the Employment Letter Agreement, pay to
Employee an amount equal $152,152, less usual withholding taxes, on
March 15, 2000 and $152,152, less usual withholding taxes, on March 15,
2001, such amounts representing the annual incentives Employee might
otherwise have earned for the years 1999 and 2000.
<PAGE>
(c) In addition to the above sum, Covance will pay to Employee
an amount equal to the value of Employee's accrued and unused vacation
time as of the Termination Date, if any, less usual withholding taxes.
Such amount shall be paid on such date as Covance makes its first
regular payroll payment after the Termination Date.
(d) Employee shall be entitled to withdraw the vested portion
of Employee's account under the Stock Purchase Savings Plan of Covance
Inc. (or any other 401(k) Plan Employee participated in during his
employment with Covance) at the times and in accordance with the other
provisions of the Plan. The amounts thereof shall be determined as of
the Termination Date. Any payroll deduction being made to the Stock
Purchase Savings Plan of Covance Inc. or the Covance Employee Stock
Purchase Plan will cease on the Termination Date.
(e) Employee is entitled to receive 392.07 shares of common
stock awarded to him pursuant to and in accordance with the terms and
conditions of Covance's Restricted Share Plan and 613.35 shares of
Covance common stock awarded to him pursuant to and in accordance with
the terms and conditions of the Covance Employee Stock Ownership Plan.
In addition, Employee hereby acknowledges that he or his designee has
already received 13,923 shares of Covance common stock granted to him
under the Covance Conversation Equity Plan.
(f) To the extent not otherwise prohibited by the applicable
benefit plans or policies, Employee's coverage for medical and dental
insurance under applicable Covance policies shall continue at Covance's
expense for the period commencing on the Termination Date and ending
six months after the Termination Date. At the expiration of such six
month period, Employee shall be entitled to make the COBRA election for
continued medical and dental health insurance benefits for Employee and
Employee's eligible dependents, subject to the terms and conditions of
the applicable policies and all COBRA requirements for up to an
additional 18 months. In the event Employee elects COBRA continuation,
Covance shall pay Employee an amount equal to the monthly premium for
such coverage, less usual withholding taxes, during the remaining 18
months of such Payment Period. Such payments will be made to Employee
in equal installments on the dates during the Payment Period that
Covance makes its regular payroll payments. To the extent not
otherwise prohibited by the applicable benefit plans or policies, life
and disability insurance coverage will continue, at Covance's expense,
through the Payment Period. At the expiration of the Payment Period,
the Employee may convert the life insurance coverage to an individual
policy, at Employee's expense, but without evidence of insurability,
within 30 days. Except as otherwise provided in this Agreement, all
other benefits coverage shall be terminated as of the Termination Date.
2
<PAGE>
Notwithstanding anything in this Section 2(f) to the contrary, Employee
agrees that if Employee obtains or is provided medical, dental, life and/or
disability insurance which is comparable to the benefits provided by Covance
under the respective Covance benefit plans in terms of the coverage provided
and the expense (both deductible and direct) borne by the Employee, then
Employee shall promptly notify Covance which of such insurance benefits
is then being provided to Employee and Covance shall cease providing such
coverage or discontinue paying the premiums for such insurance, as applicable.
(g) In the event Employee applies for unemployment
compensation, Covance agrees not to contest said payment of
unemployment compensation.
(h) In addition to the foregoing, Covance will provide
Employee outplacement services for the period from the Termination Date
to the one year anniversary of such date. Employee shall select and
Covance shall approve, which approval Covance shall not unreasonably
withhold, such outplacement provider and Covance shall pay such costs
directly to the outplacement provider.
(i) Covance hereby acknowledges that for purposes of that
certain Amended and Restated Supplemented Executive Retirement Plan
(the "SERP") Employee has accrued and vested in five Years of Services
(as defined in the SERP), and shall be entitled to the retirement
payments under the SERP in the amounts, at the times and on the other
terms and conditions specified in the SERP after giving effect to such
service crediting.
(j) No other benefits, bonuses, or additional compensation
(including, without limitation, the right to participate in the Stock
Purchase Savings Plan of Covance Inc., the Covance Inc. Employee Stock
Purchase Plan, the Covance Inc. Employee Stock Ownership Plan, the
Covance Restricted Share Plan, the Covance Inc. Employee Equity
Participation Plan, the Covance Inc. Conversion Equity Plan, the
Covance Inc. Variable Compensation Plan, the Covance Inc. General
Employee Variable Compensation Plan, or any other plan document, any
disability insurance plan of Covance or its affiliates, the Covance
Severance Pay Plan, the SERP, except as expressly provided in Section
2(i), or any other similar plans of Covance or its parents or
affiliates) shall be available or payable to Employee. Without limiting
the foregoing, and except as provided below, all stock options and
performance/restricted shares granted to Employee under the Covance
Employee Equity Participation Program or the Covance Inc. Conversion
Equity Plan, including, without limitation, 7,000 stock options of a
grant of 21,000 non-qualified stock options pursuant to that certain
Non-Qualified Stock Option Agreement dated February 18, 1998 (1998
Option Award) (the "SECOND STOCK OPTION AGREEMENT"), 8,066 stock options
of a grant of 12,100 non-qualified stock options pursuant to that
certain Non-Qualified Stock Option Agreement dated February 25, 1999
(1999 Option Award) (the "THIRD STOCK OPTION AGREEMENT"), a grant of
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16,675 performance/restricted shares (as adjusted based on actual
1997 results) pursuant to that certain Restricted Stock Agreement dated
January 20, 1997, a grant of 8,225 performance/restricted shares (as
adjusted based on actual 1998 results) pursuant to that certain
Restricted Stock Agreement dated February 18, 1998, and a grant of
6,100 performance/restricted shares pursuant to that certain Restricted
Stock Agreement dated February 25, 1999, which have not vested as of
the Termination Date, are terminated effective on the Termination Date;
PROVIDED, HOWEVER, that Employee shall have, except as specified in
Section 7, until the third anniversary of the Termination Date to
exercise his option to purchase: (i) 34,500 shares of Covance common
stock pursuant to a grant of 34,500 non-qualified stock options
pursuant to that certain Non-Qualified Stock Option Agreement (1997
Option Award) dated January 20, 1997 (the "FIRST STOCK OPTION
AGREEMENT"); (ii) 14,000 shares of Covance common stock pursuant to the
Second Stock Option Agreement; (iii) 4,034 shares of common stock
pursuant to the Third Stock Option Agreement; (iv) 8,397 shares of a
grant of 8,397 incentive stock options pursuant to that certain
Incentive Stock Option Agreement dated December 6, 1995, as amended,
under the Covance Conversion Equity Plan (the "CEP") (the "FOURTH STOCK
OPTION AGREEMENT"); (v) 23,089 shares of a grant of 23,089
non-qualified stock options pursuant to that certain Non-Qualified
Stock Option Agreement dated December 6, 1995, as amended, under the
CEP (the "FIFTH STOCK OPTION AGREEMENT"); and (vi) 35,416 shares of
Covance common stock pursuant to the CEP Stock Option Agreements (as
defined below). "CEP STOCK OPTION AGREEMENTS" means (w) that certain
Non-Qualified Stock Option Agreement dated April 28, 1994, as amended,
pursuant to which 7,084 non-qualified stock options were granted to the
Employee under the CEP; (x) that certain Incentive Stock Option
Agreement dated April 28, 1994, as amended, pursuant to which 12,594
incentive stock options were granted to Employee under the CEP; (y)
that certain Non-Qualified Stock Option Agreement dated December 7,
1994, as amended, pursuant to which 9,181 non-qualified stock options
were granted to Employee under the CEP; and (z) that certain Incentive
Stock Option Agreement dated December 7, 1994 pursuant to which 6,557
incentive stock options were granted to Employee under the CEP.
Nothing contained in this Section 2 shall be deemed to be an amendment,
modification or supplement to any of the plans described or specified
in this Agreement, except for the accelerated vesting on the
Termination Date of 11,385 stock options under the First Stock Option
Agreement, 7,000 stock options under the Second Stock Option Agreement,
4,034 stock options under the Third Stock Option Agreement, 4,199 stock
options under the Fourth Stock Option Agreement and 11,545 stock
options under the Fifth Stock Option Agreement.
(k) Covance hereby agrees to reimburse Employee up to $6,000
for the calendar year ending 1999 and $6,000 for the calendar year
ending 2,000 ($12,000 in the aggregate) for actual professional fees
for tax and/or financial counseling services provided to Employee.
Covance shall reimburse Employee for such amounts promptly after
receipt of reasonably satisfactory documentation of the type and
amounts of such services.
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3. RELEASE. The Employee, on behalf of Employee, Employee's heirs,
executors, administrators, successors and assigns, hereby releases and
forever discharges Covance and each and every subsidiary and affiliate of
Covance, and all of their successors and assigns, together with the officers,
directors and employees of the foregoing, from any and all actions, causes of
action, suits, damages, judgments, executions, claims and demands of any kind
whatsoever, (collectively, "Claims"), in law or in equity, which the Employee
or Employee's heirs, executors, administrators, successors or assigns had,
now have or hereafter may have against them or any of them the basis of which
arose on our prior to the Effective Date (as defined in Section 13) for any
reason, including, without limiting the generality of the foregoing, any
Claims arising out of, or in connection with Employee's employment with
Covance or the termination of the employment relationship, including, but not
limited to, any Claims arising out of, or in connection with any New Jersey
Civil Rights Law, Title VII of the Civil Rights Act of 1964, as amended, the
Equal Employment Opportunity Act of 1972, as amended, the Rehabilitation Act,
as amended, the Social Security Act, as amended, the Employment Retirement
Income Security Act, as amended, the Equal Pay Act, as amended, the Age
Discrimination and Employment Act, as amended, the Americans with
Disabilities Act, as amended, or any other federal, state or local law, rule,
regulation or ordinance, any common law claims under tort, contract or any
other theory now or hereafter recognized and any oral or written agreement,
including, without limitation, the Employee Letter Agreement.
Notwithstanding any breach of this Agreement by the Employee, this release
shall be binding upon the Employee, Employee's heirs, successors and assigns.
NOTICE: This Agreement is an important legal document which should be
carefully reviewed and understood before it is signed. By signing this
Agreement, Employee is agreeing to completely release Covance from all
liability to Employee. Employee, therefore, should consult with an attorney
before signing this Agreement.
Employee has 21 days from the date of receipt of this document in which
to execute this Agreement. In the event that Employee has not returned a
signed copy of this Agreement to Covance within 21 days of receipt, Covance
assumes that Employee has elected not to sign this Agreement. Employee also
understands that if Employee chooses to sign this Agreement, Employee has an
additional 7 days from the date of signing in which Employee may revoke it.
This Agreement will not become effective or enforceable until the revocation
period has expired and the other conditions specified in Section 13 have been
satisfied. If revoked, Employee agrees to return to Covance any payments made
to Employee under this Agreement prior to the date of revocation and
understands that all future payments and benefits hereunder will be canceled.
4. COVENANT. Except as otherwise specifically provided herein, any
rights of the Employee in connection with Employee's relationship with
Covance, or the termination thereof, shall be governed solely by this
Agreement, and this Agreement supersedes any prior
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oral or written agreements between the Employee and Covance in connection
with, or relating to, Employee's relationship with Covance, including,
without limitation, the Employee Letter Agreement; PROVIDED, that the
foregoing shall not be construed to supersede or nullify any obligation of
the Employee to Covance or any of its affiliates under any confidentiality
and/or non-competition agreements between Employee and Covance or any of its
affiliates or any of the obligations of Employee under the Employee Letter
Agreement, including, without limitation, obligations of confidentiality and
non-competition; PROVIDED, FURTHER, that nothing in this Agreement, the
Employee Letter Agreement or any other confidentiality and/or non-competition
agreement between you and Covance or any of its subsidiaries or affiliates
shall restrict you in your employment in any capacity by a corporation or
entity engaged substantially in the manufacture or sale of pharmaceuticals or
any other business which does not offer Covance Services (as defined in the
Employee Letter Agreement).
Without limitation to the foregoing, the Employee shall not (i) at any
time disclose or use any confidential or proprietary information, relating to
the business of Covance or any of its subsidiaries or affiliates or any
successor of any of the foregoing either by merger, assignment, operation of
law or otherwise, including, without limitation, trade secrets, technical
data, formulae, plans, computer software processes, financial and
organizational data, protocols, customer names or information, or business
methods or practices; (ii) at any time directly or indirectly, on behalf of
Employee, or any other person or entity solicit, induce or encourage any
customer, supplier or employee of Covance and each and every affiliate or
subsidiary of any of the foregoing or any successor of the foregoing either
by merger, assignment, operation of law or otherwise, to leave the employment
of or sever or diminish the relationship with Covance or any of its
subsidiaries, affiliates or successors; (iii) at any time make any derogatory
or disparaging statements to anyone regarding Covance or any of its
subsidiaries or affiliates or any officer, director or employee of any of the
foregoing, or any successor of the foregoing by either merger, assignment,
operation of law, or otherwise, take any action intended or which may
reasonably be expected, directly or indirectly, to impair the goodwill,
business reputation or good name of Covance or any of its subsidiaries or
affiliates or any officer, director or employee of any of the foregoing or
successor of them, or (iv) make or cause to be made any copies, pictures,
duplicates, facsimiles or other reproductions, records, abstracts or
summaries of any reports, studies, memoranda, correspondence, manuals,
customer lists, software, records, formulae, plans or other written, printed
or otherwise recorded material of any kind whatsoever belonging to or in the
possession of Covance or its subsidiaries or affiliates or successors, which
may have been produced or created by Employee or others, or which may have
come into Employee's possession in the course of his employment, or which
relate in any manner to the then current or prospective business of Covance
or any of its subsidiaries or affiliates or successors. Information shall
not be considered confidential or proprietary if it has been previously
disclosed or made available to the public without the benefit or express
confidentiality protection or is commonly held and understood. The Employee
shall have no right, title or interest in any such materials described in
clause (iv) above and or any other property of Covance or any of its
subsidiaries and affiliates or successors, and Employee agrees that Employee
has not removed and will not remove any such materials or other property
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without the prior written consent of Covance, any of its subsidiaries or
affiliates or successors, as applicable, and that Employee has surrendered
all and any such materials and property (including equipment) to Covance. For
purposes of this Agreement, advertisements in trade magazines, use of
executive search firms and other conventional means of obtaining employees
shall not be construed as solicitation, inducement or encouragement unless
the party utilizing such conventional means specifically directs the efforts
at employee(s) with whom the party may not have contact pursuant to the terms
of this Agreement.
5. INVALIDITY. The invalidity of any provision or provisions of
this Agreement shall not affect any other provision of this Agreement, which
shall remain in full force and effect, nor shall the invalidity of any
portion of any provision of this Agreement affect the balance of such
provision. If one or more of the provisions of this Agreement, or any part of
them, shall be held to be excessively broad as to scope, activity or subject
so as to be unenforceable at law, such provision or provision shall be
construed by the appropriate judicial body by limiting and reducing it or
them so as to be enforceable to the maximum extent compatible with the
applicable law.
6. CONFIDENTIALITY OF THIS AGREEMENT. The Employee shall not,
directly or indirectly, disclose to anyone (other than Employee's counsel,
accountant and spouse) any of the terms and provision of this Agreement, and
the substance of the negotiations and discussions held between Employee and
Covance, it being understood that such discussions, terms and provisions are
strictly confidential and provided further that no such disclosure shall be
made to any of the excepted parties except upon the express agreement and
condition that such excepted party will not further disclose any of the
discussions, terms and provisions of this Agreement.
7. BREACH. In the event that Employee (or any party claiming
through Employee) brings an action for which release has been made under
Section 3 or Employee violates any of the covenants or representations
contained in Sections 4 or 6 above, the obligations of Covance under Section
2 and the Employee's rights under Section 2(j) shall automatically be
terminated, except for payments or rights granted to or on behalf of Employee
under Sections 2(c), (d), (e) and except for the payment of three weeks base
salary under Section 2(a) and the right to make the COBRA election at
Employee's expense under Section 2(f). In the event of such default by
Employee, the parties agree that three weeks of base salary payments under
Section 2(a) and the payments made to or on behalf of Employee under Section
2(h) prior to such default shall constitute adequate payment for the
Employee's release set forth in Section 3. In the case of Employee's COBRA
election under Section 2(f), Employee shall be required, to the extent that
Employee desires to continue such COBRA coverage, from and after the default
to pay all premiums under Section 2(f) regardless of whether the default has
occurred prior to the expiration of the Payment Period. The foregoing rights
shall be in addition to any other rights or remedies permitted to Covance in
law or in equity. In addition, Employee acknowledges that any violation of
the provisions of this Agreement (after giving effect to any modification
pursuant to Section 5) would result in irreparable injury to Covance, and
Employee therefore
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<PAGE>
acknowledges that, in the event of any such violation, Covance shall be
entitled to obtain from any court of competent jurisdiction injunctive
relief, which right shall be cumulative and in addition to any other rights
or remedies to which Covance may be entitled. Notwithstanding anything in
this Section 7 to the contrary, if Employee is in violation of any of the
covenants or representations contained in Sections 4 or 6 above, which
violations can actually be cured by Employee's immediate compliance
therewith, then Covance shall first notify Employee of such violation before
terminating any of its obligations to Employee under Section 2 or Employee's
rights under Section 2(j) and Employee shall remedy his non-compliant actions
or inactions immediately but no later than two days from the date of such
notice (the "Cure Period"). During the Cure Period, Employee's rights under
Section 2(j) shall be suspended. In the event Employee does not effectuate
such cure as specified in this Section 7, then Covance shall be immediately
permitted to enforce all of its rights and remedies, including without
limitation, the termination of its obligations under Section 2 and Employees
rights under Section 2(j).
8. WAIVER. No waiver or modification of this Agreement shall be
binding unless it is in writing signed by the parties hereto. No waiver of a
breach of this Agreement shall be deemed to constitute a waiver of a further
breach, whether similar or dissimilar in nature.
9. NO ADMISSION OF LIABILITY. Covance and its subsidiaries,
parent and affiliates deny and will continue to deny any and all fault or
wrongdoing of any nature. The fact of this Agreement shall not be construed
as an admission. Covance and Employee have agreed to settle any and all
claims Employee asserted or may have asserted solely to avoid the cost,
inconvenience and uncertainty of litigation. This Agreement is not admissible
in evidence and is not subject to discovery as evidence of any occurrence,
status or meaning of any fact, matter, event or thing, or as an admission of
any wrongdoing, statutory violation or breach of duty, promise or contract of
Covance to the Employee hereto or anyone else, in any judicial,
administrative or other proceeding now pending or hereafter instituted
involving the parties to this Agreement or any other persons or entities.
10. ALTERNATIVE PAYEE. In the event that Employee dies before any
of the money owing to Employee under this Agreement is paid in full, then
Covance shall make such remaining payments to the Employee's spouse, or, if
Employee has no spouse at the time of Employee's demise, to Employee's
estate. Upon Covance's written request, Employee's spouse or estate, as
applicable, shall execute and deliver to Covance a written acknowledgment
that such payments are subject to the terms of this Agreement and that such
person or entity shall be bound by and comply with the terms hereof. Such
acknowledgment shall be provided within five days of the date requested by
Covance and Covance shall be entitled to suspend payments hereunder after the
passage of such five days until it receives such acknowledgment.
11. GOVERNING LAW. This Agreement shall be construed in accordance
with the laws of the state of New Jersey and any action filed to enforce
the terms, conditions or covenants contained herein shall be filed in
a state court of New Jersey. This Agreement represents the entire agreement
between the parties with respect to the subject matter of the Agreement and
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supersedes all previous written and oral understandings, agreements,
commitments and communications.
12. NOTICES. All notices or communications provided for under
this Agreement shall be in writing (including telecopier) and sent by
certified mail, same day or overnight courier or telecopied, if to Covance at
210 Carnegie Center, Princeton, New Jersey 08540, Attention: Dr. Paul
Sartori; and if to Employee at the address specified above or as to each
party, at such other address as shall be designated by such party in a
written notice to the other party. All notices sent by any of the foregoing
methods shall be effective when so sent.
13. CONDITIONS PRECEDENT. This Agreement shall be effective on the
date first above written, on the date, and only on the date (the "EFFECTIVE
DATE") upon which all of the following conditions shall be satisfied:
a) Covance shall have executed and delivered to Employee a
counterpart of this Agreement;
b) Employee shall have executed and delivered to Covance a
counterpart of this Agreement;
c) The Compensation and Organization Committee of the Covance
Board of Directors shall have approved this Agreement; and
d) Seven days have elapsed from the date Employee has executed
and delivered a counterpart of this Agreement.
IN WITNESS WHEREOF, parties to this Agreement have executed or caused
this Agreement to be executed by their respective officers, as applicable, as
of the date first above written, in the case of Covance, and on the date
specified below, in the case of the Employee.
Covance Inc.
By: /s/ James D. Utterback
------------------------ ---------------------------
James D. Utterback
Date:
-----------------------
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Exhibit 10B
Employment Agreement
between
Christopher Kuebler
&
Covance Inc.
This EMPLOYMENT AGREEMENT (the "Agreement") is entered into between
COVANCE INC. (the "Company"), a Delaware corporation having its principal place
of business at 210 Carnegie Center, Princeton, NJ 08540-6233, and CHRISTOPHER
KUEBLER (the "Executive"), with a residence at [address], effective as of
May 13, 1999 (the "Effective Date").
WHEREAS, Executive has been employed by the Company as President and
Chief Executive Officer pursuant to an Employment Agreement (the "Old
Agreement") dated as of November 1, 1996, as amended by Amendment No. 1 thereto
dated November 10, 1998; and
WHEREAS, the term of the Executive's employment under the Old Agreement
is scheduled to expire on November 1, 1999, unless such agreement is renewed
between six and three months before such expiration date; and
WHEREAS, the Company and the Executive now wish to enter into an
agreement of employment to replace the imminently expiring Old Agreement that
will constitute the sole and exclusive agreement relating to the employment of
the Executive by the Company and its subsidiaries following the Effective Date
on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants, terms and conditions set forth herein, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, it
is hereby agreed between the Company and the Executive as follows:
I. EMPLOYMENT: The Company shall continue to employ the Executive
following the Effective Date in a full-time capacity in the positions set forth
in this paragraph, and the Executive shall continue to accept such employment
upon the terms and conditions set forth herein. Such employment shall be in the
capacity of President and Chief Executive Officer of the Company, and Chairman
of the Board of Directors of the Company. Notwithstanding the foregoing, the
Executive shall relinquish the office of President, shall continue as Chief
Executive Officer, and shall become Co-Chairman of the Board of Directors of the
Company, if
<PAGE>
and only if the merger (the "Merger") contemplated in the Agreement and Plan of
Merger, dated as of April 28, 1999, among Parexel International Corporation
("Parexel"), the Company and CCJ Holding Corp., a wholly owned subsidiary of the
Company ("Merger Sub") is consummated. The duties, responsibilities and
capacities of the Co-Chairman shall be as set forth in the Company's Amended and
Restated By-Laws as in effect immediately following the Effective Date, as
hereinafter defined (the "Restated By-Laws"). The Company will form an office of
the Chairman which the two Co-Chairmen will occupy. Subject to the authority of
the Board of Directors, the office of the Chairman will have responsibility for
the overall strategic direction of the Company. In addition, all corporate staff
functions and the managers of the strategic business units ("Reporting Areas")
will report into the office of the Chairman. The Co-Chairmen will decide which
of them shall have management responsibility for each Reporting Area. In the
case of disagreement concerning who will have management responsibility for any
particular Reporting Area, the Chief Executive Officer of the Company shall make
the final decision. Such changes shall be effective as of the closing date (the
"Closing Date") of the Merger without any further act or action by either the
Executive or the Company except as may be required by the Delaware General
Corporation Law.
II. TERM; EFFECT ON THE OLD AGREEMENT: Unless earlier terminated
pursuant to Section IX hereof, the term of employment under the Agreement shall
commence on the Effective Date and shall continue through the third anniversary
of the Effective Date (such initial term, as it may be extended from time to
time in accordance with Section XVI or shortened pursuant to Section IX hereof,
being the "Employment Term"). Upon the Effective Date, the Old Agreement shall
be of no further force or effect and shall be rescinded without any further act
or action by Executive or the Company.
III. DUTIES: During the Employment Term, the Executive shall accept and
diligently perform to the reasonable satisfaction of the Company, those
executive services for the Company commensurate with his position and title as
may be designated from time to time by the Company's Board of Directors in
connection with any aspect of the Company's business. In his capacity as Chief
Executive Officer of the Company, the Executive shall report exclusively to the
Board of Directors of the Company, and, following the Closing Date, the
President of the Company shall report exclusively to the Executive. The
Executive agrees to devote his undivided time and attention to the business of
the Company. The Executive shall not, without the prior written consent of the
Company's Board of Directors, be directly or indirectly engaged in any other
trade, business or occupation for compensation requiring his personal services
during the Employment Term. Nothing in this Agreement shall preclude the
Executive from: (i) engaging in charitable and community activities or from
managing his personal investments, or (ii) serving as a member of the board of
directors of an unaffiliated company not in competition with the Company,
subject however in each such case of board membership, to approval by the
Company's Board of Directors (which approval shall not be unreasonably
withheld).
IV. CASH COMPENSATION: Executive shall be compensated for services
rendered during the Employment Term as follows:
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(a) BASE SALARY: The Executive shall be compensated at an annual base
salary rate of no less than $486,720 for the period from the Effective
Date to the Closing Date, and at an annual base salary rate of no less
than $500,000 following the Closing Date. The Company's Board of
Directors or the Compensation and Organization Committee of such Board
(the "Compensation Committee") shall review and may, if appropriate, at
its discretion, increase (but not decrease) this annual base salary
effective the first day of any future new year during the Employment
Term to reflect ordinary salary actions generally granted to other
Company employees.
(b) VARIABLE (BONUS) PAY: In addition to the Base Salary provided for
in Section IV(a) above, the Executive will participate in the Company's
Variable Compensation Plan (the "Bonus Plan"). The Bonus Plan provides
that upon satisfaction of certain goals for the Company established by
the Company's Board of Directors or the Compensation Committee, the
Executive shall receive an annual incentive equal to 65% of the
Executive's annual base salary earned for the relevant year.
The Bonus Plan also provides that the Executive may earn up to 130% of
the Executive's annual base salary in effect at the time the goals are
established if the Company has outstanding results, again as determined
by the Company's Board of Directors or the Compensation Committee. At
the discretion of the Company's Board of Directors or the Compensation
Committee, any annual incentive compensation in excess of 65% of the
Executive's annual base salary may be paid to the Executive in fully
vested non-qualified stock options, the terms of which would be
specified in a Stock Option Agreement entered into pursuant to the
Company's Employee Equity Participation Program. Actual awards would be
determined by the Company's Board of Directors or the Compensation
Committee after the end of the applicable performance year and would be
granted to the Executive shortly thereafter. The annual incentive
percentage targets may be increased, but not decreased, during the
Employment Term.
V. EQUITY /AWARDS: The Executive may be awarded, from time to time,
additional compensation (such as stock options or restricted stock) pursuant to
the Company's Employee Equity Participation Program or any additional or
replacement incentive compensation or long-term compensation program established
for the senior officers of the Company. Any awards under such programs, except
as provided below, shall be at such levels or in such amounts as the Company's
Board of Directors or the Compensation Committee deems, in its sole discretion,
appropriate for the position occupied by Executive and his performance therein.
The terms, conditions and rights with respect to any such grants will be subject
to the actual provisions and conditions applicable to such plans. For 1999, the
Executive acknowledges that he has been awarded 23,000 restricted shares and
52,600 options pursuant to the Company's Employee Equity Participation Program.
VI. EMPLOYEE BENEFITS:
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(a) GENERAL PROVISIONS: Except as expressly provided in this Agreement,
the Executive shall be eligible to participate in all employee benefit
plans offered by the Company (e.g. Life Insurance, Medical & Dental
Insurance, Travel Accident Insurance, Short Term Disability Insurance,
Long Term Disability Insurance, Flexible Spending Accounts, Regular and
Supplemental Accidental Death and Disability Insurance,
Optional/Supplemental Life Insurance, Stock Purchase Savings Plan
(401(k)), Employee Stock Purchase Program, and other personal benefit
plans of the Company) on a basis which is no less favorable to the
Executive than the Company may make available to other senior officers
of the Company; provided, however, that in all events the eligibility
and other terms of any such plans shall govern the participation of the
Executive therein.
(b) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN: The Executive will be
eligible to participate in the Company's Supplemental Executive
Retirement Plan ("SERP"). Under the terms of the SERP, the Executive
will be entitled to receive a nonqualified retirement benefit in
accordance with the terms and provisions thereof, as administered by
the Company's Board of Directors or the Compensation Committee.
(c) VACATION AND SICK LEAVE: The Executive shall be entitled to
vacation and sick leave in accordance with the vacation and sick leave
policies adopted by the Company from time to time, provided that the
Executive shall be entitled to no less than five (5) weeks of vacation
each calendar year. Any vacation shall be at such times and for such
periods as shall be mutually agreed upon between the Executive and the
Company. The Executive shall be entitled to all public holidays
observed by the Company.
VII. APPLICABLE TAXES: There shall be deducted from any compensation
payments made under this Agreement any Federal, state and local taxes or other
amounts required to be withheld by any entity having jurisdiction over the
matter.
VIII. MISCELLANEOUS:
(a) BUSINESS TRAVEL AND EXPENSES: The Executive shall be reimbursed by
the Company for reasonable travel and other business expenses, as
approved by the Company, which are incurred and shall be accounted for
in accordance with the Company's normal practices and procedures for
reimbursement of expenses.
(b) HOUSING LOAN: There will be no change in the terms of the
Executive's outstanding housing loan arrangement with the Company.
(c) AUTOMOBILE EXPENSES: The Company will provide the Executive with a
gross automobile allowance of $1,070 per month (or other such monthly
amount as is provided to other senior executives of the Company in
accordance with the provisions of the Company's auto allowance
program). Such amounts will be
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<PAGE>
disclosed for purposes of Securities and Exchange Commission filings as
appropriate or required.
(d) FINANCIAL COUNSELING AND LEGAL SERVICES: The Company will provide
an annual allowance of $10,000 (grossed-up for tax purposes using an
incremental income tax rate of 45%) for the Executive to use for
financial counseling, tax preparation and legal services. Such amounts
will be disclosed for purposes of Securities and Exchange Commission
filings as appropriate or required.
(e) ONGOING NON-EXCLUSIVITY: Nothing in this Agreement shall prevent
the Executive from being entitled to receive any additional
compensation or benefits as approved by the Company's Board of
Directors or the Compensation Committee and which would amend or
supplement the compensation or benefits specified in this Agreement.
IX. TERMINATION OF EMPLOYMENT: Notwithstanding any other provision of
this Agreement, the employment of the Executive pursuant to this Agreement may
be terminated by the Company's Board of Directors as follows:
(a) TERMINATION FOR CAUSE: The Executive's employment hereunder may be
terminated at any time during the Employment Term for "Cause". As used
herein, the term "Cause" shall mean (i) conviction of the Executive of
a felony or conviction of a misdemeanor if such misdemeanor involves
moral turpitude; (ii) the Executive's committing any act of gross
negligence or intentional misconduct in the performance or
non-performance of his duties as an employee of the Company, including
any such actions which constitute sexual harassment under applicable
laws, rules or regulations, which causes material financial or material
reputational harm with respect to the Company; (iii) if the Executive
is not disabled (as defined below), a failure or refusal to perform the
duties and services specified herein for a period of not less than
thirty (30) days; (iv) any material breach by the Executive of any
material provision of this Agreement (other than for reasons related
only to the business performance of the Company or business results
achieved by the Executive); or (v) misappropriation of Company assets
or personal dishonesty which causes material financial or reputational
harm with respect to the Company. With respect to clauses (iii) and,
solely to the extent a material breach is susceptible of cure, (iv) of
the immediately preceding sentence, "Cause" shall not be deemed to
exist unless and until (x) the Company shall have given the Executive
written notice of such alleged basis for Cause under clause (iii) or
(iv), as applicable, and (y) the Executive shall have failed to cure
such alleged basis for Cause to the reasonable satisfaction of the
Company's Board of Directors within 30 days following the effective
date of such notice. For purposes of this section, no act or failure to
act on the Executive's part shall be considered to be reason for
termination for Cause if done, or omitted to be done, by the Executive
in good faith and with the reasonable belief that the action or
omission was in the best interests of the Company.
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(b) TERMINATION FOR DISABILITY: At the sole discretion of the Company's
Board of Directors, the Executive's employment hereunder may be
terminated if the Executive is disabled (as defined below) and shall
have been absent from his duties with the Company on a full-time basis
for one hundred and twenty (120) consecutive days, and within thirty
(30) days after written notice by the Company to do so, the Executive
shall not have returned to the performance of his duties hereunder on a
full-time basis. In the event of such termination, the Company shall
make to the Executive the payments specified in Section IX(c). As used
herein, the term "disabled" shall (i) mean that the Executive is
unable, as a result of a medically determinable physical or mental
impairment, to perform the duties and services of his position, or (ii)
have the meaning specified in any disability insurance policy
maintained by the Company, whichever is more favorable to the
Executive.
(c) TERMINATION WITHOUT CAUSE; SEVERANCE BENEFITS: The Company's Board
of Directors may relieve the Executive of his duties, responsibilities,
positions and capacities set forth in Sections I and III of this
Agreement without Cause if the Company's Board of Directors, upon
assessment of the general business performance of the Company and the
specific performance of the Executive, determines that the business
needs of the Company require relieving the Executive from such duties,
responsibilities, positions and capacities, provided that in such
event:
(i) The Executive shall be entitled to receive three (3) years
base salary (at the Executive's effective annual rate on the date
of termination) which amount shall be paid in a lump-sum (net of
appropriate withholdings) within sixty (60) days of the date of
termination; and
(ii) The Executive shall be entitled to receive an amount equal
to the product of (A) three (3), (B) the Executive's annual base
salary in effect at the time of termination, and (C) the higher
of 65% and the then applicable annual incentive percentage
specified in the Bonus Plan, which amount shall be paid in a
lump-sum (net of appropriate withholdings) within sixty (60) days
of the date of termination; and
(iii) The Executive shall be entitled to continue participation
in the Company's health and benefit plans (to the extent
allowable in accordance with the administrative provisions of
those plans and applicable federal and state law) for a period of
up to three (3) years or until the Executive is covered by a
successor employer's benefit plans, whichever is sooner.
Notwithstanding the foregoing (including the payment of the amounts
provided above), in the event that the Executive is relieved of his
duties, responsibilities, positions and capacities without Cause prior
to a Change-of-Control as described
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in this Section IX(c), the Executive shall remain employed by the
Company for the remainder of the Employment Term in such capacity, and
on such terms (including compensation), as may be mutually agreed by
the Executive and the Company; PROVIDED that if the Executive and the
Company's Board of Directors (each of which shall act in good faith and
use their respective best efforts to reach such a mutual agreement) do
not reach such agreement within sixty (60) days of the date the
Executive has been relieved, as described in this Section IX(c), of his
duties, responsibilities, positions and capacities, the Executive's
employment with the Company in any capacity shall terminate on such
date without any further act or action by the Company or the Company's
Board of Directors, except for the preparation of the release specified
in Section XVII(i) of this Agreement. The preceding proviso shall not
be interpreted or construed to limit Executive's right to receive the
"Severance Benefits" described in this Section IX(c) provided that
Executive has complied with his obligations in Section XVII(i) of this
Agreement. In the event that, during any period of continued employment
pursuant to this subparagraph, a Change-of-Control occurs, the
Executive shall receive the additional amounts and benefits described
in Section IX(e) of this Agreement as if the occurrence of such
Change-of-Control were an Event of Termination.
(d) CONSTRUCTIVE TERMINATION: In the event the Executive resigns from
his duties, responsibilities, positions and capacities set forth in
Sections I and III of this Agreement following a Constructive
Termination (as defined in paragraph (e) below), the Executive will be
entitled to the "Severance Benefits" described in Section IX(c) of this
Agreement above, and shall continue to be employed by the Company in
the manner and on the terms and conditions specified in the last
subparagraph of Section IX(c) of this Agreement.
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(e) CHANGE-OF-CONTROL: In the event of an Event of Termination (as
defined below), the Executive will be entitled to receive all of the
"Severance Benefits" described in paragraph (c) above, and, in
addition:
(i) All stock options, restricted stock, deferred compensation
and similar benefits which have not become vested on the date of
an Event of Termination shall become vested upon such Event.
(ii) The Executive shall be entitled to receive any payments
calculated pursuant to Section XVIII hereof.
(iii) In the event the Executive is involved in any dispute about
his rights or obligations under this Agreement arising on or
after a Change-of-Control, the Company shall pay all legal costs
and fees incurred by the Executive in connection with such
dispute promptly upon receipt of any invoice relating thereto.
(iv) The benefits set forth in Sections VIII(b) and VIII(c)
hereof and medical, dental, disability and life insurance will be
continued, to the extent they are not otherwise prohibited under
the respective plans, until the Executive finds other employment
but not longer than three years from the date of the Event of
Termination.
For the purposes of this Agreement, an Event of Termination is defined
to be a termination of the Executive's employment by the Company (for
reasons other than Cause) or the Executive's resignation following a
Constructive Termination (as defined below) of the Executive's
employment, in each case within 24 months following a Change-of-Control
(as defined below), or the Executive's voluntary termination of his
employment for any reason or no reason during the one-month period
commencing twelve months following a Change-of-Control and ending
thirteen months after such Change-of-Control (a "Voluntary
Termination"); provided, however, a Voluntary Termination shall not be
an Event of Termination if it arises from a Change-of-Control pursuant
to subsection (iv) under the definition of Change-of-Control unless the
tender offer or exchange offer is a tender or exchange offer for
securities representing 20% or more of the combined voting power of
Covance's then outstanding securities.
For purposes of this Agreement, a Change-of-Control is defined to occur
when:
(i) any person (including as such term is used in Section 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
beneficial owner, directly or indirectly, of Company securities
representing 20% or more of the combined voting power of the
Company's then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or
in the
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aggregate), a majority of the individuals elected to serve on the
Company's Board of Directors are different than the individuals
who served on the Company's Board of Directors at any time within
the two years prior to such proxy contest or contests or other
forms of contested shareholder votes; or
(iii) the Company's shareholders approve a merger or
consolidation (where in each case the Company is not the survivor
thereof), or a sale or disposition of all or substantially all of
the Company's assets or a plan of partial or complete
liquidation; or
(iv) an offeror (other than the Company) purchases shares of the
Company's common stock pursuant to a tender or exchange offer for
such shares.
For purposes of this Agreement, a Constructive Termination is defined
to be:
(i) a material breach by the Company of this Agreement,
including, without limitation, a reduction in the Executive's
then current salary or the percentage of base salary eligible for
incentive compensation;
(ii) a diminution of the Executive's responsibilities, status,
title or duties under this Agreement (including any amendment to
the Restated By-Laws that results in a material and adverse
change to the responsibilities, status or duties of the
Co-Chairman of the Company), or a removal of the Executive as
Co-Chairman (other than for Cause);
(iii) a relocation of the Executive's work place which increases
the distance between the Executive's principal residence and the
Executive's work place by more than 25 miles;
(iv) a failure by the Company to provide the Executive with
benefits (A) required hereunder or (B) on or following a
Change-of-Control, which are as favorable to the Executive in all
material respects as those provided immediately prior to the
Change-of-Control; or
(v) the failure of any acquirer or successor in interest to the
business of the Company to agree in writing to be bound by the
terms of this Agreement within four months of any
Change-of-Control.
(f) Except as may be otherwise provided herein or in applicable Company
compensation and benefit plans, the Company shall not be liable for any
salary or benefit payments to the Executive beyond the date of the
Executive's voluntary termination of employment with the Company. In
the event of a termination of employment under Section IX(a) above, the
Executive shall not be entitled to any
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compensation or other benefits not already earned and owing to the
Executive on account of his services on the date of such termination of
employment.
(g) If there has been an Event of Termination or if there has been no
Change-of-Control but the Executive has been terminated without Cause
or has resigned following a Constructive Termination, the Company shall
provide for the Executive, at the Company's cost, executive
outplacement support for one year following such termination.
X. ARBITRATION: In the event of any difference of opinion or dispute
between the Executive and the Company with respect to the construction or
interpretation of this Agreement or the alleged breach thereof, which cannot be
settled amicably by agreement of the parties, then such dispute shall be
submitted to and determined by arbitration by a single arbiter in the city of
Trenton, New Jersey in accordance with the rules then in effect, of the AMERICAN
ARBITRATION ASSOCIATION, and judgment upon the award rendered shall be final,
binding and conclusive upon the parties and may be entered in the highest court,
state or federal, having jurisdiction.
The Company shall reimburse the Executive for all expenses incurred by
the Executive in connection with any arbitration, including the reasonable costs
and expenses of legal counsel, to the extent the arbitration is concluded in the
Executive's favor.
XI. CONFIDENTIALITY: The Company possesses and will continue to possess
trade secrets or other information which has been crafted, discovered, developed
by or otherwise become known to the Company, or in which property rights have
been assigned or otherwise conveyed to the Company, which information has
commercial value with respect to the business and operations of the Company or
the business and operations of its subsidiaries or its affiliates, including,
but not limited to, information regarding sales, costs, customers, employees,
products, services, apparatus, equipment, processes, formulae, marketing, or the
organization, business or finances of the Company or its subsidiaries or its
affiliates, or any information the Executive has reason to know the Company
would like to treat as confidential for any purpose, such as maintaining a
competitive advantage or avoiding undesirable publicity, whether or not
developed by the Executive ("Confidential Information"). Unless previously
authorized in writing or instructed in writing by the Company, the Executive
will not, from and after the date of employment with the Company, directly or
indirectly, use for his own benefit or purposes, or disclose to, or use for the
benefit or purposes of, anyone other than the Company or its subsidiaries or
affiliates, any Confidential Information, unless and until, and then only to the
extent that, such Confidential Information has (a) been or becomes published, or
is or becomes generally known in the trade through no fault of the Executive, or
(b) such information is made known and available to the Executive by a third
party, who, by such disclosure to the Executive does not breach any duty or
obligation to the Company or its subsidiaries or affiliates.
In the event the Executive become legally compelled to disclose any of
the Confidential Information, the Executive will provide the Company with prompt
notice so that the Company may seek a protective order or other appropriate
remedy and/or waive compliance with
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the provisions of this Agreement. If, in the absence of a protective order or
the receipt of a waiver hereunder, the Executive is nonetheless legally required
to disclose Confidential Information to any tribunal or else stand liable for
contempt or suffer other censure or penalty, the Executive may disclose such
Confidential Information to such tribunal without liability hereunder.
Upon termination of the Executive's employment with the Company, he
will deliver to the Company all written embodiments of the Confidential
Information, including all notes, drawings, records, and reports pertaining to
work done by the Executive during the Employment Term and all other matters of
secret or confidential nature relating to the Company's business.
XII. NON-COMPETITION. The Executive acknowledges that the services to
be rendered by the Executive to the Company are of a special and unusual
character, with a unique value to the Company, the loss of which cannot
adequately be compensated by damages or an action at law. In view of the unique
value to the Company of such services for which the Executive is employed at the
Company, because of the Confidential Information obtained by, or disclosed to
the Executive, and as a material inducement to the Company to compensate the
Executive as well as provide him with additional benefits and other good and
valuable consideration, the Executive covenants and agrees that:
(a) Unless authorized by the Company's Board of Directors in
writing, the Executive shall not, during the Employment Term and
for one year after the expiration of the Employment Term (the
"Post Employment Term", the Employment Term and the Post
Employment Term, being collectively, the "Period"), become
employed by, become a director, officer, shareholder or partner
of, or to otherwise enter into, conduct, or advise any business,
whether directly or indirectly, which offers services or products
in the United States and any other geographical regions where the
Company, or its subsidiaries or its affiliates, is then offering
its services or products in competition with services or products
sold by the Company, or its subsidiaries or its affiliates at any
time during the Period in the United States or such region,
including, without limitation, the conduct of contract
pre-clinical toxicology laboratory services, contract
biopharmaceutical clinical laboratory services, contract
bioprocessing or manufacturing services, contract drug packaging
services, Phase I, II, III or IV clinical studies or outcomes or
disease management studies or medical marketing or regulatory
consulting services (collectively, the "Company Services");
provided that the Executive shall not be bound by the
restrictions contained in this Section XII(a) unless the Company
has made all payments to the Executive which are due and owing to
the Executive under this Agreement or any plan of the Company,
including any equity incentive plan or bonus incentive plan of
the Company, or otherwise; provided, further, that if the
Executive has been dismissed by the Company for Cause, or the
Executive has voluntarily terminated his employment with the
Company for any reason or no reason, the Executive shall not be
bound by the provisions of this Section XII(a) during the Post
Employment Term unless the Company has made to the Executive the
payments specified in Section IX(c) of this Agreement. Nothing
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herein shall restrict the Executive in his employment in any
capacity by a corporation or entity engaged substantially in the
manufacture or sale of pharmaceuticals, or any other business
which does not offer the Company Services. Ownership of not more
than 1% of the issued and outstanding shares of any class of
securities of a corporation, the securities of which are traded
on a national securities exchange or in the over-the-counter
market, shall not cause the Executive to be deemed a shareholder
under this provision. Notwithstanding anything therein to
contrary, the non-competition covenant of this Section XII(a)
shall not apply following an Event of Termination, as defined in
Section IX(e)
(b) During the Period, the Executive shall not, directly or
indirectly, solicit, divert or accept any business from any
customer of the Company, its subsidiaries or affiliates to the
detriment of any of the foregoing or seek to cause any such
customers to refrain from doing business with or patronizing the
Company, its subsidiaries or its affiliates.
(c) During the Period, the Executive shall not, directly or
indirectly, solicit or induce for employment any employee of the
Company, its subsidiaries or affiliates or otherwise encourage
any employee of the Company, its subsidiaries or affiliates to
leave the Company, or any of its subsidiaries or affiliates. For
purposes of this Agreement, advertisements in trade magazines,
use of executive search firms and other conventional means of
obtaining employees shall not be construed as solicitation,
inducements or encouragement unless the party utilizing such
conventional means specifically directs the efforts at
employee(s) with whom the party may not have contact pursuant to
the terms of this Agreement.
(d) For purposes of this Agreement, the term "directly or
indirectly" shall be construed in its broadest sense and shall
include the activities of the members of the Executive's
immediate family or any partnership, or as otherwise specified
above, and the term "customer" shall mean any person or entity to
which the Company has sold services during the one-year period
prior to the date the Executive ceased employment with the
Company or any persons or entities targeted by the Company or
contacted for the purpose of selling such services during such
one-year period which the Executive knew about or reasonably
should have known about.
XIII. OWNERSHIP OF KNOW-HOW, INVENTIONS AND OTHER INTELLECTUAL
PROPERTY: All the know-how, innovations, inventions, discoveries, improvements,
procedures, programs, formulae and specifications which have been or may be
either, directly or indirectly, developed, conceived or made by the Executive in
connection with the Executive's employment with the Company, whether or not in
concert with other employees or shown or delivered to the Company, or any of its
subsidiaries or its affiliates, and whether or not they are eligible for patent,
copyright, trademark, trade secret or other legal protection, shall be the
exclusive property of the Company and the Executive shall, at the Company's
request and expense, promptly
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execute any and all documents or instruments which may be necessary to evidence
such ownership.
Obligations of this Agreement cover any and all inventions, discoveries
or improvements, directly or indirectly, conceived or made by the Executive in
connection with the Executive's employment with the Company prior to the date of
this Agreement.
The Executive will communicate to the Company promptly and fully all
improvements and inventions he makes or conceives (either solely or jointly with
others) during the period of the Executive's employment with the Company and
conceived by the Executive, during the Post Employment Term if based on or
related to his employment at the Company.
XIV. PATENTS: The Executive will, during and after the Period at the
Company's request and expense but without additional compensation, assist the
Company and its nominees in every proper way to obtain and to vest in the
Company or its nominees, title to patents on such improvements and inventions in
all countries, by executing all necessary or desirable documents, including
applications for patents and assignments thereof.
XV. RECORDS AND DOCUMENTS: Except in the performance of his duties as
an Executive of the Company, the Executive will not at any time or in any manner
make or cause to be made any copies, pictures, duplicates, facsimiles, or other
reproductions, recordings, abstracts, or summaries of any reports, studies,
memoranda, correspondence, manuals, customer lists, software, records, formulae,
plans or other written, printed, or otherwise recorded material of any kind
whatever belonging to or in the possession of the Company or its subsidiaries or
affiliates, which may be produced or created by the Executive or others or which
may come into the Executive's possession in the course of his employment, or
which relate in any manner to the then current or prospective business of the
Company, its subsidiaries or its affiliates. The Executive shall have no right,
title or interest in any such materials, and the Executive agrees that he has
not removed and will not remove such materials without the prior written consent
of the Company or its subsidiaries or affiliates, and that he will surrender all
such material to the Company immediately upon expiration of the Employment Term,
or at any time prior thereto upon the request of the Company.
XVI. RENEWAL: At the expiration of the initial term or any subsequent
term, the term of the Agreement may be extended for a period as determined by
the mutual agreement of the Executive and the Company's Board of Directors or
the Compensation Committee. Notice of any such extension shall be provided to
the other party not earlier than six months and not later than three months
prior to the expiration of the existing term. The Company shall be under no
obligation to extend the term of this Agreement if the Executive has engaged in
actions or inactions which would constitute reasons to dismiss the Executive for
Cause. If the Company decides not to renew the term of this Agreement (including
any renewal after initial the term and any subsequent or successor term or
terms) for any reason other than Cause, the Company shall make to the Executive
all of the payments specified in Section IX(c) and on the terms of such Section.
XVII. OTHER MATTERS:
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(a) ENTIRE AGREEMENT: This Agreement constitutes the entire agreement
between the Company and the Executive relating to the subject matter
hereof, and supersedes any previous agreements (including the Old
Agreement), commitments and understandings, written or oral, with
respect to the matters provided herein, except as expressly provided in
Section XI hereof. As used in this Agreement, terms such as "herein",
"hereof", "hereto" and similar language shall be construed to refer to
this entire instrument and not merely the paragraph or sentence in
which they appear, unless so limited by express language.
(b) ASSIGNMENT: Except as set forth below, this Agreement and the
rights and obligations contained herein shall not be assignable or
otherwise transferable by either party to this Agreement without the
prior written consent of the other party to this Agreement.
Notwithstanding the foregoing, any amounts owing to the Executive upon
his death with respect to a portion of the Employment Term prior to the
executive's death shall inure to the benefit of his heirs, legatees,
personal representatives, executor or administrator.
(c) NOTICES: Any and all notices provided for under this Agreement
shall be in writing and hand delivered or sent by first class
registered or certified mail, postage prepaid, return receipt
requested, or by reputable overnight courier, or by telecopier (with
return telecopy), addressed to the Executive at his residence or to the
Company at its usual place of business or at any other address
specified in writing and provided to the other party hereto, and all
such notices shall be deemed effective at the time of delivery or at
the time delivery is refused by the addressee upon presentation.
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(d) AMENDMENTS/WAIVER: No provision of this Agreement may be amended,
waived, modified, extended or discharged unless such amendment, waiver,
extension or discharge is agreed to in writing signed by both the
Company and the Executive.
(e) APPLICABLE LAW: This Agreement and the rights and obligations of
the parties hereunder shall be construed, interpreted, and enforced in
accordance with the laws of the State of New Jersey.
(f) SEVERABILITY: The Executive hereby expressly agrees that all of the
covenants in this Agreement are reasonable and necessary in order to
protect the Company and its business. If any provision or any part of
any provision of this Agreement shall be invalid or unenforceable under
applicable law, such part shall be ineffective only to the extent of
such invalidity or unenforceability and shall not affect in any way the
validity or enforceability of the remaining provisions of this
Agreement, or the remaining parts of such provision.
(g) SUCCESSOR OF INTERESTS: In the event the Company merges or
consolidates with or into any other corporation or corporations where
the Company is not the survivor thereof, or sells or otherwise
transfers substantially all its assets to another corporation, the
provisions of this Agreement shall be binding upon and inure to the
benefit of the corporation surviving or resulting from the merger or
consolidation or to which the assets are sold or transferred and, upon
any such event, the Company shall obtain the assumption of this
Agreement by the other corporation. All references herein to the
Company refer with equal force and effect to any corporate or other
successor of the corporation that acquires directly or indirectly by
merger, consolidation, purchase or otherwise, all or substantially all
of the assets of the Company.
(h) INJUNCTIVE RELIEF: The Executive agrees that the remedies available
to the Company at law for any breach of any of these obligations
hereunder may be inadequate, and the Executive accordingly agrees and
consents that temporary or permanent injunctive relief, and/or an order
of specific performance, may be granted in any proceeding which may be
brought to enforce any provision hereof, without the necessity of proof
of actual damage, in addition to any other remedies available to the
Company at law.
(i) RELEASE. Notwithstanding anything in this Agreement to the
contrary, if there has been an Event of Termination or if there has
been no Change-of-Control but the Executive has been terminated or
relieved of his duties, responsibilities, positions and capacities set
forth in Sections I and III of this Agreement, in each case without
Cause, or has resigned from his employment or resigned from or relieved
himself of his duties, responsibilities, positions, and capacities set
forth in Sections I and III hereof, in each case following a
Constructive Termination, the
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obligation of the Company to make to the Executive any or all of the
payments specified under this Agreement (including, without limitation,
the payments specified in Section IX) shall be subject to (A) the
Executive's execution and delivery to the Company of a release in
substantially the form attached as Exhibit A hereto of all claims,
demands, suits, or actions, whether in law or at equity, the Executive
has or may have relating to or giving rise from such Event of
Termination or such non-Cause termination or relief or resignation or
relief following Constructive Termination and (B) the expiration of any
applicable revocation period set forth in such release without the
Executive having revoked such release..
XVIII. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY:
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by, to or
for the benefit of the Executive, whether made under this Agreement or
otherwise (a "Payment"), would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Excise Tax"), then the Executive shall be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after
payment by the Executive of all taxes (including any Excise Tax)
imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) All determinations required to be made under this Section XVIII,
including whether a Gross-Up Payment is required and the amount of such
Gross-Up Payment, shall be made by the accounting firm utilized by the
Company for the preparation of its annual external financial statements
(the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 30 days of
the Event of Termination, if applicable, or such earlier time as is
requested by the Company. The Gross-Up Payment, if any, as determined
pursuant to this Section XVIII(b), shall be paid to the Executive
within 10 days of the receipt of the Accounting Firm's determination.
Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. If subsequent final determinations of the
Excise Tax made by the Internal Revenue Service give rise to additional
Excise Tax, then additional Gross-Up Payments shall be made by the
Company to the Executive within 10 days after notice is received by the
Company of such final determination.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification shall
be given as soon as practicable but no later than 10 business days
after the Executive knows of such claim. The Executive shall not pay
such claim prior to the expiration of the thirty-day period following
the date on which he gives such notice to the
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Company (or such shorter period ending on the date that any payment of
taxes with respect to such claim is due). If the Company notifies the
Executive in writing prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation with respect to such claim by an attorney selected
by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear all costs and expenses
incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax imposed as a result of such contest or representation and
payment of costs and expenses. The Company shall control all
proceedings taken in connection with such contest. The Company may, at
its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company shall determine;
provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from
any Excise Tax or income tax imposed with respect to such advance.
54(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to subsection (c), the Executive becomes entitled
to receive any refund with respect to such claim, the Executive shall
promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after taxes applicable thereto).
If, after the receipt by the Executive of an amount advanced by the
Company pursuant to subsection (c), a final determination is made that
the Executive shall not be entitled to any refund with respect to such
claim, then such advance shall be forgiven and shall not be required to
be repaid and the amount of such advance shall offset the amount of
Gross-Up Payment required to be paid.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its own behalf and has caused its corporate seal to be affixed, and
the Executive has executed this Agreement on his own behalf intending to be
legally bound, as of the date first written above.
COVANCE INC.
By:
/s/ CHARLES C. HARWOOD, JR
--------------------------
Charles C. Harwood, Jr.
Chief Financial Officer
ATTEST:
/s/ JEFFREY S. HURWITZ
- -------------------------
Jeffrey S. Hurwitz
Secretary
EXECUTIVE:
/s/ CHRISTOPHER A. KUEBLER
---------------------------
Christopher A. Kuebler
18
<PAGE>
EXHIBIT A
RELEASE. The Executive, on behalf of himself, his heirs, executors,
administrators, successors and assigns, hereby releases and forever discharges
the Company and each and every subsidiary and affiliate of the Company, and all
of their successors and assigns, together with the officers, directors and
employees of the foregoing, from any and all actions, causes of action, suits,
damages, judgments, executions, claims and demands of any kind whatsoever
relating to the Executive's employment with the Company and its affiliates and
predecessors and the termination of such employment relationship (collectively,
hereinafter referred to as "Employee Claims"), in law or in equity, which the
Executive or his heirs, executors, administrators, successors and assigns had,
now have or hereafter may have against them or any of them the basis of which
arose on or prior to the date of the execution of this Release for any reason,
including by reason of his employment with the Company and the termination of
the employment relationship, including, without limiting the generality of the
foregoing, any Employee Claims arising out of, or in connection with any New
Jersey civil rights law, Title VII of the Civil Rights Act of 1964, as amended,
the Equal Employment Opportunity Act of 1972, as amended, the Rehabilitation
Act, as amended, the Equal Pay Act, as amended, the Age Discrimination and
Employment Act, as amended, any other federal, state or local law, rule,
regulation or ordinance, any common law Employee Claims under tort, contract or
any other theory now or hereafter recognized and any oral or written agreement,
including, without limitation, that certain Employment Agreement dated May 13,
1999 between the Company and the Executive (the "Agreement"). Notwithstanding
any breach of this Release by the Executive, this Release shall be binding upon
the Executive, his heirs, successors and assigns. In the event of a claim by the
Company or its affiliates asserted against the Executive following the date
hereof, this Release shall not operate as a waiver of any defenses that may be
raised by the Executive.
The Executive acknowledges that he makes this Release voluntarily and
with full understanding of its terms and conditions. The Executive has the right
to consult with an attorney of his own choice concerning this Release and hereby
acknowledges that he has been given 21 days from the date of receipt hereof in
which to execute this Release.
The Executive understands that he may revoke this Release, in writing,
within 7 days from the date of execution hereof. If revoked, the Executive
agrees to return to the Company any payments made to him under the Agreement as
a result of the termination of his employment with the Company prior to the date
of revocation, and understands that all future payments and benefits thereunder
will be canceled.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COVANCE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 12,398,000
<SECURITIES> 0
<RECEIVABLES> 209,072,000
<ALLOWANCES> 0
<INVENTORY> 25,840,000
<CURRENT-ASSETS> 300,857,000
<PP&E> 322,535,000
<DEPRECIATION> 31,628,000
<TOTAL-ASSETS> 690,959,000
<CURRENT-LIABILITIES> 187,115,000
<BONDS> 0
0
0
<COMMON> 589,000
<OTHER-SE> 267,565,000
<TOTAL-LIABILITY-AND-EQUITY> 690,959,000
<SALES> 0
<TOTAL-REVENUES> 624,612,000
<CGS> 416,979,000
<TOTAL-COSTS> 562,088,000
<OTHER-EXPENSES> 59,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,087,000
<INCOME-PRETAX> 55,378,000
<INCOME-TAX> 22,317,000
<INCOME-CONTINUING> 33,061,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,061,000
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.56
</TABLE>
