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 March 31, 2000
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 April 25, 2000, the Registrant had 57,175,952 shares of Common Stock
outstanding.
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COVANCE INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--March 31, 2000 and December 31, 1999....... 2
Consolidated Statements of Income--Three Months ended March 31, 2000
and 1999 ............................................................... 3
Consolidated Statements of Cash Flows--Three Months ended March 31,
2000 and 1999 .......................................................... 4
Notes to Consolidated Financial Statements.............................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................. 12
SIGNATURE PAGE............................................................ 13
1
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<CAPTION>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS) MARCH 31, DECEMBER 31,
2000 1999
---------- ---------
ASSETS (UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 13,461 $ 25,444
Accounts receivable, net................................... 154,858 139,680
Unbilled services.......................................... 55,496 52,647
Inventory.................................................. 28,676 26,474
Deferred income taxes...................................... 17,610 17,292
Prepaid expenses and other assets.......................... 43,763 40,587
-------- --------
Total Current Assets.................................... 313,864 302,124
Property and equipment, net.................................... 304,500 296,943
Goodwill, net.................................................. 83,455 84,575
Other assets................................................... 19,847 16,672
-------- --------
Total Assets............................................ $721,666 $700,314
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 33,321 $ 25,715
Accrued payroll and benefits............................... 26,944 34,138
Accrued expenses and other liabilities..................... 36,313 40,318
Unearned revenue........................................... 72,452 75,531
Short-term debt............................................ 19,471 19,787
Income taxes payable....................................... 5,939 4,388
-------- --------
Total Current Liabilities............................... 194,440 199,877
Long-term debt................................................. 223,499 208,724
Deferred income taxes.......................................... 14,425 14,982
Other liabilities.............................................. 14,324 14,079
-------- --------
Total Liabilities....................................... 446,688 437,662
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock - Par value $0.01 per share; 140,000,000 shares
authorized; 59,153,250 and 59,024,976 shares issued and
outstanding, including those held in treasury,
at March 31, 2000 and December 31, 1999, respectively 592 590
Paid-in capital............................................ 100,525 95,954
Retained earnings.......................................... 202,829 192,190
Accumulated other comprehensive income--
Cumulative translation adjustment.................... (9,061) (6,504)
Treasury stock at cost (2,025,589 and 1,995,000 shares at
March 31, 2000 and December 31, 1999, respectively).. (19,907) (19,578)
-------- --------
Total Stockholders' Equity.............................. 274,978 262,652
-------- --------
Total Liabilities and Stockholders' Equity.............. $721,666 $700,314
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
2
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
-----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999
------------ ------------
Net revenues ................................... $ 209,627 $ 210,632
Cost and expenses:
Cost of revenue ............................ 145,924 141,430
Selling, general and administrative ........ 30,423 33,811
Depreciation and amortization .............. 13,356 11,225
------------ ------------
Total ................................. 189,703 186,466
------------ ------------
Income from operations ......................... 19,924 24,166
------------ ------------
Other expense, net:
Interest expense, net ...................... 2,892 1,986
Other income ............................... (381) (80)
------------ ------------
Other expense, net .................... 2,511 1,906
------------ ------------
Income before taxes ............................ 17,413 22,260
Taxes on income ................................ 6,774 9,112
------------ ------------
Net income ..................................... $ 10,639 $ 13,148
============ ============
Basic earnings per share ....................... $ 0.19 $ 0.22
Weighted average shares outstanding - basic .... 57,037,201 58,562,963
Diluted earnings per share ..................... $ 0.19 $ 0.22
Weighted average shares outstanding - diluted .. 57,199,742 59,827,159
The accompanying notes are an integral part of these consolidated
financial statements.
3
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<CAPTION>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
----------------------------
(DOLLARS IN THOUSANDS) 2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 10,639 $ 13,148
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ...................... 13,356 11,225
Stock issued under employee benefit and stock
compensation plans ............................... 130 2,178
Deferred income tax provision ...................... (875) (938)
Other .............................................. 48 26
Changes in operating assets and liabilities:
Accounts receivable .............................. (15,178) 2,502
Unbilled services ................................ (2,849) (16,709)
Inventory ........................................ (2,202) 1,462
Accounts payable ................................. 7,606 (1,196)
Accrued liabilities .............................. (11,199) (1,960)
Unearned revenue ................................. (3,079) (4,283)
Income taxes payable ............................. 1,551 6,418
Other assets and liabilities, net ................ (3,267) 1,306
------------ ------------
Net cash (used in) provided by operating activities .... (5,319) 13,179
------------ ------------
Cash flows from investing activities:
Capital expenditures ............................... (22,141) (20,196)
Contingent purchase price paid in connection with
prior acquisitions ............................... -- (15,133)
Other, net ......................................... 9 301
------------ ------------
Net cash used in investing activities .................. (22,132) (35,028)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving credit facility ..... 15,000 20,000
Repayments of long-term debt ....................... (225) --
Stock issued under employee stock purchase and
option plans ..................................... 1,022 2,659
Purchase of treasury stock ......................... (329) --
------------ ------------
Net cash provided by financing activities .............. 15,468 22,659
------------ ------------
Net change in cash and cash equivalents ................ (11,983) 810
Cash and cash equivalents, beginning of period ......... 25,444 19,263
------------ ------------
Cash and cash equivalents, end of period ............... $ 13,461 $ 20,073
============ ============
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The accompanying notes are an integral part of these consolidated
financial statements.
4
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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
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, 1999, 1998 and 1997 included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 1999. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000.
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 $30.2
million and $27.3 million at March 31, 2000 and December 31, 1999, 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 March 31, 2000
and 1999, the denominator was increased by 162,541 shares and 1,264,196 shares,
respectively, representing the dilution of stock options outstanding at March
31, 2000 and 1999 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 $8.1 million and $8.0 million for the three months
ended March 31, 2000 and 1999, 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 5 for segment disclosure.
5
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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(UNAUDITED)
MARCH 31, 2000 AND 1999
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest for the three months ended March 31, 2000 and 1999
totaled $3.3 million and $2.3 million, respectively. Cash paid for income taxes
for the three months ended March 31, 2000 and 1999 totaled $4.6 million and $2.5
million, respectively.
4. RESTRUCTURING
In order to improve its global competitiveness, better optimize capacity
utilization and enhance quality and service worldwide, during 1999 Covance
consolidated its regionally based Phase II and 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, 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 began in September 1999 and will continue through 2000. As of March 31,
2000, substantially all of these employees have been terminated and a total of
$5.5 million in costs have been paid. The remaining $2.2 million is included in
accrued expenses and other liabilities in the Consolidated Balance Sheet.
5. 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 commercialization 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.
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
months ended March 31, 2000 and 1999 are as follows:
EARLY LATE-STAGE
DEVELOPMENT DEVELOPMENT TOTAL
----------- ----------- -----
THREE MONTHS ENDED MARCH 31, 2000
Net revenues from external customers $ 72,169 $ 137,458 $ 209,627
Operating income $ 11,008 $ 8,916 $ 19,924
THREE MONTHS ENDED MARCH 31, 1999
Net revenues from external customers $ 65,583 $ 145,049 $ 210,632
Operating income $ 7,990 $ 16,176 $ 24,166
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101 is required in the second quarter of 2000. Covance is
currently in the process of evaluating the impact, if any, SAB 101 will have on
its consolidated financial position or results of operations.
6
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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 March 31, 2000.
OVERVIEW
Covance is a leading contract research organization providing a wide range
of product development services on a worldwide basis to the pharmaceutical,
biotechnology and medical device industries. Covance also 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 commercialization). Covance believes it
is one of the largest biopharmaceutical contract research organizations, based
on 1999 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 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, as 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.
7
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999. Net revenues decreased 0.5% to $209.6 million for the three months ended
March 31, 2000 from $210.6 million for the corresponding 1999 period. Excluding
the impact of foreign exchange rate variances between both periods, net revenues
increased 1.7% as compared to the corresponding 1999 period. Net revenues from
Covance's late-stage development services decreased 2.6% for the three months
ended March 31, 2000 as compared to the corresponding 1999 period, excluding the
impact of foreign exchange rate variances between both periods. The year over
year reduction in late-stage development net revenues is primarily attributable
to softness in our clinical development services, resulting from weak new
business generation. Year over year revenue growth is also affected by the
comparison to a very strong first quarter of 1999. Net revenues from Covance's
more mature early development services grew 11.1% for the three months ended
March 31, 2000 as compared to the corresponding 1999 period, excluding the
impact of foreign exchange rate variance between both periods.
Cost of revenue increased 3.2% to $145.9 million or 69.6% of net revenues
for the three months ended March 31, 2000 from $141.4 million or 67.1% of net
revenues for the corresponding 1999 period. Gross margins declined to 30.4% for
the three months ended March 31, 2000 from 32.9% for the corresponding 1999
period. The reduction in gross margins is attributable primarily to our clinical
development services, whose weak new business generation (as mentioned above)
and increasing price competition combined to account for most of the year over
year variance. In addition, direct costs in our biomanufacturing services
increased at a faster rate than net revenues from such services. While this
increase in direct costs was planned to meet demand, net revenues, although
increasing considerably over the corresponding 1999 period, fell short of plan
due to issues associated with both a planned and an unplanned (weather-related)
facility shutdown and subsequent production complications.
Overall, selling, general and administrative expenses decreased 10.0% to
$30.4 million for the three months ended March 31, 2000 from $33.8 million for
the corresponding 1999 period. As a percentage of net revenues, selling, general
and administrative expenses decreased to 14.5% for the three months ended March
31, 2000 from 16.1% for the corresponding 1999 period. This decrease is
primarily attributable to lower payroll and variable compensation expense.
Depreciation and amortization increased 19.0% to $13.4 million or 6.4% of
net revenues for the three months ended March 31, 2000 from $11.2 million or
5.3% of net revenues for the corresponding 1999 period due primarily to
increased depreciation expense associated with capital spending.
Income from operations decreased 17.6% to $19.9 million for the three
months ended March 31, 2000 from $24.2 million for the corresponding 1999
period. As a percentage of net revenues, income from operations decreased to
9.5% for the three months ended March 31, 2000 from 11.5% for the corresponding
1999 period, primarily as a result of the reduction in gross margins discussed
above. Income from operations from Covance's late-stage and early development
segments totaled $8.9 million and $11.0 million, respectively, at March 31, 2000
and $16.2 million and $8.0 million, respectively, at March 31, 1999. The
reduction in late-stage development operating income was due primarily to the
softness in clinical development and biomanufacturing services, as discussed
above.
Other expense increased $0.6 million to $2.5 million for the three months
ended March 31, 2000 from $1.9 million for the corresponding 1999 period, due to
a $0.9 million increase in interest expense resulting from higher average
borrowings and an increase in the weighted average borrowing rate under our
long-term revolving credit facility as compared to the corresponding 1999
period. This increase was partially offset by a $0.3 million increase in foreign
exchange transaction gains.
Covance's effective tax rate for the three months ended March 31, 2000
decreased to 38.9% from 40.9% for the corresponding 1999 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.
Net income decreased 19.1% to $10.6 million for the three months ended
March 31, 2000 from $13.1 million for the corresponding 1999 period, due to the
increases in cost of revenue, depreciation and amortization and interest
expense, all as discussed above.
8
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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 through a combination of borrowing under its long-term
revolving credit facility, cash generated from operations and capital that
Covance expects to be made available to it from other credit sources if
required, Covance will have 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 March 31, 2000 and December 31, 1999, there was $205.0 million
and $190.0 million, respectively, of outstanding borrowings and $11.3 million
and $11.3 million, respectively, of outstanding letters of credit, with a
remaining availability of $33.7 million and $48.7 million, respectively, under
Covance's long-term revolving credit facility. Interest on all outstanding
borrowings under Covance's long-term revolving credit facility is based upon the
London Interbank Offered Rate plus a margin and approximated 6.33% and 5.30% per
annum for the three month periods ended March 31, 2000 and 1999, respectively.
Covance Biotechnology Services Inc. ("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 March 31, 2000. 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 December 1999, Covance financed its newly constructed North American
packaging facility through a five year, $20 million mortgage which bears
interest at a rate of 7.72% per annum.
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 three months ended March 31, 2000, Covance's operations used net
cash of $5.3 million, a decrease of $18.5 million from the corresponding 1999
period. Cash flows from net earnings adjusted for non-cash activity provided
$23.3 million for the three months ended March 31, 2000, down $2.3 million or
9.1% from the corresponding 1999 period. The change in net operating assets used
$28.6 million in cash, primarily due to an increase in accounts receivable and a
reduction in accrued liabilities, and $12.5 million in cash, primarily due to an
increase in unbilled receivables, during the three months ended March 31, 2000
and 1999, respectively.
Working capital was $119.4 million at March 31, 2000, an increase of $17.2
million from December 31, 1999. Accounts receivable and unbilled services, net
of unearned revenue, at March 31, 2000 of $137.9 million were up $21.1 million
or 18.1% from the December 31, 1999 level of $116.8 million. Net days sales
outstanding ("DSOs") increased from 52 days at December 31, 1999 to 60 days at
March 31, 2000. DSOs are customarily at their lowest levels at year end and
generally increase during the first, second and third quarters, before returning
to their seasonally lower levels at year end. For comparison, DSOs at December
31, 1998 were 55 days and increased to 60 days at March 31, 1999. Covance's
ratio of current assets to current liabilities was 1.61 at March 31, 2000 and
1.51 at December 31, 1999.
Investing activities for the three months ended March 31, 2000 used $22.1
million compared to $35.0 million for the corresponding 1999 period. Capital
spending for the first three months of 2000 totaled $22.1 million, primarily for
outfitting of new facilities, purchase of new equipment, upgrade of existing
equipment and computer equipment and software for newly hired employees,
compared to $20.2 million for the corresponding 1999 period. Investing
activities for the three months ended March 31, 1999 also included a cash
payment of contingent purchase price totaling approximately $15.1 million in
connection with Covance's 1996 acquisition of Health Technology Associates, Inc.
COMPETITION
Covance's Clinical Development Services participates in a competitive
industry. Covance believes that this industry is experiencing an increase in
price competition which is having a material adverse effect on both Covance's
late-stage development and consolidated net income, and if such trend continues,
could have a material adverse effect on Covance's late-stage development and
consolidated net revenues and could continue to have a material adverse effect
on Covance's late-stage development and consolidated net income.
9
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FOREIGN CURRENCY
Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical 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
pre-tax 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
Commencing in 1997, Covance planned and implemented a Year 2000 assessment
and remediation plan. The plan approached the Year 2000 problem from an
internal, supplier and customer perspective. As a result of this plan, Covance's
information systems have been successfully transitioned into the Year 2000 and
Covance's operations have not been adversely affected by Year 2000 computer
issues.
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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 into 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 approximately $8.5 million
over the three year period ending December 31, 2000. Of these amounts, a total
of $0.3 million has been incurred and expensed during the three month period
ended March 31, 2000 and a total of $8.2 million has been incurred and expensed
to date (including $5.6 million in 1999 and $2.3 million in 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 approximately $6.5
million. Of these amounts, capitalizable expenditures totaling $0.1 million have
been made during the three month period ended March 31, 2000 and capitalizable
expenditures totaling $6.3 million have been made to date (including $4.5
million in 1999 and $1.7 million in 1998).
The primary source of funds for all costs yet to be incurred and
expenditures to be made is expected to be provided by Covance's operating 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 that look forward in time, are
forward looking statements made pursuant to 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 other than statements of historical facts. All such forward
looking statements are based on the current expectations of management and are
subject to, and are qualified 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, but are not limited to,
Covance's ability to estimate costs of Year 2000 remediation, price competition
in the clinical development services industry, Covance's ability to obtain
credit on terms satisfactory to it, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, Revenue Recognition ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to selected revenue recognition issues in financial statements.
Implementation of SAB 101 is required in the second quarter of 2000. Covance is
currently in the process of evaluating the impact, if any, SAB 101 will have on
its consolidated financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Condition and Results of
Operations
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Exhibit 10.A - Amendment No. 1 to Executive Employment Letter
between Covance Inc. and Stephen J. Sullivan.
(2) Exhibit 10.B - Covance Inc. Variable Compensation Plan.
(3) Exhibit 10.C - Amendment No. 1 to the Covance Inc. Employee Stock
Purchase Plan.
(4) Exhibit 27 - Financial Data Schedule (Edgar filing only)
(b) Reports on Form 8-K
During the three month period ended March 31, 2000, no reports on Form
8-K were filed.
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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: April 28, 2000 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.
SIGNATURE TITLE DATE
/s/ CHRISTOPHER A. KUEBLER
- ---------------------------
Christopher A. Kuebler Chairman of the Board, President April 28, 2000
and Chief Executive Officer
(Principal Executive Officer)
/s/ CHARLES C. HARWOOD, JR.
- ---------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President April 28, 2000
and Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL GIANNETTO
- ---------------------------
Michael Giannetto Corporate Vice President April 28, 2000
and Controller
(Principal Accounting Officer)
13
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
10.A Amendment No. 1 to Executive Employment Letter between Covance
Inc. and Stephen J. Sullivan.
10.B Covance Inc. Variable Compensation Plan.
10.C Amendment No. 1 to the Covance Inc. Employee Stock Purchase
Plan.
27 Financial Data Schedule (Edgar filing only)
14
March 31, 2000
Stephen J. Sullivan
[ADDRESS INTENTIONALLY LEFT BLANK]
RE: AMENDMENT NO. 1 TO EMPLOYMENT LETTER AGREEMENT (THE "AGREEMENT")
Dear Steve:
Please refer to that certain Employment Letter Agreement dated May 21, 1999
between Covance Inc. ("Covance" or, the "Company") and you (the "Letter
Agreement"). In order to provide you with additional consideration for your
relocation to the Princeton, New Jersey area, Covance has agreed to amend the
Letter Agreement to provide you with certain additional benefits. This letter
will constitute Amendment No. 1 to the Letter Agreement and will amend the
Letter Agreement as follows (any capitalized terms which are not defined herein
are used herein as defined in the Letter Agreement):
1. The Section entitled "Change-of-Control" in the letter Agreement shall be
deleted in its entirety and a section entitled "Severance" shall be inserted in
replacement thereof as follows:
SEVERANCE
Except as provided below under the paragraph headed "CHANGE-OF-CONTROL", should
you be involuntarily terminated for reasons other than for Cause, the Company
shall pay you the following:
(i) an amount equal to the sum of (a) one year of base salary (payable
on the normal payroll cycle) determined at the time of termination and (b) one
year of the annual incentive bonus (payable on the normal bonus cycle) in an
amount equal for such year to the product of your base salary in effect at
termination and 60% (the sum of (a) and (b) being, collectively, the
"Termination Payments");
(ii) during the period between the first anniversary of the date of the
involuntary termination of your employment with the Company for reasons other
than Cause and the second anniversary of such event, your base salary (payable
on the normal payroll cycle) with the Company determined at the time of such
involuntary termination in the event that, after reasonable efforts by you, you
have been unable to obtain a suitable alternative vocation, as determined by
Company's Chief Executive Officer in his sole discretion;
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31 March 2000
Page 2
(iii) your financial counseling and automobile allowance for the one year
period starting on the date of your involuntary termination from the Company for
reasons other than Cause and the first anniversary of the date of such event on
the terms and conditions of the Section of the Letter Agreement entitled "AUTO
AND FINANCIAL COUNSELING ALLOWANCE"; and
(iv) you shall be entitled to make the COBRA election for continued
medical and dental health insurance benefits for you and your eligible
dependents, subject to the terms and conditions of the applicable policies and
all COBRA requirements, for up to 18 months after the date of your termination
of employment. In the event you elect COBRA continuation, and such termination
was involuntary for reasons other than Cause, the Company shall pay you an
amount equal to the monthly premium for such coverage, less usual withholding
taxes and other customary withholdings, from the date of such involuntary
termination for reasons other than Cause until the date that is the later of (x)
the first anniversary of such involuntary termination and (y) the date you have
obtained a suitable alternative vocation, as determined in accordance with
Section 1(ii) hereof (such period, not to exceed 18 months after the date of
your involuntary termination from the Company for reasons other than Cause,
being the "Health Continuation Period"). For the remainder of such 18 month
period, if applicable, you shall be responsible for such costs. If you have not
found a suitable alternative vocation, as determined in accordance with Section
1(ii) hereof on or prior to the date that is 18 months after your involuntary
termination from the Company for reasons other than Cause, then the Company
shall continue paying to you the foregoing premium payments until the earlier of
(I) the date you find a suitable alternative vocation, as determined in
accordance with Section 1(ii) hereof and (II) the date that is the second
anniversary of your involuntary termination from the Company for reasons other
than Cause. Such payments will be made to you in equal installments on the dates
during the Health Continuation Period, or such later period, as applicable, that
Covance makes its regular payroll payments. In the event you were terminated for
Cause and the COBRA election is still available to you under applicable law, and
you so elect the COBRA continuation, you shall be responsible for all health
benefit premium costs. Life insurance coverage will continue, at the Company's
expense, for the period during which the Company pays the premiums for health
coverage provided above.
Notwithstanding anything in this Section 1 to the contrary, you agree that if
you obtain or are provided with medical, dental and life insurance from a new
employment position which provides comparable coverage and benefits to that
provided by the Company under the respective Company benefit plans and at an
equivalent or lesser expense (both deductible and direct) to you, then you shall
promptly notify the Company which of such insurance benefits is then being
provided to you and the Company shall cease providing such coverage or
discontinue paying the premiums for such insurance, as applicable.
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31 March 2000
Page 3
If there has been an Event of Termination (as defined below) or should you be
involuntarily terminated for reasons other than Cause (as defined below), at any
time prior to two years from the date of your business and residential
relocation to the Princeton, NJ area, Covance will reimburse you for the costs,
expenses and fees of moving your household goods from the Princeton, NJ area to
Illinois, as well as the travel expenses of your immediate family, all in
accordance with applicable Covance transfer policies and upon submission of
proper documentation.
Please refer to that certain Confidentiality and Non-Competition Agreement
between you and the Company (the "Non-Competition Agreement"). You agree that
any of the severance payments under Section 1(i) or (ii) of this Letter
Agreement shall constitute the payment of your base salary under Section
4(a)(ii) of the Non-Competition Agreement.
"CAUSE" shall mean (i) your convictions of a felony or a misdemeanor if such
misdemeanor involves moral turpitude; (ii) your committing any act of gross
negligence or intentional misconduct in the performance or non-performance of
your duties as an employee of Covance or its affiliates, including, any actions
which constitute sexual harassment under applicable laws, rules or regulations;
(iii) your failure to perform your duties assigned for a period of thirty (30)
or more days unless such failure is caused by an Extended Disability; or (iv)
misappropriation of assets, personal dishonesty or intentional misrepresentation
of facts which may cause Covance or its affiliates financial or reputational
harm.
Notwithstanding anything else in the Letter Agreement to the contrary, in the
event that you do not relocate your business and domestic residence to the
Princeton, New Jersey area on or before September 30, 2000 or such later date as
the Company's Chief Executive Officer may determine in his sole discretion and
you are terminated as a result of such failure, you shall not be entitled to the
severance benefits specified under SEVERANCE in Section 1 hereof; PROVIDED,
HOWEVER, that if you have not relocated as specified above on or prior to the
occurrence of a Change-of-Control (as defined below) and a Change-of-Control
shall occur, then you shall not be required to relocate and any request to
relocate shall be considered a Constructive Termination, all as specified more
fully below under the Section "CHANGE-OF-CONTROL" below.
Should your employment be terminated by Covance because of an Extended
Disability (as defined below), and not for any other reason that constitutes
Cause, for 120 consecutive days where you have not returned to your duties on a
full-time basis after the expiration of such 120 day period within 30 days after
written notice of termination is given to you, Covance shall pay to you an
amount equal to the sum of (a) two years base salary (payable on the normal
payroll cycle) determined at the time of termination, and (b) two years of the
annual incentive bonus (payable on the normal bonus cycles) in an amount equal
for each such year to the product of your base salary in effect at termination
and 60% (the sum of (a) and (b) being, collectively, the "Extended Disability
Payments").
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31 March 2000
Page 4
EXTENDED DISABILITY shall (i) mean you are unable, as a result of a medically
determinable physical or mental impairment, to perform the duties and services
of your position, or (ii) have the meaning specified in any disability insurance
policy maintained by Covance, whichever is more favorable to you.
Except as may be otherwise provided in applicable Covance compensation and
benefit plans, Covance shall not be liable for any salary or benefit payments to
you beyond the date of your voluntary termination of employment with Covance. In
the event of a termination of employment for Cause or Extended Disability, you
shall not be entitled to any compensation or other benefits not already earned
and owing to you on account of your services on the date of such termination of
employment except as provided above with respect to a termination for Extended
Disability. The provision of any benefits pursuant to this Agreement shall be in
lieu of, and not in addition to, any payment or benefits you otherwise would
have been entitled to pursuant to any severance pay plan of Company, including,
without limitation, that certain Amended and Restated Severance Pay Plan.
CHANGE-OF-CONTROL
In the event of an Event of Termination (as defined below), you will be entitled
to a lump sum payment equal to the sum of (1) the product of (a) 3 and (b) your
base annual salary in effect at the time of the Event of Termination and (2) the
product of (a) 3 and (b) number that is 60% of your base annual salary in effect
at the time of the Event of Termination. Such payment will be made within 60
days of the Event of Termination. In addition to, and as a result of, the
foregoing (i) all of your 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 and (ii) you shall be entitled
to receive any payments calculated pursuant to the paragraph headed "CERTAIN
ADDITIONAL PAYMENTS BY COVANCE".
For the purposes of this Agreement, an Event of Termination is defined to be a
termination of your employment by Covance (for reasons other than Cause) or a
Constructive Termination (as defined below) of your employment, in each case
within 24 months following a Change-of-Control (as defined below), or your
voluntary termination of your 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, that a Voluntary Termination shall not be an Event of
Termination if it arises from a Change-of-Control pursuant to clause (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:
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31 March 2000
Page 5
(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 Covance's securities representing 20% or more of the
combined voting power of Covance's then outstanding securities; or
(ii) as a result of a proxy contest or contests or other forms of
contested shareholder votes (in each case either individually or in the
aggregate), a majority of the individuals elected to serve on Covance's Board of
Directors are different than the individuals who served on Covance'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 (in each case either
individually or in the aggregate); or
(iii) Covance shareholders approve a merger, or consolidation (where in
each case Covance is not the survivor thereof), or sale or disposition of all or
substantially all of Covance's assets or a plan or partial or complete
liquidation; or
(iv) an offeror (other than Covance) purchases shares of Covance 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 Covance of this Agreement, including, without
limitation, a reduction in your then current salary or the percentage of base
salary eligible for incentive compensation;
(ii) a diminution of your responsibilities, status, title or duties
hereunder;
(iii) a relocation of your work place which increases the distance between
your principal residence and your work place by more than 25 miles;
(iv) a failure by Covance to provide you with benefits which are as
favorable to you in all material respects as those provided immediately prior to
the Change-of- Control; or
(v) the failure of any acquiror or successor in interest to the business
of Covance to agree in writing to be bound by the terms of this Agreement within
four months of any Change-of-Control.
In the event you are involved in any dispute about your rights under this
Agreement arising on or after a Change-of-Control, Covance shall pay all legal
costs and fees incurred by you in connection with such dispute promptly upon
receipt of any invoice relating thereto.
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31 March 2000
Page 6
With respect to an Event of Termination, the benefits set forth under the
paragraph headed AUTO AND FINANCIAL COUNSELING Allowance and medical, dental,
disability and life insurance will be continued, to the extent they are not
otherwise prohibited under the respective plans, until you find other employment
but not longer than three years from the date of the Event of Termination.
2. The Section entitled "Release" shall be amended to read in
its entirety as follows:
RELEASE
If there has been an Event of Termination or if there has been no
Change-of-Control but you have been terminated without Cause, the obligation of
Covance to make to you any or all of the payments specified under this Agreement
(including, without limitation, the Termination Payments, the salary
continuation payments described in Section 1(ii) of this Letter Agreement or the
payments specified under the paragraph headed "CHANGE OF CONTROL", as
applicable) shall be subject to your execution and delivery to Covance of a
release in form and substance reasonably satisfactory to Covance of all claims,
demands, suits or actions, whether in law or at equity, you have or may have
relating to or giving rise from such Event of Termination or non-Cause
termination.
3. Except as expressly modified hereby, the Letter Agreement
shall remain in full force and effect.
Please indicate your agreement with the terms and conditions of this Amendment
No. 1 by signing one copy of this letter and returning it to my attention.
Very truly yours,
Christopher A. Kuebler
President and CEO
Accepted as of the date first above specified:
By: _________________________
6
COVANCE WAY
COVANCE INC.
VARIABLE COMPENSATION PLAN
1. PURPOSE. The purpose of the Covance Inc. Variable Compensation Plan (as
amended, modified or supplemented, from time to time, the "Plan") is to reward
participating employees of Covance Inc. ("Covance") and its subsidiaries
(collectively, the "Company") for the attainment of superior performance. The
Plan does not constitute an amendment, supplement or modification of any
individual employment agreement between the Company and an employee or to that
certain Asset Purchase Agreement dated as of March 15, 1996 among Covance and
the parties specified therein with respect to the earning or payment of variable
or bonus compensation.
2. ELIGIBILITY. Variable compensation awards under the Plan may be made to
individuals who are full-time employees of the Company (including executives or
managers of the Company) PROVIDED, that (1) the employee is employed with the
Company on or before October 1 of the performance year in question, except as
specified below, and (2) the employee is employed by the Company both as of
December 31 of the performance year in question and on the date that the
variable compensation award for the performance year in question is actually
paid, except as specified below; PROVIDED, FURTHER, that (a) with respect to
clause (1) above, in the event an individual is employed by the Company (i) on
or after October 1 for the performance year in question but otherwise satisfies
the eligibility or performance requirements of the Plan, then (x) in the case of
individuals who are Corporate Vice Presidents of the Company or higher elected
officer positions, the Committee may approve a variable compensation award for
such individual based on the chief executive officer's ("CEO") recommendation or
(y) in the case of all other employees of the Company the CEO may approve a
variable compensation award for such individual or (ii) after January 1 of the
performance year in question but before October 1 of such year and otherwise
satisfies the eligibility or performance requirements
<PAGE>
of the Plan, then such employee's variable compensation award, if any, shall be
prorated based on the actual service provided by the employee for the
performance year in question based either on time worked or base pay earned and
(b) with respect to clause (2) above, in the event any employee who leaves the
Company during the performance year in question or prior to the date the
variable compensation award for such performance year is paid, in each case as a
result of death, disability or retirement with the consent of Covance, any such
award or payment shall be prorated based on actual service provided by the
employee for the performance year in question based on time worked or base pay
earned in the performance year in question. In all cases any variable
compensation awards under the Plan will be based on actual service provided by
the employee for the performance year in question based on time worked or base
pay earned in the performance year in question. Employees of the Company who
participate in other compensation plans of the Company, the terms of which
directly or indirectly exclude participation in or benefit from the Plan, shall
not be eligible for awards under the Plan. The term "subsidiary" means any
corporation in an unbroken chain descending from the parent company, where each
corporation, other than the last in the chain, owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in the chain.
3. ADMINISTRATION/DISPUTES. The Compensation and Organization Committee of the
Covance Board of Directors (the "Committee"), or a subcommittee of such
committee, consisting of at least two members who qualify as outside directors
under applicable Internal Revenue Code and Securities and Exchange Commission
(the "SEC") rules, codes and regulations, shall manage and administer the Plan.
No member of the Committee shall be eligible for awards under the Plan. The
Committee may adopt policies, rules and regulations that it deems necessary for
governing, managing or administering the Plan. It may take action either by a
majority vote of its members in attendance provided there is a quorum, or by an
instrument in writing signed by all members without a meeting. Members of the
Committee shall not be liable for any act or
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omission in their capacities as such members, except for bad faith, gross
negligence or intentional misconduct or inaction. Any dispute or disagreement
which shall arise under, or as a result of, or pursuant to, this Plan shall be
finally determined by the Committee in its absolute and uncontrolled discretion,
and any such determination or any other determination by the Committee under or
pursuant to this Plan and any interpretation by the Committee of the terms of
this Plan, shall be final, binding and conclusive on all persons affected
thereby.
4. PERFORMANCE YEAR. Each consecutive twelve month period from January 1 through
December 31 shall be treated as a separate performance year for the purpose of
the Plan.
5. COVANCE BONUS POOL/FINANCIAL TARGETS. The Committee shall approve at the
beginning of each performance year in question, or as soon as practicable
thereafter, but in no event later than the date that is 90 days after the
beginning of such performance year, financial target(s) for the Company, such as
pre-tax/pre-bonus income, and the related minimum and maximum aggregate amount
of money available for variable compensation under the Plan and the target
aggregate variable compensation awards in each case based on such financial
target or targets (the "Bonus Pool"). The Bonus Pool shall be allocated among
Covance's corporate group (such group, other than the CEO and executive
management (including the Corporate Senior Vice Presidents), being, "Covance
Corporate"), various divisions, Business Units, Operating Groups and Investment
Units (as defined in Paragraph 7), if any, and the CEO and executive management
(including the Corporate Senior Vice Presidents) as specified in Paragraph 8.
6. FINANCIAL TARGETS. (a) EXECUTIVE/BUSINESS UNITS/OPERATING GROUPS/FINANCIAL
TARGETS. Within the time limit specified in Paragraph 5, the CEO shall approve
the financial targets to be achieved during the performance year for each
Business Unit or Operating Group of the Company (including the Investment Units,
as defined in
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Paragraph 7). Examples of such financial targets include, revenue, pre-bonus
operating margin, pre-tax income, earnings per share and backlog. Such financial
target(s) may be applicable to all of the Company or only to the Business Unit
or Operating Group or Investment Unit.
(b) INDIVIDUALS. (i) OBJECTIVES. Within the time period specified in
Paragraph 5, the Committee shall approve the objectives for the performance year
in question of the CEO and the CEO shall approve the objectives of his direct
reports, including the Corporate Senior Vice Presidents. In the case of the CEO
and his executive management team, including the Corporate Senior Vice
Presidents, such objectives shall be based on a variety of criteria, including
financial performance, such as operating margin, pre-tax, pre-bonus operating
margin, revenue or earnings per share and other criteria which are of the
category type (as opposed to the actual objectives) determined by the CEO.
The Committee shall also review and approve by category employees who shall
be subject to individual performance objectives for the performance year in
question. Such objectives shall be in form and substance acceptable to such
employee's supervisor or senior management, as applicable, and completed within
the time period specified in Paragraph 5. The Committee shall also designate
employees by category who shall not be required to provide such objectives.
(ii) VARIABLE COMPENSATION TARGETS. The Committee will establish a variable
compensation target for each level of participating employee by category of
position reflected as a percentage of an employee's base pay earned during the
performance year in question (the "Employee Bonus Percentage", and the product
of an employee's base pay earned during the performance year and the applicable
Employee Bonus Percentage is, the "Employee Bonus Target Amount").
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(iii) PERFORMANCE RATINGS. The Committee shall establish performance
assessment categories for both employees with and without objectives and the
impact, in each case, of such performance assessment on such individuals'
variable compensation award, if any, under the Plan.
7. INVESTMENT UNITS. The CEO may designate any new Business Unit as an
"Investment Unit", and for any such Investment Unit, the CEO shall approve
within the time period specified in Paragraph 5 target(s) (financial or
otherwise) for such entity for the performance year in question and the amount
of variable compensation each such Investment Unit would be eligible for in the
aggregate if its applicable financial target(s) is achieved for the performance
year in question. Such financial target(s) may be different than the targets set
for the Business Units or Operating Groups for the performance year in question.
8. COMPUTATIONS. (a) MEASUREMENT. The Committee shall certify in writing before
the payment of any variable compensation under the Plan the satisfaction of the
financial target, or portion thereof (in each case after giving effect to the
adjustments specified in Paragraphs 8(a)(1) and (2)), the amount of the Actual
Bonus Pool (as hereinafter defined) for the applicable performance year and
whether the objectives of Covance's CEO have been satisfied for the performance
year in question (after giving effect to the adjustments specified in Paragraphs
8(a)(1) and (2), as applicable). Further, Covance's CEO shall assess the
performance of the Business Units and Operating Groups and Investment Units, if
any, and his executive management, including the Corporate Senior Vice
Presidents, compared to their applicable financial targets or objectives (in
each case after giving effect to the adjustments specified in Paragraphs 8(a)(1)
and (2), as applicable), for the performance year in question, and shall, at the
Committee's request, review such assessments with the Committee. Approved
minutes of the Committee shall satisfy the foregoing requirement. "Actual Bonus
Pool" means the amount of the actual Bonus Pool
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<PAGE>
for the performance year in question after giving effect to the adjustments
specified in Paragraphs 8(a)(1) and (2), as applicable.
(1) REQUIRED ADJUSTMENTS. The Bonus Pool and the related financial
target(s) shall be adjusted as of the end of the performance year in question to
give effect to the adjustment factors approved by the Committee in conjunction
with the establishment of the Bonus Pool and financial target(s) pursuant to
Paragraph 5.
(2) DISCRETIONARY ADJUSTMENTS. In addition to the required adjustments
specified in Paragraph 8(a)(1), the CEO or the Committee, as applicable, may in
calculating the amount of the Bonus Pool as of the end of the performance year
in question and assessing whether the financial targets (including for the
Investment Units, if any) and objectives, in each case, have been satisfied, in
whole or in part, as applicable, or exceeded on a basis consistent with
circumstances existing when the Bonus Pool, such financial targets and
objectives, in each case, were established include or exclude, as applicable,
the effect on the Bonus Pool, the financial targets (including for the
Investment Units, if any) and objectives arising from any acquisition of the
stock or assets of any other person or entity, the divestiture of all or any of
the Company's businesses, restructurings, strategic expenditures by Covance
identified to the Covance Board of Directors as such, force majeure events,
material litigation, or any other unexpected or unforeseen extraordinary event
or occurrence during the performance year; PROVIDED, HOWEVER, that with respect
to Company employees who meet the definition of "covered employee" under Section
162(m) of the Internal Revenue Code, as amended from time to time and the
regulations thereunder the Committee shall not increase the amount of
compensation payable to such employee that would otherwise be paid based upon
attainment of the objectives in question.
6
<PAGE>
(b) BONUS POOL ALLOCATIONS - CEO DISCRETIONARY AWARDS. The CEO shall have
the discretion and authority to allocate up to $500,000 of the Actual Bonus Pool
(such amount, as it may be increased by the Committee in its discretion for any
performance year based on the CEO's recommendation, being the "Discretionary
Bonus") to any individual who is not a Corporate Vice President or higher or to
any of the Business Units (including the Investment Units, if any) or Operating
Groups based on his sole and absolute judgment that such individual or entity
has made a significant contribution to the Company's success or for some other
important business reason. Such Discretionary Bonus shall not be paid until the
CEO has advised the Committee of his rationale for such awards.
(c) BONUS POOL ALLOCATIONS - INVESTMENT UNITS. The CEO shall review the
Investment Units' financial results after the completion of the performance year
in question. The CEO may, but shall not be obligated to, score such performance
consistent with the methods described in Paragraph 8(f). In the event that such
Investment Units either do better or worse than the financial target specified
for such Investment Unit, then the CEO shall determine and approve the amount
from the Actual Bonus Pool, if any, that should be allocated to each such
Investment Unit, if any.
(d) BONUS POOL ALLOCATIONS - COVANCE CORPORATE. Covance Corporate shall be
allocated a portion of the Actual Bonus Pool equal to the product of (1) a
fraction, (x) the numerator of which is the Actual Bonus Pool and (y) the
denominator of which is the 1x Bonus Pool (as hereinafter defined) and (2) the
1x Corporate Bonus Amount (as hereinafter defined). "1x Bonus Pool" means the
sum of the Employee Bonus Target Amounts for employees of the Company who are on
the Company's payroll as of the end of the performance year in question.
7
<PAGE>
"1x Corporate Bonus Pool" means the sum of the Employee Bonus Target
Amounts for employees of Covance Corporate who are on the Company's payroll as
of the end of the performance year in question.
(e) BONUS POOL ALLOCATIONS - CEO AND EXECUTIVE MANAGEMENT. Part I of
Appendix 1 sets forth the components of the variable compensation awards under
the Plan for any given performance year for the CEO and executive management
(including the Corporate Senior Vice Presidents). Part II of Appendix 1 sets
forth the method for computing such awards based on actual Company financial
performance.
(f) BONUS POOL ALLOCATIONS - BUSINESS UNITS/OPERATING GROUPS. The amount of
the Actual Bonus Pool that shall be available for allocation to the Business
Units and Operating Groups for a given performance year shall be the difference
between (1) the Actual Bonus Pool for such performance year and (2) the sum of
the variable compensation awards determined pursuant to Paragraphs 7(b) - (e)
above (the foregoing sum being, the "Bonus Deductions"). Appendix 2 sets forth
the methodology for scoring a Business Unit's or Operating Group's performance
against its financial target(s) for the performance year in question. Appendix 3
sets forth the methodology for determining a Business Unit's or Operating
Group's allocable share of the Actual Bonus Pool (after giving effect to the
Bonus Deductions) for the performance year in question (such variable
compensation amount being for each such Business Unit or Operating Group, a
"Business Unit Actual Bonus Pool").
(g) BONUS POOL ALLOCATIONS - INDIVIDUALS. Except in the case of the CEO and
the members of executive management (including Corporate Senior Vice
Presidents), actual variable compensation awards under the Plan to all employees
of the Company (including Covance Corporate) shall be determined by considering
the Company's Business Units', Operating Groups' and/or Investment Units', as
applicable, actual performance compared to the financial target for the year in
question (as adjusted
8
<PAGE>
pursuant to Paragraph 8(a)(1) and (2), as applicable), bonus payout percentage
represented by such results, their Employee Bonus Target Amounts, their bonus
payout percentages determined in accordance with such employees' performance
ratings and such other factors as may be appropriate; PROVIDED, HOWEVER, that
with respect to employees who are not Corporate Vice Presidents of the Company
or higher, the CEO shall have the authority to adjust, after consultation with
appropriate members of management, any individual's variable compensation award
under the Plan; PROVIDED, FURTHER, HOWEVER, that in no event shall the aggregate
amount of the variable compensation payments to a Business Unit, Operating Group
or Investment Unit for a given performance year exceed such entity's Business
Unit Actual Bonus Pool or the bonus pool for such Investment Unit (except for
any CEO discretionary awards pursuant to Paragraph 8(b)), nor shall the
aggregate of the variable compensation awards to all employees under the Plan
for a given performance year exceed the Actual Bonus Pool for the performance
year in question (except with respect to any CEO discretionary awards pursuant
to Paragraph 8(b)).
(h) PRORATIONS. In furtherance of the second proviso of Paragraph 8(g), the
computation of any individual variable compensation award to any employee under
this Plan (including the CEO and executive management) shall be prorated for the
aggregate effect of individual performance assessments that, without giving
effect to such proration, would result in variable compensation awards that
would otherwise exceed the amount of the Actual Bonus Pool for the performance
year in question.
9. MAXIMUM VARIABLE COMPENSATION AWARD PAYOUT. In no event shall any individual
receive more than 200 percent of such individual's variable compensation target.
9
<PAGE>
10. PAYMENT OF AWARDS. Variable compensation awards earned under the terms of
the Plan in excess of specified base levels may at the discretion of the
Committee, after consultation with Covance's management, be paid in cash, or in
stock options through the Employee Equity Participation Plan, or both. Payment
will be made as soon as practicable after the performance year in question, but
no later than each March 15 following the close of the applicable performance
year. Individuals may elect to defer payment of the variable compensation awards
in the event the Company has established a deferred compensation plan for
employees on the terms and conditions of such deferred compensation plan.
11. GOVERNING LAW; BINDING EFFECT. This plan shall be governed by and construed
in accordance with the laws of the State of New Jersey (without regard to the
conflict of law provisions thereof) and all questions concerning the validity
and construction thereof shall be governed in accordance with the laws of said
state; PROVIDED, HOWEVER, that all matters of corporate governance and other
corporate matters concerning Delaware corporations shall be governed by the
Delaware General Corporation Law. Except as otherwise expressly provided herein,
this Plan shall be binding upon and inure to the benefit of the parties hereto,
their legal representatives, successors and assigns.
12. TERMINATION OF EMPLOYMENT. Participation in the Plan does not create a
contract of employment, nor grant any employee of the Company the right to be
retained in the service of, or otherwise employed by, the Company. Individuals
will not receive a variable compensation award under this Plan for the
performance year in which their employment terminates for any reason or no
reason or if they are terminated for any reason or no reason prior to the date
the variable compensation is actually paid for the
10
<PAGE>
performance year in question, except as otherwise provided in Paragraph 2
hereof. Without limiting the foregoing or Paragraph 2 hereof, any individual
whose employment is terminated for wrongdoing, including, but not limited to, a
violation of the Company's Business Integrity Program, including the Code of
Conduct, will forfeit all rights to payment under this Plan.
13. EFFECTIVE DATE. The Plan will take effect as of January 1, 2000 and
supersedes in its entirety the Covance Way Covance Inc. Variable Compensation
Plan approved on February 25, 1999 (and effective January 1, 1999), the Covance
Way Covance Inc. Variable Compensation Plan, as amended, effective January 1,
1998, the Covance Inc. Variable Compensation Plan, as amended, and effective
January 1, 1997, the Covance Inc. General Employee Variable Compensation Plan,
as amended, and effective January 1, 1997 and the Covance Biotechnology Services
Inc. Variable Compensation Plan, as amended, and effective January 1, 1997.
14. AMENDMENT, SUSPENSION, OR TERMINATION. The Board or Committee may, at any
time, suspend, terminate, waive or amend the Plan (or provisions hereof, as
applicable), in such respects as the Board or Committee deems to be in the best
interest of the Company. No amendment will adversely affect any right of any
grantee, or his successors in interest, to keep any variable compensation award
actually made hereunder before the effective date of the amendment. Plan
deferrals, if any, in effect at the Plan's termination remain in effect
according to their original terms.
11
<PAGE>
APPENDIX 1
COMPONENTS, ADJUSTMENTS AND COMPUTATIONS
OF EXECUTIVE MANAGEMENT
VARIABLE COMPENSATION AWARDS
Part I. COMPONENTS
A. CEO
The CEO's variable compensation award is based on his individual
performance rating (which is based in part on the satisfaction of
objectives) and the satisfaction of targeted Covance financial
metrics for the applicable performance year such as EPS or pre-tax
and pre-bonus income, as approved by the Committee.
B. GLC STAFF EXECUTIVES
o 50% of variable compensation award is based on executive's
performance rating (which is based in part on satisfaction of
specified individual objectives).
o 50% of variable compensation awards is based on satisfaction of
targeted Covance financial targets as specified for the applicable
performance year such as EPS or pre-tax and pre-bonus income.
C. GLC OPERATIONS EXECUTIVES
o 25% of the variable compensation award is based on executive's
performance rating (which is based in part on satisfaction of
specified individual objectives).
o 25% of the variable compensation awarded is based on executive's
Business Unit's satisfaction of his Business Unit financial target
for the performance year in question such as pre-tax and pre-bonus
income or pre-bonus operating margin.
o 50% of the variable compensation award is based on satisfaction of
targeted Covance financial targets as specified for the applicable
performance year such as EPS or pre-tax and pre-bonus income.
12
<PAGE>
APPENDIX 1 (CONT'D)
Part II. METHODOLOGY
A. CEO
The CEO shall be awarded a variable compensation amount under the Plan
equal to the product of (x) such executive's Employee Bonus Target
Amount, (y) such executive's bonus payout percentage, determined in
accordance with such executive's performance rating for the
performance year in question and (z) a fraction (i) the numerator of
which is the Actual Bonus Pool earned for the performance year in
question and (ii) the denominator of which is the 1x Bonus Pool, as
adjusted, for the performance year in question.
B. GLC OPERATIONS EXECUTIVES
GLC Operations Executives shall be awarded a variable compensation
amount under the Plan equal to the sum of (1) an amount equal to the
product of (w) .5 and (x) executive's Employee Bonus Target Amount and
(y) a fraction (i) the numerator of which is the actual Bonus Pool
earned for the performance year in question and (ii) the denominator
of which is the 1x Bonus Pool, as adjusted, for the performance year
in question, (2) an amount equal to the product of (w) .25 and (x)
executive's Employee Bonus Target Amount and (y) a fraction (i) the
numerator of which is the Business Unit's Actual Bonus Pool earned for
the executive's Operating Group or Business Unit, as applicable, for
the performance year in question and (ii) the denominator of which is
the 1x Bonus Pool, as adjusted, for such Operating Group or Business
Unit and (3) an amount equal to the product of (w) .25 and (x) such
executive's Employee Bonus Target Amount and (y) such executive's
bonus payout percentage, determined in accordance with such
executive's performance rating for the performance year in question.
C. GLC STAFF
GLC Staff Executives shall be awarded a variable compensation amount
under the Plan equal to the sum of (1) an amount equal to the product
of (w).5 and (x) such executive's Employee Bonus Target Amount and (y)
such executive's bonus payout percentage, determined in accordance
with such executive's performance rating for the performance year in
question and (2) an amount equal to the product of (x) .5 and (y) such
executive's Employee Bonus Target Amount and (z) a fraction (i) the
numerator of which is the Actual Bonus Pool earned for the performance
year in question and (ii) the denominator of which is the 1x Bonus
Pool, as adjusted, for the performance year in question.
13
<PAGE>
APPENDIX 2
BONUS POOL SCORING
METHODOLOGY
METHODOLOGY: The CEO shall review and determine a Business Unit's or
Operating Group's (or Investment Unit's, as applicable) performance against its
financial targets after the completion of the performance year in question as
specified below:
FINANCIAL PERFORMANCE POINT RANGE
Minimum Target Maximum
Financial Financial Financial
Performance Performance Performance
----------- ----------- -----------
CATEGORY
Pre-Bonus -----------------------
Operating Margin(1) 70 100 120 Points
- ------------------------
(1) A Business Unit or Operating Group scores the maximum of 120 points if it
achieves 110% of its pre-bonus operating margin target (such entity gets 2
additional points for each 1% over its pre-bonus operating margin target),
and a minimum of 70 points by achieving 70% or less of its
pre-bonus-operating margin target (i.e., such entity loses 1 point for each
1% deficiency to its pre-bonus operating margin target).
14
<PAGE>
APPENDIX 3
INDIVIDUAL EMPLOYEE PAYOUT METHODOLOGY
METHODOLOGY
Any employee of the Company, except as specified in Paragraph 8(g) of the Plan,
will be paid a variable compensation amount under the Plan equal to the product
(1) a fraction, (a) the numerator of which is the Employee Theoretical Bonus
Amount (as hereinafter defined) and (b) the denominator of which is the sum of
the Business Unit's or Operating Group's Employee Theoretical Bonus Amounts and
(2) the Business Unit Actual Bonus Pool.
"EMPLOYEE THEORETICAL BONUS AMOUNT" means the product of the Employee Bonus
Target Amount and the individual's bonus payout percentage, determined in
accordance with the individual's performance rating as specified under the Plan.
15
THE COVANCE INC. EMPLOYEE STOCK PURCHASE PLAN
AMENDMENT NO. 1
Covance Inc. hereby amends the Covance Inc. Employee Stock
Purchase Plan (the "Plan") as follows:
Section 4.3 shall be amended to increase the number of shares that may be
offered under the Plan from 1,000,000 to 3,000,000 shares by deleting Section
4.3 in its entirety and replacing it with the following:
4.3 MAXIMUM OFFERING: The maximum number of shares of Stock which
shall be issued under the Plan, subject to adjustment upon changes in
capitalization of the Company as provided in Section 9.3, shall be
3,000,000 shares. If the total number of shares which would be purchased
during any Offering Period exceeds the maximum number of available shares,
the Committee shall make a pro rata allocation of the available shares in
a manner that it determines to be equitable and the balance of payroll
deductions credited to the Accounts of Participants shall be returned to
such Participants as soon as administratively practicable.
To record the adoption of this Amendment No. 1 to the Plan, Covance Inc.
has authorized its officers to affix its name this 15th day of March, 2000.
COVANCE INC.
_____________________________________
By: Jeffrey S. Hurwitz
Corporate Senior Vice President,
General Counsel and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Covance
consolidated financial statements for the quarter ended March 31, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001023131
<NAME> Covance Inc.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 13,461,000
<SECURITIES> 0
<RECEIVABLES> 210,354,000
<ALLOWANCES> 0
<INVENTORY> 28,676,000
<CURRENT-ASSETS> 313,864,000
<PP&E> 544,286,000
<DEPRECIATION> 239,786,000
<TOTAL-ASSETS> 721,666,000
<CURRENT-LIABILITIES> 194,440,000
<BONDS> 0
0
0
<COMMON> 592,000
<OTHER-SE> 274,386,000
<TOTAL-LIABILITY-AND-EQUITY> 721,666,000
<SALES> 0
<TOTAL-REVENUES> 209,627,000
<CGS> 145,924,000
<TOTAL-COSTS> 189,703,000
<OTHER-EXPENSES> (381,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,892,000
<INCOME-PRETAX> 17,413,000
<INCOME-TAX> 6,774,000
<INCOME-CONTINUING> 10,639,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,639,000
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.19
</TABLE>
