Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 1-12213
COVANCE INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-3265977
(State of Incorporation) (I.R.S. Employer Identification No.)
210 Carnegie Center, Princeton, New Jersey 08540
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (609) 452-4440
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
---------------------------- ---------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO __
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
As of February 10, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,178,971,297 (based on the closing price
of the Company's Common Stock on the New York Stock Exchange on February 10,
1998 of $20.50).
As of February 10, 1998, the Registrant had 57,698,663 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive Proxy Statement is incorporated by reference into Items
10, 11, 12 and 13 of Part III of this Form 10-K.
PART I
Item 1. Business
General
Covance Inc. ("Covance" or the "Company") is a leading contract research
organization ("CRO") providing a wide range of integrated product development
services on a worldwide basis to the biotechnology, pharmaceutical and medical
device industries. In addition and to a lesser extent, Covance also provides
services such as health economics and outcomes for managed care organizations,
hospitals and other health care providers and laboratory testing services to the
chemical, agrochemical and food industries. The services Covance provides
constitute two lines of business: early development services (preclinical, Phase
I and biomanufacturing services), and late-stage development services (clinical
and periapproval, central laboratory, pharmaceutical packaging and health
economics and outcomes services). Covance believes it is one of the largest
biopharmaceutical CROs, based on 1997 annual net revenues, and one of a few that
are capable of providing comprehensive global product development services.
On May 13, 1996, the Board of Directors of Corning Incorporated ("Corning"),
the Company's former indirect parent, approved a plan to distribute (the
"Distributions"), in a tax free distribution to all Corning stockholders of
record as of 11:59 PM on December 31, 1996, all of the Company's outstanding
Common Stock, and that of Quest Diagnostics Inc. ("Quest"). The Distributions
were effected as of the close of December 31, 1996 (the "Distribution Date") and
the Company (as well as Quest) became an independent, publicly-traded company on
such date.
The service offerings that constitute Covance's business were initially
acquired by its former parent, Corning, as part of a strategy to create a global
and full service product development company. In 1987, Corning acquired Hazleton
Corporation (now known as Covance Laboratories Inc.), owner of preclinical drug
safety assessment laboratories and Phase I clinical research units. In 1989,
Phase II and Phase III clinical trials expertise was added with G.H. Besselaar
Associates (now known as Covance Clinical and Periapproval Services Inc.).
Covance further expanded its clinical trials expertise in 1990 with the purchase
of PACT Inc. (now known as Covance Periapproval Services Inc.), a periapproval
studies company. In 1991, SciCor Inc. (now known as Covance Central Laboratories
Inc.), a clinical laboratory dedicated to the drug development process was
purchased. Covance's pharmaceutical laboratory capabilities were expanded in
1992 with the creation in Switzerland of a jointly owned company, SciCor S.A.
Covance acquired 100% of this company in 1994. Also in 1994, the Company
acquired a significant minority equity interest in Bio-Imaging Technologies Inc.
("Bio-Imaging"), which uses proprietary imaging technology to quantify the
diagnostic and therapeutic effectiveness of experimental drugs and devices. In
1995, Covance acquired National Packaging Systems, Inc. ("National Packaging")
(now known as Covance Pharmaceutical Packaging Services Inc.), a pharmaceutical
packaging company. Also in 1995, Covance formed Covance Biotechnology Services
Inc. ("Covance Biotechnology"), a majority-owned company which has enabled
Covance to engage in the manufacture of biologics.
In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics and outcomes company. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of Swiss-based
CRS Pacamed AG ("CRS Pacamed") (now known as Covance Pharmaceutical Packaging
Services AG). In addition, in connection with the acquisition of CRS Pacamed,
Covance acquired a 91,000 square-foot facility in Horsham, United Kingdom, which
is used, among other things, to enhance the Company's ability to provide
pharmaceutical packaging services in Europe. The Horsham facility became fully
operational with the completion of its substantial renovation in June 1997. Also
in 1997, Covance began construction on a 45,000 square-foot facility in
Allschwil, Switzerland, expected to be ready for occupancy by mid-1998, to
further enhance its packaging capabilities in Europe. Covance is also building
an additional 160,000 square-foot facility at its Princeton location. The
Princeton facility, to be leased, will further support the Company's clinical
services and corporate functions, and permit increased employee capacity. The
Princeton facility is expected to be ready for occupancy in late 1998. Covance
is also increasing its Indianapolis, Indiana facility by 112,000 square feet to
expand its pharmaceutical laboratory operations. The Indianapolis additional
space, also to be leased, will be ready for occupancy by mid-1998.
The Company maintains offices in 17 countries, including offices in Montreal,
Canada, Buenos Aires, Argentina, Warsaw, Poland and Prague, Czech Republic, all
of which opened in 1997.
CRO Industry Overview
The CRO industry provides independent product development services to the
pharmaceutical, biotechnology and medical device industries. In general, CROs
derive substantially all of their revenue from the research and development
expenditures of such industries. Full-service CROs design and manage preclinical
and clinical and periapproval studies and trials, provide health economics and
outcomes services and provide packaging, central laboratory and other services
required to develop and market new products in accordance with applicable
government regulations in the jurisdictions where the services are provided,
including the regulations of the Food and Drug Administration ("FDA") in the
United States. Today, there are only a few full-service CROs.
Trends Affecting the CRO Industry
Covance believes that the outsourcing of drug development activities by
pharmaceutical and biotechnology companies has been increasing and will continue
to increase as a result of a number of factors, as further described below.
Cost Containment Pressures. Market forces and governmental initiatives have
placed significant downward pressure on pharmaceutical and biotechnology
companies' drug prices. Covance believes that the pharmaceutical industry is
responding to these pressures by converting some of the fixed costs of
maintaining research and development infrastructure to variable costs by
outsourcing drug development activities to CROs. Demand for CROs is also driven
by internal development resource shortages experienced when a large number of
compounds emerge from the research process and need to undergo development.
Management also believes that many of these companies are attempting to shorten
new drug development cycle time by using CROs, which may have greater expertise
in a therapeutic area, while offering greater efficiency at a lower cost.
Marketplace Globalization. Pharmaceutical and biotechnology companies are
increasingly attempting to expand the market for new drugs by pursuing
regulatory approvals in multiple countries simultaneously rather than
sequentially as they have in the past. Covance believes that CROs with a global
presence will continue to benefit from these trends, and that the Company is
well-positioned to benefit from such trends.
Revenue Enhancement Through Faster Drug Development. Covance believes that
CROs, by providing specialized development services, are often able to perform
the needed services with a higher level of expertise or specialization, and more
quickly than a pharmaceutical or biotechnology company could perform such
services internally.
Pharmaceutical Company Consolidation. Business combinations in the
pharmaceutical industry present an opportunity for Covance, as such companies
generally seek to obtain cost reduction synergies. Once combined, many
pharmaceutical companies aggressively manage costs by reducing jobs,
decentralizing the research and development process and outsourcing to CROs in
an effort to reduce the fixed costs associated with internal drug development.
Increasingly Stringent Regulation. Increasingly stringent regulatory
requirements throughout the world and their standardization have increased the
need for broader, global regulatory expertise. Covance believes that the
pharmaceutical and biotechnology industries are outsourcing to global CROs to
take advantage of their capabilities and geographic presence.
Therapeutic Focus. Management believes that the economics of the marketplace
require increased research and development expenditures as biopharmaceutical
companies become focused on innovative new products, including drugs for an
aging population, and drugs for the treatment of chronic disorders and life
threatening conditions. The development of therapies for chronic disorders, such
as Alzheimer's disease or arthritis, requires complex clinical trials to
demonstrate the therapies' effectiveness and to determine whether the drugs
cause any long-term side effects. Management believes that CROs with the
requisite therapeutic experience and the ability to manage complex trials will
present an attractive development alternative for biopharmaceutical companies.
Biotechnology Industry Growth. The United States biotechnology industry has
grown rapidly over the last 10 years and is introducing new therapies which
require regulatory approval. Many biotechnology companies do not have the
necessary
2
internal resources and experience (capital, equipment or people) to conduct
preclinical studies and clinical trials. Accordingly, many biotechnology
companies have chosen to outsource to CROs rather than expend significant time
and resources to develop an internal preclinical or clinical development or
biomanufacturing capability.
The New Drug Development Process--Overview
Before a new drug may be marketed to the public, it must undergo extensive
testing and regulatory review to determine that the drug is both safe and
effective for its intended purpose. The developmental process and typical
corresponding time periods are as set forth below. Similar extensive testing and
regulatory reviews are required in Europe and some Asian countries to determine
that a new drug is safe and effective for its intended purpose before it can be
marketed to the public.
Preclinical Research (6 months to 3 years). In vitro ("test tube") and in
vivo ("animal") studies are conducted to establish the basic pharmacokinetic
effect and safety of a drug including the toxicity of the drug over a wide range
of doses. Initially, acute toxicology studies are conducted. In the United
States, if results warrant continuing development of the drug, the manufacturer
(also known as the "sponsor") will file an Investigational New Drug ("IND")
application, whereupon the FDA may grant permission to begin human trials (also
known as "clinical trials"). Preclinical studies may continue after the start of
clinical trials to determine the longer term effects of a product.
Clinical Trials (3.5 to 6 years).
o Phase I (6 months to 1 year). This phase involves the initial basic safety
and pharmacology testing in approximately 20 to 100 human subjects,
usually healthy volunteers in a closely monitored setting, including
studies to determine the side effect profile of the drug, how the drug
works, how it is affected by other drugs, where it goes in the body, how
long it remains active and how it is broken down and eliminated from the
body.
o Phase II (1 to 2 years). This phase involves basic efficacy
(effectiveness) and dose-range testing in approximately 100 to 400
carefully selected patients suffering from the disease or condition under
study to help determine the best effective dose, confirm that the drug
works as expected and provide additional safety data. The trials are
typically well controlled and usually involve a placebo, also known as a
"sugar pill." A placebo is an identical tablet or solution which lacks the
active substance under investigation.
o Phase III (2 to 3 years). This phase involves efficacy and safety studies
in broader populations of hundreds or thousands of patients at many
investigational sites (hospitals and clinics) and may involve
placebo-controlled trials, in which the new drug is compared with a
placebo; studies comparing the new drug with one or more drugs with
established safety and efficacy profiles in the same therapeutic category
("controlled trials"); or studies where there is no comparison to a
placebo or another drug ("uncontrolled trials"). Generally, Phase III
studies are intended to provide additional information on drug safety and
efficacy, an evaluation of the risk-benefit relationship for the drug, and
information for the adequate labeling of the product.
NDA Preparation and Submission. Upon completion of Phase III trials, the
sponsor or CRO assembles the tabulated and statistically analyzed data from all
phases of development into a single large document, the New Drug Application
("NDA"), which comprises, on average, approximately 100,000 pages.
FDA Review and Approval (1 to 2 years). At this stage, the FDA will
scrutinize data from all phases of development to confirm that the sponsor has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study. Product labeling is also approved at
this stage, which serves as a guideline to the sponsor about how its product can
be promoted in the marketplace.
Treatment Investigational New Drug (May span late Phase II, Phase III and FDA
review). When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or are of minimal value, the FDA may allow the manufacturer to make the
new drug available to a larger number of patients through the regulated
mechanism of a Treatment Investigational New Drug ("TIND") application. Although
less scientifically rigorous than a controlled clinical trial, a TIND may enroll
and collect primarily safety data from thousands of patients.
3
Post-Marketing Surveillance and Phase IV Studies (Periapproval). Federal
regulation requires the sponsor to collect and periodically report to the FDA
additional safety and effectiveness data on the drug for as long as the sponsor
markets the drug (post-marketing surveillance). If the drug is marketed outside
the United States, these reports must include data from all countries in which
the drug is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the drug or to test new dosage formulations. All
of these studies are types of "periapproval" studies.
Business Strategy
Based on 1997 annual net revenues, Covance believes it is one of the largest
CROs serving the biotechnology and pharmaceutical industries. The Company has a
focused strategy to provide high quality, cost effective, integrated,
comprehensive and innovative services to assist its pharmaceutical and
biotechnology clients to develop, produce, obtain approval for and enhance the
commercial success of their new therapeutic products worldwide. As this strategy
unfolds, Covance will focus increased attention on customers who are biased
towards development approaches that are flexible, innovative and more likely to
yield optimal outcomes.
Services. Covance believes that CROs capable of offering a full range of
biopharmaceutical drug development and manufacturing services are better able to
compete for three reasons: (1) a full range of services provides a client with
the choice of using just one provider to secure all of the client's development
needs; (2) an integrated provider of these services can provide economies of
scale and accelerate the development of the client's product through more
comprehensive planning of the development process; and (3) early stage
development provides the CRO with access to the client sooner in the development
cycle and may promote the client's use of later stage development services.
As part of its strategy, Covance both continually improves its existing
services and endeavors to create new ones. Covance has implemented a total
quality management system throughout its operations which assists the Company in
its goal of producing error-free services on time and within the client's
budget. This management system is overseen by a quality team comprised of
Covance's most senior executives, including its chief executive officer.
Furthermore, certain of Covance's United States and European subsidiaries have
received ISO 9000 and 9001 certifications based on quality standards established
by the International Organization for Standardization. The ISO 9000 standards
define the international requirements for creating a quality assurance system
that will result in providing consistent service.
Covance also developed its own Expanded Access Program ("EAP"), one of
Covance's periapproval offerings. EAP is a mechanism that allows innovative new
therapies for life threatening diseases to be given to expanded populations
prior to FDA approval pursuant to a TIND application. In January 1998, the
Company initiated the Covance Center for Central Nervous System ("CNS") Research
("CNS Research Center"). Management believes that CNS is a key therapeutic area,
with over 1,000 products in development and more than $2.5 billion spent in
research and development by the United States pharmaceutical industry alone. The
CNS Research Center focuses a core group of employees with CNS experience to
service and develop this capability. In addition, Covance created a CNS advisory
board, comprised of six leading experts in CNS research, to further its
expertise in this area and better serve its clients. In January 1998, the
Company opened an office in Tampa, Florida to further support the development of
the CNS Research Center. In addition to improving its existing services, Covance
also focuses on providing its clients new market oriented, value-added services,
including those that involve integrated services relying on multidisciplinary
teams drawn from various Covance operating units or divisions. For instance,
Covance is duplicating in the United States a Strategic Product Development
("SPD") program developed in Europe that has successfully reduced the estimated
time from preclinical testing to the first human studies.
Covance's new service offerings arise as a result of both "home-grown"
activities and through strategic acquisitions and alliances. With respect to the
former, in addition to the programs noted above, Covance has invested in the
creation of a multi-use biomanufacturing facility which became operational in
January 1997. With respect to the latter, Covance added domestic pharmaceutical
packaging capabilities through the acquisition of National Packaging in January
1995, European pharmaceutical packaging capabilities through the acquisition of
CRS Pacamed in October 1996, and enhanced its health economics and outcomes
services by acquiring HTA in March 1996. Covance expects to continue developing
services internally and making strategic acquisitions that are complementary to
its existing services and that will expand its capability to serve its clients.
4
Streamlining the Drug Development Process. In recognition of its clients'
needs with respect to cost containment, reduced testing time frames and global
trials, Covance has also created the Accelerated Clinical Trial ("ACT") team
focused exclusively on continually examining and redesigning the drug
development process with the objective of reducing the time required to develop
a new compound. The mandate of the ACT team is to examine every significant
process, system and information technology used in product development, with the
objective of applying the considerable experience and technical resources
available throughout the Company. ACT's integrated and streamlined processes
reduce redundancies and permit optimal use of shared data. ACT was used in seven
client programs in 1997, reducing by approximately fifty (50%) percent the
average time from last patient completing a trial to the preparation of a
clinical trial report. Based on preliminary results, management intends to
expand ACT to additional clinical trials in 1998.
In early 1997, the Company created the Covance Investigator Alliance ("CIA").
The CIA's purpose is to identify and form alliances with leading investigators
throughout North America and Europe to facilitate expeditious study approvals,
patient and data access and to improve the timeliness and quality of data. Over
40 investigative sites in North America are currently part of the CIA. Based on
preliminary results, management intends to continue to expand the number of CIA
sites in North America and Europe.
With respect to technical resources, Covance has over 300 information systems
professionals working in 13 regional information system centers (nine in the
United States, three in Europe and one in Australia) and nine satellite centers
(five in the United States and four in Europe). Most of the Company's employees
at its 39 locations (both domestic and international), and miniframe computers
and thousands of desktop computers, are connected by a wide area network that
provides global access to the expertise and technologies resident in the
regional information system centers. These systems also support the Company's
ability to provide integrated services and connect the Company to its clients.
For instance, Covance's development of its Trial Tracker(SM) Information Access
System ("Trial Tracker(SM)") provides clients real time access to their study
data and its drug supply management system based on Integrated Voice Response
technology allows clients to more efficiently manage the distribution of their
experimental compounds to investigational sites. In continually examining ways
to improve the drug developmental process, Covance's information technology
strategy is to capitalize on its existing heterogeneous, flexible and
proprietary computer systems, and to both customize them where appropriate for
particular client needs and incorporate new systems and technologies to meet
changing demands in a timely and cost effective manner.
Geographic Expansion. Covance believes that it will become increasingly
important to provide its full range of drug research and development services in
all major and developing biotechnology and pharmaceutical markets, especially
given industry trends to conduct research on new drugs outside the United States
first and to conduct clinical trials in multiple countries simultaneously.
Through its offices, regional monitoring sites, laboratories and manufacturing
sites in over 39 locations in 17 different countries and field work in over 30
other countries, Covance believes it is a leader among CROs in its ability to
deliver services globally. Currently, approximately 35% of Covance's 6,000
employees are based outside of the United States.
Covance will continue its strategy of establishing new or enhancing existing
operations in significant biotechnology and pharmaceutical markets. Covance
expects this will occur as a result of internal growth and through strategic
acquisitions. In February 1997, Covance opened an office in Montreal, Canada.
The Montreal office serves the Company's Canadian clients and those North
American customers who are developing their products in Canada. In March 1997,
Covance opened its Buenos Aires, Argentina office. Buenos Aires serves as
Covance's center for conducting clinical research in Latin America, in a region
that Covance believes will be a significant contributor of clinical and central
laboratory data for global regulatory dossiers. In October 1997, Covance opened
its Warsaw, Poland office. Warsaw presents an opportunity for Covance to conduct
clinical trials in a region which provides previously untapped sources for new
patient populations and investigator networks. Also in October 1997, Covance
opened an office in Prague, Czech Republic. Prague serves as additional support
to expand the Company's central laboratory project management services in
Eastern Europe and to support studies in Eastern Europe.
Covance also continues to collaborate in the Asia-Pacific region (from Japan
through Australia) with various science and technology boards and ministries to
assist in the improvement of the regulatory environment necessary to attract
more international trials. Covance is also continuing its collaboration with the
Singapore National Science and Technology Board concerning the Singapore
government's initiative to form the Asia Pacific Economic Cooperation
Coordinating Center for Good Clinical Practice. In July 1997, Covance signed a
collaboration agreement with the Chinese State Science and
5
Technology Commission - China Innovation Center for Life Sciences ("Chinese
Science Commission") to enhance multinational pharmaceutical development in the
Chinese market. Covance is currently teaching Good Clinical Practice ("GCP") to
key physicians and investigators in select Chinese hospitals and clinical
pharmacology centers. The training is expected to be expanded in future years to
include Good Laboratory Practices ("GLP") and Good Manufacturing Practices
("GMP"). Covance and the Chinese Science Commission will also be evaluating the
possible development of alternative alliances and joint venture strategies.
Services
Covance provides a wide range of integrated product development services on a
worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition and to a lesser extent, Covance provides services such
as health economics and outcomes for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. The services Covance provides constitute two
lines of business: early development (preclinical, Phase I and biomanufacturing
services) and late-stage development (clinical and periapproval, central
laboratory, pharmaceutical packaging and health economics and outcomes
services).
Early Development Line of Business
Preclinical Services
Covance has four major laboratories, employing over 2,000 people, located in
Madison, Wisconsin and Vienna, Virginia in the United States and Harrogate,
United Kingdom and Munster, Germany. The Company also has an administrative and
sales office in Tokyo, Japan. The preclinical services offered are wide-ranging,
including in vivo toxicology studies (such as acute, subchronic and
carcinogenicity studies), genetic toxicology studies (such as in vitro
cytotoxicity, cytogenetics and gene mutation studies and transgenic mouse
models) and chemistry services (such as in vitro metabolism, pharmacokinetics
and bioequivalence studies).
The preclinical area has also been a source of innovation by introducing new
technologies for client access to data, electronic animal identification,
multimedia study reports and data tables and in vivo and in vitro measures of
induced cell proliferation. Covance's preclinical group also works closely with
the Phase I and II groups to minimize product development time and to provide
clients with early data on the safety and efficacy of new molecules. This data
allows clients to make a decision about whether to continue, modify or cease
their development programs.
As part of its preclinical services, Covance is duplicating in the United
States the SPD program developed in Europe. This program has successfully
reduced in Europe the time from preclinical testing to the first human studies.
SPD involves an integrated process and team drawn from Covance's preclinical and
Phase I and II areas. In an SPD program, the compound is researched from initial
preclinical evaluation through its first dosing in humans, including the filing
and attainment of an IND application. Specific elements of the process include
formulation and dose delivery testing, product metabolism, chemistry,
pharmacology, toxicology and safety testing. The preclinical testing phase in
the United States typically takes six months to three years and Phase I studies
typically take six months to one year. Because IND applications are required in
the United States to be filed before human clinical trials start, it is
uncertain whether SPD trial completion speeds in the United States will be as
swift as the Company's experiences with clients in the United Kingdom (where
IND applications are not required to commence Phase I clinical trials), but
Covance believes that an SPD program can reduce the typical drug development
time in the United States. Several SPD trials in the United States are
continuing, with the program scheduled to be expanded in 1998.
In early 1997, Covance launched the Compound Appraisal and Selection Service
("CASS") to its clients. CASS is an integrated labs service which combines
several preclinical service offerings and is particularly directed to small and
start-up companies. CASS offers consultancy, in vitro screens and in vivo
animals tests to determine the viability of compounds for future development.
Covance also provides animals, including purpose-bred animals, for biomedical
research. These animals are used by biopharmaceutical companies, university
research centers and CROs, like Covance, as part of their preclinical in vivo
safety
6
and efficacy testing. Through a variety of processes, technology and
specifically constructed facilities, Covance is able to provide both
purpose-bred and specific pathogen free animals that meet clients' rigorous
control requirements. Covance is also a provider of custom polyclonal and
monoclonal antibody services and owns and operates a state-of-the-art antisera
production facility that complies with both GMP and GLP. Although Covance's
animal breeding facilities maintain procedures in accordance with applicable
government regulations and Company policies for the quarantine and handling of
imported animals, including primates, there is a risk that these animals may be
infected with diseases that may be harmful and even lethal to themselves and
humans.
Covance also provides laboratory testing services to the chemical,
agrochemical and food industries. Covance offers a complete range of services to
agrochemical manufacturers to determine the potential risk to humans, animals
and the environment from plant protection products. Covance also offers a broad
range of services to the food industries, including nutritional analysis and
nutritional content fact labels.
Biomanufacturing Services
Covance holds a majority interest in Covance Biotechnology, a company formed
in 1995 to manufacture peptides and recombinant proteins for biotechnology and
pharmaceutical clients in accordance with GMP for preclinical and clinical
trials as well as for commercial sales. Covance Biotechnology's services include
process development services, GMP manufacturing by microbial and mammalian cell
expression, laboratory testing, quality assurance and quality control and
regulatory affairs assistance. Covance Biotechnology is able to process multiple
compounds for multiple clients simultaneously and on a scale, Covance believes,
greater than any other contract bioprocessor. Covance Biotechnology provides an
alternative for clients who might otherwise need to design, finance and
construct their own facility to manufacture a compound for preclinical or
clinical trials or commercial sale. By retaining Covance Biotechnology, a client
can avoid the expense, time delay and risk of making additional investments for
a compound whose safety, efficacy and commercial opportunities are uncertain.
This allows clients to preserve their capital and lower their risks.
The 109,000 square-foot biomanufacturing facility, located in Research
Triangle Park, North Carolina, became "mechanically complete" in December 1996
and operational in January 1997. The biomanufacturing facility is financed
through several tax retention operating leases provided by a commercial lending
institution ("Bank"). The lease expires in December 2006. The annual minimum
lease payments are approximately $5.7 million. At the expiration of the lease
term, Covance Biotechnology is liable for the unamortized balance of the cost of
the facility, currently estimated to be approximately $37.0 million. Covance
Biotechnology may also choose to purchase the facility at specific dates over
the 10 year period. Using current estimates, the purchase price would be
approximately $52.0 million at the end of the first year, decreasing on an
amortizing basis to approximately $37.0 million at the end of the tenth year.
Covance owns 78% of the voting capital stock of Covance Biotechnology in the
form of convertible preferred stock. The remaining 22% of Covance
Biotechnology's capital stock is owned by certain minority stockholders (the
"Minority Stockholders") in the form of common stock. Covance's ownership in
Covance Biotechnology may be reduced to approximately 68% if certain options
granted to key Covance Biotechnology executives are exercised in full.
The Company, Covance Biotechnology and the Minority Stockholders are also
party to a capital contribution and stockholder agreement (the "Stockholders'
Agreement"), which, among other things, limits certain Minority Stockholders'
common stock transfers, grants Covance a right of first refusal on shares of
Minority Stockholders' common stock, and grants Covance the right to purchase up
to one-third of the common stock held by the Minority Stockholders on certain
dates. If Covance chooses not to exercise its purchase right, the Stockholders'
Agreement obligates Covance Biotechnology to use its best efforts to arrange for
the sale of such shares on certain specified terms, and certain other
conditions. Supplementing the Stockholders' Agreement, in October 1997, the
Company and the Minority Stockholders entered into an agreement by which,
subject to the satisfaction of certain conditions, the Company and the Minority
Stockholders are obligated to make, upon request by Covance Biotechnology,
additional capital contributions to Covance Biotechnology not to exceed an
aggregate amount of $12.0 million.
7
Late-Stage Development Line of Business
Clinical and Periapproval Services
Covance offers a comprehensive range of clinical trial services, including
Phase II through III clinical studies and periapproval studies, including Phase
IIIb and Phase IV clinical studies, TINDs, post-marketing surveillance studies
and prescription to over-the-counter switch studies ("Rx to O-T-C Switch").
Covance also has extensive experience in a number of therapeutic areas,
including diseases of the cardiovascular and CNS, endocrinology and respiratory
systems, oncology, infectious diseases (including AIDS), and significant
experience in other areas including bone metabolism immunology,
gastroenterology, urology, dermatology and hematology. Covance has extensive
experience in managing small, medium and large trials in the United States and
in many parts of the world. These trials may be conducted separately or
simultaneously as part of a multinational development plan.
Covance can manage every aspect of clinical trials by providing its clients
the following services: clinical development plans and protocol design,
consulting services (clinical and data management, regulatory advice and
filings, information systems and drug development strategy), site, investigator
and patient enrollment, preparation and submission of TIND and IND applications,
European study submissions, NDAs, electronic regulatory submissions also known
as computer assisted NDAs ("CANDAs") and computer assisted PLAs ("CAPLAs"),
product license applications ("PLAs"), European submission dossiers,
computerized patient randomization and dose assignment and tracking, Phase II -
Phase IV study design and implementation, monitoring and safety evaluation
management and reporting, data processing and management, statistical analyses
and report writing, medical writing, GCP and GMP audits and, through its
relationship with Bio-Imaging, medical image digitization and processing.
Clinical trials are managed by a dedicated project team, which, in each case, is
led by a project director who supervises all aspects of the clinical trial.
The following is a description of the core services Covance provides, either
on an individual or integrated basis depending on client needs, as part of
conducting clinical trials:
Study Design. Covance serves its clients in the critical area of study design
by applying its experience in the preparation of study protocols and case report
forms ("CRFs"). The study protocol defines the medical issues to be examined in
evaluating the safety and efficacy of the drug under study, the number of
patients required to produce statistically valid results, the clinical tests to
be performed in the study, the time period over which the study will be
conducted, the frequency and dosage of drug administration and the exact
inclusion and exclusion criteria to be met for the patients enrolled in the
study. The success of the study depends not only on the ability of the protocol
to accurately reflect requirements of regulatory authorities, but also on the
ability of the protocol to fit coherently with the other aspects of the
development process and the ultimate marketing strategy for the drug. This
includes outcomes and pharmacoeconomic concerns and reimbursement planning. With
study protocol finalization, CRFs must be developed to record the desired
information and ensure that valid data are acquired in a form that is most
efficient for the investigator. The various other disciplines involved in the
drug development process, including data management, statistics and regulatory
affairs, must work closely with the clinical trial management project team to
assure that the right data are acquired in a form which is most efficient for
subsequent data entry, management analyses and reporting.
Investigator Recruitment. During clinical trials, administration of the drug
to patients is supervised by physicians, also referred to as investigators, at
hospitals, clinics or other locations, also referred to as investigational
sites. The success of a clinical trial depends, in large part, on the
performance of these investigators. Covance solicits the participation in the
study of investigators who contract directly with either Covance or its client.
Covance maintains and continually expands and refines its computerized database
of approximately 30,000 investigators. Information regarding Covance's
experience with these investigators, including factors relevant to rapid study
initiation, are contained in the database. Covance has worked with approximately
25,000 general practitioners in connection with the conduct of Phase III and IV
studies.
Study Monitoring. Covance provides study monitoring services which include
investigational site initiation, patient enrollment assistance and data
collection through subsequent site visits. These visits also serve to assure
that data are gathered according to GCP, the requirements of the client, as
specified in the study protocol or otherwise, and applicable regulations.
Covance focuses at an early stage on identifying and quickly completing the
critical rate-limiting steps of screening and
8
selecting investigators, processing pre-study regulatory paperwork, obtaining
institutional review board approvals and scheduling investigational site
initiation visits.
Clinical Data Management and Biostatistical Analysis. Covance's data
management and biostatistical analysis services are managed by professionals
with extensive pharmaceutical and biotechnology industry experience in the
design and construction of local and multinational clinical trial databases.
Data management and biostatistical analysis services are offered as discrete
products and as part of an integrated drug development program. During the
design of development plans and protocols, Covance offers consulting services
relating to, and the determination of, sample size parameters for patient
enrollment, development of data analysis plans and randomization schemes. During
the conduct of clinical trials, Covance assists in the rapid acquisition of
clean and accurate data. Following completion of the clinical trials, Covance
assists in report preparation and regulatory submissions. Covance's
biostatisticians may participate with clients in meetings with the FDA to
present and discuss biostatistical analyses prepared by Covance. Covance has
expertise in electronically capturing and integrating geographically diverse
data. Covance employs a variety of software, which may be specified by clients
or combined with customized programs developed by Covance.
Clinical Development Technologies. To expedite the drug development process
and to help reduce costs, Covance created a proprietary drug management system
utilizing an array of interfaces, one of which is based on an Interactive Voice
Response System ("IVRS") and the Trial Tracker(SM) system, which are interactive
information technologies. IVRS uses touch-tone telephone technology to assist
biopharmaceutical clients in managing the "just-in-time" delivery of clinical
drug supplies and patient randomization. IVRS is available in multiple languages
using toll free numbers and has, in some cases, demonstrated up to 30% reduction
in study drug waste. Trial Tracker(SM), based on Lotus Notes(R) software,
provides clients with 24-hour access to study data, such as study patient
enrollment progress, patient visit information, CRF status, serious adverse
event experiences and other pertinent clinical trial information. Covance
continues to technologically update IVRS, launching a new computer "platform"
for IVRS in early 1997, further improving quality, shortening development
timeframes and doubling system programmers' productivity.
Medical Writing and Regulatory Services. Covance provides medical report
writing and regulatory services to its clients in a manner designed to
complement parallel development processes to reduce overall development time.
These services are fully integrated with Covance's other services to accelerate
development speed consistent with good service and regulatory compliance.
Services in this area include integrated clinical/statistical reports,
manuscripts, risk/benefit assessment reports, package inserts, quality assurance
and environmental risk assessments. Covance believes it was one of the first
CROs to develop CANDAs and CAPLAs.
Treatment Investigational New Drug Applications. The TIND is an application
by a pharmaceutical or biotechnology sponsor and the associated procedure to
allow broader populations of patients to receive treatment with an
investigational new drug for a serious or immediate life-threatening disease,
such as AIDS or cancer, for which no comparable or satisfactory therapy is
available. This treatment is provided during the clinical trial phase of
development but does not typically use controlled clinical trials. The Company
is experienced with TINDs and has developed specialized systems for prompt
initiation and effective operation of TIND programs, such as computerized
patient screening, optical scanning of CRFs and drug management systems. Other
special TIND programs or systems involve providing project specific information
to physicians, patients and patient advocacy groups, and data processing,
management, analyses and reporting systems. Covance's EAP, which is conducted
pursuant to a TIND, is a mechanism that allows innovative new therapies for
life-threatening diseases to be given to expanded populations prior to FDA
approval.
Other Periapproval Studies. Besides TINDs, Phase IIIb studies (involving
studies conducted after NDA submission but before regulatory approval is issued)
and Phase IV studies, Covance performs other types of periapproval studies such
as post-marketing surveillance studies and Rx to O-T-C Switch studies.
Post-marketing surveillance studies are epidemiologically based evaluations of
the use of products in actual medical practice using a broad range of patients.
These studies use practicing physicians to evaluate primarily the safety profile
of the product under actual medical practice conditions. Post-marketing
surveillance studies are large, typically involving over 1,000 physicians and
thousands of patients, and usually focus on evaluating just a limited number of
key clinical outcomes, such as a particular side effect. In Rx to O-T-C Switch
studies, Covance gathers, on behalf of a sponsor, the necessary safety data to
obtain regulatory permission for the sale of its drug without the need of a
prescription. These studies are also large, well-controlled programs.
9
Health Economics and Outcomes Services
Covance offers a wide range of health economics and outcomes services for
managed care organizations, hospitals, other health care providers and
pharmaceutical and device manufacturers. These services include outcomes and
pharmacoeconomic studies, reimbursement planning services and disease management
services, as discussed below.
Outcomes and Pharmacoeconomic Studies. Covance offers its clients a full
range of strategic and analytic services, including strategic planning,
quality-of-life assessment and economic studies (including feasibility studies,
protocol and instrument design and data analysis). Outcomes studies may be
prospective, often conducted in conjunction with clinical trials, or
retrospective. Many cost-effectiveness studies employ economic modeling
techniques to evaluate the full financial impact of new medical technologies.
When planning studies, the Company examines the audience for the study's
findings to determine which of the client's concerns (such as regulatory
approval, clinical acceptance, insurer coverage or insurer payment) might be
more fully informed by the availability of outcomes data, and then determines
how such data can be efficiently collected and communicated. Covance typically
involves academic and clinical experts to ensure that appropriate techniques are
used and to enhance study credibility and acceptance. Covance also designs most
studies with a goal of publishing its findings in respected, peer-reviewed
journals.
Covance believes that given the changing competitive pressures affecting the
pharmaceutical industry and the rising need to more rigorously demonstrate the
value of particular drugs, both in their own right and compared to other drugs
and treatment regimes, the ability to perform outcomes and pharmacoeconomic
studies will become increasingly important.
Reimbursement Planning. Covance offers its customers strategic reimbursement
and market planning services. These services enable clients to enhance the
commercial success of their medical products. Covance analyzes, on behalf of the
customer, who will pay for a medical product (e.g., third-party payors such as
private insurance companies or federal programs like Medicare) and what economic
barriers or opportunities exist for the product (e.g., claims coding, coverage
policy, or payment amounts). In addition, Covance often offers its reimbursement
planning activities in conjunction with its other services that evaluate
existing and potential market size, pricing, distribution and economic impact.
Through its Medical Technology Hotlines(R) division, Covance also provides
full service reimbursement case management, including: (1) contacting insurers
to investigate specific coverage and benefit matters, resolving denied claims
and educating insurers; (2) assisting manufacturers in designing and effectively
running their indigent patient programs, pursuant to which costly new products
are made available to patients who cannot afford them because of inadequate
insurance coverage or other cost reasons; (3) designing and administering
transition programs for manufacturers, which includes obtaining third-party
payment for a product for patients who had previously received it free as part
of a clinical trial; and (4) conducting reimbursement training seminars for
clients and their customers.
All of these services are supported by a dedicated information services group
that provides a range of data products, services and information systems,
including customized hospital cost reports, patient average lengths of stay or
mortality rates at the federal, state, local or individual hospital level. The
extensive economic and epidemiologic databases Covance maintains are used to
perform market research, determine the economics of a disease or inform
government authorities about the need for potential policy changes.
Disease Management Services. Working for a variety of customers, including
pharmaceutical and device manufacturers, managed care organizations, hospitals,
provider networks and computerized medical record companies, Covance designs and
implements systems that track patterns of care, patient outcomes and costs, and
develops programs and tools designed to improve quality and decrease costs of
care. Such programs and tools include medical practice guidelines and
computerized decision support tools.
Central Laboratory Services
Covance believes that the ability to provide high quality and sophisticated
central laboratory services is an integral aspect of what constitutes a full
service CRO. Covance has three facilities (located in the United States,
Switzerland and the United Kingdom) that provide central laboratory services,
two of which (the United States and Switzerland) are dedicated exclusively to
biopharmaceutical studies. The United States and Swiss facilities provide
clients with combinable data in studies that can be conducted separately, or
multinationally and simultaneously.
10
Providing combinable data eliminates the need for statistical correlation among
different laboratories by using consistent laboratory methods, the use of same
reagent manufacturers and the use of identical clinical trial reference ranges
and equipment calibration. Covance also employs a proprietary clinical trials
management system, which Covance believes is unique, that enables it to enter a
sponsor's protocol requirements directly into its own database. This system,
based on protocol requirements, constructs the drug kits that will go to the
investigational sites and the requisition forms therefor, allows for proper
laboratory specimen collection from the investigational sites, sequencing of
study participants visits and investigator ordering of additional tests and
ensures that all demographic data is complete and accurate and will produce for
the client reports that are customized to their specifications. The laboratories
provide a comprehensive audit trail by ensuring that all laboratory data are
traceable to source documents, are capable of delivering customized data
electronically within 24 hours of test completion and provide safety test
results within 48 hours of test completion from most locations. As the need for
central laboratory services expands geographically, the Company has expanded the
reach of its central laboratories services through contractual arrangements with
a leading South African laboratory and a leading Australian laboratory, each of
which allows Covance to combine the testing capabilities of such laboratory with
its own proprietary systems. In July 1997, Covance began a 112,000 square-foot
"build-to-suit" expansion of its 152,000 square-foot Indianapolis facility to
further accommodate expanding operations and future requirements. Management
expects that the Indianapolis facility expansion will be ready for occupancy by
mid-1998.
Pharmaceutical Packaging Services
Covance offers full service contract packaging for the pharmaceutical
industry in the United States and Europe including package development and
design, coldformed and thermoformed blister units, blister packaging, multi-dose
bottle filling, clinical labeling, wallet packaging, storage and site
distribution of clinical supplies and return services for unused supplies. With
the addition, in 1996, of Covance Pharmaceutical Packaging Services AG, Covance
further expanded its packaging capabilities. Management believes that by
integrating packaging services with its other clinical and periapproval services
it can accelerate the drug development process through operational efficiencies
that arise from coordinating at the outset the design of a clinical trial. In
1997, Covance completed its substantial renovation and upgrade to the 91,000
square-foot packaging facility in Horsham, United Kingdom which Covance had
purchased in 1996. The facility, which became fully operational with the
completion of its substantial renovation in June 1997, provides modern
pharmaceutical packaging operations at one of the largest packaging facilities
in Europe. Also in 1997, Covance began construction on a new, purpose designed,
"build-to-suit" 45,000 square-foot facility in Allschwil, Switzerland. This new
facility will replace Covance's existing 20,000 square-foot facility in Basel,
Switzerland to further increase European operations and capabilities. The new
Allschwil facility is expected to be ready for occupancy by mid-1998.
Customers and Marketing
Covance provides its product development services on a global basis to, among
others, the pharmaceutical and biotechnology industries. In 1997, Covance served
over 290 biopharmaceutical companies, including all 50 of the world's largest
pharmaceutical companies and 20 of the world's 25 largest biotechnology
companies. Of the 290 biopharmaceutical companies Covance serves, 45 are
Japanese. The Japanese biopharmaceutical companies are served by Covance's
United States and European operations.
For the year ended December 31, 1997, approximately 69% of Covance's net
revenues, 74% of Covance's operating income and 62% of Covance's identifiable
assets were attributed principally to United States operations, while
approximately 31% of Covance's net revenues, 26% of Covance's operating income
and 38% of Covance's identifiable assets were attributed to non-United States
operations. Approximately 61% of Covance's net revenues during 1997 were
attributed to the Company's late-stage development line of business.
Approximately 39% of Covance's net revenues during 1997 were attributed to the
Company's early development line of business. In 1997, no customer accounted for
more than 10% of the Company's net revenues, and only one customer accounted for
more than 5% of the Company's net revenues. In 1997, Covance's top five
customers accounted for approximately 20% of Covance's net revenues.
Covance's sales activities (including client contact and support) are
conducted by more than 120 sales and business development people based in
Covance's operations in the United States, Europe, Australia, Japan, Argentina
and Singapore. Most of Covance's business development personnel have technical
or scientific backgrounds.
11
During 1997, Covance introduced a strategic business initiative to increase
its commercial success by reorganizing its marketing department. Covance has
moved from service specific marketing (which focused on one type of service
offering) to business segment-based or integrated capability-based marketing
(which focuses on the Company's many services). Further, the Company created a
consolidated sales force of key account directors, strategic account managers
and business opportunity managers, each responsible for optimizing business
opportunities (whether multi-capability or service specific) throughout the
Company's operations. Such individuals are focused upon marketing the Company's
services to new and existing clients, including multi-capability services, core
competencies, global capabilities, and the ability to adapt to client region
specific needs. Although centralized, the new marketing initiative will still
permit the Company to adapt its services/products to regional market differences
and specific client needs. Management believes that this strategic business
initiative has the potential to create greater awareness among clients of the
Company's range of services and to optimize the sale of large global drug
development programs.
Contractual Arrangements
Most of Covance's contracts are either fixed price, fee-for-service or
fee-for-service with a cap. To a lesser extent, some of the contracts are
fee-for-service without a cap. In cases where the contracts are fixed price,
Covance bears the cost of overruns, with certain exceptions, but benefits if the
costs are lower than anticipated. In cases where the contracts are
fee-for-service with a cap, the contracts contain an overall budget for the
trial based on time and cost estimates. If costs are lower than anticipated, the
customer keeps the savings, but if costs are higher than estimated, then Covance
is responsible for the overrun unless the increased cost is a result of a change
requested by the customer, such as an increase in the number of patients to be
enrolled or the type or amount of data to be collected. Contracts may range from
a few months to several years depending on the nature of the work performed. In
some cases, for multi-year contracts a portion of the contract fee is paid at
the time the study or trial is started with the balance of the contract fee
payable in installments over the study or trial duration and may be performance
based. For instance, in clinical and periapproval trials, installment payments
may be related to investigator recruitment, patient enrollment or delivery of a
database.
Most of Covance's contracts for the provision of its services are terminable
by the customer either immediately or upon notice. Contracts may be terminated
for a variety of reasons, including the failure of a product to satisfy safety
requirements, unexpected or undesired results of the product, the customer's
decision to forego or terminate a particular study, insufficient enrollment or
investigator recruitment, or the Company's failure to properly discharge its
obligations thereunder.
Backlog
Certain of Covance's studies and projects are performed over an extended
period of time, which may be as long as several years. With respect to such
studies or projects, Covance maintains an order backlog to track anticipated net
revenues for such work that has yet to be earned. However, Covance does not
maintain an order backlog for certain services it provides because such services
are performed within a short period of time or where it is not otherwise
practical or feasible to maintain an order backlog.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however, Covance will work on a project prior to executing a
letter of intent and the backlog may include the net revenue expected from such
project.
No assurance can be given that the Company will be able to realize all or any
net revenues included in backlog. Although backlog can be meaningful to
management with respect to a particular study where study-specific information
is known (for example, study duration, performance clauses and other
study-specific contract terms), Covance believes that its aggregate backlog as
of any date is not necessarily a meaningful indicator of future results for a
variety of reasons, including the following: first, studies vary in duration.
For instance, some studies that are included in 1997 backlog may be completed in
1998, while others may be completed in later years. Second, the scope of studies
may change, which may either increase or decrease their value. Third, studies
included in backlog may be subject to bonus or penalty payments. Fourth, trials
under
12
verbal approvals, letters of intent or contracts included in backlog are subject
to termination or delay at any time by the client or regulatory authorities.
Termination or delays can result from a number of reasons. Delayed contracts
remain in Covance's backlog pending determination of whether to continue, modify
or cancel the study.
Based upon the above discussion, Covance's aggregate backlog at December 31,
1997 and 1996 was in excess of $625 million and $500 million, respectively.
Competition
The CRO industry is highly fragmented, with participants ranging from
hundreds of small, limited-service providers to a few full service CROs with
global capabilities. Covance primarily competes against in-house departments of
pharmaceutical companies, full-service CROs and, to a lesser extent,
universities and teaching hospitals. Covance believes, based on 1997 net
revenues, that the five largest CROs besides itself include Quintiles
Transnational Corporation, PPD/Pharmaco Inc., Huntington International Holdings
PLC, Parexel International Corporation and ClinTrials Research Inc.
There is competition among the larger CROs for both customers and acquisition
candidates. Companies may also choose to limit the CROs with whom they are
willing to work. In addition, there are few barriers to entry for small,
limited-service providers considering entering the CRO industry. CROs compete on
the basis of several factors, including reputation for on-time quality
performance, expertise and experience in specific therapeutic areas, scope of
service offerings, how well such services are integrated, strengths in various
geographic markets, price, technological expertise and efficient drug
development processes, the ability to acquire, process, analyze and report data
in a time-saving and accurate manner, the ability to manage large-scale clinical
trials both domestically and internationally, expertise and experience in health
economics and outcomes and size. The Company believes that it competes favorably
in all of these areas.
Relationship With Corning and Quest
Effective as of the Distribution Date, Corning, Quest and Covance entered
into certain agreements to provide for an orderly transition to the status of
three separate independent companies, to govern their relationship subsequent to
the Distributions and to provide for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Distributions.
Transaction Agreement. The Transaction Agreement between Corning, Quest and
the Company provided for, among other things, certain conditions precedent to
the Distributions, certain corporate transactions required to effect the
Distributions and other arrangements between Corning, Quest and Covance
subsequent to the Distributions. The Transaction Agreement provided for, among
other things, assumptions of liabilities and cross-indemnities designed to
allocate generally, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
business of the Company, Quest and Corning.
In addition to the specific indemnity described below, Corning, Quest and
Covance are obligated under the Transaction Agreement to indemnify and hold
harmless each other in respect of Indemnifiable Losses (as defined therein)
arising out of or otherwise relating to the management or conduct of their
respective businesses or the breach of any provision of the Transaction
Agreement. The Transaction Agreement also provided that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution Date in connection with the Distributions are to be
allocated among the parties. Except as set forth in the Transaction Agreement or
any related agreement, each party shall bear its own costs and expenses incurred
after the Distribution Date.
Spin-Off Tax Indemnification Agreements. Corning and Covance entered into a
tax indemnification agreement (the "Corning/Covance Spin-Off Tax Indemnification
Agreement") pursuant to which, among other things, Covance agreed with Corning
that during the period from December 31, 1996 to December 31, 1998 (the
"Restricted Period") (i) it would continue active conduct in its CRO business,
(ii) it would continue to own and manage at least 50% of the assets which it
owned immediately after the Distribution Date, and (iii) it would refrain from
certain stock issuances, mergers or liquidations, or any revisions to its Rights
Plan (as defined therein). Covance also agreed to indemnify Corning for Taxes
(as defined therein)
13
arising from certain violations of the Corning/Covance Spin-Off Tax
Indemnification Agreement and for Taxes arising as a result of the purchase of
20% or more of Covance Stock during the Restricted Period or the commencement of
a tender or purchase offer by a third party for 20% or more of Covance stock. If
the Company's obligations under the Corning/Covance Spin-Off Tax Indemnification
Agreement were breached and, as a result thereof, one or both of the
Distributions do not qualify for the treatment stated in the Private Letter
Ruling issued by the Internal Revenue Service (the "IRS Ruling"), the Company
would be required to indemnify Corning for Taxes imposed, and such
indemnification obligations could exceed the Company's net asset value at such
time.
Quest and Covance also entered into a tax indemnification agreement which was
essentially the same as the Corning/Covance Spin-Off Tax Indemnification
Agreement, except that Covance made representations and covenants to and
indemnified Quest, as opposed to Corning. Quest and Covance also entered into a
second tax indemnification agreement which is essentially the same as the
spin-off tax indemnification agreement between Corning and Quest, except that
Quest made representations and covenants to and indemnified Covance as opposed
to Corning.
The various tax indemnification agreements described above also require
Covance to take such actions as Corning and Quest may reasonably request to
preserve the favorable tax treatment provided for in the rulings obtained from
the IRS in respect of the Distributions.
Tax Sharing Agreement. Corning, Quest and Covance entered into a tax sharing
agreement (the "Tax Sharing Agreement") which allocated responsibility for
federal income and various other taxes ("Taxes") among the three companies. The
Tax Sharing Agreement provides that, except for Taxes arising as a result of the
failure of either or both of the Distributions to qualify for the treatment
stated in the IRS Ruling (which Taxes are allocated either pursuant to the tax
indemnification agreements described above or as described below), Corning is
liable for and will pay the federal income taxes of the consolidated group that
includes Quest and Covance and their subsidiaries, provided, however, that Quest
and Covance were required to reimburse Corning for taxes for periods beginning
after December 31, 1995 in which they were members of the Corning consolidated
group and for which tax returns have not been filed as of the Distribution Date.
This reimbursement obligation is based on the hypothetical separate federal tax
liability of Quest and Covance, calculated on a separate consolidated basis,
subject to certain adjustments. Under the Tax Sharing Agreement, in the case of
adjustments by a taxing authority of a consolidated federal income tax or
certain other tax returns prepared by Corning which includes Quest or Covance,
then, subject to certain exceptions, Corning is liable for and will pay any tax
assessments, and is entitled to any tax refunds, resulting from such audit.
The Tax Sharing Agreement further provided that, if either of the
Distributions fails to qualify for the tax treatment stated in the IRS Ruling
(for reasons other than those indemnified against under one or more of the tax
indemnification agreements described above), Taxes imposed upon or incurred by
Corning, Quest or Covance as a result of such failure are to be allocated among
Corning, Quest and Covance in such a manner as will take into account the extent
to which the actions or inactions of each may have contributed to such failure,
and Corning, Quest and Covance each will indemnify and hold harmless the other
from and against the taxes so allocated. If it is determined that none of the
companies contributed to the failure of such Distribution to qualify for the tax
treatment stated in the IRS Ruling, the liability for taxes will be borne by
each company in proportion to its relative average market capitalization as
determined by the average closing price for the common stock of each company
during the 20 trading-day period immediately following the Distribution Date. In
the event that either of the Distributions fails to qualify for the tax
treatment stated in the IRS Ruling and the liability for taxes as a result of
such failure is allocated among Corning, Quest and the Company, the liability so
allocated to the Company could exceed the net asset value of Covance.
Government Regulation
The laboratory, manufacturing and packaging services performed by Covance are
subject to various regulatory requirements designed to ensure the quality and
integrity of the testing, manufacturing and packaging processes. The industry
standards for conducting preclinical laboratory testing are embodied in the GLP
and GMP regulations and for central laboratory operations in the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"). Covance's central laboratory
in Geneva has also been certified by the College of American Pathologists
("CAP"). GMP sets forth the requirements for manufacturing facilities. The
standards of GLP and GMP are required by the FDA, by the Department of Health in
the United
14
Kingdom and by similar regulatory authorities in other parts of the world. GLP
and GMP stipulate requirements for facilities, equipment and professional staff.
The regulations require standardized procedures for studies, for recording and
reporting data and for retaining appropriate records. To help satisfy its
compliance obligations, Covance has established quality assurance controls at
its laboratory and manufacturing facilities which monitor ongoing compliance
with GLP and GMP regulations and CLIA, as applicable, by auditing test data and
conducting inspections of testing and manufacturing procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. The FDA and many other
regulatory authorities require that test results submitted to such authorities
be based on studies conducted in accordance with GCP. These regulations require,
but are not limited to, the following: (1) complying with specific requirements
governing the selection of qualified investigators; (2) obtaining specific
written commitments from the investigators; (3) verifying that patient informed
consent is obtained; (4) ensuring adverse drug reactions are medically evaluated
and reported; (5) monitoring the validity and accuracy of data; (6) verifying
drug or device accountability; (7) instructing investigators and studies staff
to maintain records and reports; and (8) permitting appropriate governmental
authorities access to data for their review. Covance must also maintain reports
for each study for specified periods for auditing by the study sponsor and by
the FDA. As with GLP and GMP, noncompliance with GCP can result in the
disqualification of data collection during the clinical trial.
Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
International Conference on Harmonization-Good Clinical Practice Guidelines
("ICH-GCP Guidelines"), and the requirements of the applicable country. Although
the U.S. is a signatory to the ICH-GCP Guidelines, the FDA has not formally
adopted all of the guidelines as statutory regulations, but has currently
adopted them only as guidelines. In addition, FDA regulations and guidelines
serve as a basis for Covance's North American and Asian/Pacific standard
operating procedures. From an international perspective, when applicable,
Covance has implemented common standard operating procedures across regions to
assure consistency whenever it is feasible and appropriate to do so.
Covance's animal import and breeding facilities are also subject to a variety
of federal and state laws and regulations, including The Animal Welfare Act and
the rules and regulations promulgated thereunder by the United States Department
of Agriculture ("USDA"). These regulations establish the standards for the
humane treatment, care and handling of animals by dealers and research
facilities. Covance's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to comply with
applicable regulations for the humane treatment of the animals in its custody.
Besides being licensed by the USDA as both a dealer and research facility, this
business is also accredited by the American Association for the Accreditation of
Laboratory Animal Care and has registered assurance with the United States
National Institutes of Health Office of Protection for Research Risks.
The use of controlled substances in testing for drugs with a potential for
abuse is regulated by the Drug Enforcement Administration (the "DEA"). All
Covance laboratories and packaging sites using controlled substances for testing
or packaging purposes are licensed by the DEA.
Covance's United States laboratories are subject to licensing and regulation
under federal, state and local laws relating to hazard communication and
employee right-to-know regulations, the handling and disposal of medical
specimens and hazardous waste and radioactive materials, as well as to the
safety and health of laboratory employees. All Covance laboratories are operated
in material compliance with applicable federal and state laws and regulations
relating to the storage and disposal of all laboratory specimens including the
regulations of the Environmental Protection Agency, the Nuclear Regulatory
Commission, the Department of Transportation, the National Fire Protection
Agency and the Resource Conservation and Recovery Act. Although Covance believes
that it is currently in compliance in all material respects with such federal,
state and local laws, failure to comply could subject Covance to denial of the
right to conduct business, fines, criminal penalties and other enforcement
actions.
In addition to its comprehensive regulation of safety in the workplace, the
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, whose
workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B
virus. These regulations, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations and
other measures designed to minimize exposure to chemicals, and transmission of
blood-borne and airborne pathogens. Furthermore, relevant Covance
15
employees receive initial and periodic training to ensure compliance with
applicable hazardous materials regulations and health and safety guidelines.
The regulations of the Department of Transportation, the Public Health
Service and the Postal Service apply to the surface and air transportation of
laboratory specimens. Covance's laboratories also comply with the International
Air Transport Association regulations, which govern international shipments of
laboratory specimens. Furthermore, when the materials are sent to a foreign
country, the transportation of such materials becomes subject to the laws, rules
and regulations of such foreign country.
Intellectual Property
Covance has developed certain computer software and technically derived
procedures that provide separate services and are intended to maximize the
quality and effectiveness of its services. Although Covance's intellectual
property rights are important to its results of operations, Covance believes
that such factors as the technical expertise, knowledge, ability and experience
of Covance's professionals are more important, and that, overall, these
technological capabilities provide significant benefits to its clients.
Information Technology
Information systems are an integral part of the services and products the
Company provides. The Company has formed a group, led by its Chief Information
Officer, to assess the Year 2000 issue from an internal, supplier and customer
perspective and remediate any issues discovered. Although the Company believes
at this time that neither the costs nor expenses of the Year 2000 issue will be
material to the Company, the ultimate costs and expenses are currently unknown
and such costs or the consequences of failure to correct any Year 2000 issues
could have a material impact on the Company's financial condition, business or
operations.
Employees
At January 15, 1998, Covance had approximately 6,000 employees,
approximately 35% of whom are employed outside of the United States.
Approximately 31 of Covance's employees hold M.D. degrees, 188 hold Ph.D.
degrees, 14 hold Pharm.D. degrees, 36 hold D.V.M. degrees and 603 hold masters
or other postgraduate degrees. Management believes that its relations with its
employees are good.
Item 2. Properties
Covance both owns and leases its facilities. Covance's principal executive
offices are located in Princeton, New Jersey where it leases approximately
216,000 square feet of space in three buildings. The primary lease expires in
2004. In addition, in late 1997, Covance contracted with the landlord of its
Princeton facility for the lease of a "build to suit" 160,000 square-foot
facility. This new space will accommodate the growth of the Princeton corporate
office and clinical and periapproval operations. The building is expected to be
ready for occupancy in late 1998, and will be leased for a 15-year period. Also
in mid-1997, Covance leased a 32,000 square-foot office facility in Walnut
Creek, California to accommodate the growth of its clinical and periapproval
operations on the West Coast. The lease is for a 5-year term. In early 1997, the
Company also leased an additional 18,000 square feet at its Radnor, Pennsylvania
periapproval facility, for a total of approximately 60,000 square feet. The
Radnor lease expires in 2002 and has one three-year renewal term. Covance also
leases an aggregate of 42,500 square feet in several buildings in Maidenhead,
United Kingdom for its clinical and periapproval operations, and in late 1997
added an additional 27,000 square feet to accommodate expanding operations in
that location. Covance owns its 397,000 square-foot preclinical laboratory
located in Madison, Wisconsin, its 279,000 square-foot preclinical laboratory in
Harrogate, United Kingdom and its 50,000 square-foot preclinical laboratory in
Munster, Germany. Covance leases most of its 201,000 square-foot preclinical
laboratory in Vienna, Virginia. The leases expire in 1999 and have a 10-year
renewal option. It also owns several of the buildings in Vienna, Virginia.
Covance also leases its 152,000 square-foot pharmaceutical laboratory in
16
Indianapolis, Indiana, which lease was recently extended to 2013, with renewal
options, in connection with the lease of an additional 112,000 square-foot,
"build-to-suit" adjoining facility, expected to be available for occupancy by
mid-1998. Covance leases its 51,000 square-foot pharmaceutical laboratory in
Geneva, Switzerland, which lease expires in 2000. Covance's domestic packaging
operations are conducted from its principal packaging facility in Allentown,
Pennsylvania. The packaging leases are for approximately 100,000 square feet of
space and they all expire in 1999. In addition, in October 1996, Covance
purchased a 91,000 square-foot former pharmaceutical manufacturing facility in
Horsham, United Kingdom. With its renovation completed in June 1997, the Horsham
facility is used to provide pharmaceutical packaging, clinical and periapproval
services and health economics and outcomes services. Also in 1997, Covance began
construction on a new, purpose-designed, "build-to-suit" 45,000 square-foot
facility in Allschwil, Switzerland to further enhance its packaging capabilities
in Europe, and to replace its existing 20,000 square-foot facility, located in
Basel, Switzerland. The new Allschwil facility is expected to be completed by
mid-1998. Covance Biotechnology's 109,000 square-foot facility in North Carolina
is leased. Covance also owns or leases other facilities in the United States,
Canada, Europe, Asia and Latin America.
Item 3. Legal Proceedings
Covance is party to lawsuits and administrative proceedings incidental to the
normal course of its business. Covance does not believe that any liabilities
related to such lawsuits or proceedings will have a material effect on its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the New York Stock Exchange (symbol:
CVD). The following table sets forth the high and low sales prices on the New
York Stock Exchange since the Company's Common Stock began trading on a "when
issued" basis on December 17, 1996. The Company's Common Stock began trading
"regular way" on January 14, 1997.
Quarter Ended High Low
- ------------- ---- ---
Fourth Quarter 1996(1) $25.00 $20.875
First Quarter 1997 $22.875 $15.50
Second Quarter 1997 $20.625 $14.625
Third Quarter 1997 $23.1875 $18.125
Fourth Quarter 1997 $22.75 $17.0625
- -----------
(1) December 17, 1996 through December 31, 1996
As of February 10, 1998, there were 9,826 holders of record of the Company's
Common Stock.
The Company has not paid any dividends during 1997 or 1996 (except dividends
paid to Corning in 1996). The Company does not currently intend to pay dividends
in the foreseeable future, but rather, intends to reinvest earnings in the
Company's business. The Company is also restricted (subject to certain
exceptions) from paying dividends on its Common Stock by certain covenants
contained in a credit agreement to which the Company is a party.
17
Item 6. Selected Financial Data
The following table presents selected historical consolidated financial data
of Covance as of and for each of the years ended December 31, 1997, 1996, 1995,
1994 and 1993. This data has been derived from the audited consolidated
financial statements of Covance.
The selected historical consolidated financial data should be read in
conjunction with the audited Covance consolidated financial statements and notes
thereto ("Audited Covance Consolidated Financial Statements") filed elsewhere
herein. Historical consolidated financial data may not be indicative of
Covance's future performance. See the Audited Covance Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------- ---------- --------- --------- ---------
(Dollars in thousands, except per share data)
Income Statement Data:
Net revenues.................. $590,651 $ 494,828 $ 409,174 $ 319,501 $289,697
Costs and expenses:
Cost of revenue ............. 389,785 324,345 270,726 213,490 192,783
Selling, general and
administrative .......... 92,329 80,014 64,201 48,892 42,949
Depreciation and
amortization ............ 30,877 25,204 22,070 18,520 16,984
Spin-off related charge ..... 27,404
Restructuring charge ........ 4,616
------- ---------- --------- --------- ---------
Total ................... 512,991 456,967 361,613 280,902 252,716
------- ---------- --------- --------- ---------
Income from operations ........ 77,660 37,861(a) 47,561(b) 38,599 36,981
------- ---------- --------- --------- ---------
Other expense, net
Interest expense, net ....... 8,314 6,791 5,269 4,307 4,421
Other expense (income) ...... 167 1,116 (784) (712) 852
------- ---------- --------- --------- ---------
8,481 7,907 4,485 3,595 5,273
------- ---------- --------- --------- ---------
Income before taxes and
equity investee results ..... 69,179 29,954 (a) 43,076(b) 35,004 31,708
Taxes on income ............... 29,367 17,377 18,445 14,924 13,506
Equity investee loss (gain) ... 58 (139) 405 435 1,391
------- ---------- --------- --------- ---------
Net income .................... $ 39,754 $ 12,716 (a) $ 24,226(b) $19,645 $16,811
======= ========== ========= ========= =========
Basic earnings per share....... $ 0.69 $ 0.22 N/A N/A N/A
Diluted earnings per share..... $ 0.69 N/A (c) N/A N/A N/A
Balance Sheet Data:
Working capital ............. $ 59,488 $ 65,946 $ 18,472 $ 12,961 $ 12,076
Total assets ................ 484,014 451,047 322,510 271,992 229,693
Long-term debt .............. 132,423 163,000 89,836 75,178 69,239
Stockholders' equity......... 157,057 110,704 82,517 63,908 49,388
Other Financial Data:
Gross margin................. 34.0% 34.5% 33.8% 33.2% 33.5%
Operating margin............. 13.1% 13.2%(d) 12.8%(e) 12.1% 12.8%
Net margin................... 6.7% 6.6%(d) 6.6%(e) 6.1% 5.8%
Current ratio................ 1.35 1.43 1.15 1.12 0.98
Debt to capital.............. 0.46 0.60 0.52 0.54 0.58
Book value per share......... 2.74 1.94 N/A N/A N/A
Net days sales outstanding... 48 50 47 33 30
- ------------
(a) Excluding the impact of the fourth quarter 1996 one-time spin-off related
charge totaling $27,404 ($19,725 net of tax), income from operations,
income before taxes and equity investee results and net income for the
year ended December 31, 1996 was $65,265, $57,358 and $32,441,
respectively, and basic earnings per share ("EPS") was $0.57.
(b) Excluding the impact of the second quarter 1995 restructuring charge
totaling $4,616 ($2,770 net of tax), income from operations, income before
taxes and equity investee results and net income for the year ended
December 31, 1995 was $52,177, $47,692 and $26,996, respectively.
(c) Since Covance common stock began "regular way" trading on the NYSE on
January 14, 1997, computation of diluted EPS for 1996 is not possible.
(d) Operating margin and net margin exclude the income statement impact of
the fourth quarter 1996 one-time spin-off related charge. Including the
impact of this charge, operating income and net margin were 7.7% and
2.6%, respectively.
(e) Operating margin and net margin exclude the income statement impact of
the second quarter 1995 restructuring charge. Including this charge,
operating income and net margin were 11.6% and 5.9%, respectively.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, Covance also
provides services such as health economics and outcomes for managed care
organizations, hospitals and other health care providers and laboratory testing
services to the chemical, agrochemical and food industries. The foregoing
services can be broadly classified into two lines of business: early development
services (preclinical, Phase I and biomanufacturing) and late-stage development
services (clinical and periapproval, central laboratory, pharmaceutical
packaging and health economics and outcomes). Covance believes it is one of the
largest biopharmaceutical CROs, based on 1997 annual net revenues, and one of a
few that are capable of providing comprehensive global product development
services. Covance offers its clients high quality services designed to reduce
product development time, allowing them to introduce their products into the
marketplace faster and thus, maximize the period of marketing exclusivity and
monetary return on their investments. Additionally, Covance's comprehensive
services and broad experience provide clients with a variable cost alternative
to fixed cost internal development capabilities.
The operations that today constitute Covance were acquired by Corning,
starting in 1987, as part of a strategy to create a global, integrated and full
service product development company. In keeping with this strategy, during the
period 1995 through the present, Covance has acquired three new operations and
formed a major new business venture. Specifically, in January 1995, Covance
expanded its offering of value added product development services with the
acquisition of National Packaging Systems, Inc., a pharmaceutical packaging
company, in a transaction accounted for as a purchase business combination. In
February 1995, Covance formed Covance Biotechnology, a majority-owned company
which has enabled Covance to engage in the manufacture of biologics since the
facility began operations in December 1996. In recognition of the rapid changes
in the biopharmaceutical industry's marketplace, particularly the need for the
industry to further demonstrate the benefits and cost effectiveness of their
products to payors, Covance purchased in March 1996 all of the assets and
substantially all of the liabilities of Health Technology Associates, Inc.
("HTA"), a health economics and outcomes company, in a transaction accounted for
as a purchase business combination. In October 1996, Covance expanded its
pharmaceutical packaging capabilities to Europe with the purchase of Swiss-based
CRS Pacamed AG, in a transaction accounted for as a purchase business
combination. In addition, Covance acquired a 91,000 square foot facility in
Horsham, United Kingdom, which is used to provide, among other things,
pharmaceutical packaging services in Europe.
Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is recognized as costs are incurred on the basis of
the relationship between costs incurred and estimated total costs. Typically,
Covance's contracts are either fixed price, fee-for-service or fee-for-service
with a cap. The contracts may contain provisions for renegotiation for cost
overruns arising from changes in the level of work scope. Renegotiated amounts
are included in net revenues when earned and realization is assured. In some
cases, for multi-year contracts a portion of the contract fee is paid at the
time the trial is initiated, with performance-based installments payable over
the contract duration as milestones are achieved. Covance routinely subcontracts
with independent physician investigators in connection with multi-site clinical
trials. Investigator fees are not reflected in net revenues or expenses since
such fees are granted by customers on a "pass-through basis" without risk or
reward to Covance. While most contracts are terminable either immediately or
upon notice by the client, they typically require payment of expenses to wind
down a study, payment of fees earned to date, and, in some cases, a termination
fee or a payment of some portion of the fees or profit that could have been
earned under the contract if it had not been terminated early.
Covance's cost of revenue includes appropriate amounts necessary to complete
the revenue and earnings process, and includes direct labor and related
benefit charges, other direct costs and allocable expenses (including indirect
labor, facility charges and information technology costs). These costs, as a
percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 200 basis points in either direction),
principally as a result of changes in labor utilization and the mix of service
offerings involving hundreds of studies conducted during any period of time.
Accordingly,
20
changes in cost of revenue as a percentage of net revenues plus or minus 200
basis points can be experienced from one period to another.
Results of Operations
Year ended December 31, 1997 Compared with Year Ended December 31, 1996. Net
revenues increased 19.4% to $590.7 million for 1997 from $494.8 million for
1996. Excluding the impact of 1996 acquisitions and the impact on net revenues
of foreign exchange differences between both years, growth in net revenues was
18.1%. Net revenues from Covance's late-stage development services, excluding
the impact of acquisitions and the impact on net revenues of foreign exchange
rate differences between both years, grew in excess of 20%, benefiting from the
continuing trend in outsourcing of clinical development activities. Net revenues
from Covance's early development services grew in excess of 10%.
Cost of revenue increased 20.2% to $389.8 million for 1997 from $324.3
million for 1996 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, increased to 66.0% for 1997 from 65.5% for
1996. This increase is primarily attributable to Covance's biomanufacturing
operations. During the first eleven months of 1996, all costs incurred in
Covance's biomanufacturing operations were of an administrative nature as the
biomanufacturing facility was being prepared for revenue producing operations
(which began in December 1996). Once the biomanufacturing operations began
generating revenue, many expenses shifted from administrative to cost of
revenue.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 15.4% to $92.3 million for
1997 from $80.0 million for 1996. As a percentage of net revenues, selling,
general and administrative expense decreased to 15.6% for 1997 from 16.2% for
1996. The decrease in selling, general and administrative expense as a
percentage of net revenues is primarily a result of two factors. The shift in
expenses in Covance's biomanufacturing operations, as discussed above, accounts
for most of the reduction in selling, general and administrative expense as a
percentage of net revenues for 1997 compared to 1996. Second, as a wholly-owned
business of Corning, certain administrative activities were historically
performed on Covance's behalf by Corning. Charges incurred for these services
totaled $3.4 million, or 0.7% of net revenues, in 1996. While these charges are
no longer incurred as a result of Covance's spin-off from Corning, they have
been substantially, but not entirely, replaced by internal costs as additional
resources continue to be added to perform the services previously provided by
Corning, as well as to perform functions new to Covance as a separate publicly
traded company.
Depreciation and amortization increased 22.5% to $30.9 million or 5.2% of net
revenues for 1997 from $25.2 million or 5.1% of net revenues for 1996 as the
growth in these non-cash charges outpaced the increase in net revenues.
Inclusive of a special non-recurring charge in 1996, income from operations
increased $39.8 million to $77.7 million for 1997 from $37.9 million for 1996.
During the fourth quarter of 1996, Covance recorded a large one-time charge
totaling $27.4 million ($19.7 million after tax) associated with its spin-off
from Corning. This charge consisted of the cost to establish and fund two
employee stock ownership plans ($16.7 million) and the direct expenses incurred
to establish Covance as a separate publicly traded company ($10.7 million).
Excluding the impact of the 1996 spin-off related charge, income from operations
increased $12.4 million or 19.0% to $77.7 million for 1997 as compared to $65.3
million for 1996. Income from operations as a percentage of net revenues
decreased from 13.2% for 1996 to 13.1% for 1997.
Other expense (net) increased $0.6 million to $8.5 million for 1997 from $7.9
million for 1996, due to an increase in net interest expense of $1.5 million,
partially offset by a decrease in net foreign exchange transaction losses of
$0.9 million, in 1997 as compared to 1996.
Covance's effective tax rate, excluding the special non-recurring charge in
1996, decreased to 42.5% for 1997 from 43.7% for 1996. Since Covance operates on
a global basis, its effective tax rate is subject to variation from year to year
as the geographic distribution of its pre-tax earnings changes.
Net income increased to $39.8 million for 1997 from $12.7 million for 1996.
Excluding the after tax impact of the 1996 spin-off related charge, net income
increased $7.3 million or 22.5%.
21
Year ended December 31, 1996 Compared with Year Ended December 31, 1995. Net
revenues increased 20.9% to $494.8 million for 1996 from $409.2 million for
1995. Excluding the impact of 1996 acquisitions, growth in net revenues was
16.4%. Net revenues from Covance's late-stage development services, excluding
the recently acquired health economics and outcomes and Swiss packaging
operations, grew approximately 20%, benefiting from the continuing trend in
outsourcing of clinical development activities, while net revenues from
Covance's early development operations grew approximately 10%.
Cost of revenue increased 19.8% to $324.3 million for 1996 from $270.7
million for 1995 as a result of the increase in net revenues. Cost of revenue,
as a percentage of net revenues, decreased to 65.5% for 1996 from 66.2% for
1995.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 24.6% to $80.0 million for
1996 from $64.2 million for 1995. As a percentage of net revenues, selling,
general and administrative expense increased to 16.2% for 1996 from 15.7% for
1995. Contributing to the increase in selling, general and administrative
expense were a continuing increase in Covance's corporate center function,
increasing pre-operating costs relative to Covance's biomanufacturing
operations, investment in a Covance-wide global sales force initiative,
administrative costs associated with the establishment of Covance's new
Singapore operation and the evaluation of further geographic expansion
opportunities, partially offset by a reduction in certain administrative costs
allocated by Corning and affiliates.
Depreciation and amortization increased 14.2% to $25.2 million or 5.1% of net
revenues for 1996 from $22.1 million or 5.4% of net revenues for 1995 as the
growth in net revenues outpaced the increase in these non-cash charges.
Inclusive of special non-recurring charges in both years, income from
operations decreased $9.7 million to $37.9 million for 1996 from $47.6 million
for 1995. During the fourth quarter of 1996, Covance recorded a large one-time
charge totaling $27.4 million ($19.7 million after tax) associated with its
spin-off from Corning. During the second quarter of 1995, Covance recorded a
restructuring provision totaling $4.6 million ($2.8 million after tax) as a
result of management's decision to discontinue certain nonstrategic operations.
Excluding the impact of the 1996 spin-off related charge and the 1995
restructuring provision, income from operations increased 25.1% to $65.3 million
or 13.2% of net revenues for 1996 from $52.2 million or 12.8% of net revenues
for 1995.
Other expense (net) increased $3.4 million to $7.9 million for 1996 from $4.5
million for 1995, due to net foreign exchange transaction losses of $1.1 million
incurred in 1996 as compared to net gains of $0.8 million recorded in 1995 and
to an increase in net interest expense of $1.5 million.
Covance's effective tax rate, excluding the special non-recurring charges in
both years, increased to 43.7% for 1996 from 42.5% for 1995. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
year to year as the geographic distribution of its pre-tax earnings changes.
Net income decreased to $12.7 million for 1996 from $24.2 million for 1995.
Excluding the after tax impact of the 1996 spin-off related charge and 1995
restructuring provision, net income increased $5.4 million or 20.2% to $32.4
million from $27.0 million for 1995.
Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant drug development trials,
termination of drug development trials, acquisitions and exchange rate
fluctuations. Delays and terminations of studies or trials are often the result
of actions taken by clients or regulatory authorities and are not typically
controllable by Covance. Since a large amount of Covance's operating costs are
relatively fixed while revenue is subject to fluctuation, minor variations in
the commencement, progress or completion of drug development trials may cause
significant variations in quarterly operating results.
The following table presents unaudited quarterly operating results of Covance
for each of the eight most recent fiscal quarters during the period ended
December 31, 1997. In the opinion of Covance, this information has been prepared
on the same basis
22
as the Audited Covance Consolidated Financial Statements and reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for those periods. This quarterly
financial data should be read in conjunction with the Audited Covance
Consolidated Financial Statements included elsewhere herein. Operating results
for any quarter are not necessarily indicative of the results to be expected in
any future period.
Quarter Ended
---------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- --------- ---------- --------- --------- -------- ---------- ---------
(Dollars in thousands, except per share data)
Net revenues.................... $ 108,697 $ 121,530 $ 127,179 $137,422 $ 135,723 $ 145,392 $ 151,464 $ 158,072
Operating expenses.............. 94,659 104,195 109,677 148,436 118,584 125,170 130,562 138,675
--------- --------- ---------- --------- --------- -------- ---------- ---------
Income (loss) from operations 14,038 17,335 17,502 (11,014)(a) 17,139 20,222 20,902 19,397
Other expense, net.............. 1,156 1,615 1,550 3,586 2,489 1,648 2,127 2,217
--------- --------- ---------- --------- --------- -------- ---------- ---------
Income before taxes and equity
investee results.............. 12,882 15,720 15,952 (14,600)(a) 14,650 18,574 18,775 17,180
Taxes on income.................. 5,619 6,861 6,931 (2,034) 6,153 7,940 8,058 7,216
Equity investee loss (gain)..... (44) 29 (53) (71) (130) 115 (142) 215
--------- --------- ---------- --------- --------- --------- ---------- ---------
Net income (loss)............... $ 7,307 8,830 $ 9,074 $ (12,495)(a) $8,627 $ 10,519 $ 10,859 $ 9,749
========= ========= ========== ========= ========= ========= ========== =========
Basic earnings per share........ $ 0.13 $ 0.15 $ 0.16 $ (0.22)(a) $ 0.15 $ 0.18 $ 0.19 $ 0.17
Diluted earnings per share....... N/A N/A N/A N/A (b) $ 0.15 $ 0.18 $ 0.19 $ 0.17
- -----------
- -----------
(a)Excluding the impact of the fourth quarter 1996 spin-off related charge
totaling $27,404 ($19,725 net of tax), income from operations, income before
taxes and equity investee results and net income were $16,390, $12,804 and
$7,230,respectively, and basic earnings per share was $0.13.
(b)Since Covance's common stock began "regular way" trading on the NYSE on
January 14, 1997, computation of diluted earnings per share for 1996 is not
possible.
Liquidity and Capital Resources
Covance has a centralized domestic cash management function whereby cash
received from operations is generally swept daily to a centrally managed
concentration account. Cash disbursements for operations are funded as needed
from the concentration account. From time to time excess cash balances are
maintained at Covance, generally for specific cash requirements.
In November 1996, Covance borrowed $160 million under a newly established
five-year $250 million senior revolving credit facility ("the Credit Facility")
to repay Corning and affiliates for all intercompany borrowings and income tax
liabilities existing at that time. At December 31, 1997, there was $120.0
million of outstanding borrowings and $11.2 million in outstanding letters of
credit, resulting in a remaining availability of $119.8 million under the Credit
Facility. Covance has several different interest rate options available to it
under the Credit Facility. Interest on all outstanding borrowings under the
Credit Facility during 1997 was computed based upon the London Interbank Offered
Rate plus a margin and approximated 6.0% per annum. The Credit Facility expires
in November 2001 and contains various covenants which, among other things, may
restrict Covance from engaging in certain financing activities and prohibits
Covance from paying cash dividends on the Covance Common Stock during a default
or an event of default, as defined in the Credit Facility, or if after giving
effect to the payment of such dividends Covance would not be in compliance with
the financial covenants of the Credit Facility. At December 31, 1997, Covance
was in compliance with the terms of the Credit Facility.
As of December 31, 1997, Covance Biotechnology had $3.0 million in long-term
debt outstanding with the North Carolina Biotechnology Center. This debt matures
in December 1999 and is guaranteed by Covance. In addition, Covance
23
Biotechnology has a $10.0 million short-term revolving credit facility with a
bank, of which $10.0 million of borrowings were outstanding as of December 31,
1997. This short-term revolving credit facility carries interest at a rate
substantially equivalent to the rate in effect on Covance's borrowings under the
Credit Facility and is guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss
Francs from a bank. This loan bears interest at a fixed rate of 2.9% per annum
and matures in three years. In connection with the loan, Covance provided a
letter of credit in favor of the lender which may be drawn upon in event of
default. This letter of credit carries a variable cost which is presently 37.5
basis points per annum. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Management believes that the Credit Facility will provide Covance with
sufficient financial flexibility and ready access to cash on both a short-term
and a long-term basis to fund, as required, capital expenditures, potential
future acquisitions and other longer-term growth opportunities.
During the year ended December 31, 1997, Covance's operations provided net
cash of $76.6 million, an increase of $46.8 million from the corresponding 1996
amount. Cash flows from net earnings adjusted for non-cash activity provided
$84.7 million during 1997, up $31.0 million or 57.7% from the corresponding 1996
amount of $53.7 million. The change in net operating assets used $8.1 million in
cash during 1997 while this net change used $23.8 million in cash during 1996,
primarily due to an increase in accounts and unbilled receivables. Covance's
ratio of current assets to current liabilities was 1.35 at December 31, 1997 and
1.43 at December 31, 1996.
Investing activities for the years ended December 31, 1997 and 1996 included
capital spending to expand existing operations and purchase equipment to enhance
scientific technology capabilities. Investing activities for the year ended
December 31, 1996 also included acquisitions. In March 1996, Covance acquired
Health Technology Associates, Inc. for a cash payment of approximately $14.9
million. In October 1996, Covance acquired CRS Pacamed AG for a cash payment of
approximately $14.4 million. In October 1996, Covance also acquired a new
facility which is used to provide, among other things, pharmaceutical packaging
services in Europe for a cash payment of approximately $9.0 million. Also in
October 1996, Covance paid $7.0 million in contingent purchase price in
connection with its 1995 acquisition of National Packaging Systems, Inc. During
1997 and 1996, Covance spent approximately $56.5 million and $37.9 million
(excluding the October 1996 facility purchase of $9.0 million), respectively, on
capital expenditures for maintenance and upgrade of existing equipment,
outfitting of new facilities and computer equipment and software for newly hired
employees.
As described in Note 10 to the Audited Covance Consolidated Financial
Statements, a Covance subsidiary, Covance Biotechnology, entered into an
operating lease arrangement in June 1995 whereby a custom-designed,
fully-equipped facility was constructed. The lease, which commenced in December
1996 upon completion of construction of the facility, requires minimum annual
lease payments of approximately $5.7 million.
Foreign Currency
Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical and periapproval services. The first risk occurs
as revenue recognized for services rendered is denominated in a currency
different from the currency in which the subsidiary's expenses are incurred. As
a result, the subsidiary's net revenues and resultant earnings can be affected
by fluctuations in exchange rates. While some contracts provide that currency
fluctuations from the rates in effect at the time the contract is executed are
the responsibility of the customer and others provide that currency fluctuations
from the rates in effect at the time the contract is executed up to a specified
threshold (generally plus or minus a few percentage points) are absorbed by
Covance while fluctuations in excess of the threshold are the customer's
responsibility, most contracts do not specifically address responsibility for
currency fluctuations. Historically, fluctuations in exchange rates from those
in effect at the time contracts were executed have not had a material effect
upon Covance's consolidated financial results.
24
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, Covance recognizes a receivable at the
time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
and payment from the customer is received will result in Covance receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. This difference is recognized by Covance as a foreign currency
transaction gain or loss, as applicable, and is reported in other expense
(income) in Covance's Consolidated Statements of Income.
Finally, Covance's consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
Covance's consolidated financial results. The process by which each foreign
subsidiary's financial results are translated into U.S. dollars is as follows:
income statement accounts are translated at average exchange rates for the
period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical exchange
rates. Translation of the balance sheet in this manner affects the stockholders'
equity account, referred to as the cumulative translation adjustment account.
This account exists only in the foreign subsidiary's U.S. dollar balance sheet
and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. To date such cumulative translation adjustments have not been material
to Covance's consolidated financial position.
Taxes
Since Covance conducts operations on a global basis, Covance's effective tax
rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. See
Note 5 to the Audited Covance Consolidated Financial Statements.
Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result, Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
Year 2000
Information systems are an integral part of the services and products Covance
provides. The Company has formed a group, led by its Chief Information Officer,
to assess the Year 2000 issue from an internal, supplier and customer
perspective. Presently, this group consists of thirteen individuals who are
dedicated full-time to the Year 2000 project. Covance plans to add six
individuals to this group during 1998. Covance's Year 2000 plan will have risk
assessment, evaluation and remediation schedules finalized during 1998. For
business critical systems, remediation, validation and implementation is already
underway. This plan is being executed under the guidance of Covance's senior
management, who will receive periodic progress reports from the group. Although
the Company believes at this time that neither the costs nor expenses of the
Year 2000 issue will be material to the Company, the ultimate costs and expenses
are currently unknown and such costs or the consequences of failure to correct
any Year 2000 issues could have a material impact on Covance's financial
conditions, business or operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). This Statement
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. This Statement shall be effective for
financial statements for periods
25
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods presented for comparative purposes is required. Covance is in
the process of evaluating the disclosure requirements. This Statement, by its
nature, will not impact Covance's consolidated results of operations, financial
position or cash flows.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement shall be
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. Covance is in the process of evaluating the disclosure requirements.
This Statement, by its nature, will not impact Covance's consolidated results of
operations, financial position or cash flows.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
None.
26
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Price Waterhouse LLP--Independent Accountants ................................................................ 28
Consolidated Balance Sheets--December 31, 1997 and 1996 ................................................................ 29
Consolidated Statements of Income--Years ended December 31, 1997, 1996 and 1995......................................... 30
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995..................................... 31
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996 and 1995........................... 32
Notes to Consolidated Financial Statements ............................................................................. 33
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Covance Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of stockholders' equity
appearing on pages 29 through 45 present fairly, in all material respects, the
financial position of Covance Inc. and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Morristown, NJ
January 16, 1998
28
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in thousands) 1997 1996
----- -----
Assets
Current Assets:
Cash and cash equivalents............... $ 28,027 $ 25,416
Accounts receivable, net................ 104,789 93,700
Unbilled services....................... 40,980 39,313
Inventory............................... 18,088 16,410
Deferred income taxes................... 10,474 17,529
Prepaid expenses and other assets....... 28,120 25,526
-------- --------
Total Current Assets................ 230,478 217,894
Property and equipment, net................. 193,129 167,809
Goodwill, net............................... 50,979 53,271
Other assets................................ 9,428 12,073
-------- --------
Total Assets........................ $484,014 $451,047
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable........................ $ 24,344 $ 26,652
Accrued payroll and benefits............ 39,647 28,212
Accrued expenses and other liabilities.. 30,702 35,840
Unearned revenue........................ 62,099 57,794
Short-term debt......................... 10,000 --
Income taxes payable.................... 4,198 3,450
-------- --------
Total Current Liabilities........... 170,990 151,948
Long-term debt.............................. 132,423 163,000
Deferred income taxes....................... 10,758 9,957
Other liabilities........................... 12,786 15,438
-------- --------
Total Liabilities................... 326,957 340,343
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock - Par value $0.01 per share;
140,000,000 shares authorized;
57,678,977 and 57,063,644 shares
issued and outstanding at December 31,
1997 and 1996, respectively 577 571
Paid-in capital......................... 58,276 48,970
Retained earnings....................... 97,764 58,010
Cumulative translation adjustment....... 440 3,153
-------- --------
Total Stockholders' Equity.......... 157,057 110,704
-------- --------
Total Liabilities and Stockholders'
Equity............................ $484,014 $451,047
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands, except per share data) 1997 1996 1995
----- ------ ------
Net revenues...................................... $ 590,651 $ 494,828 $409,174
Cost and expenses:
Cost of revenue................................. 389,785 324,345 270,726
Selling, general and administrative expenses.... 92,329 80,014 64,201
Depreciation and amortization................... 30,877 25,204 22,070
Spin-off related charge......................... -- 27,404 --
Restructuring charge............................ -- -- 4,616
-------- -------- --------
Total....................................... 512,991 456,967 361,613
-------- -------- --------
Income from operations............................ 77,660 37,861 47,561
-------- -------- --------
Other expense, net:
Interest expense, net........................... 8,314 6,791 5,269
Other expense (income).......................... 167 1,116 (784)
-------- -------- --------
Other expense, net......................... 8,481 7,907 4,485
-------- -------- --------
Income before taxes and equity investee results... 69,179 29,954 43,076
Taxes on income................................... 29,367 17,377 18,445
Equity investee loss (gain)....................... 58 (139) 405
-------- -------- --------
Net income........................................ $ 39,754 $ 12,716 $ 24,226
======== ======== ========
Basic earnings per share.......................... $ 0.69 $ 0.22 N/A
Weighted average shares outstanding - basic....... 57,254,042 57,063,644 N/A
Diluted earnings per share........................ $ 0.69 N/A N/A
Weighted average shares outstanding - diluted..... 57,463,587 N/A N/A
The accompanying notes are an integral part of these consolidated financial
statements.
30
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Dollars in thousands) 1997 1996 1995
-------- --------- --------
Cash flows from operating activities:
Net income..................................................... $ 39,754 $ 12,716 $ 24,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............................. 30,877 25,204 22,070
Stock issued under employee benefit and stock
compensation plans...................................... 5,523 -- --
Deferred income tax provision.............................. 7,856 (3,188) (4,503)
ESOP component of spin-off related charge.................. -- 16,673 --
Restructuring reserve, net of cash paid.................... -- -- 2,965
Related party charges...................................... -- 2,052 3,288
Other...................................................... 673 237 1,266
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable..................................... (11,089) (12,444) (10,082)
Unbilled services....................................... (1,667) (18,568) (5,023)
Inventory............................................... (1,678) (1,911) (2,576)
Accounts payable........................................ (2,308) 2,327 6,783
Accrued liabilities..................................... 6,297 15,800 11,669
Unearned revenue........................................ 4,305 14,701 (7,556)
Income taxes payable.................................... 748 (13,606) 8,673
Other assets and liabilities, net....................... (2,662) (10,135) (6,094)
-------- --------- --------
Net cash provided by operating activities...................... 76,629 29,858 45,106
-------- --------- --------
Cash flows from investing activities:
Capital expenditures....................................... (56,538) (46,941) (34,792)
Acquisition of businesses, net of cash acquired............ -- (33,883) (14,000)
Other, net................................................. 196 34 571
-------- --------- --------
Net cash used in investing activities.......................... (56,342) (80,790) (48,221)
-------- --------- --------
Cash flows from financing activities:
Repayments of long-term debt............................... (40,000) -- --
Proceeds from short-term debt.............................. 10,000 -- --
Proceeds from long-term debt............................... 9,423 160,000 --
Stock issued under employee stock purchase and stock
option plans............................................. 2,901 -- --
Capital contributions...................................... -- -- 1,000
Due to Corning Incorporated and affiliates................. -- (88,361) 14,236
Dividends paid to Corning.................................. -- (3,359) (10,229)
-------- --------- --------
Net cash provided by (used in) financing activities............ (17,676) 68,280 5,007
-------- --------- --------
Net change in cash and cash equivalents........................ 2,611 17,348 1,892
Cash and cash equivalents, beginning of year................... 25,416 8,068 6,176
-------- --------- --------
Cash and cash equivalents, end of year......................... $ 28,027 $ 25,416 $ 8,068
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
31
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Cumulative Total
Common Paid-in Retained Translation Stockholders'
(Dollars in thousands) Stock Capital Earnings Adjustment Equity
-------- -------- -------- ---------- ---------
Balance, December 31, 1994............ -- $ 26,528 $ 34,656 $ 2,724 $ 63,908
Net income............................ -- -- 24,226 -- 24,226
Dividends paid to Corning............. -- -- (10,229) -- (10,229)
Capital contribution.................. -- 4,288 -- -- 4,288
Currency translation adjustment....... -- -- -- 324 324
-------- -------- ------- ------- ---------
Balance, December 31, 1995............ -- 30,816 48,653 3,048 82,517
Net income............................ -- -- 12,716 -- 12,716
Dividends paid to Corning............. -- -- (3,359) -- (3,359)
Capital contribution.................. -- 2,052 -- -- 2,052
Adjustment to reflect par value
of shares issued in spin-off
(56,208,644 shares).................. $ 562 (562) -- -- --
ESOP contribution..................... 9 16,664 -- -- 16,673
Currency translation adjustment....... -- -- -- 105 105
-------- -------- -------- -------- ---------
Balance, December 31, 1996............ 571 48,970 58,010 3,153 110,704
Net income............................ -- -- 39,754 -- 39,754
Capital contribution.................. -- 888 -- -- 888
Shares issued under various employee
benefit and stock compensation plans 6 8,245 -- -- 8,251
Stock option exercises................ -- 173 -- -- 173
Currency translation adjustment....... -- -- -- (2,713) (2,713)
-------- -------- -------- -------- ---------
Balance, December 31, 1997............ $ 577 $ 58,276 $ 97,764 $ 440 $ 157,057
======== ======== ======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
32
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
1. Organization and Spin-off
Organization
Covance Inc. and its subsidiaries ("Covance") is a leading contract research
organization providing a wide range of integrated product development services
on a worldwide basis to the biotechnology, pharmaceutical and medical device
industries. In addition and to a lesser extent, Covance provides services such
as health economics and outcomes for managed care organizations, hospitals and
other health care providers and laboratory testing services to the chemical,
agrochemical and food industries. Covance's operations involve a single industry
segment for financial reporting purposes. At the present time, operations are
principally focused in the United States and Europe.
Spin-off
Prior to December 31, 1996, Covance was an indirect wholly-owned business of
Corning Incorporated ("Corning"). In May 1996, Corning's Board of Directors
approved a plan to distribute to its stockholders on a pro rata tax-free basis
all of its ownership interest in Covance (the "Spin-Off Distribution"). The
intent of the plan was to create an independent, publicly-owned company
(Covance). The Spin-Off Distribution was complete on December 31, 1996. Under
the terms of the Spin-Off Distribution, shareholders of record of Corning common
stock on December 31, 1996 received one share of Covance common stock for each
four shares of Corning common stock held, resulting in Covance issuing
approximately 56.2 million shares of its common stock.
In connection with the Spin-Off Distribution, Covance recorded a one-time
charge totaling $27.4 million ($19.7 million net of tax), consisting of the cost
of establishing and funding two employee stock ownership plans (collectively,
the "ESOP") and the direct costs incurred to effect the Spin-Off Distribution.
The ESOP component of the charge, which totaled $16.7 million, represents the
fair market value of the shares (approximately 855,000) issued into the ESOP.
The direct costs consist primarily of accounting, legal and other professional
fees associated with Covance being established as a separate publicly traded
entity.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of all entities
controlled by Covance, including Covance Biotechnology Services Inc. ("Covance
Biotechnology"), a majority owned business. All significant intercompany
accounts and transactions are eliminated. The equity method of accounting is
used for investments in affiliates in which Covance owns between 20 and 50
percent.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, income and expense items are translated to United States
dollars at average rates of exchange prevailing during the year, assets and
liabilities are translated at year-end exchange rates and equity accounts are
translated at historical exchange rates. Translation adjustments are
33
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
accumulated in a separate component of stockholders' equity. Transaction gains
and losses are included in the determination of income.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an
original maturity of three months or less at date of purchase and consist
principally of amounts temporarily invested in money market funds.
Financial Instruments
The fair value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and long and short-term debt are not materially
different than their carrying amounts as reported at December 31, 1997 and 1996.
Accounts receivable and unbilled services represent amounts due from Covance
customers who are concentrated primarily in the pharmaceutical and biotechnology
industries. Covance monitors the creditworthiness of its customers to which it
grants credit terms in the ordinary course of business. Although Covance
customers are concentrated primarily within these two industries, management
considers the likelihood of material credit risk exposure as remote. In
addition, in some cases Covance requires advance payment for a portion of the
contract price from its customers upon the signing of a contract for services.
Historically, bad debts have been minimal.
Inventory
Inventories, which consist principally of supplies, are valued at the lower
of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight-line method at rates adequate to allocate the cost
of the applicable assets over their estimated useful lives, which range in term
from three to thirty years.
Goodwill
Goodwill (investment costs in excess of the fair value of net tangible assets
acquired) is capitalized and amortized on a straight-line basis over the period
expected to be benefited, which ranges from twenty to forty years.
Impairment of Long-Lived Assets
Assessments of the recoverability of long-lived assets are conducted when
events or changes in circumstances occur that indicate that the carrying value
of the asset may not be recoverable. The assessment of possible impairment is
based upon the ability to recover the asset from the expected future
undiscounted cash flows of related operations.
Revenue Recognition
Revenue is recognized using the cost-to-cost type percentage-of-completion
method of accounting for services rendered in connection with contractual
arrangements, which generally range from a few months to two years. Revenue is
recognized as costs are incurred on the basis of the relationship between costs
incurred and total estimated costs. Contracts may contain provisions for
renegotiation in the event of cost overruns due to changes in the level of work
scope. Renegotiated amounts are included in revenue when earned and realization
is assured. Provisions for losses to be incurred on contracts are recognized in
full in the period in which it is determined that a loss will result from
performance of the contractual arrangement. Most service contracts may be
terminated for a variety of reasons by Covance's customers either immediately or
upon notice. The contracts often require payments to Covance to recover costs
incurred, including costs to wind down the study, and payment of fees earned
34
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
to date, and in some cases to provide Covance with a portion of the fees or
profits that would have been earned under the contract had the contract not been
terminated early.
Revenue from performing clinical laboratory testing services is recognized as
tests are completed. Revenue from other activities is recognized as services are
performed or products are shipped.
Unbilled services are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms. In general,
amounts become billable upon the achievement of milestones or in accordance with
predetermined payment schedules. Unbilled services are billable to customers
within one year from the respective balance sheet date. Unearned revenue is
recorded for cash received from customers for which revenue has not been
recognized at the balance sheet date.
Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not reflected
in revenue or expense since such fees are granted by customers on a
"pass-through basis" without risk or reward to Covance.
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to complete
the revenue earning process and encompasses direct labor and related benefit
charges, other direct costs and allocable expenses (including facility charges,
indirect labor and information technology costs). Selling, general and
administrative expenses primarily consist of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative travel and
allocable expenses (facility charges and information technology costs).
Advertising expense is recognized as incurred.
Taxes on Income
Covance uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the temporary differences are expected to reverse.
The effect on deferred taxes of a change in enacted tax rates is recognized in
income in the period when the change is effective.
Supplemental Cash Flow Information
Cash paid for interest for the years ended December 31, 1997, 1996 and 1995
totaled $9.1 million, $6.5 million and $5.8 million, respectively. Cash paid for
income taxes for the years ended December 31, 1997, 1996 and 1995 totaled $27.9
million, $25.5 million and $16.7 million, respectively.
Earnings per share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 128, Earnings Per Share ("SFAS 128"), which supersedes
existing standards found in APB Opinion No. 15. This Statement specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS, and for entities
with a complex capital structure requires the additional presentation of diluted
EPS on the face of the income statement. Basic EPS is computed by dividing net
income available to common stockholders by the weighted average number of shares
outstanding during the period. The computation of diluted EPS is similar to the
computation of basic EPS, except that the denominator is increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. This Statement is effective
for Covance's fiscal year ended December 31, 1997.
35
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
In computing diluted earnings per share for the year ended December 31, 1997,
the denominator was increased by 209,545 shares, representing the dilution of
stock options outstanding at December 31, 1997 with exercise prices less than
the average market price of Covance's Common Stock during 1997. Excluded from
the computation of diluted earnings per share were options to purchase 1,474,585
shares of common stock at prices ranging from $19.00 to $20.56 per share because
the exercise prices of such options were greater than the average market price
of Covance's Common Stock during 1997. Since Covance's Common Stock began
"regular way" trading on the NYSE on January 14, 1997, computation of diluted
earnings per share for 1996 is not possible.
Basic earnings per share has been presented for 1996 based upon the number of
Covance shares issued and outstanding as a result of the Spin-Off Distribution.
Historical EPS has not been presented for periods prior to 1996 because
Covance's status as an indirect wholly-owned business of Corning for such
periods does not permit a determination of the number of shares outstanding on a
comparable or consistent basis.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ("SFAS 130"). This Statement establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
This Statement shall be effective for financial statements for periods beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods presented for comparative purposes is required. Covance is in the
process of evaluating the disclosure requirements. This Statement, by its
nature, will not impact Covance's consolidated results of operations, financial
position or cash flows.
Also in June 1997, the FASB issued Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual and interim financial statements.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement shall be
effective for financial statements for fiscal years beginning after December 15,
1997. Financial statement disclosures for prior periods are required to be
restated. Covance is in the process of evaluating the disclosure requirements.
This Statement, by its nature, will not impact Covance's consolidated results of
operations, financial position or cash flows.
3. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consist of the
following:
1997 1996
-------- --------
Property and equipment at cost:
Land........................................ $ 6,859 $ 6,859
Buildings and improvements.................. 126,594 116,176
Equipment................................... 156,872 136,711
Furniture, fixtures & leasehold
improvements............................... 50,994 41,116
Construction-in-progress.................... 14,492 4,025
-------- --------
355,811 304,887
Less: Accumulated depreciation and amortization (162,682) (137,078)
-------- --------
Property and equipment, net.................... $ 193,129 $ 167,809
======== ========
Depreciation and amortization expense aggregated $28.0 million, $23.2 million
and $20.8 million for 1997, 1996 and 1995, respectively.
36
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
4. Acquisitions and Goodwill
In October 1996, Covance acquired the stock of CRS Pacamed AG (now known as
Covance Pharmaceutical Packaging Services AG) for a cash payment of
approximately $14.4 million in a transaction accounted for as a purchase
business combination. The goodwill resulting from this transaction aggregated
$10.3 million.
In March 1996, Covance acquired all of the assets and substantially all of
the liabilities of Health Technology Associates, Inc. ("HTA", now known as
Covance Health Economics and Outcomes Services Inc.) for an initial cash payment
of approximately $14.9 million in a transaction accounted for as a purchase
business combination. In accordance with the terms of the asset purchase
agreement, Covance is contingently obligated to pay up to an additional $17.2
million in contingent purchase price if HTA achieves certain established
earnings targets for the three year period ending March 1999. The goodwill
resulting from the initial cash payment on this transaction aggregated $13.7
million.
In January 1995, Covance acquired National Packaging Systems, Inc. ("NPS",
now known as Covance Pharmaceutical Packaging Services Inc.) for an initial cash
payment of $14.0 million in a transaction accounted for as a purchase business
combination. In October 1996, Covance paid, pursuant to the terms of the
acquisition agreement, an additional $7.0 million in contingent purchase price
to former NPS shareholders as NPS achieved certain established earnings targets
for the period January 1995 through September 1996. The goodwill resulting from
this transaction aggregated $16.1 million.
Results of operations for these entities have been included in the
accompanying consolidated financial statements beginning on the respective dates
of acquisition. Pro forma information for these entities has not been presented,
due to their insignificance to Covance taken as a whole.
Goodwill associated with these and prior acquisitions aggregated $51.0
million and $53.3 million, net of accumulated amortization of $7.5 million and
$5.2 million at December 31, 1997 and 1996, respectively. Amortization expense
aggregated $2.3 million, $1.7 million and $0.9 million for 1997, 1996 and 1995,
respectively.
5. Taxes on Income
The components of income before taxes and the related provision (benefit) for
taxes on income for 1997, 1996 and 1995 are as follows:
1997 1996 1995
------- ------- -------
Income before taxes and equity
investee results:
Domestic............... $ 48,927 $ 23,259 $ 32,771
International.......... 20,252 6,695 10,305
------- ------- -------
Total................ $ 69,179 $ 29,954 $ 43,076
======= ======= =======
Federal income taxes:
Current provision...... $ 14,968 $ 17,108 $ 19,118
Deferred provision
(benefit)............. 2,700 (6,311) (6,760)
International income taxes:
Current provision (benefit) 3,987 1,248 (933)
Deferred provision..... 2,387 1,635 3,434
State and other income taxes:
Current provision...... 5,840 4,174 3,959
Deferred benefit....... (515) (477) (373)
------- ------- -------
Net income tax
provision......... $ 29,367 $ 17,377 $ 18,445
======= ======= =======
37
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
The differences between the provision for income taxes and income taxes
computed using the Federal statutory income tax rate for 1997, 1996 and 1995 are
as follows:
1997 1996 1995
----- ----- -----
Taxes at statutory rate........ 35.0% 35.0% 35.0%
State and local taxes, net of
Federal benefit............... 5.1 8.0 5.5
Non-deductible spin-off related
charge........................ -- 7.1 --
Goodwill amortization.......... 1.1 2.1 1.1
Impact of international
operations.................... (1.0) 1.8 (0.3)
Other, net..................... 2.3 4.0 1.5
---- ---- ----
Total.................. 42.5% 58.0% 42.8%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
1997 1996
----- -----
Current deferred tax assets:
Liabilities not currently
deductible.................... $ 8,007 $ 15,571
Net operating losses........... 3,793 2,332
Other.......................... 592 792
------- -------
Gross current deferred tax
assets........................ 12,392 18,695
Less: Valuation allowance...... (1,918) (1,166)
------- -------
Net current deferred tax assets $ 10,474 $ 17,529
======= =======
1997 1996
----- -----
Noncurrent deferred tax assets:
Liabilities not currently
deductible.................... $ 5,842 $ 5,256
Less: Valuation allowance...... (1,212) (1,212)
------- -------
Net noncurrent deferred tax
assets........................ 4,630 4,044
Noncurrent deferred tax liabilities:
Property and equipment......... (15,388) (14,001)
------- -------
Net noncurrent deferred tax
liabilities................... $ (10,758) $ (9,957)
======= =======
Covance currently provides income taxes on the earnings of foreign
subsidiaries to the extent they are taxable or expected to be remitted. Taxes
have not been provided on $33.6 million of accumulated foreign unremitted
earnings because those earnings are expected to remain invested indefinitely. It
is not practical to estimate the amount of additional tax that might be payable
if such accumulated earnings were remitted. Additionally, if such accumulated
earnings were remitted, certain countries impose withholding taxes that, subject
to certain limitations, are available for use as a tax credit against any
Federal income tax liability arising from such remittance.
38
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
Historically, Covance and its subsidiaries operated under a tax sharing
agreement with Corning, pursuant to which they were required to compute their
provision for income taxes on a separate return basis and pay to Corning the
separate Federal income tax return liability so computed. Covance's operations
through December 31, 1996 were included in the Federal income tax return filed
by Corning. As a result of the Spin-Off Distribution, Covance will file its own
separate Federal income tax return beginning in 1997.
In connection with the Spin-Off Distribution, Covance entered into a tax
indemnification agreement with Corning and a former affiliate of Corning that
prohibits Covance for a period of two years after the date of the Spin-Off
Distribution from taking certain actions that might jeopardize the favorable tax
treatment of the Spin-Off Distribution under Section 355 of the Internal Revenue
Code of 1986, as amended, and will provide Corning and the former affiliate of
Corning with certain rights of indemnification against Covance. The tax
indemnification agreement will also require Covance to take such actions as
Corning and the former affiliate of Corning may request to preserve the
favorable tax treatment provided for in any rulings obtained from the Internal
Revenue Service in respect of the Spin-Off Distribution.
Covance also entered into a tax sharing agreement with Corning and a former
affiliate of Corning which allocates responsibility for federal, state and local
taxes relating to taxable periods before the Spin-Off Distribution and provides
for computing and apportioning tax liabilities and tax benefits for such
periods.
6. Short and Long-Term Debt
In connection with being established as a separate publicly traded company,
Covance negotiated a five-year $250 million senior revolving credit facility
(the "Credit Facility") with a syndicate of banks in November 1996 and borrowed
$160.0 million thereunder to repay Corning and affiliates for intercompany
borrowings and income tax liabilities. Under the Credit Facility, borrowings can
be made in a number of different currencies until the fifth anniversary thereof
at which time all outstanding loans must be paid in full. In addition, Covance
has several different interest rate options under the Credit Facility. Interest
on all outstanding borrowings during 1997 was computed based upon the London
Interbank Offered Rate ("LIBOR") plus an applicable margin and approximated 6.0%
per annum. Covance has the option to prepay the loans outstanding under the
Credit Facility in whole or in part at any time, subject to payment of breakage
costs, in certain circumstances. The Credit Facility contains certain covenants
and requires the maintenance of key ratios, as defined in the Credit Facility.
At December 31, 1997, there was $120.0 million of outstanding borrowings and
$11.2 million in outstanding letters of credit under the Credit Facility.
As of December 31, 1997, Covance Biotechnology had $3.0 million in long-term
debt outstanding with the North Carolina Biotechnology Center. This debt matures
in December 1999 and is guaranteed by Covance. In addition, Covance
Biotechnology has a $10.0 million short-term revolving credit facility with a
bank, of which $10.0 million of borrowings were outstanding as of December 31,
1997. This short-term revolving credit facility carries interest at a rate
substantially equivalent to the rate in effect on Covance's borrowings under the
Credit Facility and is guaranteed by Covance.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss
Francs from a bank. This loan bears interest at a fixed rate of 2.9% per annum
and matures in three years. In connection with the loan, Covance provided a
letter of credit in favor of the lender which may be drawn upon in event of
default. This letter of credit carries a variable cost which is presently 37.5
basis points per annum. These funds were used to repay certain cross-currency
intercompany obligations and to fund capital expenditures.
7. Employee Benefit Plans
Covance has several defined contribution plans covering substantially all of
its full-time employees. Contributions to these plans aggregated $8.1 million,
$6.6 million and $4.9 million for 1997, 1996 and 1995, respectively.
39
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
8. Stockholders' Equity
Preferred Stock
Covance is authorized to issue up to 10.0 million shares of Series Preferred
Stock, par value $1.00 per share (the "Covance Series Preferred Stock"). The
Covance Board of Directors has the authority to issue such shares from time to
time, without stockholder approval, and to determine the designations,
preferences, rights, including voting rights, and restrictions of such shares,
subject to the Delaware General Corporate Laws. Pursuant to this authority, the
Covance Board of Directors has designated 1.0 million shares of the Covance
Series Preferred Stock as Covance Series A Preferred Stock. No other class of
Covance Series Preferred Stock has been designated by the Board. As of December
31, 1997 no Covance Series Preferred Stock has been issued or is outstanding.
Dividends - Common Stock
Covance's Board of Directors may declare dividends on the shares of Covance
Common Stock out of legally available funds (subject to any preferential rights
of any outstanding Covance Series Preferred Stock). However, Covance has no
present intention to declare dividends for the foreseeable future, but instead
intends to retain earnings to provide funds for the operation and expansion of
its business. In addition, the Credit Facility prohibits Covance from paying
cash dividends on the Covance Common Stock during a default or event of default,
as defined in the Credit Facility, or after giving effect to the payment of such
dividends Covance would not be in compliance with the financial covenants of the
Credit Facility. While owned by Corning, Covance paid to Corning dividends of
$3.4 million and $10.2 million during 1996 and 1995, respectively.
Stock Compensation Plans
In December 1996, Covance adopted, in connection with the Spin-Off
Distribution, the Employee Equity Participation Program ("EEPP"). The EEPP
consists of two plans: (a) a stock option plan (the "Covance Stock Option
Plan"); and (b) an incentive stock plan (the "Covance Incentive Stock Plan").
The Covance Stock Option Plan of the EEPP, which is administered by the Covance
Compensation and Organization Committee of the Board of Directors, provides for
the grant to eligible employees of either non-qualified or incentive stock
options, or both, to purchase shares of Covance Common Stock at no less than
fair market value on the date of grant. Options granted are not exercisable for
at least twelve months and expire no more than ten years from date of grant. The
Covance Incentive Stock Plan of the EEPP authorizes the Covance Compensation and
Organization Committee to award eligible employees shares, or the right to
receive shares, of Covance Common Stock. The shares awarded may be subject to
certain restrictions prohibiting sale or other disposition and may be subject to
forfeiture, in certain circumstances. A maximum of 6.0 million shares may be
optioned or granted to eligible employees under the EEPP.
Covance also established in December 1996 a stock purchase plan (the "Covance
Stock Purchase Plan") pursuant to which Covance may make available for sale to
employees shares of its common stock at a price equal to 85% of the lower of the
market value on the first or last day of each calendar quarter. The Covance
Stock Purchase Plan, which is administered by the Covance Compensation and
Organization Committee, is intended to give Covance employees the opportunity to
purchase shares of Covance Common Stock through payroll deductions. A maximum of
1.0 million shares may be purchased by Covance employees under the Covance Stock
Purchase Plan. During 1997, a total of 190,928 shares of common stock were
issued under the Covance Stock Purchase Plan.
From 1990 through 1996, certain employees of Covance were granted incentive
stock awards or options, or a combination thereof, to purchase shares of Corning
common stock, under existing Corning stock award and option plans. In connection
with the Spin-Off Distribution, options outstanding under the Corning stock
option plans held by Covance employees and incentive share awards made to
Covance employees were replaced by substitute awards under a newly established
conversion plan (the "Covance Conversion Plan"). The Covance Conversion Plan has
essentially all of the same characteristics as the EEPP. The replacement stock
awards have the same terms and conditions as the Corning stock awards they
replaced. The replacement stock options have the same vesting provisions, option
periods and other terms and conditions and retain the same
40
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
ratio of exercise price per share to market value per share and the same
aggregate difference between market value and exercise price as the Corning
stock options they replaced.
During 1997, Covance recorded compensation expense of $1.1 million in
connection with stock issued to certain members of Covance's executive
management under the Covance Incentive Stock Plan. During 1996 and 1995, certain
members of Covance management participated in various stock compensation
programs sponsored by Corning resulting in Covance recognizing compensation
expense of $1.5 million and $0.4 million, respectively.
Covance has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, and accordingly, applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Had Covance elected to recognize compensation expense in accordance
with the provisions of SFAS No. 123 for the stock option awards and for the
stock purchased by Covance employees under the Covance Stock Purchase Plan or
Corning employee stock purchase program, as applicable, its net income in 1997,
1996 and 1995 would have been $35.9 million, $10.8 million and $23.8 million,
respectively, its basic and diluted earnings per share would both have been
$0.63 in 1997 and its basic earnings per share would have been $0.19 in 1996.
The fair value of the Covance stock options used to compute the net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: expected volatility of 33.3%,
24.5% and 24.5%; risk free interest rate of 6.50%, 6.34% and 5.67%; and an
expected holding period of seven years, five years and five years.
41
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
The following table sets forth Covance's stock option activity during 1997
and on a pro forma basis during 1996 and 1995, the stock option activity for
the Covance stock options issued in replacement of the Corning stock options
under the Covance Conversion Plan (grant dates are original Corning option grant
dates):
Number Weighted
of Shares Average
(in thousands) Price
-------------- ---------
Options outstanding, January 1, 1995 496.6 $15.43
Granted................................ 306.0 $15.81
Exercised.............................. (0.3) $11.66
--------------
Options outstanding, December 31, 1995 802.3 $15.58
Granted................................ 268.6 $17.61
Exercised.............................. (8.4) $13.43
--------------
Options outstanding, December 31, 1996 1,062.5 $16.11
Granted................................ 1,763.1 $19.49
Exercised.............................. (11.8) $14.62
Forfeited.............................. (66.6) $18.63
--------------
Options outstanding, December 31, 1997 2,747.2 $18.01
==============
The weighted average fair value of the stock options granted during 1997,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $9.33 per share.
The following table sets forth the status of all options outstanding at
December 31, 1997:
Stock Options Outstanding Stock Options Exercisable
-------------------------------------------- --------------------------
Weighted
Option Number Average Weighted Number Weighted
Price of Shares Remaining Average of Shares Average
Range (in thousands) Contractual Life Price (in Thousands) Price
- --------------- -------------- ------------------ -------- -------------- ---------
$11.66 - $16.49 869.5 7.1 years $15.07 439.6 $14.34
$16.50 - $20.56 1,877.7 9.0 years $19.38 138.2 $17.65
In connection with the Spin-Off Distribution, Covance established two
employee stock ownership plans (collectively, the "ESOP") for the benefit of all
active Covance employees as of December 31, 1996. Covance contributed
approximately 855,000 shares of its common stock into the ESOP. The shares
contributed were allocated among the plan participants based upon a percentage
of each employee's annual compensation. As a result of this contribution,
Covance recorded a one-time charge of $16.7 million, representing the fair
market value of the shares issued into the ESOP.
9. Restructuring Charge
In 1995, Covance recorded a $4.6 million restructuring provision in
connection with management's decision to discontinue certain nonstrategic
operations. The restructuring charge consisted of employee termination costs of
$1.5 million (relating to approximately 90 employees), the write-off of fixed
assets of $1.7 million and costs of exiting leased facilities of $1.4 million.
During 1995 and 1996, the affected employees were terminated and all other
activities to complete the restructuring plan were substantially completed.
42
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
10. Commitments and Contingent Liabilities
Minimum annual rental commitments under noncancellable operating leases,
primarily office and laboratory facilities (including the Covance Biotechnology
facility), in effect at December 31, 1997 are as follows:
Year ended December 31,
1998............................................ $ 25,439
1999............................................ $ 25,209
2000............................................ $ 22,551
2001............................................ $ 20,709
2002............................................ $ 12,720
2003 and beyond................................. $ 59,082
Operating lease rental expense aggregated $26.0 million, $16.1 million and
$14.1 million for 1997, 1996 and 1995, respectively.
In June 1995, Covance Biotechnology ("lessee") entered into a lease
arrangement whereby a custom-designed, fully equipped facility would be
constructed for the lessee at a cost of approximately $55 million to perform
specialized research and manufacturing activities for biotechnology and
pharmaceutical companies. The lessor in this arrangement is a subsidiary of one
of the largest banks in the United States. The lease arrangement contains
purchase and cancellation options for the lessee at any time during the ten year
period covered by the lease arrangement. Although the lease arrangement is
cancelable by the lessee at any time throughout the ten year period, an initial
lease term of five years, representing management's estimate at the lease
inception date of the period in which occupancy of the facility is reasonably
assured, has been selected for financial reporting purposes. The initial term of
the lease commenced in December 1996, upon completion of construction of the
facility. The annual minimum lease payments total approximately $5.7 million.
The lease arrangement is classified as an operating lease.
A purchase price option has been established at specific dates over the ten
year period covered by the lease arrangement. Using current estimates, the
purchase price would approximate $52 million at the end of the first year and
decreases on an amortizing basis to approximately $37 million at the end of the
tenth year.
The cancellation option provisions of the lease arrangement stipulate a
residual value guarantee by Covance at specific dates over the ten year period.
Sale of the facility is stipulated in the lease arrangement at such time that
the lessee exercises the cancellation option provisions. The lessee's residual
value guarantee ("Deficiency Payment") is unconditionally payable to the lessor
in the event that the lessee terminates the lease arrangement and the sale of
the facility results in receipt of sales proceeds by the lessor in an amount
less than the lessor's unamortized investment in the lease arrangement. The
lessee's maximum Deficiency Payment would approximate $35 million at the end of
the first year and decreases to approximately $25 million at the end of the
tenth year, assuming that the sales proceeds received by the lessor were zero.
43
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
11. Geographic Information
United Europe &
States Other
------ -------
Net revenues:
1997................................. $406,100 $184,551
1996................................. $348,996 $145,832
1995................................. $286,474 $122,700
Income from operations:
1997................................. $ 57,342 $ 20,318
1996................................. $ 29,244(1) $ 8,617(1)
1995................................. $ 34,799(2) $ 12,762
Identifiable assets:
1997................................. $298,786 $185,228
1996................................. $297,386 $153,661
1995................................. $229,720 $ 92,790
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404, United States and Europe & Other income from
operations was $48,848 and $16,417, respectively.
(2) Excluding the impact of the 1995 restructuring provision totaling $4,616,
United States income from operations was $39,415.
12. Related Party Transactions
Historically, Covance had participated in Corning's centralized treasury and
cash management processes. For domestic operations, cash received from
operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was periodically transferred to Corning.
Cash disbursements for operations, acquisitions and other investments were
funded as needed from Corning. Substantially all of Covance's borrowings during
1996 (prior to the establishment of the Credit Facility) and 1995 were from
Corning. The blended rate on those borrowings for 1996 and 1995 was
approximately 6%.
During 1996 and 1995, Corning and affiliates provided a number of
administrative functions to Covance which resulted in charges of $3.4 million
and $5.3 million being recorded in Covance's results of operations for 1996 and
1995, respectively. Management believes the method used to allocate these costs
is reasonable under the circumstances. The charges for these functions are
included primarily in selling, general and administrative expenses and do not
necessarily reflect the amount of expenses that would have been incurred by
Covance on a stand-alone basis. In certain cases, related party expenses
allocated to Covance have not required reimbursement in cash and, accordingly,
have been treated as capital contributions.
44
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(Dollars in thousands, unless otherwise indicated)
13. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information for
1997 and 1996:
First Second Third Fourth
Year Ended December 31, 1997 Quarter Quarter Quarter Quarter
- ------------------------------ -------- -------- -------- --------
Net revenues.................. $135,723 $145,392 $151,464 $158,072
Income from operations........ 17,139 20,222 20,902 19,397
Net income.................... 8,627 10,519 10,859 9,749
Basic and diluted earnings
per share................... $0.15 $0.18 $0.19 $0.17
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- ------------------------------ -------- -------- -------- --------
Net revenues.................. $108,697 $121,530 $127,179 $137,422
Income (loss) from operations. 14,038 17,335 17,502 (11,014)(1)
Net income (loss)............. 7,307 8,830 9,074 (12,495)(1)
Basic earnings per share...... $0.13 $0.15 $0.16 $(0.22)(1)
Diluted earnings per share.... N/A N/A N/A N/A
- ---------------------
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404 ($19,725 net of tax), income from operations and net
income in the fourth quarter of 1996 were $16,390 and $7,230,
respectively, and basic earnings per share was $0.13.
45
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors.
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on April 28, 1998,
which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities and Exchange Act of 1934, as amended.
(b) Identification of Officers.
Christopher A. Kuebler, 44, has been Covance's President and Chief Executive
Officer since November 1994. From March 1993 through November 1994, he was the
Corporate Vice President, European Operations for Abbott Laboratories Inc.
("ALI"), a diversified health care company. From January 1991 until March 1993,
Mr. Kuebler was the Vice President, Sales and Marketing for ALI's Pharmaceutical
Division. Mr. Kuebler has been a member of the Covance Board since November
1994, and was elected Chairman in November 1996. Mr. Kuebler also serves in
various executive officer and director capacities of Covance's subsidiaries.
Richard J. Andrews, 50, has been a Corporate Senior Vice President of Covance
since July 1996. In addition, Mr. Andrews has served as the Group President,
Central Laboratory Services ("Central Labs") since June 1994 and served as
President of Central Laboratory's Swiss operations ("CLS") since January 1993.
Central Labs and CLS provide the Company's central laboratory services. Prior to
January 1993, Mr. Andrews served in various executive capacities in Europe,
including Worldwide Business Director, for Dupont International S.A., a
multinational chemical and pharmaceutical company. Mr. Andrews also serves as a
director of several of Covance's subsidiaries.
Michael Giannetto, 35, has been the Company's Controller since July 1996 and
a Vice President since November 1996. From March 1995 to July 1996, Mr.
Giannetto was the Business Controller for Covance. From December 1992 to March
1995, Mr. Giannetto was the Manager of Financial Reporting and Technical
Accounting for Corning Life Sciences Inc. ("CLSI"), an affiliate of the Company
prior to the Distribution Date. Prior to December 1992, Mr. Giannetto was a
Senior Audit Manager for Deloitte & Touche.
Charles C. Harwood, Jr., 44, has been the Company's Corporate Senior Vice
President and Chief Financial Officer since July 1996. From November 1994 to
July 1996, Mr. Harwood was the Company's Vice President and Chief Financial
Officer. From May 1993 to November 1994, Mr. Harwood was Executive Director,
Finance of Covance. From January 1993 to May 1993, Mr. Harwood was Chief
Financial Officer and Vice President of Finance with Integrated Telecom
Technologies, Inc. Prior to January 1993, Mr. Harwood worked seven years in the
field of commercial real estate development and six years with the
Hewlett-Packard Company in its Medical Products Division. Mr. Harwood also
serves as a director of several of Covance's subsidiaries.
Jeffrey S. Hurwitz, 37, has been the Company's Corporate Senior Vice
President, General Counsel and Secretary since July 1996. From November 1994 to
July 1996, Mr. Hurwitz was Covance's Vice President, General Counsel and
Secretary. From October 1993 to November 1994, Mr. Hurwitz was Covance's General
Counsel and Secretary. From May 1992 to October 1993, Mr. Hurwitz was an
Assistant Counsel and Assistant Secretary for CLSI, an affiliate of the Company
prior to the Distribution Date. From August 1991 to May 1992, Mr. Hurwitz was an
Assistant Counsel for Corning, an affiliate of the Company prior to the
Distribution Date. From February 1991 to June 1991, Mr. Hurwitz was an Associate
with the law firm of Luskin & Stern. Prior to February 1991, Mr. Hurwitz was an
Associate with the law firm of Shearman & Sterling. Mr. Hurwitz also serves as a
director of Bio-Imaging, and several of Covance's subsidiaries.
Kim D. Lamon, M.D., Ph.D., 45, has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Dr. Lamon has been the Group President,
Clinical and Periapproval Services ("CAPS") since May 1996. CAPS and its
European affiliates provide the Company's clinical and
46
periapproval services. From April 1994 until May 1996, he was the Executive Vice
President, Chief Medical Officer for Quest Diagnostics Incorporated, and Senior
Vice President, Science and Technology for CLSI, in each case an affiliate of
the Company prior to the Distribution Date. From July 1992 until April 1994, Dr.
Lamon was Senior Vice President, Clinical Research and Development and Executive
Medical Director for Rhone-Poulenc Rorer ("RPR"), a pharmaceutical company.
Prior to July 1992, Dr. Lamon was Senior Vice President, Clinical Research and
Regulatory Affairs at RPR. Dr. Lamon received his M.D. and Ph.D. in Pharmacology
from Thomas Jefferson University. Since 1989, Dr. Lamon has been an Adjunct
Assistant Professor of Pharmacology at Thomas Jefferson University. Dr. Lamon
also serves as a director of several of Covance's subsidiaries.
James D. Utterback, 42, has been a Corporate Senior Vice President of Covance
since July 1996 and Group President, Global Ventures since August 1995. Global
Ventures is responsible for the Company's international expansion plans in Asia
Pacific, Latin America and Africa. Mr. Utterback has also been responsible for
Covance's global pharmaceutical packaging operations since August 1995. From May
1994 until August 1995, Mr. Utterback was the Senior Vice President, Human
Resources and Quality for CLSI, an affiliate of the Company prior to the
Distribution Date. Prior to May 1994, Mr. Utterback served in various executive
capacities, including Chief Executive Officer in South Africa, for RPR, a
pharmaceutical company. Mr. Utterback has worked in the pharmaceutical industry
since 1985, living in Europe, Africa and the United States. Mr. Utterback also
serves as a director of several of Covance's subsidiaries.
Kathleen A. Weslock, 42, has been the Company's Corporate Senior Vice
President, Human Resources since April 1997. From May 1995 until April 1997, Ms.
Weslock was the Senior Vice President, Human Resources and Development, Private
Client Services at Lehman Brothers Inc., a financial services firm. Prior to May
1995, Ms. Weslock was a principal with William M. Mercer, Inc. a consulting
firm.
Michael G. Wokasch, 46, has been a Corporate Senior Vice President of Covance
since July 1996. In addition, Mr. Wokasch has been the Group President,
Laboratory Services ("Labs"), since July 1995. Labs and its affiliates provide
the Company's preclinical services. From January 1992 until July 1995, Mr.
Wokasch served as Divisional Vice President of Sales of ALI. From October 1991
to January 1992, Mr. Wokasch served as Director for New Product/Marketing/
Development & Scientific Relations at ALI. Prior to October 1991, Mr. Wokasch
was a Director, New Product Development at ALI. Mr. Wokasch also serves as a
director of several of Covance's subsidiaries.
Item 11. Executive Compensation
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 12. Security Ownership by Certain Beneficial Owners and Management of
Covance
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's definitive Proxy Statement in
connection with its 1998 Annual Meeting of Shareholders to be held on April 28,
1998, which Proxy Statement has been filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report.
1. Financial Statements. The financial statements filed as part of this
report are listed on the Index to Consolidated Financial Statements on page 27.
2. Financial Statement Schedules. Schedules are omitted because they are not
applicable or the required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits. The exhibits required by Item 601 of Regulation S-K filed as
part of, or incorporated by reference in, this report are listed in (c) below
and in the accompanying Exhibit Index.
(b) Reports on Form 8-K.
None.
(c) Item 601 Exhibits.
2.1 Transaction Agreement among Corning Incorporated, Corning Life Science
Inc., Corning Clinical Laboratories Inc. (Delaware), Covance Inc. and
Corning Clinical Laboratories Inc. (Michigan), dated November 22, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
3.1 Certificate of Incorporation. Incorporated by reference to Registrant's
filing on Amendment No. 2 on Form 10, filed with the SEC on November 19,
1996.
3.2 By-Laws. Incorporated by reference to Registrant's filing on Amendment No.
2 on Form 10, filed with the SEC on November 19, 1996.
4.1 Form of Common Stock Certificate. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the SEC on
November 25, 1996.
4.2 Rights Agreement between Covance Inc. and Harris Trust and Savings Bank,
dated December 31, 1996. Filed herewith.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated and
Covance Inc., dated December 31, 1996. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning
Clinical Laboratories Inc., December 31, 1996. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of
Georgia, N.A. and Lenders named therein, dated November 26,1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
48
10.6 Employee Stock Ownership Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
10.9 Employee Equity Participation Plan. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the SEC on
November 25, 1996.
10.10 Executive Retirement Supplemental Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
10.12 Directors' Restricted Stock Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.13 Directors' Deferred Compensation Plan, as amended. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
Incorporated by reference to Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
10.15 Executive Employment Letters and Schedule. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's filing
on a Registration Statement on Form S-8, Registration No. 333-29467, filed
with the SEC on June 18, 1997.
21 Subsidiaries. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
23 Consent of Price Waterhouse LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).
(d) Financial Statement Schedules.
None.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COVANCE INC.
Dated: February 27, 1998 By: /s/ Christopher A. Kuebler
--------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Christopher A. Kuebler
- -------------------------
Christopher A. Kuebler Chairman of the Board, February 27, 1998
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- --------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President February 27, 1998
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ---------------------
Michael Giannetto Vice President and Controller February 27, 1998
(Principal Accounting Officer)
/s/ Robert M. Baylis
- --------------------
Robert M. Baylis Director February 27, 1998
/s/ Van C. Campbell
- ------------------
Van C. Campbell Director February 27, 1998
/s/ Irwin Lerner
- ----------------
Irwin Lerner Director February 27, 1998
/s/ J. Randall MacDonald
- ------------------------
J. Randall MacDonald Director February 27, 1998
/s/ Nigel W. Morris
- -------------------
Nigel W. Morris Director February 27, 1998
/s/ William C. Ughetta
- ----------------------
William C. Ughetta Director February 27, 1998
EXHIBIT INDEX
Exhibit
Number Description
- ---- --------------------------------------------------------------------
2.1 Transaction Agreement among Corning Incorporated, Corning Life
Science Inc., Corning Clinical Laboratories Inc. (Delaware), Covance
Inc. and Corning Clinical Laboratories Inc. (Michigan), dated
November 22, 1996. Incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
3.1 Certificate of Incorporation. Incorporated by reference to
Registrant's filing on Amendment No. 2 on Form 10, filed with the
SEC on November 19, 1996.
3.2 By-Laws. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
4.1 Form of Common Stock Certificate. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the
SEC on November 25, 1996.
4.2 Rights Agreement between Covance Inc. and Harris Trust and Savings
Bank, dated December 31, 1996. Filed herewith.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning Incorporated
and Covance Inc., dated December 31, 1996. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and
Corning Clinical Laboratories Inc., December 31, 1996. Incorporated
by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A., Wachovia
Bank of Georgia, N.A. and Lenders named therein, dated November
26,1996. Incorporated by reference to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
10.6 Employee Stock Ownership Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.7 Stock Purchase Savings Plan, as amended. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.8 Employee Stock Purchase Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.9 Employee Equity Participation Plan. Incorporated by reference to
Registrant's filing on Amendment No. 3 on Form 10, filed with the
SEC on November 25, 1996.
10.10 Executive Retirement Supplemental Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.11 Restricted Share Plan. Incorporated by reference to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
10.12 Directors' Restricted Stock Plan. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
Exhibit
Number Description
- --------- --------------------------------------------------------------------
10.13 Directors' Deferred Compensation Plan, as amended. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
10.15 Executive Employment Letters and Schedule. Incorporated by reference
to Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
10.16 Variable Compensation Plan. Filed herewith.
10.17 Conversion Equity Plan. Incorporated by reference to Registrant's
filing on a Registration Statement on Form S-8, Registration No.
333-29467, filed with the SEC on June 18, 1997.
21 Subsidiaries. Incorporated by reference to Registrant's filing on
Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.
23 Consent of Price Waterhouse LLP. Filed herewith.
27 Financial Data Schedule. (Edgar filing only).