-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
IJ/U82PsbePaKeMDozk3php1OfNw0kHb7ZEDplOMsrx1DUE29+VDiDcsGxkd7YfS
1XgVhk3IP1wyDeIU1oVzSA==
<SEC-DOCUMENT>0000950146-97-000448.txt : 19970329
<SEC-HEADER>0000950146-97-000448.hdr.sgml : 19970329
ACCESSION NUMBER: 0000950146-97-000448
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 18
CONFORMED PERIOD OF REPORT: 19961231
FILED AS OF DATE: 19970328
SROS: NONE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COVANCE INC
CENTRAL INDEX KEY: 0001023131
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731]
IRS NUMBER: 223265977
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-12213
FILM NUMBER: 97566335
BUSINESS ADDRESS:
STREET 1: 210 CARNEGIE CENTER
CITY: PRINCETON
STATE: NJ
ZIP: 08540
BUSINESS PHONE: 6094528550
MAIL ADDRESS:
STREET 1: CORNING PHARMACEUTICAL SERVICES INC
STREET 2: 210 CARNEGIE CENTER
CITY: PRINCETON
STATE: NJ
ZIP: 08540
FORMER COMPANY:
FORMER CONFORMED NAME: CORNING PHARMACEUTICAL SERVICES INC
DATE OF NAME CHANGE: 19960917
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>ANNUAL REPORT
<TEXT>
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, 1996
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) 452-4400
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 March 3, 1997, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,078,308,751 (based on the closing price
of the Company's Common Stock on the New York Stock Exchange on March 3, 1997 of
$19.25).
As of March 3, 1997, the Registrant had 56,087,500 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
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. Covance also provides services such as health economics for
managed care organizations, hospitals and health care provider networks, and
early development and laboratory testing services to the chemical, agrochemical
and food industries. The services Covance provides constitute six lines of
business: preclinical, biomanufacturing, clinical and periapproval, central
laboratory, clinical packaging and health economics. These six lines of business
can be further categorized as non-clinical (preclinical and biomanufacturing)
and clinical (clinical and periapproval, central laboratory, clinical packaging
and health economics). Covance believes it is one of the largest
biopharmaceutical CROs, based on estimated 1996 annual net revenue, 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.
Covance's businesses were initially acquired by its former parent,
Corning, as part of a strategy to create a global, integrated 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.), and Covance further
expanded its clinical trials expertise in 1990 with the purchase of PACT Inc.
(now known as Covance Clinical and 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
1
<PAGE>
Systems, Inc. ("National Packaging") (now known as Covance Pharmaceutical
Packaging Services Inc.), a clinical packaging company. Also in 1995, Covance
formed Covance Biotechnology Services Inc. ("Covance Biotechnology"), a
majority-owned company which will enable Covance to engage in biomanufacturing.
In early 1996, Covance purchased Health Technology Associates Inc. ("HTA")
(now known as Covance Health Economics and Outcomes Services Inc.), a health
economics company. In October 1996, Covance expanded its clinical packaging
capabilities to Europe with the purchase of Swiss-based CRS Pacamed AG ("CRS
Pacamed") (now known as Covance Pharmaceutical Packaging Services A.G.). In
addition, Covance acquired a 91,000 square-foot facility in Horsham, United
Kingdom, which will be used, among other things, to enhance the Company's
ability to provide clinical packaging services in Europe, and serve as the
Company's European headquarters.
The Company maintains offices in 15 countries, including offices in
Singapore and Canada, which opened in 1996.
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. Today, there are only a few full-service
companies. Full-service CROs design and manage preclinical and clinical and
periapproval studies and trials, provide health economic services, and provide
packaging and central laboratory services and other services required to develop
and market new products in accordance with applicable government regulations in
the jurisdictions where the services are provided, including the regulations of
the FDA in the United States.
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 downsizing its research and development
infrastructure and converting the fixed costs of maintaining such infrastructure
to variable costs by outsourcing drug development activities to CROs. The
downsizing of development capabilities also creates demand for CROs as
biopharmaceutical companies experience internal development resource shortages
when a large number of compounds emerge from the research process and need to
undergo development. Management also believes that many of these companies are
2
<PAGE>
attempting to decrease the new drug development cycle by using CROs, which may
have greater expertise in the 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 it 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.
Consolidation in the Pharmaceutical Industry. The pharmaceutical industry
is consolidating as such companies seek to obtain cost reduction synergies
through business combinations. Once consolidated, many pharmaceutical companies
aggressively manage costs by reducing jobs, decentralizing the research and
development process, and outsourcing to CROs in an effort to reduce the fixed
costs associated with internal drug development.
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
drug causes 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 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.
3
<PAGE>
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 Application
("IND"), whereupon the Food and Drug Administration ("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; 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.
4
<PAGE>
NDA Preparation and Submission. Upon completion of Phase III trials, the
sponsor or CRO assembles the tabulated and statistically analyzed data from all
phases of development into a single large document, the New Drug Application
("NDA"), which comprises, on average, approximately 100,000 pages.
FDA Review and Approval (1 to 2 years). At this stage, the FDA will
scrutinize data from all phases of development to confirm that the sponsor has
complied with regulations and that the drug is safe and effective for the
specific use (or "indication") under study. Product labeling is also approved at
this stage, which serves as a guideline to the sponsor about how its product can
be promoted in the marketplace.
Treatment Investigational New Drug (May span late Phase II, Phase III, and
FDA review). When results from Phase II or Phase III show special promise in the
treatment of a serious condition for which existing therapeutic options are
limited or of minimal value, the FDA may allow the manufacturer to make the new
drug available to a larger number of patients through the regulated mechanism of
a treatment investigational new drug ("TIND") application. Although less
scientifically rigorous than a controlled clinical trial, a TIND may enroll and
collect primarily safety data from thousands of patients.
Post-Marketing Surveillance and Phase IV Studies (Periapproval). Federal
regulation requires the sponsor to collect and periodically report to the FDA
additional safety and efficacy data on the drug for as long as the sponsor
markets the drug (post-marketing surveillance). If the drug is marketed outside
the United States, these reports must include data from all countries in which
the drug is sold. Additional studies (Phase IV) may be undertaken after initial
approval to find new uses for the drug or to test new dosage formulations. All
of these studies are types of "periapproval" studies.
Business Strategy
Based on 1996 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.
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.
5
<PAGE>
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 the Expanded Access Program ("EAP"), one of
Covance's periapproval offerings. EAP is a mechanism that allows innovative new
therapies for life threatening diseases to be given to expanded populations
prior to FDA approval pursuant to a TIND application. 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. With respect to the former, in
addition to SPD, Covance has invested in the creation of a multi-use
biomanufacturing facility, Covance Biotechnology. With respect to the latter,
Covance added domestic clinical packaging capabilities through the acquisition
of National Packaging in January 1995, European clinical packaging capabilities
through the acquisition of CRS Pacamed in October 1996, and enhanced its health
economics services by acquiring HTA in March 1996. Covance expects to continue
developing services internally and making strategic acquisitions that are
complementary to its existing services and that will expand its capability to
serve its clients.
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 a dedicated 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 this team is to examine every significant process, system and information
technology used in product development, with the objective of applying the
considerable experience and technical resources available throughout the
Company. Covance has over 300 information systems professionals working in 12
regional information system centers (nine in the United States and three in
Europe) and nine satellite centers (five in the United States and four in
Europe). All of the Company's employees at its 33 locations (both domestic and
6
<PAGE>
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
Information Access System permits clients to obtain 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 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 33 locations in 15 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 30% of Covance's 5,400
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 April 1996, Covance opened its Singapore office.
Singapore will serve as Covance's center for conducting clinical trials in Asia,
a region that Covance believes will be increasingly important for the research,
development and therapeutic use of drugs. Covance is also collaborating with the
Singapore National Science and Technology Board concerning the Singapore
government's initiative to form the Asia Pacific Economic Cooperation
coordinating center for Good Clinical Practice. In December 1996, Covance opened
an office in Montreal, Canada, to serve the pharmaceutical and biotechnology
markets and to have further access to patients. Covance is also discussing with
its clients opening new offices in Latin America and Africa to serve their
growing need to conduct drug development studies in these regions.
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 for managed care organizations, hospitals and health care
provider networks, and early development and laboratory testing services to the
chemical, agrochemical and food
7
<PAGE>
industries. The services Covance provides constitute six lines of business:
preclinical, biomanufacturing, clinical and periapproval, central laboratory,
clinical packaging and health economics.
Preclinical Services
Covance has four major laboratories, employing over 1,900 people, located
in Madison, Wisconsin, Vienna, Virginia, Harrogate, United Kingdom, and Munster,
Germany. The Company also has an administrative 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
its Phase I and II groups to minimize product development time and to provide
clients with early data on the safety and efficacy of new molecules. This data
allows clients to make a decision about whether to continue, cease or modify
their development program.
As part of its preclinical services, Covance is duplicating in the United
States an SPD program developed in Europe that has successfully reduced the time
from preclinical testing to the first human studies. SPD involves an integrated
process and team drawn from Covance's preclinical and Phase I and II areas. In
an SPD program, the compound is researched from initial preclinical evaluation
through its first dosing in humans, including the filing and attainment of 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 INDs are required in the United States to be filed before
human clinical trials start, it is uncertain whether SPD trial completion speeds
in the United States will be as swift as the Company's experiences with clients
in the United Kingdom (where INDs 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.
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 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 meets clients' rigorous
control requirements. Covance is also a provider of custom
8
<PAGE>
polyclonal and monoclonal antibody services and owns and operates an 18,000
square-foot state-of-the-art antisera production facility that complies with
both good manufacturing practices ("GMP") and good laboratory practices ("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. In 1996, Covance, with the approval of the
Texas Department of Health and the Centers for Disease Control, destroyed a
shipment of monkeys from the Philippines because some had been infected with a
sub-strain of the Ebola-Reston virus, which is lethal to monkeys.
Covance also provides early development and 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
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.
Covance Biotechnology has submitted proposals to a number of prospective
biopharmaceutical clients, and it has been awarded two contracts. For the year
ended December 31, 1996, Covance Biotechnology reported a net loss of
approximately $3.1 million. Cumulatively since its inception, Covance
Biotechnology has incurred net losses totaling $5.0 million.
The 109,000 square-foot biomanufacturing facility, located in Research
Triangle Park, North Carolina, became "mechanically complete" in December 1996,
and became operational in January 1997, although the facility continues to
undergo validation. The
9
<PAGE>
biomanufacturing facility is financed through several tax retention operating
leases provided by a commercial lending institution ("Bank") and, during the
construction phase, was being leased by the General Contractor, before being
transferred to Covance Biotechnology upon the "mechanical completion" of the
facility. The leases expires in December 2006. The annual minimum lease payments
are $5.3 million. At the expiration of the lease term, Covance Biotechnology is
liable for the unamortized balance of the cost of the facility, currently
estimated to be approximately $37 million. Covance Biotechnology may also choose
to purchase the facility at specific dates over the 10 year period. Using
current estimates, the purchase price would be approximately $52 million at the
end of the first year, decreasing on an amortizing basis to approximately $34.5
million at the end of the tenth year.
Covance owns 76% of the voting capital stock of Covance Biotechnology in
the form of convertible preferred stock. The remaining 24% of Covance
Biotechnology's capital stock is owned by certain minority stockholders (the
"Minority Stockholders") in the form of common stock. Covance's ownership in
Covance Biotechnology may be reduced to 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 "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 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. The
Company has no affirmative obligation to provide further funds or financial
assistance of any kind to Covance Biotechnology.
Clinical and Periapproval Services
Covance offers a comprehensive range of clinical trial services, including
Phase I through III clinical studies and periapproval studies, including Phase
IIIb and Phase IV clinical studies, TINDs, post-marketing surveillance studies
and prescription to over-the-counter switch studies ("Rx to O-T-C Switch").
Covance also has extensive experience in a number of therapeutic areas,
including diseases of the cardiovascular and central nervous systems,
endocrinology and respiratory systems, infectious diseases (including AIDS), and
significant experience in other areas including oncology, bone metabolism
immunology, gastroenterology, urology, dermatology and hematology. Covance has
extensive experience in managing both small, medium and large trials in the
United States and in many parts of the world, including Australia, Canada,
Western, Central and Eastern Europe, Israel, Mexico and Russia. These trials may
be conducted separately or simultaneously as part of a multinational development
plan.
10
<PAGE>
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 TINDs, INDs, European
study permissions, NDAs, computer assisted NDAs ("CANDAs"), product license
applications ("PLAs"), computer assisted PLAs ("CAPLAs") and European submission
dossiers, computerized patient randomization and dose assignment and tracking,
Phase I - Phase IV study design and implementation, monitoring and safety
evaluation management and reporting, data processing and management, statistical
analyses and report writing, medical writing, good clinical practices ("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 to be obtained from the clinical studies. The various other
disciplines involved in the drug development process, including data management,
statistics and regulatory affairs, must work closely with the clinical trial
management project team to assure that the right data are acquired in a form
which is most efficient for subsequent data entry, management analyses and
reporting.
Investigator Recruitment. During the clinical trials, administration of
the drug to patients is supervised by physicians, also referred to as
investigators, at hospitals, clinics or other locations, also referred to as
investigational sites. Covance solicits the participation in the study of
investigators who contract directly with either Covance or its client. 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
11
<PAGE>
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 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 operations are managed by professionals
with extensive pharmaceutical and biotechnology industry experience in the
design and construction of local and multinational clinical trial databases.
Data management and biostatistical analysis services are offered as discrete
products and as part of an integrated drug 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 based on an Interactive Voice Response System ("IVRS") and an Information
Access System ("IAS"), which are interactive information technologies. IVRS uses
touch-tone telephone technology to assist biopharmaceutical clients in managing
the "just-in-time" delivery of clinical drug supplies and patient randomization.
IVRS is available in multiple languages using toll free numbers and has, in some
cases, demonstrated up to 30% reduction in study drug waste. IAS, based on Lotus
Notes(R) software, provides clients with 24-hour access to study data, such as
study patient enrollment progress, patient visit information, CRF status and
serious adverse event experience.
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
12
<PAGE>
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.
Health Economics
Covance offers a wide range of health economic services for managed care
organizations, hospitals, health care provider networks and pharmaceutical and
device manufacturers. These services include outcomes and pharmacoeconomic
studies, reimbursement planning services and disease management services, 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
13
<PAGE>
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.
14
<PAGE>
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 conduct high quality and
sophisticated central laboratory services is an integral aspect of what
constitutes a full service CRO. Covance's two facilities (one located in the
United States and the other in Switzerland) provide central laboratory services
dedicated exclusively to biopharmaceutical studies. These facilities provide
clients with combinable data in studies that can be conducted separately, or
multinationally and simultaneously. Providing combinable data eliminates the
need for statistical correlation among different laboratories by using
consistent laboratory methods, the use of same reagent manufacturers, and the
use of identical clinical trial reference ranges and equipment calibration.
Covance also employs a proprietary clinical trials management system, which
Covance believes is unique, that enables it to enter a sponsor's protocol
requirements directly into its own database. This system, based on protocol
requirements, constructs the drug kits that will go to the investigational sites
and the requisition forms therefor, allows for proper laboratory specimen
collection from the investigational site, sequencing of study participants
visits and investigator test ordering of additional tests and ensures that all
demographic data is complete and accurate and will produce for the client
reports that are customized to their specifications. The laboratories provide a
comprehensive audit trail by ensuring that all laboratory data are traceable to
source documents, are capable of delivering customized data electronically
within 24 hours and provide safety test results within 48 hours from most
locations. As the need for central laboratory services expands geographically,
the Company has expanded the reach of its central laboratories business through
a contractual arrangement with a leading South African laboratory that allow
Covance to combine the testing capabilities of such laboratory with its own
proprietary systems.
Clinical Packaging
Covance offers full service contract packaging for the pharmaceutical
industry in the United States and Europe including package development and
design, coldformed and thermoformed blister units, blister packaging, multi-dose
bottle filling, clinical labeling, storage and site distribution of clinical
supplies and return services for unused supplies. With the addition, in 1996, of
Covance Pharmaceutical Packaging Services AG, Covance packaging services and
products have been expanded to include software inventory and validation
controls and processes and the manufacturing of robotic packaging machines.
Covance believes that by integrating packaging services with its other clinical
and periapproval services it can accelerate the drug development process through
operational
15
<PAGE>
efficiencies that arise from coordinating at the outset the design of a clinical
trial. Also in 1996, Covance purchased a 91,000 square foot packaging facility
in Horsham, United Kingdom. This facility will provide a modern pharmaceutical
packaging operation at one of the largest packaging facilities in Europe.
Management expects commercial operations to commence early in the second quarter
1997, with the facility to be fully operational in mid 1997.
Clients and Marketing
Covance provides its product development services on a global basis to,
among others, the pharmaceutical and biotechnology industries. In 1996, Covance
served over 270 biopharmaceutical companies, including all 50 of the world's
largest pharmaceutical companies and 17 of the world's 25 largest biotechnology
companies. Of the 270 biopharmaceutical companies Covance serves, 45 are
Japanese. The Japanese biopharmaceutical companies are served by Covance's
United States and European operations.
For the year ended December 31, 1996, approximately 71% of Covance's net
revenues, 77% of Covance's operating income and 77% of Covance's identifiable
assets were attributed principally to United States operations, while
approximately 29% of Covance's net revenues, 23% of Covance's operating income
and 23% of Covance's identifiable assets were attributed to European (including
Asian) operations. Approximately 62% of Covance's net revenues during 1996 were
attributed to the Company's clinical lines of business. Approximately 38% of
Covance's net revenues during 1996 were attributed to the Company's nonclinical
lines of business. In 1996, no client accounted for more than 10% of the
Company's net revenue, and only one client accounted for more than 5% of the
Company's net revenue. In 1996, Covance's top five clients accounted for
approximately 20% of Covance's net revenues.
Covance's sales activities are conducted by more than 120 business
development people based in Covance's operations in the United States, Europe,
Australia, Japan and Singapore. Most of Covance business development personnel
have technical or scientific backgrounds.
To strengthen its sales and marketing activities, Covance introduced in
1995 a Lotus Notes(R) based large account management process ("LAMP") that
allows Covance business development personnel in all locations to promptly
ascertain the status of any new client activity with any Covance operation. LAMP
is an important tool in managing Covance's key account program. Through LAMP,
the key account program and dedicated resources, Covance believes it can better
coordinate and unite the efforts of its sales and marketing personnel and
strengthen relationships with pivotal biopharmaceutical clients. Covance
believes that this will allow it to improve its understanding of its clients'
organizational structure, management practices and product pipeline, and, thus,
better serve its clients' needs. Conversely, LAMP also enables
16
<PAGE>
clients, across different business functions, to better understand the full
range of Covance's services.
Contractual Arrangements
Most of Covance's contracts in the preclinical, central laboratory,
clinical packaging and health economics areas are fixed price or
fee-for-service, and in the clinical and periapproval areas are fee-for-service
with a cap. To a lesser extent, some of the contracts in the clinical and
periapproval areas are fixed price or fee-for-service without a cap. In cases
where the contracts are fixed price, Covance bears the cost of overruns, with
certain exceptions, but benefits if the costs are lower than anticipated. In
cases where the contracts are fee-for-service with a cap, the contracts contain
an overall budget for the trial based on time and cost estimates. If costs are
lower than anticipated, the client keeps the savings, but if costs are higher
than estimated, then Covance is responsible for the overrun unless the increased
cost is a result of a change requested by the client, such as an increase in the
number of patients to be enrolled or the type or amount of data to be collected.
Contracts may range from a few months to several years depending on the nature
of the work performed. In some cases, for multiyear contracts involving either
preclinical or clinical and periapproval trials, a portion of the contract fee
is paid at the time the study or trial is started with the balance of the
contract fee payable in installments over the study or trial duration and may be
performance based. For instance, in clinical and periapproval trials,
installment payments may be related to investigator recruitment, patient
enrollment or delivery of the database.
Most of Covance's contracts for the provision of its services are
terminable by the client either immediately or upon notice. Contracts may be
terminated for a variety of reasons, including the failure of a product to
satisfy safety requirements, unexpected or undesired results of the product, the
client's decision to forego or terminate a particular study, insufficient
enrollment or investigator recruitment, or 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 all the services it provides because such services
are performed within a short period of time or for other reasons where it is not
practical or feasible to maintain an order backlog. Additionally, services
appropriate for backlog measurement do not correspond exactly with any
particular line of business.
Backlog is principally calculated with respect to work to be performed
pursuant to letters of intent and contracts. Once work under a letter of intent
or contract commences, net revenue is recognized over the life of the contract.
In certain cases, however,
17
<PAGE>
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 revenue 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 1995 backlog may be completed in
1996, while others may be completed in later years. Second, the scope of studies
may change, which may either increase or decrease their value. Third, studies
included in backlog may be subject to bonus or penalty payments. Fourth, trials
under letters of intent or contracts included in backlog are subject to
termination or delay at any time by the client or regulatory authorities.
Termination or delays can result from a number of reasons. 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 was
approximately $503 million, compared to approximately $392 million at December
31, 1995.
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 1996 revenues,
that the five largest CROs besides itself include Pharmaceutical Product
Development Inc. (after its merger with Applied Bioscience International Inc.),
Quintiles Transnational Corporation, Huntington International Holdings PLC,
Parexel International Corporation and ClinTrials Inc.
As a result of competitive pressures, the CRO industry is consolidating.
This trend is likely to produce competition among the larger CROs for both
clients and acquisition candidates and companies may choose to limit the CROs
with whom they are willing to work. In addition, there are few barriers to entry
for small, limited-service entities 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 size. The Company believes that it competes favorably in all of
these areas.
18
<PAGE>
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) 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
19
<PAGE>
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 (the
"Quest Diagnostics/Covance Spin-Off 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 (the "Covance/Quest Diagnostics Spin-Off
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 Spin-Off Tax Indemnification Agreements 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
Spin-Off Tax Indemnification Agreements or as described below), Corning is
liable for and will pay the federal income taxes of the consolidated group that
includes 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
Spin-Off Tax Indemnification Agreements), 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
20
<PAGE>
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.
Banking Facilities
In November 1996, Covance obtained from a syndicate of banks (the "Banks")
a five-year $250,000,000 Senior Revolving Credit Facility (the "Credit
Facility"). The Credit Facility is guaranteed by certain material United States
subsidiaries of Covance and, in certain circumstances, by the pledges of stock
of certain foreign subsidiaries of Covance. The proceeds of the Credit Facility
were used to effect certain repayments required by the Distributions. The Credit
Facility will also be used to provide financing for the Company's and its
subsidiaries' working capital needs, capital expenditures, acquisitions and
other corporate purposes. Covance may prepay the loans under the Credit Facility
in whole or in part (subject to certain reimbursements to the Banks) and may
permanently reduce or terminate the Banks commitments. Under the Credit
Facility, Covance may choose to obtain different forms of loans, at varying
interest rates. The Company is also obligated to pay certain fees in connection
with the Credit Facility, including a facility fee. Covance will be required to
comply with certain affirmative and negative covenants, including financial
covenants which require the Company to meet minimum interest coverage targets
and maximum leverage ratios.
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
laboratories also, in limited circumstances and when required by a client,
follow GLP. 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. GLP and GMP have been adopted by the FDA, by the
Department of Health in the United Kingdom and by similar regulatory authorities
in other parts of the world. GLP and GMP stipulate requirements for facilities,
equipment and professional staff. The regulations require standardized
procedures for studies, for recording and reporting data and for retaining
appropriate records. To help satisfy its compliance obligations, Covance has
established quality assurance controls at its laboratory and manufacturing
facilities which monitor ongoing
21
<PAGE>
compliance with GLP, GMP and CLIA regulations, as applicable, by auditing test
data and conducting regular inspections of testing and manufacturing procedures.
The industry standard for the conduct of clinical research and development
studies is embodied in the regulations for GCP. Although GCP has not been
formally adopted by the FDA nor, with certain exceptions, by similar regulatory
authorities in other countries, certain provisions of GCP have been included in
FDA regulations. As a matter of practice, the FDA and many other regulatory
authorities require that test results submitted to such authorities be based on
studies conducted in accordance with GCP. These regulations require (1)
complying with specific requirements governing the selection of qualified
investigators; (2) obtaining specific written commitments from the
investigators; (3) verifying that patient informed consent is obtained; (4)
monitoring the validity and accuracy of data; (5) verifying drug or device
accountability; (6) instructing investigators to maintain records and reports;
and (7) permitting appropriate governmental authorities access to data for their
review. Covance must also maintain reports for each study for specified periods
for inspection by the study sponsor and the FDA during audits. As with GLP and
GMP, noncompliance with GCP can result in the disqualification of data
collection during the clinical trial.
Covance's standard operating procedures are written in accordance with
regulations and guidelines appropriate to the region and the nation where they
will be used. Within Europe, all work is carried out in accordance with the
European Community Note for Guidance "Good Clinical Practice for Trials on
Medicinal Products in the European Community" and the requirements of the
applicable country. In addition, FDA regulations and guidelines serve as a basis
for Covance's North American and Asian/Pacific standard operating procedures.
From an international perspective, when applicable, Covance has implemented
common standard operating procedures across regions to assure consistency
whenever it is feasible and appropriate to do so.
Covance's animal import and breeding facilities are also subject to a
variety of federal and state laws and regulations, including The Animal Welfare
Act and the rules and regulations promulgated thereunder by the United States
Department of Agriculture ("USDA"). These regulations establish the standards
for the humane treatment, care and handling of animals by dealers and research
facilities. Covance's breeding and import animal facilities maintain detailed
standard operating procedures and the documentation necessary to 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 of 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.
22
<PAGE>
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 employees
receive initial and periodic training to ensure compliance with applicable
hazardous materials regulations and health and safety guidelines.
The regulations of the Department of Transportation, the Public Heath
Service and the Postal Service apply to the surface and air transportation of
laboratory specimens. Covance's laboratories also comply with the International
Air Transport Association regulations, which govern international shipments of
laboratory specimens. Furthermore, when the materials are sent to a foreign
country, the transportation of such materials becomes subject to the laws, rules
and regulations of such foreign country.
Intellectual Property
Covance has developed certain computer software and technically derived
procedures that provide separate services and are intended to maximize the
quality and effectiveness of its services. Although Covance's intellectual
property rights are important to its results of operations, Covance believes
that such factors as the technical expertise, knowledge, ability and experience
of Covance's professionals are more important, and that, overall, these
technological capabilities provide significant benefits to its clients.
Employees
At January 15, 1997, Covance had approximately 5,400 employees,
approximately 30% of whom are employed outside of the United States.
Approximately 25 of Covance's employees hold M.D. degrees, 169 hold Ph.D.
degrees, 11 hold Pharm.D.
23
<PAGE>
degrees, 25 hold D.V.M. degrees and 434 hold masters or other postgraduate
degrees. Covance 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
157,000 square feet of space. The lease expires in 2004. Covance owns its
397,000 square-foot preclinical laboratory located in Madison, Wisconsin and its
205,000 square-foot preclinical laboratory in Harrogate, United Kingdom. Covance
leases most of its 201,000 square-foot preclinical laboratory in Vienna,
Virginia. It also owns several of the buildings. The leases expire in 1999 and
have a 10-year renewal option. Covance also leases its 152,000 square-foot
pharmaceutical laboratory in Indianapolis, Indiana, which expires in 2000.
Covance leases its 51,000 square-foot pharmaceutical laboratory in Geneva,
Switzerland, which lease expires in 2000. Covance's domestic packaging
operations are conducted from several leased facilities. The principal packaging
facility is in Allentown, Pennsylvania. The leases are for approximately 100,000
square feet of space and they all expire in 1999. Covance's Swiss-based
packaging operation currently conducts business in a 20,000 square-foot leased
facility, but has plans to construct a new, purpose-designed 37,000 square-foot
facility. The new facility is expected to be completed in early 1998. In
addition, in October 1996, Covance purchased a 91,000 square-foot former
pharmaceutical manufacturing facility in Horsham, United Kingdom. After its
renovation is completed by mid-1997, this facility will be used to provide
clinical packaging, clinical and periapproval services and health economics
services and also serve as Covance's European headquarters. Covance
Biotechnology's facility in North Carolina is leased. Covance also owns or
leases other facilities in the United States, United Kingdom, Ireland, Belgium,
France, Germany, Switzerland, Sweden, Australia, Singapore and Japan.
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.
24
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
In October 1996, the Company's sole stockholder, Quest Diagnostics, Inc.
("Quest"), by unanimous written consent, approved the change of the Company's
name from Corning Pharmaceutical Services Inc. to Covance Inc.
In October 1996, Quest, by unanimous written consent, approved the merger
of the Company's subsidiary, Covance Clinical and Periapproval Services Inc.
with and into the Company.
On December 31, 1996, the Company held a Special Meeting, in lieu of an
Annual Meeting of Stockholders, to elect Class I, II and III Directors. All
shares were voted in favor of the election of the following Directors to their
respective Class, with each term expiring at the Annual Meeting of Stockholders
as noted, or until their successors have been elected and qualified:
Name Class Term Expiring
---- ----- -------------
Robert M. Baylis I 1998
Irwin Lerner I 1998
J. Randall MacDonald II 1999
William C. Ughetta II 1999
Van C. Campbell III 2000
Christopher A. Kuebler III 2000
Nigel W. Morris III 2000
25
<PAGE>
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 $25.00 $20.875
(December 17th
through December 31st)
As of March 3, 1997, there were 15,448 holders of record of the Company's
Common Stock.
The Company does not currently intend to pay dividends in the foreseeable
future, but 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.
26
<PAGE>
Item 6. Selected Financial Data
The following table presents selected historical financial data of Covance
at the dates and for each of the periods indicated. The selected financial data
as of and for each of the years ended December 31, 1996, 1995, 1994 and 1993 has
been derived from the audited consolidated financial statements of Covance. The
selected financial data as of and for the year ended December 31, 1992 has been
derived from Covance's unaudited consolidated financial statements. In the
opinion of management, the unaudited financial statements include all
adjustments, consisting of normal recurring accruals, that are necessary for a
fair presentation of the financial position and results of operation for 1992.
The selected financial data should be read in conjunction with the audited
Covance financial statements and notes thereto ("Audited Covance Financial
Statements") filed elsewhere herein. Historical consolidated financial data may
not be indicative of Covance's future performance. See the Audited Covance
Financial Statements. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Covance."
27
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues ......................... $ 494,828 $ 409,174 $ 319,501 $289,697 $270,871
Costs and expenses:
Cost of revenue .................... 324,345 270,726 213,490 192,783 192,375
Selling, general and
administrative ................. 80,014 64,201 48,892 42,949 41,230
Spin-off related charge .............. 27,404
Restructuring charge ................. 4,616 3,373
Depreciation and
amortization ................... 25,204 22,070 18,520 16,984 15,212
--------- --------- --------- -------- --------
Total .......................... 456,967 361,613 280,902 252,716 252,190
--------- --------- --------- -------- --------
Income from operations ............... 37,861(a) 47,561(b) 38,599 36,981 18,681
--------- --------- --------- -------- --------
Other expense (income)
Interest expense, net .............. 6,791 5,269 4,307 4,421 5,686
Foreign exchange (gain)
loss ........................... 1,116 (784) (712) 852 1,258
--------- --------- --------- -------- --------
7,907 4,485 3,595 5,273 6,944
--------- --------- --------- -------- --------
Income before taxes and
equity investee loss
(gain) ........................... 29,954(a) 43,076(b) 35,004 31,708 11,737
Taxes on income ...................... 17,377 18,445 14,924 13,506 6,834
Equity investee (gain) loss .......... (139) 405 435 1,391 303
--------- --------- --------- -------- --------
Net income before cumulative
effect of change in
accounting method ................ 12,716 24,226 19,645 16,811 4,600
Cumulative effect of change
in method of accounting
for postretirement
benefits other than
pensions ......................... 4,334
--------- --------- --------- -------- --------
Net income ........................... $ 12,716(a) $ 24,226(b) $ 19,645 $ 16,811 $ 266
========= ========= ========= ======== ========
Balance Sheet Data (at end of period):
Working capital .................... $ 65,946 $ 18,472 $ 12,961 $ 12,076 $ 15,451
Total assets ....................... 451,047 322,510 271,992 229,693 225,337
Long-term debt ..................... 163,000 89,836 75,178 69,239 77,916
Stockholder's equity ............... 110,704 82,517 63,908 49,388 37,197
</TABLE>
- ------------
(a)Excluding the impact of the fourth quarter 1996 one-time spin-off
related charge totaling $27,404 ($19,725 net of tax), income from
operations, income before taxes and equity investee gain and net income
for the year ended December 31, 1996 was $65,265, $57,358 and $32,441,
respectively.
(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 loss and net income for the year ended
December 31, 1995 was $52,177, $47,692 and $26,996, respectively.
28
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Covance is a leading CRO providing a wide range of integrated product
development services on a worldwide basis to the biotechnology, pharmaceutical
and medical device industries. In addition, and to a lesser extent, Covance
provides services such as health economics for managed care organizations,
hospitals and health care provider networks, and early development and
laboratory testing services to the chemical, agrochemical and food industries.
The foregoing services can be broadly classified into six lines of business:
preclinical, biomanufacturing, clinical and periapproval, central laboratory,
clinical packaging, and health economics. These six lines of business can be
further categorized as non-clinical (preclinical and biomanufacturing) and
clinical (clinical and periapproval, central laboratory, clinical packaging and
health economics). Covance believes it is one of the largest biopharmaceutical
CROs, based on estimated 1996 annual net revenue, and one of only a few that are
capable of providing comprehensive global product development services. Covance
offers its clients high quality services designed to reduce product development
time, allowing them to introduce their products into the marketplace faster and,
thus, maximize the period of marketing exclusivity and monetary return on their
investments. Additionally, Covance's comprehensive services and broad experience
provide clients with a variable cost alternative to fixed cost internal
development capabilities.
The businesses that today constitute Covance were acquired by Corning,
starting in 1987, as part of a strategy to create a global, integrated and full
service product development company. In keeping with this strategy, during the
period 1994 through the present, Covance has purchased the remaining interest in
a jointly owned company, acquired a significant minority interest in a
complementary service business, acquired three new businesses and formed a major
new business venture. Specifically, in April 1994, Covance acquired the
remaining interest in SciCor S.A., a provider of central laboratory testing
services based in Switzerland. The transaction was accounted for as a purchase
business combination. In October 1994, Covance acquired a significant minority
equity position in Bio-Imaging Technologies, Inc. ("Bio-Imaging"), which uses
proprietary imaging technology to quantify the diagnostic and therapeutic
effectiveness of experimental drugs and devices. Covance expanded its offering
of value added product development services in January 1995 with the acquisition
of National Packaging Systems, Inc., a leading clinical packaging company. The
transaction was accounted for as a purchase business combination. In February
1995, Covance formed Covance Biotechnology, a majority-owned company which will
enable Covance to engage in biomanufacturing. In recognition of the rapid
changes in the biopharmaceutical industry's marketplace, particularly the need
for the industry to further demonstrate the benefits and cost effectiveness of
their products to payors, Covance purchased in March 1996 all the assets and
substantially all of the liabilities of Health Technology Associates,
29
<PAGE>
Inc. ("HTA"), a leading health economics company, in a transaction accounted for
as a purchase business combination. In October 1996, Covance expanded its
clinical packaging capabilities to Europe with the purchase of Swiss based CRS
Pacamed AG (now known as Covance Pharmaceutical Packaging Services AG). In
addition, Covance acquired an 81,000 square foot facility in Horsham, England,
which will be used, among other things, to provide clinical packaging services
in Europe.
During the year ended December 31, 1996, approximately three-quarters of
Covance's net revenues were earned under contracts, which generally range in
duration from a few months to two years. Revenue from these contracts is
recognized as costs are incurred on the basis of the relationship between costs
incurred and estimated total costs. Typically, Covance's contracts in the
preclinical, central laboratory, clinical packaging and health economics areas
are fixed price or fee-for-service and in the clinical and periapproval areas
are fee-for-service with a cap. To a lesser extent, some of the contracts in the
clinical and periapproval areas are fixed price or fee-for-service without a
cap. The contracts may contain provisions for renegotiation for cost overruns
arising from changes in the level of work scope. Renegotiated amounts are
included in net revenues when earned and realization is assured. In some cases,
for multi-year contracts involving preclinical and clinical and periapproval
trials, a portion of the contract fee is paid at the time the trial is
initiated, with performance-based installments payable over the contract
duration, in some cases on a milestone achievement basis. Covance routinely
subcontracts with independent physician investigators in connection with
multi-site clinical trials. Investigator fees are not reflected in net revenues
or expenses since such fees are granted by customers on a "pass-thru basis"
without risk or reward to Covance. While most contracts are terminable either
immediately or upon notice by the client, they typically require payment of
expenses to wind down a study and fees earned to date, and, in some cases, a
termination fee or a payment of some portion of the fees or profit that could
have been earned under the contract if it had not been terminated early.
Covance's cost of revenue includes appropriate amounts necessary to
complete the net revenues and earnings process and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These costs,
as a percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 2% in either direction) principally as a
result of changes in labor utilization and the mix of service offerings
involving hundreds of studies conducted during any period of time. Accordingly,
changes in cost of revenue as a percentage of net revenues plus or minus 2% are
expected from one period to another.
30
<PAGE>
Results of Operations
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 combined clinical lines of business,
excluding the recently acquired health economics and Swiss packaging businesses,
grew approximately 20%, benefiting from the continuing trend in outsourcing of
clinical development activities, while net revenues from Covance's more mature
preclinical business 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 business,
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 by $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. 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). 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.
31
<PAGE>
Other expense increased $3.4 million to $7.9 million for 1996 from $4.5
million for 1995, due to a net foreign exchange transaction loss of $1.1 million
incurred in 1996 as compared to a net gain 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 dispersion 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.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994.
Net revenues increased 28.1% to $409.2 million for 1995 from $319.5 million for
1994. Excluding the impact of the 1995 acquisition of National Packaging
Systems, Inc., growth in net revenues was 23.8%. Net revenues from Covance's
combined clinical lines of business, excluding the newly acquired clinical
packaging business, grew in excess of 35%, generally as a result of the growth
in outsourcing of clinical development activities in 1995 as compared to 1994
and more specifically because of Covance's central laboratory's effort to
complete development work on several large protease inhibitor studies by the end
of 1995. Net revenues from Covance's preclinical business grew nearly 10%,
largely as a result of particularly strong growth in Europe, fueled by new
service offerings, overall volume increases and favorable foreign exchange rates
in 1995 compared to 1994.
Cost of revenue increased 26.8% to $270.7 million or 66.2% of net revenues
for 1995 from $213.5 million or 66.8% of net revenues for 1994, as a result of
the increase in net revenues.
Overall, selling, general and administrative expense increased 31.3% to
$64.2 million for 1995 from $48.9 million for 1994. As a percentage of net
revenues these costs increased to 15.7% for 1995 from 15.3% for 1994. Largely
contributing to the increase in selling, general and administrative expenses
were administrative costs associated with the establishment of Covance's new
biomanufacturing business, an increase in Covance's corporate center function,
strategic consulting expenses incurred to reorganize a large portion of
Covance's clinical operations into customer teams to better manage large scale
clinical trials and increased marketing initiatives such as the establishment of
a Lotus Notes(R) based centralized client contact database for use by Covance's
sales force, partially offset by a non-recurring charge incurred in 1994 in
connection with a separation payment made to Covance's then chief executive
officer upon his resignation.
32
<PAGE>
During 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. The restructuring charge included
severance costs relating to approximately 90 employees of which approximately 50
had been terminated as of December 31, 1995. The remaining employees were
terminated and all other substantive activities to complete the restructuring
plan were completed by April 30, 1996. Severance benefits are being paid in the
form of salary continuation. The restructuring activities have occurred
substantially in accordance with the restructuring plan.
Depreciation and amortization increased 19.2% to $22.1 million or 5.4% of
net revenues for 1995 from $18.5 million or 5.8% of net revenues for 1994 as the
growth in net revenues outpaced the increase in these non-cash charges.
Income from operations increased $9.0 million or 23.2% to $47.6 million
for 1995 from $38.6 million for 1994. Excluding the impact of the 1995
restructuring provision, the increase in income from operations was $13.6
million or 35.2% to 12.8% of net revenues for 1995 from 12.1% of net revenues
for 1994.
Other expense increased $0.9 million for 1995 to $4.5 million from $3.6
million for 1994. This increase is entirely a result of an increase in interest
expense relating principally to 1995 acquisition activity. Substantially all
borrowings to date have been from Corning.
Covance's effective tax rate for 1995 increased slightly to 42.8% from
42.6% for 1994.
Net income increased 23.3% to $24.2 million for 1995 from $19.6 million
for 1994. Excluding the impact of the 1995 restructuring provision, the increase
in net income was $7.4 million or 37.4% for 1995.
Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant preclinical and clinical and
periapproval trials, termination of preclinical and clinical and periapproval
trials, acquisitions and exchange rate fluctuations. Delays and terminations of
studies or trials are often the result of actions taken by clients or regulatory
authorities and are not typically controllable by Covance. Since a large amount
of Covance's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the commencement, progress or completion of
preclinical and clinical and periapproval trials may cause significant
variations in quarterly operating results.
33
<PAGE>
The following table presents unaudited quarterly operating results of
Covance for each of the ten most recent fiscal quarters in the period ended
December 31, 1996. In the opinion of Covance, this information has been prepared
on the same basis as the Audited Covance Financial Statements and reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results of operations for those periods. This quarterly
financial data should be read in conjunction with the Audited Covance Financial
Statements included elsewhere herein. The operating results for any quarter are
not necessarily indicative of the results to be expected in any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.. $ 82,904 $ 84,612 $ 91,974 $ 104,813 $ 106,099 $ 106,288 $ 108,697 $ 121,530 $ 127,179 $ 137,422
Operating
expenses.... 73,214 74,967 78,991 95,148 92,428 95,046 94,659 104,195 109,677 148,436
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.. 9,690 9,645 12,983 9,665(b) 13,671 11,242 14,038 17,335 17,502 (11,014)(a)
Other expense,
net......... 1,030 897 1,434 1,644 231 1,176 1,156 1,615 1,550 3,586
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Pre-tax
income (loss). 8,660 8,748 11,549 8,021(b) 13,440 10,066 12,882 15,720 15,952 (14,600)(a)
Income taxes.. 3,693 3,732 4,953 3,423 5,771 4,298 5,619 6,861 6,931 (2,034)
Equity investee
loss (gain). -- 87 49 149 153 54 (44) 29 (53) (71)
------- ------- ------- ------- -------- -------- -------- -------- -------- --------
Net income
(Loss)...... $ 4,967 $ 4,929 $ 6,547 $ 4,449(b)$ 7,516 $ 5,714 $ 7,307 $ 8,830 $ 9,074 $ (12,495)(a)
======= ======= ======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(a) Excluding the impact of the fourth quarter 1996 spin-off related
charge totaling $27,404 ($19,725 net of tax), income from operations,
pre-tax income and net income were $16,390, $12,804 and $7,230
respectively.
(b) Excluding the impact of the second quarter 1995 restructuring provision
totaling $4,616 ($2,770 net of tax), income from operations, pre-tax
income and net income were $14,281, $12,637 and $7,219 respectively.
34
<PAGE>
Liquidity and Capital Resources
Historically, Covance had participated in the centralized treasury and
cash management processes of Corning. For domestic operations, cash received
from operations was generally transferred to Corning on a daily basis. For
international operations, excess cash was transferred to Corning periodically.
Cash disbursements for operations were funded as needed from Corning. From time
to time excess cash balances were maintained at Covance, generally for specific
cash requirements.
In November 1996, Covance established the $250 million Credit Facility.
Covance borrowed $160 million in November 1996 under the Credit Facility to
repay Corning and affiliates for all of its intercompany borrowings and income
tax liabilities existing at that time. Under the Credit Facility, Covance has
several different interest rate options. Interest on all outstanding borrowings
under the Credit Facility is computed based upon the London Interbank Offered
Rate plus a margin. 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 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, 1996, Covance was in compliance with the terms of the
Credit Facility.
Covance has now established a similar centralized cash management function
as had existed when Covance was a subsidiary of Corning, whereby cash received
from operations is generally swept daily, for domestic operations, and
periodically, for international operations, to a concentration account managed
centrally. 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.
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.
Covance's management believes that the Credit Facility will provide it with
sufficient financial flexibility and ready access to cash on both a short-term
and a long-term basis to fund, as required, capital expenditures, potential
future acquisitions and other longer-term growth opportunities.
During the year ended December 31, 1996, Covance's operations provided net
cash of $29.9 million, a decrease of $15.2 million from the corresponding 1995
amount. This reduction is attributable to a larger increase in working capital
during 1996 as compared to 1995. Working capital was $65.9 million at December
31, 1996, an increase of $47.4 million from the December 31, 1995 level of $18.5
million. This increase was primarily attributable to an increase in cash of
$17.3 million to $25.4 million at December 31, 1996 and to an increase in
aggregate accounts receivable and unbilled services of $35.8 million or 36.9% to
$133.0 million at December 31, 1996. Excluding the impact of acquisitions
35
<PAGE>
made in 1996, the aggregate increase in accounts receivable and unbilled
services was 29.1%. Covance initiated collection and contract management efforts
during the fourth quarter of 1996 to reduce the percentage increase in aggregate
accounts receivable and unbilled services to a level more consistent with the
increase in net revenues. While further progress still needs to be made, the
percentage increase in aggregate accounts receivable and unbilled services from
year end 1995 to year end 1996 is down from the 42.8% increase (35.7% excluding
acquisitions) experienced during the first nine months of 1996. Covance's ratio
of current assets to current liabilities was 1.43 at December 31, 1996 and 1.15
at December 31, 1995.
Investing activities for the years ended December 31, 1996 and 1995
included acquisitions and capital spending to expand existing operations and
purchase equipment to enhance scientific technology capabilities. 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, a new facility to house its
clinical packaging, clinical and periapproval services and health economics
operations in Europe for a cash payment of approximately $9.0 million and paid
$7.0 million in contingent purchase price in connection with Covance's 1995
acquisition of National Packaging Systems, Inc. During 1996, Covance spent
approximately $37.9 million on capital expenditures (excluding the October 1996
facility purchase of $9.0 million) for maintenance and upgrade of existing
equipment, outfitting of new facilities and computer equipment and software for
newly hired employees. Funding for new business acquisitions was provided
through borrowings from Corning.
As described in Note 10 to the Audited Covance Financial Statements, a
Covance subsidiary, Covance Biotechnology, entered into an operating lease
arrangement in June 1995 whereby a custom-designed, fully equipped facility
would be constructed. The lease, which commenced in December 1996 upon
completion of construction of the facility, requires minimum annual lease
payments of approximately $5.3 million.
Foreign Currency
Contracts between Covance's foreign subsidiaries and its clients are
frequently denominated in currencies other than the applicable subsidiary's
local currency. Accordingly, payments received for services rendered under such
contracts are denominated in a currency different than the currency used for the
payment of the subsidiary's expenses. Therefore, the subsidiary's net revenues,
expenses and earnings are affected by fluctuations in exchange rates. In
addition, Covance's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of such
subsidiary's financial results into U.S. dollars for purposes of reporting
Covance's consolidated financial results. Translation adjustments are reported
as a separate section of stockholder's equity. To date, such adjustments have
not been material to Covance's financial statements.
36
<PAGE>
Taxes
Since Covance conducts operations on a global basis, Covance's effective
tax rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of Covance's pre-tax earnings among various
tax jurisdictions changes, Covance's effective tax rate may vary from period to
period. See Note 5 to the Audited Covance Financial Statements.
Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
37
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FINANCIAL STATEMENTS OF COVANCE INC.
Report of Price Waterhouse LLP--Independent Accountants.................................................... 39
Consolidated Financial Statements:
Consolidated Balance Sheets--December 31, 1996 and 1995.................................................. 40
Consolidated Statements of Income--Years ended December 31, 1996, 1995 and 1994.......................... 41
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994...................... 42
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1996, 1995 and 1994....................................................................... 43
Notes to Consolidated Financial Statements............................................................... 44
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Covance Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of cash flows and of stockholders'
equity appearing on pages 40 through 56 present fairly, in all material
respects, the financial position of Covance Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, 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 27, 1997
39
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
----- -----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.......................................... $ 25,416 $ 8,068
Accounts receivable, net........................................... 93,700 78,968
Unbilled services.................................................. 39,313 18,217
Inventory.......................................................... 16,410 14,004
Deferred income taxes.............................................. 17,529 11,337
Prepaid expenses and other assets.................................. 25,526 15,189
-------- --------
Total Current Assets........................................... 217,894 145,783
Property and equipment, net............................................ 167,809 140,708
Goodwill, net.......................................................... 53,271 24,028
Other assets........................................................... 12,073 11,991
-------- --------
Total Assets................................................... $451,047 $322,510
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Trade accounts payable............................................. $ 26,652 $ 23,761
Accrued payroll and benefits....................................... 28,212 20,339
Accrued expenses and other liabilities............................. 35,840 24,701
Unearned revenue................................................... 57,794 41,879
Income taxes payable............................................... 3,450 16,631
-------- --------
Total Current Liabilities...................................... 151,948 127,311
Long-term Debt......................................................... 163,000 --
Due to Corning Incorporated and affiliates............................. -- 89,836
Deferred income taxes.................................................. 9,957 6,406
Other liabilities...................................................... 15,438 16,440
-------- --------
Total Liabilities.............................................. 340,343 239,993
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common stock - Par value $0.01 per share; 140,000,000
shares authorized; 57,063,644 shares issued and
outstanding at December 31, 1996................................ 571 --
Additional paid-in capital......................................... 48,970 30,816
Retained earnings.................................................. 58,010 48,653
Cumulative translation adjustment.................................. 3,153 3,048
-------- --------
Total Stockholders' Equity..................................... 110,704 82,517
-------- --------
Total Liabilities and Stockholders' Equity..................... $451,047 $322,510
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Net revenues................................................... $ 494,828 $ 409,174 $ 319,501
Cost and expenses
Cost of revenue.............................................. 324,345 270,726 213,490
Selling, general and administrative expenses................. 80,014 64,201 48,892
Spin-off related charge...................................... 27,404 -- --
Restructuring charge......................................... -- 4,616 --
Depreciation and amortization................................ 25,204 22,070 18,520
-------- -------- --------
Total.................................................... 456,967 361,613 280,902
-------- -------- --------
Income from operations......................................... 37,861 47,561 38,599
-------- -------- --------
Other expense (income)
Interest expense, net........................................ 6,791 5,269 4,307
Foreign exchange loss (gain)................................. 1,116 (784) (712)
-------- -------- --------
7,907 4,485 3,595
-------- -------- --------
Income before taxes and equity investee (gain) loss............ 29,954 43,076 35,004
Taxes on income................................................ 17,377 18,445 14,924
Equity investee (gain) loss.................................... (139) 405 435
-------- -------- --------
Net income..................................................... $ 12,716 $ 24,226 $ 19,645
======== ======== ========
Earnings per share............................................. $ 0.22 N/A N/A
Weighted average shares outstanding............................ 57,063,644 N/A N/A
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
----- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net income.......................................................... $ 12,716 $ 24,226 $ 19,645
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................... 25,204 22,070 18,520
ESOP component of spin-off related charge....................... 16,673 -- --
Restructuring reserve, net of cash paid......................... -- 2,965 --
Deferred income tax provision................................... (3,188) (4,503) (1,502)
Related party charges........................................... 2,052 3,288 3,504
Other........................................................... 237 1,266 1,375
Changes in operating assets and liabilities, net of effects
of acquisitions
Accounts receivable............................................. (12,444) (10,082) (11,706)
Unbilled services............................................... (18,568) (5,023) 2,058
Inventory....................................................... (1,911) (2,576) (603)
Accounts payable................................................ 2,327 6,783 4,372
Accrued liabilities............................................. 15,800 11,669 7,550
Unearned revenue................................................ 14,701 (7,556) 2,894
Income taxes payable............................................ (13,606) 8,673 194
Other assets and liabilities, net............................... (10,135) (6,094) (3,369)
------- ------- -------
Net cash provided by operating activities........................... 29,858 45,106 42,932
------- ------- -------
Cash flows from investing activities
Capital expenditures............................................ (46,941) (34,792) (25,242)
Acquisition of businesses, net of cash acquired................. (33,883) (14,000) (10,789)
Other, net...................................................... 34 571 (2,432)
------- ------- -------
Net cash used in investing activities............................... (80,790) (48,221) (38,463)
------- ------- -------
Cash flows from financing activities
Proceeds from Long-term debt.................................... 160,000 -- --
Due to Corning Incorporated and affiliates...................... (88,361) 14,236 6,079
Capital contributions........................................... -- 1,000 --
Dividends paid to Corning....................................... (3,359) (10,229) (9,465)
------- ------- -------
Net cash provided by (used in) financing activities................. 68,280 5,007 (3,386)
------- ------- -------
Net change in cash and cash equivalents............................. 17,348 1,892 1,083
Cash and cash equivalents, beginning of year........................ 8,068 6,176 5,093
------- ------- -------
Cash and cash equivalents, end of year.............................. $ 25,416 $ 8,068 $ 6,176
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Retained Translation Stockholders'
(Dollars in thousands) Stock Capital Earnings Adjustment Equity
-------- -------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.................. -- $ 23,024 $ 24,476 $ 1,888 $ 49,388
Net income.................................. -- -- 19,645 -- 19,645
Dividends paid to Corning................... -- -- (9,465) -- (9,465)
Capital contribution........................ -- 3,504 -- -- 3,504
Currency translation adjustment............. -- -- -- 836 836
------- ------- ------- ------ -------
Balance, December 31, 1994.................. -- 26,528 34,656 2,724 63,908
Net income.................................. -- -- 24,226 -- 24,226
Dividends paid 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 (855,000 shares).......... 9 16,664 -- -- 16,673
Currency translation adjustment............. -- -- -- 105 105
------- ------- ------- ------ -------
Balance, December 31, 1996.................. $ 571 $ 48,970 $ 58,010 $ 3,153 $ 110,704
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. Also, Covance provides services such as health economics for
managed care organizations, hospitals and health care provider networks, and
early development and laboratory testing services to the chemical, agrochemical
and food industries. Covance's operations involve a single industry segment for
financial reporting purposes. At the present time, operations are principally
focused in the United States and Europe.
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 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). In June
1996, Corning submitted to the Internal Revenue Service ("IRS") a request for a
ruling that the Spin-Off Distribution qualify as a tax free distribution under
the Internal Revenue Code of 1986, as amended. In November 1996, the IRS
approved that request. In November 1996, Corning's Board of Directors approved
the final terms of the Spin-Off Distribution, and effective December 31, 1996
the Spin-Off Distribution was complete. Under the terms of the Spin-Off
distribution, shareholder's 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. As a result of the Spin-Off Distribution, Covance issued
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, 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.
44
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Foreign Currencies
For subsidiaries outside of the United States that operate in a local
currency environment, assets and liabilities are translated to United States
dollars at year-end exchange rates. Income and expense items are translated at
average rates of exchange prevailing during the year. Translation adjustments
are accumulated in a separate component of 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, accounts receivable, trade accounts payable and
accrued expenses are not materially different than their carrying amounts as
reported at December 31, 1996 and 1995.
Accounts receivable and unbilled services from Covance customers are
concentrated primarily in the pharmaceutical and biotechnology industries.
Covance monitors the creditworthiness of its customers to which it grants credit
terms in the ordinary course of business. Although Covance customers are
concentrated primarily within these two industries, management considers the
likelihood of material credit risk exposure as remote. Covance in some cases
requires advance payment for a portion of the contract price from its customers
upon the signing of a contract for services. Historically, bad debts have been
minimal.
Inventory
Inventories, which consist principally of supplies, are valued at the
lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided on the straight line method at rates adequate to allocate the cost
of the applicable assets over their estimated useful lives, which range in term
from three to thirty years.
45
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
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
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"), was adopted in 1995. Assessments of the recoverability of
long-lived assets are conducted when events or changes in circumstances occur
that indicate that the carrying value of the asset may not be recoverable. The
assessment of possible impairment is based upon the ability to recover the asset
from the expected future undiscounted cash flows of related operations. The
policy on impairment prior to the adoption of SFAS No. 121 was not materially
different.
Revenue Recognition
Revenue is recognized using the cost-to-cost type of
percentage-of-completion method of accounting for services rendered in
connection with contractual arrangements, which generally range from a few
months to two years. Revenue is recognized as costs are incurred on the basis of
the relationship between costs incurred and total estimated costs. 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
fees earned to date, and in some cases to provide Covance with a portion of the
fees or profits that would have been earned under the contract had the contract
not been terminated early.
Revenue from performing clinical laboratory testing services is recognized
as tests are completed. Revenue from other activities is recognized as services
are performed or products are shipped.
Unbilled receivables are recorded for revenue recognized to date that is
currently unbillable to the customer pursuant to contractual terms. In general,
amounts become billable upon the achievement of milestones or in accordance with
predetermined payment schedules. Unbilled receivables are billable to customers
within one year from the respective balance sheet date. Unearned revenue is
recorded for advance billings to customers for which revenue has not been
recognized at a given date.
Covance routinely subcontracts with independent physician investigators in
connection with multi-site clinical trials. Investigator fees are not reflected
in revenue or expense since such fees are granted by customers on a "pass-thru
basis" without risk or reward to Covance.
46
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
Costs and Expenses
Cost of revenue generally includes appropriate amounts necessary to
complete the revenue earning process and encompass direct labor and related
benefit charges, other direct costs and allocable expenses (including facility
charges, indirect labor and information technology costs). Selling, general and
administrative expenses primarily consist of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative travel and
allocable expenses (facility charges and information technology costs).
Advertising expense is recognized as incurred.
Taxes on Income
Covance uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the temporary differences are expected to
reverse. The effect on deferred taxes of a change in enacted tax rates is
recognized in income in the period when the change is effective.
Earnings per share
Earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. 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 earnings per share has not been
presented for periods prior to 1996 because Covance's status as a 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. Common stock
equivalents are not included in the earnings per share computation because they
do not result in material dilution.
3. Property and Equipment
Property and equipment at December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Property and equipment at cost:
Land................................................................... $ 6,859 $ 2,996
Buildings and improvements............................................. 116,176 105,291
Equipment.............................................................. 136,711 101,686
Furniture, fixtures & leasehold improvements........................... 41,116 39,622
Construction-in-progress............................................... 4,025 5,861
-------- --------
304,887 255,456
Less: Accumulated depreciation and amortization.......................... (137,078) (114,748)
-------- --------
Property and equipment................................................... $ 167,809 $140,708
======== ========
</TABLE>
Depreciation and amortization expense aggregated $23.2 million, $20.8
million and $17.8 million for 1996, 1995 and 1994, respectively.
47
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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.
In April 1994, Covance acquired SciCor S.A. (now known as Covance Central
Laboratory Services SA), a provider of laboratory testing services domiciled in
Switzerland, for total consideration of approximately $10.8 million in a
transaction accounted for as a purchase business combination. The goodwill
resulting from this transaction aggregated $9.5 million.
Results of operations for these entities have been included in the
accompanying financial statements beginning on the respective dates of
acquisition. Pro forma information for these entities has not been presented,
due to their insignificance to Covance taken as a whole.
Goodwill associated with these and prior acquisitions aggregated $53.3
million and $24.0 million, net of accumulated amortization of $5.2 million and
$3.5 million at December 31, 1996 and 1995, respectively. Amortization expense
aggregated $1.7 million, $0.9 million and $0.5 million for 1996, 1995 and 1994,
respectively.
48
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
5. Taxes on Income
Historically, Covance and its subsidiaries have 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 will be included in the Federal income tax
return filed by Corning.
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.
The components of income before taxes and the related provision (benefit)
for taxes on income for 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Income before taxes and equity investee (gain) loss:
Domestic................................... $23,259 $ 32,771 $ 30,928
International.............................. 6,695 10,305 4,076
------- ------- -------
Total.................................... $29,954 $ 43,076 $ 35,004
======= ======= =======
Federal income taxes:
Current provision.......................... $17,108 $ 19,118 $ 12,167
Deferred benefit........................... (6,311) (6,760) (1,742)
International income taxes:
Current (benefit) provision................ 1,248 (933) 602
Deferred provision......................... 1,635 3,434 1,440
State and other income taxes:
Current provision.......................... 4,174 3,959 2,868
Deferred benefit........................... (477) (373) (411)
------- ------- -------
Net income tax provision............... $17,377 $ 18,445 $ 14,924
======= ======= =======
</TABLE>
49
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 1996, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Taxes at statutory rate.............................. 35.0% 35.0% 35.0%
State and local taxes, net of Federal benefit........ 8.0 5.5 4.6
Non-deductible spin-off related charge............... 7.1 -- --
Goodwill amortization................................ 2.1 1.1 0.5
Impact of international operations................... 1.8 (0.3) 1.7
Other, net........................................... 4.0 1.5 0.8
---- ---- ----
Total........................................ 58.0% 42.8% 42.6%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Current deferred tax assets:
Liabilities not currently deductible................... $15,571 $ 10,356
Net operating losses................................... 2,332 888
Other.................................................. 792 538
------- -------
Gross current deferred tax assets...................... 18,695 11,782
Less: valuation allowance.............................. (1,166) (445)
------- -------
Net current deferred tax assets........................ $17,529 $ 11,337
======= =======
Noncurrent deferred tax assets:
Liabilities not currently deductible................... $ 5,256 $ 5,857
Less: valuation allowance.............................. (1,212) --
------- -------
Net noncurrent deferred tax assets..................... 4,044 5,857
Noncurrent deferred tax liabilities:
Property and equipment................................. (14,001) (12,263)
------- -------
Net noncurrent deferred tax liabilities................ $ (9,957) $ (6,406)
======= =======
</TABLE>
Income taxes payable at December 31, 1996 consist primarily of liabilities
for state and international income taxes, while income taxes payable at December
31, 1995 consist of Federal income taxes payable to Corning of $17.0 million,
state and other income taxes payable of $1.6 million and international income
taxes receivable of $2.0 million. Covance paid income taxes of $25.5 million,
$16.7 million and $17.0 million for the years 1996, 1995 and 1994, respectively.
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 $18.9 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.
50
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
6. 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. 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. Under the Credit Facility, Covance has several different interest rate
options. Interest on all outstanding borrowings during 1996 was computed based
upon the London Interbank Offered Rate ("LIBOR") plus an applicable margin.
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.
In order to repay Corning and affiliates for intercompany borrowings and
income tax liabilities, Covance borrowed $160.0 million under the Credit
Facility in November 1996. For the period of time during 1996 that this
borrowing was outstanding, interest was incurred at the rate of approximately
6.0% per annum.
7. Employee Benefit Plans
Covance has several defined contribution plans covering substantially all
of its full-time employees. Contributions to these plans aggregated $6.6
million, $4.9 million and $4.2 million for 1996, 1995 and 1994, respectively.
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, 1996 no Covance Series Preferred Stock has been issued or is
outstanding.
Dividends - Common Stock
While owned by Corning, Covance paid to Corning dividends of $3.4 million,
$10.2 million and $9.5 million during 1996, 1995 and 1994, respectively. As a
separate publicly traded company, 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.
51
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
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 EEPP, which is administered by the Covance Compensation 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 EEPP also authorizes the Covance Compensation
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.
Also in December 1996, Covance adopted 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
Committee, is intended to give Covance employees the opportunity to purchase
shares of Covance common stock through payroll deduction. A maximum of 1.0
million shares may be purchased by Covance Employees under the Covance Stock
Purchase Plan.
From 1990 through 1996, certain employees of Covance were granted
restricted stock awards or options, or both, 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 restricted 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 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.
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 granted under
the Corning stock option plans to Covance employees and for the stock purchased
by Covance employees under the Corning employee stock purchase program, its net
income in 1996 and 1995 would have been $10.8 million and $23.8 million,
respectively, and its earning per share in 1996 would have been $0.19. The fair
value of the Corning stock options used to compute the pro forma 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: expected volatility of 24.5%; risk free interest rate of 5.5% to
7.2%; and an expected holding period of five years.
52
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
The following table sets forth on a pro forma basis the stock option
activity during 1996, 1995 and 1994 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):
<TABLE>
<CAPTION>
Number Weighted
of Shares Average
(in thousands) Price
----------- ---------
<S> <C> <C>
Pro Forma:
Options outstanding, January 1, 1994..................... 67.5 $13.21
Granted.................................................. 429.1 $15.28
------
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
======
</TABLE>
The weighted average fair value of the stock options granted during 1996,
calculated using the Black-Scholes option-pricing model with the assumptions as
set forth above, is $6.20 per share.
The following table sets forth the status of the options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
-------------------------------------- -----------------------
Weighted
Option Number Average Weighted Number Weighted
Price of Shares Remaining Average of Shares Average
Range (in thousands) Contractual Life Price (in Thousands) Price
----------- ----------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$11.66 - $16.49 787.2 8.1 years $15.58 212.8 $15.23
$16.50 - $19.57 275.3 9.3 years $17.63 3.7 $18.40
</TABLE>
In connection with the Spin-Off Distribution, Covance established two
employee stock ownership plans (collectively, the "ESOP") for the benefit of all
active Covance employees as of December 31, 1996. Covance contributed
approximately 855,000 shares of its common stock into the ESOP. The shares
contributed were allocated among the plan participants based upon a percentage
of each employees 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.
53
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
9. Restructuring Charge
In 1995, Covance recorded a provision for restructuring charges totaling
$4.6 million as a result of management's decision to discontinue certain
nonstrategic operations. The restructuring charge 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 approximately 50 of the employees had been
terminated and a total of approximately $1.7 million had been charged against
the restructuring reserve. During 1996, the remaining 40 employees were
terminated and all other substantive activities to complete the restructuring
plan were completed. At December 31, 1996 approximately $1.0 million in
restructuring reserves remain relating to facility lease obligations, which are
expected to be paid during 1997.
10. Commitments and Contingent Liabilities
Minimum rental commitments under noncancellable operating leases,
primarily office and laboratory facilities (including the Covance Biotechnology
facility), in effect at December 31, 1996 are as follows:
Year ended December 31,
1997........................................... $24,514
1998........................................... $21,434
1999........................................... $18,910
2000........................................... $16,183
2001........................................... $13,169
2002 and beyond................................ $20,619
Operating lease rental expense aggregated $16.1 million, $14.1 million and
$11.0 million for 1996, 1995 and 1994, 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 $5.3 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.
54
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
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.
11. Geographic Information
United Europe &
States Other
------ -------
Net revenue:
1996....................... $348,996 $145,832
1995....................... $286,474 $122,700
1994....................... $242,131 $ 77,370
Income from operations:
1996....................... $ 29,244(1) $ 8,617(1)
1995....................... $ 34,799(2) $ 12,762
1994....................... $ 32,710 $ 5,889
Identifiable assets:
1996....................... $297,386 $153,661
1995....................... $229,720 $ 92,790
1994....................... $202,986 $ 69,006
(1) Excluding the impact of the 1996 one-time spin-off related charge
totaling $27,404, United States and European & Other income from
operations were $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.
55
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, unless otherwise indicated)
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 was funded
as needed from Corning. Substantially all of Covance's borrowings during 1996
(prior to the establishment of the Credit Facility), 1995 and 1994 were from
Corning. The blended rate on those borrowings for 1996, 1995 and 1994 was
approximately 6.0%.
During 1996, 1995 and 1994, certain members of Covance management
participated in various stock compensation programs sponsored by Corning
resulting in Covance recognizing compensation expense of $1.5 million, $0.4
million and $0.1 million, respectively.
During 1996, 1995 and 1994 Corning and affiliates provided a number of
administrative functions to Covance which resulted in charges of $3.4 million,
$5.3 million and $5.7 million being recorded in Covance's results of operations
for 1996, 1995 and 1994, respectively. Management believes the method used to
allocate such costs is reasonable under the circumstances. The charges for these
functions are included primarily in selling, general and administrative expenses
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.
13. Quarterly Financial Information (Unaudited)
The following is a summary of unaudited quarterly financial information
for 1996 and 1995:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
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......................................... 7,307 8,830 9,074 (12,495)(1)
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended December 31, 1995 Quarter Quarter Quarter Quarter
- ---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues....................................... $ 91,974 $104,813 $106,099 $106,288
Income from operations............................. 12,983 9,665(2) 13,671 11,242
Net income......................................... 6,547 4,449(2) 7,516 5,714
</TABLE>
(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.
(2) Excluding the impact of the 1995 restructuring provision totaling
$4,616 ($2,770 net of tax), income from operations and net income in
the second quarter of 1995 were $14,281 and $7,219, respectively.
56
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
57
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Management
Directors. The Covance Board of Directors ("Covance Board") is comprised
of seven Directors and is divided into three classes, each class is elected for
a three-year term at the annual meeting of stockholders. Set forth below is the
names and ages of each Director, and their class and term of office. Messrs.
Campbell, Kuebler and Ughetta are continuing Directors of the Company. In
connection with the Distribution, Messrs. Baylis, Lerner, MacDonald, and Morris
were elected to the Covance Board on December 31, 1996. The Company does not
intend to hold an annual meeting of stockholders until Spring 1998.
Name Age Class Term Expires
- ---------------------------- --- ----- ------------
Robert M. Baylis 58 I 1998
Van C. Campbell 58 III 2000
Christopher A. Kuebler 43 III 2000
Irwin Lerner 66 I 1998
J. Randall MacDonald 48 II 1999
Nigel W. Morris 38 III 2000
William C. Ughetta 63 II 1999
Robert M. Baylis was a Vice Chairman of CS First Boston Corporation
("First Boston"), a financial services company, from March 1992 to March 1994,
and from August 1995 to January 1996. He was Chairman and Chief Executive
Officer of CS First Boston Pacific Inc./Hong Kong from March 1994 to August
1995. Prior to March 1992, Mr. Baylis held a variety of positions with First
Boston, including Managing Director-Investment Banking Group and Managing
Director-Equity Security Department. Prior to his retirement, Mr. Baylis was
with First Boston for over 33 years. He is also a director of Host Marriott
Corporation (hotels), Gryphon Holdings, Inc. (insurance), Home State Holdings,
Inc. (insurance) and New York Life Insurance Company (insurance). Mr. Baylis has
been a member of the Covance Board since December 1996.
Van C. Campbell is the Vice Chairman of Corning, an affiliate of the
Company prior to the Distribution Date, which he joined in 1964. He was elected
assistant treasurer in 1971, treasurer in 1972, a vice president in 1973,
financial vice president in 1975 and senior vice president for finance in 1980.
He became general manager of the Consumer Products Division in 1981. Mr.
Campbell was elected Vice Chairman and a director of Corning in 1983. He is a
director of Armstrong World Industries, Inc. (flooring and building products),
General Signal Corporation (industrial products) and Quest Diagnostics, Inc.
(clinical testing), an affiliate of the Company prior to the Distribution Date.
Mr. Campbell has been a member of the Covance Board since May 1995.
58
<PAGE>
Christopher A. Kuebler 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.
Irwin Lerner was the Chairman of the Board of Directors and Executive
Committee of Hoffmann-La Roche, Inc. ("Roche"), a pharmaceutical company, from
January to September 1993. From April 1980 to January 1993, Mr. Lerner was the
President and Chief Executive Officer of Roche. He is also a director of Humana,
Inc. (HMO), Medarex, Inc. (biotechnology), Public Service Enterprise Group Inc.
(public utility) and Sequana Therapeutics, Inc. (genomics). Mr. Lerner has been
a member of the Covance Board since December 1996.
J. Randall MacDonald has been the Senior Vice President-Human Resources
and Administration for the GTE Corporation, a telecommunications company, since
April 1995. Prior to April 1995, Mr. MacDonald held various senior positions
with GTE, including Vice President-Employee Relations and Organizational
Development (from 1988) and Vice President of Organizational Development (from
1986). Mr. MacDonald joined GTE in 1983 as a Director of Employee Relations. Mr.
MacDonald has been a member of the Covance Board since December 1996.
Nigel W. Morris has been the President and Chief Operating Officer of
Capital One Financial Corporation ("Capital One"), a financial services company,
since July 1994. Mr. Morris was an Executive Vice President of the Signet
Banking Corporation ("Signet Bank") credit card division from May 1993 to
November 1994. From October 1988 until April 1993, Mr. Morris was the Senior
Vice President-Policy/Strategy-Credit Card Business for Signet Bank. He is also
a director of Capital One and a member of Visa U.S.A. Inc.'s Marketing
Committee. Mr. Morris has been a member of the Covance Board since December
1996.
William C. Ughetta is the Senior Vice President and General Counsel of
Corning, an affiliate of the Company prior to the Distribution Date. Mr. Ughetta
joined Corning in 1968 as assistant secretary and assistant counsel. He was
elected secretary of the corporation in 1971 and vice president in 1972. He was
elected a senior vice president in 1983. Mr. Ughetta has been a member of the
Covance Board since July 1996. He is a director of Siecor Corporation (fiber
optics) and Chemung Canal Trust Company (banking).
59
<PAGE>
Directors' Compensation. Each director of Covance, other than a director
who is an employee of Covance, receives $15,000 annually for services as a
director and is also paid $1,000 for each meeting of the Covance Board and $500
for each meeting of any committee thereof which he attends.
Pursuant to a Directors Deferred Compensation Plan ("DDCP"), adopted
December 1996, each director may elect to defer until a date specified by him
receipt of all or a portion of his cash compensation. Such plan provides that
amounts deferred may be allocated to (i) a cash account upon which amounts
deferred may earn interest, compounded quarterly, at the base rate of Citibank,
N.A. in effect on certain specified dates, (ii) a market value account, the
value of which will be based upon the market value of Covance Common Stock from
time to time, or (iii) a combination of such accounts. All six non-employee
directors are eligible to participate in the DDCP.
Non-Employee Directors also participate in a Director's Restricted Stock
Plan ("DRSP"), adopted December 1996, pursuant to which Covance issues to each
non-employee director elected 200 shares of Covance Common Stock for each year
of their term of service, subject to forfeiture and restrictions on transfer,
and 2,000 shares upon such director's election, subject to forfeiture and
restrictions on transfer.
Committees of the Board of Directors. Covance has established three Board
committees: the Audit and Finance Committee, the Corporate Governance Committee,
and the Compensation Committee (collectively, the "Committees"). The Committees
were established in December 1996. No meetings of any of these Committees took
place in 1996. The Audit and Finance Committee examines and considers matters
relating to the financial affairs of Covance, including reviewing Covance's
annual financial statements, the scope of the independent and internal audits
and the independent auditor's letter to management concerning the effectiveness
of Covance's internal financial and accounting controls. The Audit and Finance
Committee's members are Mr. Baylis (Chairman), Mr. Campbell and Mr. Ughetta. The
Corporate Governance Committee examines, considers and makes recommendations
concerning various policies relating to the management of the Company, including
policies concerning the evaluation and remuneration of Directors, and
performance requirements for Directors. The Corporate Governance Committee's
members are Mr. Morris (Chairman), Mr. Kuebler, Mr. MacDonald and Mr. Ughetta.
The Compensation Committee makes recommendations to the Covance Board with
respect to programs for human resource development and management organization
and succession, determine senior executive compensation, consider and make
recommendations to the Covance Board with respect to compensation matters and
policies and employee benefit and incentive plans, administer such plans, and
administer Covance's stock option and equity based plans and grant stock options
and other rights under such plans. The Compensation Committee's members are Mr.
MacDonald (Chairman), Mr. Morris and Mr. Lerner.
60
<PAGE>
Executive Officers. In addition to Mr. Kuebler, the following persons
serve as executive officers of Covance:
Richard J. Andrews (49) has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Andrews has served as the President of
Covance Central Laboratory Services Inc. ("Central Labs"), a wholly owned
subsidiary of Covance, since June 1994. From January 1993, Mr. Andrews has
served as the President of Covance Central Laboratory Services S.A. ("Central
Labs S.A."), a wholly owned subsidiary of Central Labs. Central Labs and Central
Labs S.A. 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 (34) has been the Company's Controller since July 1996
and a Vice President since November 1996. 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. From March 1995 to July 1996, Mr. Giannetto was the Business
Controller for Covance. Prior to December 1992, Mr. Giannetto was a Senior Audit
Manager for Deloitte & Touche.
Charles C. Harwood, Jr. (43) has been 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 that position, he was the President of Pembroke
Development Co., Inc., a commercial real estate development company. Mr. Harwood
also serves as a director of Bio-Imaging, Covance Biotechnology and several of
Covance's subsidiaries.
Jeffrey S. Hurwitz (36) 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, Covance Biotechnology and several of Covance's
subsidiaries.
61
<PAGE>
Kim D. Lamon, M.D., Ph.D. (44) has been a Corporate Senior Vice President
of Covance since July 1996. In addition, Dr. Lamon has been the President of
Covance Clinical and Periapproval Services Inc. ("CAPS") and Covance
Periapproval Services Inc. ("CPSI") since May 1996. CAPS and CPSI, and their
European affiliates, provide the Company's clinical and 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 (41) has been the Company's Corporate Senior Vice
President and Group President, Global Ventures, since August 1995. Global
Ventures is responsible for the Company's international expansion plans. Mr.
Utterback has also been responsible for Covance's global clinical packaging
operations since August 1995. From May 1994 until August 1995, Mr. Utterback was
the Senior Vice President, Human Resources and Quality for CLSI, 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.
Michael G. Wokasch (45) has been a Corporate Senior Vice President of
Covance since July 1996. In addition, Mr. Wokasch has been the President of
Covance Laboratories Inc. ("Labs"), a wholly owned subsidiary of Covance, 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.
62
<PAGE>
Item 11. Executive Compensation
Compensation. The following table sets forth information with respect to
annual and long-term compensation paid by Covance and its subsidiaries, or its
affiliates (prior to the Distribution Date) as noted in the footnotes, to each
of the chief executive officer and the four other most highly compensated
executive officers (collectively, the "named executive officers") of Covance
during the years ended December 31, 1996, 1995 and 1994 for services rendered by
each of the named executive officers. Unless otherwise noted, all references in
the following tables and footnotes to stock and stock options relate to awards
of, and options to purchase, Corning Common Stock. Effective on the Distribution
Date, all such Corning awards were terminated or otherwise forfeited. See
Footnote 2 to this table. The Corning awards are being presented for historical
purposes only.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation (1) Awards (1) (2)
____________________________________________ ____________________________
Restricted Securities All Other
Name and Other Annual Stock Underlying Compensation
Principal Position Year Salary Bonus Compensation Awards (3) Options (4) (1) (5)
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler, 1996 345,833 231,000 72,447 (14) (18) -0- 72,043
Chairman, President and 1995 322,567 303,958 50,427 (19) (26) 68,680
Chief Executive Officer 1994 51,667 (8) 101,679 -0- -0- (26) 2,140
____________________________________________________________________________________________________________________________________
Richard J. Andrews, 1996 231,444 106,696 -0- -0- (27) 58,788
Corporate Senior Vice 1995 222,833 176,512 -0- -0- -0- 57,478
President; President, 1994 197,635 41,000 -0- -0- (27) 50,499
Covance Central
Laboratory Services Inc.
____________________________________________________________________________________________________________________________________
Kim D. Lamon (6), 1996 206,111 (9) 156,957 (12) 40,745 (15) (20) -0- 55,786
Corporate Senior Vice 1995 (9) (12) 34,097 (21) (28) 58,060
President; President, 1994 (9) (12) -0- -0- (28) 18,534
Covance Clinical and
Periapproval Services
Inc. and Covance
Periapproval Services
Inc.
____________________________________________________________________________________________________________________________________
James D. Utterback (7), 1996 244,565 162,200 34,254 (16) (22) -0- 45,376
Corporate Senior 1995 98,820 (10) 78,738 (13) 26,831 (23) (29) 41,595
Vice President; Group 1994 (10) (13) -0- -0- (29) 17,509
President, Global
Ventures
____________________________________________________________________________________________________________________________________
Michael G. Wokasch, 1996 202,614 103,334 -0- (17) (24) -0- 17,730
Corporate Senior 1995 100,000 (11) 76,500 -0- (25) (30) 4,740
Vice President;
President, Covance
Laboratories, Inc.
____________________________________________________________________________________________________________________________________
</TABLE>
63
<PAGE>
(1) As noted in the footnotes set forth below, compensation disclosed
in this table, including the footnotes thereto, may reflect
compensation paid by the Company, Corning, Quest or CLSI, for
services rendered by the named executive to entities other than the
Company.
(2) All awards reflected in these columns, including the footnotes
thereto, reflect awards to the named executives by Corning for
Corning securities. Except to the extent noted in the footnotes
below, all such awards were terminated or forfeited on the
Distribution Date. For the purpose of the discussion set forth in
the footnotes below, (i) a "terminated" Corning stock or option
award refers to Corning awards which ended as at the Distribution
Date but were eligible for regrant by the Company pursuant the
Conversion Plan (as hereinafter defined) and (ii) a "forfeited"
Corning stock or option award refers to Corning awards which ended
as at the Distribution Date and were not eligible for regrant under
any Company plan.
(3) No Covance restricted stock awards were granted in 1996. All
restricted stock awards granted in 1996, 1995 and 1994 were for
shares of Corning common stock granted pursuant to Corning benefit
plans. Except as noted below, all such Corning restricted stock
awards terminated as at the Distribution Date and were replaced by
Company restricted stock awards pursuant to the Conversion Plan as
follows: (i) for Mr. Kuebler, an aggregate of 31,805 Corning
restricted shares were terminated and 15,000 shares were forfeited,
all at the Distribution Date, and an aggregate of 62,579 Covance
shares were granted in January 1997 pursuant to the Conversion
Plan; (ii) for Dr. Lamon, an aggregate of 14,841 Corning restricted
shares were terminated, 11,250 shares were forfeited and 3,750
shares were released from restriction, all at the Distribution
Date, and an aggregate of 29,201 Covance shares were granted in
January 1997 pursuant to the Conversion Plan; (iii) for Mr.
Utterback, an aggregate of 7,076 Corning restricted shares were
terminated, 7,500 shares were forfeited and 2,500 shares were
released from restriction, all at the Distribution Date, and an
aggregate of 13,923 Covance shares were granted in January 1997
pursuant to the Conversion Plan; and (iv) for Mr. Wokasch, an
aggregate of 5,950 Corning restricted shares were terminated, 2,250
shares were forfeited and 750 shares were released from
restriction, all at the Distribution Date, and an aggregate of
11,707 Covance shares were granted in January 1997 pursuant to the
Conversion Plan. Conversion Plan restricted shares, in substitution
of all terminated Corning restricted shares, were granted to the
named executives on January 31, 1997, which shares are subject to
forfeiture conditions and restrictions on transfer until July 1,
1997.
(4) No Covance options were granted in 1996. All options granted in
1996, 1995 and 1994 were options for shares of Corning common stock
granted pursuant to Corning benefit plans. All such Corning options
terminated as at the Distribution Date and were replaced by Company
options pursuant to the Conversion Plan, as noted below. Conversion
Plan options, in substitution of the Corning options, were granted
to the named executives on January 31, 1997.
(5) Includes the following amounts contributed by Covance, except as
noted, as matching contributions to such individuals 401(k) Plan
(as defined below) account for 1996: $6,531 for Mr. Kuebler, $6,517
for Mr. Andrews, $5,774 for Dr. Lamon, $8,250 for Mr. Utterback and
$8,250 for Mr. Wokasch. In addition, pursuant to a non-qualified
benefit plan of which Mr. Andrews is the sole beneficiary, Mr.
Andrews received a 1996 Company contribution of $43,951 to his
account in such plan. Also includes a $12,840 automobile allowance
received by each of Messrs. Kuebler, Utterback and Dr. Lamon,
$8,320 received by Mr. Andrews and $9,480 received by Mr. Wokasch.
Also includes (i) the forgiveness of 20% of principal on
interest-free loans made by Covance to the following individuals,
for the following amounts forgiven: $40,000 for Mr. Kuebler,
$30,000 for Dr. Lamon, and $20,000 for Mr. Utterback, and (ii)
imputed interest on such loans to the following individuals for the
following amounts: $12,672 for Mr. Kuebler, $7,172 for Dr. Lamon
and $4,286 for Mr. Utterback. The original principal amount of such
loans were $200,000 for Mr. Kuebler, $150,000 for Dr. Lamon and
$100,000 for Mr. Utterback, which loans are to be forgiven over a
five year period provided
64
<PAGE>
such individuals continue to be employed by Covance. Such loans
were made to assist these individuals in relocating to the New
Jersey area.
(6) Dr. Lamon joined the Company in May 1996. All compensation and
benefits reflected in this table for fiscal 1994 and 1995, and
January through May 1996, reflect compensation received from CLSI
or Quest, affiliates of the Company prior to the Distribution Date,
for services performed for such company. All stock and option
awards during such dates were issued by Corning for CLSI or Quest
performance by Dr. Lamon.
(7) Mr. Utterback joined the Company in August 1995. All compensation
and benefits reflected in this table for fiscal 1994, and January
through August 1995, reflect compensation received from CLSI or
Quest, affiliates of the Company prior to the Distribution Date,
for services performed for such company. All stock and option
awards during such dates were issued by Corning for CLSI or Quest
performance by Mr. Utterback.
(8) Mr. Kuebler joined the Company in November 1994.
(9) For the period January through April 1996, Dr. Lamon also received
salary from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $115,813. In fiscal 1995 and 1994, Dr. Lamon received
salary from CLSI, for work performed for CLSI or Quest, in the
amounts of $309,417 and $200,000, respectively.
(10) For the period January through July 1995, Mr. Utterback also
received salary from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $138,347. In fiscal 1994, Mr. Utterback received salary
from CLSI, for work performed for CLSI or Quest, in the amount of
$153,333.
(11) Mr. Wokasch joined the Company in July 1995.
(12) For the period January through April 1996, Dr. Lamon received a
bonus from CLSI (an affiliate of the Company prior to the
Distribution Date), for work performed for CLSI or Quest, in the
amount of $37,102. In fiscal 1995 and 1994, Dr. Lamon received
bonuses from CLSI, for work performed for CLSI or Quest, in the
amounts of $160,265 and $175,625, respectively.
(13) For the period January through July 1995, Mr. Utterback also
received a bonus from CLSI (an affiliate of the Company prior to
the Distribution Date), for work performed for CLSI or Quest, in
the amount of $26,088. In fiscal 1994, Mr. Utterback received a
bonus from CLSI, for work performed for CLSI or Quest, in the
amount of $134,646.
(14) The amount shown for Mr. Kuebler reflects (i) dividends on shares
of Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $42,727, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
(15) The amount shown for Dr. Lamon reflects (i) dividends on shares of
Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $27,545, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
65
<PAGE>
(16) The amount shown for Mr. Utterback reflects (i) dividends on shares
of Corning restricted stock granted but not earned within one year
from the date of grant, (ii) tax and financial counseling services,
(iii) transportation services and (iv) tax reimbursement allowances
in the aggregate amount of $21,364, which are intended to offset
the inclusion in taxable income of the value of certain benefits.
(17) The value of benefits received by the named individual did not
exceed the lesser of either $50,000 or 10% of the total annual
salary and bonus reported.
(18) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr. Kuebler
was granted 13,500 Corning restricted performance shares in
December 1995. Mr. Kuebler, pursuant to the terms of such plan,
earned an aggregate of 16,065 Corning restricted shares in fiscal
1996, valued at $743,006 as of December 31,1996. As a result of the
Distribution, Mr. Kuebler's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Mr.
Kuebler pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(19) Pursuant to Corning's Corporate Performance Plan/CPP-5, Mr. Kuebler
was granted 10,000 Corning restricted performance shares in
December 1994. Mr. Kuebler, pursuant to the terms of such plan,
earned an aggregate of 10,740 Corning restricted shares in fiscal
1995, valued at $326,926 as of December 31, 1995. As a result of
the Distribution, Mr. Kuebler's rights to such CPP-5 shares were
terminated. Furthermore, pursuant to a Corning benefit plan, Mr.
Kuebler was also granted 20,000 restricted shares ("Career Shares")
valued at $608,800 as of December 31, 1995. Such Career Shares were
subject to certain restrictions on transfer until retirement, and
certain forfeiture provisions. With respect to such Career Shares,
5,000 shares were terminated and 15,000 shares were forfeited as at
the Distribution Date. See Footnote 3 with respect to shares
granted to Mr. Kuebler pursuant to the Conversion Plan in January
1997 as a replacement for all terminated Corning shares. Forfeited
shares were not replaced.
(20) Pursuant to Corning's Corporate Performance Plan/CPP-6, Dr. Lamon
was granted 10,000 Corning restricted performance shares in
December 1995. Dr. Lamon, pursuant to the terms of such plan,
earned an aggregate of 11,900 Corning restricted shares in fiscal
1996, valued at $550,375 as of December 31, 1996. As a result of
the Distribution, Dr. Lamon's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Dr.
Lamon pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(21) Pursuant to Corning's Corporate Performance Plan/CPP-5, Dr. Lamon
was granted 6,500 Corning restricted performance shares in December
1994. Dr. Lamon, pursuant to the terms of such plan, earned an
aggregate of 2,941 Corning restricted shares in fiscal 1995, valued
at $89,524 as of December 31, 1995. As a result of the
Distribution, Dr. Lamon's rights to such CPP-5 shares were
terminated. Furthermore, pursuant to a Corning benefit plan, Dr.
Lamon was also granted 15,000 Career Shares, valued at $456,600 as
of December 31, 1995. Such Career Shares were subject to certain
restrictions on transfer until retirement, and certain forfeiture
provisions. With respect to such Career Shares, 11,250 shares were
forfeited and 3,750 shares were released from all restriction and
delivered to Dr. Lamon prior to the Distribution Date. See Footnote
3 with respect to shares granted to Dr. Lamon pursuant to the
Conversion Plan in January 1997 as a replacement for all terminated
Corning shares. Forfeited shares were not replaced.
66
<PAGE>
(22) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr.
Utterback was granted 4,000 Corning restricted performance shares
in December 1995. Mr. Utterback, pursuant to the terms of such
plan, earned an aggregate of 4,760 Corning restricted shares in
fiscal 1996, valued at $220,150 as of December 31, 1996. As a
result of the Distribution, Mr. Utterback's rights to such CPP-6
shares were terminated. See Footnote 3 with respect to shares
granted to Mr. Utterback pursuant to the Conversion Plan in January
1997 as a replacement for all terminated Corning shares. Forfeited
shares were not replaced.
(23) Pursuant to Corning's Corporate Performance Plan/CPP-5, Mr.
Utterback was granted 4,000 Corning restricted performance shares
in December 1994. Mr. Utterback, pursuant to the terms of such
plan, earned an aggregate of 2,316 Corning restricted shares in
fiscal 1995, valued at $70,499 as of December 31, 1995. As a result
of the Distribution, Mr. Utterback's rights to such CPP-5 shares
were terminated. Furthermore, pursuant to a Corning benefit plan,
Mr. Utterback was also granted 10,000 Career Shares, valued at
$304,400 as of December 31, 1995. Such Career Shares were subject
to certain restrictions on transfer until retirement, and certain
forfeiture provisions. With respect to such Career Shares, 7,500
shares were forfeited and 2,500 shares were released from all
restriction and delivered to Mr. Utterback prior to the
Distribution Date. See Footnote 3 with respect to shares granted to
Mr. Utterback pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(24) Pursuant to Corning's Corporate Performance Plan/CPP-6, Mr. Wokasch
was granted 5,000 Corning restricted performance shares in December
1995. Mr. Wokasch, pursuant to the terms of such plan, earned an
aggregate of 5,950 Corning restricted shares in fiscal 1996, valued
at $275,188 as of December 31, 1996. As a result of the
Distribution, Mr. Wokasch's rights to such CPP-6 shares were
terminated. See Footnote 3 with respect to shares granted to Mr.
Wokasch pursuant to the Conversion Plan in January 1997 as a
replacement for all terminated Corning shares. Forfeited shares
were not replaced.
(25) Pursuant to a Corning benefit plan, Mr. Wokasch was granted 3,000
Career Shares, valued at $91,320 as of December 31, 1995. Such
Career Shares were subject to certain restrictions on transfer
until retirement, and certain forfeiture provisions. With respect
to such Career Shares, 2,250 shares were forfeited and 750 shares
were released from all restriction and delivered to Mr. Wokasch
prior to the Distribution Date. See Footnote 3 with respect to
shares granted to Mr. Wokasch pursuant to the Conversion Plan in
January 1997 as a replacement for all terminated Corning shares.
Forfeited shares were not replaced.
(26) Pursuant to various Corning stock options plans, Mr. Kuebler was
granted (i) in 1995, an option to purchase 81,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 20,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 145,611 Covance shares pursuant to the
Conversion Plan.
(27) Pursuant to various Corning stock options plans, Mr. Andrews was
granted (i) in 1996, an option to purchase 4,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 12,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 31,487 Covance shares pursuant to the
Conversion Plan.
67
<PAGE>
(28) Pursuant to various Corning stock options plans, Dr. Lamon was
granted (i) in 1995, an option to purchase 60,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 23,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 123,967 Covance shares pursuant to the
Conversion Plan.
(29) Pursuant to various Corning stock options plans, Mr. Utterback was
granted (i) in 1995, an option to purchase 24,000 shares of Corning
common stock and (ii) in 1994, an option to purchase 18,000 shares
of Corning common stock. As at the Distribution Date, all such
options terminated and were replaced in January 1997 with options
to purchase an aggregate of 66,902 Covance shares pursuant to the
Conversion Plan.
(30) Pursuant to various Corning stock options plans, Mr. Wokasch was
granted in 1995 an option to purchase 38,000 shares of Corning
common stock. As at the Distribution Date, all such options
terminated and were replaced in January 1997 with options to
purchase an aggregate of 55,095 Covance shares pursuant to the
Conversion Plan.
68
<PAGE>
Option Grants. The following table sets forth certain information
regarding options granted by Corning in 1996 to all of the named executive
officers pursuant to Corning stock option plans. All such options terminated as
of the Distribution Date. These awards are being presented for historical
purposes only. No Covance options were granted in 1996. Employees of Covance,
including the named executive officers, who held at the Distribution Date
Corning stock options or restricted shares, received new Covance options or
restricted shares under the Conversion Plan (as defined below) in exchange for
the surrender of all such eligible Corning options or restricted shares. Such
grants under the Conversion Plan were approved on January 31, 1997 and are not
reported herein.
OPTION/SAR GRANTS IN FISCAL YEAR 1996 (1)
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Individual Grants Option Term (3)
______________________________________ ___________________________________________
% of Total
Number of Options
Securities Granted to Gain
Underlying Employees at
Options in Fiscal Exercise Expiration 0%
Name Granted Year Price Date (4) Gain at 5% Gain at 10%
______________________________ _______________ ______________ __________ _______________ ________ _______________ _________________
<S> <C> <C> <C> <C> <C> <C> <C>
Christopher A. Kuebler -0-
Richard J. Andrews 4,000 (2) 0.1% 34.44 4/24/06 0 86,637 219,554
Kim D. Lamon -0-
James D. Utterback -0-
Michael G. Wokasch -0-
All Optionees as a
Group 4,000 100.0 % 4.44 2006 0 86,637 219,554
______________________________ _______________ ______________ __________ _______________ ________ _______________ _________________
</TABLE>
(1) No SARs were granted.
(2) The Corning stock option agreement with Mr. Andrews provided that
one-half of the options would become exercisable on April 24, 1997
and all of the options would become exercisable on April 24, 1998.
Such agreement was terminated as of the Distribution Date and Mr.
Andrews received conversion options under the Conversion Plan on
January 31, 1997. This award is being presented for historical
purposes only.
(3) The dollar amounts set forth under these columns are the result of
calculations at 0% and at the 5% and 10% rates established by the
Commission and therefore are not intended to forecast future
appreciation of the Company's or Corning's stock price.
(4) No gain to the optionees is possible without an appreciation in
stock price, an event which will also benefit all stockholders. If
the stock price does not appreciate, the optionees will realize no
benefit.
69
<PAGE>
Option Exercises and Fiscal Year-End Values. The named executive officers
exercised no Corning options pursuant to Corning plans in 1996. The named
executive officers did not exercise any options pursuant to Company plans in
1996.
Corporate Performance Plan Activity. Awards of performance-based shares of
Corning Common Stock were granted to Covance's executive officers pursuant to a
series of Corning performance-based plans (the "Corporate Performance Plan").
The Corporate Performance Plan provided the mechanisms to reward improvement in
corporate performance as measured by net income, earnings per share and/or
return on equity. Each year minimum, target and maximum goals were set and
shares awarded (at target levels) which were subject to forfeiture in whole or
in part if performance goals were not met. The percentage of awards that could
have been earned range from 0% to 150% of target. Shares earned remained subject
to forfeiture and restrictions on transfer for two years following the end of
the performance period.
In December 1996, the Compensation Committee of the Board of Directors of
Corning assessed performance against goals, determined the number of shares
earned of the CPP-6 target shares granted in December 1995. As set forth in the
footnotes to the Summary Compensation Table, Corporate Performance Plan awards
for the CPP-5 and CPP-6 Corning grants were terminated as at the Distribution
Date. Covance granted, in substitution, Covance restricted shares pursuant to
the Covance Conversion Plan, on January 31, 1997.
Variable Compensation. During fiscal 1996, Company employees participated
in a Corning approved variable compensation plan (the "Plan"), for approximately
400 supervisory, management and executive employees. The performance-based
annual cash incentive awards payable under the Plan were based on financial
goals such as net income, operating margin, return on equity, or earnings per
share, or a combination thereof, and quantifiable non-financial goals. Each
participant was assigned a target award, as a percentage of base salary in
effect at the end of the performance year for which the target is set, payable
if the target is achieved. Actual results were compared to the scale of targets
with each gradation of desired result corresponding to a percentage which was
multiplied by the employee's assigned target award. If the actual result was
below target, awards are less than target, down to a point below which no awards
are earned. If the desired result was above target, awards were greater than
target, up to a stated maximum award. The maximum award assigned to the chief
executive officer could not exceed 200% of base salary in effect on the date the
Corning Compensation Committee set the target for such performance year. The
committee also retained the right to reduce any award if it believed individual
performance did not warrant the award calculated by reference to the result.
Bonus' earned in 1996 for the named executive officers are disclosed in the
Summary Compensation Table.
Employee Equity Participation Plan. Covance adopted, in December 1996, the
Employee Equity Participation Program ("EEPP"). The EEPP consists of two plans:
(a) a stock option plan from which the Company may grant incentive or
non-statutory stock
70
<PAGE>
options and (b) an incentive stock plan from which the Company may grant
restricted stock awards. No awards were granted to the named executive officers
pursuant to the EEPP in 1996.
Conversion Plan. In December 1996, the Company adopted the Conversion
Equity Plan (the "Conversion Plan"). The Conversion Plan has essentially the
same characteristics as the EEPP, but any grants made pursuant to the Conversion
Plan are to replace all eligible Corning options and restricted shares held by
Company employees at the Distribution Date, all of which were terminated or
forfeited at the Distribution Date. No awards were granted to the named
executive officers pursuant to the Conversion Plan in 1996.
Pension Plans. Covance does not currently have any qualified defined
pension benefit plans. In December 1996, Covance adopted a nonqualified
Supplemental Executive Retirement Plan ("SERP") for the benefit of certain
executive officers of Covance, including the named executive officers. Such plan
is, in whole or in part, an unfunded, unsecured obligation of Covance and
administered by the Compensation Committee.
Eligible executives may commence receiving full benefits under the plan
upon attaining age 60, so long as they have completed at least twenty years of
service (fifteen years for certain Company executives, including the named
executives) with Covance (including service with Corning) or any subsidiary
thereof. Retirement benefits to be provided under the plan will be based on 40%
of an executive's "Final Average Pay," defined to mean the average of an
executive's base salary plus bonus, taking into account the highest five
consecutive years of the executive's last ten years of employment with Covance
or any subsidiary thereof. Under the terms of the plan, executives may, with the
approval of the Compensation Committee, elect to commence receiving reduced
benefits prior to age 60, provided that they have completed at least five years
of service with Covance or any subsidiary thereof and have attained age 55.
Benefits commencing prior to age 60 will be reduced by 5% of the amount of
benefits earned for each year prior to age 60. For example, at age 55, an
executive with at least twenty years (or fifteen years, if applicable) of
service may be eligible to receive 30% of Final Average Pay so long as the
executive receives approval from the Compensation Committee.
At retirement, the normal form of payment under the plan will be monthly
payments over the lifetime of the executive (or actuarially reduced joint and
survivor benefits over the joint lives of the executive and a named
beneficiary). Alternatively, the executive may elect under the plan, subject to
the approval of the Compensation Committee, the right to receive an actuarially
determined lump-sum distribution from the plan.
Maximum annual benefits, based on at least twenty years of service and the
Final Average Pay calculated under the straight life annuity option form of
pension, payable to participants at ages 55 to 60 are illustrated in the table
set forth below. The same benefits would apply for those participants eligible
for full benefits with 15 years of service. The
71
<PAGE>
table below does not reflect any limitations on benefits imposed by the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Pension Plan Table
<TABLE>
<CAPTION>
Age (with at Least 20 Years of Service)
______________________________________________________________________________________________________________
Final Average
Pay 55 56 57 58 59 60
_________________ _______________ _______________ ______________ ______________ ______________ ______________
<S> <C> <C> <C> <C> <C> <C>
$ 100,000 30,000 32,000 34,000 36,000 38,000 40,000
200,000 60,000 64,000 68,000 72,000 76,000 80,000
300,000 90,000 96,000 102,000 108,000 114,000 120,000
400,000 120,000 128,000 136,000 144,000 152,000 160,000
500,000 150,000 160,000 170,000 180,000 190,000 200,000
600,000 180,000 192,000 204,000 216,000 228,000 240,000
700,000 210,000 224,000 238,000 252,000 266,000 280,000
800,000 240,000 256,000 272,000 288,000 304,000 320,000
900,000 270,000 288,000 306,000 324,000 342,000 360,000
1,000,000 300,000 320,000 340,000 360,000 380,000 400,000
1,100,000 330,000 352,000 374,000 396,000 418,000 440,000
1,200,000 360,000 384,000 408,000 432,000 456,000 480,000
____________________________________________________________________________________________________________________________________
</TABLE>
Retirement Savings Plan. Most of the employees of Covance and its
subsidiaries have been eligible to participate in a tax-qualified, defined
contribution plan known as the Stock Purchase Savings Plan (the "401(k) Plan"),
which provides for investment of employee contributions, including tax-deferred
contributions under Section 401(k) of the Code, and matching contributions made
by their employers, in several investment funds, including Covance Common Stock,
at the employees' discretion. As of the January 1, 1997, Covance Common Stock
was added as an investment fund and all or a portion of the employer matching
contributions will automatically be invested in Covance Common Stock. Corning
Common Stock will no longer be available as an investment fund except with
respect to amounts already so invested under the 401(k) Plan. All of the named
executives are eligible to participate in the 401(k) Plan, and their respective
Company matching contributions are disclosed in the Summary Compensation Table
for the periods covered thereby.
Employee Stock Ownership Plan. Individuals who were active employees of
Covance and its United States subsidiaries as of the Distribution Date became
participants in the Employee Stock Ownership Plan ("ESOP"). To the extent
permitted under the ESOP, Covance contributed, in the aggregate and as of the
Distribution Date, an amount equal to a portion of each participating employee's
annual compensation. Covance may in its discretion from time to time make
additional contributions to the ESOP for the benefit of participating employees.
The assets of the ESOP will be invested primarily in shares of Covance Common
Stock. Amounts contributed to the ESOP for the benefit of participating
employees will be 100% vested on the earlier of death, disability or the
72
<PAGE>
second anniversary of the effective date of the grant. Contributions to the ESOP
will not currently be taxable income to the participating employees and will not
generally be available to them until termination of employment.
Restricted Share Plan. In December 1996, Covance adopted the Restricted
Share Plan ("RSP"), intended to provide to Covance's foreign national employees
in its non-United States locations who otherwise are ineligible to participate
in the ESOP and to domestic employees whose participation therein is subject to
limitations imposed by ERISA benefits similar to the ESOP. To the extent
permitted under the RSP, Covance will award to participating employees shares of
Covance Common Stock as of the Distribution Date, the market value of which
shall equal a portion of such employee's annual compensation. Covance may in its
discretion from time to time make additional awards to participating employees.
Shares of Covance Common Stock awarded to participating employees will be 100%
vested on the earlier of death, disability or the second anniversary of the date
of each grant.
Employee Stock Purchase Plan. In December 1996, Covance adopted the
Employee Stock Purchase Plan (the "ESPP") pursuant to which Covance makes
available for sale to employees shares of its Common Stock at a price equal to
85% of the market value on the first or last day of each calendar quarter,
whichever is lower. The ESPP, administered by the Compensation Committee, is
designed to give eligible employees (generally, employees of Covance and its
United States subsidiaries) the opportunity to purchase shares of Covance Common
Stock through payroll deductions up to 10% of compensation in a series of
quarterly offerings commencing January 1, 1997, and ending no later than
December 31, 2006.
Employment Agreements; Severance and Change in Control Arrangements. In
November 1996, Mr. Kuebler entered into an employment agreement with Covance.
The agreement expires on or before the third anniversary of the Distribution
Date. The agreement includes provisions for an annual salary of no less than
$450,000, with increases subject to the discretion of the Covance Board; annual
target participation in the Variable Compensation Plan of Covance in amounts no
less than 65% of annual salary in effect at the time performance goals are
established; and severance payments following a termination or a change in
control in accordance with the severance policy described below, except that Mr.
Kuebler will receive three times his base annual salary and three times his
annual award of variable compensation in the event of termination for reasons
other than cause.
In November 1996, Covance adopted an employment and severance policy
pursuant to which it provided to each executive officer, including the named
executive officers, compensation equal to two times the executive officer's base
annual salary at the annual rate in effect on the date of termination and two
times the annual award of variable compensation at the most recent target level
in the event that such executive officer has been terminated for reasons other
than cause. Such executive officer will also be entitled to participate in
Covance's health and benefits plans (to the extent permitted by the
73
<PAGE>
administrative provisions of such plans and applicable federal and state law)
for a period of up to two years or until such officer is covered by a successor
employer's benefit plans, whichever first occurs. Pursuant to such policy,
Covance will also provide to each executive officer upon the termination of
employment by Covance other than for cause during the twelve months following a
change in control of Covance compensation equal to three times base annual
salary in effect on the termination date and three times the annual variable
compensation at the most recent target level and such officer will be entitled
to participate in Covance's health and benefits plans for a period of up to
three years. A "change in control" is defined in the policy to include the
following: the acquisition by a person of 20% or more of the voting stock of
Covance; as a result of a contested election a majority of the Covance Board
members are different than the individuals who served on Covance's Board in the
two years prior to such contested election; or approval by Covance's
stockholders of a merger or consolidation in which Covance is not the survivor
thereof, or a sale or disposition of all or substantially all of Covance's
assets or a plan of partial or complete liquidation.
74
<PAGE>
Item 12. Security Ownership by Certain Beneficial Owners and Management
of Covance
The following table sets forth the number of shares of Covance Common
Stock beneficially owned by Directors, by the named executive officers and by
all Directors and executive officers of Covance as a group, as of March 3, 1997.
Except as otherwise noted, the named individual has sole voting and investment
with respect to such power securities.
<TABLE>
<CAPTION>
Number of Shares Number of Currently Percent
Name Beneficially Owned (1) Exercisable Options Outstanding
_____________________________________ ______________________________ ________________________ ________________
<S> <C> <C> <C>
Richard J. Andrews 509 (2) 19,545 *
Robert M. Baylis 5,200 (3) 0 *
Van C. Campbell 24,787 (3) 0 *
Christopher A. Kuebler 340 (2) 39,345 *
Kim D. Lamon 1,365 (2) 19,678 *
Irwin Lerner 3,200 (3) 0 *
J. Randall MacDonald 3,100 (3) 0 *
Nigel W. Morris 2,200 (3) 0 *
William C. Ughetta 29,598 (3) 0 *
James D. Utterback 768 (2) 19,678 *
Michael G. Wokasch 221 (2) 7,869 *
All Directors and Executive 71,461 (1),(2),(3) 132,187 *
Officers as a Group (14)
</TABLE>
____________________________
* Less than 1%.
(1) Does not include 53 shares owned by the spouses and minor children
of certain executive officers and Directors, as to which such
officers and Directors disclaim beneficial ownership.
(2) Does not include restricted performance shares granted in January
1997 pursuant to the EEPP. Such shares are subject to performance
conditions, certain vesting restrictions and forfeiture
restrictions.
(3) Includes 2,000 shares of Covance Common Stock, issued pursuant to
the DRSP, which each non-employee Director received in connection
with their election as a director. Such shares are currently
subject to certain vesting restrictions, restrictions on transfer
and forfeiture restrictions. Also, includes a minimum of 200 shares
of Covance Common Stock, issued pursuant to the DRSP, which each
non-employee Director receives annually in connection with their
yearly service as a Director. Such shares are currently subject to
certain restrictions on transfer and forfeiture restrictions.
75
<PAGE>
Item 13. Certain Relationships and Related Transactions
None.
76
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K
(a) Documents filed as part of this report.
1. Financial Statements.
Report of Price Warehouse LLP - Independent Accountants
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders Equity - Years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Index to Financial Statement Schedules. Schedules are omitted because
they are not applicable or the required information is shown in the
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.
3.1 Certificate of Incorporation.
3.2 By-Laws.
4.1 Form of Common Stock Certificate.
4.2 Form of Rights Agreement between Covance Inc. and Harris Trust and
Savings Bank, dated December 31, 1996.
77
<PAGE>
10.1 Tax Sharing Agreement among Corning Incorporated, Corning Clinical
Laboratories Inc. and Covance Inc., dated December 31, 1996.
10.2 Spin-Off Tax Indemnification Agreement between Corning
Incorporated and Covance Inc., dated December 31, 1996.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc. and
Corning Clinical Laboratories Inc., dated December 31, 1996.
10.4 Spin-Off Tax Indemnification Agreement between Corning Clinical
Laboratories Inc. and Covance Inc., dated 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.
10.6 Employee Stock Ownership Plan.
10.7 Stock Purchase Savings Plan, as amended.
10.8 Employee Stock Purchase Plan.
10.9 Employee Equity Participation Plan.
10.10 Executive Retirement Supplemental Plan.
10.11 Restricted Share Plan.
10.12 Directors' Restricted Stock Plan.
10.13 Directors' Deferred Compensation Plan.
10.14 Employment Agreement between Christopher Kuebler and Covance Inc.
10.15 Executive Employment Letters and Schedule.
21 Subsidiaries.
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedules. (Edgar filing only)
(d) Financial Statement Schedules.
None.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COVANCE INC.
Dated: March 24, 1997 By: /s/ Christopher A. Kuebler
---------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Christopher A. Kuebler
- ----------------------------------
Christopher A. Kuebler Chairman of the Board, March 24, 1997
President and
Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- ----------------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President March 24, 1997
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ----------------------------------
Michael Giannetto Vice President and Controller March 24, 1997
(Principal Accounting Officer)
/s/ Robert M. Baylis
- ----------------------------------
Robert M. Baylis Director March 24, 1997
/s/ Van C. Campbell
- ----------------------------------
Van C. Campbell Director March 24, 1997
/s/ Irwin Lerner
- ----------------------------------
Irwin Lerner Director March 24, 1997
/s/ J. Randall MacDonald
- ----------------------------------
J. Randall MacDonald Director March 24, 1997
/s/ Nigel W. Morris
- ----------------------------------
Nigel W. Morris Director March 24, 1997
/s/ William C. Ughetta
- ----------------------------------
William C. Ughetta Director March 24, 1997
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------------- ---------------------------------------------------------
2.1 Transaction Agreement among Corning Incorporated, Corning
Life Science Inc., Corning Clinical Laboratories Inc.
(Delaware), Covance Inc. and Corning Clinical Laboratories
Inc. (Michigan), dated November 22, 1996. Filed herewith.
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 Form of Rights Agreement between Covance Inc. and Harris
Trust and Savings Bank, dated December 31, 1996. Incorporated
by reference to Registrant's filing on Amendment No. 2 on
Form 10, filed with the SEC on November 19, 1996.
10.1 Tax Sharing Agreement among Corning Incorporated, Corning
Clinical Laboratories Inc. and Covance Inc., dated December
31, 1996. Filed herewith.
10.2 Spin-Off Tax Indemnification Agreement between Corning
Incorporated and Covance Inc., dated December 31, 1996. Filed
herewith.
10.3 Spin-Off Tax Indemnification Agreement between Covance Inc.
and Corning Clinical Laboratories Inc., December 31, 1996.
Filed herewith.
10.4 Spin-Off Tax Indemnification Agreement between Corning
Clinical Laboratories Inc. and Covance Inc., dated December
31, 1996. Filed herewith.
10.5 Credit Agreement among Covance Inc., NationsBank, N.A.,
Wachovia Bank of Georgia, N.A. and Lenders named therein,
dated November 26,1996. Filed herewith.
10.6 Employee Stock Ownership Plan. Filed herewith.
10.7 Stock Purchase Savings Plan, as amended. Filed herewith.
10.8 Employee Stock Purchase Plan. Filed herewith.
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. Filed herewith.
10.11 Restricted Share Plan. Filed herewith.
10.12 Directors' Restricted Stock Plan. Filed herewith.
10.13 Directors' Deferred Compensation Plan. Filed herewith.
10.14 Employment Agreement between Christopher Kuebler and Covance
Inc. Filed herewith.
10.15 Executive Employment Letters and Schedule. Filed herewith.
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 Schedules. (Edgar filing only) Filed herewith.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.1
<SEQUENCE>2
<DESCRIPTION>TRANSACTION AGREEMENT
<TEXT>
================================================================================
---------------------------------------------
TRANSACTION AGREEMENT
---------------------------------------------
dated as of November 22, 1996
by and among
CORNING INCORPORATED,
CORNING LIFE SCIENCES INC.,
CORNING CLINICAL LABORATORIES INC. (Delaware),
COVANCE INC.,
and
CORNING CLINICAL LABORATORIES INC. (Michigan)
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page
ARTICLE I
DEFINITIONS
SECTION 1.01. General................................................................................. 2
SECTION 1.02. References; Interpretation.............................................................. 7
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent.................................................................... 7
SECTION 2.02. The Distributions and Other Transactions................................................ 8
SECTION 2.03. Treatment of Fractional Shares.......................................................... 12
SECTION 2.04. Certain Intercompany Financial and Other Arrangements................................... 12
SECTION 2.05. Certain Indebtedness and Capital Structure.............................................. 13
SECTION 2.06. Further Assurances...................................................................... 13
SECTION 2.07. No Representations or Warranties........................................................ 14
SECTION 2.08. Guarantees.............................................................................. 14
SECTION 2.09. Certain Transactions.................................................................... 15
SECTION 2.10. Insurance............................................................................... 15
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning.............................................................. 15
SECTION 3.02. Indemnification by CCL.................................................................. 22
SECTION 3.03. Indemnification by Covance.............................................................. 23
SECTION 3.04. Adjustments for Indemnification Obligations............................................. 23
SECTION 3.05. Procedures for Indemnification - Third Party Claims..................................... 23
SECTION 3.06. Survival of Indemnities................................................................. 25
SECTION 3.07. Payments................................................................................ 25
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records.......................................................... 25
SECTION 4.02. Access to Information................................................................... 25
SECTION 4.03. Reimbursement........................................................................... 26
SECTION 4.04. Confidentiality......................................................................... 26
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations................................................................. 27
SECTION 5.02. Procedure............................................................................... 27
<PAGE>
ii
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses................................................................................ 28
SECTION 6.02. Notices................................................................................. 28
SECTION 6.03. Complete Agreement; Construction........................................................ 29
SECTION 6.04. Ancillary Agreements.................................................................... 29
SECTION 6.05. Counterparts............................................................................ 29
SECTION 6.06. Survival of Agreements.................................................................. 29
SECTION 6.07. Waiver.................................................................................. 29
SECTION 6.08. Amendments.............................................................................. 30
SECTION 6.09. Assignment.............................................................................. 30
SECTION 6.10. Successors and Assigns.................................................................. 30
SECTION 6.11. Termination............................................................................. 30
SECTION 6.12. Subsidiaries............................................................................ 30
SECTION 6.13. Third Party Beneficiaries............................................................... 30
SECTION 6.14. Headings................................................................................ 30
SECTION 6.15. Specific Performance.................................................................... 30
SECTION 6.16. Governing Law........................................................................... 31
SECTION 6.17. Public Announcements.................................................................... 31
SECTION 6.18. Severability............................................................................ 31
<PAGE>
iii
SCHEDULES
Schedule 2.08 Guarantees
EXHIBITS
Exhibit A Forms of Contribution Agreement, Liabilities Undertaking, Bill of Sale
and Assignment and Instrument of Assignment and Assumption
Exhibit B Form of Plan of Liquidation and Dissolution of CLSI
Exhibit C Certificate of Ownership and Merger and Certificate of Merger, with
attached Agreement and Plan of Merger and Complete Liquidation
(Covance CAPS into Covance)
Exhibit D Form of Insurance Agreement
Exhibit E Form of Services Agreement
Exhibit F Form of Spin-off Tax Indemnification Agreements
Exhibit G Form of Tax Sharing Agreement
Exhibit H Forms of Amended Charter and By-Laws of CCL
Exhibit I Forms of Amended Charter and By-Laws of Covance
</TABLE>
<PAGE>
TRANSACTION AGREEMENT dated as of November 22, 1996, by and
among CORNING INCORPORATED, a New York corporation ("Corning"), CORNING LIFE
SCIENCES INC., a Delaware corporation ("CLSI"), CORNING CLINICAL LABORATORIES
INC., a Delaware corporation ("CCL"), COVANCE INC., a Delaware corporation
("Covance") and CORNING CLINICAL LABORATORIES INC., a Michigan corporation ("CCL
(MI)").
W I T N E S S E T H:
WHEREAS, Corning is the common parent of a consolidated group
which includes CLSI, CCL, Covance and CCL (MI);
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to distribute to the holders of shares of common
stock, par value $0.50 per share, of Corning (the "Corning Common Shares") all
the outstanding shares of common stock of CCL (the "CCL Common Stock") and,
immediately following such distribution, for CCL to distribute to the holders of
CCL Common Stock all the outstanding shares of common stock of Covance (the
"Covance Common Stock");
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to set forth the principal corporate transactions
required to effect such distribution and to set forth other agreements that will
govern certain other matters following the distribution;
WHEREAS, each of Corning, CCL and Covance has determined that
it is necessary and desirable to allocate and assign responsibility for those
liabilities in respect of the activities of the businesses of such entities on
the Distribution Date (as defined herein) and those liabilities in respect of
other businesses and activities of Corning and its former subsidiaries and other
matters;
WHEREAS, Corning currently owns 100% of the stock of CLSI;
WHEREAS, CLSI currently owns 100% of the stock of CCL;
WHEREAS, CCL currently owns 100% of the stock of each
of Covance and CCL (MI);
WHEREAS, Covance currently owns 100% of the stock of
Covance Clinical and Periapproval Services Inc. (formerly
Corning Besselaar, Inc.) ("Covance CAPS"); and
<PAGE>
2
WHEREAS, prior to the Distribution Date, CLSI will contribute
to CCL substantially all of its assets other than the stock of CCL in exchange
for additional shares of CCL Common Stock, shares of voting preferred stock of
CCL and cash and will contribute to CCL (MI) certain of its obligations and
liabilities and Corning will cause CLSI to dissolve and Covance CAPS to be
merged with and into Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified
person, another person that directly, or indirectly through one or more
intermediaries, will control or will be controlled by or will be under common
control with the person specified immediately following the Effective Time.
"Agent" shall have the meaning as defined in Section 2.02(g).
"Agreement Disputes" shall have the meaning as defined in
Section 5.01.
"Ancillary Agreements" shall mean the Insurance Agreement, the
Intellectual Property Agreement, the Services Agreement, the Spin-off
Tax Indemnification Agreements and the Tax Sharing Agreement.
"Assignee" shall have the meaning as defined in Section
2.02(i)(ii).
"CCL" shall mean Corning Clinical Laboratories Inc., a
Delaware corporation.
"CCL Business" shall mean all businesses and operations
conducted by (i) CLSI, MRL Nucor, Inc. and all current and former
subsidiaries of CLSI (other than Covance Biotechnology Services Inc.
(formerly CORNING Bio Inc.), Covance and its
<PAGE>
3
Subsidiaries, Pharmaceutical Laboratory Services, Inc., Quanterra Incorporated,
California Analytical Laboratory, Chemical Research Laboratories, Inc., Enseco
Incorporated, ERCO, Rocky Mountain Analytical Laboratory and Wadsworth/Alert
Laboratories, Inc.), including without limitation CCL (but excluding in any
event the environmental testing business previously conducted by CCL); and (ii)
any business entities acquired or established by or for CCL or any of its
Subsidiaries after the date of this Agreement.
"CCL Indemnitees" shall mean CCL, each Affiliate of CCL, each
of their respective directors and officers and each of the heirs, executors,
successors and assigns of any of the foregoing.
"CCL Liabilities" shall mean, collectively, (i) all the
Liabilities of CCL and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
CCL Business.
"CCL (MI)" shall mean Corning Clinical Laboratories Inc., a
Michigan corporation.
"CCL Record Holders" shall mean all holders of CCL Common
Stock as of the Distribution Record Date, provided that the CCL Record Holders
shall be deemed to be determined immediately following the distribution of CCL
Common Stock to all Corning Record Holders.
"CLSI" shall mean Corning Life Sciences Inc., a Delaware
corporation.
"CLSI Revolver" shall mean the Revolving Credit Agreement
dated December 1, 1994 between Corning and CLSI.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury regulations promulgated thereunder, including any
successor legislation.
"Commission" shall mean the Securities and Exchange
Commission.
"Company Policies" shall mean all Policies, current or past,
which are or at any time were maintained by or on behalf of or for the benefit
or protection of Corning or any of its predecessors which relate to the Corning
Business, the CCL Business or the Covance Business, or current or past
directors, officers, employees or agents of any of the foregoing Businesses.
<PAGE>
4
"Corning" shall mean Corning Incorporated, a New York
corporation.
"Corning Business" shall mean (i) all businesses and
operations of Corning and its subsidiaries other than the CCL Business and the
Covance Business and (ii) the environmental testing business previously
conducted by CCL and its Subsidiaries, including California Analytical
Laboratory, Chemical Research Laboratories, Inc., Enseco Incorporated, ERCO,
Quanterra Incorporated, Rocky Mountain Analytical Laboratory and Wadsworth/Alert
Laboratories, Inc.
"Corning Indemnitees" shall mean Corning, each Affiliate of
Corning, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
"Corning Liabilities" shall mean all the Liabilities of
Corning and its Subsidiaries under this Agreement and any of the Ancillary
Agreements, and all the Liabilities of Corning and its subsidiaries that are not
CCL Liabilities or Covance Liabilities including, without limitation, all
Liabilities under any employee benefit plans maintained by Corning and any stock
option employment or consulting agreements to which Corning is a party,
including any such benefit plans or agreements covering or with persons who are
or were employees of CCL or Covance and their respective Subsidiaries.
Notwithstanding the foregoing, the remaining payment obligations under the
Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman and the
Consulting Agreement dated June 7, 1995 among Corning, CLSI and Ralph H. Thurman
shall be CCL Liabilities and not Corning Liabilities.
"Corning Record Holders" shall mean all holders of record of
Corning Common Shares as of the Distribution Record Date.
"Covance" shall mean Covance Inc., a Delaware corporation
(formerly known as Corning Pharmaceutical Services Inc.).
"Covance Business" shall mean all businesses and operations
conducted by (i) all current and former subsidiaries of Covance and by Covance
Biotechnology Services Inc. and Pharmaceutical Laboratory Services, Inc. prior
to the Effective Time; and (ii) any business entities acquired or established by
or for Covance or any of its Subsidiaries after the date of this Agreement.
"Covance Indemnitees" shall mean Covance, each Affiliate of
Covance, each of their respective directors and officers and each of the heirs,
executors, successors and assigns of any of the foregoing.
<PAGE>
5
"Covance Liabilities" shall mean, collectively, (i) all the
Liabilities of Covance and its Subsidiaries under this Agreement and any of the
Ancillary Agreements, and (ii) all the Liabilities of the parties hereto or
their respective Subsidiaries (whenever arising whether prior to, at or
following the Effective Time) arising out of or in connection with or otherwise
relating to the management or conduct before or after the Effective Time of the
Covance Business.
"Distribution Date" shall mean December 31, 1996 or such later
date as may hereafter be determined by Corning's Board of Directors as the date
as of which the Distributions shall be effected.
"Distribution Record Date" shall mean December 31, 1996 or
such later date as may hereafter be determined by Corning's Board of Directors
as the record date for the Distributions.
"Distributions" shall mean the two consecutive distributions
in the following order on the Distribution Date to (i) all Corning Record
Holders of the CCL Common Stock owned by Corning and (ii) all CCL Record Holders
of the Covance Common Stock owned by CCL.
"Effective Time" shall mean 11:59 p.m., New York time, on the
Distribution Date.
"Exchange Act" shall mean the Securities and Exchange Act of
1934, as amended.
"Indemnifiable Losses" shall mean any and all losses,
liabilities, claims, damages, demands, costs or expenses (including, without
limitation, reasonable attorneys' fees and any and all reasonable and necessary
out-of-pocket expenses) whatsoever, including any and all losses, liabilities,
claims, damages, demands, costs or expenses reasonably incurred in
investigating, preparing for or defending against any Actions or potential
Actions, provided, however, that such Indemnifiable Losses shall not include
Taxes or other amounts indemnified against under the Spin-off Tax
Indemnification Agreements and the Tax Sharing Agreement.
"Indemnifying Party" shall have the meaning as defined in
Section 3.04.
"Indemnitee" shall have the meaning as defined in Section
3.04.
"Information Statement" shall mean the Information Statement
sent to all the Record Holders in connection with the Distributions, including
any amendment or supplement thereto.
<PAGE>
6
"Insurance Agreement" shall mean the Insurance Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
D.
"Intellectual Property Agreement" shall mean the Intellectual
Property and Licensing Agreement among Corning, CCL and Covance, in a form to be
agreed upon by the parties to this Agreement.
"Liabilities" shall mean any and all debts, liabilities and
obligations, absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including, without limitation, those debts, liabilities and obligations arising
under any law, rule, regulation, Action, threatened Action, order or consent
decree of any court, any governmental or other regulatory or administrative
agency or commission or any award of any arbitration tribunal, and those arising
under any contract, guarantee, commitment or undertaking.
"person" shall mean any natural person, corporation, business
trust, joint venture, association, company, partnership or government, or any
agency or political subdivision thereof.
"Policies" shall mean insurance policies and insurance
contracts of any kind (other than life and benefits policies or contracts),
including, without limitation, primary, excess and umbrella policies,
comprehensive general liability policies, fiduciary liability, automobile,
aircraft, property and casualty, workers' compensation and employee dishonesty
insurance policies, bonds and self-insurance and captive insurance company
arrangements, together with the rights, benefits and privileges thereunder.
"Record Holders" shall mean the CCL Record Holders and the
Corning Record Holders, collectively.
"Records" shall have the meaning as defined in Section 4.01.
"Registration Statements" shall mean the registration
statements on Form 10 in respect of the CCL Common Stock and the Covance Common
Stock required to be filed with the Commission pursuant to Rule 12(b) under the
Exchange Act.
"Rules" shall have the meaning as defined in Section 5.02.
"Services Agreement" shall mean the Services Agreement among
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
E.
<PAGE>
7
"Spin-off Tax Indemnification Agreement" shall mean each of
the Spin-off Tax Indemnification Agreements between or among two or more of
Corning, CCL and Covance, in substantially the form attached hereto as Exhibit
F.
"Subsidiary" shall mean any corporation, partnership or other
entity of which another entity (i) will own, immediately following the Effective
Time, directly or indirectly, ownership interests sufficient to elect a majority
of the board of directors (or persons performing similar functions)
(irrespective of whether at the time any other class or classes of ownership
interests of such corporation, partnership or other entity shall or might have
such voting power upon the occurrence of any contingency) or (ii) will be,
immediately following the Effective Time, a general partner or an entity
performing similar functions; provided that Bio Imaging Technologies Inc. will
be deemed to be a Subsidiary of Covance and, National Imaging Associates will be
deemed to be a Subsidiary of CCL, in each case, for all purposes of this
Agreement.
"Tax" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Tax Sharing Agreement" shall mean the Tax Sharing Agreement
among Corning, CCL and Covance, in substantially the form attached hereto as
Exhibit G.
"Third Party Claim" shall have the meaning as defined in
Section 3.05.
SECTION 1.02. References; Interpretation. References to an
"Exhibit" or to a "Schedule" are, unless otherwise specified, to one of the
Exhibits or Schedules attached to this Agreement, and references to a "Section"
are, unless otherwise specified, to one of the Sections of this Agreement.
ARTICLE II
DISTRIBUTIONS AND OTHER TRANSACTIONS; CERTAIN COVENANTS
SECTION 2.01. Conditions Precedent. Neither the Distributions
nor the related transactions set forth in this Agreement or in the Ancillary
Agreements shall become effective unless the following conditions have been
satisfied or waived by Corning on or before the Effective Time:
(a) The Registration Statements shall have been filed by
CCL and Covance, as applicable, with, and declared
effective by, the Commission and the Information
Statement shall have been mailed in a timely manner
to all holders of Corning Common Shares prior to the
Distribution Date.
<PAGE>
8
(b) Corning shall have received a favorable ruling from
the Internal Revenue Service to the effect that the
Distributions qualify as tax-free distributions under
Section 355 of the Code.
(c) Corning shall have received a favorable response from
the Commission to the "no-action request" letter
describing the Distributions filed by Corning with
the Commission.
(d) The New York Stock Exchange shall have approved the
CCL Common Stock and Covance Common Stock for listing
on its exchange, subject to official notice of
distribution.
(e) The financing arrangements among and between the
parties contemplated in the Information Statement
will have been consummated. CCL and Covance each
shall pay all of the expenses associated with their
respective financings.
SECTION 2.02. The Distributions and Other Transactions. (a)
Certain Transactions. Prior to the Distribution Date:
(i) Covance CAPS shall be merged with and into Covance
pursuant to the Certificate of Ownership and Merger between Covance
CAPS and Covance and the Certificate of Merger between Covance CAPS and
Covance, in substantially the forms attached hereto as Exhibit C, and
in accordance with all applicable filing requirements under the
Delaware General Corporation Law and the New Jersey Business
Corporation Act. As a result of the merger, Covance CAPS will cease to
exist and Covance will acquire the assets of Covance CAPS and assume
(or take the assets of Covance CAPS subject to) the liabilities of
Covance CAPS.
(ii) CLSI will contribute to CCL all of CLSI's assets other
than the stock of CCL and CLSI's rights under certain agreements that
CLSI agrees to transfer pursuant to Section 2.02(i) in exchange for
200,000 additional shares of CCL Common Stock, 1,000 shares of voting
preferred stock of CCL and $250,000 in cash from CCL pursuant to (A)
the Contribution Agreement between CLSI and CCL, (B) the Liabilities
Undertaking between CLSI and CCL (C) the Instrument of Assignment and
Assumption between CLSI and CCL and (D) the Bill of Sale and Assignment
between CLSI and CCL, each in substantially the forms attached hereto
as Exhibit A, and in accordance with all applicable filing requirements
under the Delaware General Corporation Law. As a result of such
transactions, CCL will acquire the assets of CLSI and assume (or take
the assets of CLSI subject to) the liabilities of CLSI other than (A)
such obligations and liabilities for which either Corning or Covance is
responsible under this Agreement or the Ancillary Agreements and (B)
any obligations that CCL(MI) assumes pursuant to
<PAGE>
9
the following sentence. CCL (MI) shall assume (A) the first $2 million
in principal amount of obligations of CLSI owed by CLSI to Corning
under the CLSI Revolver and (B) the first $2 million of CLSI's
obligations under Section 6.06(a) of the Agreement and Plan of Merger
among Corning, Opera Acquisition Corp. and CLSI (then known as Damon
Corporation). Following such contributions and assumptions, CLSI shall
adopt a plan of liquidation and dissolve pursuant to the Plan of
Liquidation and Dissolution of CLSI, substantially in the form attached
hereto as Exhibit B, and in accordance with all applicable filing
requirements under the Delaware General Corporation Law. As a result of
such liquidation and dissolution, CLSI will distribute to Corning its
remaining assets, which will consist largely of the capital stock of
CCL, and CLSI will cease to exist.
(iii) No earlier than one day following the effective date for
the transactions described in Section 2.02(a)(ii), CCL will transfer to
certain of its subsidiaries the following shares of common stock that
CCL will have received from CLSI pursuant to the transactions described
in Section 2.02(a)(ii): (A) the shares of common stock of Corning
Nichols Institute, (B) the shares of common stock of Corning Clinical
Laboratories Inc. (Mass.) and (C) the shares of common stock of Corning
Clinical Laboratories Inc. (MD).
(iv) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), CCL will transfer its Covance Common Stock, its entire
interest in Pharmaceutical Laboratory Services, Inc. and its entire
interest in Covance Biotechnology Services Inc. to Covance by
delivering to Covance stock certificates representing each of CCL's
share interests in such companies, accompanied by stock powers duly
endorsed by CCL and with all required stock transfer tax stamps
affixed. In connection therewith CCL shall deliver to Covance for
cancellation the share certificate currently held by it representing
Covance Common Stock and Covance shall issue to CCL new certificates
representing the total number of newly-issued shares of Covance Common
Stock sufficient in number to allow for an orderly and pro rata
distribution of such Covance Common Stock to the CCL common
shareholders.
(v) No earlier than three (3) days following the later of the
effective dates for the transactions described in Sections 2.02(a)(i),
(ii) and (iii), Corning will transfer its CCL Common Stock and its
entire interest in MRL Nucor, Inc. to CCL by delivering to CCL stock
certificates representing each of Corning's share interests in CCL and
MRL Nucor, Inc., accompanied by stock powers duly endorsed by Corning
and with all required stock transfer tax stamps affixed. In connection
therewith Corning shall deliver to CCL for cancellation the share
certificate then held by it representing CCL Common Stock and shall
receive new certificates representing the total number of newly-issued
shares of CCL Common Stock sufficient in number to
<PAGE>
10
allow for an orderly and pro rata distribution of such CCL Common Stock
to the Corning common shareholders.
(b) Ancillary Agreements. On or prior to the Distribution
Date, each of Corning, CCL and Covance shall have executed and
delivered to each of the others, each of the Ancillary Agreements.
(c) Charters; By-laws. On or prior to the Distribution Date:
(i) All necessary actions shall have been taken to provide for
the amendments of the Articles of Incorporation and By-laws for CCL,
such amendments to be in substantially the forms attached hereto as
Exhibit H.
(ii) All necessary actions shall have been taken to provide
for the amendments of the Articles of Incorporation and By-laws for
Covance, such amendments to be in substantially the forms attached
hereto as Exhibit I.
(d) Benefit Plans. On or prior to the Distribution Date, any
shareholder approvals deemed necessary for employee benefit plans shall
have been obtained.
(e) Directors. On or prior to the Distribution Date, Corning
as the sole shareholder of CCL, and CCL, as the sole shareholder of
Covance, shall have taken all necessary action by written consent on or
prior to the Distribution Date to elect to the Board of Directors of
CCL and the Board of Directors of Covance the individuals identified in
the Information Statement as directors of CCL and Covance,
respectively.
(f) Consents. The parties hereto shall use their commercially
reasonable efforts to obtain any required consents to assignment of
agreements hereunder, if applicable.
(g) Delivery of Shares to Agent. Corning shall deliver to
Harris Trust and Savings Bank (the "Agent") the share certificates
representing the CCL Common Stock and CCL shall deliver to the Agent
the share certificates representing the Covance Common Stock and
Corning and CCL shall instruct the Agent to distribute, on or as soon
as practicable following the Distribution Date, such common stock to
the Corning Record Holders and the CCL Record Holders, as the case may
be, as further contemplated by the Information Statement and herein.
CCL and Covance shall provide all share certificates that the Agent
shall require in order to effect the Distributions.
<PAGE>
11
(h) Sublease. Corning shall have entered into a sublease
agreement with National Imaging Associates, Inc. with respect to the
first floor of 10 Mountainview Road, Upper Saddle River, New Jersey.
(i) Transfer of Agreements. (i) CLSI hereby agrees that on or
prior to the date on which it is dissolved, subject to the limitations
set forth in this Section 2.02(i), it will assign, transfer and convey
to Covance all of CLSI's rights and obligations under (a) the Capital
Contribution Agreement and Shareholder Agreement dated February 22,
1995 among Corning BioPro Inc., CLSI, Richard Hawkins, Dr. John
Scarlett, Robert F. Amundsen and Dr. Nona Niland, (b) any and all
existing stock option agreements between CLSI, Corning Bio Inc. and
individual employees of Corning Bio Inc., (c) the Registration
Agreement dated as of February 22, 1995 by and between Corning BioPro
Inc. and CLSI, (d) the Joint Escrow Instructions dated February 22,
1995 by and between Corning BioPro Inc., CLSI, Robert F. Amundsen and
the Escrow Agent named therein, and (e) the Joint Escrow Instructions
dated February 22, 1995 by and between Corning BioPro Inc., CLSI, Dr.
John Scarlett and the Escrow Agent named therein. CLSI hereby further
agrees that on or prior to the date on which it is dissolved, subject
to the limitations set forth in this Section 2.02(i), it will assign,
transfer and convey to Corning all of its rights and obligations under
the lease agreement dated October 5, 1995 between 2154 Trading
Corporation and CLSI with respect to 10 Mountainview Road, Upper Saddle
River, New Jersey and a sublease to National Imaging Associates with
respect to a portion of such premises. CCL hereby agrees that on or
prior to the Distribution Date or as soon as reasonably practicable
thereafter, subject to the limitations set forth in this Section
2.02(i), it will assign, transfer and convey to Corning all of CCL's
rights and obligations under the Asset Transfer Agreement dated as of
May 2, 1994, as amended, among CCL, International Technology
Corporation, IT Corporation and Quanterra Incorporated and the related
closing documents thereunder, including without limitation the General
Instrument of Assignment and Assumption dated June 28, 1994 between CCL
and Quanterra Incorporated. Corning hereby agrees that on or prior to
the Distribution Date or as soon as reasonably practicable thereafter,
subject to the limitations set forth in this Section 2.02(i), it will
assign, transfer and convey to Covance all of Corning's rights and
obligations under that certain Registration Agreement dated as of
February 22, 1995 by and between Corning, Dr. Nona Niland, Dr. John
Scarlett, Robert F. Amundsen and Richard Hawkins.
(ii) The assignee of any agreement assigned, in whole or in
part, hereunder (an "Assignee") shall assume and agree to pay, perform,
and fully discharge all obligations of the assignor under such
agreement or such Assignee's related portion of such obligations as
determined in accordance with the terms of the relevant agreement,
where determinable on the face thereof, and otherwise as determined in
accordance with the practice of the parties prior to the Distribution.
<PAGE>
12
(iii) Notwithstanding anything in this Agreement to the
contrary, this Agreement shall not constitute an agreement to assign
any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or attempt to assign, without the consent of a
third party, would constitute a breach thereof or in any way adversely
affect the rights of the Assignee thereof. Until such consent is
obtained, or if an attempted assignment thereof would be ineffective or
would adversely affect the rights of any party hereto so that the
Assignee would not, in fact, receive all such rights, the parties will
cooperate with each other in any arrangement designed to provide for
the Assignee the benefits of, and to permit the Assignee to assume
liabilities under, any such agreement.
(iv) Corning understands and agrees that approximately 10,968
Corning Common Shares are held to secure certain claims of CCL under
that Escrow Agreement dated as of October 9, 1994 (the "Escrow
Agreement") among Corning, The First National Bank of Boston and former
shareholders of Moran Research Labs, as amended, and will act at CCL's
direction and at CCL's expense with respect to those shares. The
remaining Corning Common Shares held under the Escrow Agreement are
being held for the benefit of Corning.
(j) Other Transactions. On or prior to the Distribution Date,
each of Corning, CCL and Covance shall have consummated those other
transactions in connection with the Distributions that are contemplated
by the Information Statement and the ruling request submission by
Corning to the Internal Revenue Service dated June 17, 1996, as
supplemented, and not specifically referred to in subparagraphs (a)-(i)
above.
SECTION 2.03. Treatment of Fractional Shares. As soon as
practicable after the Distribution Date, the Agent shall determine the number of
whole shares and fractional shares of CCL and Covance allocable to each Corning
Record Holder and CCL Record Holder, respectively, as of the Distribution Record
Date, to aggregate all such fractional shares and sell the whole shares obtained
thereby, in open market transactions or otherwise, in each case at then
prevailing trading prices, and to cause to be distributed to each such holder to
which a fractional share shall be allocable such holder's ratable share of the
proceeds of such sale, after making appropriate deductions of the amount
required to be withheld for federal income tax purposes and after deducting an
amount equal to all brokerage charges, commissions and transfer taxes attributed
to such sale. In determining the manner and timing of selling the aggregated
fractional shares, the Agent shall use its independent judgment and shall
neither consult with nor communicate its plans to Corning, CCL or Covance.
SECTION 2.04. Certain Intercompany Financial and Other
Arrangements. (a) Intercompany Accounts. Without limiting the terms of Section
2.05, all intercompany receivables, payables and loans (other than receivables,
payables and loans otherwise specifically provided for in any of the Ancillary
Agreements or hereunder), including, without limitation, in respect of any cash
balances, any cash balances representing deposited checks or drafts for which
only a provisional credit has been allowed or any cash held in any centralized
cash management system, between Corning, CCL, Covance or any of their respective
Subsidiaries, on the one hand, and Corning, CCL, Covance or any of their
respective Subsidiaries, on the other hand, shall, as of the Effective Time, be
settled or contributed to capital, in each case as may be agreed in writing
prior to the Effective Time by duly authorized representatives of Corning, CCL
or Covance, as applicable. Notwithstanding the foregoing, on or after the
Distribution Date, CCL shall make a payment to Corning in an amount equal to
<PAGE>
13
the excess, if any, of (i) the aggregate amount of cash and cash equivalents
held by CCL and its Subsidiaries on the Distribution Date over (ii) the sum of
the aggregate principal amount of Working Capital Loans and Swingline Loans
(each as defined in the credit agreement among CCL and the banks listed therein
to be entered into prior to the Distribution Date) outstanding on the
Distribution Date, plus $40,000,000 plus the net cash proceeds from the sales of
assets identified in the credit agreement received on or prior to the
Distribution Date. If the amount calculated in accordance with clause (ii) of
the preceding sentence, less $10,000,000, is greater than the amount calculated
in accordance with clause (i) then, on or after the Distribution Date, Corning
shall make a payment to CCL in an amount equal to the difference between such
calculations.
(b) Operations in Ordinary Course. Each of CCL and Covance
covenants and agrees that, except as otherwise provided in any Ancillary
Agreement, during the period from the date of this Agreement through the
Distribution Date, it will, and will cause any entity that is a Subsidiary of
such party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
administration of accounts payable and the administration of accounts
receivable, the purchase of capital assets and equipment and the management of
inventories.
SECTION 2.05. Certain Indebtedness and Capital Structure.
Corning, CCL and Covance each agree to use their respective commercially
reasonable efforts to achieve both an allocation of consolidated indebtedness of
Corning and a capital structure (including cash position) of each of CCL and
Covance so as to substantially reflect the respective capital structures after
the Distributions of CCL and Covance set forth in the Information Statement
under the headings "Capitalization of CCL" and "Capitalization of Covance".
SECTION 2.06. Further Assurances. In case at any time after
the Effective Time any further action is reasonably necessary or desirable to
carry out the purposes of this Agreement and the Ancillary Agreements, the
proper officers of each party to this Agreement shall take all such necessary
action. Without limiting the foregoing, Corning, CCL and Covance shall use their
commercially reasonable efforts to obtain all consents and approvals, to enter
into all amendatory agreements and to make all filings and applications that may
be required for the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements, including, without limitation, all
applicable governmental and regulatory filings.
<PAGE>
14
SECTION 2.07. No Representations or Warranties. Each of the
parties hereto understands and agrees that, except as otherwise expressly
provided, no party hereto is, in this Agreement, in any Ancillary Agreement or
in any other agreement or document contemplated by this Agreement or otherwise,
making any representation or warranty whatsoever, including, without limitation,
as to title, value or legal sufficiency.
SECTION 2.08. Guarantees. (a) Except as otherwise specified in
any Ancillary Agreement, Corning, CCL and Covance shall use their commercially
reasonable efforts to have, on or prior to the Distribution Date, or as soon as
practicable thereafter, Corning and any of its Subsidiaries removed as guarantor
of or obligor for any CCL Liability or Covance Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(a), and to
the extent any such guarantee is not removed, CCL or Covance, as the case may
be, will indemnify Corning for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Corning a fee reflecting Corning's continuing role as guarantor.
(b) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, CCL and any of its Subsidiaries removed as guarantor of or obligor
for any Corning Liability or Covance Liability, including, without limitation,
in respect of those guarantees set forth on Schedule 2.08(b), and to the extent
any such guarantee is not removed, Corning or Covance, as the case may be, will
indemnify CCL for all Indemnifiable Losses related to or arising from such
guarantee, in accordance with the procedures set forth in Section 3.05 and will
pay CCL a fee reflecting CCL's continuing role as guarantor.
(c) Except as otherwise specified in any Ancillary Agreement,
Corning, CCL and Covance shall use their commercially reasonable efforts to
have, on or prior to the Distribution Date, or as soon as practicable
thereafter, Covance and any of its Subsidiaries removed as guarantor of or
obligor for any Corning Liability or CCL Liability, including, without
limitation, in respect of those guarantees set forth on Schedule 2.08(c), and to
the extent any such guarantee is not removed, Corning or CCL, as the case may
be, will indemnify Covance for all Indemnifiable Losses related to or arising
from such guarantee, in accordance with the procedures set forth in Section 3.05
and will pay Covance a fee reflecting Covance's continuing role as guarantor.
<PAGE>
15
SECTION 2.09. Certain Transactions. (a) On or prior to the
Distribution Date, and in accordance to Section 2.02(b), Corning, CCL and
Covance shall enter into (i) the Tax Sharing Agreement which shall govern, among
other things, their respective rights and obligations with respect to Taxes of
CCL and Covance and each of their respective Subsidiaries for all periods
through the Distribution Date and certain other tax-related matters; and (ii)
the Spin-off Tax Indemnification Agreements which shall, among other things,
restrict CCL and Covance from engaging in certain activities that might
jeopardize the continuing tax-free treatment of the Distributions.
(b) Following the Distribution Date, Corning, CCL and Covance
shall each comply with and otherwise not take any action inconsistent with each
representation and statement made, or to be made, to the Commission in
connection with the "no-action request" letter describing the Distributions
filed by Corning with the Commission.
SECTION 2.10. Insurance. Except as contemplated by the
Insurance Agreement, any and all coverage of CCL, Covance and their respective
Subsidiaries under Company Policies has terminated or will terminate (and will
not be replaced by Corning) no later than the Effective Time.
ARTICLE III
INDEMNIFICATION
SECTION 3.01. Indemnification by Corning. (a) Except as
otherwise specifically set forth in any provision of this Agreement or of any
Ancillary Agreement, Corning shall indemnify and hold harmless the CCL
Indemnitees and the Covance Indemnitees from and against any and all
Indemnifiable Losses of the CCL Indemnitees and the Covance Indemnitees,
respectively, arising out of, by reason of or otherwise in connection with (i)
the Corning Liabilities or (ii) the breach by Corning of any provision of this
Agreement or any Ancillary Agreement.
(b) Corning shall indemnify and hold harmless CCL and its
Subsidiaries from and against any and all monetary payments by or on behalf of
CCL or any of its Subsidiaries (other than criminal fines or penalties imposed
upon former or current employees of CCL or its subsidiaries) to the United
States government or one of the States of the United States or any of their
respective departments, branches or agencies arising out of any investigation or
claim by or on behalf of the United States government or one of the States of
the United States or any of their respective departments, branches or agencies,
whether criminal, civil or administrative in nature which investigation or claim
has been settled prior to the Distribution Date or is pending as of the
Distribution Date pursuant to service of subpoena or other notice of such
investigation to Corning, CCL or any of its Subsidiaries, as well as any qui tam
proceeding for which a complaint was filed prior to the Distribution Date
whether or not Corning, CCL or any Subsidiary of CCL has been served with such
complaint or otherwise been notified of the pendency of such action, but only to
the extent such investigations or claims arise out of or are related to alleged
violations of (i) the federal civil False Claims Act (31 USC ss. 3729, et seq.)
and its criminal counterpart (18 USC ss. 287), (ii) Medicare and Medicaid fraud
(42 USC ss. 1320a-7(b)(a)(1)), (iii) the Civil Monetary Penalties Law (42 USC
ss.ss. 1320a-7a and 1320a-7(b)(b)), (iv) mail fraud and wire fraud statutes (18
USC ss.ss. 1341 and 1343), (v) false statements (18 USC ss. 1301), (vi)
conspiracy (18 USC ss. 371), (vii) money laundering (18 USC ss. 1956, et seq.),
(viii) RICO (18 USC ss. 1961), (ix) Title II of the Health Insurance Portability
and Accountability Act of 1996, (x) Title XVIII of the Social Security
<PAGE>
16
Act (42 USC ss.ss. 1395-1395ccc) (the Medicare statute), (xi) Title XIX of the
Social Security Act (42 USC ss.ss. 1396, et seq.) (the Medicaid statute), (xii)
the Programs Fraud Civil Remedies Act (31 USC ss.ss. 3801, et seq.); or (xiii)
the federal Anti-Kickback Act (42 USC ss.ss. 52, et seq.) arising out of the
billing or alleged overbilling by CCL or any past or present subsidiary of CLSI
(or any of their predecessors) of any federal program or agency, or any
federally supported state health care program or agency, or any beneficiary of
any of them, for services provided to any such beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(c) In the event that CCL or its Subsidiaries make monetary
payments in excess of forty-two million dollars ($42,000,000) within the period
beginning on the Distribution Date and ending five (5) years thereafter in
respect of claims by nongovernmental persons relating to or arising out of the
investigations or claims referred to in Section 3.01(b) and alleging
overbillings of such person or any beneficiary of such person by CCL, its
Subsidiaries or any past or present subsidiary of CLSI (or any of their
predecessors) for services provided prior to the Distribution Date to such
person or beneficiary thereof by CCL, its Subsidiaries or any past or present
subsidiary of CLSI (or any of their predecessors), then Corning shall indemnify
and hold harmless CCL and its Subsidiaries from and against fifty percent (50%)
of up to fifty million dollars ($50,000,000) in the aggregate of such monetary
payments actually paid by CCL or any Subsidiary of CCL in excess of such
forty-two million dollars ($42,000,000) in respect of such alleged overbillings.
(d) (i) Except as otherwise agreed by Corning and CCL or
unless otherwise required by a change in applicable law or regulations, a
contrary judicial decision, adverse determination by a Taxing authority, or a
contrary published ruling (in each case, subsequent to the date hereof), all
payments made by Corning to CCL, or to another party for the benefit of CCL,
pursuant to Section 3.01(b) and Section 3.01(c) shall be treated as nontaxable
capital contributions by Corning to CCL and the parties shall report the
payments consistent with such treatment for Tax purposes.
(ii) Each amount indemnified against by Corning pursuant to
Section 3.01(b) and Section 3.01(c) shall be reduced by (1) the product of (x)
the amount of any Tax deduction used to reduce the Tax liability of CCL, any CCL
Subsidiary (CCL and the CCL Subsidiaries shall be referred to in this Section
3.01(d) individually as a "CCL Company" and collectively as the "CCL Companies")
or any combined or consolidated group which has any of the CCL Companies as a
member and which does not have Corning as a member (referred to in this Section
3.01(d) as the "CCL Group") to the extent such Tax deduction is attributable to
the portion of the payment, loss, expense or other item indemnified against by
Corning and (y) the maximum marginal statutory rate (exclusive of any surtax
rate or other marginal rate imposed in lieu of a surtax to eliminate the
benefits of a lower marginal rate) at which the Tax to which such deduction
relates is imposed for the taxable year in which the CCL Company or the CCL
Group uses the Tax deduction to reduce its Tax liability, and (2) the amount of
any other Tax
<PAGE>
17
credit, benefit or other similar item (a "Tax Benefit Item") used to reduce the
Tax liability of any CCL Company or the CCL Group to the extent the Tax Benefit
Item is attributable to the portion of the payment, loss, expense or other item
indemnified against by Corning.
(iii) For purposes of determining whether any Tax deduction or
Tax Benefit Item of any CCL Company attributable to the portion of a payment,
loss, expense or other item indemnified against by Corning (a "Corning
Deduction") is used to reduce the Tax liability of any CCL Company or the CCL
Group, it shall be assumed that all losses and deductions of such CCL Company or
the CCL Group (including carryforwards and carrybacks (unless otherwise excluded
below) of net operating losses or other items) other than Corning Deductions are
applied in reduction of such CCL Company's or the CCL Group's Tax liability
before any Corning Deductions are so applied, except that Tax deductions and Tax
Benefit Items attributable to the following items shall be deemed to be applied
to reduce such CCL Company's or the CCL Group's Tax liability after using (in
determining such Tax liability) all available Corning Deductions: (i) Special
Events (as defined below), (ii) claims against which Corning has partially
indemnified CCL pursuant to Section 3.01(c) (other than payments applied toward
the $42,000,000 threshold specified in Section 3.01(c)) and (iii) carrybacks of
losses or other Tax items from Tax years subsequent to the Tax year in which the
amount indemnified against under Sections 3.01(b) or (3.01(c) is paid by
Corning. Special Event shall mean a material event that is unusual in nature or
occurs infrequently (but not both) and is unrelated to normal operations
(including, without limitation, entering or exiting businesses, sales or other
dispositions, litigation or regulatory settlements, restructuring reserves), but
does not include operating items such as start-up expenses and receivable
reserves. For this purpose, material means an event or series of related events
involving amounts exceeding 5 percent of CCL's pre-tax income (determined on a
consolidated basis).
(iv) Corning shall make estimated payments to CCL, or another
party for the benefit of CCL, pursuant to Section 3.01(b) and Section 3.01(c)
(the "Estimated Payments") which shall be calculated in good faith by CCL and
Corning by taking into account the adjustments required by Section 3.02(d)(ii)
and Section 3.01(d)(iii) to the extent practical (based on information available
to the parties at the time the Estimated Payment is made as to the proper tax
treatment of the item, CCL's projected Tax liability (including for estimated
Tax payments), or losses for the year in which the Estimated Payment is made
(without taking into account the use of Corning Deductions in future years),
prior Tax return positions and other factors the parties deem relevant).
Estimated Payments shall be paid by Corning (1) if paid to a CCL Company, as
directed by CCL, within 15 business days after written notice from CCL to
Corning indicating that the underlying obligation indemnified against by Corning
has been paid by a CCL Company (which notice shall include any documentation
reasonably requested by Corning establishing the amount and Tax treatment of
such payment) or, (2) if paid directly by Corning for the benefit of a CCL
Company, within 15 business days after written notice from CCL that the
obligation has been settled or is otherwise due (which notice shall include to
whom such payment should be made, the amount of the payment, an executed copy of
the
<PAGE>
18
settlement or other agreement and any other documentation reasonably requested
by Corning establishing the amount and Tax treatment of such payment); provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent Corning shall have been
actually prejudiced as a result of such failure.
(v) Within 60 business days following the close of the Tax
year in which an Estimated Payment is made and each tax year thereafter until
the Corning Deductions (as adjusted under Sections 3.01(d)(ii) and 3.01(d)(iii))
are fully used by the CCL Companies to reduce the Tax liability of the CCL Group
or any CCL Member, CCL shall compute the amount by which any reduction in the
Tax liability of a CCL Company or the CCL Group for such Tax year attributable
to a Corning Deduction decreases the after-Tax indemnity payable by Corning
under Sections 3.02(d)(ii) and (iii). CCL shall submit such computation in
writing to Corning (together with such other documentation as is reasonably
necessary to demonstrate how the reduction was computed) for review and approval
by Corning, which approval shall not be unreasonably withheld, within 20
business days of the receipt by Corning of such computation prepared by CCL. If
Corning does not approve of such computation and the parties cannot otherwise
agree on such computation, then the disagreement shall be resolved under Section
3.01(d)(ix). Promptly following agreement by the parties as to the computation
required under this paragraph, either CCL shall pay to Corning an adjusting
payment if the amount of such after-Tax indemnity payable by Corning under
Sections 3.01(d)(ii) and 3.01(d)(iii) is less than the aggregate amount of
Estimated Payments made to CCL for such Tax year and prior years (net of any
prior adjusting payments) or Corning shall pay to CCL an adjusting payment if
the amount of such after-Tax indemnity payable by Corning under Section
3.02(d)(ii) and (iii) exceeds the aggregate amount of Estimated Payments made to
CCL for such Tax year and prior years (net of any prior adjusting payments).
(vi) CCL shall consult with Corning and CCL and Corning shall
determine the Tax treatment by any CCL Company or the CCL Group of any payment,
loss, expense or other amount indemnified against by Corning under Section
3.01(b) or Section 3.01(c) provided that neither the CCL Group nor any CCL
Company nor Corning shall be required to take a position on any Tax return for
which there is no reasonable basis. If requested by CCL, Corning at its expense
will provide CCL with an opinion of independent tax counsel selected by Corning
(provided such counsel is not reasonably objected to by CCL) to the effect that
there exists a reasonable basis for the treatment proposed by Corning as part of
such determination. The parties shall report the payments consistent with the
treatment as determined by them for Tax purposes.
(vii) If any payments are made by Corning pursuant to Section
3.01(b) or Section 3.01(c), and calculated and paid pursuant to this Section
3.01(d), and the amount of the after-Tax indemnity payable by Corning pursuant
to such sections would have been different if the computation of such
indemnification payment were made at a later time (because of final settlements
or final dispositions of audit adjustments, administrative or judicial
proceedings,
<PAGE>
19
amended returns, utilization or disallowance of Corning Deductions in subsequent
Tax periods or other reasons), then the amount of such indemnification shall be
recomputed by CCL and Corning at such later time by taking into account such
subsequent events and the parties shall make an adjusting payment between each
other as is appropriate because of such recomputation within 15 business days of
their agreement as to the amount of such adjusting payment.
(viii) (A) CCL shall notify Corning promptly (and in any event
within 15 business days) after receipt by any CCL Company of written notice of
any demand or claim by a Taxing authority relating to the Tax treatment of a
payment, loss, expense or other item indemnified against by Corning under
Section 3.01(b) or Section 3.01(c). Such notice shall contain factual
information (to the extent known to any CCL Company) describing the asserted tax
treatment in reasonable detail and shall include copies of any notice or other
document received from any Taxing authority. If the Taxing authority proposes in
writing an adjustment to a Corning Deduction, which adjustment if sustained
would reduce the amount of a Corning Deduction or otherwise increase the amount
indemnified against by Corning, CCL shall notify Corning promptly of such
adjustment and of all action taken or proposed to be taken by the Taxing
authority; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent Corning shall
have been actually prejudiced as a result of such failure.
(B) If Corning requests within 30 days (or sooner if
the nature of the proposed adjustment so requires) after CCL's notice that the
proposed adjustment to a Corning Deduction be contested, CCL shall contest the
proposed adjustment in good faith upon receipt of an opinion of independent tax
counsel selected by Corning (provided such counsel is not reasonably objected to
by CCL) to the effect that there exists a reasonable basis that CCL will prevail
in such contest; provided, that (i) CCL shall be required to contest any
proposed adjustment beyond the level of administrative proceedings only if the j
aggregate amount of the proposed adjustment (exclusive of penalties, interest
and additions to tax) exceeds $250,000, (ii) CCL shall determine the court of
competent jurisdiction in which to contest the proposed adjustment either before
or after payment of the Tax asserted to be payable as a result thereof, (iii)
Corning shall control with counsel selected by Corning (provided such counsel is
not reasonably objected to by CCL) the prosecution of any contested adjustment
or asserted deficiency in respect of a Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b), and CCL shall control with
counsel selected by CCL (provided such counsel is not reasonably objected to by
Corning) the prosecution of any contested adjustment or asserted deficiency in
respect of a Corning Deduction arising from an amount indemnified against by
Corning under Section 3.01(c), (iv) the controlling party shall keep the other
party informed as to the progress of any contest or litigation and, if requested
by such other party, shall consult with such other party's tax counsel, and (v)
the controlling party shall not settle, compromise or otherwise concede the
adjustment or deficiency in respect of a Corning Deduction that the controlling
party is contesting without the consent of the other party, which consent shall
not be unreasonably withheld, provided, further, that any adverse
<PAGE>
20
court determination will be required to be appealed only upon receipt of an
additional opinion from independent tax counsel that there exists a reasonable
basis that the appellate court will reverse such adverse determination. CCL
shall not be required to take any action pursuant to this Section 3.01(viii)(B)
in respect of a contesting Corning Deduction relating to an amount indemnified
against by Corning under Section 3.01(b) unless Corning shall have agreed to pay
(with no net after-Tax cost to CCL) all penalties, interest and additions to tax
that CCL may incur in connection with contesting a proposed adjustment to such
Corning Deduction. The controlling party shall pay all out-of-pocket expenses
and other costs relating to a contest of an adjustment to a Corning Deduction
("Expenses"), including but not limited to fees for attorneys, accountants,
expert witnesses or other consultants retained by (or selected or controlled by)
the controlling party incurred at any time during which the controlling party is
controlling and directing the proceeding in respect of which such fees are
incurred; provided, however, that Corning shall pay CCL, in respect of a
proceeding controlled by CCL that relates to or involves a proposed adjustment
or asserted deficiency in respect of a Corning Deduction attributable to an
amount indemnified against by Corning under Section 3.01(c), that proportion of
the Expenses relating to the proceeding and involving such deduction as is equal
to the ratio of (i) the amount of the adjustment or deficiency that relates to
such Corning Deduction at issue in the proceeding and (ii) the total adjustments
at issue in the proceeding that relate to claims by nongovernmental persons
described in Section 3.01(c).
(C) If asserted liabilities unrelated to the
matters contemplated herein become grouped with contests arising hereunder, the
parties shall use their respective best efforts to cause the contest arising
hereunder to be the subject of a separate proceeding. If such severance is not
possible, Corning shall control only the prosecution of any contested adjustment
or asserted deficiency in respect of a Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b), and CCL shall have sole
discretion to determine the court of competent jurisdiction in which to contest
the proposed adjustment either before or after payment of the tax asserted to be
payable, provided that CCL shall not settle, compromise or otherwise concede any
such contested adjustment or asserted deficiency without the consent of Corning,
which consent shall not be unreasonably withheld. If CCL pays a disputed amount
of Taxes resulting from a disallowed Corning Deduction arising from an amount
indemnified against by Corning under Section 3.01(b) or Section 3.01(c), and
brings suit for refund, Corning shall advance the disputed amount of Taxes (but
only to the extent of the portion of such disputed Taxes as is attributable to
the disallowance of such Corning Deduction) to CCL within 15 business days of
such payment by CCL. If CCL subsequently receives a refund or credit, of all or
a part of the amount of disputed Taxes advanced by Corning, CCL shall promptly
pay (and in any event within 15 business days) to Corning an amount equal to the
portion of such refund or credit attributable to a Corning Deduction together
with any interest received (including by offset) by CCL from the Taxing
authority with respect to such portion. With respect to matters arising
hereunder controlled by Corning, and where deemed necessary by Corning, CCL
shall itself, and shall compel any
<PAGE>
21
CCL Subsidiary to, authorize by appropriate powers of attorney such persons as
Corning shall designate to represent CCL, or such CCL Subsidiary, with respect
to such matters.
(ix) If Corning and CCL are unable to agree on the proper
calculation or treatment of a payment or other obligation, a Tax deduction or
Tax Benefit Item or any other item described in this Section 3.01(d), then such
disputed item or items shall be resolved by a nationally recognized accounting
or law firm chosen and mutually acceptable to both parties. Such accounting or
law firm shall resolve the dispute within 30 days of having the item or items
referred to it and such resolution shall be binding on the parties. The costs,
fees and expenses of the accounting or law firm shall be borne equally by
Corning and CCL. In the event the parties are not able to agree on an accounting
or law firm, each party shall select its own nationally recognized law firm (and
bear the costs, fees and expenses thereof) and such law firms shall select a
nationally recognized accounting or law firm which accounting or law firm shall
be deemed to be mutually acceptable to both parties for the purpose of applying
this provision. Nothing in this Section 3.01(d) shall require either party to
take any position on a Tax return or for Tax purposes for which there is no
reasonable basis.
(x) All payments under Sections 3.01(b), 3.01(c) and 3.01(d)
shall be made without gross-up for Taxes, except if (A) the Tax liability of
Corning or a consolidated or combined group which has Corning as a member and
which does not have CCL as a member (the "Corning Group") is actually reduced by
a Tax deduction attributable to the payment by Corning of an amount indemnified
against by Corning under Sections 3.01(b) or 3.01(c) in any tax year that ends
after the Distribution Date because such payment is properly treated as an
deduction against ordinary income for Corning or the Corning Group in computing
its Taxable income for such year (a "CCL Payment Deduction") and (B) the Tax
Liability of any CCL Company or the CCL Group for such year is actually
increased by such payment because such payment is properly treated as an item of
ordinary income for any CCL Company or the CCL Group, then Corning shall pay to
CCL an amount equal to the lesser of the amount of such Corning Tax reduction
and the amount of such CCL Tax increase, within 15 business days after the
parties agree on the amount of the Corning Tax reduction and CCL Tax increase,
provided, however, any payment by Corning to CCL shall be net of Taxes imposed
on Corning or the Corning Group in respect of amounts paid by CCL to Corning
under Section 3.01(d). For purposes of computing a Corning Tax increase, it
shall be assumed that all losses and deductions other than the CCL Payment
Deduction are applied to reduce the Tax Liability of Corning or the Corning
Group before the CCL Payment Deduction is so applied.
(e) Notwithstanding anything to the contrary in this
agreement, Corning shall not indemnify, defend or hold harmless CCL or any
Subsidiary of CCL against (x) costs and expenses relating to the investigations
or claims referred to in Sections 3.01(b) and (c) (including, without
limitation, fees and expenses of attorneys, consultants and other agents of CCL
or any Subsidiary of CCL), or (y) losses of revenues or profits that may arise
as a consequence of the claims or investigations referred to in Sections 3.01(b)
or 3.01(c) or the
<PAGE>
22
settlements entered into or judgments rendered as a result thereof or as a
consequence of any exclusion from participation in any federal or state health
care program, or (z) any other consequential or incidental damages that may be
incurred by CCL or any Subsidiary of CCL, in each case which relates to the
billing of any person or any beneficiary of such person by CCL, any Subsidiary
of CCL or any past or present subsidiary of CLSI (or any of their predecessors)
for services provided to any such person or beneficiary thereof by CCL, any
Subsidiary of CCL or any past or present subsidiary of CLSI (or any of their
predecessors).
(f) All indemnification obligations of Corning pursuant to
this Section 3.01 may be made or assumed by an Affiliate of Corning to the
extent deemed necessary or desirable by Corning in its sole discretion;
provided, however, that Corning shall remain liable for such obligations.
SECTION 3.02. Indemnification by CCL. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, CCL shall indemnify and hold harmless the Corning Indemnitees and the
Covance Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnitees and the Covance Indemnitees, respectively, arising out of,
by reason of or otherwise in connection with (i) the CCL Liabilities or (ii) the
breach by CCL of any provision of this Agreement or any Ancillary Agreement;
provided, however, that CCL is under no obligation to indemnify or hold harmless
Corning from and against any Indemnifiable Losses arising out of, or by reason
of or otherwise in connection with any and all monetary payments by Corning in
respect of (i) the investigations or claims referred to in Section 3.01(b) or
(ii) claims referred to in Section 3.01(c) as to which no CCL Indemnitee is a
party.
SECTION 3.03. Indemnification by Covance. Except as otherwise
specifically set forth in any provision of this Agreement or of any Ancillary
Agreement, Covance shall indemnify and hold harmless the Corning Indemnitees and
the CCL Indemnitees from and against any and all Indemnifiable Losses of the
Corning Indemnities and the CCL Indemnitees, respectively, arising out of, by
reason of or otherwise in connection with (i) the Covance Liabilities or (ii)
the breach by Covance of any provision of this Agreement or any Ancillary
Agreement.
SECTION 3.04. Adjustments for Indemnification Obligations. If
the amount that any party (an "Indemnifying Party") is or may be required to pay
to any other person (an "Indemnitee") pursuant to Section 3.01, Section 3.02 or
Section 3.03, as applicable, shall, at any time subsequent to the payment
required by this Agreement, be reduced by insurance or other recovery,
settlement or otherwise, the amount of such reduction, less any expenses
incurred in connection therewith, shall promptly be repaid by the Indemnitee to
the Indemnifying Party, up to the aggregate amount of any payments received from
such Indemnifying Party pursuant to this Agreement in respect of such
Indemnifiable Loss.
<PAGE>
23
SECTION 3.05. Procedures for Indemnification - Third Party
Claims. If a claim or demand is made against an Indemnitee by any person who is
not a party to this Agreement (a "Third Party Claim") as to which such
Indemnitee is entitled to indemnification pursuant to this Agreement, such
Indemnitee shall notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim promptly (and in any event within 15 business
days) after receipt by such Indemnitee of written notice of the Third Party
Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent the
Indemnifying Party shall have been actually prejudiced as a result of such
failure (except that the Indemnifying Party shall not be liable for any expenses
incurred during the period in which the Indemnitee failed to give such notice).
If a Third Party Claim is made against an Indemnitee, the
Indemnifying Party shall be entitled to participate in the defense thereof and,
in the case of an Indemnifying Party's obligation to indemnify the Indemnitee
pursuant to Section 3.01(a), Section 3.01(b), Section 3.02 or Section 3.03, if
the Indemnifying Party so chooses and acknowledges in writing its obligation to
indemnify the Indemnitee therefor, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnitee. Should the Indemnifying Party so elect
to assume the defense of a Third Party Claim, the Indemnifying Party shall not
be liable to the Indemnitee for legal or other expenses subsequently incurred by
the Indemnitee in connection with the defense thereof. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the Indemnifying Party has failed to assume the defense
thereof. If the Indemnifying Party so elects to assume the defense of any Third
Party Claim, all of the Indemnitees shall cooperate with the Indemnifying Party
in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability
for a Third Party Claim, then in no event will the Indemnitee admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the Indemnifying Party's prior written consent, which consent
shall not be unreasonably withheld or delayed; provided, however, that the
Indemnitee shall have the right to settle, compromise or discharge such Third
Party Claim without the consent of the Indemnifying Party if the Indemnitee
releases the Indemnifying Party from its indemnification obligation hereunder
with respect to such Third Party Claim and such settlement, compromise or
discharge would not otherwise adversely affect the Indemnifying Party. If the
Indemnifying Party acknowledges in writing liability for a Third Party Claim,
the Indemnitee will agree to any settlement, compromise or discharge of a Third
Party Claim that the Indemnifying Party may recommend which by its terms (i)
obligates the Indemnifying Party to pay the full amount of its indemnification
obligation in connection with such Third Party Claim and (ii) releases the
Indemnitee completely in
<PAGE>
24
connection with such Third Party Claim and which would not otherwise adversely
affect the Indemnitee; and provided further that the Indemnitee may refuse to
agree to any such proposed settlement, compromise or discharge if the Indemnitee
agrees that the Indemnifying Party's indemnification obligation with respect to
such Third Party Claim shall not exceed the amount that would be required to be
paid by or on behalf of the Indemnifying Party in connection with such proposed
settlement, compromise or discharge.
Notwithstanding the foregoing, the Indemnifying Party shall
not be entitled to assume the defense of any Third Party Claim (and shall be
liable for the fees and expenses of counsel incurred by the Indemnitee in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the Indemnitee which the Indemnitee reasonably determines, after
conferring with its counsel, cannot be separated from any related claim for
money damages. If such equitable relief or other relief portion of the Third
Party Claim can be so separated from that for money damages, the Indemnifying
Party shall be entitled to assume the defense of the portion relating to money
damages.
The provisions contained in Section 3.01(d) shall control in
the situations described particularly in that section.
SECTION 3.06. Survival of Indemnities. The obligations of
Corning, CCL and Covance under this Article III shall survive the sale or other
transfer by any of them of any assets or businesses, with respect to any
Indemnifiable Loss of any Indemnitee related to such assets or businesses.
SECTION 3.07. Payments. All payments under this Agreement
shall be made without gross-up for Taxes except as provided in Section
3.01(d)(x).
ARTICLE IV
ACCESS TO INFORMATION
SECTION 4.01. Provision of Corporate Records. From and after
the Distribution Date, upon the prior written request by Corning, CCL or Covance
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting Corning, CCL or Covance, as
applicable, Corning, CCL or Covance, as the case may be, shall arrange, as soon
as reasonably practicable following the receipt of such request, for the
provision of appropriate copies of such Records (or other originals thereof if
the party making the request has a reasonable need for such originals) then in
the possession of Corning, CCL or Covance, as the case may be, or any of their
Subsidiaries, but only to the extent such items are not already in the
possession of the requesting party; provided, however, that nothing in this
Section 4.01 shall obligate a party to retain any records except to the extent
required by
<PAGE>
25
law or by an Ancillary Agreement or to provide Records if the party reasonably
determines that such provision of Records would prevent it from claiming that
the Records were privileged or otherwise not subject to disclosure in any
Action.
SECTION 4.02. Access to Information. (a) From and after the
Distribution Date, each of Corning, CCL and Covance shall afford to the other
and its authorized accountants, counsel and other designated representatives
reasonable access during normal business hours, subject to appropriate
restrictions for classified, privileged or confidential information, to the
personnel, properties, books and records of such party and its Subsidiaries
insofar as such access is reasonably required by the other party.
(b) For a period of five years following the Distribution
Date, each of Corning, CCL and Covance shall provide to the other, promptly
following such time at which such documents shall be filed with the Commission,
all documents that shall be filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
SECTION 4.03. Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing Records or access to
information to the other party under this Article IV shall be entitled to
receive from the recipient, upon the presentation of invoices therefor, payments
for such amounts, relating to supplies, disbursement and other out-of-pocket
expenses, as may be reasonably incurred in providing such Records or access to
information.
SECTION 4.04. Confidentiality. (a) Each of (i) Corning and its
Subsidiaries, (ii) CCL and its Subsidiaries and (iii) Covance and its
Subsidiaries shall not use or permit the use of (without the prior written
consent of the other) and shall hold, and shall cause its directors, officers,
employees, agents, consultants and advisors to hold, in strict confidence, all
information concerning the other parties in its possession, its custody or under
its control (except to the extent that (x) such information has been in the
public domain through no fault of such party, (y) such information has been
later lawfully acquired from other sources by such party or (z) this Agreement,
any Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (i) was obtained prior to or relates to periods prior to the
Effective Time, (ii) relates to any Ancillary Agreement or (iii) is obtained in
the course of performing services for the other party pursuant to any Ancillary
Agreement, and each party shall not (without the prior written consent of the
other) otherwise release or disclose such information to any other person,
except such party's auditors and attorneys, unless compelled to disclose such
information by judicial or administrative process or unless such disclosure is
required by law and such party has used commercially reasonable efforts to
consult with the other affected party or parties prior to such disclosure.
<PAGE>
26
(b) To the extent that a party hereto is compelled by judicial
or administrative process to disclose otherwise confidential information under
circumstances in which any evidentiary privilege would be available, such party
agrees to assert such privilege in good faith prior to making such disclosure.
Each of the parties hereto agrees to consult with each relevant other party in
connection with any such judicial or administrative process, including, without
limitation, in determining whether any privilege is available, and further
agrees to allow each such relevant party and its counsel to participate in any
hearing or other proceeding (including, without limitations, any appeal of an
initial order to disclose) in respect of such disclosure and assertion of
privilege.
ARTICLE V
DISPUTE RESOLUTION
SECTION 5.01. Good Faith Negotiations. In the event of a
controversy, dispute or claim arising out of, in connection with, or in relation
to the interpretation, performance, nonperformance, validity or breach of this
Agreement or otherwise arising out of, or in any way related to this Agreement,
including, without limitation, any claim based on contract, tort or statute
(collectively, "Agreement Disputes"), the general counsels of the relevant
parties shall negotiate in good faith for a reasonable period of time to settle
such Agreement Dispute.
SECTION 5.02. Procedure. If after such reasonable period such
general counsels are unable to settle such Agreement Dispute (and in any event
after 60 days have elapsed from the time the relevant parties began such
negotiations), such Agreement Dispute shall be determined, at the request of any
relevant party, by arbitration conducted in New York City, before and in
accordance with the then-existing Rules for Commercial Arbitration of the
American Arbitration Association (the "Rules"), and any judgment or award
rendered by the arbitrator shall be final, binding and nonappealable (except
upon grounds specified in 9 U.S.C. ss. 10(a) as in effect on the date hereof),
and judgment may be entered by any state or federal court having jurisdiction
thereof in accordance with Section 6.16 hereof. Unless the arbitrator otherwise
determines, the pre-trial discovery of the then-existing Federal Rules of Civil
Procedure and the then-existing Rules 46 and 47 of the Civil Rules for the
United States District Court for the Southern District of New York shall apply
to any arbitration hereunder. Any controversy concerning whether an Agreement
Dispute is an arbitrable Agreement Dispute, whether arbitration has been waived,
whether an assignee of this Agreement is bound to arbitrate, or as to the
interpretation of enforceability of this Article V shall be determined by the
arbitrator. The arbitrator shall be a retired or former judge of any United
States District Court or Court of Appeals or such other qualified person as the
relevant parties may agree to designate, provided, however, such individual has
had substantial professional experience with regard to settling sophisticated
commercial disputes. The parties intend that the provisions to arbitrate set
forth herein be valid, enforceable and irrevocable. The designation of a situs
or a
<PAGE>
27
governing law for this Agreement or the arbitration shall not be deemed an
election to preclude application of the Federal Arbitration Act, if it would be
applicable. In his or her award the arbitrator shall allocate, in his or her
discretion, among the parties to the arbitration all costs of the arbitration,
including, without limitation, the fees and expenses of the arbitrator and
reasonable attorneys' fees, costs and expert witness expenses of the parties.
The undersigned agree to comply with any award made in any such arbitration
proceedings that has become final in accordance with the Rules and agree to the
entry of a judgment in any jurisdiction upon any award rendered in such
proceedings becoming final under the Rules. The arbitrator shall be entitled if
appropriate, to award any remedy in such proceedings, including, without
limitation, monetary damages, specific performance and all other forms of legal
and equitable relief; provided, however, the arbitrator shall not be entitled to
award punitive damages.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. Expenses. Except as otherwise set forth in this
Agreement or any Ancillary Agreement, each of Corning, CCL and Covance shall
bear its own costs and expenses incurred on or prior to the Distribution Date
(whether or not paid on or prior to the Distribution Date) in connection with
the preparation, execution, delivery and implementation of this Agreement and
any Ancillary Agreement, the Information Statement, the Registration Statements
and the Distributions and the consummation of the transactions contemplated
thereby and the parties to this Agreement shall agree on an equitable allocation
of costs and expenses where any item is not clearly allocable to Corning, CCL or
Covance. Except as otherwise set forth in this Agreement or any Ancillary
Agreement, each party shall bear its own costs and expenses incurred after the
Distribution Date.
SECTION 6.02. Notices. All notices, requests, claims,
demands and other communications hereunder shall be in writing and shall be
given or made (and shall be deemed to have been duly given or made upon receipt)
by delivery in person, by courier service, by cable, by telecopy, by telegram,
by telex or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the addresses (or at such other address
for a party as shall be specified in a notice given in accordance with this
Section 6.02) listed below (with copies to Shearman & Sterling at 599 Lexington
Avenue, New York, New York 10022, Attn: Creighton Condon):
<PAGE>
28
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: General Counsel
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: General Counsel
(c) To Covance:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy: (609) 452-9865
Attn: General Counsel
SECTION 6.03. Complete Agreement; Construction. This
Agreement, including the Exhibits and Schedules, and the Ancillary Agreements
shall constitute the entire agreement between the parties hereto with respect to
the subject matter hereof and shall supersede all prior agreements and
undertakings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. In the event of any inconsistency between
this Agreement and any Schedule hereto, the Schedule shall prevail.
Notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there shall be a conflict between the provisions of
this Agreement and the provisions of any Ancillary Agreement, such Ancillary
Agreement shall control.
SECTION 6.04. Ancillary Agreements. This Agreement is not
intended to address, and should not be interpreted to address, the matters
specifically and expressly covered by the Ancillary Agreements.
SECTION 6.05. Counterparts. This Agreement may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
<PAGE>
29
SECTION 6.06. Survival of Agreements. Except as otherwise
contemplated by this Agreement, all covenants and agreements of the parties
contained in this Agreement shall survive the Distribution Date.
SECTION 6.07. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 6.08. Amendments. Subject to the terms of Section 6.11
hereof, this Agreement may not be amended or modified except (a) by an
instrument in writing signed by, or on behalf of, the parties or (b) by a waiver
in accordance with Section 6.07.
SECTION 6.09. Assignment. This Agreement may not be assigned
by operation of law or otherwise without the express written consent of the
other parties (which consent may be granted or withheld in the sole discretion
of the parties), and any attempt to assign any rights or obligations arising
under this Agreement without such consent shall be void.
SECTION 6.10. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
SECTION 6.11. Termination. This Agreement (including, without
limitation, Article III hereof) may be terminated and the Distributions may be
amended, modified or abandoned at any time prior to the Distributions by and in
the sole discretion of Corning without the approval of CCL or Covance or the
shareholders of Corning. In the event of such termination, no party shall have
any liability of any kind to any other party or any other person. After the
Distributions, this Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Article III shall not be
terminated or amended after the Distributions in respect of the third party
beneficiaries thereto without the consent of such persons.
SECTION 6.12. Subsidiaries. Each of the parties hereto
shall cause to be performed, and hereby guarantees the performance of, all
actions, agreements and obligations
<PAGE>
30
set forth herein to be performed by any Subsidiary of such party or by any
entity that is contemplated to be a Subsidiary of such party on and after the
Distribution Date.
SECTION 6.13. Third Party Beneficiaries. Except as provided in
Article III relating to Indemnitees, this Agreement shall be binding upon and
inure solely to the benefit of the parties hereto and their respective
Subsidiaries, Affiliates and assigns and nothing herein, express or implied, is
intended to or shall confer upon any third parties any legal or equitable right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 6.14. Headings. The descriptive headings contained
in this Agreement are for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
SECTION 6.15. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 6.16. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York,
applicable to contracts executed in and to be performed entirely within that
state. Without limiting the provisions of Article V, all actions and proceedings
arising out of or relating to this Agreement shall be heard and determined in
any New York state or federal court sitting in the City of New York.
SECTION 6.17. Public Announcements. (a) Prior to the Effective
Time, neither CCL nor Covance shall make, or cause to be made, any press release
or public announcement in respect of this Agreement or the transactions
contemplated hereby or otherwise communicate with any news media without the
prior written consent of Corning.
(b) Following the Effective Time, no party to this Agreement
shall make, or cause to be made, any press release or public announcement in
respect of this Agreement or the transactions contemplated hereby or otherwise
communicate with any news media without prior consultation with the other
parties, and the parties shall cooperate as to the timing and contents of any
such press release or public announcement.
SECTION 6.18. Severability. If any term or other provision of
this Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely
<PAGE>
31
as possible in an acceptable manner in order that the transactions contemplated
hereby are consummated as originally contemplated to the greatest extent
possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED
by /s/ A. John Peck, Jr.
---------------------
Name:
Title:
CORNING LIFE SCIENCES INC.
by /s/ Leo C. Farrenkopf, Jr.
--------------------------
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
(Delaware)
by /s/ Robert A. Carothers
-----------------------
Name:
Title:
COVANCE INC.
by /s/ Jeffrey S. Hurwitz
----------------------
Name:
Title:
CORNING CLINICAL LABORATORIES INC.
(Michigan)
by /s/ A.W. Reynolds
-----------------
Name:
Title:
<PAGE>
32
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>3
<DESCRIPTION>TAX SHARING AGREEMENT
<TEXT>
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT (this "Agreement") is dated as of
December 16, 1996, by and among CORNING INCORPORATED, a New York corporation
("Corning"), CORNING CLINICAL LABORATORIES INC., a Delaware corporation ("CCL"),
and COVANCE INC., a Delaware corporation ("Covance").
W I T N E S S E T H
WHEREAS, Corning is the common parent of an affiliated group
of corporations which includes CCL and Covance and which group and the members
thereof file consolidated federal income tax returns as well as certain
consolidated, combined or unitary state tax returns;
WHEREAS, the Board of Directors of Corning has determined that
it is appropriate and desirable to effect the Distributions as defined in and
pursuant to a Transaction Agreement dated as of even date herewith between
Corning, Corning Life Sciences Inc., a Delaware corporation ("CLSI"), CCL, and
Covance (the "Transaction Agreement"), subject to the satisfaction or waiver of
the conditions set forth in the Transaction Agreement; and
WHEREAS, the parties hereto desire to set forth their
agreements with regard to their respective liabilities for federal, state, local
and foreign taxes for periods before and after the Distributions and to provide
for certain other tax matters.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. General. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
<PAGE>
"Affiliate" shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
will control, or will be controlled by or will be under common control with the
person specified immediately following the Distribution Date.
"Agreement" shall have the meaning described in the above preamble.
"Carryback Item" shall have the meaning as described in Section
5.01(b) below.
"CCL" shall have the meaning as described in the preamble to this
Agreement.
"CCL Companies" shall mean, collectively, CCL and each Subsidiary of
CCL, other than Covance and any Subsidiary of Covance.
"CCL Distribution" shall mean the distribution by Corning to the
Corning shareholders of the stock of CCL as more particularly described in the
Transaction Agreement.
"CCL Domestic Companies" shall mean, collectively, each CCL Company
incorporated or organized under the laws of one of the respective States of the
United States.
"CCL Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which CCL is the common parent, not including
Covance or any member of the Covance Group and determined as if the capital
stock of CCL is widely held.
"CCL Returns" shall have the meaning as described in Section 2.03
below.
"CCL Return Period" shall mean a taxable period to which this Agreement
applies and for which a CCL Return is filed.
"CCL Separate Liability" shall have the meaning as described in
Section 4.01.
"CI Consolidated Return" shall mean any consolidated federal income tax
return or amendment thereof of the CI Group which includes one or more of the
CCL Domestic Companies or the Covance Domestic Companies.
"CI Consolidated Return Period" shall mean a taxable period to which
this Agreement applies and for which a CI Consolidated Return is filed.
"CI Group" shall mean the affiliated group of corporations as defined
in Section 1504(a) of the Code of which Corning is the common parent.
2
<PAGE>
"CI Group Benefit Amount" shall have the meaning as described in
Section 4.04(b) hereof.
"CI State, Local and Foreign Returns" shall have the meaning as
described in Section 2.02 below.
"CI State, Local and Foreign Return Period" shall mean a taxable period
to which this Agreement applies and for which a CI State, Local and Foreign
Return is filed.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Corning" shall have the meaning as described in the preamble to this
Agreement.
"Corning Subsidiary" shall mean any subsidiary of Corning other than
any of the Covance Companies and the CCL Companies.
"Covance" shall have the meaning as described in the preamble to this
Agreement.
"Covance Companies" shall mean, collectively, Covance and each
Subsidiary of Covance.
"Covance Distribution" shall mean the distribution by CCL to the CCL
shareholders of the stock of Covance as more particularly described in the
Transaction Agreement.
"Covance Domestic Companies" shall mean, collectively, each Covance
Company incorporated or organized under the laws of one of the respective States
of the United States. "Covance Group" shall mean the affiliated group of
corporations as defined in Section 1504(a) of the Code of which Covance is the
common parent and determined as if the capital stock of Covance is widely held.
"Covance Returns" shall have the meaning as described in Section 2.04
below.
"Covance Return Period" shall mean a taxable period to which this
Agreement applies and for which a Covance Return is filed.
"Covance Separate Liability" shall have the meaning as described in
Section 4.01 below.
"Distributions" shall mean the CCL Distribution, the Covance
Distribution and any transfers relating to the CCL Distribution or the Covance
Distribution.
"Distribution Date" shall have the meaning as described in the
Transaction Agreement.
"IRS" shall mean the Internal Revenue Service.
"IRS Penalty Rate" small mean the rate of interest imposed from time to
time on underpayments of income tax pursuant to Code section 6621.
3
<PAGE>
"IRS Ruling" shall mean the ruling issued by the IRS which states the
tax treatment of the Distributions and related transactions.
"person" shall mean any natural person, corporation, business trust,
joint venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Separate Covance/CCL Liability" shall have the meaning as described in
Section 4.02 below.
"Separate Returns" shall have the meaning as described in Section 2.04
below.
"Spin-Off Tax Indemnification Agreements" shall mean the Spin-Off Tax
Indemnification Agreements dated of even date herewith between or among two or
more of Corning, CCL and Covance.
"Subsidiary" shall have the meaning as described in the Transaction
Agreement.
"Tax" or "Taxes" shall mean all federal, state, local and foreign gross
or net income, gross receipts, withholding, franchise, transfer, estimated or
other tax or similar charges and assessments, including all interest, penalties
and additions imposed with respect to such amounts.
"Temporary Differences" attributable to any entity shall mean (a) any
single item of income or deduction in a CI Consolidated Return in respect of any
tax period that should reverse in one or more subsequent tax periods assuming
proper tax treatment and no change in law or in the tax accounting policies of
such entity (each an "Originating Temporary Difference") or (b) the partial or
complete reversal of an Originating Temporary Difference.
"Transaction Agreement" shall have the meaning as described on page 1
of this Agreement.
SECTION 1.02. CLSI. For all tax periods ending before or on the
Distribution Date, references herein to CCL shall include CLSI, which will be
merged into CCL prior to the Distribution Date pursuant to the Transaction
Agreement.
4
<PAGE>
ARTICLE 2
TAX RETURN FILING
SECTION 2.01. CI Consolidated Returns. Corning shall prepare and file
with the IRS all CI Consolidated Returns and amendments thereto required to be
filed by the CI Group for all tax periods beginning before or on the
Distribution Date. Such returns shall include all income, gains, losses,
deductions and credits of the CCL Domestic Companies and the Covance Domestic
Companies. Corning shall make all decisions relating to the preparation and
filing of such returns, subject to the approval of CCL and Covance, which
approval shall not be withheld unless no reasonable basis exists for the
decisions made by Corning in respect of such return. CCL and Covance further
agree to, and respectively agree to compel the CCL Domestic Companies and the
Covance Domestic Companies to, file or join in the filing of such
authorizations, elections, consents and other documents, and take such other
actions as may be necessary or appropriate, in the opinion of Corning, to carry
out the purposes and intent of this Section 2.01, provided that such actions are
not inconsistent with this Agreement or the Spin-Off Tax Indemnification
Agreements. CCL and Covance each shall furnish Corning at least sixty (60) days
before the due date (including extensions) of any such CI Consolidated Return
with its completed section of such CI Consolidated Return, prepared in
accordance with this Agreement, in accordance with instructions from Corning and
in a manner consistent with prior returns, except to the extent otherwise
required by the Spin-Off Tax Indemnification Agreements. CCL and Covance each
shall also furnish Corning work papers and other such information and
documentation as is reasonably requested by Corning with respect to the CCL
Companies and the Covance Companies. At Corning's request, major items of
income, deduction, gain and loss selected by Corning for inclusion in the CI
Consolidated Returns and relating to CCL Domestic Companies and Covance Domestic
Companies shall have been reviewed and approved prior to submission to Corning
by a nationally recognized accounting firm or law firm with expertise sufficient
to address the issues presented mutually acceptable to Corning and the party or
parties submitting such information. Corning and the other party or parties
submitting such information shall each pay an equal share of the cost of such
review.
5
<PAGE>
SECTION 2.02. CI State, Local and Foreign Returns. For any taxable
period beginning before or on the Distribution Date, Corning will prepare and
file all combined, consolidated or unitary state, local or foreign income or
franchise tax returns which are required to be filed by Corning or a Corning
Subsidiary and which include the operations conducted before or as of the
Distribution Date by (i) any of the CCL Companies or the Covance Companies, and
(ii) Corning or any Corning Subsidiary (herein, together with such returns filed
for previous periods, "CI State, Local and Foreign Returns"). Corning will
timely advise CCL and Covance of the inclusion of any of the CCL Companies and
the Covance Companies in any CI State, Local and Foreign Returns and the
jurisdictions in which such returns will be filed, which inclusion will not be
inconsistent with prior CI State, Local and Foreign Returns unless required by
applicable law. CCL and Covance will, and respectively will compel each of the
CCL Companies and Covance Companies whose tax information is included in any CI
State, Local and Foreign Return to, evidence its agreement to be included in
such return on the appropriate form and take such other action as may be
appropriate, in the opinion of Corning, to carry out the purposes and intent of
this Section 2.02, provided that such actions are not inconsistent with this
Agreement or the Spin-Off Tax Indemnification Agreements. CCL and Covance each
shall furnish Corning at least sixty (60) days before the due date (including
extensions) of any such CI State, Local and Foreign Return with a final copy of
the information necessary for Corning to complete such CI State, Local and
Foreign Return, prepared in accordance with instructions from Corning and in a
manner consistent with prior returns, except to the extent otherwise required by
the Spin-Off Tax Indemnification Agreements. CCL and Covance each shall also
furnish Corning work papers and other such information and documentation as is
reasonably requested by Corning.
2.03 CCL Returns. For any taxable period beginning before or on the
Distribution Date, CCL will prepare and file all combined, consolidated or
unitary state, local or foreign income or franchise tax returns which are
required to be filed separately by CCL or any Subsidiary of CCL, and which
include the operations conducted before or as of the
6
<PAGE>
Distribution Date by any of the CCL Companies and any of the Covance
Companies (herein, together with such returns filed for previous periods, "CCL
Returns"). CCL will timely advise Covance of the inclusion of any of the Covance
Companies in any CCL Returns and the jurisdictions in which such returns will be
filed, which inclusion will not be inconsistent with prior CCL Returns unless
required by applicable law. Covance will, and will compel each of the Covance
Companies whose tax information is included in any CCL Return to, evidence its
agreement to be included in such return on the appropriate form and take such
other action as may be appropriate, in the opinion of CCL, to carry out the
purposes and intent of this Section 2.03, provided that such actions are not
inconsistent with this Agreement or the Spin-Off Tax Indemnification Agreements.
Covance shall furnish CCL at least sixty (60) days before any CCL Return is due
(with extensions) with a final copy of the information necessary for CCL to
complete such CCL Return, prepared in accordance with instructions from CCL and
in a manner consistent with prior returns, except to the extent otherwise
required by the Spin-Off Tax Indemnification Agreements. Covance shall also
furnish CCL work papers and other such information and documentation as is
requested by CCL.
2.04 Separate Returns. For any taxable period ending before, on or
after the Distribution Date, each of Corning, CCL and Covance will prepare and
file all respective separate combined, consolidated or unitary state, local or
foreign income or franchise tax returns which are required to be filed
separately by such party and not otherwise described in Section 2.01, 2.02 or
2.03 above (herein, together with such returns filed for previous periods,
"Separate Returns").
ARTICLE 3
TAX LIABILITY
SECTION 3.01. Corning Liability. Except to the extent otherwise
provided herein and in the Spin-Off Tax Indemnification Agreements, for each CI
Consolidated Return Period and each CI State, Local and Foreign Return Period,
Corning shall be liable for and indemnify
7
<PAGE>
CCL and Covance against all taxes due in respect of all CI Consolidated Returns
and all CI State, Local and Foreign Returns, subject to reimbursement from CCL
and Covance respectively as contemplated by Article 4.
SECTION 3.02. State, local and foreign and separate return liability.
Except to the extent otherwise provided herein and in the Spin-Off Tax
Indemnification Agreements, (a) Corning will pay all taxes due on CI State,
Local and Foreign Returns, subject to appropriate reimbursement by CCL and
Covance respectively for liabilities for state, local and foreign returns as
contemplated by Article 4; (b) CCL will pay all taxes due on returns required to
be filed by CCL by Sections 2.03 and 2.04 hereof, subject to appropriate
reimbursement by Covance as contemplated by Article 4; and (c) Covance will pay
all taxes due on returns required to be filed by Covance by Section 2.04 hereof.
SECTION 3.03. Taxes resulting from the failure of either Distribution.
In the event that either the CCL Distribution or the Covance Distribution shall
fail to qualify for the tax treatment stated in the IRS Ruling, for reasons
other than those indemnified against in the Spin-Off Tax Indemnification
Agreements, any and all Taxes imposed upon or incurred by Corning, CCL or
Covance as a result of such failure (including any liability of Corning, CCL or
Covance arising from Taxes imposed on shareholders of Corning, CCL or Covance to
the extent any such shareholders successfully seek recourse against Corning, CCL
or Covance on account of such failure, or any liability for such Taxes which
Corning, CCL or Covance may assume or otherwise provide for) shall be allocated
among Corning, CCL and Covance in such a manner as will take into account the
extent to which the actions or inactions before, on or after the Distribution
Date of each of Corning, CCL, Covance and their respective Affiliates may have
contributed to such failure, and Corning, CCL and Covance each shall indemnify
and hold harmless the other from and against the Taxes so allocated to Corning,
CCL and Covance, respectively. In determining the extent to which Corning, CCL
and Covance may have contributed to such failure, all facts and circumstances
shall be taken into account. If it is determined that none of Corning, CCL or
Covance contributed to the failure of such Distribution to qualify for the tax
8
<PAGE>
treatment stated in the IRS Ruling, the liability of Corning, CCL and Covance
under this Section 3.03 shall be borne by each corporation in proportion to
their relative average market capitalization as determined by the average
closing price for each of Corning, CCL and Covance common stock during the 20
trading-day period immediately following the Distribution Date. Any payments to
be made by any of Corning, CCL or Covance to another pursuant to this Section
3.03 shall be made in immediately available funds within ten (10) days of the
receipt of notice that a payment requiring indemnification under this Section
3.03 has been made (or is required to be made), or if there is disagreement
among the parties as to the amount or existence of liability under this Section
3.03, within ten (10) days of the resolution of such disagreement.
ARTICLE 4
SEPARATE LIABILITY
SECTION 4.01. Separate Federal Liability Computation. For all tax
periods beginning after December 31, 1995, for which CI Consolidated Returns
have not been filed by Corning as of the Distribution Date and in respect of
which Corning is required to file a CI Consolidated Return, CCL and Covance
respectively shall compute the CCL Separate Liability and the Covance Separate
Liability for the portion of such periods in which the CCL Domestic Companies
and the Covance Domestic Companies respectively are members of the CI Group.
"CCL Separate Liability" in respect of any CI Consolidated Return Period means
the federal income tax liability (including CCL's share of Corning's alternative
minimum tax if Corning is subject to alternative minimum tax for such CI
Consolidated Return Period, not to exceed Corning's consolidated alternative
minimum tax for such period) computed as of December 31, 1996, as if CCL had
filed a consolidated federal income tax return for the CCL Group in respect of
such CI Consolidated Return Period. "Covance Separate Liability" in respect of
any CI Consolidated Return Period means the federal income tax liability
(including Covance's share of Corning's alternative minimum tax if Corning is
subject to alternative minimum tax for such CI Consolidated Return Period, not
to exceed Corning's consolidated alternative minimum tax for such period)
computed as of December 31, 1996, as if Covance had filed a consolidated federal
9
<PAGE>
income tax return for the Covance Group in respect of such CI Consolidated
Return Period. If, in computing the CCL Separate Liability or the Covance
Separate Liability, CCL or Covance calculates that the CCL Group or the Covance
Group, respectively, would experience a net operating loss resulting in no
federal income tax liability as of December 31, 1996, the CCL Separate Liability
or the Covance Separate Liability, as the case may be, shall be equal to a
credit amount calculated by Corning and equal to the reduction in the Federal
income tax liability of the CI Group by reason of the use of such net operating
loss of the CCL Group or the Covance Group, as the case may be, in the CI
Consolidated Return that Corning projects to be filed in respect of such period.
Except as may otherwise be required by the Spin-Off Tax Indemnification
Agreements, computations in respect of the CCL Separate Liability and the
Covance Separate Liability shall be consistent with prior CI Group returns,
shall follow the tax elections and other tax positions adopted or prescribed by
Corning and shall take into account the adjustments and modifications set forth
in Section 4.03; provided, however, that the Tax Director and/or General Counsel
of each of Corning and CCL or Covance, as the case may be, shall negotiate
reasonable modifications or alternatives to such requirements in the event that
either CCL or Covance, as the case may be, reasonably determines that such
elections, positions, adjustments or modifications would have a materially
detrimental effect on the tax obligations of CCL or Covance, as the case may be,
in respect of the current or any subsequent tax period.
SECTION 4.02. Separate Covance/CCL Liability Computation. For all tax
periods beginning after December 31, 1995, for which CCL Returns have not been
filed by CCL as of the Distribution Date and in respect of which CCL is required
to prepare and file a CCL Return, Covance shall compute the Separate Covance/CCL
Liability for the portion of such periods in which the Covance Companies
respectively are subsidiaries of CCL. "Separate Covance/CCL Liability" in
respect of any tax period means the state, local and foreign tax liability
computed as of December 31, 1996, as if Covance had filed consolidated combined
or unitary state, local and foreign tax returns with the Covance Companies in
respect of such tax period. Except as may otherwise be required by the Spin-Off
Tax Indemnification Agreements, computations in respect of the Separate
Covance/CCL Liability shall be consistent with any prior CCL Returns,
10
<PAGE>
shall follow the tax elections, positions, adjustments and modifications adopted
or prescribed by CCL and take into account adjustments and modifications similar
to those set forth in Section 4.03; provided, however, that the Tax Director
and/or General Counsel of each of CCL and Covance shall negotiate reasonable
modifications or alternatives to such requirements in the event that Covance
reasonably determines that such elections, positions, adjustments or
modifications would have a materially detrimental effect on the tax obligations
of Covance in respect of the current or any subsequent tax period.
SECTION 4.03. Adjustments. In computing the liabilities under
Sections 4.01 and 4.02, CCL and Covance respectively shall take into account the
following adjustments and modifications:
(i) Dividends from any member of the CI Group shall be
eliminated;
(ii) Gains or losses on intercompany transactions and
intercompany distributions between any members of the CI Group shall be
deferred and recognized pursuant to Treas. Reg. ss. 1.1502-13 and
1.1502-14 and Code Section 267 and the regulations thereunder;
(iii) All carryforwards of tax credits (except the minimum tax
credit), net operating losses, capital losses, charitable contributions
and other similar items shall be determined consistent with prior CI
Consolidated Returns;
(iv) All ordinary income shall be subject to tax at the
highest tax rate applicable to taxable ordinary income of corporations;
(v) Any exemption or similar item that must be prorated or
apportioned among the component members of a controlled group of
corporations shall not be taken into account; and
(vi) Other adjustments specified by Corning shall be made.
SECTION 4.04. Payments. In respect of each period for which liabilities
are required to be calculated pursuant to Section 4.01, CCL and Corning shall
provide for payments in respect of the CCL Separate Liability and Covance and
Corning shall provide for payments in
11
<PAGE>
respect of the Covance Separate Liability, in each case effective as of December
31, 1996. In respect of each period for which liabilities are required to be
calculated pursuant to Section 4.02, Covance and CCL shall provide for payments
in respect of the Separate Covance/CCL Liability, effective as of December 31,
1996.
SECTION 4.05. Discrepancies. (a) To the extent that the liabilities
calculated pursuant to Section 4.01 are not equal to the liabilities reported on
the actual tax returns filed in respect of the periods contemplated therein: (i)
Corning shall be liable for and shall indemnify and hold harmless the other
parties hereto against all liabilities and claims and shall receive all benefits
and refunds arising in respect of such differences that do not relate to
Temporary Differences attributable to CCL or Covance and (ii) CCL or Covance, as
the case may be, shall be liable for, make payment to Corning in respect of, and
indemnify and hold harmless the other parties hereto against all liabilities and
claims and shall receive all benefits and refunds arising in respect of such
differences that relate to Temporary Differences attributable to CCL or Covance,
respectively, in accordance with Section 7.01(b).
(b) To the extent that the liabilities calculated pursuant to Section
4.02 are not equal to the liabilities reported on the actual tax returns filed
in respect of the periods contemplated therein, Covance shall be liable for,
make payment to CCL in respect of, and indemnify and hold harmless the other
parties hereto against all liabilities and claims where such actual liabilities
are greater than the liabilities calculated under Section 4.02 and shall receive
all benefits and refunds arising in respect of such differences attributable to
Covance where such actual liabilities are less than the liabilities calculated
under Section 4.02.
(c) Payments to be made to Corning ,CCL or Covance in respect of
obligations arising under this Section 4.04 shall be made no later than five
days before the due date (without extensions) of the actual return to be filed.
SECTION 4.06. State and local returns. The liabilities of CCL and the
CCL Companies and Covance and the Covance Companies with respect to CI State,
Local and Foreign Returns in respect of tax periods beginning before or on the
Distribution Date shall be computed as of December 31, 1996, under the
principles set forth in Section 4.01 and
12
<PAGE>
compensation in respect to such liabilites shall be provided to Corning in
accordance with the principles of Sections 4.04 and 4.05.
ARTICLE 5
POST-DISTRIBUTION CARRYBACKS OF TAX BENEFITS
SECTION 5.01(a). CI Consolidated Returns; Net Operating Losses. If for
any taxable period beginning on or after the Distribution Date, a CCL Company or
a Covance Company incurs a net operating loss that may be carried back to a CI
Consolidated Return Period, the CCL Company or the Covance Company shall make an
election to relinquish the entire carryback period with respect to any such net
operating loss. If for any taxable period beginning on or after the Distribution
Date, a CCL Company or a Covance Company is entitled to a foreign tax credit or
a deduction in respect of such foreign taxes, such CCL Company or Covance
Company must take the deduction in lieu of the foreign tax credit, unless the
foreign tax credit can be fully utilized on a return other than a CI
Consolidated Return.
(b) Other Tax Benefits. If for any taxable period beginning on
or after the date of the CCL Distribution, a CCL Company or a Covance Company
incurs a net capital loss, business credit or other Tax attribute that must be
carried back to a CI Consolidated Return (each a "Carryback Item"), such CCL
Company or Covance Company may file a refund claim reflecting such Carryback
Item only after having obtained a written consent from Corning. In the event
that such CCL Company or Covance Company does not obtain such written consent or
shall not be eligible to file such claim under applicable law, Corning may, at
the written request and expense of such CCL Company or Covance Company, file
amended returns or refund claims reflecting such Carryback Item. Such CCL
Company or Covance Company shall be compensated for the use of such Carryback
Item as follows:
(i) Corning shall, within thirty (30) days after
receipt thereof, pay to such CCL Company or Covance Company respectively any
refunds actually received by Corning resulting from the filing of an amended
return or refund claim with respect to such Carryback Item attributable to such
company, whether such amended return or refund claim was filed by
13
<PAGE>
Corning or the CCL Company or the Covance Company, together with interest
received net of taxes with respect thereto. With respect to CCL, in the event
that Corning would have received a refund (including interest) with respect to
such claim had such refund not been offset against deficiencies, interest, or
penalties assessed against the CI Group or any member thereof (other than
deficiencies, interest or penalties (A) attributable to the operations of such
CCL Company and with respect to which such entity would otherwise be responsible
under the terms of this Agreement, (B) attributable to a taxable period of the
CI Group for which the statute of limitations has expired, (C) against which CCL
is obligated to indemnify Corning pursuant to the Spin-Off Tax Indemnity
Agreements or (D) in respect of which CCL is obligated to share payment pursuant
to Section 3.03 hereof), Corning shall pay to such CCL Company, within thirty
(30) days after receipt of notice of such offset, an amount equal to the amount
of such offset, together with interest that would have been paid to Corning if
such refund had not been offset. With respect to Covance, in the event that
Corning would have received a refund (including interest) with respect to such
claim had such refund not been offset against deficiencies, interest, or
penalties assessed against the CI Group or any member thereof (other than
deficiencies, interest or penalties (A) attributable to the operations of such
Covance Company and with respect to which such entity would otherwise be
responsible under the terms of this Agreement, (B) attributable to a taxable
period of the CI Group for which the statute of limitations has expired, (C)
against which Covance is obligated to indemnify Corning pursuant to the Spin-Off
Tax Indemnity Agreements or (D) in respect of which Covance is obligated to
share payment pursuant to Section 3.03 hereof), Corning shall pay to such
Covance Company, within thirty (30) days after receipt of notice of such offset,
an amount equal to the amount of such offset, together with interest that would
have been paid to Corning if such refund had not been offset.
(ii) If, for any taxable period, Corning is required
to and does make a repayment to the IRS of any portion of a refund described in
this Article 5 attributable to the denial of the CCL Company or Covance Company
Carryback Item, then such CCL Company or Covance Company shall pay to Corning in
immediately available funds within ten (10) days
14
<PAGE>
following the date Corning notifies such CCL Company or Covance Company of such
repayment, the amount of such repayment including interest thereon.
(iii) If Corning elects not to file amended returns
or refund claims reflecting a Carryback Item as to which CCL or Covance might
receive a tax benefit, Corning shall notify such CCL Company or Covance Company
of its decision and state the amount including interest which it has determined
to be the appropriate compensation for its claim, and Corning shall pay such CCL
Company or Covance Company within ten (10) days of the receipt by Corning of
written notification that the CCL Company or the Covance Company agrees with its
determination, or upon irreconcilable disagreement between such parties, upon
receipt by Corning of a written determination of a nationally recognized
accounting firm or law firm with expertise sufficient to address the issues
presented and mutually agreeable to such parties.
(iv) Notwithstanding anything to the contrary in this Article,
before Corning files a claim for refund or a CCL Company or a Covance Company is
permitted to file a claim for refund which reflects a Carryback Item and which
would affect a CI Consolidated Return, the validity and amount of any such
Carryback Item shall be reviewed and approved by Corning and such CCL Company or
Covance Company, as applicable, and, upon irreconcilable disagreement between
such parties, by a nationally recognized accounting firm or law firm with
expertise sufficient to address the issues presented and mutually agreeable to
such parties. Each CCL Company and each Covance Company, as applicable, agrees
to reimburse Corning for its reasonable expenses incurred in reviewing, filing
and securing any refund claim made at the request of such CCL Company or Covance
Company.
ARTICLE 6
POST-DISTRIBUTION CARRYOVERS OF TAX BENEFITS
SECTION 6.01. CI Group items. Corning shall notify CCL and Covance as
soon as practicable after the Distribution Date of any consolidated carryover
item which may be partially or totally attributed to and carried over by a CCL
Company or a Covance Company and will notify CCL and Covance of subsequent
adjustments which may affect such carryover item.
15
<PAGE>
SECTION 6.02. CCL Group Items. CCL shall notify Corning and Covance as
soon as practicable after the Distribution Date of any consolidated carryover
item which may be partially or totally attributed to and carried over by a
Covance Company and will notify Corning and Covance of subsequent adjustments
which may affect such carryover item. ARTICLE 7 AUDIT ADJUSTMENTS
SECTION 7.01. CI Consolidated, State, Local and Foreign Returns. Except
as provided in the Spin-Off Tax Indemnification Agreements and in Section 3.03
hereof, if any tax liability or refund in respect of the CI Group arises as a
result of an audit by the IRS or other taxing authority and such tax liability
or refund relates to a CI Consolidated Return or a CI State, Local and Foreign
Return filed in respect of any period commencing before or on the Distribution
Date and such liability:
(a) does not relate to Temporary Differences attributable to CCL or
Covance, Corning shall be liable for and shall pay any tax liabilities
and any interest and underpayment penalties associated therewith and
Corning shall receive any such tax refunds and any interest associated
therewith. Any penalties or additions to tax associated with tax
liabilities that are not underpayment penalties shall be allocated
among Corning, CCL and Covance in the proportion to which such
penalties are assessed to Corning, CCL and Covance, respectively, or in
the event such penalties are not clearly assessed to any individual
party or parties, in such a manner as will take into account the extent
to which each may have contributed to such penalties. Corning, CCL and
Covance each shall indemnify and hold harmless the other from and
against the penalties so allocated to Corning, CCL and Covance,
respectively; or
(b) does relate to Temporary Differences attributable to CCL or
Covance, and such taxing authority:
(i) acknowledges directly or indirectly to Corning's sole
satisfaction that Corning may utilize such Temporary
Differences in computing tax liability,
16
<PAGE>
benefit or refunds in respect of post-Distribution Date tax
periods, Corning shall be liable for and shall pay any such
tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; or
(ii) does not acknowledge directly or indirectly to Corning's
sole satisfaction that Corning may utilize such Temporary
Differences in computing tax liability, benefit or refunds in
respect of post-Distribution Date tax periods, the party
hereto against which the issue giving rise to such tax
liability is directed shall be liable for and shall pay any
such tax liability and any interest and underpayment penalties
associated with such tax liability and shall receive any such
benefit or refunds and any interest associated therewith; and
any liability and any penalties or additions to tax associated with
such tax liability that are not underpayment penalties shall be
allocated among Corning, CCL and Covance in the proportion to which
such penalties have been assessed by such taxing authority to Corning,
CCL and Covance, respectively, or in the event such penalties have not
been clearly assessed to any individual party or parties, in such a
manner as will take into account the extent to which each may have
contributed to such penalties, and Corning, CCL and Covance each shall
indemnify and hold harmless the other from and against the penalties so
allocated to Corning, CCL and Covance, respectively.
SECTION 7.02. Non-CI Consolidated, State, Local and Foreign Returns. If
any tax liability or refunds arise in respect of any member of the CI Group
(determined before giving effect to the Distributions) as a result of an audit
by the IRS or other taxing authority and such tax liability or refund does not
relate to a CI Consolidated Return or a CI State, Local and Foreign Return, the
party hereto against which the issue giving rise to such tax liability is
directed or in favor of which such return is applicable shall be liable for and
shall pay any such tax liability and any interest and penalties associated
therewith and shall receive any such refund and any interest associated
therewith, and shall indemnify and hold harmless the other parties hereto from
and against all such liabilities and any interest and penalties related thereto.
17
<PAGE>
SECTION 7.03. Other Audit Liabilities and Refunds. Except as otherwise
provided in this Article 7 or Articles 3 or 4 hereof or in the Spin-Off Tax
Indemnification Agreements, (a) CCL or Covance, as the case may be, shall be
liable for and shall pay all tax liabilities and any interest and penalties
associated therewith, and shall receive any tax refunds and any interest
associated therewith, that arise as a result of an audit by the IRS or other
taxing authority and that relate to the business or operations of CCL or
Subsidiaries of CCL and Covance or Subsidiaries of Covance, respectively, and
CCL and Covance each shall indemnify and hold harmless Corning and each other
from and against the penalties so allocated to CCL and Covance, respectively;
and (b) Corning shall be liable for and shall pay all tax liabilities and any
interest and penalties associated therewith, and shall receive any tax refunds
and any interest associated therewith, that arise as a result of an audit by the
IRS or other taxing authority and that relate to the business or operations of
Corning or Corning Subsidiaries.
SECTION 7.04. Expenses. Any out-of-pocket expenses (e.g., travel
expenses, accountants' fees, attorneys' fees, experts' fees, etc.) incurred by
the CI Group in connection with proposed or actual liabilities or refunds of the
type contemplated in this Article 7 shall be paid by the entities to which such
liabilities or refunds are allocated hereunder. In cases where such expenses
relate to more than one member of the CI Group or more than one party hereto,
the parties affected shall determine how such expenses shall be allocated.
ARTICLE 8
CONTESTS
SECTION 8.01. CI Group Contests; Notification and communication. If a
notice of audit is given, an audit is begun, an audit adjustment is (or has
been) proposed, or any other claim is (or has been) made by any taxing authority
with respect to a tax liability that, pursuant to the terms hereof, may be
attributable to a CCL Company or a Covance Company with regard to a CI
Consolidated Return or a CI State, Local and Foreign Return, Corning shall
promptly
18
<PAGE>
notify CCL and Covance of such event (unless a CCL Company and a Covance Company
previously was notified directly by the relevant tax authority). Thereafter,
Corning or CCL or Covance, as the case may be, shall keep the others, on a
timely basis, informed of all material developments in connection with audits,
administrative proceedings, litigation and other similar matters that may affect
their respective tax liabilities. Failure or delay in providing notification
hereunder shall not relieve any party hereto of any obligation hereunder in
respect of any particular tax liability, except to the extent that such failure
or delay restricts the ability of such party to contest such liability
administratively or in the courts and otherwise materially and adversely
prejudices such party.
SECTION 8.02. Group Contests; Control and Management of Claims. (a) As
among the parties hereto, Corning shall control the prosecution of any audits
and any contests in respect of any claim made by a taxing authority on audit or
in a related administrative or judicial proceeding or in respect of any refund
or credit of taxes, and shall make and prosecute other claims for refunds with
respect to any tax liability, that relates to a CI Consolidated Return Period or
a CI State, Local and Foreign Return Period. CCL or Covance, as the case may be,
may participate in such audits or contests to the extent that Corning in its
sole discretion shall deem appropriate, provided, however, that Corning shall
have the sole right to control, at Corning's expense, the prosecution of any
audit, refund claim or related administrative or judicial proceeding with
respect to those matters which could affect the CI Group's tax liability.
(b) With respect to a tax liability or refund that, pursuant to the
provisions hereof, may be attributable to a CCL Company or a Covance Company
relating to a CI Consolidated Return Period or a CI State, Local and Foreign
Return Period, if Corning elects not to exercise its rights of control under
subsection (a) hereof, and if CCL or Covance so requests, Corning shall contest,
control and allow CCL or Covance, as the case may be, to participate to the
extent that Corning in its sole discretion shall deem appropriate, all at CCL's
or Covance's respective expense, or in the alternative shall permit CCL or
Covance at its own expense to contest and control a claim made by a taxing
authority on audit or in a related administrative or judicial
19
<PAGE>
proceeding or by appropriate claim for refund or credit of taxes (or to make and
prosecute other claims for refund. CCL or Covance, as the case may be, shall pay
all out-of-pocket and other costs relating to such contests, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants.
(c) If asserted liabilities unrelated to the matters contemplated
herein become grouped with contests arising hereunder, the parties shall use
their respective best efforts to cause the contest arising hereunder to be the
subject of a separate proceeding.
(d) With respect to matters arising hereunder controlled by Corning,
and where deemed necessary by Corning, CCL and Covance respectively shall compel
the relevant CCL Company or Covance Company to authorize by appropriate powers
of attorney such persons as Corning shall designate to represent such CCL
Company or Covance Company with respect to such matters. The parties hereto
shall reasonably cooperate with one another in a timely manner with respect to
any matter arising hereunder.
(e) With respect to a particular adjustment or claim made with respect
to a CCL Company or a Covance Company that, pursuant to the provisions hereof,
may be attributable to a CCL Company or a Covance Company, to the extent, and
for so long as, Corning, in the exercise of its reasonable judgment, is
satisfied that CCL and the CCL Companies or Covance and the Covance Companies
can and will meet all their obligations under this Agreement, Corning shall not
settle, compromise, or concede such adjustment or claim without the written
consent of CCL or Covance, as the case may be, which consent shall not be
unreasonably withheld.
(f) Group contests and the control and management of matters hereunder
relating solely to CCL Returns shall be subject to the provisions of this
Section 8.02, applied as if CCL was Corning and Covance was CCL for purposes
thereof.
ARTICLE 9
20
<PAGE>
INFORMATION AND COOPERATION; BOOKS AND RECORDS
SECTION 9.01(a). Each of CCL and Covance shall deliver to Corning, as
soon as practicable after Corning's request, and Covance shall deliver to CCL,
as soon as practicable after CCL's request, such information and data concerning
the operations conducted before or as of the Distribution Date by the CCL
Companies and the Covance Companies respectively and make available such
knowledgeable employees of the CCL Companies and Covance Companies respectively
as Corning or CCL, as the case may be, may reasonably request, including
providing the information and data required by Corning's, CCL's or Covance's
customary internal tax and accounting procedures, in order to enable each of
Corning or CCL, as the case may be, to complete and file all tax forms or
reports that it may be required to file with respect to the activities of the
CCL Companies and the Covance Companies for taxable periods ending on, prior to
or including the Distribution Date, to respond to audits by any taxing
authorities with respect to such activities, to prosecute or defend any
administrative or judicial proceeding and to otherwise enable Corning or CCL, as
the case may be, to satisfy its accounting and tax requirements. CCL and Covance
shall provide office space to IRS and other tax auditors when they are
conducting on-site audits, and to employees and representatives of Corning or
CCL, as the case may be, as long as a CI Consolidated Return Period or a CI
State, Local and Foreign Return Period or a CCL Return Period, as the case may
be, is open to assessment of additional taxes or an assessment with respect to
such period is being contested. Corning shall deliver to CCL or Covance as soon
as practical after CCL's or Covance's request, and CCL shall deliver to Covance
as soon as practical after Covance's request, such information and data
concerning any tax attributes which were allocated to a CCL Company or a Covance
Company that is reasonably necessary in order to enable CCL or Covance to
complete and file all tax forms or reports that it may be required to file with
respect to such activities of the CCL Companies or the Covance Companies from
and after the Distribution Date, to respond to audits by any tax authorities
with respect to such activities, to prosecute or defend claims for taxes in any
administrative or judicial proceeding, and to otherwise enable CCL or Covance to
satisfy its
21
<PAGE>
accounting and tax requirements. In addition, Corning shall make available to
CCL and Covance, and CCL shall make available to Covance, its knowledgeable
employees for such purpose.
(b). Each CCL Company and each Covance Company shall retain all books,
records, documentation or other information relating to any CI Consolidated
Return or CI State, Local and Foreign Return, and each Covance Company shall
retain all books, records, documentation or other information relating to any
CCL Return Period, until the expiration of the applicable statute of limitations
(including any extension or waiver thereof). Upon the expiration of any statute
of limitations, the foregoing information may be destroyed or disposed of
provided that (i) the CCL Company or the Covance Company provides sixty (60)
days prior written notice to Corning or CCL, as the case may be, describing in
reasonable detail the documentation to be destroyed or disposed of and (ii)
Corning or CCL, as the case may be, agrees in writing to such destruction or
disposal. If Corning or CCL, as the case may be, objects to the proposed
destruction or disposal, then the CCL Company or the Covance Company shall
promptly deliver such materials to Corning or CCL, as the case may be, or
continue to retain such materials.
ARTICLE 10
GENERAL PROVISIONS
SECTION 10.01. Effectiveness. The effectiveness of this Agreement and
the obligations and rights created hereunder are subject and conditioned upon
the completion of the Distributions pursuant to the terms of the Transaction
Agreement.
SECTION 10.02. Notices. All notices, requests, claims, demands
and other communications hereunder shall be in writing and shall be
given or made (and shall be deemed to have been duly given or made upon
receipt) by delivery in person, by courier service (including overnight
delivery), by cable, by telecopy confirmed by
22
<PAGE>
return telecopy, by telegram, by telex or by registered or certified
mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall
be specified in a notice given in accordance with this Section 10.01)
listed below:
(a) To Corning Incorporated:
One Riverfront Plaza
Corning, New York 14831
Telecopy: (607) 974-8656
Attn: each of the General Counsel and Tax Director
(b) To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608
Telecopy: (201) 462-4795
Attn: each of the General Counsel and Tax Director
(c) To Covance:
210 Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:(609) 452-9865
Attn: each of the General Counsel and Tax Director
SECTION 10.03. Complete Agreement; Construction. This Agreement is
intended to provide rights, obligations and covenants in respect of Taxes and,
together with the Spin-Off Tax Indemnification Agreements, shall supersede all
prior agreements and undertakings, both written and oral, between the parties
with respect to the subject matter hereof and thereof. In the event provisions
of this Agreement are inconsistent with provisions in a Spin-Off Tax
Indemnification Agreement, the provisions in the Spin-Off Tax Indemnification
Agreement shall control, except in cases where this construction would provide a
duplicate benefit.
SECTION 10.04. Counterparts. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which when
23
<PAGE>
executed shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
SECTION 10.05. Waiver. The parties to this Agreement may (a) extend the
time for the performance of any of the obligations or other acts of the other
party or parties, (b) waive any inaccuracies in the representations and
warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 10.06. Amendments. This Agreement may not be amended or
modified except (a) by an instrument in writing signed by, or on behalf of, the
parties or (b) by a waiver in accordance with Section 10.05.
SECTION 10.07. Successors and Assigns. The provisions of this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and permitted assigns. This Agreement cannot be
assigned by Corning, CCL or Covance, in each case without the consent of the
other two parties hereto.
SECTION 10.08. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any subsidiary of such party
or by any entity that is contemplated to be a subsidiary of such party on and
after the Distribution Date.
24
<PAGE>
SECTION 10.09. Third Party Beneficiaries. This Agreement shall be
binding upon and inure solely to the benefit of the parties hereto and their
respective subsidiaries, and nothing herein, express or implied, is intended to
or shall confer upon any third parties any legal or equitable right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 10.10. Headings. The descriptive headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 10.11. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity.
SECTION 10.12. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, applicable to
contracts executed in and to be performed entirely within that state.
SECTION 10.13. Arbitration. Any conflict or disagreement arising out of
the interpretation, implementation, or compliance with the provisions of this
Agreement shall be finally settled pursuant to the provisions of Article V
(Dispute Resolution) of the Transaction Agreement, which provisions are
incorporated herein by reference.
SECTION 10.14. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
25
<PAGE>
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
26
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED,
by /s/ James B. Flaws
------------------------------------
Name:
Title:
CORNING CLINICAL LABORATORIES INC.,
by /s/ Robert A. Carothers
------------------------------------
Name:
Title:
COVANCE INC.,
by /s/ Jeffrey S. Hurwitz
------------------------------------
Name: Jeffrey S. Hurwitz
Title: Corporate Senior Vice President
MPE
taxshar.009
27
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>4
<DESCRIPTION>CORNING/COVANCE SPIN-OFF AGREEMENT
<TEXT>
CORNING/COVANCE SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this 16th day of December, 1996, by and among CORNING
INCORPORATED, a New York corporation ("Corning") and COVANCE INC., a Delaware
corporation ("Covance").
WITNESSETH
WHEREAS, Corning is the common parent of an affiliated group
of corporations within the meaning of Code1 Section 1504 which includes Covance;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement and Plan of Reorganization (the "Transaction
Agreement") dated of even date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify Corning as hereinafter provided in the event the Distributions or
the Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) Covance has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of Covance's knowledge, these materials, including, without limitation, any
statements and representations concerning Covance, its business, operations
capital structure and/or organization, are complete and accurate in all material
respects. Covance shall, and shall cause each member of the Covance Group, to
comply with each such representation and statement concerning Covance and the
Covance Group made in the materials so submitted, the IRS Ruling and any
subsequent IRS ruling, including without limitation, statements as to the
creation, funding and operation of employee compensation
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
plans by Covance. With respect to any representation or statement made by or on
behalf of Covance in connection with the IRS Ruling and any subsequent IRS
ruling and to the extent such representation or statement relates to future
actions or events under their control, neither Covance nor any member of the
Covance Group will take any action during the Restricted Period that would have
caused such representation or statement to be untrue if Covance had planned or
intended to take such action at the time such representation or statement was
made by or on behalf of Covance.
(b) Covance hereby represents and warrants to Corning that
Covance has no present intention to undertake any of the transactions set forth
in Section 1.02 (a) (iii) or to cease to engage in the active conduct of the
trade or business (within the meaning of Section 355(b)(2) of the Code) of
providing pharmaceutical services.
SECTION 1.02. Covenants. (a) Covance covenants and agrees with
Corning that during the Restricted Period:
(i) Covance will continue to engage in the pharmaceutical
services business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit Covance from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as Covance continues to engage in
such pharmaceutical services business in the U.S. and continues to so maintain
such substantial portion in the U.S.;
(ii) Covance will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
Covance managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which Covance owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither Covance,
nor any of its Affiliates nor any of their respective, directors, officers or
other representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of Covance Common Stock (including options,
warrants, rights or securities exercisable for, or convertible into, Covance
Common Stock) in a single transaction or in a series of related or unrelated
transactions or otherwise or in the aggregate which would exceed (or could
exceed if any such options, warrants or rights were exercised or such securities
were converted) fifty percent (50%) when expressed as a percentage of the
outstanding shares of Covance Common Stock immediately following the
Distributions; (B) the issuance of any class or series of capital stock or any
other instrument (other than Covance Common Stock and options, warrants, rights
or securities exercisable for, or convertible into, Covance Common Stock) that
would constitute equity for federal tax purposes (such classes or series of
capital stock and other instruments being referred to herein as
2
<PAGE>
"Disqualified Covance Stock"); (C) the issuance of any options, rights,
warrants, securities or similar arrangements exercisable for, or convertible
into, Disqualified Covance Stock; (D) any redemptions, repurchases or other
acquisitions of capital stock or other equity interests in Covance in a single
transaction or a series of related or unrelated transactions, unless such
redemptions, repurchases or other acquisitions (1) satisfy the following
requirements: (a) there is a "sufficient business purpose" (within the meaning
of Section 4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the
stock to be purchased, redeemed or otherwise acquired is widely held, (c) the
stock purchases or other acquisitions will be made on the open market, and (d)
the amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
Covance immediately following the Distributions; or (2) are made in connection
with employee equity compensation plans of Covance and do not result,
individually or in the aggregate, in the acquisition of more than ten percent
(10%) of the voting power in respect of the outstanding stock of Covance
immediately following the Distributions, (E) the dissolution, merger , or
complete or partial liquidation of Covance or any announcement of such action;
or (F) the waiver, amendment, termination or modification of any provision of
the Covance Rights Plan in connection with, or in order to permit or facilitate,
any acquisition or proposed acquisition of Beneficial Ownership of capital stock
or other equity interest in Covance.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, Covance and the Covance
Group will take, or refrain from taking, as the case may be, such actions as
Corning may reasonably request during the Ruling Period as necessary to insure
that the Distributions and the Other Transactions qualify for the tax treatment
stated in the IRS Ruling, including, without limitation, such actions as Corning
determines may be necessary to obtain and preserve the IRS Ruling or any
subsequent IRS ruling on which the parties can rely. Without limiting the
generality of the foregoing, Covance and the Covance Group shall cooperate with
Corning if Corning determines to obtain additional IRS rulings pertaining to
whether any actual or proposed change in facts and circumstances affects the tax
status of the Distributions or the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, Covance and its Affiliates may take any action or engage in conduct
otherwise prohibited by Section 1.02 so long as prior to such action or conduct,
as the case may be, Corning or Covance receives (A) a ruling from the IRS in
form and substance reasonably satisfactory to Corning and upon which Corning can
rely to the effect that the proposed action or conduct, as the case may be, will
not cause the Distributions or the Other Transactions to fail to qualify for the
tax treatment stated in the IRS Ruling or otherwise to be taxable for federal
income tax purposes, or (B) an Opinion of Counsel in form and substance
reasonably satisfactory to Corning and upon which Corning can rely to the effect
that the proposed action or conduct, as the case may be, will not cause the
Distributions or the Other Transactions to fail to qualify for the tax treatment
stated in the IRS Ruling or otherwise to be taxable for federal income tax
purposes.
3
<PAGE>
ARTICLE 2: Covance Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If Covance, or another
member of the Covance Group (collectively the "Indemnifying Party") shall take
any action prohibited by Article 1 or shall violate a representation or covenant
contained in Article 1, and either of the Distributions or any of the Other
Transactions shall fail to qualify for the tax treatment stated in the IRS
Ruling primarily as a result of such action or violation, then the Indemnifying
Party shall (jointly or severally) indemnify and hold harmless Corning and each
member of the Corning Group (collectively the "Indemnified Party") against any
and all Taxes imposed upon or incurred by the Indemnified Party as a result of
the failure, including, without limitation, any liability of the Indemnified
Party arising from Taxes imposed on shareholders of Corning to the extent any
shareholder or shareholders of Corning successfully seek recourse against the
Indemnified Party on account of any such failure, or any liability for such
Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of Covance Common Stock (or any other class of outstanding Covance
stock) or commences a tender or other purchase offer for the capital stock of
Covance upon consummation of which such Person or Group of Affiliated Persons or
Associated Persons would acquire Beneficial Ownership of twenty percent (20%) or
more of the Covance Common Stock (or any other class of outstanding Covance
stock) and either of the Distributions or any of the Other Transactions shall
fail to qualify for the tax treatment stated in the IRS Ruling primarily as a
result of such acquisition or tender or other purchase offer; then the
Indemnifying Party shall indemnify and hold harmless the Indemnified Party
against any and all Taxes imposed upon or incurred by the Indemnified Party
and/or its shareholders as a result of the failure of either Distribution or the
Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held
harmless under Section 2.01(a) without regard to the fact that the Indemnified
Party may have received a supplemental ruling from the IRS or an Opinion of
Counsel as contemplated by Section 1.02(c). The Indemnified Party shall be
indemnified and held harmless under Section 2.01(b) without regard to whether an
acquisition of Beneficial Ownership results from a transaction which is not
prohibited under Article 1.
4
<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability.
The amount indemnified against under Article 2 ("Indemnified Liability") for a
tax based on or determined with reference to income shall be deemed to be the
amount of the tax computed by multiplying (i) the taxing jurisdiction's highest
marginal tax rate applicable to taxable income of corporations such as the
Indemnified Party on income of the character subject to tax and indemnified
against under Article 2 for the taxable period in which the Distributions occur,
times (ii) the gain or income of the Indemnified Party which is subject to tax
in the taxing jurisdiction and indemnified against under Article 2. In the case
of an Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of Corning, the amount of the Indemnified Liability shall be equal
to the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
5
<PAGE>
all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
6
<PAGE>
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The
Indemnifying Party shall pay to the Indemnified Party the amount of the
Indemnified Liability and any expenses or other costs indemnified against (less
any amount paid directly by the Indemnifying Party to the taxing authority) no
less than (7) business days prior to the date payment of the Indemnified
Liability is to be made by any party to the taxing authority. Such payment shall
be paid by wire transfer of immediately available funds to an account designated
by the Indemnified Party by written notice to the Indemnifying Party prior to
the due date of such payment. If the Indemnifying Party delays making payment
beyond the due date hereunder, such party shall pay interest on the amount
unpaid at the IRS Penalty Rate for each day and the actual number of days for
which any amount due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
7
<PAGE>
To Corning:
One Riverfront Plaza
Corning, New York 14831
Telecopy:
Attn: General Counsel
To Covance:
Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of
this Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, Covance shall not assign this Agreement
or any rights, interests or obligations hereunder, or delegate performance of
any of its obligations hereunder, without the consent of Corning.
8
<PAGE>
SECTION 5.05. Specific Performance. The parties hereto
agree that irreparable damage would occur in the event any provision of this
Agreement was not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or equity.
SECTION 5.06. Governing Law and Severability.
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of New York, applicable to contracts executed in and to be
performed entirely within that state. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING INCORPORATED COVANCE INC.
By /s/ James B. Flaws By /s/ Jeffrey S. Hurwitz
------------------------------ --------------------------------
Name: Name: Jeffrey S. Hurwitz
Title: Title: Corporate Senior
Vice President
9
<PAGE>
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding Covance and the other members of the Covance Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of December 30, 1996, between CCL
and Harris Trust and Savings Bank, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and Covance and other members of the Covance Group.
<PAGE>
"Covance Common Stock" shall mean the common stock, [$0.50] par value [with
attached Preferred Stock Purchase Rights] of Covance.
"Covance Distribution" shall mean the distribution by CCL to the CCL
shareholders of the Covance Common Stock.
"Covance Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Covance (or any successor thereto) is the
common parent.
"Covance Rights Plan" shall mean the Preferred Share Purchase Rights Plan of
Covance as governed by the Rights Agreement, dated as of December 31, 1996,
between Covance and Harris Trust and Savings Bank, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the Covance
Distribution, including any transfers relating to the CCL Distribution or the
Covance Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
2
<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or Covance to such counsel.
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>5
<DESCRIPTION>COVANCE/CCL SPIN-OFF TAX INDEMNIFICATION AGREEMENT
<TEXT>
Covance/CCL SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this 16th day of December, 1996, by and among COVANCE
INC., a Delaware corporation ("Covance") and CORNING CLINICAL LABORATORIES INC.,
a Delaware corporation ("CCL").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning"), is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes Covance and CCL;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify Covance as hereinafter provided in the event the Covance
Distribution or the Other Transactions fail to qualify for the tax treatment
stated in the IRS Ruling due to actions by CCL.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) CCL has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of CCL's knowledge, these materials, including, without limitation, any
statements and representations concerning CCL, its business, operations capital
structure and/or organization, are complete and accurate in all material
respects. CCL shall, and shall cause each member of the CCL Group, to comply
with each such representation and statement concerning CCL and the CCL Group
made in the materials so submitted, the IRS Ruling and any subsequent IRS
ruling, including without limitation, statements as to the creation, funding and
operation of employee
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
compensation plans by CCL. With respect to any representation or statement made
by or on behalf of CCL in connection with the IRS Ruling and any subsequent IRS
ruling and to the extent such representation or statement relates to future
actions or events under their control, neither CCL nor any member of the CCL
Group will take any action during the Restricted Period that would have caused
such representation or statement to be untrue if CCL had planned or intended to
take such action at the time such representation or statement was made by or on
behalf of CCL.
(b) CCL hereby represents and warrants to Covance that CCL has
no present intention to undertake any of the transactions set forth in Section
1.02 (a) (iii) or to cease to engage in the active conduct of the trade or
business (within the meaning of Section 355(b)(2) of the Code) of providing
clinical laboratory testing services.
SECTION 1.02. Covenants. (a) CCL covenants and agrees with
Covance that during the Restricted Period:
(i) CCL will continue to engage in the clinical laboratory
testing business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit CCL from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as CCL continues to engage in such
clinical business in the U.S. and continues to so maintain such substantial
portion in the U.S.;
(ii) CCL will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
CCL managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which CCL owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither CCL, nor
any of its Affiliates nor any of their respective, directors, officers or other
representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of CCL Common Stock (including options, warrants,
rights or securities exercisable for, or convertible into, CCL Common Stock) in
a single transaction or in a series of related or unrelated transactions or
otherwise or in the aggregate which would exceed (or could exceed if any such
options, warrants or rights were exercised or such securities were converted)
fifty percent (50%) when expressed as a percentage of the outstanding shares of
CCL Common Stock immediately following the Distributions; (B) the issuance of
any class or series of capital stock or any other instrument (other than CCL
Common Stock and options, warrants, rights or securities exercisable for, or
convertible into, CCL Common Stock) that would constitute equity for federal tax
purposes (such classes or series of capital stock and other instruments being
referred to herein as
2
<PAGE>
"Disqualified CCL Stock"); (C) the issuance of any options, rights, warrants,
securities or similar arrangements exercisable for, or convertible into,
Disqualified CCL Stock; (D) any redemptions, repurchases or other acquisitions
of capital stock or other equity interests in CCL in a single transaction or a
series of related or unrelated transactions, unless such redemptions,
repurchases or other acquisitions (1) satisfy the following requirements: (a)
there is a "sufficient business purpose" (within the meaning of Section
4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the stock to be
purchased, redeemed or otherwise acquired is widely held, (c) the stock
purchases or other acquisitions will be made on the open market, and (d) the
amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
CCL immediately following the Distributions; or (2) are made in connection with
employee equity compensation plans of CCL and do not result, individually or in
the aggregate, in the acquisition of more than ten percent (10%) of the voting
power in respect of the outstanding stock of CCL immediately following the
Distributions, (E) the dissolution, merger , or complete or partial liquidation
of CCL or any announcement of such action; or (F) the waiver, amendment,
termination or modification of any provision of the CCL Rights Plan in
connection with, or in order to permit or facilitate, any acquisition or
proposed acquisition of Beneficial Ownership of capital stock or other equity
interest in CCL.
(b) Following the six-month anniversary of the Distribution
Date, CCL and its Affiliates may take any action or engage in conduct otherwise
prohibited by Section 1.02 so long as prior to such action or conduct, as the
case may be, Corning or CCL receives (A) a ruling from the IRS in form and
substance reasonably satisfactory to Corning to the effect that the proposed
action or conduct, as the case may be, will not cause the Covance Distribution
or the Other Transactions to fail to qualify for the tax treatment stated in the
IRS Ruling or otherwise to be taxable for federal income tax purposes, or (B) an
Opinion of Counsel in form and substance reasonably satisfactory to Corning to
the effect that the proposed action or conduct, as the case may be, will not
cause the Covance Distribution or the Other Transactions to fail to qualify for
the tax treatment stated in the IRS Ruling or otherwise to be taxable for
federal income tax purposes.
ARTICLE 2: CCL Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If CCL, or another member
of the CCL Group (collectively the "Indemnifying Party") shall take any action
prohibited by Article 1 or shall violate a representation or covenant contained
in Article 1, and the Covance Distribution or any of the Other Transactions
shall fail to qualify for the tax treatment stated in the IRS Ruling primarily
as a result of such action or violation, then the Indemnifying Party shall
(jointly or severally) indemnify and hold harmless Covance and each member of
the Covance Group (collectively the "Indemnified Party") against any and all
Taxes imposed upon or incurred by the Indemnified Party as a result of the
failure, including, without limitation, any liability of the
3
<PAGE>
Indemnified Party arising from Taxes imposed on shareholders of Covance to the
extent any shareholder or shareholders of Covance successfully seek recourse
against the Indemnified Party on account of any such failure, or any liability
for such Taxes which the Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of CCL Common Stock (or any other class of outstanding CCL stock)
or commences a tender or other purchase offer for the capital stock of CCL upon
consummation of which such Person or Group of Affiliated Persons or Associated
Persons would acquire Beneficial Ownership of twenty percent (20%) or more of
the CCL Common Stock (or any other class of outstanding CCL stock) and the
Covance Distribution or any of the Other Transactions shall fail to qualify for
the tax treatment stated in the IRS Ruling primarily as a result of such
acquisition or tender or other purchase offer; then the Indemnifying Party shall
indemnify and hold harmless the Indemnified Party against any and all Taxes
imposed upon or incurred by the Indemnified Party and/or its shareholders as a
result of the failure of either Distribution or the Other Transactions to so
qualify.
(c) The Indemnified Party shall be indemnified and held
harmless under Section 2.01(a) without regard to the fact that the Indemnified
Party may have received a supplemental ruling from the IRS or an Opinion of
Counsel as contemplated by Section 1.02(c). The Indemnified Party shall be
indemnified and held harmless under Section 2.01(b) without regard to whether an
acquisition of Beneficial Ownership results from a transaction which is not
prohibited under Article 1.
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of Covance, the amount of the Indemnified Liability shall be equal
to the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
4
<PAGE>
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at all meetings with such taxing
authority or any representative thereof pertaining to such investigation or
inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
5
<PAGE>
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall
6
<PAGE>
pay interest on the amount unpaid at the IRS Penalty Rate for each day and the
actual number of days for which any amount due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
To Covance:
210 Carnegie Center
Princeton, New Jersey 08540
Telecopy:
Attn: General Counsel
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which
7
<PAGE>
taken together shall constitute one and the same agreement. This Agreement may
not be amended or modified except (a) by an instrument in writing signed by, or
on behalf of, the parties or (b) by a waiver in accordance with Section 5.03.
This Agreement shall be binding upon and inure solely to the benefit of the
parties hereto and their respective subsidiaries, and nothing herein, express or
implied, is intended to or shall confer upon any third parties any legal or
equitable right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, CCL shall not assign this Agreement or
any rights, interests or obligations hereunder, or delegate performance of any
of its obligations hereunder, without the consent of Covance.
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING PHARMACEUTICAL CORNING CLINICAL
SERVICES LABORATORIES INC.
By /s/ Jeffrey S. Hurtz By /s/ Leo C. Farrenkopf, Jr.
---------------------------- ---------------------------
Name: Jeffrey S. Hurtz Name:
Title: Title:
9
<PAGE>
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding Covance and the other members of the Covance Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of December 30, 1996, between CCL
and Harris Trust and Savings Bank, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any comparable successor
legislation.
"Corning Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Corning (or any successor thereto) is the
common parent, excluding for tax periods of the Corning Group commencing
subsequent to the Distribution Date, CCL and the other members of the CCL Group
and Covance and other members of the Covance Group.
<PAGE>
"Covance Common Stock" shall mean the common stock, [$0.50] par value [with
attached Preferred Stock Purchase Rights] of Covance.
"Covance Distribution" shall mean the distribution by CCL to the CCL
shareholders of the Covance Common Stock.
"Covance Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which Covance (or any successor thereto) is the
common parent.
"Covance Rights Plan" shall mean the Preferred Share Purchase Rights Plan of
Covance as governed by the Rights Agreement, dated as of December 31, 1996,
between Covance and Harris Trust and Savings Bank, as Rights Agent.
"Distributions" shall mean the each of the CCL Distribution and the Covance
Distribution, including any transfers relating to the CCL Distribution or the
Covance Distribution.
"Distribution Date" shall mean such date as has been or hereafter will be
determined by Corning's Board of Directors as the date as of which the
Distributions shall be effected.
"Gross Assets" shall mean, when used with respect to a specified Person, the
fair market value of such Person's assets unencumbered by any liabilities.
"Group" shall have the meaning ascribed to such term in the Securities Exchange
Act of 1934, as amended, and the rules and regulations promulgated thereunder.
"IRS" shall mean the U.S. Internal Revenue Service.
"IRS Penalty Rate" shall mean the rate of interest imposed from time to time on
underpayments of income tax pursuant to Code section 6621.
"IRS Ruling" shall mean the private letter ruling (together with any
supplements) issued by the IRS in respect of the Ruling Request.
"Opinion of Counsel" shall mean an opinion of independent tax counsel of
recognized national standing and experienced in the issues to be addressed and
otherwise reasonably acceptable to Corning, which sets forth an Unqualified Tax
Opinion in form and substance satisfactory to Corning. In no event shall Corning
be required to conclude that an opinion is satisfactory if there is any risk,
however remote, that the transaction which is the subject of the opinion will
cause either of the Distributions to be taxable to any extent under the Code.
"Other Transactions" shall mean the transactions related to the Distributions
and described in Parts I through IV of the Ruling Request.
2
<PAGE>
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Restricted Period" shall mean the two year period following the Distribution
Date.
"Ruling Period" shall mean the period commencing on the Distribution Date and
ending on the later of (i) the third anniversary of the close of the taxable
year of Corning in which the Distributions occur, and (ii) the first anniversary
of the date on which there shall have expired all statutes of limitations in
respect of taxable periods for which Taxes might be imposed or otherwise
assessed in respect of the Distributions and the Other Transactions.
"Ruling Request" shall mean the request for rulings, as amended and
supplemented, under Section 355 of the Code, as filed on behalf of Corning on
June 17, 1996, in respect of the Distributions.
"Taxes" shall mean all federal, state, local and foreign gross or net income,
gross receipts, withholding, franchise, transfer, estimated or other taxes or
similar charges and assessments, including all interest, penalties and additions
imposed with respect to such amounts.
"Unqualified Tax Opinion" shall mean (a) an unqualified "will" opinion of tax
counsel to the effect that a transaction does not disqualify either of the
Distributions from qualifying for tax-free treatment for the shareholders of
Corning and CCL and any member of the Corning Group and the CCL Group under Code
section 355 and any other applicable sections of the Code, assuming that the
Distributions would have qualified for tax-free treatment if such transaction
did not occur. An Unqualified Tax Opinion may rely upon, and assume the accuracy
of, any representations contained in any application for a letter ruling from
the IRS, and any representations contained in an officer's certificate delivered
by an officer of Corning, CCL or Covance to such counsel.
3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.4
<SEQUENCE>6
<DESCRIPTION>CCL/COVANCE SPIN-OFF AGREEMENT
<TEXT>
CCL/Covance SPIN-OFF TAX INDEMNIFICATION AGREEMENT
This SPIN-OFF TAX INDEMNIFICATION AGREEMENT ("Agreement") is
made and entered into this 16th day of December, 1996, by and among CORNING
CLINICAL LABORATORIES INC., a Delaware corporation ("CCL") and COVANCE INC.,
a Delaware corporation ("Covance").
WITNESSETH
WHEREAS, Corning Incorporated, a New York corporation
("Corning") is the common parent of an affiliated group of corporations within
the meaning of Code1 Section 1504 which includes Covance;
WHEREAS, Corning has determined to effect the Distributions
pursuant to a Transaction Agreement (the "Transaction Agreement") dated of even
date herewith;
WHEREAS, the IRS has issued the IRS Ruling which states the
tax treatment of the Distributions and the Other Transactions; and
WHEREAS, the parties hereto are entering into this Agreement
to indemnify CCL as hereinafter provided in the event the Distributions or the
Other Transactions fail to qualify for the tax treatment stated in the IRS
Ruling due to actions by Covance.
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE 1: Representations and Covenants
SECTION 1.01. Representations. (a) Covance has reviewed the
materials submitted to the IRS in connection with the IRS Ruling and, to the
best of Covance's knowledge, these materials, including, without limitation, any
statements and representations concerning Covance, its business, operations
capital structure and/or organization, are complete and accurate in all material
respects. Covance shall, and shall cause each member of the Covance Group, to
comply with each such representation and statement concerning Covance and the
Covance Group made in the materials so submitted, the IRS Ruling and any
subsequent IRS ruling, including without limitation, statements as to the
creation, funding and operation of employee compensation
- --------
1 Capitalized terms not defined herein have the meaning given to them in Annex
A.
<PAGE>
plans by Covance. With respect to any representation or statement made by or on
behalf of Covance in connection with the IRS Ruling and any subsequent IRS
ruling and to the extent such representation or statement relates to future
actions or events under their control, neither Covance nor any member of the
Covance Group will take any action during the Restricted Period that would have
caused such representation or statement to be untrue if Covance had planned or
intended to take such action at the time such representation or statement was
made by or on behalf of Covance.
(b) Covance hereby represents and warrants to CCL that Covance
has no present intention to undertake any of the transactions set forth in
Section 1.02 (a) (iii) or to cease to engage in the active conduct of the trade
or business (within the meaning of Section 355(b)(2) of the Code) of providing
pharmaceutical services.
SECTION 1.02. Covenants. (a) Covance covenants and agrees with
CCL that during the Restricted Period:
(i) Covance will continue to engage in the pharmaceutical
services business in the U.S. and will continue to maintain in the U.S. a
substantial portion of its assets and business operations as they existed prior
to the Distributions, provided that the foregoing shall not be deemed to
prohibit Covance from entering into or acquiring other businesses or operations
which may or may not be consistent with its business and operations as they
existed prior to the Distributions so long as Covance continues to engage in
such pharmaceutical services business in the U.S. and continues to so maintain
such substantial portion in the U.S.;
(ii) Covance will continue to manage and to own (A) directly
assets which represent at least fifty percent (50%) of the Gross Assets which
Covance managed and owned directly immediately after the Distributions, and (B)
directly or indirectly through one or more entities, assets which represent at
least 50% of the Gross Assets which Covance owned indirectly through one or more
entities immediately after the Distributions;
(iii) except as provided in Section 1.02(c), neither Covance,
nor any of its Affiliates nor any of their respective, directors, officers or
other representatives will undertake, authorize, approve, recommend, permit,
facilitate, or enter into any contract, or consummate any transaction with
respect to: (A) the issuance of Covance Common Stock (including options,
warrants, rights or securities exercisable for, or convertible into, Covance
Common Stock) in a single transaction or in a series of related or unrelated
transactions or otherwise or in the aggregate which would exceed (or could
exceed if any such options, warrants or rights were exercised or such securities
were converted) fifty percent (50%) when expressed as a percentage of the
outstanding shares of Covance Common Stock immediately following the
Distributions; (B) the issuance of any class or series of capital stock or any
other instrument (other than Covance Common Stock and options, warrants, rights
or securities exercisable for, or convertible into, Covance Common Stock) that
would constitute equity for federal tax purposes (such classes or series of
capital stock and other instruments being referred to herein as
2
<PAGE>
"Disqualified Covance Stock"); (C) the issuance of any options, rights,
warrants, securities or similar arrangements exercisable for, or convertible
into, Disqualified Covance Stock; (D) any redemptions, repurchases or other
acquisitions of capital stock or other equity interests in Covance in a single
transaction or a series of related or unrelated transactions, unless such
redemptions, repurchases or other acquisitions (1) satisfy the following
requirements: (a) there is a "sufficient business purpose" (within the meaning
of Section 4.05(1)(b) of Revenue Procedure 96-30) for the transaction, (b) the
stock to be purchased, redeemed or otherwise acquired is widely held, (c) the
stock purchases or other acquisitions will be made on the open market, and (d)
the amount of stock purchases, redemption, or other acquisitions in a single
transaction or in a series of related or unrelated transactions will not exceed
an amount of stock representing twenty percent (20%) of the outstanding stock of
Covance immediately following the Distributions; or (2) are made in connection
with employee equity compensation plans of Covance and do not result,
individually or in the aggregate, in the acquisition of more than ten percent
(10%) of the voting power in respect of the outstanding stock of Covance
immediately following the Distributions, (E) the dissolution, merger , or
complete or partial liquidation of Covance or any announcement of such action;
or (F) the waiver, amendment, termination or modification of any provision of
the Covance Rights Plan in connection with, or in order to permit or facilitate,
any acquisition or proposed acquisition of Beneficial Ownership of capital stock
or other equity interest in Covance.
(b) In addition to the other representations, warranties,
covenants and agreements set forth in this Agreement, Covance and the Covance
Group will take, or refrain from taking, as the case may be, such actions as CCL
may reasonably request during the Ruling Period as necessary to insure that the
Distributions and the Other Transactions qualify for the tax treatment stated in
the IRS Ruling, including, without limitation, such actions as CCL determines
may be necessary to obtain and preserve the IRS Ruling or any subsequent IRS
ruling on which the parties can rely. Without limiting the generality of the
foregoing, Covance and the Covance Group shall cooperate with CCL if CCL
determines to obtain additional IRS rulings pertaining to whether any actual or
proposed change in facts and circumstances affects the tax status of the
Distributions or the Other Transactions.
(c) Following the six-month anniversary of the Distribution
Date, Covance and its Affiliates may take any action or engage in conduct
otherwise prohibited by Section 1.02 so long as prior to such action or conduct,
as the case may be, CCL or Covance receives (A) a ruling from the IRS in form
and substance reasonably satisfactory to CCL and upon which CCL can rely to the
effect that the proposed action or conduct, as the case may be, will not cause
the Distributions or the Other Transactions to fail to qualify for the tax
treatment stated in the IRS Ruling or otherwise to be taxable for federal income
tax purposes, or (B) an Opinion of Counsel in form and substance reasonably
satisfactory to CCL and upon which CCL can rely to the effect that the proposed
action or conduct, as the case may be, will not cause the Distributions or the
Other Transactions to fail to qualify for the tax treatment stated in the IRS
Ruling or otherwise to be taxable for federal income tax purposes.
3
<PAGE>
ARTICLE 2: Covance Indemnity Obligations
SECTION 2.01. Tax Indemnities. (a) If Covance, or another
member of the Covance Group (collectively the "Indemnifying Party") shall take
any action prohibited by Article 1 or shall violate a representation or covenant
contained in Article 1, and either of the Distributions or any of the Other
Transactions shall fail to qualify for the tax treatment stated in the IRS
Ruling primarily as a result of such action or violation, then the Indemnifying
Party shall (jointly or severally) indemnify and hold harmless CCL and each
member of the CCL Group (collectively the "Indemnified Party") against any and
all Taxes imposed upon or incurred by the Indemnified Party as a result of the
failure, including, without limitation, any liability of the Indemnified Party
arising from Taxes imposed on shareholders of CCL to the extent any shareholder
or shareholders of CCL successfully seek recourse against the Indemnified Party
on account of any such failure, or any liability for such Taxes which the
Indemnified Party may assume or otherwise provide for.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, if, during the Restricted Period, any Person or Group of Affiliated
Persons or Associated Persons acquires Beneficial Ownership of twenty percent
(20%) or more of Covance Common Stock (or any other class of outstanding Covance
stock) or commences a tender or other purchase offer for the capital stock of
Covance upon consummation of which such Person or Group of Affiliated Persons or
Associated Persons would acquire Beneficial Ownership of twenty percent (20%) or
more of the Covance Common Stock (or any other class of outstanding Covance
stock) and either of the Distributions or any of the Other Transactions shall
fail to qualify for the tax treatment stated in the IRS Ruling primarily as a
result of such acquisition or tender or other purchase offer; then the
Indemnifying Party shall indemnify and hold harmless the Indemnified Party
against any and all Taxes imposed upon or incurred by the Indemnified Party
and/or its shareholders as a result of the failure of either Distribution or the
Other Transactions to so qualify.
(c) The Indemnified Party shall be indemnified and held harmless
under Section 2.01(a) without regard to the fact that the Indemnified Party may
have received a supplemental ruling from the IRS or an Opinion of Counsel as
contemplated by Section 1.02(c). The Indemnified Party shall be indemnified and
held harmless under Section 2.01(b) without regard to whether an acquisition of
Beneficial Ownership results from a transaction which is not prohibited under
Article 1.
4
<PAGE>
ARTICLE 3: Calculation of Indemnity Amounts
SECTION 3.01. Amount of Indemnified Liability. The amount
indemnified against under Article 2 ("Indemnified Liability") for a tax based on
or determined with reference to income shall be deemed to be the amount of the
tax computed by multiplying (i) the taxing jurisdiction's highest marginal tax
rate applicable to taxable income of corporations such as the Indemnified Party
on income of the character subject to tax and indemnified against under Article
2 for the taxable period in which the Distributions occur, times (ii) the gain
or income of the Indemnified Party which is subject to tax in the taxing
jurisdiction and indemnified against under Article 2. In the case of an
Indemnified Liability attributable to a payment owed to a shareholder or
shareholders of CCL, the amount of the Indemnified Liability shall be equal to
the amount so owed, including without limitation, interest, costs, additions,
expenses and penalties. All amounts payable under this Agreement shall be paid
on an after-tax basis. If an Indemnified Liability is of a type that constitutes
a deduction from income in any taxable period in determining the Indemnified
Party's liability for a tax based upon or determined with reference to income,
the amount of the Indemnified Liability shall be reduced by the reduction in the
tax liability of the Indemnified Party.
ARTICLE 4: Procedural Matters
SECTION 4.01. General. (a) If either the Indemnified Party or
the Indemnifying Party receives any written notice of deficiency, claim or
adjustment or any other written communication from a taxing authority that may
result in an Indemnified Liability, the party receiving such notice or
communication shall promptly give written notice thereof to the other party,
provided that any delay by the Indemnified Party in so notifying an Indemnifying
Party shall not relieve the Indemnifying Party of any liability hereunder,
except to the extent (i) such delay restricts the ability of the Indemnifying
Party to contest the resulting Indemnified Liability administratively or in the
courts in accordance with Section 4.02 and (ii) the Indemnifying Party is
materially and adversely prejudiced by such delay.
(b) The parties hereto undertake and agree that from and after
such time as they obtain knowledge that any representative of a taxing authority
has begun to investigate or inquire into either Distribution or any of the Other
Transactions (whether or not such investigation or inquiry is a formal or
informal investigation or inquiry), the party obtaining such knowledge shall (i)
notify the other party thereof, provided that any delay by the Indemnified Party
in so notifying the Indemnifying Party shall not relieve the Indemnifying Party
of any liability hereunder (except to the extent (A) such delay restricts the
ability of the Indemnifying Party to contest the resulting Indemnified Liability
administratively or in the courts in accordance with Section 4.02 and (B) the
Indemnifying Party is materially and adversely prejudiced by such delay), (ii)
consult with the other party from time to time as to the conduct of such
investigation or inquiry, (iii) provide the other party with copies of all
correspondence with such taxing authority or any representative thereof
pertaining to such investigation or inquiry, and (iv) arrange for a
representative of the other party to be present at
5
<PAGE>
all meetings with such taxing authority or any representative thereof pertaining
to such investigation or inquiry.
SECTION 4.02. Contests. (a) Provided that (i) the Indemnifying
Party shall furnish the Indemnified Party with evidence reasonably satisfactory
to the Indemnified Party of its ability to pay the full amount of the
Indemnified Liability and (ii) the Indemnifying Party acknowledges in writing
that the asserted liability is an Indemnified Liability, the Indemnifying Party
shall assume and direct the defense or settlement of any hearing, arbitration,
suit or other proceeding (each a "Proceeding") commenced, filed or otherwise
initiated or convened to investigate or resolve the existence and extent of such
liability.
(b) If the Indemnified Liability is grouped with other
unrelated asserted liabilities or issues in the Proceeding, the parties shall
use their respective best efforts to cause the Indemnified Liability to be the
subject of a separate proceeding. If such severance is not possible, the
Indemnifying Party shall assume and direct and be responsible only for the
matters relating to the Indemnified Liability.
(c) If at any time during a Proceeding controlled by the
Indemnifying Party pursuant to Section 4.02(a) the Indemnifying Party fails to
provide evidence reasonably satisfactory to the Indemnified Party of its ability
to pay the full amount of the Indemnified Liability or the Indemnified Party
reasonably determines, after due investigation, that the Indemnifying Party
could not pay the full amount of the Indemnified Liability, then the Indemnified
Party may assume control of the Proceedings upon seven (7) days written notice.
(d) The Indemnifying Party shall pay all out-of-pocket
expenses and other costs related to the Indemnified Liability, including but not
limited to fees for attorneys, accountants, expert witnesses or other
consultants retained by the Indemnifying Party and/or the Indemnified Party,
other than fees for attorneys, accountants, expert witnesses or other
consultants retained solely by the Indemnified Party and incurred at any time
during which the Indemnifying Party is controlling and directing the Proceeding
in respect of which such fees are incurred. To the extent that any such expenses
and other costs have been or are paid by an Indemnified Party, the Indemnifying
Party shall promptly reimburse the Indemnified Party therefor.
(e) The Indemnifying Party shall not pay (unless otherwise
required by a proper notice of levy and after prompt notification to the
Indemnified Party of receipt of notice and demand for payment), settle,
compromise or conceded any portion of the Indemnified Liability without the
written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. The Indemnifying Party shall, on a timely basis, keep the
Indemnified Party informed of all developments in the Proceeding and provide the
Indemnified Party with copies of all pleadings, briefs, orders, and other
written papers.
6
<PAGE>
(f) Any Proceeding which is not controlled or which is no
longer controlled by the Indemnifying Party pursuant to Section 4.02 shall be
controlled and directed exclusively by the Indemnified Party, and any related
out-of-pocket expenses and other costs incurred by the Indemnified Party,
including but not limited to, fees for attorneys, accountants, expert witnesses
or other consultants, shall be reimbursed by the Indemnifying Party. The
Indemnified Party will not be required to pursue the claim in the federal
district court, Court of Claims or any state court if as a prerequisite to such
Court's jurisdiction, the Indemnified Party is required to pay the asserted
liability unless the funds necessary to invoke such jurisdiction are provided by
the Indemnifying Party.
SECTION 4.03. Time and Manner of Payment. The Indemnifying
Party shall pay to the Indemnified Party the amount of the Indemnified Liability
and any expenses or other costs indemnified against (less any amount paid
directly by the Indemnifying Party to the taxing authority) no less than (7)
business days prior to the date payment of the Indemnified Liability is to be
made by any party to the taxing authority. Such payment shall be paid by wire
transfer of immediately available funds to an account designated by the
Indemnified Party by written notice to the Indemnifying Party prior to the due
date of such payment. If the Indemnifying Party delays making payment beyond the
due date hereunder, such party shall pay interest on the amount unpaid at the
IRS Penalty Rate for each day and the actual number of days for which any amount
due hereunder is unpaid.
SECTION 4.04. Refunds. In connection with this Agreement,
should an Indemnified Party receive a refund in respect of amounts paid by an
Indemnifying Party to any taxing authority on its behalf, or should any such
amounts that would otherwise be refundable to the Indemnifying Party be applied
by the taxing authority to obligations of the Indemnified Party unrelated to an
Indemnified Liability, then such Indemnified Party shall, promptly following
receipt (or notification of credit), remit such refund and any related interest
to the Indemnifying Party.
SECTION 4.05. Cooperation. The parties shall cooperate with
one another in a timely manner in any administrative or judicial proceeding
involving any matter that may result in an Indemnified Liability.
ARTICLE 5: General Provisions
SECTION 5.01. Notices. All notices, requests, claims and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
respective parties at the addresses (or at such other address for a party as
shall be specified in a notice given in accordance with this Section 5.01)
listed below:
7
<PAGE>
To CCL:
One Malcolm Avenue
Teterboro, New Jersey 07608-1070210
Telecopy:
Attn: General Counsel
To Covance:
Carnegie Center
Princeton, New Jersey 08540-6233
Telecopy:
Attn: General Counsel
SECTION 5.02. Miscellaneous. This Agreement, including the
attachments, shall constitute the entire agreement between the parties hereto
with respect to the subject matter hereof and shall supersede all prior
agreements and undertakings, both written and oral, between the parties with
respect to the subject matter hereof and thereof. This Agreement may be executed
in one or more counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement. This
Agreement may not be amended or modified except (a) by an instrument in writing
signed by, or on behalf of, the parties or (b) by a waiver in accordance with
Section 5.03. This Agreement shall be binding upon and inure solely to the
benefit of the parties hereto and their respective subsidiaries, and nothing
herein, express or implied, is intended to or shall confer upon any third
parties any legal or equitable right, benefit or remedy of any nature whatsoever
under or by reason of this Agreement.
SECTION 5.03. Waiver. The parties to this Agreement may (a)
extend the time for the performance of any of the obligations or other acts of
the other party or parties, (b) waive any inaccuracies in the representations
and warranties of the other party or parties contained herein or in any document
delivered by the other party or parties pursuant hereto or (c) waive compliance
with any of the agreements or conditions of the other party or parties contained
herein. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed by the party to be bound thereby. Any waiver of any
term or condition shall not be construed as a waiver of any subsequent breach or
a subsequent waiver of the same term or condition, or a waiver of any other term
or condition, of this Agreement. The failure of any party to assert any of its
rights hereunder shall not constitute a waiver of any such rights.
SECTION 5.04. Successors and Assigns. The provisions of this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns.
Notwithstanding the previous sentence, Covance shall not assign this Agreement
or any rights, interests or obligations hereunder, or delegate performance of
any of its obligations hereunder, without the consent of CCL.
8
<PAGE>
SECTION 5.05. Specific Performance. The parties hereto agree
that irreparable damage would occur in the event any provision of this Agreement
was not performed in accordance with the terms hereof and that the parties shall
be entitled to specific performance of the terms hereof, in addition to any
other remedy at law or equity.
SECTION 5.06. Governing Law and Severability. This Agreement
shall be governed by, and construed in accordance with, the laws of the State of
New York, applicable to contracts executed in and to be performed entirely
within that state. If any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any law or public policy, all other
terms and provisions of this Agreement shall nevertheless remain in full force
and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
CORNING CLINICAL
LABORATORIES INC. COVANCE INC.
By /s/ Leo C. Farrenkopf, Jr. By /s/ Jeffrey S. Hurwitz
--------------------------- --------------------------------
Name: Leo C. Farrenkopf, Jr. Name: Jeffrey S. Hurwitz
Title: Vice President Title: Corporate Senior Vice President
<PAGE>
ANNEX A
DEFINITIONS
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with such Person.
"Affiliated Person" shall have the meaning ascribed to such term in the
Investment Company Act of 1940, as amended, and the rules and regulations
promulgated thereunder.
"Associated Person" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"Beneficial Ownership" shall have the meaning ascribed to such term in the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.
"CCL Common Stock" shall mean the common stock, [$0.50] par value [with attached
Preferred Stock Purchase Rights] of CCL.
"CCL Distribution" shall mean the distribution by Corning to the Corning
shareholders of the CCL Common Stock.
"CCL Group" shall mean the affiliated group of corporations as defined in
Section 1504(a) of the Code of which CCL (or any successor thereto) is the
common parent, excluding Covance and the other members of the Covance Group.
"CCL Rights Plan" shall mean the Preferred Share Purchase Rights Plan of CCL as
governed by the Rights Agreement, dated as of December 30, 1996, between CCL
and Harris Trust and Savings Bank, as Rights Agent.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including a