UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
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(X) ANNUAL REPORT PURSUANT TO SECTION 15(d) OF |
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THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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OR |
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( ) TRANSITION REPORT PURSUANT TO SECTION 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission File Number: 1-12213 |
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A. Full title of the plan and address of the plan, if different from that of the issuer named below:
COVANCE 401(k) SAVINGS PLAN
B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:
COVANCE INC.
210 CARNEGIE CENTER
PRINCETON, NEW JERSEY 08540
Covance 401(k) Savings Plan
Financial Statements
and Supplemental Schedule
December 31, 2005 and 2004
Index
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1 |
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Financial Statements |
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2 |
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3 |
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4 |
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Schedule H, Line 4i—Schedule of Assets (Held at End of Year) |
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10 |
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11 |
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12 |
Report of Independent Registered Public Accounting Firm
To the Participants and Administrative Committee of the Covance 401(k) Savings Plan
We have audited the accompanying statements of net assets available for benefits of the Covance 401(k) Savings Plan (the “Plan”) as of December 31, 2005 and 2004, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Plan’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 2005 and 2004, and the changes in its net assets available for benefits for the years then ended, in conformity with U.S. generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedule of assets (held at end of year) as of December 31, 2005, is presented for purposes of additional analysis and is not a required part of the financial statements but is supplemental information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This supplemental schedule is the responsibility of the Plan’s management. The supplemental schedule has been subjected to the auditing procedures applied in our audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.
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/s/ Ernst & Young LLP |
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MetroPark, New Jersey |
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May 31, 2006 |
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1
Covance 401(k) Savings Plan
Statements of Net Assets Available for Benefits
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December 31 |
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2005 |
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2004 |
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Investments at fair value: |
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Registered investment companies |
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$ |
229,914,203 |
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$ |
202,184,726 |
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Covance stock fund |
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106,974,099 |
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92,761,029 |
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Participant loans |
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5,317,674 |
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4,458,586 |
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Total investments |
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342,205,976 |
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299,404,341 |
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Participant contribution receivable |
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1,308,946 |
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1,178,932 |
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Employer contribution receivable |
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717,739 |
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693,874 |
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Interest bearing cash |
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3,055,697 |
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2,908,162 |
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Interest receivable |
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10,818 |
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4,692 |
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Total assets |
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347,299,176 |
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304,190,001 |
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Unsettled participant activity |
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(2,016 |
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(12,845 |
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Net assets available for benefits |
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$ |
347,297,160 |
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$ |
304,177,156 |
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See accompanying notes.
2
Covance 401(k) Savings Plan
Statements of Changes in Net Assets Available for Benefits
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Year ended December 31 |
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2005 |
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2004 |
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Additions |
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Investment income: |
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Interest and dividends |
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$ |
8,330,026 |
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$ |
4,855,815 |
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Net appreciation in fair value of investments |
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33,735,702 |
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44,072,366 |
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42,065,728 |
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48,928,181 |
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Contributions: |
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Participant (cash) |
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19,718,566 |
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17,399,322 |
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Employer (employer common stock) |
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8,843,525 |
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9,010,049 |
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28,562,091 |
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26,409,371 |
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Total additions |
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70,627,819 |
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75,337,552 |
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Deductions |
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Benefits paid to participants |
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27,466,487 |
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19,966,746 |
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Administrative fees |
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41,328 |
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41,037 |
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Total deductions |
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27,507,815 |
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20,007,783 |
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Net increase in net assets available for benefits |
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43,120,004 |
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55,329,769 |
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Net assets available for benefits at beginning of year |
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304,177,156 |
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248,847,387 |
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Net assets available for benefits at end of year |
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$ |
347,297,160 |
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$ |
304,177,156 |
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See accompanying notes.
3
Covance
401(k) Savings Plan
Notes to Financial Statements
December 31, 2005 and 2004
1. Description of the Plan
The following description of the Covance 401(k) Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan documents for a more complete description of the Plan’s provisions.
General
The Plan is a defined contribution plan intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”) and includes assets transferred effective December 31, 1999 from the Covance Employee Stock Ownership Plan (the “ESOP”). The ESOP was designed to comply with Section 4975(e)(7) and the regulations thereunder the Code. The Plan is subject to the applicable provisions of ERISA. Employees hired after December 31, 1998 are not eligible to participate in the ESOP and Covance does not intend to make any future contributions to the ESOP.
Eligibility
Any U.S. employee who has completed one hour of service is eligible to participate in the Plan; however, an employee is only eligible to receive employer matching contributions on the first day of the month following the completion of six months of service.
Contributions
Each participant may contribute any whole percentage of their eligible compensation between 1% and 50%, subject to annual Internal Revenue Service (“IRS”) limitations. Covance Inc. (the “Company”) makes a matching contribution to the Plan equal to three times each participant’s contribution for the first 1% of eligible compensation contributed to the Plan and 1/2 of each additional 1% of each participant’s eligible compensation contributed to the Plan up to an additional 5%, resulting in a maximum matching contribution of 5.5% for a participant who contributes 6% or more of their eligible compensation. This matching contribution is made 100% to the Covance Stock Fund on a semi-monthly basis. At its own discretion, the Company may make a discretionary contribution to the Plan (“Discretionary Contribution”) in any year, which would be allocable equally to all eligible participants employed by the
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Covance 401(k) Savings Plan
Notes to Financial Statements (continued)
December 31, 2005 and 2004
1. Description of the Plan (continued)
Company at the end of the Plan year, provided that any such Discretionary Contribution for any Plan year may only be made out of current or accumulated Company earnings and profits, and may not exceed the maximum allowable as a deduction to the Company under Section 404 of the Code. No such Discretionary Contribution has been made for the years ended December 31, 2005 and 2004.
Investment Elections
Participants may elect to have their contributions invested in any one or a combination of select funds offered by Fidelity Investments (“Fidelity”) in accordance with the Plan document. In addition, participants can elect to have their contributions invested in the Covance Stock Fund and all Company matching contributions are invested in the Covance Stock Fund. The length of service required for participants to have investment discretion with respect to the Company match is two years and the employee age requirement for Company match investment discretion is age 50 regardless of length of service.
Participant Accounts
Each participant’s account is credited with the participant’s contribution, the Company’s matching contribution, an allocation of Discretionary Contributions and an allocation of the Plan’s earnings. Discretionary Contributions are allocated pro rata based on participant account balances. Earnings are allocated by fund based on the ratio of a participant’s account invested in a particular fund to all investments in that fund.
Vesting
Participants are immediately vested in their contributions and the allocated earnings thereon. Participants become 25%, 50% and 100% vested in Company contributions after two, three and four years of service, respectively.
5
Covance 401(k) Savings Plan
Notes to Financial Statements (continued)
December 31, 2005 and 2004
1. Description of the Plan (continued)
Payment of Benefits
Each participant is entitled to receive the balance of their account upon retirement on or after age 65, or in the event of total and permanent disability or death. In addition, upon termination of employment with the Company, a participant may elect to be paid a lump sum amount equal to the value of the vested portion of their account balance. Participants entitled to a distribution of benefits with a vested account balance of $1,000 or less will automatically receive a lump sum payment. Prior to April 2005, participants with a vested account balance of $5,000 or less automatically received a lump sum payment. If the balance of a participant’s account exceeds $1,000, they can elect to receive either an immediate distribution or defer taking a distribution (but not beyond age 70 1/2). Prior to April 2005, the balance of a participant’s account had to exceed $5,000 in order to elect to defer the distribution of benefits. Payments may be distributed in cash or stock, at the discretion of the participant (or the participant’s beneficiary). Benefit distributions are recorded when paid.
Loans to Participants
A participant may borrow from the Plan a minimum of $1,000 up to the lesser of (i) 50% of the value of the vested portion of their account balance on the date the loan is made or (ii) $50,000 less the highest outstanding loan balance in the last twelve months. A participant may only have one loan outstanding at any time. Loans bear interest at a rate of one percent above the prime rate, as published in the Wall Street Journal.
Forfeited Accounts
Employees who leave the Company prior to completing four years of service forfeit the unvested portion of the Company’s matching contributions. Forfeited amounts are invested in the Fidelity Managed Income Portfolio Fund and are used to reduce future Company matching contributions and/or to pay Plan administration expenses. At December 31, 2005 and 2004, the balance of unused forfeited amounts totaled approximately $617,000 and $229,000, respectively.
Plan Termination
Although it has not expressed any intent to do so, the Company reserves the right to terminate the Plan at any time, subject to provisions of ERISA and the Plan. In the event of Plan termination, each participant’s account balance would become fully vested.
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Covance 401(k) Savings Plan
Notes to Financial Statements (continued)
December 31, 2005 and 2004
1. Description of the Plan (continued)
Plan Administration
The Plan is administered by a benefits administration committee appointed by the Compensation and Organization Committee of the Board of Directors of the Company. Fidelity Management Trust Company is the trustee of the Plan. Plan administration expenses can either be paid directly by the Company or paid through the liquidation of amounts forfeited under the Plan. When paid by the Company these expenses are not reflected in the accompanying financial statements. When paid by the Plan, through the liquidation of amounts forfeited under the Plan, these expenses are reflected in the accompanying financial statements.
2. Summary of Significant Accounting Policies
Basis of Accounting
The financial statements are prepared on the accrual basis of accounting.
Investments
The Plan’s investments are stated at fair value. Investments in the Covance Stock Fund and registered investment company funds are valued at quoted active market prices. Participant loans are valued at amortized cost which approximates fair value. Purchases and sales of securities are recorded on a trade date basis using the average cost method.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
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Covance
401(k) Savings Plan
Notes to Financial Statements (continued)
December 31, 2005 and 2004
3. Investments
During 2005 and 2004, the Plan’s investments (including investments purchased and sold as well as held during the year) appreciated in fair value as determined by quoted active market prices as follows:
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Net Realized and Unrealized |
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2005 |
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2004 |
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Covance Stock Fund |
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$ |
23,037,112 |
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$ |
30,509,885 |
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Shares of registered investment companies |
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10,698,590 |
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13,562,481 |
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$ |
33,735,702 |
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$ |
44,072,366 |
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Investments that represent 5% or more of the fair value of the Plan’s net assets are as follows:
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December 31 |
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2005 |
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2004 |
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Covance Stock Fund(a) |
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$ |
106,974,099 |
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$ |
92,761,029 |
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Fidelity Contrafund |
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40,342,578 |
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33,353,808 |
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Fidelity Managed Income Portfolio Fund |
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33,162,980 |
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33,134,446 |
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Fidelity Equity Income Fund |
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27,456,675 |
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27,942,858 |
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Fidelity Magellan Fund |
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23,259,314 |
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26,957,774 |
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(a) Includes both nonparticipant-directed and participant-directed investments.
4. Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that increases or decreases in the values of investment securities will occur in the near term, and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.
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Covance
401(k) Savings Plan
Notes to Financial Statements (continued)
December 31, 2005 and 2004
5. Nonparticipant-Directed Investments
The Covance stock fund contains a mix of nonparticipant-directed and participant-directed investments. Since it is not practical to segregate the non-participant directed and participant-directed investment balances, the entire fund is considered to be nonparticipant-directed for disclosure purposes. Information about the net assets and the significant components of the changes in net assets relating to the Covance stock fund is as follows:
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December 31 |
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2005 |
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2004 |
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Net assets: |
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Covance stock fund |
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$ |
106,974,099 |
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$ |
92,761,029 |
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Year ended December 31 |
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2005 |
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2004 |
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Changes in Covance stock fund: |
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Contributions (employer and employee)(a) |
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$ |
9,523,357 |
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$ |
9,375,010 |
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Earnings and net realized and unrealized gain in fair value |
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23,037,112 |
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30,509,885 |
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Distributions to participants |
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(8,734,073 |
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(5,342,062 |
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Net transfers to participant-directed investments |
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(7,506,153 |
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(9,772,300 |
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Forfeitures transferred to other accounts |
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(2,107,173 |
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(1,126,624 |
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Net change in Covance stock fund |
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$ |
14,213,070 |
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$ |
23,643,909 |
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(a) Contributions do not reflect an allocation of the total year-end contributions receivable into this fund.
6. Income Tax Status
The Plan has received a determination letter from the Internal Revenue Service dated November 2, 2001, stating that the Plan is qualified under Section 401(a) of the Internal Revenue Code and, therefore, the related trust is exempt from taxation. Subsequent to this determination by the Internal Revenue Service, the Plan was amended. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. The Plan administrator believes the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended, is qualified and the related trust is tax exempt.
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EIN: 22-3265977
Plan # 001
Covance 401(k) Savings Plan
Schedule
H, Line 4i—Schedule of Assets (Held at End of Year)
December 31, 2005
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Identity of Issuer, Borrower, |
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Description of Investment Including |
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Cost |
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Current Value |
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Value of interests in registered investment companies: |
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Fidelity Investments Institutional |
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Fidelity Contrafund*; 622,955 shares |
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** |
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$ |
40,342,578 |
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Fidelity Investments Institutional |
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Fidelity Managed Income Portfolio Fund*; 33,162,980 shares |
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** |
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33,162,980 |
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Fidelity Investments Institutional |
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Fidelity Equity Income Fund*; 520,210 shares |
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** |
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27,456,675 |
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Fidelity Investments Institutional |
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Fidelity Magellan Fund*; 218,520 shares |
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** |
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23,259,314 |
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Fidelity Investments Institutional |
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Fidelity International Discovery Fund*; 488,703 shares |
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** |
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15,472,341 |
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Fidelity Investments Institutional |
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Fidelity Balanced Fund*; 641,473 shares |
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** |
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12,034,025 |
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Fidelity Investments Institutional |
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Neuberger Berman Genesis Trust; 245,577 shares |
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** |
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11,922,780 |
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Fidelity Investments Institutional |
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Fidelity Freedom 2020 Fund*; 588,048 shares |
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** |
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8,650,189 |
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Fidelity Investments Institutional |
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Fidelity Freedom 2030 Fund*; 558,764 shares |
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** |
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8,392,629 |
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Fidelity Investments Institutional |
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Fidelity Freedom 2040 Fund*; 873,578 shares |
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** |
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7,713,696 |
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Fidelity Investments Institutional |
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Fidelity US Bond Index Fund*; 645,631 shares |
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** |
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7,037,378 |
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Fidelity Investments Institutional |
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Oakmark Select I; 200,448 shares |
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** |
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6,594,725 |
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Fidelity Investments Institutional |
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Baron Growth Fund; 128,069 shares |
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** |
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5,814,312 |
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Fidelity Investments Institutional |
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Fidelity Freedom 2010 Fund*; 403,660 shares |
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** |
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5,671,429 |
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Fidelity Investments Institutional |
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Spartan US Equity Index Fund; 124,788 shares |
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** |
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5,510,619 |
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Fidelity Investments Institutional |
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Fidelity Mid-Cap Stock*; 126,343 shares |
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** |
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3,356,930 |
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Fidelity Investments Institutional |
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Fidelity Export & Multinational Fund*; 112,044 shares |
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** |
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2,379,823 |
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Fidelity Investments Institutional |
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Fidelity Freedom Income Fund*; 206,115 shares |
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** |
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2,343,532 |
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Fidelity Investments Institutional |
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Fidelity Capital Appreciation Fund*; 71,108 shares |
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** |
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1,784,817 |
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Fidelity Investments Institutional |
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Fidelity Aggressive Growth Fund*; 25,692 shares |
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** |
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457,311 |
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Fidelity Investments Institutional |
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Fidelity Freedom 2000 Fund*; 25,912 shares |
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** |
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316,384 |
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Fidelity Investments Institutional |
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Spartan International Index Fund; 6,710 shares |
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** |
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239,736 |
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Total value of interest in registered investment companies |
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229,914,203 |
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Covance Inc. * |
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Covance stock fund: |
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Common stock; 2,203,380 shares |
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$ |
52,467,235 |
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106,974,099 |
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Participant loans* |
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Interest rates ranging from 5.0% to 10.50%, due in installments |
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** |
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5,317,674 |
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Total investments |
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$ |
342,205,976 |
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* Party-in-interest
** Not required as the investment is participant-directed
10
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the plan sponsor of the Covance 401(k) Savings Plan has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
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COVANCE 401(K) SAVINGS PLAN |
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Dated: |
June 20, 2006 |
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/s/ CHARLES A. HOPPER |
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Charles A. Hopper |
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V.P. Compensation, Benefits and HR Technology Covance Inc. |
11
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Exhibit Number |
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Document |
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23.1 |
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Consent of Independent Registered Public Accounting Firm |
12