SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10/A
Amendment No. 1 to Form 10
General Form For Registration of Securities
Pursuant to Section 12(b) or (g) of
the Securities Exchange Act of 1934
CORNING CLINICAL LABORATORIES INC.
(Exact name of registrant as specified in its charter)
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Delaware 16-1387862
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Malcolm Avenue
Teterboro, New Jersey 07608
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(Address of principal executive offices) (Zip Code)
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201 393 5000
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(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which
to be so registered each class is to be registered
Common Stock, with attached Preferred New York Stock Exchange
Stock Purchase Right
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Securities to be registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
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CORNING CLINICAL LABORATORIES INC.
INTRODUCTION
This Registration Statement on Form 10 relates to the registration under
the Securities Exchange Act of 1934, as amended, of the common stock, with
attached Preferred Stock Purchase Right, of the Registrant which is being
issued as described in the Information Statement, subject to completion or
amendment (the "Information Statement"), dated November 5, 1996, of Corning
Incorporated. Selected pages of the Information Statement which are related
to the Registrant and the securities being registered hereunder (the "CCL
Information") are attached hereto as Exhibit 99.1 and are incorporated herein
by reference in answer to the items of this Registration Statement set forth
below.
Item 1. Business
The information required by this item is contained under the sections"
Risk Factors--Risks Relating to CCL," "Business of CCL" and "The Relationship
Among Corning, CCL and Covance After the Distributions" of the CCL
Information and such sections are incorporated herein by reference.
Item 2. Financial Information
The information required by this item is contained under the sections
"Capitalization of CCL," "Pro Forma Financial Information of CCL," "Selected
Historical Financial Data of CCL" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of CCL" of the CCL
Information and such sections are incorporated herein by reference.
Item 3. Properties
The information required by this item is contained under the section
"Business of CCL--Properties" of the CCL Information and such section is
incorporated herein by reference.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is contained under the section
"Security Ownership of Certain Beneficial Owners and Management of CCL" of
the CCL Information and such section is incorporated herein by reference.
Item 5. Directors and Executive Officers
The information required by this item is contained under the section
"Management of CCL" of the CCL Information and such section is incorporated
herein by reference.
Item 6. Executive Compensation
The information required by this item is contained under the section
"Management of CCL" of the CCL Information and such section is incorporated
herein by reference.
Item 7. Certain Relationships and Related Transactions
The information required by this item is contained under the section
"Management of CCL" of the CCL Information and such section is incorporated
herein by reference.
Item 8. Legal Proceedings
The information required by this item is contained under the sections
"Business of CCL--OIG Investigations and Related Claims" and "--Legal
Proceedings" of the CCL Information and such sections are incorporated herein
by reference.
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Item 9. Market Price of and Dividends on the Registrant's Common Equity and
RelatedStockholder Matters
The information required by this item is contained under the sections
"Risk Factors--Risks Relating to CCL-- Absence of Dividends; Restrictions
Imposed on Dividends by the Indenture and the CCL Credit Facility," "Risk
Factors--Risks Relating to CCL--Absence of Prior Public Market," "Risk
Factors--Risks Relating to CCL-- Potential Volatility of Stock Price,"
"Description of CCL Capital Stock--CCL Common Stock--Dividend Policy," "--CCL
Common Stock--Listing and Trading" and "Management of CCL" of the CCL
Information and such sections are incorporated herein by reference.
Item 10. Recent Sales of Unregistered Securities
Not applicable.
Item 11. Description of Registrant's Securities to be Registered
The information required by this item is contained under the sections
"Description of CCL Capital Stock" and "Antitakeover Effects of Certain
Provisions of the CCL Certificate of Incorporation and By-Laws" of the CCL
Information and such sections are incorporated herein by reference.
Item 12. Indemnification of Directors and Officers
The information required by this item is contained under the section
"Liability and Indemnification of Directors and Officers of CCL" of the CCL
Information and such section is incorporated herein by reference.
Item 13. Financial Statements and Supplementary Data
The information required by this item is contained under the sections
"Capitalization of CCL," "Pro Forma Financial Information of CCL," "Selected
Historical Financial Data of CCL," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of CCL" and "Financial
Statements of Corning Clinical Laboratories Inc." of the CCL Information and
such sections are incorporated herein by reference.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 15. Financial Statements and Exhibits
(a) Financial Statements
The information required by this item is contained under the section
"Financial Statements of Corning Clinical Laboratories Inc." of the CCL
Information and such section is incorporated herein by reference.
(b) Exhibits
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Exhibit
Number Description
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2.1* Form of Transaction Agreement among Corning Incorporated, Corning Life Sciences Inc.,
Corning Clinical Laboratories Inc. and Covance Inc., dated [ ], 1996
3.1* Certificate of Incorporation of the Registrant
3.2* By-Laws of the Registrant
4.1* Form of Common Stock certificate
4.2* Form of Rights Agreement between Corning Clinical Laboratories Inc. and [ ], dated
[ ], 1996
10.1* Form of Tax Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories
Inc. and Covance Inc., dated [ ], 1996
10.2* Form of Spin-Off Tax Indemnification Agreement between Corning Incorporated and Corning
Clinical Laboratories Inc. dated [ ], 1996
10.3* Form of Spin-Off Tax Indemnification Agreement between Corning Clinical Laboratories
Inc. and Covance, Inc. dated [ ], 1996
10.4* Form of Credit Agreement among Corning Clinical Laboratories Inc., Morgan Guaranty Trust
Company of New York, Nationsbank, N.A. and Wachovia Bank of Georgia, N.A., dated [ ],
1996
10.5* Form of Spin-Off Tax Indemnification Agreement between Covance Inc. and Corning Clinical
Laboratories Inc., dated [ ], 1996
10.6* Form of Corning Clinical Laboratories Inc. Employee Stock Purchase Plan
10.7* Form of Corning Clinical Laboratories Inc. Variable Compensation Plan
10.8* Form of Corning Clinical Laboratories Inc. Profit Sharing Plan
10.9* Form of Corning Clinical Laboratories Inc. Employee Equity Participation Program
10.10* Form of Corning Clinical Laboratories Inc. Executive Retirement Supplemental Plan
10.11* Form of Corning Clinical Laboritories Inc. Directors' Restricted Stock Plan
21* Subsidiaries of the Registrant
27* Financial Data Schedules
99.1 Selected pages of the Information Statement, subject to completion or amendment, of
Corning Incorporated dated November 5, 1996 (pages 2; 28-100; F-1-F-28)
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* To be filed
by amendment.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to the registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
CORNING CLINICAL LABORATORIES INC.
Dated: November 5, 1996 By: /s/ Kenneth W. Freeman
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Kenneth W. Freeman, President
and Chief Executive Officer
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TABLE OF CONTENTS
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THE RELATIONSHIP AMONG CORNING, CCL AND COVANCE AFTER THE DISTRIBUTIONS 28
CORNING CLINICAL LABORATORIES INC.
RISK FACTORS 31
CAPITALIZATION OF CCL 36
SELECTED HISTORICAL FINANCIAL DATA OF CCL 37
PRO FORMA FINANCIAL INFORMATION OF CCL 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CCL 48
BUSINESS OF CCL 56
MANAGEMENT OF CCL 77
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CCL 88
DESCRIPTION OF CCL CAPITAL STOCK 89
ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CCL CERTIFICATE OF
INCORPORATION AND BY-LAWS 95
DESCRIPTION OF CERTAIN INDEBTEDNESS OF CCL 99
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF CCL 100
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS OF Covance 161
AVAILABLE INFORMATION 162
INDEX TO FINANCIAL STATEMENTS F-1
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THE RELATIONSHIP AMONG CORNING, CCL AND COVANCE
AFTER THE DISTRIBUTIONS
After the Distributions, Corning Clinical Laboratories Inc. ("CCL") and
Covance Inc. ("Covance") will be independent public companies and Corning
Incorporated ("Corning") will not have any ownership interest in either CCL
or Covance other than shares of CCL's nonvoting cumulative preferred stock.
Corning, CCL and Covance will enter into certain agreements, summarized
below, 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.
Copies of the forms of such agreements are filed as exhibits to the
Registration Statements of which this Information Statement is a part. The
following description summarizes the material terms of such agreements, but
is qualified by reference to the texts of such agreements as filed.
Transaction Agreement
Corning, CCL and Covance will enter into the Transaction Agreement (the
"Transaction Agreement") providing for, among other things, certain
conditions precedent to the Distributions, certain corporate transactions
required to effect the Distributions and other arrangements between Corning,
CCL and Covance subsequent to the Distributions. See "The
Distributions--Conditions; Termination."
The Transaction Agreement will provide 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 (i) the clinical
laboratory business to CCL and its subsidiaries, (ii) the contract research
business to Covance and its subsidiaries and (iii) all other business
conducted by Corning prior to the Distribution Date to Corning and its
subsidiaries other than CCL and Covance.
The Transaction Agreement will provide that Corning, CCL and Covance will
use their respective commercially reasonable efforts to achieve an allocation
of consolidated indebtedness of Corning and a capital structure that reflects
the capital structure after the Distributions of Corning, CCL and Covance as
contemplated in the discussion under "Capitalization of CCL" and
"Capitalization of Covance." Each of Corning, CCL and Covance will agree to
indemnify the other parties to the Transaction Agreement in connection with
losses that may result from certain liabilities or the breach of any
provision of the Transaction Agreement.
As discussed under "Business of CCL--OIG Investigations and Related
Claims," CCL is subject to several governmental investigations. Any amounts
paid by CCL to settle these investigations, or as a result of a judgment
relating to these investigations, will be indemnified by Corning under the
Transaction Agreement. Under the Transaction Agreement Corning will agree to
indemnify CCL against all monetary penalties, fines or settlements arising
out of any governmental criminal, civil or administrative investigations or
claims that are pending as of the Distribution Date to the extent that such
investigations or claims arise out of or are related to alleged violations of
federal laws by reason of CCL or any company acquired by CCL billing any
federal program or agency for services rendered to beneficiaries of such
program or agency. Corning will also indemnify CCL for 50% of the aggregate
of all judgment or settlement payments made by CCL that are in excess of
$42.0 million in respect of claims by nongovernmental parties (including,
without limitation, private insurers) alleging overbillings by CCL or any
existing subsidiaries of CCL for services provided prior to the Distribution
Date; provided, however, such indemnification for nongovernmental claims will
terminate five years after the Distribution Date and will not exceed $25.0
million in the aggregate. CCL's aggregate reserve with respect to all
governmental and nongovernmental claims, including litigation costs, was $215
million at September 30, 1996 and is estimated to be $85 million at the
Distribution Date.
Corning will not indemnify CCL against any governmental claims that arise
after the Distribution Date, even though relating to events prior to the
Distribution Date, or to any nongovernmental claims that do not relate to
alleged overbillings prior to the Distribution Date. Corning will not
indemnify CCL against consequential or incidental damages relating to the
billing claims, including losses of revenues and profits as a consequence of
any exclusion from participation in federal or state health care programs or
the fees and expenses of the litigation, including attorneys' fees and
expenses. All amounts indemnified against by Corning for the benefit of CCL
will be calculated on a net after-tax basis by taking into account deductions
and, if any, other tax benefits in respect of the underlying settlement or
judgment payment or other loss that gives rise to the indemnification
obligation of Corning, which deductions or other tax benefits are or would be
available to CCL or other indemnitee or the consolidated tax group
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of which CCL is a member and by assuming such deductions or other tax
benefits can be utilized by CCL or such group, as the case may be, in the tax
period in which the underlying payment or other loss occurs to reduce taxes
at the highest marginal corporate tax rate applicable for the period in which
such payment or loss occurred.
The Transaction Agreement will also provide 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 will 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 CCL will enter into a tax indemnification agreement (the
"Corning/CCL Spin-Off Tax Indemnification Agreement") pursuant to which (1)
CCL will represent to Corning that, to the best of its knowledge, the
materials relating to CCL submitted to the Internal Revenue Service ("IRS")
in connection with the request for ruling submitted to the IRS are complete
and accurate in all material respects, (2) CCL will represent that it has no
present intention to undertake the transactions described in part (3)(iii)
hereafter or cease to engage in the active conduct of providing clinical
laboratory testing services, (3) CCL will covenant and agree that for a
period of two years following the Distribution Date (the "Restricted
Period"), (i) CCL will continue to engage in the clinical laboratory testing
business, (ii) CCL will continue to manage and own at least 50% of the assets
which it owns directly and indirectly immediately after the Distribution Date
and (iii) neither CCL, nor any related corporation 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 and other instruments convertible into
CCL Common Stock) which would exceed fifty percent (50%) of the outstanding
shares of CCL Common Stock immediately after the Distribution Date; (B) the
issuance of any other instrument that would constitute equity for federal tax
purposes ("Disqualified CCL Stock"); (C) the issuance of options and other
instruments convertible into Disqualified CCL Stock; (D) any repurchases of
CCL Common Stock, unless such repurchases satisfy certain requirements; (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 (as defined therein) in
connection with, or in order to permit or facilitate, any acquisition of CCL
Common Stock or other equity interest in CCL, and (4) CCL will agree to
indemnify Corning for Taxes (as defined below) arising from violations of
(1), (2) or (3) above and for Taxes arising as a result of an acquisition of
20% or more of the stock of CCL by a person or related persons during the
Restricted Period. If obligations of CCL under this agreement were breached
and as a result thereof one or both of the Distributions do not qualify for
the treatment stated in the ruling Corning requested from the IRS (the "IRS
Ruling"), CCL would be required to indemnify Corning for Taxes imposed and
such indemnification obligations could exceed the net asset value of CCL at
such time.
Corning and Covance will enter into a tax indemnification agreement (the
"Corning/Covance Spin-Off Tax Indemnification Agreement") pursuant to which
(1) Covance will represent to Corning that to the best of its knowledge, the
materials relating to Covance submitted to the IRS in connection with the
request for ruling submitted to the IRS are complete and accurate in all
material respects, (2) Covance will represent that it has no present
intention to undertake the transactions described in part (3)(iii) hereafter
or to cease to engage in the active conduct of providing contract research
services, (3) Covance will covenant and agree that during the Restricted
Period, (i) Covance will continue to engage in the contract research
business, (ii) Covance will continue to manage and own at least 50% of the
assets which it owns directly and indirectly immediately after the
Distribution Date and (iii) neither Covance, nor any related corporations 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 and other instruments convertible
into Covance Common Stock) which would exceed fifty percent (50%) of the
outstanding shares of Covance Common Stock immediately after the Distribution
Date; (B) the issuance of any other instrument that would constitute equity
for federal tax purposes ("Disqualified Covance Stock"); (C) the issuance of
options and other instruments convertible into Disqualified Covance Stock;
(D) any repurchases of Covance Common Stock, unless such repurchases satisfy
certain requirements; (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 (as defined therein) in connection with, or in order to permit or
facilitate, any acquisition of Covance Common Stock or other equity interest
in Covance and (4) Covance will agree to indemnify Corning for Taxes arising
from violations of (1), (2) or (3) above and for Taxes arising
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as a result of an acquisition of 20% or more of the stock of Covance by a
person or related persons during the Restricted Period. If obligations of
Covance under this agreement were breached and as a result thereof one or
both of the Distributions do not qualify for the treatment stated in the IRS
Ruling, Covance would be required to indemnify Corning for Taxes imposed and
such indemnification obligations could exceed the net asset value of Covance
at such time.
CCL and Covance will enter into a tax indemnification agreement (the
"CCL/Covance Spin-Off Tax Indemnification Agreement") which will be
essentially the same as the Corning/Covance Spin-Off Tax Indemnification
Agreement except that Covance will make representations to and indemnify CCL
as opposed to Corning. If obligations of Covance under this agreement were
breached and as a result thereof one or both of the Distributions do not
qualify for the treatment stated in the IRS Ruling, Covance would be required
to indemnify CCL for Taxes imposed and such indemnification obligations could
exceed the net asset value of Covance at such time. CCL and Covance will
enter into a second tax indemnification agreement (the "Covance/CCL Spin-Off
Tax Indemnification Agreement") which will be essentially the same as the
Corning/CCL Spin-Off Tax Indemnification Agreement except that CCL will make
representations to and indemnify Covance as opposed to Corning. If
obligations of CCL under this agreement were breached and as a result thereof
one or both of the Distributions do not qualify for the treatment stated in
the IRS Ruling, CCL would be required to indemnify Covance for Taxes imposed
and such indemnification obligations could exceed the net asset value of CCL
at such time.
The Spin-Off Tax Indemnification Agreements will also require (i) CCL to
take such actions as Corning may reasonably request and (ii) Covance to take
such actions as Corning and CCL may reasonably request to preserve the
favorable tax treatment provided for in any rulings obtained from the IRS in
respect of the Distributions.
Tax Sharing Agreement
Corning, CCL and Covance will enter into a tax sharing agreement (the "Tax
Sharing Agreement") which will allocate 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 CCL
and Covance and their subsidiaries, provided, however, that CCL and Covance
are required to reimburse Corning for taxes for periods beginning after
December 31, 1995 in which they are 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 CCL and Covance, including their respective subsidiaries,
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 CCL 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 provides 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, CCL or Covance as a result of such failure are to be allocated among
Corning, CCL 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, CCL and Covance each will indemnify and hold harmless
the other from and against the taxes so allocated. If it is determined that
none of the companies contributed to the failure of such distribution to
qualify for the tax treatment stated in the IRS Ruling, the liability for
taxes will be borne by each in proportion to its relative average market
capitalization as determined by the average closing price for the common
stock of each 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, CCL and
Covance, the liability so allocated to CCL or Covance could exceed the net
asset value of CCL or Covance, respectively.
Nonvoting Cumulative Preferred Stock of CCL
After the Distributions, Corning will retain 1,000 shares of CCL's
nonvoting cumulative preferred stock, with an aggregate liquidation
preference of $1.0 million. Corning is the sole holder of such shares. For a
description of the terms of the CCL nonvoting cumulative preferred stock, see
"Description of CCL Capital Stock--CCL Nonvoting Cumulative Preferred Stock."
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CORNING CLINICAL LABORATORIES INC.
RISK FACTORS
Corning shareholders should be aware that the Distributions and ownership
of the CCL Common Stock involve certain risks, including those described
below, which could adversely affect the value of their holdings. Neither
Corning nor CCL makes, nor is any other person authorized to make, any
representations as to the future market value of CCL Common Stock.
Risks Relating to the Distributions
Effects on Corning Stock. Following the Distributions, Corning Common
Stock will continue to be listed and traded on the NYSE and certain other
stock exchanges. As a result of the Distributions, the trading price of
Corning Common Stock is expected to be lower than the trading price of
Corning Common Stock immediately prior to the Distributions. There can be no
assurance that the combined trading prices of Corning Common Stock, CCL
Common Stock and Covance Common Stock after the Distributions will be equal
to or greater than the trading price of Corning Common Stock prior to the
Distributions.
Risks Relating to CCL
Financial Impact of the Distributions on CCL. While CCL has a substantial
operating history, it has not operated as an independent company since 1982.
As a Corning subsidiary, CCL's working capital requirements have been
financed by Corning and CCL's major acquisitions have been financed through
the issuance of Corning common stock and borrowings from Corning. Subsequent
to the Distributions, CCL's activities will no longer be financed by Corning.
In addition, it is anticipated that the rating of CCL's long-term debt will
be non-investment grade. This may impact, among other things, CCL's ability
to raise capital, fund working capital requirements or expand, through
acquisitions or otherwise, and could thereby have an adverse effect on CCL's
operating earnings and cash flow.
Substantial Leverage and Debt Service Requirements. After the
Distributions and as a result of the incurrence of debt under the CCL Credit
Facility (as defined below) and the issuance of Notes (as defined below) in
the CCL Notes Offering (as defined below), CCL will have substantial debt. At
September 30, 1996, after giving effect to the transactions and adjustments
described in "Pro Forma Financial Information of CCL," CCL would have had
$517 million of total debt and total capitalization of $1,120 million, on a
pro forma basis, and CCL's total debt as a percentage of total capitalization
would have been approximately 46%. In addition to creating significant debt
service obligations for CCL, the terms of the CCL Credit Facility will
contain customary affirmative and negative covenants that will, among other
things, require CCL to maintain certain financial tests and ratios and will
restrict CCL's ability to make asset dispositions, incur additional
indebtedness, make certain payments and investments, transact with affiliates
or enter into mergers or consolidate. The Indenture will include similar, but
less restrictive, incurrence tests.
The degree to which CCL is leveraged could have important consequences to
holders of CCL Common Stock, including the following: (1) CCL's ability to
obtain additional financing in the future for working capital, capital
expenditures, product development, acquisitions, general corporate purposes
or other purposes may be impaired; (ii) a substantial portion of CCL's and
its subsidiaries' cash flow from operations must be dedicated to the payment
of the principal of and interest on its indebtedness; (iii) the CCL Credit
Facility will contain certain restrictive financial and operating covenants,
including, among others, requirements that CCL satisfy certain financial
ratios; (iv) a significant portion of borrowings will be at floating rates of
interest, causing CCL to be vulnerable to increases in interest rates; (v)
CCL's degree of leverage may make it more vulnerable in a downturn in general
economic conditions; and (vi) CCL's financial position may limit its
flexibility in responding to changing business and economic conditions. In
addition, the Notes will contain certain financial covenants. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CCL--Liquidity and Capital Resources" and "Description of
Certain Indebtedness of CCL."
Intense Competition. The independent clinical laboratory industry in the
United States is intensely competitive. CCL believes that in 1995
approximately 56% of the revenues of the clinical laboratory testing industry
was generated by hospital-affiliated laboratories, approximately 36% by
independent clinical laboratories and 8% by thousands of individual
physicians in their offices and laboratories. Independent clinical
laboratories fall into two
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separate categories: (1) smaller, generally local, laboratories that
generally offer fewer tests and services and have less capital than the
larger laboratories, and (2) larger laboratories such as CCL that provide a
broader range of tests and services. CCL has two major competitors that
operate in the national market--SmithKline Beecham Clinical Laboratories,
Inc. ("SmithKline") and Laboratory Corporation of America Holdings, Inc.
("LabCorp"). Both SmithKline and LabCorp are affiliated with larger
corporations that have greater financial resources than CCL. There are also
many independent clinical laboratories that operate regionally and that
compete with CCL in these regions. In addition, hospitals are in general both
competitors and customers of independent clinical laboratories. The
independent clinical laboratory testing industry has experienced intense
price competition over the past several years, which has negatively impacted
CCL's profitability. The following factors, among others, are often used by
health care providers in selecting a laboratory: (i) pricing of the
laboratory's testing services; (ii) accuracy, timeliness and consistency in
reporting test results; (iii) number and type of tests performed; (iv)
service capability and convenience offered by the laboratory; and (v) its
reputation in the medical community. See "Business of CCL--The Clinical
Laboratory Testing Industry" and "Business of CCL--Competition."
Role of Managed Care. Managed care organizations play a significant role
in the health care industry and their role is expected to increase over the
next several years. Managed care organizations typically negotiate capitated
payment contracts, whereby a clinical laboratory receives a fixed monthly fee
per covered individual, regardless of the number or cost of tests performed
during the month (excluding certain tests, such as esoteric tests and
anatomic pathology services). Laboratory services agreements with managed
care organizations have historically been priced aggressively due to
competitive pressure and the expectation that a laboratory would capture not
only the volume of testing to be covered under the contract, but also the
additional fee-for-service business from patients of participating physicians
who are not covered under the managed care plan. However, as the number of
patients covered under managed care plans continues to increase, there is
less such fee-for-service business and, accordingly, less high margin
business to offset the low margin (and often unprofitable) managed care
business. Furthermore, increasingly, physicians are affiliated with more than
one managed care organization and as a result may be required to refer
clinical laboratory tests to different clinical laboratories, depending on
the coverage of their patients. As a result, a clinical laboratory might not
receive any fee-for-service testing from such physicians. See "Business of
CCL--Customers and Payors" and "Business of CCL--Effect of the Growth of the
Managed Care Sector on the Clinical Laboratory Business." During the nine
months ended September 30, 1996, services to managed care organizations under
capitated rate agreements accounted for approximately 6% of CCL's net
revenues from clinical laboratory testing and approximately 15% of the tests
performed by CCL. CCL is currently reviewing its pricing structures for
agreements with managed care organizations and intends to insure that all of
its future agreements with managed care organizations are profitably priced.
However, there can be no assurance that CCL will be able to increase the
prices charged to managed care organizations or that CCL will not lose market
share in the managed care market to other clinical laboratories who continue
to aggressively price laboratory services agreements with managed care
organizations. CCL may experience declines in per-test revenue as managed
care organizations continue to increase their share of the health care
insurance market.
Reliance on Medicare/Medicaid Reimbursements. Approximately 23% and 22% of
CCL's net revenues for the year ended December 31, 1995 and the nine months
ended September 30, 1996, respectively, were attributable to tests performed
for Medicare and Medicaid beneficiaries. CCL's business and financial results
depend substantially on reimbursements paid to CCL under these programs. CCL
is legally required to accept the government's reimbursement for most
Medicare and Medicaid testing as payment in full. Such reimbursements are
generally made pursuant to fee schedules, which are subject to certain
limitations the levels of which have declined steadily since late 1984.
Congress enacted a phased-in set of reductions in the reimbursement
limitations as part of its 1993 budget legislation that reduced the Medicare
national limitations in 1994 to 84% of the 1984 national median, in 1995 to
80% of the 1984 national median and in 1996 to 76% of the 1984 national
median. In 1995, both houses of Congress passed a bill (the Medicare
Preservation Act) that would have reduced the fee cap schedule from 75% to
65% of the 1984 national median, but the bill was vetoed by the President.
Effective January 1, 1996, the Health Care Financing Administration ("HCFA")
adopted a new policy on reimbursement for chemistry panel tests. As of
January 1, 1996, 22 automated tests (rather than 19 tests) became
reimbursable by Medicare as part of an automated chemistry profile. An
additional allowance of $0.50 per test is authorized when more than 19 tests
are billed in a panel. HCFA retains the authority to expand in the future the
list of tests included in a panel. Effective as of March 1, 1996, HCFA
eliminated its prior policy of permitting payment for all tests contained in
an automated chemistry panel when at least one of the tests in the panel is
medically necessary. Under
32
<PAGE>
the new policy, Medicare payment will not exceed the amount that would be
payable if only the tests that are "medically necessary" had been ordered. In
addition, since 1995 most Medicare carriers have begun to require clinical
laboratories to submit documentation supporting the medical necessity, as
judged by ordering physicians, for many commonly ordered tests. CCL expects
to incur additional reimbursement reductions and additional costs associated
with the implementation of these requirements of HCFA and Medicare carriers.
The amount of the reductions in reimbursements and additional costs cannot be
determined at this time. These and other proposed changes affecting the
reimbursement policy of Medicare and Medicaid programs could have a material
adverse effect on the business, financial condition, results of operations or
prospects of CCL. See "Business of CCL-- Regulation and
Reimbursement--Regulation of Reimbursement for Clinical Laboratory Services."
A failure of CCL to properly and promptly process its bills to Medicare may
result in an increase in CCL's bad debt expense. See "Business of
CCL--Billing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CCL--Results of Operations."
Government Regulation. The clinical laboratory industry is subject to
extensive governmental regulations at the federal, state and local levels.
See "Business of CCL--Regulation and Reimbursement."
At the federal level, CCL's laboratories are required to be certified
under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") and
approved to participate in the Medicare/Medicaid programs. Currently, all
clinical laboratories, including most physician-office laboratories ("POLs"),
are required to comply with CLIA. However, the Medicare Preservation Act,
passed in 1995 by both Houses of Congress, would have largely exempted POLs
from having to comply with CLIA (except with respect to pap smear tests).
Although this provision was not maintained by the House-Senate conference and
was not included in the subsequent legislation, it could be reintroduced at
any time. The exemption of POLs from CLIA would significantly reduce their
costs, making them more financially viable and a greater competitive
challenge to CCL and would more likely encourage physicians to establish
laboratories in their offices.
A wide array of Medicare/Medicaid fraud and abuse provisions apply to
clinical laboratories participating in such programs. Penalties for
violations of these federal laws include exclusion from participation in the
Medicare/ Medicaid programs, asset forfeitures, civil and criminal penalties.
Civil penalties for a wide range of offenses may be up to $2,000 per item and
twice the amount claimed. These penalties will be increased effective January
1, 1997 to up to $10,000 per item plus three times the amount claimed. In the
case of certain offenses, exclusion from participation in Medicare and
Medicaid is a mandatory administrative penalty. The Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS")
interprets these fraud and abuse administrative provisions liberally and
enforces them aggressively. Provisions in a bill enacted in August 1996 are
likely to expand the federal government's involvement in curtailing fraud and
abuse due to the establishment of (i) an anti-fraud and abuse trust fund
funded through the collection of penalties and fines for violations of such
laws and (ii) a health care anti-fraud and abuse task force. See "Business of
CCL--Regulation and Reimbursement."
Government Investigations and Related Claims. As discussed under "CCL
Business--OIG Investigations and Related Actions," CCL has settled various
governmental and private litigations relating primarily to industry- wide
billing and marketing practices that had been discontinued by late 1992.
Specifically, CCL has settled seven claims by the Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS") and
the Department of Justice ("DOJ") with respect to Medicare and Medicaid
marketing and billing practices of CCL and certain companies acquired by CCL
prior to their acquisition and thirteen related private actions. There are,
however, pending several investigations by the OIG and DOJ, into marketing
and billing practices at Nichols prior to its acquisition by CCL. At present
there are no settlement discussions pending between DOJ and CCL regarding
these investigations, and it is too early to predict which tests, time
periods and locations the government may challenge. Remedies available to the
government include exclusion from participation in Medicare and Medicaid,
criminal fines, civil recoveries plus civil penalties and asset forfeitures.
Application of such remedies and penalties could materially and adversely
affect CCL's business, financial condition, results of operations and
prospects.
As discussed under "The Relationship Among Corning, CCL and Covance After
the Distributions-- Transaction Agreement," Corning will agree to indemnify
CCL against these governmental claims and up to $25.0 million, on an
after-tax basis, of nongovernmental claims in excess of $42.0 million that
relate to billings prior to the Distribution Date. However, such
indemnification will not cover (i) any governmental claims that arise after
the Distribution Date, (ii) any nongovernmental claims not settled prior to
five years after the Distribution Date,
33
<PAGE>
(iii) any consequential or incidental damages relating to the billing claims,
including losses of revenues and profits as a consequence of exclusion for
participation in federal or state health care programs or (iv) the fees and
expenses of litigation.
Although management believes that established reserves for both
indemnified and non-indemnified claims are sufficient, it is possible that
additional information may become available which may cause the final
resolution of these matters to exceed the established reserves by an amount
which could be material to CCL's results of operations and, for
non-indemnified claims, CCL's cash flows in the period in which such claims
are settled. CCL does not believe that these matters will have a material
adverse effect on CCL's overall financial condition.
Recent Losses. CCL incurred net losses of $52 million for the year ended
December 31, 1995 and $158.9 million for the nine months ended September 30,
1996. The 1995 loss includes the provision of $33 million for restructuring
charges (primarily relating to workforce reduction programs and the cost of
exiting a number of leased facilities) and $17.6 million of special charges
related to settlements of governmental billing claims. The loss for the 1996
period reflects the provision of $188 million for additional reserves
primarily relating to the investigation of pre-acquisition billing practices
of Damon Corporation and Nichols Institute and $13.7 million for the write
off of the development costs of what was intended as a new company-wide
billing system. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CCL." There can be no assurance that
CCL's operations will be profitable in the future.
Billing. CCL's billings have been hampered by both the industry-wide
phenomenon of frequently missing or incorrect billing information and
increasingly stringent payor requirements, as well as the existence of
multiple billing information systems which have resulted in large part from
CCL's growth through acquisitions. CCL's standard billing system has been
implemented in seven of its 22 billing sites, which seven sites account for
35% of CCL's net revenues. CCL is beginning to convert the remaining
non-standard billing systems to the standard SYS system. See "Business of
CCL--Information Systems" and "Business of CCL--Billing Practices."
Standardizing its billing systems presents conversion risk to CCL as key
databases and masterfiles are transferred to the SYS system and because the
billing workflow is interrupted during the conversion, which may cause
backlogs.
Professional Liability Litigation. As a general matter, providers of
clinical laboratory testing services may be subject to lawsuits alleging
negligence or other similar legal claims, which suits could involve claims
for substantial damages. Damages assessed in connection with, and the costs
of defending any such actions could be substantial. Litigation could also
have an adverse impact on CCL's client base. CCL maintains liability
insurance (subject to maximum limits and self-insured retentions) for
professional liability claims. This insurance does not cover liability for
any of the investigations described under "--Government Investigations."
While there can be no assurance, CCL management believes that the levels of
coverage are adequate to cover currently estimated exposures. Although CCL
believes that it will be able to obtain adequate insurance coverage in the
future at acceptable costs, there can be no assurance that CCL will be able
to obtain such coverage or will be able to do so at an acceptable cost or
that CCL will not incur significant liabilities in excess of policy limits.
Absence of Dividends; Restrictions on Dividends Imposed by the CCL Credit
Facility and the Indenture. It is currently contemplated that, following the
Distributions, CCL will not pay cash dividends on the CCL Common Stock in the
foreseeable future, but will retain earnings to provide funds for the
operation and expansion of its business. In addition, the CCL Credit Facility
prohibits CCL from paying cash dividends on the CCL Common Stock. Further,
the Indenture under which the Notes will be issued will restrict CCL's
ability to pay cash dividends based on a percentage of CCL's cash flow. See
"Description of Certain Indebtedness of CCL" and "Description of Capital
Stock of CCL."
Potential Liability under the Spin-Off Tax Indemnification Agreements. CCL
will enter into the Corning/CCL Spin-Off Tax Indemnification Agreement that
will prohibit CCL for a period of two years after the Distribution Date from
taking certain actions, including a sale of 50% or more of the assets of CCL
or engaging in certain equity or financing transactions, that might
jeopardize the favorable tax treatment of the Distributions under Code
section 355 and will provide Corning with certain rights of indemnification
against CCL. The Corning/CCL Spin-Off Tax Indemnification Agreement will also
require CCL to take such actions as Corning may reasonably request to
preserve the favorable tax treatment provided for in any rulings obtained
from the IRS in respect of the Distributions. CCL and Covance will enter into
the Covance/CCL Spin-Off Tax Indemnification Agreement, that will be
essentially the same as the Corning/CCL Spin-Off Tax Indemnification except
that CCL will make representations to and
34
<PAGE>
indemnify Covance as opposed to Corning. If obligations of CCL under either
agreement were breached and primarily as a result thereof the Distributions
do not receive favorable tax treatment under Code section 355, CCL would be
required to indemnify Corning or Covance, as the case may be, for Taxes
imposed and such indemnification obligations could exceed the net asset value
of CCL at such time. See "The Relationship Among Corning, CCL and Covance
After the Distributions--Spin-Off Tax Indemnification Agreements."
Absence of a Prior Public Market. Prior to the Distributions, there has
been no public market for the CCL Common Stock. Although it is expected that
the CCL Common Stock will be approved for listing on the NYSE, there is no
existing market for the CCL Common Stock and there can be no assurance as to
the liquidity of any markets that may develop, the ability of CCL
stockholders to sell their shares of CCL Common Stock or at what price CCL
stockholders will be able to sell their shares of CCL Common Stock. Future
trading prices will depend on many factors including, among other things,
prevailing interest rates, CCL's operating results and the market for similar
securities.
Potential Volatility of Stock Price. The market price of CCL Common Stock
could be subject to wide fluctuations in response to seasonal variations in
operating results, changes in earnings estimates by analysts, market
conditions in the clinical laboratory industry, prospects for health care
reform, changes in government regulation and general economic conditions. In
addition, the stock market has from time to time experienced significant
price and volume fluctuations that have been unrelated to the operating
performance of particular companies. Moreover, CCL Common Stock could be
subject to wide fluctuations for some time after the Distributions as a
result of heavy trading volume stemming from sales by shareholders of Corning
Common Stock who decide not to continue owning CCL Common Stock. Certain of
such sales may include those to be made on behalf of investment plans
maintained for the benefit of Corning employees. These plans currently hold
slightly less than 5% of the outstanding Corning Common Stock and, as a
result of the Distributions, are expected to hold a similar percentage of the
CCL Common Stock. From time to time as market conditions warrant, and as the
administrator of the plans believes to be in the best interests of the
employee beneficiaries, the administrator will sell all of the CCL Common
Stock held by the plans. Such sales are expected to occur within a period of
three years after the Distribution Date. See "Security Ownership by Certain
Beneficial Owners and Management of CCL." These market fluctuations could
have an adverse effect on the market price of CCL Common Stock. CCL
stockholders should be aware, and must be willing to bear the risk, of such
fluctuations in earnings and stock price.
Dependence on Key Employees. CCL's affairs are managed by a small number
of key management personnel, the loss of any of whom could have an adverse
impact on CCL. There can be no assurance that CCL can retain its key
managerial and technical employees or that it can attract, assimilate or
retain other skilled technical personnel in the future. See "Business of
CCL--Recent Organizational Changes" and "Management of CCL."
Certain Antitakeover Effects. CCL's amended and restated certificate of
incorporation (the "CCL Certificate") and by-laws (the "CCL By-Laws"), and
the Delaware General Corporation Law ("DGCL"), contain several provisions
that could have the effect of delaying, deferring or preventing a change in
control of CCL in a transaction not approved by the board of directors of CCL
(the "CCL Board"), or, in certain circumstances, by the disinterested members
of the CCL Board. In addition, an acquisition of certain securities or assets
of CCL within two years after the Distribution Date might jeopardize the tax
treatment of the Distributions and could result in CCL being required to
indemnify Corning and Covance. See "--Potential Liability under the Spin-Off
Tax Indemnification Agreements" and "Antitakeover Effects of Certain
Provisions of the CCL Certificate of Incorporation and By-Laws."
35
<PAGE>
CAPITALIZATION OF CCL
The following table sets forth CCL's capitalization as of September 30,
1996 giving effect to (i) the consummation of the CCL Notes Offering and the
estimated initial borrowings under the CCL Credit Facility, (ii) the
Distributions and (iii) the CCL Accounting Policy Change (as defined below),
as if such transactions occurred on such date. This table should be read in
conjunction with the CCL Financial Statements and notes thereto and the CCL
Pro Forma Financial Information (as defined below) and notes thereto included
elsewhere herein. Historical combined and pro forma combined financial
information may not be indicative of CCL's future capitalization as an
independent company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of CCL" and "Business of CCL."
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
--------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C>
Cash $ 48,319 $ (8,319)(a) $ 40,000
============= =============== ============
Short-term Debt:
Current portion of long-term debt $ 11,885 $ (10,000)(b) $ 1,885(h)
Revolving credit facility (c)
------------- --------------- ------------
Total Short-term Debt $ 11,885 $ (10,000) $ 1,885
============= =============== ============
Long-term Debt:
Term loans $ 15,494 $ 350,000 (b) $ 365,494(h)
Notes 150,000 (b) 150,000
Payable to Corning 1,204,406 (8,319)(a)
(447,669)(b)
(748,418)(d)
------------- --------------- ------------
Total Long-term Debt 1,219,900 (704,406) 515,494
------------- --------------- ------------
Stockholder's Equity:
Contributed capital 297,823 748,418 (d)
11,250 (e)
150,000 (f) 1,207,491
Accumulated deficit (163,158) (13,239) (e)
(425,000) (g) (601,397)
Cumulative translation adjustment. 1,801 1,801
Market valuation adjustment (3,796) (3,796)
------------- --------------- ------------
Total Stockholder's Equity 132,670 471,429 604,099
------------- --------------- ------------
Total Capitalization $1,352,570 $ (232,977) $1,119,593
============= =============== ============
</TABLE>
---------
(a) Historically, CCL has participated in Corning's centralized treasury and
cash management processes. Cash received from operations was generally
transferred to Corning on a daily basis. Cash disbursements for
operations and investments were funded as needed from Corning. The cash
balance at the Distribution Date will range from $30 million to $40
million. The pro forma adjustment to cash and payable to Corning
represents the reduction to bring cash to the Distribution Date range.
(b) The pro forma adjustment to current portion of long-term debt, term loans,
Notes, and payable to Corning reflects borrowings by CCL, immediately prior
to the CCL Spin-Off Distribution, to repay Corning for certain income tax
liabilities and intercompany borrowings. The assumed interest rates on these
borrowings are 7.50% and 11.50% for the CCL Credit Facility and the Notes,
respectively.
(c) The CCL Credit Facility will include a revolving credit facility of $100
million which can be used to fund working capital and investment
activities. CCL management believes that the entire facility will be
available at the Distribution Date.
(d) The pro forma adjustment to payable to Corning and contributed capital of
$748.4 million reflects Corning's capital contribution to CCL of the
estimated remaining intercompany borrowings.
(e) The pro forma adjustment to contributed capital and accumulated deficit
represents costs directly related to the CCL Spin-Off Distribution that CCL
expects to record coincident with the CCL Spin-Off Distribution. These
costs, which are estimated at $20.2 million ($13.2 million after tax),
include approximately $9.0 million related to professional advisory and
financing commitment fees and $11.2 million related to the establishment of
an employee stock ownership plan. This amount is subject to change based on
the market price of the CCL Common Stock on the Distribution Date.
(f) The pro forma adjustment to contributed capital represents the estimated
capital contribution related to Corning's indemnification under the
Transaction Agreement. See "Relationship Among Corning, CCL and Covance
After the Distributions--Transaction Agreement." The receivable from
Corning is estimated to approximate $25 million at the Distribution Date.
(g) Coincident with the CCL Spin-Off Distribution, CCL will adopt a new
accounting policy for evaluating and measuring the recoverability of
intangible assets based on a fair value approach (the "CCL Accounting
Policy Change"). The pro forma adjustment to accumulated deficit
represents the estimated impact of the CCL Accounting Policy Change. CCL
management estimates the charge to reduce the carrying value of
intangible assets to fair value will be in the range of $400 million to
$450 million. The midpoint of the range has been utilized for the
preparation of the Unaudited Pro Forma Combined Balance Sheet.
(h) The current portion of long-term debt and the term loans, exclusive of
the pro forma adjustment, consists primarily of a mortgage note payable
and capital lease obligations.
36
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CCL
The following table presents selected historical financial data of CCL 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, 1995, 1994 and 1993 have
been derived from the audited combined financial statements of CCL (the
"Audited CCL Financial Statements") and the notes thereto included elsewhere
herein. The selected financial data as of and for the three and nine months
ended September 30, 1996 and 1995 (the "CCL Interim Financial Statements"
and, together with the Audited CCL Financial Statements, the "CCL Financial
Statements") and the years ended December 31, 1992 and 1991 have been derived
from the unaudited combined financial statements of CCL. In the opinion of
management, the unaudited combined financial statements include all
adjustments, consisting only of normal recurring adjustments, that are
necessary for a fair presentation of the financial position and results of
operations for these periods. The unaudited interim results of operations for
the three and nine months ended September 30, 1996 are not necessarily
indicative of the results for the entire year ending December 31, 1996.
The selected financial data should be read in conjunction with the CCL
Financial Statements and notes thereto, and the CCL Pro Forma Financial
Information and notes thereto included elsewhere herein. Historical combined
financial data may not be indicative of CCL's future performance as an
independent company. See the CCL Financial Statements and notes thereto and
CCL Pro Forma Financial Information. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations of CCL" and
"Business of CCL."
37
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
1996 1995 1996 1995
---------------- -------------- --------------- --------------
(in thousands, except percentage data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 405,352 $ 399,959 $1,231,290 $1,239,474
Costs and expenses:
Cost of services 255,390 240,868 768,809 735,984
Selling, general and administrative 125,190 181,346(b) 371,439 399,635(b)
Provision for restructuring and other
special charges(c) 155,730 201,730 45,885
Interest expense, net 19,866 20,927 59,887 61,529
Amortization of intangible assets 10,328 11,293 31,772 33,678
Other, net 1,837 1,930 (198) 4,429
---------------- -------------- --------------- --------------
Total 568,341 456,364 1,433,439 1,281,140
---------------- -------------- --------------- --------------
Income (loss) before taxes (162,989) (56,405) (202,149) (41,666)
Income tax expense (benefit) (43,553) (17,810) (43,280) (3,642)
---------------- -------------- --------------- --------------
Income (loss) before cumulative effect of
change in accounting principle (119,436) (38,595) (158,869) (38,024)
Cumulative effect of change in accounting
principle
---------------- -------------- --------------- --------------
Net income (loss) $ (119,436) $ (38,595) $ (158,869) $ (38,024)
================ ============== =============== ==============
Balance Sheet Data (at end of period):
Cash $ 48,319 $ 46,908 $ 48,319 $ 46,908
Working capital 114,718 129,319 114,718 129,319
Total assets 1,886,378 1,896,058 1,886,378 1,896,058
Long-term debt 1,219,900 1,114,367 1,219,900 1,114,367
Total debt 1,231,785 1,226,211 1,231,785 1,226,211
Stockholder's equity 132,670 320,576 132,670 320,576
Ratio of earnings to fixed charges (d) (d) (d) (d)
Supplemental Data:
EBITDA(e) $ (118,123)(f) $ (9,910)(b) $ (67,030)(f) $ 95,899(b)
EBITDA as a % of net revenues (29.1)% (2.5)% (5.4)% 7.7%
Adjusted EBITDA(g) $ 37,607 $ (9,910)(b) $ 134,700 $ 141,784(b)
Adjusted EBITDA as a % of net revenues 9.3% (2.5)% 10.9% 11.4%
</TABLE>
(Footnotes on page 40)
38
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1995 1994(a) 1993 1992 1991
-------------- ------------- ------------- ------------- -----------
(in thousands, except percentage data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $1,629,388 $1,633,699 $1,416,338 $1,228,964 $941,116
Costs and expenses:
Cost of services 980,232 969,844 805,729 657,354 553,810
Selling, general and administrative 523,271(b) 411,939 363,579 334,665 193,934
Provision for restructuring and other
special charges(c) 50,560 79,814 99,600 13,000
Interest expense, net 82,016 63,295 41,898 31,775 14,205
Amortization of intangible assets 44,656 42,588 28,421 21,359 16,556
Other, net 6,221 3,464 6,423 16,300 6,636
-------------- ------------- ------------- ------------- -----------
Total 1,686,956 1,570,944 1,345,650 1,074,453 785,141
-------------- ------------- ------------- ------------- -----------
Income (loss) before taxes (57,568) 62,755 70,688 154,511 155,975
Income tax expense (benefit) (5,516) 34,410 25,929 52,115 52,128
-------------- ------------- ------------- ------------- -----------
Income (loss) before cumulative effect of
change in accounting principle (52,052) 28,345 44,759 102,396 103,847
Cumulative effect of change in accounting
principle (10,562)
-------------- ------------- ------------- ------------- -----------
Net income (loss) $ (52,052) $ 28,345 $ 34,197 $ 102,396 $103,847
============== ============= ============= ============= ===========
Balance Sheet Data (at end of period):
Cash $ 36,446 $ 38,719 $ 39,410 $ 20,528 $ 24,068
Working capital 200,740 214,358 139,771 161,759 126,406
Total assets 1,853,385 1,882,663 1,861,162 1,024,806 764,087
Long-term debt 1,195,566 1,153,054 1,025,787 431,624 270,682
Total debt 1,207,714 1,165,626 1,123,307 474,175 287,973
Stockholder's equity 295,801 386,812 395,509 408,149 291,973
Ratio of earnings to fixed
charges (d) 1.77(d) 2.20(d) 4.44(d) 5.83(d)
Supplemental Data:
EBITDA(e) $ 125,961(b) $ 215,567 $ 179,065 $ 242,527 $213,593
EBITDA as a % of net revenues 7.7% 13.2% 12.6% 19.7% 22.7%
Adjusted EBITDA(g) $ 176,521(b) $ 295,381 $ 278,665 $ 255,527 $213,593
Adjusted EBITDA as a % of net revenues 10.8% 18.1% 19.7% 20.8% 22.7%
</TABLE>
(Footnotes on page 40)
39
<PAGE>
- -------------
(Footnotes for preceding pages)
(a) In August 1993, CCL acquired Damon, a national clinical-testing
laboratory with approximately $280 million in annualized revenues,
excluding Damon's California-based laboratories, which were sold in April
1994. In November 1993, CCL acquired certain clinical-testing
laboratories of Unilab Corporation ("Unilab"), with approximately $90
million in annualized revenues. The Damon and Unilab acquisitions were
accounted for as purchases. CCL acquired Maryland Medical Laboratory,
Inc. ("MML"), Nichols and Bioran Medical Laboratory ("Bioran") in June,
August and October 1994, respectively, and accounted for these
acquisitions as poolings of interest. Results presented include the
results of CCL, MML, Nichols and Bioran on a pooled basis. The increase
in 1994 net revenues compared to 1993 net revenues was primarily due to
the Damon and Unilab acquisitions.
(b) Includes a third quarter 1995 charge of $62.0 million to increase the
reserve for doubtful accounts and allowances resulting from billing
systems implementation and integration problems at certain laboratories
and increased regulatory requirements.
(c) Provision for restructuring and other special charges includes charges
for restructurings primarily for work force reduction programs, the
write-off of fixed assets and the costs of exiting a number of leased
facilities. Other special charges is primarily comprised of settlement
reserves for claims related to billing practices. See Note 5 to the
Audited CCL Financial Statements and Notes 2 and 3 to the CCL Interim
Financial Statements.
(d) For purposes of this calculation, earnings consist of pretax income from
continuing operations plus fixed charges. Fixed charges consist of
interest expense and one-third of rental expense, representing that
portion of rental expense deemed representative of the interest factor.
Earnings were insufficient to cover fixed charges by the following
amounts (in thousands):
<TABLE>
<CAPTION>
Three months Ended Nine months Ended
September 30, September 30, Year Ended December 31,
--------------------- --------------------- ------------------------
<C> <C> <C> <C> <C>
1996 1995 1996 1995 1995
$162,989 $56,405 $202,149 $41,666 $57,568
</TABLE>
(e) EBITDA represents income (loss) before income taxes plus net interest
expense, depreciation and amortization. EBITDA is presented because
management believes it is a widely accepted financial indicator of a
company's ability to service and incur debt. EBITDA does not represent
net income or cash flows from operations as those terms are defined by
generally accepted accounting principles and does not necessarily
indicate whether cash flows will be sufficient to fund cash needs or
service debt. Cash flows as defined by generally accepted accounting
principles were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
September 30, September 30, Year Ended December 31,
----------------- ----------------- ---------------------------------------------------
1996 1995 1996 1995 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash provided by operating
activities $25,236 $ 38,202 $ 41,937 $ 53,789 $ 85,828 $ 37,963 $ 99,614 $ 101,077 (h)
Cash used in investing
activities (7,904) (17,044) (53,097) (77,911) (93,087) (46,186) (473,687) (203,884) (h)
Cash provided by
(used in) financing
activities (6,618) (18,006) 23,033 32,311 4,986 7,532 392,956 99,267 (h)
</TABLE>
(f) 1996 EBITDA includes charges of $142 million and $188 million for the
three months and nine months ended September 30, 1996, respectively,
related to charges to establish additional reserves for settlement
issues. In October 1996, Corning contributed $119 million to CCL's
capital to fund the settlement of billing issues related to Damon and has
agreed to indemnify CCL against certain related and similar claims
pending at the Distribution Date.
(g) Adjusted EBITDA represents income (loss) before income taxes plus net
interest expense, depreciation and amortization and restructuring and
other special charges. Adjusted EBITDA includes bad debt expense.
Adjusted EBITDA is presented because management believes it is an
accepted financial indicator of a company's ability to service and incur
debt. Adjusted EBITDA does not represent net income or cash flows from
operations as those terms are defined by generally accepted accounting
principles and does not necessarily indicate whether cash flows will be
sufficient to fund cash needs or service debt.
(h) 1991 cash flow data, on a basis restated for poolings, is not available.
40
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF CCL
The unaudited pro forma combined statements of operations for the three
and nine months ended September 30, 1996 and for the year ended December 31,
1995 present the results of operations of CCL assuming that the Distributions
and the CCL Accounting Policy Change had been completed as of January 1,
1995. The unaudited pro forma combined balance sheet as of September 30, 1996
presents the combined financial position of CCL assuming that the
Distributions and the CCL Accounting Policy Change had been completed on that
date. In the opinion of CCL management, the unaudited pro forma combined
financial information for the year ended December 31, 1995 and the three and
nine months ended September 30, 1996 (the "CCL Pro Forma Financial
Information") includes all material adjustments necessary to restate CCL's
historical results. The adjustments required to reflect such assumptions are
described in the Notes to the CCL Pro Forma Financial Information and are set
forth in the "Pro Forma Adjustments" column.
The CCL Pro Forma Financial Information should be read in conjunction with
the CCL Financial Statements and notes thereto included elsewhere herein. The
CCL Pro Forma Financial Information presented is for informational purposes
only and may not necessarily reflect the future results of operations or
financial position or what the results of operations or financial position
would have been had the Distributions and the CCL Accounting Policy Change
occurred as assumed herein, or had CCL been operated as an independent
company during the periods shown.
41
<PAGE>
CORNING CLINICAL LABORATORIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------- ------------- -------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues $ 405,352 $ $ 405,352
Costs and expenses
Cost of services 255,390 255,390
Selling, general and administrative 125,190 0 (a) 125,190
Provision for restructuring and other special
charges 155,730 155,730
Interest expense, net 19,866 (7,677)(b) 12,189
Amortization of intangible assets 10,328 (2,656)(c) 7,672
Other, net 1,837 1,837
------------- ------------- -------------
Loss before taxes (162,989) 10,333 (152,656)
Income tax (benefit) provision (43,553) 3,032 (d) (40,521)
------------- ------------- -------------
Net loss $(119,436) $ 7,301 $ (112,135)
============= ============= =============
Pro forma shares outstanding 28,901,735 (e)
=============
Pro forma net loss per share $ (3.88)(f)
=============
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
42
<PAGE>
CORNING CLINICAL LABORATORIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------- -------------- ----------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues $1,231,290 $ $ 1,231,290
Costs and expenses
Cost of services 768,809 768,809
Selling, general and administrative 371,439 0 (a) 371,439
Provision for restructuring and other special
charges 201,730 201,730
Interest expense, net 59,887 (22,949)(b) 36,938
Amortization of intangible assets 31,772 (7,969)(c) 23,803
Other, net (198) (198)
------------- -------------- ----------------
Loss before taxes (202,149) 30,918 (171,231)
Income tax (benefit) provision (43,280) 9,065 (d) (34,215)
------------- -------------- ----------------
Net loss $ (158,869) $ 21,853 $ (137,016)
============= ============== ================
Pro forma shares outstanding 28,901,735 (e)
================
Pro forma net loss per share $ (4.74)(f)
================
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
43
<PAGE>
CORNING CLINICAL LABORATORIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------- -------------- ----------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Net revenues $1,629,388 $ $ 1,629,388
Costs and expenses
Cost of services 980,232 980,232
Selling, general and administrative 523,271 0 (a) 523,271
Provision for restructuring and other special
charges 50,560 50,560
Interest expense, net 82,016 (31,268)(b) 50,748
Amortization of intangible assets 44,656 (10,625)(c) 34,031
Other, net 6,221 6,221
------------- -------------- ----------------
Loss before taxes (57,568) 41,893 (15,675)
Income tax (benefit) provision (5,516) 12,351(d) 6,835
------------- -------------- ----------------
Net loss $ (52,052) $ 29,542 $ (22,510)
============= ============== ================
Pro forma shares outstanding 28,901,735 (e)
================
Pro forma net loss per share $ (0.78)(f)
================
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
44
<PAGE>
CORNING CLINICAL LABORATORIES INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1996
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
------------- --------------- -------------
(in thousands)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 48,319 $ (8,319)(g) $ 40,000
Accounts receivable 323,171 323,171
Inventories 25,559 25,559
Deferred taxes on income 126,906 9,400 (h) 136,306
Due from Corning Incorporated 150,000 (i) 150,000
Prepaid expenses and other assets 25,217 25,217
------------- --------------- -------------
Total current assets 549,172 151,081 700,253
Property, plant and equipment, net 293,490 293,490
Intangible assets, net 1,001,500 (425,000)(j) 576,500
Other assets 42,216 42,216
------------- --------------- -------------
TOTAL ASSETS $1,886,378 $ (273,919) $1,612,459
============= =============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 374,058 $ 9,000 (k) $ 383,058
Current portion of long-term debt 11,885 (10,000)(h) 1,885
Income taxes payable 34,212 (18,632)(h)
(7,011)(k) 8,569
Due to Corning Incorporated and affiliates 14,299 (14,299)(h)
------------- --------------- -------------
Total current liabilities 434,454 (40,942) 393,512
Long-term debt, third-party 15,494 500,000 (h) 515,494
Payable to Corning 1,204,406 (8,319)(g)
(447,669)(h)
(748,418)(l)
Other liabilities 99,354 99,354
------------- --------------- -------------
Total liabilities 1,753,708 (745,348) 1,008,360
------------- --------------- -------------
Stockholder's Equity:
Contributed capital 297,823 150,000 (i)
11,250 (k)
748,418 (l) 1,207,491
Accumulated deficit (163,158) (425,000)(j)
(13,239)(k) (601,397)
Cumulative translation adjustment 1,801 1,801
Market valuation adjustment (3,796) (3,796)
------------- --------------- -------------
Total stockholder's equity 132,670 471,429 604,099
------------- --------------- -------------
TOTAL LIABILITIES
AND STOCKHOLDER'S EQUITY $1,886,378 $ (273,919) $1,612,459
============= =============== =============
</TABLE>
The accompanying notes to unaudited pro forma combined financial information
are an integral part hereof.
45
<PAGE>
CORNING CLINICAL LABORATORIES INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Statements of Operations
(a) The historical financial statements include substantially all of the
costs incurred by Corning on CCL's behalf and reflect all of its costs of
doing business. CCL management does not expect administrative costs to
increase as a result of being an independent, public company.
(b) The pro forma adjustment to interest expense, net represents the
difference between historical intercompany interest expense and interest
expense on the third party debt to be incurred in connection with the CCL
Spin-Off Distribution. CCL will borrow, immediately prior to the CCL
Spin-Off Distribution, approximately $500 million in long-term debt to
repay Corning for certain intercompany borrowings. The debt is assumed to
consist of $350 million of CCL Credit Facility borrowings and $150
million of Notes to be issued under the CCL Notes Offering. The assumed
interest rates on these new borrowings are 7.50% and 11.50% for the CCL
Credit Facility and the Notes, respectively. If the interest rate on the
CCL Credit Facility fluctuates by 1/8%, interest expense fluctuates by
approximately $440,000 annually. Depending on market conditions at the
time of the CCL Notes Offering and the consummation of the CCL Credit
Facility, the total combined debt amount, the interest rates, and the
amounts of each of the CCL Credit Facility and the Notes may vary from
that indicated herein.
(c) The pro forma adjustment to amortization of intangible assets represents
the estimated reduction of amortization expense due to the CCL Accounting
Policy Change. Most of CCL's intangible assets resulted from business
combinations in 1993 accounted for as purchases. Significant changes in
the clinical laboratory and health care industries subsequent to 1993
have caused the fair value of CCL's intangible assets to be significantly
less than their carrying value. CCL management believes that a valuation
of intangible assets based on the amount for which each regional
laboratory could be sold in an arms-length transaction is preferable to
using projected undiscounted pre-tax cash flows. CCL believes fair value
is a better indicator of the extent to which the intangible assets may be
recoverable and therefore may be impaired. CCL management estimates that
the reduction of amortization expense will approximate between $10.0
million and $11.3 million annually and $2.5 million and $2.8 million
quarterly. The midpoint of the range has been utilized for the
preparation of the Unaudited Pro Forma Combined Statements of Operations.
(d) The pro forma adjustment to income tax (benefit) provision represents the
estimated income tax impact of the pro forma reduction in interest
expense at the incremental tax rate of 39.5%. The pro forma amortization
expense reduction will not impact income taxes as the amortization is not
deductible for tax purposes.
(e) The pro forma common shares outstanding represents CCL management's
current estimate of the number of shares to be outstanding after the CCL
Spin-Off Distribution. Management's estimate includes (a) the issuance of
approximately 28.0 million shares of CCL Common Stock at an exchange
ratio of one share of CCL Common Stock issued for every eight shares of
Corning Common Stock outstanding at September 30, 1996 and (b) the
issuance of an estimated 900,000 shares into the employee stock ownership
plan. CCL management's estimate of shares outstanding is subject to
change as the result of normal issuances and repurchases of Corning
Common Stock prior to the date of the CCL Spin-Off Distribution and
finalization of the proposed structure of the employee stock ownership
plan.
(f) Pro forma net loss per share is computed by dividing net loss by the pro
forma shares outstanding during each period. Common stock equivalents are
not included in the loss per share computation because they do not result
in material dilution. Historical net loss per share data is not presented
as CCL's historical capital structure is not comparable to periods
subsequent to the CCL Spin-Off Distribution.
Balance Sheet
(g) Historically, CCL has participated in Corning's centralized treasury and
cash management processes. Cash received from operations was generally
transferred to Corning on a daily basis. Cash disbursements for
operations and investments were funded as needed from Corning. The cash
balance at the Distribution Date will range from $30 million to $40
million. The pro forma adjustment to cash and payable to Corning
represents the reduction to bring cash to the Distribution Date range.
(h) The pro forma adjustment to deferred taxes on income, current portion of
long-term debt, income taxes payable, due to Corning Incorporated and
affiliates, long-term debt third party and payable to Corning reflects
borrowings by CCL, immediately prior to the CCL Spin-Off Distribution, to
repay Corning for certain income tax liabilities and intercompany
borrowings. The debt is assumed to consist of $350 million of bank
borrowings under the CCL Credit Facility and $150 million of Notes to be
issued under the CCL Notes Offering.
46
<PAGE>
(i) The pro forma adjustment to due from Corning Incorporated and contributed
capital represents the estimated receivable from Corning and capital
contribution related to Corning's indemnification under the Transaction
Agreement. The receivable from Corning is estimated to approximate $25
million at the Distribution Date.
(j) The pro forma adjustment to intangible assets, net and accumulated
deficit represents the estimated impact of the CCL Accounting Policy
Change. CCL management estimates the charge to reduce the carrying value
of intangible assets to fair value will be in the range of $400 million
to $450 million. The midpoint of the range has been utilized for the
preparation of the Unaudited Pro Forma Combined Balance Sheet. This
charge has not been reflected in the Unaudited Pro Forma Combined
Statements of Operations because it is non-recurring. See additional
discussion on CCL's planned change in accounting policy in note (c)
above.
(k) The pro forma adjustment to accounts payable and accrued expenses, income
taxes payable, contributed capital and accumulated deficit represents
costs directly related to the CCL Spin-Off Distribution that CCL expects
to record coincident with the CCL Spin-Off Distribution. These costs,
which are estimated at $20.2 million ($13.2 million after tax), include
approximately $9 million related to professional advisory and financing
commitment fees and $11.2 million related to the establishment of an
employee stock ownership plan. This amount is subject to change based on
the market price of the CCL Common Stock on the Distribution Date. This
charge has not been reflected in the Unaudited Pro Forma Statements of
Operations because it is nonrecurring.
(l) The pro forma adjustment to payable to Corning and contributed capital of
$748.4 million reflects Corning's capital contribution to CCL of the
estimated remaining intercompany borrowings.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CCL
Overview
In the last several years, CCL's business has been affected by significant
government regulation, price competition and rapid change resulting from
payors' efforts to control cost, utilization and delivery of health care
services. As a result of these factors, CCL's profitability has been impacted
by changes in the volume of testing, the prices and costs of its services,
the mix of payors and the level of bad debt expense.
Payments for clinical laboratory services are made by government, managed
care organizations, insurance companies, physicians and patients. Increased
government regulation focusing on health care cost containment has reduced
prices and added costs for the clinical laboratory industry by increasing
complexity and adding new regulatory requirements. Also, in recent years
there has been a significant shift away from traditional fee-for- service
health care to managed health care, as employers and other payors of health
care costs aggressively move the populations they control into lower cost
plans. Managed care organizations typically negotiate capitated payment
contracts whereby CCL receives a fixed monthly fee per covered individual for
all services included under the contract. Capitated contract arrangements
shift the risks of additional routine testing beyond that covered by the
capitated payment to the clinical laboratory. The managed care industry is
growing as well as undergoing rapid consolidation which has created large
managed care companies that control the delivery of health care services for
millions of people, and have significant bargaining power in negotiating fees
with providers, including clinical laboratories. These market factors have
had a significant adverse impact on prices in the clinical laboratory
industry, and are major contributors to CCL's decline in profitability over
the last two years. This growth of managed care and use of capitated
agreements are expected to continue for the foreseeable future. See "Business
of CCL--Effect of the Growth of the Managed Care Sector on the Clinical
Laboratory Business."
A substantial portion of CCL's growth has come from acquisitions in the
last four years. The largest of these acquisitions were the purchases of
Damon and certain operations of Unilab in 1993 and the acquisitions of MML,
Nichols Institute and Bioran in 1994. As a result of these acquisitions, CCL
has recorded a number of special charges for restructuring and integration
costs since 1993. See Note 5 to the Audited CCL Financial Statements and
Notes 2 and 3 to the CCL Interim Financial Statements.
The MML, Nichols Institute and Bioran transactions were accounted for as
poolings of interests. The accompanying financial statements of CCL have been
restated to include the results of operations of these pooled entities on a
combined basis for all periods presented. The results of operations for Damon
and Unilab, as well as all other acquisitions accounted for as purchases,
have been included since their respective dates of acquisition. Acquisitions
accounted for as purchases have generated large amounts of goodwill which are
not deductible for tax purposes, giving rise to a high effective income tax
rate and increased sensitivity of the income tax rate to changes in pre-tax
income. See Note 3 to the Audited CCL Financial Statements.
The clinical laboratory industry is subject to seasonal fluctuations in
operating results. CCL's cash flows are influenced by seasonal factors.
During the summer months, year-end holiday periods and other major holidays,
volume of testing declines, reducing net revenues and resulting cash flows
below annual averages during the third and fourth quarters of the year.
Winter months are also subject to declines in testing volume due to inclement
weather, which varies in severity from year to year.
The clinical laboratory industry is labor intensive. Approximately half of
CCL's total costs and expenses are associated with employee compensation and
benefits. Cost of services, which have approximated sixty percent of net
revenues over the past several years, consists principally of costs for
obtaining, transporting and testing specimens. Selling, general and
administrative expenses consist principally of the cost of the sales force,
billing operations (including bad debt expense), and general management and
administrative support.
Results of Operations
Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995. Earnings for the third quarter of 1996 were significantly
below those for the prior year due principally to the impact of special
charges. Before special charges, earnings were significantly above the prior
year level, which included a $62 million charge to operations to increase
accounts receivable reserves.
48
<PAGE>
Net Revenues
Net revenues increased by $5.4 million, or 1.3%, over the three months
ended September 30, 1995 due to increased revenues from CCL's nonclinical
testing businesses. Volume of clinical testing increased by 1.8% but was
offset by average price declines of 1.7%. The majority of the price decline
resulted from changes in reimbursement policies of various third-party
payors, shifts in volume to lower-priced managed care business and intense
price competition in the industry. Also contributing to the price decline was
a reduction in Medicare fee schedules effective January 1, 1996, which
accounted for approximately a 1% decrease in net revenues.
Costs and Expenses
Cost of services increased by $14.5 million from the prior period and as a
percentage of net revenues increased to 63.0% in 1996 from 60.2% in 1995.
These increases were due principally to the effects of declining prices and
increases in salaries and wages associated with improving customer service
levels, and wage adjustments.
Selling, general and administrative expense decreased by $56.2 million
from the prior period and as a percentage of revenues decreased to 30.9% in
1996 from 45.3% in 1995. These decreases were due principally to a reduction
in bad debt expense, which decreased by $55.3 million, from $85.8 million to
$30.5 million, and as a percentage of net revenues decreased from 21.5% to
7.5%. The reduction in bad debt expense results primarily from the unusually
high level of bad debt expense in the prior year, which included a charge of
$62.0 million to increase receivables reserves. CCL has established, and
maintains, rigorous programs to improve the effectiveness of CCL's billing
and collection operations. The established programs include standard policies
and procedures, employee training programs and regular reporting and tracking
of key measures by senior management. The implementation of these programs
during the fourth quarter of 1995 has aided in reducing bad debt expense.
However, additional requirements to provide documentation of the "medical
necessity" of testing have added to the backlog of unbilled receivables and
caused third quarter 1996 bad debt expense as a percentage of revenues to
increase above the rate CCL had experienced during the first two quarters of
1996. Additional efforts to collect medical necessity documentation are
currently being made and are expected to lower bad debt expense below the
1996 third quarter rate during 1997.*
During the third quarter of 1996, CCL recorded a $142.0 million charge to
establish additional reserves associated with government and other claims
primarily related to billing practices at certain laboratories of Damon and
Nichols prior to their acquisition by CCL. Subsequent to the third quarter,
CCL entered into an agreement with the DOJ to pay $119.0 million to settle
all federal and Medicaid claims related to the billing by Damon of certain
blood test series for federally sponsored health care programs. This payment
was fully reserved as part of the third quarter charge. CCL's aggregate
reserve with respect to all governmental and nongovernmental claims,
including litigation costs, was $215 million at September 30, 1996, and is
estimated to be $85 million at the Distribution Date. Although management
believes that established reserves for both indemnified and non-indemnified
claims are sufficient, it is possible that the final resolution of these
matters could be in excess of established reserves by an amount which could
be material to CCL's results of operation and, for non-indemnified claims,
CCL's cash flows in the periods in which such claims are settled. CCL does
not believe that these matters will have a material adverse effect on CCL's
overall financial condition. See "Business of CCL--OIG Investigations and
Related Claims."
Additionally, in the third quarter CCL recorded a charge of $13.7 million
to write off the development costs of what was intended as a new company-wide
billing system. Management now plans to standardize billing systems using a
system already implemented in seven of its sites. See "Business of
CCL--Information Systems" and "-- Billing" and Notes 2 and 3 to the CCL
Interim Financial Statements.
Net interest expense declined from the prior year's level due to lower
average borrowings during 1996. Amortization of intangible assets decreased
below the prior year's level due to certain intangible assets having been
fully amortized.
CCL's effective tax rate is significantly impacted by goodwill
amortization which is not deductible for tax purposes and which had the
effect of decreasing the tax benefit rate for the third quarter of 1996.
Nine Months Ended September 30, 1996 Compared with Nine Months Ended
September 30, 1995. Earnings were substantially below those for the prior
year due principally to special charges, price declines, increases in
salaries and wages, higher bad debt expense, and unusually severe winter
weather experienced during the first quarter of 1996.
- -------------
* This is a forward looking statement. See "Business of CCL--Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995." In particular see factors (c),
(d), (j) and (k).
49
<PAGE>
Net Revenues
Net revenues decreased by $8.2 million, or .7%, from the prior period,
principally due to average price declines of approximately 3.4%, partially
offset by an increase in clinical testing of 1.2% and increased revenues from
CCL's nonclinical testing businesses. Adversely affecting the volume growth
was unusually severe winter weather in the northeastern and central parts of
the United States during the first quarter of 1996. The majority of the price
declines resulted from changes in reimbursement policies of various
third-party payors, shifts in volume to lower-priced managed care business,
and intense price competition in the industry. Also contributing to the price
declines was a reduction in Medicare fee schedules effective January 1, 1996,
which accounted for approximately a 1% decrease in net revenues.
Costs and Expenses
Cost of services increased by $32.8 million from the prior period and as a
percentage of net revenues increased to 62.4% in 1996 from 59.4% in 1995.
These increases were due principally to the effects of declining prices and
increases in salaries and wages associated with improving customer service
levels, and wage adjustments.
Selling, general and administrative expense decreased by $28.2 million
from the prior period and as a percentage of net revenues decreased to 30.2%
in 1996 from 32.2% in 1995. These decreases were due principally to a
reduction in bad debt expense, which decreased, by $45.4 million, from $127.3
million to $81.9 million, and as a percentage of net revenues decreased from
10.3% to 6.7%, partially offset by costs associated with developing and
implementing strategic action plans and operating improvement plans. The
reduction in bad debt expense results primarily from the unusually high level
of bad debt expense in the prior year, which included a charge of $62.0
million to increase receivables reserves. CCL has established, and maintains,
rigorous programs to improve the effectiveness of CCL's billing and
collection operations. The established programs include standard policies and
procedures, employee training programs and regular reporting and tracking of
key measures by senior management. The implementation of these programs
during the fourth quarter of 1995 has aided in reducing bad debt expense.
However, additional requirements to provide documentation of the "medical
necessity" of testing have added to the backlog of unbilled receivables and
caused third quarter 1996 bad debt expense as a percentage of revenues to
increase above the rate CCL had experienced during the first two quarters of
1996. Additional efforts to collect medical necessity documentation are
currently being made and are expected to lower bad debt expense below the
1996 third quarter rate during 1997.*
In the second quarter of 1996, as a consequence of an investigation begun
in 1993, the DOJ notified CCL that it has taken issue with payments related
to certain tests received by Damon from federally funded health care programs
prior to the acquisition of Damon by CCL. CCL management met with the DOJ
several times to evaluate the substance of the government's allegations. A
special charge of $46.0 million was recorded in the second quarter of 1996 to
establish additional reserves equal to management's estimate, at that time,
of the low end of the range of potential amounts which could be required to
satisfy the government's claims. During the third quarter of 1996 CCL
recorded a $142.0 million charge to establish additional reserves associated
with government and other claims primarily related to billing practices at
certain laboratories of Damon and Nichols prior to their acquisition by CCL.
Subsequent to the third quarter, CCL entered into an agreement with the DOJ
to pay $119.0 million to settle all federal and Medicaid claims related to
the billing by Damon of certain blood test series for federally sponsored
health care programs. This payment was fully reserved as part of the third
quarter charge. Additionally, in the third quarter CCL recorded a charge of
$13.7 million to write off the development costs of what was intended as a
new company-wide billing system. Management now plans to standardize billing
systems using a system already implemented in seven of its sites. See
"Business of CCL--Information Systems" and "--Billing" and Notes 2 and 3 to
the CCL Interim Financial Statements.
In the second quarter of 1995, CCL recorded a provision for restructuring
totalling $33 million primarily for work force reduction programs and the
costs of exiting a number of leased facilities. Additionally, in the first
quarter of 1995 CCL recorded a special charge of $12.8 million for the
settlement of claims related to the inadvertent billing errors of certain
laboratory tests that were not completely and/or successfully performed or
reported due to insufficient samples and/or invalid results.
- -------------
* This is a forward looking statement. See "Business of CCL--Cautionary
Statement for Purposes of the 'Safe Harbor' Provisions of the Private
Securities Litigation Reform Act of 1995." In particular see factors (c),
(d), (j) and (k).
50
<PAGE>
Net interest expense remained relatively unchanged from the prior year
level. Amortization of intangible assets decreased below the prior year level
due to certain intangible assets having been fully amortized. A gain on the
sale of several small investments and the favorable settlement of a
contractual obligation, both of which occurred in 1996, accounted for the
majority of the change in "other, net" compared to the prior year.
CCL's effective tax rate is significantly impacted by goodwill
amortization which is not deductible for tax purposes. This had the effect of
reducing the tax benefit rate of CCL in both 1996 and 1995. The effect of
this non- deductibility is particularly apparent when amortization increases
in proportion to pre-tax earnings, as was the case in 1995.
Year Ended December 31, 1995 Compared with Year Ended December 31,
1994. Earnings for 1995 were significantly below those for the prior year as
a result of price declines, higher bad debt expense, and the impact of
restructuring and other special charges. The 1995 bad debt expense included a
$62.0 million charge to increase accounts receivable reserves in the third
quarter.
Net Revenues
Net revenues of $1.6 billion in fiscal 1995 remained essentially unchanged
from the prior year. Average price declines, estimated to be 3.7%, were
offset by estimated growth of approximately 4% in requisition volume. The
majority of the price declines resulted from changes in reimbursement
policies of various third-party payors, an accelerated shift in volume to
lower-priced managed care business, and intense price competition in the
industry. Also contributing to the price declines was a reduction in Medicare
fee schedules effective January 1, 1995 which accounted for approximately a
1% decrease in net revenues.
Costs and Expenses
Cost of services increased $10.4 million from 1994 and as a percentage of
net revenues increased to 60.2% in 1995 from 59.4% in 1994. These increases
were due principally to the impact of price declines and the added cost of
doing business in an increasingly complex environment. Partially offsetting
these factors were synergies realized from integration of acquisitions.
Selling, general and administrative expense increased $111.3 million from
1994 and as a percentage of net revenues increased to 32.1% in 1995 from
25.2% in 1994. These increases resulted primarily from a higher level of bad
debt expense, which included a charge of $62.0 million to increase
receivables reserves. Bad debt expense increased to $152.6 million or 9.4% of
net revenues in 1995 from $59.5 million or 3.6% of net revenues in 1994, as a
result of the $62.0 million charge and an increase in bad debt expense in the
fourth quarter of 1995. Excluding bad debt expense, selling, general and
administrative expenses as a percentage of net revenues were approximately
22.7% as compared to 21.6% in 1994. The $62.0 million charge was attributable
to integration problems at certain laboratories, the cost of compliance with
increased regulatory requirements and a failed billing system implementation
at CCL's largest facility in Teterboro, New Jersey. All of these factors
contributed to a significant growth in the backlog of unbilled receivables,
which caused the deterioration in the collection of receivables during the
third quarter of 1995. In addition to the $62.0 million charge, the accrual
rate for bad debt expense was increased to 6.4% of net revenues after the
charge from 5.0% of net revenues prior to the charge. CCL has put in place a
rigorous program to improve the effectiveness of its billing and collection
operations. Additionally, CCL has stabilized the current billing system in
Teterboro. See "Business of CCL--Information Systems" and "--Billing."
In the second quarter of 1995, CCL recorded a provision for restructuring
totalling $33.0 million, consisting primarily of costs for work force
reduction programs and exiting a number of leased facilities. In the first
quarter of 1995, CCL recorded a special charge of $12.8 million for the
settlement of claims related to inadvertent billing errors of certain
laboratory tests that were not completely and/or successfully performed or
reported due to insufficient samples and/or invalid results. In the third
quarter of 1994, CCL recorded a provision for restructuring and other special
charges totalling $79.8 million which included $48.2 million of integration
costs, $21.6 million of transaction expenses, and $10.0 million of other
reserves primarily related to the Nichols Institute, MML and Bioran
acquisitions. See Note 5 to the Audited CCL Financial Statements.
Net interest expense increased by $18.7 million over the 1994 level due to
an increase in average debt levels, resulting principally from funding
investing activities and cash requirements associated with restructuring and
other special charges.
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Amortization expense increased principally due to additional intangible
assets arising from acquisitions completed in 1994 and 1995. CCL's effective
tax rate is significantly impacted by goodwill amortization which is not
deductible for tax purposes. This had the effect of reducing the tax benefit
rate to CCL in 1995 while increasing the overall tax rate in 1994. See Note 4
to the Audited CCL Financial Statements.
Year Ended December 31, 1994 Compared with Year Ended December 31,
1993. Earnings for 1994 were below those for the prior year due principally
to price declines, which outpaced the cost efficiencies realized from the
integration of acquisitions and other activities to reduce costs.
Net Revenues
Net revenues increased by $217.4 million, or 15.3%, over the prior year,
due principally to the net impact of acquisitions and dispositions which
increased net revenues by approximately $240 million. The net effect of
average price declines, estimated at 4%, offset by an increase in requisition
volume, estimated at 3%, accounted for the remaining change in net revenues.
The majority of the price declines resulted from a shift in volume to
lower-priced managed care business, changes in reimbursement policies of
various third-party payors, and intense price competition. Also contributing
to the price declines was a reduction in Medicare fee schedules effective
January 1, 1994 which accounted for approximately a 1% decrease in net
revenues.
Costs and Expenses
Cost of services increased $164.1 million over 1993 and as a percentage of
net revenues increased to 59.4% in 1994 from 56.9% in 1993. These increases
were due principally to the impact of price declines and the added cost of
doing business in an increasingly complex environment. Partially offsetting
these factors were synergies realized from integration of acquisitions.
Selling, general and administrative expense increased $48.4 million over
1993 and as a percentage of net revenues decreased slightly from 25.7% in the
prior year to 25.2%. Synergies associated with the elimination of duplicate
facilities, personnel and administrative functions of acquired entities,
primarily Damon, MML and Nichols, with those of CCL were partially offset by
an increase in bad debt expense, which increased by $12.3 million, from $47.2
million to $59.5 million, and increased from 3.3% of net revenues in 1993 to
3.6% in 1994.
In the third quarter of 1994, CCL recorded a provision for restructuring
and other special charges totalling $79.8 million, which included $48.2
million of integration costs, $21.6 million of transaction expenses, and
$10.0 million of other reserves primarily related to the Nichols Institute,
MML and Bioran acquisitions. Integration costs represented the expected costs
for closing clinical laboratories in certain markets where duplicate CCL and
Nichols Institute, MML or Bioran facilities existed at the time of the
acquisitions. In the third quarter of 1993, CCL recorded a provision for
restructuring costs and other special charges totalling $99.6 million. The
restructuring component of this special charge aggregated $56.6 million
related principally to the integration of CCL's operations with those
acquired in the Damon acquisition. The special charge consisted primarily of
a $36.5 million charge to reflect the settlement and related legal expenses
associated with a compromise agreement with the DOJ to settle claims brought
on behalf of the OIG. In making the settlement, CCL did not admit any
wrongdoing in connection with its marketing or business practices. See "--DOJ
Investigations," "Business of CCL--OIG Investigations" and Note 5 to the
Audited CCL Financial Statements.
Net interest expense increased by $21.4 million over the prior year, due
principally to increased borrowings associated with financing acquisitions
and, to a lesser degree, increased borrowing rates. Amortization of
intangibles increased due to additional intangible assets arising from
acquisitions completed in 1993 and 1994.
CCL's effective tax rate is significantly impacted by goodwill
amortization which is not deductible for tax purposes, and has the effect of
increasing the overall tax rate, particularly when amortization increases in
proportion to pre-tax earnings. This situation was the principal contributor
to the increase in the 1994 effective tax rate over the prior year. See Note
4 to the Audited CCL Financial Statements.
Liquidity and Capital Resources
After the Distributions
Concurrently with the CCL Spin-Off Distribution, CCL's debt will be
restructured and equity recapitalized. CCL plans to complete the CCL Notes
Offering of approximately $150 million principal amount of Notes, and incur
approximately $350 million of borrowings under the CCL Credit Facility. The
proceeds from these borrowings will
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be used to repay amounts owed to Corning. Any amounts owed to Corning in
excess of the proceeds from these borrowings will be contributed by Corning
to CCL's capital. As a result of these actions, management estimates that
CCL's debt will be reduced by approximately $720 million to approximately
$515 million, and annual interest expense will be reduced by approximately
$31 million. The CCL Credit Facility will include a revolving credit facility
of $100 million, all of which is expected to be available for borrowing at
the time of the Distributions.
CCL estimates that it will invest approximately $20 million during the
fourth quarter of 1996 for capital expenditures, principally related to
facility upgrades and investments in information technology. Capital
expenditures in 1997 are estimated to be approximately $95 million. CCL
expects to expand its operations principally through internal growth and
accelerated growth in strategic markets and related lines of business. CCL
expects such activities will be funded from existing cash and cash
equivalents, cash flow from operations, and borrowings under the revolving
credit facility. CCL believes that the revolving credit facility will be
sufficient to meet both its short-term and its long-term financing needs. As
a result, CCL believes it has sufficient financial flexibility and sufficient
access to funds to meet seasonal working capital requirements, capital
expenditures and growth opportunities.
CCL does not anticipate paying dividends on the CCL Common Stock in the
foreseeable future. In addition, the CCL Credit Facility prohibits CCL from
paying cash dividends on the CCL Common Stock. Further, the Indenture under
which the Notes will be issued will restrict CCL's ability to pay cash
dividends on the CCL Common Stock based on a percentage of CCL's cash flow.
Coincident with the Distributions, CCL plans to record a non-recurring
charge of approximately $20 million associated with the Distributions. The
largest component of the charge will be the cost of establishing an employee
stock ownership plan. The remainder of the charge will consist principally of
the costs for advisors and other fees associated with establishing CCL as a
separate publicly traded entity. The amount of the charge is subject to
change based on the price of the CCL Common Stock on the Distribution Date.
Although CCL has no present acquisition agreements or arrangements, there
may be acquisitions or other growth opportunities which will require
additional external financing, and CCL may from time to time seek to obtain
funds from public or private issuances of equity or debt securities. There
can be no assurance that such financing will be available on terms acceptable
to CCL. See "Risk Factors -- Risks Relating to CCL -- Potential Liability
under the Spin-Off Tax Indemnification Agreements."
CCL management believes that the recapitalization of CCL and the
indemnification by Corning against monetary fines, penalties or losses from
outstanding government claims, together with the successful implementation of
its business strategy, will generate more predictable and improved cash
flows. Additionally, CCL management believes that these actions, together
with CCL's leading market position or low cost provider status in a number of
geographic regions accounting for the majority of its net revenues, will aid
CCL in meeting the ongoing challenges in the clinical laboratory industry
brought on by growth in managed care and increased regulatory complexity.
The immediately preceding paragraph includes forward-looking statements
which involve risks and uncertainties. CCL's actual performance may differ
materially from that discussed above. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors"
as well as future events that have the effect of reducing CCL's available
cash flows, such as unexpected operating losses, restructuring activities and
cash payments or losses of revenues related to settlement of claims by
non-governmental entities that arise out of the governmental investigations
or other claims which are instituted after the Distributions (which are not
covered by Corning's indemnity).
Prior to the Distributions
Historically, CCL has financed its operations and growth with cash flow
from operations, borrowings from Corning, and stock issued by Corning to
finance certain acquisitions on behalf of CCL. Investing activities have
included business acquisitions and capital expenditures for facility
expansions and upgrades and information systems improvements. Replacement of
laboratory equipment has typically been financed through operating leases.
Net cash provided by operating activities for the nine months ended
September 30, 1996 was below the level for the comparable period of the prior
year, as a result of reduced earnings, partially offset by an improved
collection rate of accounts receivable and a reduction in restructuring
spending. This improvement in accounts receivable is
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a direct result of specific programs initiated in the fourth quarter of 1995
to improve billing operations. Although these programs are continuing,
additional requirements of customers to provide documentation of the "medical
necessity" of testing are expected to increase receivable levels in the
future. The number of days sales outstanding in accounts receivable ("DSOs")
for the clinical testing business is one measure used by CCL to monitor the
effectiveness of its billing operations. DSOs were 74 days at September 30,
1996 and December 31, 1995, 81 days at December 31, 1994, and 90 days at
December 31, 1993.
Net cash provided by operating activities during 1995 increased above the
prior year despite reduced earnings, due primarily to changes in accounts
payable and accrued expenses and reduced spending for restructuring
integration and other special charges. Net cash provided by operating
activities in 1994 declined from the 1993 level principally due to larger
increases in accounts receivables and higher levels of spending for
restructuring, integration and other special charges during 1994.
Cash used for investing activities for the nine months ended September 30,
1996 was below the prior year level due to reduced acquisition activity and
the sale of several small investments during 1996. Investing activities
during 1995, 1994 and 1993 were funded principally by cash flow from
operations and borrowings from Corning, and were principally for capital
expenditures and acquisitions. Cash used in investing activities in 1995
exceeded the prior year level due principally to cash proceeds generated from
the sale of certain California operations in 1994. See Note 3 to the Audited
CCL Financial Statements.
Net cash provided by financing activities for the nine months ended
September 30, 1996 was below the prior year level due primarily to reduced
acquisition activity during 1996. Financing activities in 1995, 1994 and 1993
consisted principally of dividend payments to and net borrowing activities
with Corning.
Adjusted EBITDA
Adjusted EBITDA represents income (loss) before income taxes plus net
interest expense, depreciation and amortization and restructuring and other
special charges. Adjusted EBITDA includes bad debt expense. Adjusted EBITDA
is presented because management believes it is an accepted financial
indicator of a company's ability to service and incur debt. Adjusted EBITDA
does not represent net income or cash flows from operations as those terms
are defined by generally accepted accounting principles and does not
necessarily indicate whether cash flows will be sufficient to fund cash needs
or service debt.
Adjusted EBITDA for the third quarter of 1996 was $37.6 million, or 9.3%
of net revenues. Adjusted EBITDA in the prior year period was ($9.9) million.
The improvement in Adjusted EBITDA was principally due to a decrease in
selling, general and administrative expense (which decreased $56.2 million)
and an increase in net revenues of $5.4 million, partially offset by an
increase in cost of services (which increased $14.5 million).
Adjusted EBITDA for the nine months ended September 30, 1996 was $134.7
million, or 10.9% of net revenues. Adjusted EBITDA in the prior year period
was $141.8 million, or 11.4% of net revenues. The decline in Adjusted EBITDA
was principally due to a decrease in net revenues of $8.2 million and an
increase in cost of services (which increased $32.8 million), partially
offset by a decrease in selling, general and administrative expense (which
decreased $28.2 million).
Adjusted EBITDA for 1995 was $176.5 million, or 10.8% of net revenues.
Adjusted EBITDA for the prior year period was $295.4 million, or 18.1% of net
revenues. The decline in Adjusted EBITDA was principally due to an increase
in cost of services (which increased $10.4 million) and an increase in
selling, general and administrative expense (which increased $111.3 million).
Adjusted EBITDA for 1994 was $295.4 million, or 18.1% of net revenues.
Adusted EBITDA in the prior year period was $278.7 million, or 19.7% of net
revenues. The increase in Adjusted EBITDA was principally due to an increase
in revenues (which increased $217.4 million), partially offset by an increase
in cost of services (which increased $164.1 million) and an increase in
selling, general and administrative expenses (which increased $48.4 million).
Changes in Accounting Policies
Coincident with the CCL Spin-Off Distribution, CCL management will adopt a
new accounting policy for evaluating the recoverability of intangible assets
and measuring possible impairment under Statement of the Accounting
Principles Board No. 17. Most of CCL's intangible assets resulted from
purchase business combinations
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in 1993. Significant changes in the clinical laboratory and health care
industries subsequent to 1993, including increased government regulation and
movement from traditional fee-for-service care to managed cost health care,
have caused the fair value of CCL's intangible assets to be significantly
less than carrying value. CCL management believes that a valuation of
intangible assets based on the amount for which each regional laboratory
could be sold in an arms-length transaction is preferable to using projected
undiscounted pre-tax cash flows. CCL believes fair value is a better
indicator of the extent to which the intangible assets may be recoverable and
therefore, may be impaired. This change in method of evaluating the
recoverability of intangible assets will result in CCL recording a charge of
between $400 million and $450 million coincident with the CCL Spin-Off
Distribution to reflect the other than temporary impairment of intangible
assets. This will result in a reduction of amortization expense of
approximately $10 million to $11.3 million annually and $2.5 million to $2.8
million quarterly. See Note 15 to the Audited CCL Financial Statements.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"). This
statement defines a fair value-based method of accounting for employee stock
options and similar equity investments and encourages adoption of that method
of accounting for employee stock compensation plans. However, it also allows
entities to continue to measure compensation cost for employee stock
compensation plans using the intrinsic value-based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Entities which elect to continue accounting for stock
compensation plans utilizing APB 25 are required to disclose pro forma net
income and earnings per share, as if the fair value-based method of
accounting under SFAS 123 had been applied. CCL intends to account for stock
compensation plans pursuant to APB 25 and, as such, will include the pro
forma disclosures required by SFAS 123 in the financial statements beginning
in 1996.
Inflation
CCL believes that inflation generally does not have a material adverse
effect on its operations or financial condition because substantially all of
its contracts are short-term.
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BUSINESS OF CCL
Overview
CCL is one of the largest clinical laboratory testing companies in the
United States, offering a broad range of routine and esoteric testing
services used by the medical profession in the diagnosis, monitoring and
treatment of disease and other medical conditions. CCL currently processes
approximately 60 million requisitions each year.
CCL is the successor by merger to MetPath Inc. ("MetPath"), a New York
corporation organized in 1967. Corning acquired MetPath in 1982 and in 1992
merged MetPath into CCL, which had been organized in 1990 as a holding
company for the clinical laboratory testing business and contract research
business. In 1994, CCL expanded its presence in the esoteric testing market
through the acquisition of Nichols Institute, now known as Corning Nichols
Institute ("Nichols"), which is one of the leading esoteric clinical
laboratories in the world.
Since its founding in 1967, CCL's clinical laboratory testing business has
grown into a network of 17 regional laboratories across the United States,
the Nichols esoteric testing laboratory in San Juan Capistrano, California
and one branch laboratory in Mexico City. In addition, CCL has 14 smaller
branch laboratories, approximately 200 "STAT" laboratories and approximately
850 patient service centers located throughout the United States. A
substantial portion of this growth has resulted from acquisitions. See
"--Acquisitions and Dispositions."
Recent Organizational Changes
Between 1990 and 1995, Corning tripled the size of its clinical laboratory
testing business, principally through acquisitions. Historically, prior
management pursued a strategy of growth through acquisitions, including
diversification outside of the clinical laboratory testing business. As a
result of difficult integrations and increased pricing pressures and
regulatory complexity in the clinical testing industry, a new strategy was
needed. In May 1995, Corning responded by appointing Kenneth Freeman, then an
Executive Vice President of Corning, as President and Chief Executive Officer
of CCL, who was charged with the responsibility to formulate a new strategy.
Mr. Freeman has over 24 years of key financial and managerial experiences at
Corning, including serving as the general manager of Corning's science
products division and the President and Chief Executive Officer of Corning
Asahi Video Products Company. Under Mr. Freeman's leadership, profitability
of these operations increased.
Mr. Freeman immediately suspended CCL's acquisition program. Under his
direction, CCL began to refocus on its core clinical laboratory testing
business and reorganize its senior management team. As a result, CCL is
implementing the best practices in each region throughout CCL; standardizing
processes and systems; analyzing the cost of serving various customers;
intensifying efforts to correct persistent billing errors to both enhance
customer satisfaction and reduce the cost of billing operations; enhancing
its compliance program to audit and correct system defaults and to better
train employees in the laws and rules governing the industry; and improving
communications with employees by improving systems and the kind and amount of
current information available to employees.
Mr. Freeman revamped the senior management team by appointing four new
senior executives and changing the responsibilities of five other senior
executives. Additionally, approximately one-half of the existing laboratory
facility general managers were replaced.
Mr. Freeman also changed the management structure, appointing three of the
senior executives to newly created key positions--Douglas VanOort, who will
focus exclusively on laboratory operations, Donald Hardison, who will focus
on commercial activities, and Dr. Gregory Critchfield, who will lead the
efforts in the science and medical areas and pursue innovations. All three
report directly to Mr. Freeman. See "Management of CCL--Executive Officers."
CCL believes that this new management structure will greatly enhance CCL's
ability to pursue its business strategy. Mr. VanOort and the regional and
facility operations leaders who report to him will focus their primary
attention on laboratory operations, efficiencies and standardization. Mr.
Hardison and the regional and local commercial leaders who report to him will
develop and coordinate national, regional and local sales and marketing
efforts, and will cultivate national and regional client relationships and
provider alliances. Dr. Critchfield will pursue scientific excellence in the
laboratory as well as seek out, develop and assimilate those new tests and
technologies that will differentiate CCL and propel its growth in the future.
This three-prong management structure is designed to implement CCL's
Business Strategy to make CCL the best supplier (i.e., lowest-cost, highest
quality) of quality testing services; the preferred provider of fairly priced
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and useful health care services and information; and the industry's leading
innovator of new clinical tests, methodologies and services.
Business Strategy
CCL's overall goal is to be recognized by its competitors, customers and
employees as the best provider of comprehensive and innovative clinical
testing, information and services. To achieve this, CCL has set several
strategic goals and put in place organizational structures to implement them.
Best Supplier. CCL seeks to be the best supplier of the highest quality
and the lowest-cost testing services. Health care providers and patients
expect accurate, timely and consistent laboratory test results at a fair
price.
(bullet) Lowest Cost Provider. Currently, approximately 28% of CCL's net
revenues are from laboratories that CCL believes are the
lowest-cost providers in their respective markets. CCL currently
receives approximately 60 million requisitions for testing each
year. Currently, CCL's average cost per requisition varies
significantly among its regional laboratories: an approximately
$7.00 difference in cost per requisition between the most
efficient regional laboratory and the average and an
approximately $13.00 difference in cost per requisition between
the most and the least efficient regional laboratories. In many
cases, these variations do not relate to testing volumes or
mixes, space costs, service requirements or regional labor cost
differences. To reduce costs, CCL has begun to replicate the best
practices from each region throughout its national network.
Standardization of equipment and supplies, as well as leveraging
of CCL's purchasing power, is also part of this strategy. While
CCL's overall program of standardization is in a preliminary
stage, CCL has already selected its standard clinical instruments
and has selected its national vendors for laboratory supplies,
temporary services and personal computers. Management expects to
achieve significant cost savings within the next three years as
these programs are fully implemented, the majority of which are
expected to be achieved by the end of 1998. *
(bullet) Highest Quality Provider. CCL is dedicated to providing accurate
and timely testing results and to being viewed by its customers
as the highest quality provider of clinical testing services. CCL
believes that implementation of best practices already developed
in certain regions will permit CCL to be viewed by its customers
as the highest quality provider of clinical testing services. For
example, as part of its best practices policy, CCL is identifying
the most common service failures in each regional laboratory and
establishing procedures to substantially reduce these service
failures. Management believes that implementing these best
practices will increase the level of quality while lowering
costs.** Historically, CCL's experience has been that the regions
with the highest quality of services have also had the lowest
costs.
Preferred Provider. CCL seeks to be the preferred provider of laboratory
testing services to existing and new health care networks on a selective
basis determined by profitability of accounts. CCL believes that it will
become the preferred provider to these networks as (1) large networks
typically prefer to utilize large independent clinical laboratories that can
service them on a national or regional basis and (2) CCL continues to pursue
its primary strategy of becoming the highest quality, lowest cost provider.
To achieve this, CCL will employ a rigorous national and regional process to
identify prospective customers and to efficiently allocate resources to
support these efforts. CCL will also pursue innovative alliances and seek to
assist its partners in achieving their business objectives.
(bullet) Account Profitability. CCL intends to refocus its sales efforts
on pursuing and keeping profitable accounts. CCL is engaging in
an active program with current accounts, including those with
managed care organizations, to evaluate their profitability and
either increase pricing or eliminate accounts that cannot be
serviced profitably. Throughout the independent clinical
laboratory industry, there are substantial differences in pricing
among, as well as the cost of serving, various categories of
payors and health care providers. CCL is beginning to provide
clear pricing guidelines to its sales force and changing its
commission structure so that compensation is tied to the
profitability of (rather than revenues from) new business.
- -------------
* This is a forward looking statement. See "--Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995." In particular see factors (c), (d), (g)
and (j).
** This is a forward looking statement. See "--Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995." In particular see factors (b), (c), (d),
(f) and (j).
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Management expects to achieve significant benefits from these
programs within the next three years, the majority of which are
expected to be achieved by the end of 1998.*
(bullet) Regional Profitability. CCL presently believes that it has the
leading market share among independent clinical laboratories in
most routine testing markets of the northeast, mid-Atlantic and
midwest regions. Approximately 65% of CCL's revenues and almost
all of its EBITDA is generated from markets in which CCL believes
that it has the leading market share. In most of these markets,
CCL believes that it also is the lowest cost provider. CCL is
evaluating its strategic alternatives relative to units whose
profitability does not meet its internal goals. These
alternatives may include joint ventures, alliances, or
dispositions. CCL believes that, while the clinical laboratory
industry is becoming national in scope, CCL can subcontract with
other clinical laboratories to perform testing for national
accounts in any markets in which CCL chooses not to compete. CCL
may also make selected local acquisitions where appropriate.
Leading Innovator. CCL intends to remain a leading innovator in the
clinical laboratory industry by continuing to introduce new tests, technology
and services. Through its relationship with the academic community and
pharmaceutical and biotechnology firms and a research and development budget
exceeding $15 million per year, CCL believes it is one of the leaders in
transferring innovation from academic biotechnology laboratories to the
market. For example, CCL (through its subsidiary Nichols) believes that it is
currently the only clinical laboratory that is using both molecular signal
amplification (branched DNA) and polymerase chain reaction (PCR) technologies
for HIV testing. These technologies permit the detection of lower levels of
HIV than can be achieved using other technologies, which in turn permits
health care providers to better tailor drug therapies for HIV-infected
patients. Nichols continues to be one of the leading esoteric testing
laboratories in the world. Nichols serves approximately 2,000 of the
country's estimated 6,400 hospitals and counts among its largest customers
both LabCorp and SmithKline. CCL hopes to leverage Nichols' existing
relationships with hospitals into increased routine testing to hospitals,
which continue to perform over half of the clinical laboratory testing in the
United States.
The Clinical Laboratory Testing Industry
Clinical testing is a critical component in the delivery of quality health
care service to patients. Currently, clinical laboratory testing is the first
step in determining how a significant amount of all health care dollars are
spent. Laboratory tests and procedures are used generally by physicians and
other health care providers to assist in the diagnosis, evaluation,
monitoring and treatment of diseases and other medical conditions through the
measurement and analysis of chemical and cellular components in blood,
tissues and other specimens. Clinical laboratory testing is generally
categorized as either clinical testing, which is performed on body fluids
such as blood and urine, or anatomical pathology testing, which is performed
on tissue and other samples, including human cells. Clinical and anatomical
pathology procedures are frequently ordered as part of regular physician
office visits and hospital admissions. Most clinical laboratory tests ordered
by health care providers are considered "routine" and can be performed by
most independent clinical laboratories, while "esoteric" tests (which
generally require more sophisticated equipment, materials and personnel) are
generally referred to laboratories, such as the Nichols facility in San Juan
Capistrano, that specialize in such tests.
CCL believes that in 1995 the entire United States clinical laboratory
industry had revenues exceeding $30 billion. The clinical laboratory industry
consists primarily of three types of providers: hospital-affiliated
laboratories, independent clinical laboratories, such as those owned by CCL,
and physician-office laboratories. CCL believes that in 1995 approximately
56% of the clinical testing revenues in the United States were attributable
to hospital-affiliated laboratories, approximately 36% were attributable to
independent clinical laboratories and approximately 8% were attributable to
physicians in their offices and laboratories.
CCL believes that consolidation will continue in the clinical laboratory
testing business. In addition, CCL believes that it and the other large
independent clinical laboratory testing companies may have the opportunity to
increase their share of the overall clinical laboratories testing market due
to a number of external factors including cost efficiencies afforded by
large-scale automated testing, Medicare reimbursement reductions and the
growth of managed health care entities which require low-cost testing
services and large service networks. In addition, legal restrictions on
physician
- -------------
* This is a forward looking statement. See "--Cautionary Statement for
Purposes of the 'Safe Harbor' Provisions of the Private Securities
Litigation Reform Act of 1995." In particular see factors (a), (b), (c),
(d), (f) and (i).
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referrals and the ownership of laboratories as well as increased regulation
of laboratories are expected to contribute to the continuing consolidation of
the industry.
CCL believes that a number of factors are likely to positively influence
the volume of clinical laboratory testing performed in the United States in
the future, including (1) the general aging of the population in the United
States; (2) an expanded base of scientific knowledge which has led to the
development of more sophisticated specialized tests and an increase in the
awareness of physicians of the value of clinical laboratory testing as a
cost-effective means of early detection of disease and monitoring of
treatment; (3) an increase in the number and types of tests which are, due to
advances in technology and increased cost efficiencies, readily available on
a more affordable basis to physicians; (4) expanded substance-abuse testing
by corporations and governmental agencies; and (5) increased testing for
sexually transmitted diseases such as AIDS. The impact of these factors is
expected to be offset in part by increased controls over the utilization of
clinical laboratory tests by both Medicare and the private sector,
particularly managed care organizations.
CCL believes that the clinical laboratory industry will continue to be
subject to pricing pressures as a result of (1) continued growth of the
managed care sector; (2) a shift toward capitated payment contracts within
the managed care sector; and (3) decreases in Medicare reimbursement rates.
In addition, increased regulatory requirements in the billing of Medicare are
expected to result in reimbursement reductions and additional costs to
clinical laboratory testing companies in the United States. CCL has
formulated strategies to address these challenges. See "--Business Strategy."
Services Provided by CCL
CCL's laboratory business is comprised of routine testing, which CCL
management estimates currently generates approximately 88% of CCL's net
revenues; and esoteric testing, which is performed at the Nichols facility in
San Juan Capistrano and which CCL management estimates generates
approximately 10% of CCL's net revenues. The balance of CCL's net revenues is
derived principally from the manufacture of clinical laboratory test kits.
Routine Testing Services and Operations. Routine tests, which are
performed at CCL's regional laboratories, include procedures in the area of
blood chemistry, hematology, urine chemistry, virology, tissue pathology and
cytology. Commonly ordered individual tests include red and white blood cell
counts, Pap smears, blood cholesterol level tests, AIDS-related tests,
urinalyses, pregnancy tests, and alcohol and other substance-abuse tests.
Routine test groups include tests to determine the function of the kidney,
heart, liver and thyroid, as well as other organs, and several health screens
that measure various important bodily health parameters.
CCL provides services through 17 regional laboratories located in major
metropolitan areas throughout the United States, as well as 14 branch
laboratories, approximately 200 STAT laboratories and 850 patient service
centers. CCL also operates a branch laboratory in Mexico. Regional
laboratories offer a full line of routine clinical testing procedures. "STAT"
laboratories are local laboratory facilities where CCL can quickly perform
and report results of certain routine tests for customers that require such
emergency testing services. "Branch laboratories" have a test menu that is
smaller than that of regional laboratories but larger than that of STAT
laboratories. A "patient service center" is a facility maintained by CCL,
typically in or near a medical professional building, to which patients can
be referred by physicians for specimen collection.
CCL operates 24 hours a day, 365 days a year, utilizing a fully integrated
collection and processing system. CCL generally performs and reports most
routine procedures within 24 hours, employing a variety of sophisticated and
computerized laboratory testing instruments. On an average work day, CCL
processes approximately 220,000 requisitions. CCL provides daily pickup of
specimens from most customers principally through an in-house courier system.
The specimens are sent to one of CCL's laboratories (generally a regional or
branch laboratory) where one or more tests are performed.
Each patient specimen is accompanied by a test requisition form, which is
completed by the customer, that indicates the tests to be performed and
provides the necessary billing information. Each specimen and related
requisition form is checked for completeness and then given a unique
bar-coded identification number. The unique identification number assigned to
each specimen helps to assure that the results are attributed to the correct
patient. The requisition form is sent to a data entry department where a file
is established for each patient and the necessary testing and billing
information is entered. Once this information is entered into the computer
system, the tests are performed and the results are entered, primarily
through computer interface or manually, depending upon the type of testing
equipment involved. Most of CCL's computerized testing equipment is directly
linked with CCL's information systems. Most routine testing is performed and
completed during the evening following receipt of the specimens to be tested,
and test results are readied
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for distribution the following morning either electronically or by service
representatives. Many customers have local printer capability enabling
laboratory medical reports to be printed in their offices. Customers who
request that they be called with a result are so notified in the morning. It
is CCL's policy to notify the customer immediately if a life- threatening
result is found at any point during the course of the testing process.
Esoteric Testing Services and Operations. Through Nichols, CCL operates
one of the leading esoteric clinical testing laboratories in the world.
Esoteric tests are performed in cases where the information provided by
routine tests is not specific enough or is inconclusive as to the existence
or absence of disease or when a physician requires more information.
Typically, unlike routine testing, only one test is performed per
requisition. The logistics for esoteric testing are similar to that for
routine testing except that, due to the complexity of the testing,
approximately 60% of the tests are performed within 24 hours, with almost all
of the rest being performed within one week. During 1995 Nichols performed
approximately 3.9 million esoteric tests, of which 77% were referred by
sources other than CCL regional laboratories.
Esoteric tests generally require more sophisticated equipment and
materials as well as more highly skilled personnel to perform test procedures
and analyze results than what is required for routine testing. Consequently,
esoteric tests are generally priced substantially higher than routine tests.
New medical discoveries lead to the development of new esoteric tests.
However, over time esoteric tests may become routine tests as a result of
improved technology or increased volume. The volume of esoteric tests
required by most health care providers, including hospitals, is relatively
low compared to the volume of routine tests. Because it is generally not cost
effective for such health care providers to perform the low volume of
esoteric tests in-house, a significant portion of esoteric tests are referred
to clinical laboratories like Nichols that specialize in such tests. Some
examples of esoteric testing procedures include capillary electrophoresis,
cell culture technology, chemiluminescent immunoassays, certain enzyme
immunoassays, flow cytometry, fluorescent in situ hybridization (FISH),
inductively coupled plasma mass spectroscopy (ICPMS), molecular tissue
pathology, molecular signal amplification (branched DNA), and polymerase
chain reaction (PCR) technologies.
Nichols's laboratory is comprised of 18 individual laboratory departments,
which in the aggregate offer approximately 1,400 individual tests or "assays"
in such fields as endocrinology, genetics, immunology, microbiology,
molecular biology, oncology, serology, special chemistry and toxicology.
Nichols believes that it has been one of the leaders in transferring
technological innovation from academic biotechnology laboratories to the
marketplace. Nichols was the first to introduce a number of esoteric tests,
including immunoassay methods for measurement of circulating hormone levels
and sensitive tests to predict breast cancer prognosis. Among more recent
developments have been tests to detect a variety of tumor types, a common
form of mental retardation, leukemia, cystic fibrosis, osteoporosis,
hepatitis and neurological disorder and to monitor success of therapy in
cancer and AIDS. The branched DNA and PCR technologies can be applied to a
variety of infectious agents and permit the detection of lower levels of HIV
than can be achieved under other technologies. The ability to measure the
amount of HIV permits health care providers to better tailor drug therapies
for HIV-infected patients. As part of its research and development efforts,
Nichols maintains a relationship with the academic community through its
Academic Associates program, under which approximately sixty scientists from
academia and biotechnology firms work directly with Nichols's staff
scientists to monitor and consult on existing test procedures and develop new
esoteric test methods. In addition, Nichols relies on internal resources for
the development of new tests as well as on license arrangements and co-
development agreements with biotechnology companies and academic medical
centers.
Nichols also provides clinical laboratory testing in connection with
pre-marketing clinical trials of pharmaceutical drugs. This testing is
competitive with the testing performed by a subsidiary of Covance and is
expected to continue in the future. CCL management estimates that net
revenues from such testing accounted for less than 1% of CCL's net revenues
in 1995.
Diagnostics. Through its Nichols Institute Diagnostics ("NID")
subsidiaries, which were acquired as a result of the acquisition of Nichols
Institute in August 1994, CCL manufactures and markets clinical laboratory
kits primarily for esoteric testing. Test kits are sold principally to
hospital and clinical laboratories.
Customers and Payors
CCL provides testing services to a broad range of health care providers.
The primary types of customers served by CCL are as follows:
Independent Physicians and Physician Groups. Physicians requesting testing
for their patients who are unaffiliated with a managed care plan remain the
principal source of CCL's clinical laboratory business. Fees for
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clinical laboratory testing services rendered for these physicians are billed
either to the physician, to the patient, or to the patient's third-party
payor such as insurance companies, Medicare and Medicaid. In four states,
including New York and Michigan, CCL is required to bill patients directly.
The clinical laboratory industry is supporting legislative efforts to expand
direct patient billing. Billings are typically on a fee-for-service basis. If
the billings are to the physician, they are based on the laboratory's
wholesale or customer fee schedule and are typically subject to negotiation.
Otherwise, the billings are based on the laboratory's retail or patient fee
schedule, subject to limitations on fees imposed by third parties and to
negotiation by physicians on behalf of their patients. Medicare and Medicaid
billings are based on fee schedules set by governmental authorities. See
"--Regulation and Reimbursement."
HMOs and Other Managed Care Groups. HMOs and other managed care
organizations typically contract with a limited number of clinical
laboratories and then designate the laboratory or laboratories to be used for
tests ordered by their participating physicians. In an effort to control
costs, the managed care groups generally negotiate discounts to the fees
usually charged by such laboratories. Most testing for managed care
organizations is being performed on a capitated basis. Under a capitated
payment contract, the clinical laboratory and the managed care organization
agree to a monthly payment per covered individual to cover all laboratory
tests during the month, regardless of the number or cost of tests actually
performed. Such contracts shift the risks of additional routine testing
beyond that covered by the capitated payment to the clinical laboratory. In
certain cases, however, the monthly payment may be subject to prospective or
retroactive adjustment if the number of tests performed exceeds (or is less
than) certain thresholds. The types of tests covered by capitated contracts
are negotiated for each contract, with esoteric tests and anatomic pathology
services generally not being covered under the capitation rate. Large
regional and national HMOs and preferred provider organization networks
typically prefer to utilize large independent clinical laboratories such as
CCL that can service the managed care groups on a national or regional basis.
See "--Effect of the Growth of the Managed Care Sector on the Clinical
Laboratory Business."
Hospitals. CCL serves approximately 3,000 hospitals with services that
vary from providing esoteric testing to management contracts, where CCL
manages the hospital's laboratory for a fee. Hospitals generally maintain an
on-site laboratory to perform testing on patients receiving care and refer
less frequently needed procedures to outside laboratories. Hospitals are
typically charged for such tests a negotiated fee-for-service which is based
on the laboratory's customer fee schedule. Some hospitals actively encourage
community physicians to send their testing to the hospital's laboratory. In
addition, some hospitals have been purchasing physician practices and
requiring that the physicians/employees send their testing to the hospital's
affiliated laboratory. As a result, hospital-affiliated laboratories can be
both a customer and a competitor for independent clinical laboratories such
as CCL.
Other Institutions. CCL also serves other institutions, including
governmental agencies, such as the Department of Defense and prison systems,
large employers and independent clinical laboratories that do not have the
full range of CCL's testing capabilities. These institutions are typically
charged on a negotiated or bid fee-for- service basis. CCL's services to
employers principally involve the provision of substance abuse testing
services.
In 1995, no single customer or affiliated group of customers accounted for
more than 2% of CCL's net revenues. CCL believes that the loss of any one of
its customers would not have a material adverse effect on CCL's results of
operations or cash flows.
Payors. Most clinical laboratory testing is billed to a party other than
the "customer" that ordered the test. Tests performed for various patients of
a single physician may be billed to different payors besides the ordering
physician, including third-party payors (generally an insurance company or
managed care organization), Medicare, Medicaid or the patient.
The following table sets forth current estimates of the breakdown by payor
of CCL's total volume of requisitions and average approximate revenues per
requisition:
<TABLE>
<CAPTION>
Requisition Volume as
% of Total Revenue Per Requisition
--------------------- -------------------------
<S> <C> <C>
Patient 5%-10% $60-$80
Medicare & Medicaid 20%-25% $20-$25
Monthly Bill
(Physician, Hospital, Employer, Other) 35%-40% $15-$35
Third Party Fee-For-Service 15%-20% $30-$40
Managed Care--Capitated 15%-20% $ 5-$15
</TABLE>
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For a discussion of the mix shift and the impact of the managed care
sector on volume and price trends, see "--Effect of the Growth of the Managed
Care Sector on the Clinical Laboratory Business."
Average Revenue per Requisition Trends. Since the fourth quarter of 1995,
declines in CCL's average revenue per requisition have moderated. Average
revenue per requisition for the quarter ended September 30, 1996 was
approximately 1.7% below the comparable period in 1995. This decline in
revenue per requisition was smaller than the approximate 4.8% and 3.6%
decline experienced in the first and second quarters of 1996, respectively.
Since August of 1995, the company-wide average revenue per requisition has
remained relatively stable and is effectively unchanged during the first
three quarters of 1996. This trend is illustrated by the following chart:
[REPRESENTATION OF A LINE CHART GRAPHIC]
Average Revenue per Requisition as a Percentage
of December 1994 Revenue per Requisition
Q1/95 98.6
Q2/95 97.6
Q3/95 95.8
Q4/95 95.1
Q1/96 93.9
Q2/96 94.1
Q3/96 94.2
Sales and Marketing
CCL markets and services its customers through its direct sales force of
approximately 430 sales representatives, 300 account representatives and
2,200 couriers.
Most sales representatives market the mainstream or traditional routine
laboratory services primarily to physicians, while others concentrate on
individual market segments, such as hospitals or managed care organizations,
or on testing niches, such as substance abuse testing. CCL's sales
representatives are compensated through a combination of salaries,
commissions and bonuses, at levels commensurate with each individual's
qualifications and responsibilities. Commissions are based primarily upon the
individual's results in generating new business for CCL. CCL is currently
changing its commission structure so that compensation is tied to the
profitability of (rather than revenues from) new business. See "--Business
Strategy--Preferred Provider."
CCL's account representatives interact with customers on an ongoing basis.
Account representatives monitor the status of services being provided to
customers, act as problem-solvers, provide information on new testing
developments and serve as the customer's regular point of contact with CCL.
Account representatives are compensated with a combination of salaries and
bonuses commensurate with each individual's qualifications and
responsibilities.
CCL believes that the clinical laboratory service business is shifting
away from the traditional direct sales structure and into one in which the
purchasing decisions for laboratory services are increasingly made by managed
care organizations, integrated health delivery systems, insurance plans,
employers and by patients themselves. In view of these changes, CCL has
completed a rigorous regional market strategy process and has reorganized its
sales and marketing organization structure to support these strategies and
emerging customers.
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CCL believes that, given the increasing regulation and complexity of the
clinical laboratory marketplace, training of its sales force is of paramount
importance. With this goal in mind, during 1995 CCL enhanced its
comprehensive sales training program and compliance training. See
"--Compliance Program."
Effect of the Growth of the Managed Care Sector on the Clinical Laboratory
Business
The managed care industry is growing as well as undergoing rapid
consolidation which has created large managed care companies that control the
delivery of health care services for millions of people, and have significant
bargaining power in negotiating fees with health care providers, including
clinical laboratories. CCL believes that there are potential opportunities
for large, low-cost, clinical laboratories such as CCL to capture additional
testing volume from managed care organizations. The larger regional and
national managed care organizations typically prefer to utilize large
independent clinical laboratories, like CCL, that can service their
organizations on a national or a regional basis. In addition, smaller
laboratories are unlikely to be able to achieve the low cost structures
necessary to profitably service managed care organizations.
The growth of the managed care sector presents various challenges to
independent clinical laboratories, including CCL. Managed care organizations
typically negotiate capitated payment contracts, whereby the clinical
laboratory receives a monthly fee per covered individual. The fixed monthly
payment generally covers all laboratory tests (excluding certain tests, such
as esoteric tests and anatomic pathology services) performed during the
month, regardless of the number or cost of the tests performed. Unlike
fee-for-service indemnity insurance, such contracts shift the risks of
additional routine testing beyond that covered by the capitated payment to
the clinical laboratory. In certain cases, however, the monthly payment may
be subject to prospective or retroactive adjustment if the number of tests
performed exceeds (or is less than) certain thresholds. CCL expects the
amount of clinical laboratory testing performed for managed care
organizations under capitated rate agreements to continue to grow.
Laboratory services agreements with managed care organizations have
historically been priced aggressively due to competitive pressures and the
expectation that a laboratory would capture not only the volume of testing to
be covered under the contract, but also the additional fee-for-service
business from patients of participating physicians who are not covered under
the managed care plan. However, as the number of patients covered under
managed care plans continues to increase, there is less such fee-for-service
business and, accordingly, less high margin business to offset the low margin
(and often unprofitable) managed care business. Furthermore, increasingly,
physicians are affiliated with more than one managed care organization and as
a result may be required to refer clinical laboratory tests to different
clinical laboratories, depending on the coverage of their patients. As a
result, a clinical laboratory might not receive any fee-for-service testing
from such physicians. The level of pricing charged to managed care
organizations, including under capitated payment contracts, if continued, may
adversely affect the pricing of the clinical laboratory industry.
During the nine months ended September 30, 1996, services to managed care
organizations under capitated rate agreements accounted for approximately 6%
of CCL's net revenues from clinical laboratory testing and approximately 15%
of the number of tests performed by CCL. CCL believes that the prices charged
by the independent clinical laboratory testing companies to managed care
organizations can and must be increased. CCL is currently reviewing its
pricing structures for agreements with managed care organizations and intends
to insure that all such agreements are profitably priced. However, there can
be no assurance that CCL will be able to increase the prices charged to
managed care organizations or that CCL will not lose market share in the
managed care market to other clinical laboratories who continue to
aggressively price laboratory services agreements with managed care
organizations. CCL believes that the growth of the managed care sector
presents both challenges and opportunities. CCL, as part of its preferred
provider strategy, will seek to capitalize on the opportunity and meet the
challenge by seeking to secure large-volume, profitable managed care
contracts through providing low cost, high quality testing services at
rational prices.
Expansion Opportunities
CCL believes that there are several expansion opportunities. CCL believes
that it can take advantage of these opportunities without incurring
significant capital expenditures or deploying significant resources.
Hospital Alliances. In response to the growth of the managed care sector
and the developments described under "--Effects of the Growth of the Managed
Care Sector on the Clinical Laboratory Business," many health
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care providers have established new alliances. Hospital-physician networks
are emerging in many markets in order to offer comprehensive, integrated
service capabilities, either to managed care plans or directly to employers.
Since CCL has traditionally derived a substantial portion of its esoteric
testing revenues from referrals from hospitals, which perform approximately
half of all clinical laboratory tests in the United States, CCL established a
hospital business venture group whose primary goal is to develop additional
nontraditional hospital arrangements, including management and consulting
agreements, shared service arrangements and joint ventures.
Under federal cost containment legislation enacted in 1985, treatment
provided to hospital inpatients covered by Medicare is classified into
diagnosis-related groups ("DRGs") which prescribe the maximum reimbursable
payments for all services, including laboratory testing services, provided on
behalf of an inpatient under each DRG. As a result of this payment structure,
and similar price constraints from managed care organizations and other
third- party payors, hospitals have an economic incentive to seek the most
cost-effective laboratory testing services for their patients. CCL believes
that in many cases, by managing a hospital laboratory or entering into a
joint venture with a hospital, CCL can improve a hospital laboratory's
economic structure and preserve hospital capital that would be required for
needed laboratory improvements while providing accurate and timely testing
services due to greater economies of scale, increased utilization of
expensive testing and data processing equipment through optimization of the
mix between on-site and off-site testing and more efficient use of laboratory
employees. CCL has several such arrangements with hospitals, including a
joint venture with two hospitals in Erie, Pennsylvania that performs outreach
testing and a management agreement with a group of approximately 25 hospitals
in eastern Nebraska and Sioux City, Iowa. These two laboratory arrangements,
which provide testing for both the hospitals and the commercial outreach
markets in their geographical areas, serve as two of CCL's laboratory
facilities. CCL also manages the laboratories at several hospitals in the
eastern United States. However, despite the potential cost savings and
additional revenues available to hospitals through such arrangements, CCL
believes that only a small percentage of the hospitals in the United States
have entered into such arrangements with independent clinical laboratories.
Nonetheless, CCL expects to enter into alliances with various hospitals in
the future and believes that this market has potential. As an alternative
service for hospitals that are entering into integrated delivery systems, CCL
is beginning to market consulting support and technical solutions for
integrating diverse laboratory infrastructures, systems and data.
Employer Market. CCL is considering expanding its business in the employer
market to include the provision of laboratory services to large employers on
a basis comparable to that offered to managed care organizations, whereby
laboratory services paid under self-insured indemnity plans may be relatively
fixed (rather than on a fee- for-service basis). These services could be
offered in alliance with other service providers, including pharmaceutical
benefits and diagnostic imaging services. CCL recently organized National
Imaging Associates Inc. ("NIA"), a company offering diagnostic imaging
benefit management services to employers, payors and managed care
organizations. NIA seeks to carve out the imaging component of a health care
plan service offering and manage it at lower cost through utilization
controls and provider price concessions.
Medical Information. The market need for medical information,
particularly disease-specific information about provider practices and
patient care, is growing rapidly. Large customers of clinical laboratories
are increasingly interested in using information from clinical laboratory
data on their covered population to answer financial, marketing and quality
related questions. Integrated data from clinical laboratories and other
health encounters provides additional insights to these questions. To meet
these emerging needs, CCL created the Corning Medical Informatics ("CMI")
division which focuses solely on the medical information needs of managed
care organizations, integrated healthcare delivery networks and other large
customers. Through internal development, CCL now has a portfolio of
information products based primarily upon its extensive database. A
combination of advanced information technology and experienced analytical and
data integration skills provides the platform for delivery of these products.
As market interest has increased, the CMI division has devoted experienced
account executives to work with customers to meet their information needs.
Current information products include provider profiles and benchmarks,
high-risk patient registries based on customer disease management
initiatives, normative comparisons with other populations, and quantitative
clinical outcomes based on laboratory measures. CCL believes that health care
customers will increasingly see value in the information obtained from
clinical laboratory results.
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Information Systems
The need for information systems to support laboratory, billing, customer
service, logistics, medical data, and other business requirements is
significant and will continue to place high demands on CCL's information
systems staff. CCL has historically not standardized the billing, laboratory
and other information systems at laboratories that it has acquired. As a
result, CCL has numerous different information systems to handle billing,
test result reporting and financial data and transactions. CCL believes that
the efficient handling of information involving customers, patients, payors,
and other parties will be critical to CCL's future success.
To this end, CCL has chosen standard billing and laboratory systems.
During the third quarter 1996, CCL recorded a charge of $13.7 million to
write off the development costs of what was intended as a new company-wide
billing system. Management now plans to standardize using a SYS billing
system which has already been implemented in seven of its 22 billing sites,
which seven sites account for 35% of CCL's net revenues. The standard
laboratory system is already operational in nine of its 22 billing sites,
which account for 30% of CCL's net revenues. Such sites are not necessarily
the same sites as those with standard billing systems. CCL is beginning to
convert the remaining nonstandard billing and laboratory systems to the
standard systems, prioritized on an impact basis. The most critical
conversions will be completed within three years. The New York/New Jersey
(Teterboro) laboratory is the first priority. The conversion costs are
expected to average approximately $3 million per billing system and $1
million to $3 million per laboratory system.
CCL is developing systems that will permit managed care organizations and
other providers to have electronic access to test orders and results for
participating physicians, which will permit managed care organizations to
better monitor and control the utilization of testing services.
Billing
Billing for laboratory services is a complicated process. Laboratories
must bill different payors such as doctors, patients, insurance companies,
Medicare, Medicaid and employer groups, all of whom have different billing
requirements. CCL believes that less than 30% of its bad debt expense is
attributable to specific credit or payment issues of its customers. The
remainder of the bad debt expense is the result of many non-credit related
issues which slow the billing process, create backlogs of unbilled
requisitions and generally increase the aging of accounts receivable. A
primary cause of bad debt expense is missing or incorrect billing information
on requisitions. Typically approximately one-third of the requisitions that
CCL receives either do not provide all the necessary data or provide
incorrect data. CCL believes that this experience is similar to that of its
primary competitors. CCL performs the requested tests and reports back the
test results regardless of whether billing information has been provided at
all or has been provided incorrectly. CCL subsequently attempts to obtain any
missing information or rectify any incorrect billing information received
from the health care provider. Among the many other factors complicating the
billing process are pricing differences between the fee schedules of CCL and
the payor, disputes between payors as to the party responsible for payment of
the bill and auditing for specific compliance issues. Ultimately, if all
issues are not resolved in a timely manner, the related receivables are
written off to bad debt expense.
CCL's bad debt expense has increased each year since 1993 due principally
to four developments that have further complicated the billing process: (1)
increased complexity in the health care system; (2) increased requirements in
complying with fraud and abuse regulations; (3) deterioration in
reimbursement as the payor mix shifts; and (4) changes in Medicare
reimbursement policies. These four factors have placed additional
requirements on the billing process, including the need for specific test
coding, additional research on processing rejected claims that comply with
prior practices, increased audits for compliance, and management of a large
number of contracts which have very different information requirements for
pricing and reimbursement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation of CCL." CCL's billing has also
been hampered by the existence of multiple billing information systems. In
1995 CCL had severe billing problems at its largest laboratory site in
Teterboro, New Jersey. A new billing information system developed with
outside consultants experienced significant implementation problems,
including excessive downtime, which severely impacted CCL's ability to
efficiently bill for its services from the Teterboro location. The problem
was compounded by a lack of experienced staff as the result of work force
reductions made to meet cost reduction initiatives undertaken in anticipation
of greater efficiencies from the new billing information system. As a result
of all of these factors, CCL recorded a charge to bad debt of $62 million in
the third quarter of 1995. Of this amount, approximately $34 million was
attributable to the Teterboro location. At the time of charge, the backlog of
unbilled requisitions was estimated
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at over 2 million requisitions and DSOs for the clinical testing business
were 90 days. In addition, significant backlogs existed in (1) reconciling
cash received to payment of specific bills, (2) rejected claims that needed
to be researched and (3) correspondence from customers attempting to resolve
billing problems.
Integration of a standardized billing system is a priority of CCL and CCL
is in the process of integrating a billing system with proven reliability
throughout its network. The SYS system is in use at seven of CCL's
laboratories. Its reliability is evidenced by both the improvement in the
laboratories' bad debt experience after SYS was implemented and the improved
capability to handle new billing requirements as compared with non-SYS
laboratories, such as Teterboro. For example, bad debt expense for the
nine months ended September 30, 1996 for the combined SYS laboratories is
6.4% of sales, versus 7.1% for all other laboratories combined. The use of a
standard system will also provide for operational efficiencies as redundant
programming efforts are eliminated and the ability to consolidate billing
sites will become more feasible. See "--Information Systems." Standardizing
billing systems presents conversion risk to CCL as key databases and
masterfiles are transferred to the SYS system and because the billing
workflow is interrupted during the conversion, which may cause backlogs. CCL,
however, has already completed seven conversions to this system and has
retained key people who have been involved in those conversions.
CCL has focused on improving its billing operations in the last year. Over
the last twelve months, the backlog of unbilled requisitions has been reduced
by approximately 30%, DSOs for the clinical testing business have been
reduced to 74 days, bad debt expense as a percentage of net revenues has
decreased, the percentage of requisitions received with missing billing
information has been reduced by approximately 30% and backlogs in rejected
claims, unapplied cash and customer correspondence have been significantly
reduced. These improvements were achieved in spite of a higher level of
information requirements necessary for correct billing, especially those
bills relating to Medicare. However, additional requirements to provide
documentation of the "medical necessity" of testing have added to the backlog
of unbilled receivables and caused third quarter 1996 bad debt expense as a
percentage of revenues to increase above the rate CCL had experienced during
the first two quarters of 1996. See "--Regulation and
Reimbursement--Regulation of Reimbursement for Clinical Laboratory Services."
Acquisitions and Dispositions
MetPath, CCL's predecessor, originally commenced operations in 1967 with
laboratories only in the New York metropolitan area. Most of CCL's other
regional laboratories have been added through acquisitions. Principally as
the result of the acquisitions discussed below that were completed in 1993
and 1994, CCL's revenues have almost tripled since 1991. However, this
increase in revenues is not reflected in the CCL Financial Statements because
several of the major acquisitions are accounted for as a pooling of
interests. Acquisition activity has diminished significantly since May 1995,
in part so that CCL could concentrate on the integration of the laboratory
networks that had been acquired in 1993 and 1994. CCL may resume making
acquisitions in the future, most likely focusing on acquisitions of smaller
laboratories that can be folded into existing laboratories where CCL can
expect to achieve significant cost savings and other benefits resulting from
the elimination of redundant facilities and equipment and reductions in
staffing or personnel. CCL is evaluating its strategic alternatives relative
to units whose profitability does not meet its internal goals. These
alternatives may include joint ventures, alliances or dispositions. However,
there are no negotiations or definitive plans with respect to any such
dispositions.
During 1994 Corning acquired three large clinical laboratory testing
companies, each of which was accounted for as a pooling of interests. In June
1994, Corning acquired Maryland Medical Laboratory, Inc. ("MML"), a regional
laboratory based in Baltimore, Maryland with approximately $90 million in
annual revenues. In August 1994, Corning acquired the stock of Nichols
Institute, a national esoteric clinical laboratory with approximately $280
million in annual revenues. In October 1994, Corning acquired Bioran, a
regional laboratory based in Cambridge, Massachusetts with approximately $65
million in annual revenues.
In August 1993, Corning acquired Damon, a national clinical testing
laboratory with approximately $330 million in annualized revenue. The
acquisition was accounted for as a purchase. The assets of Damon's
California- based laboratories were sold in April 1994 to Physicians Clinical
Laboratory Inc. In November 1993, CCL acquired the clinical testing
laboratories of Unilab in Dallas, Denver and Phoenix, in exchange for CCL's
then 43% ownership of Unilab and the assumption of approximately $70 million
of indebtedness of Unilab. In a separate transaction, CCL transferred to
Unilab CCL's investment in J.S. Pathology PLC, a clinical testing laboratory
based in the United Kingdom, in exchange for a small equity interest in
Unilab. CCL currently owns approximately 4% of Unilab's
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outstanding common stock. In May 1993, Corning acquired and contributed to
CCL DeYor Laboratory Inc., a regional laboratory based in Ohio, Pennsylvania
and Tennessee with approximately $20 million of annual revenues. This
transaction was accounted for under the pooling of interests method, although
CCL's consolidated financial statements for prior periods have not been
restated since this acquisition is not material. See Note 3 to the Audited
CCL Financial Statements. In addition to the acquisitions discussed above,
since January 1993 CCL has acquired approximately 25 other smaller clinical
laboratories and customer lists, principally in assets acquisitions. Only one
such acquisition has been completed since May 1995.
Competition
The clinical laboratory testing business is intensely competitive. CCL
believes that in 1995 the entire United States clinical laboratory testing
industry had revenues exceeding $30 billion; approximately 56% of such
revenues were attributable to hospital-affiliated laboratories, approximately
36% were attributable to independent clinical laboratories and approximately
8% were attributable to physicians in their offices and laboratories. As
recently as 1993, there were seven laboratories that provided clinical
laboratory testing services on a national basis: CCL, SmithKline, National
Health Laboratories Inc. ("NHL"), Roche Biomedical Laboratories Inc.
("Roche"), Damon, Allied Clinical Laboratories Inc. ("Allied") and Nichols
Institute. In April 1995 Roche merged into NHL (under the name LabCorp),
which had acquired Allied in June 1994. CCL acquired Nichols Institute in
August 1994 and Damon in August 1993. In addition, in the last several years
a number of large regional laboratories have been acquired by national
clinical laboratories. There are presently three national independent
clinical laboratories: CCL, which had approximately $1.63 billion in revenues
from clinical laboratory testing in 1995; LabCorp, which had approximately
$1.68 billion in revenues from clinical laboratory testing in 1995 on a pro
forma basis, after giving effect to the April 1995 merger of Roche into NHL;
and SmithKline, which had approximately $1.29 billion in revenues from
clinical laboratory testing in 1995. Both LabCorp and SmithKline are
affiliated with large corporations that have greater financial resources than
CCL. SmithKline is wholly owned by SmithKline Beecham Ltd. and R. Hoffman La
Roche S.A. beneficially owns approximately 49.9% of the outstanding capital
stock of LabCorp.
In addition to the three national clinical laboratories, CCL competes on a
regional basis with many smaller regional independent clinical laboratories
as well as laboratories owned by hospitals and physicians. CCL has the
leading market share in most of the northeast, mid-Atlantic and midwest
routine testing markets, while its market share is much lower in the routine
testing market in the rest of the country. Approximately 65% of CCL's net
revenues and almost all of its EBITDA currently is generated from markets in
which CCL believes that it has the largest market share. In most of these
markets CCL believes that it also is the lowest cost provider. CCL does not
generally compete in the California routine testing market other than in the
San Diego metropolitan area.
CCL believes that the following factors, among others, are often used by
health care providers in selecting a laboratory: (i) pricing of the
laboratory's testing services; (ii) accuracy, timeliness and consistency in
reporting test results; (iii) number and type of tests performed; (iv)
service capability and convenience offered by the laboratory; and (v) its
reputation in the medical community. CCL believes that it competes favorably
with its principal competitors in each of these areas and is currently
implementing strategies to improve its competitive position. See "--Business
Strategy."
CCL believes that consolidation will continue in the clinical laboratory
testing business. In addition, CCL believes that it and the other large
independent clinical laboratory testing companies will be able to increase
their share of the overall clinical laboratories testing market due to a
number of external factors including cost efficiencies afforded by
large-scale automated testing, Medicare reimbursement reductions and the
growth of managed health care entities which require low-cost testing
services and large service networks. In addition, legal restrictions on
physician referrals and the ownership of laboratories as well as increased
regulation of laboratories are expected to contribute to the continuing
consolidation of the industry.
Quality Assurance
CCL maintains a comprehensive quality assurance program for all of its
laboratories and patient service centers. The goal is to ensure optimal
patient care by continually improving the processes used for collection,
storage and transportation of patient specimens, as well as the precision and
accuracy of analysis and result reporting.
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The CCL quality assurance efforts focus on: proficiency testing, process
audits, statistical process control, credentialing and personnel training.
Internal Quality Control and Audits. Quality control samples are processed
in parallel with the analysis of patient specimens. The results of tests on
such samples are then monitored to identify drift, shift or imprecision in
the analytical processes. In addition, CCL administers an extensive internal
program of "blind" proficiency testing. These samples are processed through
the CCL system as routine patient samples, unknown to the laboratory as
quality control samples. Samples are then handled, processed and reported
with patient specimens. This provides a system to assure accuracy of the
entire pre- and post-analytical testing process. Another element of the CCL
comprehensive quality assurance program includes performance of internal
process audits.
External Proficiency Testing and Accreditation. All CCL laboratories
participate in numerous externally conducted, blind sample quality
surveillance programs. These include proficiency testing programs
administered by the College of American Pathologists ("CAP"), as well as many
state agencies. These programs supplement all other quality assurance
procedures.
All CCL laboratories are accredited by CAP. Accreditation includes on-site
inspections and participation in the CAP Proficiency Test Program. CAP is an
independent nongovernmental organization of board certified pathologists that
offers an accreditation program to which laboratories may voluntarily
subscribe. CAP is approved by HCFA to inspect clinical laboratories to
determine compliance with the standards required by the Clinical Laboratory
Improvement Amendments of 1988 ("CLIA").
Regulation and Reimbursement
Overview. The clinical laboratory industry is subject to significant
governmental regulation at the federal and state levels. All CCL laboratories
and patient service centers are appropriately licensed and accredited by
various state and federal agencies.
The health care industry is undergoing significant change as third-party
payors, such as Medicare (which principally serves patients 65 and older),
Medicaid (which principally serves indigent patients), private insurers and
large employers increase their efforts to control the cost, utilization and
delivery of health care services. In an effort to address the problem of
increasing health care costs, legislation has been proposed or enacted at
both the federal and state levels to regulate health care delivery in general
and clinical laboratories in particular. Some of the proposals include
managed competition, global budgeting and price controls. Although the
Clinton Administration's health care reform proposal, initially advanced in
1994, was not enacted, such proposal or other proposals may be considered in
the future. In particular, CCL believes that reductions in reimbursement for
Medicare services will continue to be implemented from time to time.
Reductions in the reimbursement rates of other third- party payors are likely
to occur as well. CCL cannot predict the effect health care reform, if
enacted, would have on its business, and there can be no assurance that such
reforms, if enacted, would not have a material adverse effect on CCL's
business and operations.
Regulation of Clinical Laboratory Operations. The CLIA standards were
designed to ensure that all clinical laboratory testing services are
uniformly accurate and of high quality by using a single set of requirements.
On February 28, 1992, the final rules implementing CLIA were published in the
Federal Register. These regulations extended federal oversight, with few
exceptions, to virtually all clinical laboratories regardless of size, type,
location or ownership of the laboratory. The regulations generally became
effective in 1992. However, certain quality control and proficiency testing
requirements are still being phased in. The standards for laboratory
personnel, quality control, quality assurance and patient test management are
based on complexity and risk factors. Laboratories categorized as "high"
complexity are required to meet more stringent requirements than either
"moderate" or "waived" (tests regarded as having a low potential for error
and requiring little or no oversight) laboratories.
Most of the CCL laboratories are categorized as high complexity and these
laboratories are in compliance with the more stringent standards for
personnel, quality control, quality assurance and patient test management. A
few CCL laboratories are categorized as moderate complexity (some STAT
laboratories) or waived (only patient service centers).
The sanction for failure to comply with these regulations may be
suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines or criminal penalties. The
loss of a
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license, imposition of a fine or future changes in such federal, state and
local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on CCL.
CCL is also subject to state regulation. CLIA permits states to adopt
regulations that are more stringent than federal law. For example, state law
may require that laboratory personnel meet certain more stringent
qualifications, specify certain quality control standards, maintain certain
records and undergo additional proficiency testing. For example, certain of
CCL's laboratories are subject to the State of New York's clinical laboratory
regulations, which contain provisions that are significantly more stringent
than federal law.
CCL believes it is in material compliance with the foregoing standards.
See "--Compliance Program."
Drug Testing. Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Services Administration ("SAMHSA")
(formerly the National Institute on Drug Abuse), which has established
detailed performance and quality standards that laboratories must meet in
order to be approved to perform drug testing on employees of federal
government contractors and certain other entities. To the extent that CCL's
laboratories perform such testing, each must be certified by HHS as meeting
SAMHSA standards. Seven of CCL's laboratories are SAMHSA certified.
Controlled Substances. The use of controlled substances in testing for
drug abuse is regulated by the federal Drug Enforcement Administration
("DEA"). All CCL laboratories using controlled substances for testing
purposes are licensed by the DEA.
Medical Wastes and Radioactive Materials. CCL is subject to licensing and
regulation under federal, state and local laws relating to 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 CCL
laboratories are operated in material compliance with applicable federal and
state laws and regulations relating to disposal of all laboratory specimens.
CCL utilizes outside vendors for disposal of specimens. Although CCL believes
that it is currently in compliance in all material respects with such
federal, state and local laws, failure to comply could subject CCL to denial
of the right to conduct business, fines, criminal penalties and other
enforcement actions.
Occupational Safety. In addition to its comprehensive regulation of safety
in the workplace, the federal Occupational Safety and Health Administration
("OSHA") has established extensive requirements relating to workplace safety
for health care employers, including clinical laboratories, 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.
Specimen Transportation. Regulations of the Department of Transportation,
the Public Health Service and the Postal Service apply to the surface and air
transportation of clinical laboratory specimens.
Regulation of Reimbursement for Clinical Laboratory Services. Containment
of health care costs, including reimbursement for clinical laboratory
services, has been a focus of ongoing governmental activity. In 1984,
Congress established a Medicare fee schedule for clinical laboratory services
performed for patients covered under Part B of the Medicare program.
Subsequently, Congress imposed a national ceiling on the amount that would be
paid under the Medicare fee schedule. Laboratories must bill the program
directly and must accept the scheduled amount as payment in full for most
tests performed on behalf of Medicare beneficiaries. In addition, state
Medicaid programs are prohibited from paying more (and in most instances, pay
significantly less) than the Medicare fee schedule for clinical laboratory
testing services furnished to Medicaid recipients. In 1995, CCL derived
approximately 20% and 3% of its net revenues from tests performed for
beneficiaries of Medicare and Medicaid programs, respectively. Since 1984,
Congress has periodically reduced the ceilings on Medicare reimbursement to
clinical laboratories from previously authorized levels. In 1993, pursuant to
the Omnibus Budget and Reconciliation Act of 1993 ("OBRA '93"), Congress
reduced, effective January 1, 1994, the Medicare national fee schedule
limitations from 88% of the 1984 national median to 76% of the 1984 national
median, which reductions were phased in from 1994 through 1996 (to 84% in
1994, 80% in 1995 and 76% in 1996, in each case as a percentage of the 1984
national median). The 1996 reduction to 76% was implemented as scheduled on
January 1, 1996. OBRA '93 also eliminated the provision for annual fee
schedule increases based upon the consumer price index for 1994 and 1995.
Medicare reimbursement reductions have a direct adverse effect on CCL's net
earnings and cash flows. CCL cannot predict if additional Medicare reductions
will be implemented. The Senate and House Medicare proposal (the Medicare
Preservation Act of 1995) passed in October 1995 would have reduced the
national limitation
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to 65% beginning in 1997 and would have eliminated all annual consumer price
index adjustments through 2002. This reduction in laboratory reimbursement
rates was retained in the House-Senate conference report agreed upon in
November 1995. The President vetoed this bill in December 1995.
Effective January 1, 1996, HCFA adopted a new policy on reimbursement for
chemistry panel tests. As of January 1, 1996, 22 automated tests (rather than
19 tests) became reimbursable by Medicare as part of an automated chemistry
profile. An additional allowance of $0.50 per test is authorized when more
than 19 tests are billed in a panel. HCFA retains the authority to expand in
the future the list of tests included in a panel. Effective as of March 1,
1996, HCFA eliminated its prior policy of permitting payment for all tests
contained in an automated chemistry panel when at least one of the tests in
the panel is medically necessary. Under the new policy, Medicare payment will
not exceed the amount that would be payable if only the tests that are
"medically necessary" had been ordered. In addition, since 1995 most Medicare
carriers have begun to require clinical laboratories to submit documentation
supporting the medical necessity, as judged by ordering physicians, for many
commonly ordered tests. CCL expects to incur additional reimbursement
reductions and additional costs associated with the implementation of these
requirements of HCFA and Medicare carriers. The amount of the reductions in
reimbursements and additional costs cannot be determined at this time. See
"--Billing."
Major clinical laboratories, including CCL, use dual fee schedules:
"client" fees charged to physicians, hospitals, and institutions with which a
laboratory deals on a bulk basis and "patient" fees charged to individual
patients and third-party payors, including Medicare and Medicaid, who
generally require separate bills or claims for each requisition. Medicare and
other third party payors also set maximum fees that they will pay which are
substantially lower than the patient fees otherwise charged by CCL, but are
generally higher than CCL's client fees, which may be subject to negotiation
or discount. Federal and some state regulatory programs prohibit clinical
laboratories from charging government programs more than certain charges to
other customers. During 1992, in issuing final regulations implementing the
federal statutory prohibition against charging Medicare substantially in
excess of a provider's usual charge, the OIG declined to provide any guidance
concerning the interpretation of this legislation, including whether or not
discounting or the dual fee structure employed by clinical laboratories might
raise issues under the provision.
Medicare budget proposals developed by the Clinton Administration in 1993
and 1994, along with proposals incorporated in many major health reform bills
considered by Congress in 1994, called for the reinstatement of 20% Medicare
clinical laboratory co-insurance (which was last in effect in 1984). While
co-insurance was in effect, clinical laboratories received from Medicare
carriers only 80% of their Medicare reimbursement rates and were required to
bill Medicare beneficiaries for the balance of the charges. A co-insurance
proposal was not included in any of the Congressional Medicare reform
packages considered to date in the 1995 and 1996 legislative sessions.
However, it is still possible a co-insurance provision will be proposed in
the future and, if enacted, such a proposal could materially adversely affect
the revenues and costs of the clinical laboratory industry, including CCL, by
exposing the testing laboratory to the credit of individuals and by
increasing the number of bills. In addition, a laboratory could be subject to
potential fraud and abuse violations if adequate procedures to bill and
collect the co-insurance payments are not established and followed.
Proposals have also been developed to procure Medicare and Medicaid
laboratory testing services through competitive bidding mechanisms. To date,
none of the Congressional Medicare reform packages introduced in the 1995 and
1996 legislative sessions have included a competitive bidding provision for
clinical laboratory tests. However, President Clinton's Medicare reform
proposal would have established competitive bidding for clinical laboratory
services. If competitive bidding were implemented, such action could
materially adversely affect the revenues of the clinical laboratory industry,
including CCL. HCFA is currently developing a demonstration project to
determine whether competitive bidding can be used to provide quality
laboratory services at prices below current Medicare reimbursement rates. The
demonstration is expected to be conducted in Kentucky and to commence in
1997.
Future changes in federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement
for clinical laboratory testing could have a material adverse effect on CCL.
CCL is unable to predict, however, whether and what type of legislation will
be enacted into law.
Fraud and Abuse Regulations. The Medicare and Medicaid anti-kickback laws
prohibit clinical laboratories from, among other things, making payments or
furnishing other benefits to influence the referral of tests billed to
Medicare, Medicaid or other federal programs. Penalties for violations of
these federal laws include exclusion from
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participation in the Medicare/Medicaid programs, assets forfeitures, and
civil and criminal penalties. Civil administrative penalties for a wide range
of offenses may be up to $2,000 per item and twice the amount claimed. Under
the Health Insurance Portability and Accountability Act of 1996 (the "Health
Insurance Act"), the penalties will be increased, effective January 1, 1997
to up to $10,000 per item plus three times the amount claimed. In the case of
certain offenses, exclusion from participation in Medicare and Medicaid is a
mandatory penalty.
The fraud and abuse provisions are interpreted liberally and enforced
aggressively by various enforcing agencies of the federal government,
including the Federal Bureau of Investigation ("FBI") and the OIG. According
to public statements by the DOJ, health care fraud has been elevated to the
second-highest priority of the DOJ, and FBI agents have been transferred from
investigating counterintelligence activities to health care provider fraud.
The OIG also is involved in such investigations and has, according to recent
workplans, targeted certain laboratory practices for study, investigation and
prosecution. The federal government's involvement in curtailing fraud and
abuse is likely to increase as a result of the enactment in August 1996 of
the Health Insurance Act which will require, by January 1, 1997, the U.S.
Attorney General and the OIG to jointly establish a program to (a) coordinate
federal, state and local enforcement programs to control fraud and abuse with
respect to health care, (b) conduct investigations, audits, evaluations and
inspections relating to the delivery and payment for health care, (c)
facilitate the enforcement of the health care fraud and abuse laws, (d)
provide for the modification and establishment of safe harbors and to issue
advisory opinions and Special Fraud Alerts and (e) provide for a data
collection system for the reporting and disclosure of adverse actions taken
against health care providers. The Health Insurance Act also authorizes the
establishment of an anti-fraud and abuse trust fund funded through the
collection of penalties and fines for violations of the health care
anti-fraud laws as well as amounts authorized therefor by Congress. The
Health Insurance Act also requires HHS to establish a program to encourage
Medicare beneficiaries and others to report violations of the health care
anti-fraud laws, including by paying to the reporting person a portion of any
fines and penalties collected.
In October 1994, the OIG issued a Special Fraud Alert, which set forth a
number of practices allegedly engaged in by clinical laboratories and health
care providers that the OIG believes violate the anti-kickback laws. These
practices include providing employees to collect patient samples at physician
offices if the employees perform additional services for physicians that are
typically the responsibility of the physicians' staff; selling laboratory
services to renal dialysis centers at prices that are below fair market value
in return for referrals of Medicare tests which are billed to Medicare at
higher rates; providing free testing to a physician's HMO patients in
situations where the referring physicians benefit from lower utilization;
providing free pickup and disposal of bio-hazardous waste for physicians for
items unrelated to a laboratory's testing services; providing facsimile
machines or computers to physicians that are not exclusively used in
connection with the laboratory services performed; and providing free testing
for health care providers, their families and their employees (professional
courtesy testing). The OIG stressed in the Special Fraud Alert that when one
purpose of the arrangements is to induce referral of program- reimbursed
laboratory testing, both the clinical laboratory and the health care provider
or physician may be liable under the anti-kickback laws and may be subject to
criminal prosecution and exclusion from participation in the Medicare and
Medicaid programs. The Special Fraud Alert was issued in part at the request
of the American Clinical Laboratory Association, which requested
clarification of certain of these rules. CCL does not believe that it has
been negatively affected by the issuance of the Special Fraud Alert.
Many of these statutes and regulations, including those relating to joint
ventures and alliances, are vague or indefinite and have not been interpreted
by the courts. In addition, regulators have generally offered little guidance
to the clinical laboratory industry. Despite requests from the American
Clinical Laboratory Association for clarification of the anti-fraud and abuse
rules, since 1992, OIG has issued only two fraud alerts specifically with
regard to clinical laboratory practices and has insisted that it lacked
statutory authority to issue advisory opinions. Legislation requiring OIG to
issue fraud alerts and advisory opinions was enacted in August 1996, and as a
result CCL is hopeful that additional regulatory guidance will be given to
the clinical laboratory industry.
According to the 1995 work plan of the OIG, its recently established
Office of Civil Fraud and Administrative Adjudication ("OCFAA") will be
responsible for protecting the government-funded health care programs and
deterring fraudulent conduct by health care providers through the negotiation
and imposition of civil monetary penalties, assessments and program
exclusions. The OCFAA works very closely with the DOJ, the Office of General
Counsel of HHS and the OIG investigative and audit offices in combating fraud
and abuse. In addition, the OIG stated in its 1995 work plan that it will
determine the extent to which laboratories supply physicians' offices with
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phlebotomists (blood-drawing technicians), offer management services or
medical waste pick-up to physicians, provide training to physicians or engage
in other financial arrangements with purchasers of laboratories' services.
The OIG will assess the potential benefits of such arrangements as well as
the extent to which such arrangements might be unlawful.
A federal "self-referral" law commonly known as the "Stark" law has, since
1992, generally prohibited (with certain exceptions) Medicare payments for
laboratory tests referred by physicians who have (personally or through a
family member) an investment interest in, or a compensation arrangement with,
the testing laboratory. Since January 1995, these restrictions apply to
Medicaid-covered services as well. Physicians may, however, be reimbursed by
Medicare and Medicaid for testing performed by or under the supervision of
the physician or the group practice to which the physician belongs. In
addition, a physician may refer specimens to a laboratory owned by a company,
such as CCL, whose stock is traded on a public exchange and which has
stockholders' equity exceeding $75 million even if the physician owns stock
of that company. An amendment to the Stark law in August 1993 makes it clear
that ordinary day-to-day transactions between laboratories and their
customers, including, but not limited to, discounts granted by laboratories
to their customers, are not covered by the compensation arrangement
provisions of the Medicare statute. Sanctions for laboratory violations of
the prohibition include denial of Medicare payments, refunds, civil money
penalties of up to $15,000 for each service billed in violation of the
prohibition and exclusion from the Medicare and Medicaid programs.
The 1995 House Medicare reform proposal contained, and the House-Senate
report adopted, provisions that would significantly narrow the scope of the
Stark anti-referral laws. That proposal would, among other changes, have
ended the ban on physician referrals to laboratories based on any
"compensation arrangements" between the laboratory and the physician. The
President vetoed this bill on December 6, 1995.
OIG Investigations and Related Claims
In connection with the Distributions, Corning will agree to indemnify CCL
against all monetary penalties, fines or settlements for any governmental
claims discussed below that are pending on the Distribution Date. Corning
will also agree to indemnify CCL for 50% of the aggregate of all judgment or
settlement payments made by CCL that are in excess of $42.0 million in
respect of claims by nongovernmental parties (including, without limitation,
private insurers) alleging overbillings by CCL or any existing subsidiaries
of CCL, for services provided prior to the Distribution Date; provided,
however, such indemnification for nongovernmental claims will terminate five
years after the Distribution Date and will not exceed $25.0 million in the
aggregate. CCL's aggregate reserve with respect to all governmental and
nongovernmental claims, including litigation costs, was $215 million at
September 30, 1996 and is estimated to be $85 million at the Distribution
Date.
Corning will not indemnify CCL against any governmental claims that arise
after the Distribution Date, even though relating to events prior to the
Distribution Date, or to any nongovernmental claims that do not relate to
alleged overbillings prior to the Distribution Date. Corning will not
indemnify CCL against consequential or incidental damages relating to the
billing claims, including losses of revenues and profits as a consequence of
any exclusion from participation in federal or state health care programs or
the fees and expenses of the litigation, including attorneys' fees and
expenses. All amounts indemnified against by Corning for the benefit of CCL
will be calculated on a net after-tax basis by taking into account deductions
and, if any, other tax benefits in respect of the underlying settlement or
judgment payment or other loss that gives rise to the indemnification
obligation of Corning, which deductions or other tax benefits are or would be
available to CCL or other indemnitee or the consolidated tax group of which
CCL is a member and by assuming such deductions or other tax benefits can be
utilized by CCL or such group, as the case may be, in the tax period in which
the underlying payment or other loss occurs to reduce taxes at the highest
marginal corporate tax rate applicable for the period in which such payment
or loss occurred. See "The Relationship Among Corning, CCL and Covance After
the Distributions--Transaction Agreement."
In September 1993, CCL (under the name MetPath Inc.) entered into an
agreement with the DOJ and the OIG pursuant to which CCL paid a total of
$36.1 million in settlement of civil claims by the United States that the
companies had wrongfully induced physicians to order certain laboratory tests
without their realizing that such tests would be billed to Medicare at rates
higher than those the physicians believed were applicable. At about the same
time, by issuing civil subpoenas in August, 1993, the government began formal
investigations of several other large national and regional laboratories for
similar practices, including Damon and Nichols, two companies acquired by
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Corning in August 1993 and August 1994, respectively, as well as CCL's
principal competitors and their predecessors. Subsequent to September 1993,
several additional subpoenas were issued.
By a plea agreement and civil agreement and release dated October 9, 1996,
between DOJ and Damon, all federal criminal matters within the scope of the
various federal investigations against Damon, and all claims including the
civil qui tam cases underlying the civil investigations were settled for an
aggregate of $119 million, which sum was reimbursed to CCL by Corning, and
considered material to both companies. At the time CCL began its settlement
negotiations with DOJ in April 1996, it believed it had meritorious defenses
to a number of charges and claims made by the government. Certain of these
positions were ultimately rejected by criminal and civil prosecutors in the
final rounds of negotiations which occurred through early October 1996,
resulting in a total settlement substantially in excess of what had earlier
been anticipated. The Damon settlement does not exclude CCL from future
participation in any federal health care programs on account of Damon's
practices.
CCL understands that the Boston United States Attorney's Office has
designated several former officers and employees of Damon as targets of its
criminal investigation, and will seek indictments against them. Under the
agreement and plan of merger under which Damon was acquired by Corning, CCL
is obligated to indemnify former officers and directors of Damon to the
fullest extent permitted by Delaware law with respect to this investigation.
These obligations will remain those of CCL and will not be indemnified by
Corning as mentioned above.
The investigation of Nichols remains open. While CCL has established
reserves in respect of the Nichols investigations, at present there are no
settlement discussions pending between DOJ and CCL regarding Nichols, and it
is too early to predict with any accuracy which particular tests, time
periods and locations the government may challenge. Remedies available to the
government include exclusions from participation in Medicare and Medicaid,
criminal fines, civil recoveries plus civil penalties and asset forfeitures.
Application of such remedies and penalties could materially and adversely
affects CCL's business, financial condition, results of operations and
prospects. As discussed above, Corning has agreed to indemnify CCL against
any monetary penalties, fines or settlements for any governmental claims that
may arise as a result of the Nichols investigations.
The Damon settlement involved, and a settlement regarding Nichols is
expected to involve, only matters predating Corning's acquisition of both
such companies, and turned on, or will turn on, facts unique to those
companies and other factors individual government enforcement personnel may
take into account. However, recent experience in CCL's settlement of the
Damon case and public announcements by various government officials indicate
that the government's position on health care fraud is still hardening and
collections of fines and penalties greatly in excess of mere recoupment of
overcharges from laboratories and other providers will be more prevalent. In
addition, new legislation to combat health care fraud and abuse will give
federal enforcement personnel substantial increased funding, powers and
remedies to pursue suspected fraud and abuse. In connection with the Damon
settlement, CCL signed a Corporate Integrity Agreement pursuant to which CCL
will maintain its corporate compliance program, modify certain of its
marketing materials, make periodic reports to the OIG and take certain other
steps to demonstrate CCL's integrity as a provider of services to federally
sponsored health care programs. This agreement also includes an obligation to
self-report instances of noncompliance that are uncovered by CCL, but also
gives CCL the opportunity to obtain clearer guidance on matters of compliance
and to resolve compliance issues directly with OIG. Importantly, the
agreement gives CCL the opportunity to cure any asserted breaches and to
otherwise initiate corrective actions, which CCL believes should help to
avoid enforcement actions outside of the process provided in the agreement.
See "--Compliance Program."
In December 1995, CCL received a subpoena from the OIG seeking information
as to CCL's policies in instances in which specimens were received and tested
by a laboratory without first receiving or verifying specific test
requisitions. Compliance with the subpoena is ongoing, however, CCL has
concluded the occurrence of this practice was relatively rare and was engaged
in primarily to preserve the integrity of test results from specimens subject
to rapid deterioration. During 1996, CCL voluntarily self-reported to the
government a few isolated events that may have resulted in overpayment by
Medicare and Medicaid to CCL. It is CCL's policy to internally investigate
all such incidents and to self-report and reimburse payors as appropriate.
Although CCL has commenced internal investigations to quantify the amounts
that may be recouped by the government and corrective action has been taken
as to each such event, it is too early to predict the outcome of these
disclosures to the government. As discussed above, Corning has agreed to
indemnify CCL against any monetary penalties, fines or settlements for any
governmental claims that may arise as a result of the investigations
described in this paragraph.
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In addition to the foregoing settlements and investigations, since 1992
CCL has settled five other federal and state billing-related claims for a
total of $25 million and thirteen related private actions in the amount of
$12 million. CCL has reserved additional amounts for future government and
private settlements of matters either presently pending or anticipated as a
consequence of these settlements and self-reported matters, which it believes
are adequate for the purpose, but there can be no assurance that the amounts
so reserved will be sufficient.
Although management believes that established reserves for both
indemnified and non-indemnified claims are sufficient, it is possible that
the additional information may become available which may cause the final
resolution of these matters to be in excess of established reserves by an
amount which could be material to CCL's results of operations and, for
non-indemnified claims, CCL's cash flows in the period in which such claims
are settled. CCL does not believe, however, that these matters will have a
material adverse impact on CCL's overall financial condition.
Compliance Program
Because of evolving interpretations of regulations and the national debate
over health care, compliance with all Medicare, Medicaid and other
government-established rules and regulations has become a significant concern
throughout the clinical laboratory industry. CCL began the implementation of
a compliance program early in 1993. The objective of the program is to
develop aggressive and reliable compliance safeguards. Emphasis is placed on
developing training programs for personnel intended to assure the strict
implementation and observance of all applicable rules and regulations.
Further, in-depth reviews of procedures, personnel and facilities are
conducted to assure regulatory compliance throughout CCL. CCL's current
compliance plan establishes a Compliance Committee of the CCL Board and
requires periodic reporting of compliance operations by management to the
Compliance Committee. Such sharpened focus on regulatory standards and
procedures will continue to be a priority for CCL in the future.
CCL has established a comprehensive program designed to ensure that it is
in compliance in all material respects with all statutes, regulations and
other requirements applicable to its clinical laboratory operations. This
program was publicly cited with approval by government officials at the time
the Damon settlement was announced and characterized as a "model" for the
industry. In addition, the government advised CCL representatives that CCL's
compliance program, coupled with corrective action taken by CCL after its
acquisition of Damon, greatly reduced the amounts of fines and penalties, and
was influential in causing the OIG not to seek exclusion of CCL from future
participation in governmental health care programs. Pursuant to the Damon
settlement, CCL signed a five year Corporate Integrity Agreement with the OIG
pursuant to which CCL will, among other things, maintain its corporate
compliance program, make certain changes to its test order forms, provide
certain additional notices to ordering physicians, provide to the OIG data on
certain test ordering patterns, adopt certain pricing guidelines, audit
laboratory operations, deliver annual reports on compliance activities, and
investigate and report instances of noncompliance, including any corrective
actions and disciplinary steps. Importantly, the agreement gives CCL the
opportunity to cure any asserted breaches and to otherwise initiate
corrective actions, which CCL believes should help to avoid enforcement
actions outside of the process provided in the agreement. The agreement gives
CCL the opportunity to obtain clearer guidance on matters of compliance and
to resolve compliance issues directly with the OIG. CCL has been advised that
its principal competitors will be obliged to execute similar agreements at
the conclusion of investigations pending against them and that the OIG will
likely publish to the clinical laboratory testing industry a guideline on the
essential elements of a satisfactory compliance program. This latter step may
help create a fairer competitive environment for CCL. None of the
undertakings included in the agreement is expected to have any material
adverse affect on CCL's business, financial condition, results of operations
and prospects. The clinical laboratory testing industry is, however, subject
to extensive regulation. CCL believes that it is in all material respects in
compliance with all applicable statutes and regulations. However, there can
be no assurance that any statutes or regulations might not be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a manner that
would adversely affect CCL. Potential sanctions for violation of these
statutes and regulations include significant fines and the loss of various
licenses, certificates and authorizations.
Insurance
CCL maintains liability insurance (subject to maximum limits and
self-insured retentions) for claims, which may be substantial, that could
result from providing or failing to provide clinical laboratory testing
services, including inaccurate testing results. While there can be no
assurance that coverage will be adequate to cover all
74
<PAGE>
future exposure, management believes that the present levels of coverage are
adequate to cover currently estimated exposures. Although CCL believes that
it will be able to obtain adequate insurance coverage in the future at
acceptable costs, there can be no assurance that CCL will be able to obtain
such coverage or will be able to do so at an acceptable cost or that CCL will
not incur significant liabilities in excess of policy limits.
Employees
At September 30, 1996, CCL employed approximately 18,700 people. These
include approximately 16,500 full-time employees and approximately 2,200
part-time employees. CCL has no collective bargaining agreements with any
unions and believes that its overall relations with its employees are good.
Seasonality
During the summer months, year-end holiday periods and other major
holidays, volume of testing declines, reducing net revenues and resulting
cash flows below annual averages during the third and fourth quarters each
year. Winter months are also subject to declines in testing volume due to
inclement weather. As a result, comparisons of the results of successive
quarters may not accurately reflect trends or results for the full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of CCL--Overview."
Properties
CCL's principal laboratories (listed alphabetically by state) are located
in the following metropolitan areas:
<TABLE>
<CAPTION>
Location Type of Laboratory Leased or Owned
- ------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Phoenix, Arizona Regional Leased
San Diego, California Regional Leased
San Juan Capistrano, California Esoteric Owned
Denver, Colorado Regional Leased
New Haven, Connecticut Regional Owned
Miami, Florida Branch Leased
Tampa, Florida Regional Leased
Atlanta, Georgia Regional Leased
Chicago, Illinois Regional Leased
Indianapolis, Indiana Branch Leased
Baltimore, Maryland Regional Owned
Boston, Massachusetts Regional Owned subject to
put/call
with option to lease
Detroit, Michigan Regional Leased
Grand Rapids, Michigan Branch Leased
Kansas City, Missouri Branch Leased
St. Louis, Missouri Regional Leased
Billings, Montana Branch Leased
Teterboro, New Jersey/New York, New York Regional Owned
Lincoln, Nebraska Regional Managed (hospital)
Albuquerque, New Mexico Branch Leased
Buffalo, New York Branch Owned
Long Island, New York Branch Leased
Cleveland, Ohio Branch Owned
Columbus, Ohio Branch Leased
Portland, Oregon Regional Leased
Erie, Pennsylvania Leased by joint
Branch venture
Philadelphia, Pennsylvania Regional Leased
Pittsburgh, Pennsylvania Regional Leased
Nashville, Tennessee Branch Owned
Dallas, Texas Regional Leased
El Paso, Texas Branch Leased
Salt Lake City, Utah Branch Leased
</TABLE>
75
<PAGE>
CCL executive offices are located in Teterboro, New Jersey in the building
that serves as CCL's regional laboratory in the New York City metropolitan
area. CCL owns its branch laboratory facility in Mexico City. CCL believes
that, in general, its laboratory facilities are suitable and adequate for its
current and anticipated future levels of operation. CCL believes that if it
were unable to renew the lease on any of its testing facilities, it could
find alternative space at competitive market rates and relocate its
operations to such new locations.
Legal Proceedings
In addition to the investigations described in "--OIG Investigations and
Related Claims," CCL is involved in various legal proceedings arising in the
ordinary course of business. Some of the proceedings against CCL involve
claims that are substantial in amount. Although it is not feasible to predict
the outcome of such proceedings or any claims made against CCL, it does not
anticipate that the ultimate liability of such proceedings or claims will
have a material adverse effect on CCL's financial position or results of
operations as they primarily relate to professional liability for which CCL
believes it has adequate insurance coverage. CCL maintains professional
liability insurance for its professional liability claims. See "--Insurance."
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a new "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so
long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those projected in
the statement. This section is included to take advantage of the new "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 in
connection with the information included herein. Accordingly, the following
factors are hereby identified as important factors that could cause CCL's
actual financial results to differ materially from those projected, forecast,
estimated, or budgeted by CCL in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition. See "Risk Factors-- Competition."
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed- cost health care.
(c) Adverse actions by governmental or other third-party payors, including
unilateral reduction of fee schedules payable to CCL.
(d) The impact upon CCL's collection rates or general or administrative
expenses resulting from compliance with Medicare administrative
policies, including specifically the recent requirements of Medicare
carriers to provide diagnosis codes for commonly ordered tests and the
policy of HCFA to limit Medicare reimbursement for tests contained in
automated chemistry panels to the amount that would have been paid if
only the covered tests, determined on the basis of demonstrable
"medical necessity," had been ordered.
(e) Adverse results from pending governmental investigations of Damon and
Nichols including specifically significant monetary damages and/or
exclusion from the Medicare and Medicaid programs and/or other
significant litigation matters.
(f) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing
customers.
(g) Inability to obtain professional liability insurance coverage or a
material increase in premiums for such coverage.
(h) Denial of CLIA certification or other licensure of any of CCL's
clinical laboratories under CLIA, by HCFA for Medicare and Medicaid
programs or other federal, state and local agencies.
(i) Adverse publicity and news coverage about CCL or the clinical
laboratory industry.
(j) Computer or other system failures that affect the ability of CCL to
perform tests, report test results or properly bill customers.
(k) Development of technologies that substantially alter the practice of
laboratory medicine.
76
<PAGE>
MANAGEMENT OF CCL
Management
Directors. Certain information with respect to the persons who will serve
as directors of CCL following the Distributions is set forth below. Prior to
the closing of the CCL Notes Offering and the CCL Spin-Off Distribution, one
of the current directors will resign and the prospective directors listed
below will be elected to fill the vacancies created by such resignations. As
provided in the CCL Certificate, the CCL Board will be divided into three
classes effective upon the Distributions and one class of the CCL Board will
be elected for a three-year term at each annual meeting of stockholders.
Included in the information set forth below are the names of the directors of
each class and their original terms. CCL is contemplating the selection of
additional directors, which selection may occur prior to the Distributions.
CCL does not intend to hold an annual meeting of stockholders until the
Spring of 1998.
<TABLE>
<CAPTION>
Name Age Year Term Expires
------------------ ----- ------------------
<S> <C> <C>
Kenneth W. Freeman 46
Van C. Campbell 58
David A. Duke 60
</TABLE>
Kenneth W. Freeman was elected President and Chief Executive Officer of
CCL in May 1995 and has been a director of CCL since July 1995. Prior to
1995, he served in a variety of key financial and managerial positions at
Corning, which he joined in 1972. He was elected controller and a vice
president of Corning in 1985, senior vice president in 1987, and general
manager of the Science Products Division in 1989. He was appointed president
and chief operating officer of Corning Asahi Video Products Company in 1990.
In 1993, he was elected executive vice president.
Van C. Campbell is the Vice Chairman of Corning, 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 in
1983 and during 1995 was appointed to the additional position of chairman of
Corning Life Sciences, Inc. He is a director of Armstrong World Industries,
Inc. and General Signal Corporation. Mr. Campbell has been a director of CCL
since January 1991.
David A. Duke is a Retired Vice Chairman of Corning. Dr. Duke joined
Corning in 1962 and served in a succession of research and management
positions. He was elected vice president--Telecommunications Products in
1980, elected a senior vice president in 1984 and named director of Research
and Development in 1985. He became responsible for Engineering in March 1987
and was elected as a director and Vice Chairman of Corning in 1988. He
resigned as a director of Corning in April 1996 and retired in June 1996. Dr.
Duke is a director of Armco, Inc. Mr. Duke was a director of CCL from October
1994 to July 1996 and was re-elected a director of CCL in October 1996.
Directors' Compensation. Each director of CCL, other than a director who
is an employee of CCL, will receive $18,000 annually for service as a
director and will also be paid $1,000 for each meeting of the CCL Board and
$500 for each meeting of any committee thereof which he attends.
CCL has adopted, effective the Distribution Date, a deferred compensation
plan for directors pursuant to which each director may elect to defer until a
date specified by him receipt of all or a portion of his 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
prime 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 CCL Common Stock from time to time, or (iii) a combination of such
accounts. As of the Distribution Date, it is anticipated that there will be
no non- employee directors eligible to participate in the plan.
CCL has adopted, effective the Distribution Date, a restricted stock plan
for non-employee directors, pursuant to which CCL will issue to each
non-employee director elected 750 shares of CCL Common Stock for each year
specified in the term of service for which such director was elected, subject
to forfeiture and restrictions on transfer, and 5,000 shares upon such
director's election, subject to forfeiture and restrictions on transfer.
77
<PAGE>
Committees of the Board of Directors. Prior to the Distributions, the CCL
Board is expected to establish and designate specific functions and areas of
oversight to an Audit and Finance Committee, a Compensation Committee ("CCL
Compensation Committee") and a Compliance Committee. The Audit and Finance
Committee will examine and consider matters relating to the financial affairs
of CCL, including reviewing CCL's annual financial statements, the scope of
the independent and internal audits and the independent auditor's letter to
management concerning the effectiveness of CCL's internal financial and
accounting controls. The CCL Compensation Committee will make recommendations
to the CCL Board with respect to programs for human resource development and
management organization and succession, determine senior executive
compensation, make recommendations to the CCL Board with respect to
compensation matters and policies and employee benefit and incentive plans,
administer such plans, and administer CCL's stock option and equity based
plans and grant stock options and other rights under such plans. The
Compliance Committee will oversee CCL's compliance program, which is
administered by management's compliance council. The council will prepare for
review and action by the Compliance Committee reports on such matters as
audits and investigations. See "Business of CCL--Compliance Program."
Executive Officers of CCL. In addition to Mr. Freeman, the following
persons will serve as executive officers of CCL after the Distributions:
Robert A. Carothers (60) will become Vice President and Chief Financial
Officer at the Distribution Date. Mr. Carothers joined Corning in 1959 and
has served in a number of key financial positions in the United States and
Japan. He was elected Assistant Controller in 1991. In January 1996 he was
appointed Assistant to the President of CCL.
James D. Chambers (39) is Vice President-Billing. Mr. Chambers joined
Corning in 1986 and has served in a variety of managerial and financial
positions for Corning and its subsidiaries, becoming Assistant Treasurer in
1991. Mr. Chambers joined CCL in 1992 as Treasurer and served as Chief
Financial Officer from 1994 through 1995. In 1995 Mr. Chambers assumed his
current responsibilities overseeing CCL's billing process.
Gregory C. Critchfield, M.D. (45) is Senior Vice President, and Chief
Medical and Science Officer. Dr. Critchfield joined CCL in 1995 as Chief
Laboratory Officer and assumed his current responsibilities in May 1996. Dr.
Critchfield has served as a consultant to the National Institutes of Health
in the capacity of a reviewer for more than ten years and was selected as
Study Section Chair of several Multidisciplinary Review Teams during the last
two years. Prior to joining CCL, Dr. Critchfield was a clinical pathologist
with Intermountain Health Care ("IHC") for eight years and served in various
director positions with IHC Laboratory Services, including Director of
Clinical Pathology. Dr. Critchfield also served as Chairman of the Department
of Pathology at Utah Valley Regional Medical Center from 1992 through 1995.
Kurt R. Fischer (41) is Vice President-Human Resources. Mr. Fischer joined
Corning in 1976 and has served in a variety of Human Resources positions. He
was appointed Human Resource Manager for the Research, Development and
Engineering Group in 1986 and Director-Quality and Performance Management for
the Specialty Materials Group in 1991. Mr. Fischer assumed his present
responsibilities with CCL in December 1995.
Delbert A. Fisher, M.D. (68) is Vice President of Corning Nichols
Institute and currently serves as President of its Academic Associates, a
select group of eminent physicians and scientists who advise the company on
new medical and scientific developments. Dr. Fisher joined Nichols Institute
in 1991 as President of its esoteric laboratory facility and assumed his
present responsibilities in 1993. Prior to joining Nichols, he was a
professor of pediatrics and the Associate Chairman of the Department of
Pediatrics of the UCLA School of Medicine for 13 years.
Raymond Gambino, M.D. (69) is Chief Medical Officer Emeritus. Dr. Gambino
joined CCL in 1983 as President of the Eastern Region. From 1984 to 1994, Dr.
Gambino served as Chief Medical Officer and Executive Vice President, at
which time his appointment was changed to emeritus. He continues to serve CCL
as a senior medical advisor.
Donald M. Hardison, Jr. (45) is Senior Vice President-Sales and Marketing,
with overall responsibility for all commercial activities. Mr. Hardison
joined CCL in January 1996. Prior to joining CCL, Mr. Hardison had 18 years
experience in health care with subsidiaries of SmithKline Beecham and its
predecessor entities, including seven years with the clinical laboratory
division of SmithKline, where he held a succession of positions including
Director of Marketing; Vice President of Sales-Northern; Vice
President-General Manager of the Atlanta Operation; and Vice President of
Sales and Marketing.
78
<PAGE>
Paul A. Krieger, M.D. (49) is Vice President-Anatomic Pathology with
responsibility for all aspects of CCL's anatomic pathology testing. Dr.
Krieger joined CCL in 1975 and served as Vice President, Director of Anatomic
Pathology at CCL's regional laboratory in Teterboro, New Jersey until 1995,
when he was appointed to his present position. Concurrent with his employment
with CCL, Dr. Krieger has served as an Adjunct Assistant Professor at the
College of Physicians and Surgeons of Columbia University.
Raymond C. Marier (51) is Vice President, Secretary and General Counsel.
Mr. Marier joined Corning's Legal Department in 1973 as an Assistant Counsel,
where he worked with a number of Corning's operating units, including its
Medical and Science Products Divisions. He has held his present position
since 1992.
C. Kim McCarthy (41) is Vice President-Compliance and Government Affairs.
Ms. McCarthy joined Corning in 1987 as Director of Federal Government Affairs
and Legislative Counsel. She became Vice President of Public Affairs of CCL
in 1992 and Senior Vice President of Corporate Affairs in 1994. Ms. McCarthy
assumed her present responsibilities in June 1996.
Alister W. Reynolds (39) is Vice President-Information Technology. Mr.
Reynolds joined CCL in 1982 and has served in a variety of staff, executive
and general management positions. Mr. Reynolds assumed his current
responsibilities in 1995.
Douglas M. VanOort (40) will become Senior Vice President-Operations at
the Distribution Date. Mr. VanOort joined Corning in 1982 and has served in
various finance, analysis and control positions. He became Vice President and
Chief Financial Officer of CCL in 1990, Senior Vice President-Finance and New
Business Development of CCL in 1993 and Executive Vice President and Chief
Financial Officer of CCL in 1995.
Executive Compensation
Historical Compensation. The following table sets forth information with
respect to annual and long-term compensation expected to be paid by CCL and
its subsidiaries to each of the chief executive officer and the four other
most highly compensated executive officers (the "named executive officers")
of CCL for services to be rendered in all capacities in fiscal year 1996 and
such compensation paid or accrued during the years ended December 31, 1995
and December 31, 1994 for services rendered by each of the named executive
officers. All references in the following tables to stock and stock options
relate to awards of, and options to purchase, Corning Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------
Name and Other Annual
Principal Position Year Salary (1) Bonus (2) Compensation(3)
- ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman, 1996 385,000 211,750 10,440
President and Chief 1995 316,667 249,918 7,200
Executive Officer 1994 240,000 244,634 6,900
Robert A. Carothers, 1996 250,000 136,714 1,800
Vice President and 1995 173,000 68,337 --
Chief Financial Officer 1994 165,250 84,180 --
Gregory C. Critchfield, 1996 310,000 182,900 40,909
Senior Vice President 1995 (6) 70,000 122,920 --
and Chief Medical and
Science Officer
Donald M. Hardison, Jr., 1996 260,000 159,467 2,880
Senior Vice President-
Sales and Manufacturing
Douglas M. VanOort, 1996 325,000 178,750 2,880
Senior Vice President- 1995 251,912 56,754 7,200
Operations 1994 228,333 165,969 6,900
</TABLE>
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------
Awards Payouts
---------------------------- -------------
Restricted Securities Incentive
Name and Stock Underlying Plan All Other
Principal Position Awards(4) Options Payouts Compensation(5)
- ------------------------- ------------- ------------- --------- --------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman, -- -- -- 16,690
President and Chief 326,926 87,000 -- 14,057
Executive Officer 406,766 20,000 162,679 13,376
Robert A. Carothers, -- -- -- 8,254
Vice President and -- 16,500 -- 8,561
Chief Financial Officer -- 6,092 -- 7,557
Gregory C. Critchfield, -- 2,000 -- 65,690
Senior Vice President -- 3,000 -- 2,370
and Chief Medical and
Science Officer
Donald M. Hardison, Jr., -- 24,000 -- 17,123
Senior Vice President-
Sales and Manufacturing
Douglas M. VanOort, -- -- -- 4,750
Senior Vice President- 98,626 60,000 -- 4,620
Operations 109,652 20,000 -- 4,178
</TABLE>
- -------------
(1) Reflects for 1996 current salaries on an annualized basis, including
amounts deferred.
(2) Reflects for 1996 projected performance-based annual cash compensation
awards at target levels.
(3) Includes dividends on shares of restricted stock granted but not earned
within one year from date of grant and tax gross-up payments.
79
<PAGE>
(4) Messrs. Freeman, Carothers, Hardison and VanOort held an aggregate of
97,930, 2,500, 4,000 and 43,627 shares of restricted stock of Corning,
respectively, having an aggregate value on September 30, 1996 of
$3,819,270, $97,500, $156,000 and $1,701,453, respectively. Certain of
such shares, net of forfeitures, were subject to performance-based
conditions on vesting and are subject to forfeiture upon termination and
restrictions on transfer prior to stated dates. Certain other shares
("Career Shares") are subject to restrictions on transfer until the
executive officer retires at or after age 60 and are subject to
forfeiture prior to age 60 in whole if such officer voluntarily
terminates employment with CCL and in part if such officer's employment
is terminated by CCL. On or prior to the Distribution Date (a) all
forfeiture conditions and transfer restrictions will be removed from
performance-based shares, (b) all restrictions on transfer will be
removed from shares which are no longer subject to forfeiture and (c)
Career Shares which are subject to forfeiture conditions and transfer
restrictions will be forfeited, and restricted shares and/or options to
purchase shares of CCL Common Stock will thereafter be granted pursuant
to the terms of the CCL Incentive Stock Plan (as defined below).
Dividends are paid to such individuals on all shares of restricted
Corning Common Stock held by them.
(5) Includes the following amounts to be contributed by CCL to the CCL Profit
Sharing Plan (as defined below) for 1996: $3,850 for Mr. Freeman, $4,283
for Mr. Hardison and $4,750 for Mr. VanOort. Also includes $12,840
automobile allowance received by each of Messrs. Freeman and Hardison and
$9,480 for Dr. Critchfield. Also includes 50% of a $100,000 interest-free
loan made by CCL to Dr. Critchfield together with imputed interest
thereon, which loan is to be forgiven over a two-year period provided Dr.
Critchfield continues to be employed by CCL and was made to assist Dr.
Critchfield in relocating to the New Jersey area.
(6) Dr. Critchfield commenced employment with CCL in October 1995.
Option Grants. The following table sets forth certain information regarding
options granted in 1995 (except for Mr. Hardison whose options were granted
on February 7, 1996) to the named executive officers pursuant to Corning
stock option plans. No other options were granted to the named executive
officers in 1996. Employees of CCL who hold at the Distribution Date Corning
stock options other than those granted on December 6, 1995 and February 7,
1996 will continue to hold Corning stock options following the CCL Spin-Off
Distribution. It is anticipated that appropriate adjustments to the number of
shares subject to options and to the exercise prices will be made to reflect
the CCL Spin-Off Distribution. A portion of the options granted on December
6, 1995 and February 7, 1996 will be converted into options to purchase
shares of CCL Common Stock ("New Options") under the CCL Stock Option Plan
(as defined below). The remainder of the options granted on December 6, 1995
and February 7, 1996 will be cancelled. It is anticipated that such cancelled
options will be replaced by options to be granted under the CCL Stock Option
Plan.
The exercise prices and the number of shares of CCL Common Stock subject to
New Options will be determined as of the time of the Distributions so as to
preserve the investment basis and intrinsic gain associated with the Corning
options surrendered as of the date of the CCL Spin-Off Distribution.
Generally, the expiration dates and the dates on which New Options are
exercisable will be identical to those under the corresponding Corning
options at the time of the Distributions. Certain New Options will provide
that upon exercise of such option through the surrender of previously owned
shares of CCL Common Stock, the participant will be entitled to receive
options covering the same number of shares so surrendered, with an exercise
price equal to the fair market value of the shares at the time of the
exercise of the New Option.
80
<PAGE>
OPTION/SAR GRANTS IN FISCAL YEAR 1995 (1)
<TABLE>
<CAPTION>
Individual Grants
--------------------------------------------------
% of Total
Number of Options
Securities Granted
Underlying to Employees
Options in Fiscal Exercise Expiration
Name Granted (2) Year Price Date
-------------------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Kenneth W. Freeman 87,000 2.6% 31.25 12/5/2005
Robert A. Carothers 1,500 0.0% 31.75 6/7/2005
15,000 0.4% 31.25 12/5/2005
Gregory C. Critchfield 3,000 0.1% 27.50 10/3/2005
Donald M. Hardison, Jr. 24,000 0.7% 33.69 2/6/2006
Douglas M. VanOort 60,000 1.8% 31.25 12/5/2005
All Optionees as a Group (4) 3,389,100 100.0% 31.34 2005
</TABLE>
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for
Option Term (3)
-------------------------------------
Gain at Gain at Gain at
Name 0% (4) 5% 10%
-------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Kenneth W. Freeman 0 1,709,807 4,332,987
Robert A. Carothers 0 29,951 75,902
0 294,794 747,067
Gregory C. Critchfield 0 51,884 131,484
Donald M. Hardison, Jr. 0 508,499 1,288,636
Douglas M. VanOort 0 1,179,177 2,988,267
All Optionees as a Group (4) 0 66,797,662 169,278,390
</TABLE>
- -------------
(1) No SARs were granted.
(2) The stock option agreements with Messrs. Freeman, Carothers (with respect
to the 15,000 share grant), Hardison and VanOort provide that one-half of
the options will become exercisable on February 1, 1999 and all options
will become exercisable on February 1, 2000. The stock option agreement
with Dr. Critchfield provides that one-half of the options will become
exercisable on October 4, 1996 and all of the options will become
exercisable on October 4, 1997. The stock option agreement with Mr.
Carothers with respect to the 1,500 share grant provides that one-half of
the options became exercisable on June 6, 1996 and all of the options
will become exercisable on June 6, 1997. All such agreements also provide
that an additional option may be granted when the optionee uses shares of
Corning Common Stock to pay the purchase price of an option. The
additional option will be exercisable for the number of shares tendered
in payment of the option price, will be exercisable at the then fair
market value of the Corning Common Stock, will become exercisable only
after the lapse of twelve months and will expire on the expiration date
of the original option.
(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 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.
Option Exercises and Fiscal Year-End Values. The following table sets
forth the number of shares of Corning Common Stock covered by both
exercisable and unexercisable stock options as of December 31, 1995, for the
named executive officers. The named executive officers exercised no options
in 1996.
81
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL
YEAR 1995 AND 1995 FISCAL YEAR-END OPTION/SAR VALUES (1)
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
Fiscal Year End At Fiscal Year End
------------------------- -------------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 0 0 103,500 127,000 827,784 107,500
Robert A. Carothers 0 0 12,483 15,749 0 0
Gregory C. Critchfield 0 0 0 5,000 0 10,688
Donald M. Hardison, Jr. -- -- -- -- -- --
Douglas M. VanOort 0 0 11,500 88,000 19,729 55,750
</TABLE>
- -------------
(1) There are no SARs outstanding.
Corporate Performance Plan Activity. Awards of performance-based shares of
Corning Common Stock have been granted to CCL's executive officers pursuant
to a series of performance-based plans (the "Corporate Performance Plan").
The Corporate Performance Plan provides 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 are set and
shares awarded (at target levels) which are subject to forfeiture in whole or
in part if performance goals are not met. The percentage of awards that may
be earned ranges from 0% to 150% of target. Shares earned remain subject to
forfeiture and restrictions on transfer for two years following the end of
the performance period.
The following table sets forth the number of performance-based shares
awarded under the Corporate Performance Plan. The dollar value of shares
earned for 1995 is reflected in the "Restricted Stock Awards" column of the
Summary Compensation Table appearing on page .
In late 1996, the Compensation Committee of the board of directors of
Corning (the "Corning Board") will assess performance against goals,
determine the number of shares earned of those granted on December 6, 1995
and February 7, 1996 and remove all possibility of forfeiture and
restrictions on transfer from such shares.
CORPORATE PERFORMANCE PLAN ACTIVITY TABLE
<TABLE>
<CAPTION>
Number Number Number
Grant of Shares Performance of Shares of Shares Vesting Date of
Name Year Date Granted Period Forfeited Earned Earned Shares
- ------------------------- ------ ------------------ ------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth W. Freeman 1996 12/95 14,500 1996 2/99
1995 12/94 10,000 1995 10,740 2/98
1994 12/93 10,000 1994 14,690 2/97
Robert A. Carothers 1996 12/95 2,500 1996 2/99
1995 0
1994 0
Gregory C. Critchfield 1996 0
1995 0
Donald M. Hardison, Jr. 1996 2/96 4,000 1996 2/99
Douglas M. VanOort 1996 12/95 10,000 1996 2/99
1995 12/94 10,000 1995 6,760 3,240 2/98
1994 12/93 4,000 1994 40 3,960 2/97
</TABLE>
Variable Compensation. CCL has adopted, effective upon the Distributions,
a variable compensation plan (the "Plan"), an annual incentive cash
compensation plan for approximately 950 supervisory, management and executive
employees similar to an annual performance plan currently maintained by CCL.
The terms of the Plan are as follows.
The performance-based annual cash incentive awards payable under the Plan
will be grounded in financial goals such as net income, cash flow, operating
margin, return on equity, or earnings per share, or a combination
82
<PAGE>
thereof, and quantifiable non-financial goals. Each participant will be
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 will be compared to the scale of targets with each
gradation of desired result corresponding to a percentage, which will be
multiplied by the employee's assigned target award. If the actual result is
below target, awards will be less than target, down to a point below which no
awards are earned. If the desired result is above target, awards will be
greater than target, up to a stated maximum award. The maximum award assigned
to the chief executive officer may not exceed 200% of base salary in effect
on the date the CCL Compensation Committee sets the target for the
performance year. The CCL Compensation Committee retains the right to reduce
any award if it believes individual performance does not warrant the award
calculated by reference to the result.
Employee Equity Participation Program. CCL has adopted, effective upon the
Distributions, the Employee Equity Participation Program (the "Program")
consisting of two plans: (a) a stock option plan (the "CCL Stock Option
Plan") and (b) an incentive stock plan (the "CCL Incentive Stock Plan"). The
Program is designed to provide a flexible mechanism to permit key employees
of CCL and of any subsidiary to obtain significant equity ownership in CCL,
thereby increasing their proprietary interest in the growth and success of
CCL.
The Program, which will be administered by the CCL Compensation Committee,
provides for the grant to eligible employees of either non-qualified or
"incentive stock" options, or both, to purchase shares of CCL Common Stock at
no less than fair market value on the date of grant. The CCL Compensation
Committee may also provide that options may not be exercised in whole or in
part for any period or periods of time; provided, however, that no option
will be exercisable until at least twelve months from the date of grant. All
options shall expire not more than ten years from the date of grant. Options
will not be assignable or transferable except for limited circumstances on
death. During the lifetime of the employee an option may be exercised only by
him. The option price must be paid to CCL by the optionee in full prior to
delivery of the stock. The optionee may pay the option price in cash or with
shares of CCL Common Stock owned by him. The optionee will have no rights as
a stockholder with respect to the shares subject to option until shares are
issued upon exercise of the option. The CCL Compensation Committee may grant
options pursuant to which an optionee who uses shares of CCL Common Stock to
pay the purchase price of an option will receive automatically on the date of
exercise an additional option to purchase shares of CCL Common Stock. Such
additional option will cover the number of shares tendered in payment of the
option price, will be exercisable at the then fair market value of CCL Common
Stock, will become exercisable only after the lapse of twelve months and will
expire on the expiration date of the original option.
The Program also authorizes the CCL Compensation Committee to award to
eligible employees shares, or the right to receive shares, of CCL Common
Stock, the equivalent value in cash or a combination thereof (as determined
by the CCL Compensation Committee). The CCL Compensation Committee shall
determine the number of shares which are to be awarded to individual
employees and the number of rights covering shares to be issued upon
attainment of predetermined performance objectives for specified periods. The
shares awarded directly to individual employees may be made subject to
certain restrictions prohibiting sale or other disposition and may be made
subject to forfeiture in certain events. Shares may be issued to recognize
past performance either generally or upon attainment of specific objectives.
Shares issuable for performance (based upon specific predetermined
objectives) will be payable only to the extent that the CCL Compensation
Committee determines that an eligible employee has met such objectives and
will be valued as of the date of such determination. Upon issuance, such
shares may (but need not) be made subject to the possibility of forfeiture or
certain restrictions on transfer.
Key executive, managerial and technical employees (including officers and
employees who are directors) of CCL and of any subsidiary will be eligible to
participate in the Program and the plans thereunder. The selection of
employees eligible to participate in any plan under the Program is within the
discretion of the CCL Compensation Committee. Approximately 150 employees
would have been eligible to participate in the plans under the Program had
the Program been in effect in 1996.
Under the Program, the maximum number of shares of CCL Common Stock which
may be optioned or granted to eligible employees will be 3,000,000. Shares
from expired or terminated options under the CCL Stock Option Plan will be
available again for option grant under the Program. Shares which are issued
but not earned, or which are forfeited under the CCL Incentive Stock Plan,
will be available again for issuance under the Program. The Program provides
for appropriate adjustments in the aggregate number of shares subject to the
Program and in the number of shares and the price per share, or either, of
outstanding options in the case of changes in the capital stock of CCL
resulting from any recapitalization, stock or unusual cash dividend, stock
distribution, stock split or any
83
<PAGE>
other increase or decrease effected without receipt of consideration by CCL,
or a merger or consolidation in which CCL is the surviving corporation.
The Program has a term of five years and no shares may be optioned or
awarded and no rights to receive shares may be granted after the expiration
of the Program. The CCL Board is authorized to terminate or amend the
Program, except that it may not increase the number of shares available
thereunder, decrease the price at which options may be granted, change the
class of employees eligible to participate, or extend the term of the Program
or options granted thereunder without the approval of the holders of a
majority of the outstanding shares of CCL Common Stock.
CCL believes that the federal income tax consequences of the Program are
as follows. An optionee who exercises a non-qualified option granted under
the CCL Stock Option Plan will recognize compensation taxable as ordinary
income (subject to withholding) in an amount equal to the difference between
the option price and the fair market value of the shares on the date of
exercise and CCL or the subsidiary employing the optionee will be entitled to
a deduction from income in the same amount. The optionee's basis in such
shares will be increased by the amount taxable as compensation, and his
capital gain or loss when he disposes of the shares will be calculated using
such increased basis.
If all applicable requirements of the Code with respect to incentive stock
options are met, no income to the optionee will be recognized and no
deduction will be allowable to CCL at the time of the grant or exercise of an
incentive stock option. The excess of the fair market value of the shares at
the time of exercise of an incentive stock option over the amount paid is an
item of tax preference which may be subject to the alternative minimum tax.
In general, if an incentive stock option is exercised three months after
termination of employment, the optionee will recognize ordinary income in an
amount equal to the difference between the option price and the fair market
value of the shares on the date of exercise and CCL or the subsidiary
employing the optionee will be entitled to a deduction in the same amount. If
the shares acquired subject to the option are sold within one year of the
date of exercise or two years from the date of grant, the optionee will
recognize ordinary income in an amount equal to the difference between the
option price and the lesser of the fair market value of the shares on the
date of exercise or the sale price and CCL or the employing subsidiary will
be entitled to a deduction from income in the same amount. Any excess of the
sale price over the fair market value on the date of exercise will be taxed
as a capital gain.
Shares of CCL Common Stock which are not subject to restrictions and
possibility of forfeiture and which are awarded to an employee under the CCL
Incentive Stock Plan will be treated as ordinary income, subject to
withholding, to an employee at the time of the transfer of the shares to him
and the value of such awards will be deductible by CCL or by the subsidiary
employing the employee at the same time in the same amount. Shares granted
subject to restrictions and possibility of forfeiture will not be subject to
tax nor will such grant result in a tax deduction for CCL at the time of
award. However, when such shares become free of restrictions and possibility
of forfeiture, the fair market value of such shares at that time (i) will be
treated as ordinary income to the employee and (ii) will be deductible by CCL
or by the subsidiary employing the employee.
The tax treatment upon disposition of shares acquired under the Program
will depend upon how long the shares have been held and on whether or not the
shares were acquired by exercising an incentive stock option. There are no
tax consequences to CCL upon a participant's disposition of shares acquired
under the Program, except that CCL may take a deduction equal to the amount
the participant must recognize as ordinary income in the case of the
disposition of shares acquired under incentive stock options before the
applicable holding period has been satisfied.
Pension Plans. None of the executive officers of CCL are currently active
participants in a qualified defined benefit plan of CCL.
Prior to June 1, 1995, December 1, 1996 and January 1, 1995, respectively,
Messrs. Freeman, Carothers and VanOort were eligible to participate in, and
accrue benefits under, Corning's Salaried Pension Plan (the "Corning Salaried
Pension Plan"), a defined benefit plan, contributions to which are determined
by Corning's actuaries and are not made on an individual basis. Benefits paid
under this plan are based upon career earnings (regular salary and cash
awards paid under Corning's variable compensation plans) and years of
credited service. The Corning Salaried Pension Plan provides that salaried
employees of Corning who retire on or after December 31, 1993 will receive
pension benefits equal to the greater of (a) benefits provided by a formula
pursuant to which they shall receive for each year of credited service an
amount equal to 1.5% of annual earnings up to the social security wage base
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<PAGE>
and 2% of annual earnings in excess of such base or (b) benefits calculated
pursuant to a formula which provides that retirees will receive for each year
of credited service prior to January 1, 1994 an amount equal to 1% of the
first $24,000 of average earnings for the highest five consecutive years of
annual earnings in the ten years of credited service immediately prior to
1994 and 1.5% of such average earnings in excess of $24,000. Effective upon
commencement of employment, salaried employees may contribute to the Corning
Salaried Pension Plan 2% of their annual earnings up to the social security
wage base. Such employees will receive for each year of credited service
after December 31, 1990, in lieu of the amount described in (a) above, an
amount equal to 2% of annual earnings. The benefit formula is reviewed and
adjusted periodically for inflationary and other factors.
Corning maintains a non-qualified Executive Supplemental Pension Plan (the
"Executive Supplemental Plan") pursuant to which it will pay to certain
executives amounts approximately equal to the difference between the benefits
provided for under the Corning Salaried Pension Plan and benefits which would
have been payable thereunder but for the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
It is anticipated that, prior to the Distribution Date, the Compensation
Committee of the Corning Board will adopt a transferee supplemental pension
plan (the "Transferee Supplemental Plan"), a nonqualified, unfunded defined
benefit plan for the benefit of key employees and executive officers of CCL
who are former employees of Corning, including Messrs. Freeman and VanOort,
effective immediately after the Distribution Date. The Transferee
Supplemental Plan will provide benefits approximately equal to the difference
between the benefits provided for under the Corning Salaried Pension Plan and
the Executive Supplemental Plan and benefits which would have been payable
thereunder but for the termination of employment with Corning of such
employees.
Maximum annual benefits calculated under the straight life annuity option
form of pension payable to participants at age 65, the normal retirement age
specified in the Corning Salaried Pension Plan, are illustrated in the table
set forth below. The table below does not reflect any limitations on benefits
imposed by ERISA. It is estimated that Messrs. Freeman and VanOort, who have
24 and 14 years of credited service, respectively, would receive each year if
they worked to age 65, the normal retirement age specified in the Corning
Salaried Pension Plan, $ and $ , respectively, under the Corning
Salaried Pension Plan, the Executive Supplemental Plan and the Transferee
Supplemental Plan.
<TABLE>
<CAPTION>
Years of Service
----------------------------------------------------------------------------
Remuneration 15 20 25 30 35 40
----------------- ------------ ------------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
1,100,000
1,200,000
</TABLE>
CCL Profit Sharing Plan. Most of the employees of CCL and its subsidiaries
have been eligible to participate in a tax-qualified, defined contribution
plan known as the CCL Profit Sharing Plan (the "CCL Profit Sharing 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
Corning Common Stock, at the employees' discretion. Effective as of the
Distribution Date, CCL Common Stock will be added as an investment fund and a
portion of the employer matching contributions will automatically be invested
in CCL Common Stock. Corning Common Stock will no longer be available as an
investment fund except with respect to amounts already so invested under the
CCL Profit Sharing Plan.
Effective as of the Distribution Date, the CCL Profit Sharing Plan will be
amended to permit participating employees' employers to make discretionary
contributions, other than matching contributions, to the CCL Profit Sharing
Plan for the benefit of such employees, which contributions may be invested
in CCL Common Stock.
85
<PAGE>
CCL Employee Stock Ownership Plan. CCL has adopted, effective upon the
Distributions, an employee stock ownership plan, as defined in Section
4975(e)(7) of the Code and related regulations and intended to qualify as a
retirement plan under Section 401(a) of the Code, to be known as the CCL
Employee Stock Ownership Plan (the "CCL ESOP").
Most employees of CCL and its subsidiaries will become participants in the
CCL ESOP after accruing six months of service. To the extent permitted under
the CCL ESOP, CCL will contribute as of the Distribution Date an amount equal
to a portion of each participating employee's annual compensation. CCL may in
its discretion from time to time make additional contributions to the CCL
ESOP for the benefit of participating employees. The assets of the CCL ESOP
will be invested primarily in shares of CCL Common Stock.
Amounts contributed to the CCL ESOP for the benefit of participating
employees will be 100% vested at age 65, the normal retirement age specified
in the CCL ESOP, or at death, disability or termination of employment
following completion of two years of credited service. Contributions to the
CCL ESOP will not currently be taxable income to the participating employees
and will not generally be available to them until termination of employment.
Employee Stock Purchase Plan. CCL has adopted, as of the Distribution
Date, the Employee Stock Purchase Plan (the "CCL Stock Purchase Plan"),
pursuant to which CCL may make 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 CCL Stock Purchase Plan, which will be administered by the CCL
Compensation Committee, is designed to give eligible employees (generally,
employees of CCL and its subsidiaries) the opportunity to purchase shares of
CCL 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, 2001.
Any eligible employee may elect to participate in the CCL Stock Purchase
Plan on a quarterly basis and may terminate his payroll deduction at any time
or increase or reduce prospectively the amount of his deduction at the
beginning of any calendar quarter. At the end of each calendar quarter, a
participating employee will purchase shares of CCL Common Stock with the
funds deducted. The number of shares purchased will be a number determined by
dividing the amount withheld by the lower of 85% of the closing price of a
share of CCL Common Stock as reported in The Wall Street Journal on the first
or last business day of the particular calendar quarter. An employee will
have no interest in any shares of CCL Common Stock until such shares are
actually purchased by him.
Under the CCL Stock Purchase Plan, the maximum number of shares of CCL
Common Stock which may be purchased by eligible employees will be 2,000,000
shares, subject to adjustment in the case of changes in the capital stock of
CCL resulting from any recapitalization, stock dividend, stock split or any
other increase or decrease effected without receipt of consideration by CCL
or a merger or consolidation in which CCL is the surviving corporation.
The CCL Stock Purchase Plan has a term of five years and no shares of CCL
Common Stock may be offered for sale or sold under the CCL Stock Purchase
Plan after the fifth anniversary of the effective date. The CCL Board is
authorized to terminate or amend the CCL Stock Purchase Plan, except that it
may not increase the number of shares of CCL Common Stock available
thereunder, decrease the price at which such shares may be offered for sale
or extend the term of the CCL Stock Purchase Plan without the approval of the
holders of a majority of the shares of the capital stock of CCL cast at a
meeting at which such matter is considered.
Severance Arrangements. On or before the Distribution Date, CCL will adopt
a severance policy pursuant to which it will provide to each named executive
officer (other than Mr. Freeman) upon the termination of employment by CCL
other than for cause upon a determination that the business needs of CCL
require the replacement of such named executive officer and other than in
connection with a change of control compensation equal to two times the named
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. Such named executive officer will also be
entitled to participate in CCL's health and benefits plans (to the extent
permitted by the 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, upon a change of control CCL will provide to each
named executive officer upon the termination of employment by CCL other than
for cause, compensation equal to three times annual base salary and three
times
86
<PAGE>
the award of annual variable compensation at the most recent target level and
such officer will be entitled to participate in CCL's health and benefit
plans for a period of up to three years (to the extent permitted by the
administrative provisions of such plans and applicable federal and state
law). 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
CCL; the membership of the CCL Board changes as a result of a contested
election such that a majority of the CCL Board members at any particular time
were initially placed on the CCL Board as a result of such contested
election; or approval by CCL's stockholders of a merger or consolidation in
which CCL is not the survivor thereof, or a sale or disposition of all or
substantially all of CCL's assets or a plan of partial or complete
liquidation.
87
<PAGE>
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF CCL
All of the outstanding shares of CCL Common Stock are currently held by
CLSI, which is wholly owned by Corning. The following table sets forth the
number of shares of CCL Common Stock that are projected to be beneficially
owned after the CCL Spin-Off Distribution by the directors, by the named
executive officers and by all directors and executive officers of CCL as a
group. The projections are based on the number of shares of Corning Common
Stock held by such persons and such group as of October 31, 1996 (excluding
Career Shares that will be forfeited prior to the Distribution Date and
Corning Common Stock held in the CCL Profit Sharing Plan and the Corning
Investment Plans) and on the number of options to acquire Corning Common
Stock held as of such date and exercisable within 60 days thereof. With
respect to the shares of CCL Common Stock, the number reflects the
distribution ratio of one share of CCL Common Stock for every eight shares of
Corning Common Stock and with respect to options the number reflects the
actual number of shares of Corning Common Stock subject to options. The stock
options held by the directors and executive officers of CCL will not affect
the security ownership of CCL unless (i) such options are exercised prior to
the Record Date and the underlying shares of Corning Common Stock are held on
the Record Date or (ii) such options are converted into options to purchase
shares of CCL Common Stock.
<TABLE>
<CAPTION>
Number of Shares Number of
Name Beneficially Owned (1) Exercisable Options
--------------------------------- ------------------------------------------------
<S> <C> <C>
Van C. Campbell
Gregory C. Critchfield
David A. Duke
Kenneth W. Freeman
Donald M. Hardison, Jr.
Douglas M. VanOort
All Directors and Executive
Officers as a Group
</TABLE>
- -------------
(1) Does not include shares owned by the spouses and minor children of
certain executive officers and directors as to which such officers and
directors disclaim beneficial ownership.
88
<PAGE>
DESCRIPTION OF CCL CAPITAL STOCK
General
The following is a brief summary of certain provisions of the CCL
Certificate, as the restated certificate of incorporation will be amended
immediately prior to the CCL Spin-Off Distribution, and does not relate to or
give effect to provisions of statutory or other law except as specifically
stated. The CCL Certificate authorizes the issuance of 100,000,000 shares of
CCL Common Stock. Approximately 28,901,735 shares of CCL Common Stock are
expected to be outstanding immediately following the CCL Spin-Off
Distribution. The rights of holders of shares of CCL Common Stock are
governed by the CCL Certificate, the CCL By-Laws and by the DGCL.
Voting Rights
Subject to the voting of any shares of CCL Series Preferred Stock (as
defined below) that may be outstanding, voting power is vested in the CCL
Common Stock, each share having one vote.
Preemptive Rights
The CCL Certificate provides that no holder of shares of CCL Common Stock
or CCL Series Preferred Stock shall have any preemptive rights except as the
CCL Board may determine from time to time. No such rights have been granted
by the CCL Board.
CCL Common Stock
Liquidation Rights. Subject to the preferential rights of any outstanding
CCL Series Preferred Stock, in the event of any liquidation of CCL, holders
of shares of CCL Common Stock then outstanding are entitled to share ratably
in the assets of CCL available for distribution to such holders.
Dividend Policy. Subject to any preferential rights of any outstanding CCL
Series Preferred Stock or CCL Nonvoting Cumulative Preferred Stock, such
dividends as may be determined by the CCL Board may be declared and paid on
the shares of CCL Common Stock from time to time out of any funds legally
available therefor. It is currently contemplated that, following the
Distributions, CCL will not pay cash dividends in the foreseeable future, but
will retain earnings to provide funds for the operation and expansion of its
business. Dividend decisions will be based upon a number of factors,
including the operating results and financial requirements of CCL and such
other considerations as the CCL Board deems relevant. In addition, the CCL
Credit Facility prohibits CCL from paying cash dividends on the CCL Common
Stock. Further, the Indenture under which the Notes will be issued will
restrict CCL's ability to pay cash dividends on the CCL Common Stock based on
a percentage of CCL's cash flow.
Other Provisions. The shares of CCL Common Stock have no redemption,
sinking fund or conversion privileges applicable thereto and holders of
shares of CCL Common Stock are not liable to assessments or to further call.
Listing and Trading. Prior to the Distributions, there has been no public
trading market for the CCL Common Stock although a "when issued" market is
expected to develop prior to the Distribution Date. Application has been made
to list the CCL Common Stock on the NYSE, subject to official notice of the
Distributions, under the trading symbol " ." Prices at which CCL Common
Stock may trade prior to the Distributions on a "when-issued" basis or after
the Distributions cannot be predicted. Until shares of the CCL Common Stock
are fully distributed and an orderly market develops, the prices at which
trading in such stock occurs may fluctuate significantly. The prices at which
CCL Common Stock will trade will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity
of the market for CCL Common Stock, investor perceptions of CCL, the clinical
laboratory testing business, and general economic and market conditions. CCL
initially will have approximately stockholders of record, based on the
number of holders of record of Corning Common Stock at the date of this
Information Statement. The Transfer Agent and Registrar for the CCL Common
Stock will be Harris Trust and Savings Bank. For certain information
regarding options to purchase CCL Common Stock that may become outstanding
after the Distributions, see "Management of CCL."
CCL Series Preferred Stock
The CCL Certificate authorizes the issuance of up to 10,000,000 shares of
CCL Series Preferred Stock, par value $ per share (the "CCL Series
Preferred Stock"). The CCL Board has the authority to issue such shares from
time to time, without stockholder approval, and to determine the
designations, preferences, rights, including
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<PAGE>
voting rights, and restrictions of such shares, subject to the DGCL. Pursuant
to this authority, the CCL Board has designated shares of CCL Series
Preferred Stock as CCL Series A Preferred Stock and 1,000 shares of CCL
Nonvoting Cumulative Preferred Stock. No other class of CCL Series Preferred
Stock has been designated by the CCL Board.
Nonvoting Cumulative Preferred Stock
General. Prior to the CCL Spin-off Distribution, CCL will issue to Corning
1,000 shares of Nonvoting Cumulative Preferred Stock, liquidation preference
$1,000 per share (the "CCL Nonvoting Cumulative Preferred Stock") without
further stockholder approval.
Dividend Policy. Holders of shares of CCL Nonvoting Cumulative Preferred
Stock will be entitled to receive, when, as and if declared by the CCL Board
out of funds legally available for the purpose, quarterly dividends payable
in cash at the rate of 10% (the "Dividend Rate") per annum, provided,
however, that the Dividend Rate per annum shall be the greater of (a) 10% and
(b) the yield to maturity of the Notes expressed as a percentage plus 1%.
Voting Rights. The holders of shares of CCL Nonvoting Cumulative Preferred
Stock will have no voting rights whatsoever, except for any voting rights to
which they may be entitled under the laws of the State of Delaware, and
except as follows:
(a) Whenever, at any time or times, dividends payable on the shares of CCL
Nonvoting Cumulative Preferred Stock or on any Parity Preferred Stock (as
defined below) with respect to payment of dividends, shall be in arrears for
an aggregate number of days equal to six calendar quarters or more, whether
or not consecutive, the holders of the outstanding shares of CCL Nonvoting
Cumulative Preferred Stock will have the right, with holders of shares of CCL
Common Stock and any other capital stock of CCL having voting rights (voting
together as one class), to vote on all matters submitted to a vote of the
shareholders of CCL until such arrearages have been paid or set apart for
payment, at which time such right shall terminate, except as herein or by law
expressly provided, subject to revesting in the event of each and every
subsequent default of the character above mentioned. So long as holders of
CCL Nonvoting Cumulative Preferred Stock are entitled to vote, each holder of
shares of CCL Nonvoting Cumulative Preferred Stock shall be entitled to one
vote for each share held (the holders of shares of any other class or series
of preferred stock having like voting rights being entitled to such number of
votes, if any, for each share of such stock held as may be granted to them).
(b) So long as any shares of CCL Nonvoting Cumulative Preferred Stock
remain outstanding, the consent of the holders of at least two-thirds of the
shares of CCL Nonvoting Cumulative Preferred Stock outstanding at the time
and all other classes or series of stock upon which like voting rights have
been conferred and are exercisable (voting together as one class) given in
person or by proxy, either in writing or at any meeting called for the
purpose, will be necessary to permit, effect or validate the amendment,
alteration or repeal, whether by merger, consolidation or otherwise, of any
of the provisions of the CCL Certificate that would materially and adversely
affect any power, preference, or special right of the shares of CCL Nonvoting
Cumulative Preferred Stock or of the holders thereof; provided, however, that
any increase in the amount of authorized CCL Common Stock or authorized
preferred stock or any increase or decrease in the number of shares of any
series of preferred stock or the creation and issuance of other series of
common stock or preferred stock shall not be deemed to materially adversely
affect the powers, preferences or special rights of the CCL Nonvoting
Cumulative Preferred Stock.
Certain Restrictions. Whenever quarterly dividends or other dividends or
distributions payable on the CCL Nonvoting Cumulative Preferred Stock are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of CCL Nonvoting Cumulative
Preferred Stock outstanding shall have been paid in full, CCL shall not:
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding-up) to the CCL Nonvoting Cumulative
Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of Parity Preferred Stock on which dividends are payable or in
arrears in proportion to the total amounts to which the holders of all
such shares are then entitled;
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(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding-up) to the CCL Nonvoting Cumulative Preferred
Stock, provided that CCL may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any
stock of CCL ranking junior (either as to dividends or upon dissolution,
liquidation or winding-up) to the CCL Nonvoting Cumulative Preferred
Stock; or
(iv) redeem or purchase or otherwise acquire for consideration any
shares of CCL Nonvoting Cumulative Preferred Stock, or any shares of stock
ranking on a parity with the CCL Nonvoting Cumulative Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the CCL Board) to all holders of such shares
upon such terms as the CCL Board, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
CCL shall not permit any subsidiary of CCL to purchase or otherwise
acquire for consideration any shares of stock of CCL unless CCL could
purchase or otherwise acquire such shares at such time and in such manner.
Liquidation Preference. The shares of CCL Nonvoting Cumulative Preferred
Stock shall rank, as to liquidation, dissolution or winding-up of CCL, prior
to the shares of CCL Common Stock and any other class of stock of CCL ranking
junior to the CCL Nonvoting Cumulative Preferred Stock as to rights upon
liquidation, dissolution or winding-up of CCL, so that in the event of any
liquidation, dissolution or winding-up of CCL, whether voluntary or
involuntary, the holders of the CCL Nonvoting Cumulative Preferred Stock
shall be entitled to receive out of the assets of CCL available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any distribution is made to holders of shares of CCL Common Stock or
any other such junior stock, an amount equal to $1,000 per share (the
"Liquidation Preference" of a share of CCL Nonvoting Cumulative Preferred
Stock) plus an amount equal to all dividends (whether or not earned or
declared) accrued and accumulated and unpaid on the shares of CCL Nonvoting
Cumulative Preferred Stock to the date of final distribution. The holders of
the CCL Nonvoting Cumulative Preferred Stock will not be entitled to receive
the Liquidation Preference and such dividends until the liquidation
preference of any other class of stock of CCL ranking senior to the CCL
Nonvoting Cumulative Preferred Stock as to rights upon liquidation,
dissolution or winding-up shall have been paid (or a sum set aside therefor
sufficient to provide for payment) in full. After payment of the full amount
of the Liquidation Preference and such dividends, the holders of shares of
CCL Nonvoting Cumulative Preferred Stock will not be entitled to any further
participation in any distribution of assets by CCL. If, upon any liquidation,
dissolution or winding-up of CCL, the assets of CCL, or proceeds thereof,
distributable among the holders of the shares of CCL Nonvoting Cumulative
Preferred Stock and Parity Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid, then such assets, or the proceeds
thereof, shall be distributable among such holders ratably in accordance with
the respective amounts which would be payable on such shares if all amounts
payable thereon were paid in full. For the purposes hereof, neither a
consolidation or merger of CCL with or into any other corporation, nor a
merger of any other corporation with or into CCL, nor a sale or transfer of
all or any part of CCL's assets for cash or securities shall be considered a
liquidation, dissolution or winding-up of CCL.
Conversion. The CCL Nonvoting Cumulative Preferred Stock is not
convertible into shares of any other class or series of stock of CCL.
Optional Redemption. The shares of the CCL Nonvoting Cumulative Preferred
Stock may be redeemed at the option of CCL, as a whole, or from time to time
in part, at any time, out of funds legally available therefor, upon giving a
notice or redemption at least 30 days prior to the date set for redemption;
provided, however, that shares of the CCL Nonvoting Cumulative Preferred
Stock shall not be redeemable prior to December 31, 2002. Subject to the
foregoing, on or after such date, shares of the CCL Nonvoting Cumulative
Preferred Stock are redeemable at the redemption prices per share (expressed
as a percentage of the Liquidation Preference set forth below) plus an amount
in cash equal to all dividends (whether or not earned or declared) accrued
and accumulated and unpaid to, but excluding, the date fixed for redemption
(the "Redemption Amount") if redeemed during the 12-month period beginning
January 1 of each of the years set forth below:
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<TABLE>
<CAPTION>
Year Percentage
- ------------------------- ---------------
<S> <C>
2003 106.000%
2004 104.000%
2005 102.000%
2006 and thereafter 100.000%
</TABLE>
If CCL effects such redemption, it shall do so ratably according to the
number of shares held by each holder of CCL Nonvoting Cumulative Preferred
Stock.
Mandatory Redemption. On January 1, 2022, CCL shall redeem all of the then
outstanding shares of CCL Nonvoting Cumulative Preferred Stock, out of funds
legally available therefor at a redemption price equal to the Liquidation
Preference. The redemption payment for each share of CCL Nonvoting Cumulative
Preferred Stock shall be the Redemption Amount, in cash, as of January 1,
2022.
Authorization and Issuance of Other Securities. No consent of the holders of
the CCL Nonvoting Cumulative Preferred Stock shall be required for (a) the
creation of any indebtedness of any kind of CCL, (b) the creation, or
increase or decrease in the amount, of any class or series of stock of CCL
ranking on a parity with or senior to the CCL Nonvoting Cumulative Preferred
Stock as to the payment of dividends or amounts upon liquidation, dissolution
or winding up or (c) any increase or decrease in the amount of authorized
Common Stock or any increase, decrease or change in the par value thereof or
in any other terms thereof.
Rank. The CCL Nonvoting Cumulative Preferred Stock will rank senior to the
CCL Common Stock and the Series A Preferred Stock, on a parity with any
series of preferred stock ranking on a parity with the CCL Nonvoting
Cumulative Preferred Stock as to the payment of dividends and amounts upon
liquidation, dissolution and winding- up (a "Parity Preferred Stock"), and
junior to all other series of preferred stock that do not expressly provide
that such series is to rank junior to or on a parity with the CCL Nonvoting
Cumulative Preferred Stock.
Preferred Share Purchase Rights
Attached to each share of CCL Common Stock is one right ("CCL Right"),
which entitles the registered holder to purchase from CCL one one-hundredth
of a share of CCL Series A Preferred Stock at a price of $[50] per one-
hundredth of a share of CCL Series A Preferred Stock (the "Exercise Price"),
subject to adjustment. The CCL Rights expire on December 31, 2006 (the "Final
Expiration Date"), unless the Final Expiration Date is extended or unless the
CCL Rights are earlier exercised.
The CCL Rights represented by the certificates for shares of CCL Common
Stock are not exercisable, and are not transferable apart from the shares of
CCL Common Stock, until the earlier of (1) ten days following the public
announcement by CCL or an Acquiring Person (as defined below) that a person
or group has acquired beneficial ownership of 20% or more of the shares of
CCL Common Stock (an "Acquiring Person") or (2) ten business days (or such
later date as the CCL Board may determine prior to such time as any person or
group of affiliated persons becomes an Acquiring Person) after the
commencement or first public announcement of an intention to make a tender or
exchange offer that would result in a person or group beneficially owning 20%
or more of the shares of CCL Common Stock (the earlier of such dates being
called the "Rights Distribution Date"). The CCL Board has the authority to
determine that a person that has inadvertently acquired beneficial ownership
of 20% of the shares of CCL Common Stock is not an Acquiring Person if such
person promptly reduces its ownership interest to below 20%. Separate
certificates for the CCL Rights will be mailed to holders of record of the
shares of CCL Common Stock as of such date. The CCL Rights could then begin
trading separately from the shares of CCL Common Stock.
Generally, in the event that a person or group becomes an Acquiring
Person, each CCL Right (other than the CCL Rights owned by the Acquiring
Person and certain affiliated persons) will thereafter entitle the holder to
receive, upon exercise of the CCL Right, shares of CCL Common Stock having a
value equal to two times the Exercise Price of the CCL Right. In the event
that a person or group becomes an Acquiring Person (but prior to such time as
such person or group beneficially owns 50% or more of the outstanding shares
of CCL Common Stock), the CCL Board may exchange each CCL Right and each one
one-hundredth of a share of CCL Series A Preferred Stock (other than CCL
Rights and CCL Series A Preferred Stock owned by the Acquiring Person and
certain affiliated persons) for one share of CCL Common Stock. In the event
that CCL is acquired in a merger, consolidation, or other business
combination transaction or more than 50% of CCL's assets, cash flow or
earning power is sold
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or transferred, each CCL Right (other than the CCL Rights owned by an
Acquiring Person and certain affiliated persons) will thereafter entitle the
holder thereof to receive, upon the exercise of the CCL Right, common stock
of the acquiring corporation having a value equal to two times the Exercise
Price of the CCL Right.
The CCL Rights are redeemable in whole, but not in part, at $.01 per CCL
Right at any time prior to any person or group becoming an Acquiring Person.
The right to exercise the CCL Rights terminates at the time that the CCL
Board elects to redeem the CCL Rights. Notice of redemption shall be given by
mailing such notice to the registered holders of the CCL Rights. At no time
will the CCL Rights have any voting rights. The CCL Rights Agent is Harris
Trust and Savings Bank (the "CCL Rights Agent").
The exercise price payable, and the number of shares of CCL Series A
Preferred Stock or other securities or property issuable, upon exercise of
the CCL Rights are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the shares of CCL Series A Preferred
Stock, (ii) upon the grant to holders of the shares of CCL Series A Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
CCL Series A Preferred Stock at a price, or securities convertible into
shares of CCL Series A Preferred Stock with a conversion price, less than the
then current market price of the shares of CCL Series A Preferred Stock or
(iii) upon the distribution to holders of the shares of CCL Series A
Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or
dividends payable in shares of CCL Series A Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
The number of outstanding CCL Rights and the number of one one-hundredths
of a share of CCL Series A Preferred Stock issuable upon exercise of each CCL
Right are also subject to adjustment in the event of a stock split of, or
stock dividend on, or subdivision, consolidation or combination of, the
shares of CCL Common Stock prior to the CCL Rights Distribution Date. With
certain exceptions, no adjustment in the exercise price will be required
until cumulative adjustments require an adjustment of at least 1% in such
exercise price.
Upon exercise of the CCL Rights, no fractional shares of CCL Series A
Preferred Stock will be issued (other than fractions which are integral
multiples of one one-hundredth of a share, which may, at the election of CCL,
be evidenced by depository receipts) and in lieu thereof an adjustment in
cash will be made.
The CCL Rights have certain antitakeover effects. The CCL Rights may cause
substantial dilution for a person or group that attempts to acquire CCL on
terms not approved by the CCL Board, except pursuant to an offer conditioned
on a substantial number of CCL Rights being acquired. The CCL Rights should
not interfere with any merger or other business combination approved by the
CCL Board since the CCL Rights may be redeemed by CCL at $.01 per CCL Right
prior to the acquisition by a person or group of beneficial ownership of 20%
or more of the shares of CCL Common Stock.
The shares of CCL Series A Preferred Stock purchasable upon exercise of
the CCL Rights will rank junior to all other series of CCL's preferred stock
or any similar stock that specifically provides that they shall rank prior to
the shares of CCL Series A Preferred Stock. The shares of CCL Series A
Preferred Stock will be nonredeemable. Each share of CCL Series A Preferred
Stock will be entitled to a minimum preferential quarterly dividend of $1 per
share, but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of CCL Common Stock. In the event of liquidation,
the holders of the shares of CCL Series A Preferred Stock will be entitled to
a minimum preferential liquidation payment of $1 per share, but will be
entitled to an aggregate payment of 100 times the payment made per share of
CCL Common Stock. Each share of CCL Series A Preferred Stock will have 100
votes, voting together with the shares of CCL Common Stock. In the event of
any merger, consolidation or other transaction in which shares of CCL Common
Stock are exchanged, each share of CCL Series A Preferred Stock will be
entitled to receive 100 times the amount and type of consideration received
per share of CCL Common Stock. These rights are protected by customary
antidilution provisions. Because of the nature of the CCL Series A Preferred
Stock's dividend, liquidation and voting rights, the value of the interest in
a share of CCL Series A Preferred Stock purchasable upon the exercise of each
CCL Right approximates the value of one share of CCL Common Stock.
The foregoing description of the CCL Rights, which describes all of the
material terms of the CCL Rights, does not purport to be complete and is
qualified in its entirety by reference to the description of the CCL Rights
contained in the CCL Rights Agreement, dated as of , 1996 between CCL and
the CCL Rights Agent, which agreement will be filed as an exhibit to CCL's
registration statement on Form 10 (the "CCL Form 10") that CCL
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has filed with the Commission. Prior to the CCL Rights Distribution Date, the
CCL Rights Agreement may be amended in any respect. After the CCL Rights
Distribution Date, the CCL Rights Agreement may be amended in any respect
that does not adversely affect the CCL Rights holders.
Restrictions on Transfer
Shares of the CCL Common Stock distributed to Corning shareholders will be
freely transferable, except for shares received by any persons who may be
deemed to be "affiliates" of CCL as that term is defined in Rule 144
promulgated under the Securities Act, which shares will remain subject to the
resale limitations of Rule 144. Persons who may be deemed to be affiliates of
CCL after the CCL Spin-off Distribution generally include individuals or
entities that control, are controlled by, or are under common control with
CCL and may include certain officers and directors of CCL as well as
principal stockholders of CCL. Persons who are affiliates of CCL will be
permitted to sell their shares of CCL only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption
provided by Section 4(1) of the Securities Act or Rule 144 thereunder. The
Section 4(1) exemption allows the sale of unregistered shares by a person who
is not an issuer, an underwriter or a dealer. Rule 144 provides persons who
are not issuers with objective standards for selling restricted securities
and securities held by affiliates without registration. The rule requires (1)
current public information be available concerning the issuer; (2) volume
limitations be placed on sales during any three-month period; and (3)
compliance with certain manner of sale restrictions. The amount of the CCL
Common Stock which could be sold under Rule 144 during a three-month period
cannot exceed the greater of (1) 1% of the outstanding shares of CCL Common
Stock, or (2) the average weekly trading volume for the shares for a
four-week period prior to the date that notice of the sale is filed with the
Commission.
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ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE
CCL CERTIFICATE OF INCORPORATION AND BY-LAWS
General
In addition to the CCL Rights, the CCL Certificate and the CCL By-Laws
contain other provisions that may discourage a third party from seeking to
acquire CCL, or to commence a proxy contest or other takeover-related action.
These provisions, which are in all material respects identical to the
provisions contained in the certificate of incorporation and By-Laws of
Corning, are intended to enhance the likelihood of continuity and stability
in the composition of the CCL Board and in the policies formulated by the CCL
Board and to discourage certain types of transactions that may involve an
actual or threatened change of control of CCL. These provisions are designed
to reduce the vulnerability of CCL to an unsolicited acquisition proposal and
also to discourage certain tactics that may be used in proxy fights. Because
such provisions could have the effect of discouraging potential acquisition
proposals, they may consequently inhibit fluctuations in the market price of
CCL Common Stock which could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of CCL. See "Risk Factors--Risks Relating to CCL--Certain
Provisions Relating to Change in Control."
Board of Directors
The CCL Certificate provides that, effective as of the CCL Spin-Off
Distribution, the CCL Board is divided into three classes, with the classes
to be nearly as equal as possible. One class has a term expiring at the 1998
annual meeting of stockholders of CCL; the second class has a term expiring
at the 1999 annual meeting of stockholders of CCL; and the third class has a
term expiring at the 2000 annual meeting of stockholders of CCL. At each
annual meeting of stockholders, one class of the CCL Board will be elected
for a three-year term. The classification of directors has the effect of
making it more difficult to change the composition of the CCL Board. At least
two annual meetings of stockholders, instead of one, generally will be
required to effect a change in the majority of the CCL Board. The CCL Board
believes that the longer time required to elect a majority of a classified
board will help ensure the continuity and stability of CCL's management and
policies, because in most cases a majority of the directors at any given time
will have had prior experience as directors of CCL.
Under the DGCL, unless the certificate of incorporation otherwise
provides, a director on a classified board may only be removed by the
stockholders for cause. The CCL Certificate provides that a director of CCL
is only removable by the stockholders for cause. The CCL Certificate limits
the number of directors to twelve and requires that any vacancies on the CCL
Board be filled only by a majority of the entire CCL Board. The provisions of
the DGCL and the CCL Certificate relating to the removal of directors and the
filling of vacancies on the CCL Board preclude a third party from removing
incumbent directors without cause and simultaneously gaining control of the
CCL Board by filling, with its own nominees, the vacancies created by
removal. These provisions also reduce the power of stockholders generally,
even those with a majority voting power in CCL, to remove incumbent directors
and to fill vacancies on the CCL Board without the support of the incumbent
directors.
Stockholder Action and Special Meetings
The CCL Certificate provides that all stockholder actions to be effected
by written consent and not a duly called meeting must be effected by the
unanimous written consent of all stockholders entitled to consent thereto.
This provision reduces the power of the CCL stockholders and precludes a
stockholder of CCL from conducting any form of consent solicitation. The CCL
Certificate also does not permit stockholders of CCL to call special meetings
of stockholders.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations
The CCL By-Laws contain an advance notice procedure with respect to the
nomination, other than by or at the direction of the CCL Board or a committee
thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at annual meetings of stockholders.
Delivery of a notice with the required information must be delivered to the
Secretary of CCL not later than 60 days nor more than 90 days prior to the
date of the stockholders' meeting at which the nomination or other proposal
is to be considered. No matters can be considered at special meetings of the
stockholders other than such matters as are set forth in the notice of
meeting.
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Although the notice provisions do not give the CCL Board any power to approve
or disapprove stockholder nominations or proposals for action by CCL, they
may have the effect of (i) precluding a contest for the election of directors
or the consideration of stockholder proposals if the procedures established
by the CCL By-Laws are not followed and (ii) discouraging or deterring any
third party from conducting a solicitation of proxies to elect its own slate
of directors or to approve its proposals, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
CCL and its stockholders. The purpose of requiring advance notice is to
afford the CCL Board an opportunity to consider the qualifications of the
proposed nominees or the merits of other stockholder proposals and, to the
extent deemed necessary or desirable by the CCL Board, to inform stockholders
about those matters.
Business Combinations with Interested Stockholders
Paragraph 6 of the CCL Certificate (the "Fair Price Amendment") requires
the approval by the holders of at least 80% of the voting power of the
outstanding capital stock of CCL entitled to vote generally in the election
of directors (the "CCL Voting Stock") as a condition for mergers and certain
other Business Combinations (as defined below) with any beneficial owner of
more than 10% of such voting power (an "Interested Stockholder") unless (i)
the transaction is approved by at least a majority of the Continuing
Directors (as defined below) or (ii) certain minimum price, form of
consideration and procedural requirements are met.
An Interested Stockholder, in general, is defined as any person or group
who is, or was at any time within the two-year period immediately prior to
the date in question, the beneficial owner of more than 10% of the voting
power of the CCL Voting Stock. The term "beneficial owner" includes persons
directly or indirectly owning or having the right to acquire or vote the
shares. In certain circumstances, an Interested Stockholder could include
persons or entities affiliated or associated with the Interested Stockholder.
A Business Combination generally includes the following transactions: (i)
a merger or consolidation of CCL or any subsidiary with an Interested
Stockholder; (ii) the sale or other disposition by CCL or a subsidiary of
assets having an aggregate fair market value of $20,000,000 or more if an
Interested Stockholder is a party to the transaction; (iii) the issuance or
transfer of stock or other securities of CCL or of a subsidiary to an
Interested Stockholder in exchange for cash or property (including stock or
other securities) having an aggregate fair market value of $20,000,000 or
more; (iv) the adoption of any plan or proposal for the liquidation or
dissolution of CCL proposed by or on behalf of an Interested Stockholder; (v)
any reclassification of securities, recapitalization, merger or consolidation
with a subsidiary or other transaction which has the effect, directly or
indirectly, of increasing the percentage of the outstanding stock of any
class of CCL or a subsidiary owned by an Interested Stockholder; or (vi) any
agreement, contract or other arrangement providing for any one or more of the
foregoing actions.
A Continuing Director is in general (i) any member of the CCL Board who is
not an Interested Stockholder or affiliated or associated with an Interested
Stockholder and was a director of CCL prior to the time the Interested
Stockholder became an Interested Stockholder, and any successor to such a
Continuing Director who is not affiliated or associated with an Interested
Stockholder and was recommended or elected by a majority of the Continuing
Directors then on the CCL Board, or (ii) any person who was a director of CCL
as of the Distribution Date and any successor thereto who was recommended or
elected by a majority of the Continuing Directors then on the CCL Board. It
is possible that the approval of a majority of the Continuing Directors could
be required in circumstances where the Continuing Directors constitute less
than a quorum of the entire CCL Board.
The 80% affirmative stockholder vote would not be required if the Business
Combination in question had been approved by a majority of the Continuing
Directors or if all the minimum price, form of consideration and procedural
requirements described below are satisfied.
Minimum Price and Form of Consideration Requirements. In a Business
Combination involving cash or other consideration being paid to CCL's
stockholders, the consideration required, in the case of each class of CCL
Voting Stock, would be either cash or the same type of consideration used by
the Interested Stockholder in acquiring the largest portion of its share of
that class of CCL Voting Stock prior to the first public announcement of the
proposed Business Combination. In addition, such consideration would be
required to meet the minimum price requirements described below.
In the case of payments to holders of CCL Common Stock, the fair market
value per share of such payments would be at least equal in value to the
higher of (i) the highest per share price paid by the Interested Stockholder
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in acquiring any shares of CCL Common Stock during the two years prior to the
first public announcement of the proposed Business Combination (the
"Announcement Date") or in the transaction in which it became an Interested
Stockholder, whichever is higher, and (ii) the fair market value per share of
CCL Common Stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder, whichever is higher.
In the case of payments to holders of any series of CCL's voting Series
Preferred Stock, if any, the fair market value per share of such payments
would have to be at least equal to the higher of (i) the price per share
determined with respect to shares of such series in the same manner as
described in the preceding paragraph with respect to shares of Common Stock
and (ii) the highest preferential amount per share to which the holders of
such series of CCL Series Preferred Stock are entitled in the event of a
voluntary or involuntary liquidation of CCL.
If the transaction does not involve any cash or other property being
received by any of the other stockholders, such as a sale of assets or an
issuance of CCL's securities to an Interested Stockholder, then the minimum
price, form of consideration and procedural requirements would not apply, but
an 80% vote of stockholders would still be required unless the transaction
was approved by a majority of the Continuing Directors.
Procedural Requirements. An 80% stockholder vote would be required to
authorize a Business Combination with an Interested Stockholder if CCL, after
the interested stockholder became an Interested Stockholder, had failed to
pay full quarterly dividends on its Preferred Stock, if any, or reduced the
rate of dividends paid on its Common Stock, unless such failure or reduction
was approved by a majority of the Continuing Directors.
An 80% stockholder vote to authorize a Business Combination with an
Interested Stockholder would also be required if the Interested Stockholder
had acquired any additional shares of the CCL Voting Stock, directly from CCL
or otherwise, in any transaction subsequent to the transaction pursuant to
which it became an Interested Stockholder.
The receipt by the Interested Stockholder at any time after it became an
Interested Stockholder, whether in connection with the proposed Business
Combination or otherwise, of the benefit of any loans or other financial
assistance or tax advantages provided by CCL (other than proportionately as a
stockholder) would also trigger the 80% stockholder vote requirement to
authorize a Business Combination with an Interested Stockholder (unless the
Business Combination was approved by a majority of the Continuing Directors).
In summary, none of the minimum price, form of consideration or procedural
requirements described above would apply in the case of a Business
Combination approved by a majority of the Continuing Directors. In the
absence of such approval, all of such requirements would have to be satisfied
to avoid the 80% stockholder vote requirements.
Amendment of the CCL Certificate
Amendment or repeal of the provisions of the CCL Certificate described
above or the adoption of any provision inconsistent therewith would require
the affirmative vote of at least 80% of the CCL Voting Stock unless the
proposed amendment or repeal or the adoption of the inconsistent provisions
are approved by two-thirds of the entire CCL Board and a majority of the
Continuing Directors.
Antitakeover Statutes
Section 203 of the DGCL prohibits transactions between a Delaware
corporation and an "interested stockholder," which is defined therein as a
person who, together with any affiliates and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. This provision prohibits certain
business combinations (defined broadly to include mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of
10% of the consolidated assets of the corporation, and certain transactions
that would increase the interested stockholder's proportionate share
ownership in the corporation) between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock unless (i) the business combination is
approved by the corporation's board of directors prior to the date the
interested stockholder acquired shares, (ii) the interested stockholder
acquired at least 85% of the voting stock of the corporation in the
transaction in which it becomes an interested stockholder,
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or (iii) the business combination is approved by a majority of the board of
directors and by the affirmative vote of 66 2/3% of the votes entitled to be
cast by disinterested stockholders at an annual or special meeting. The CCL
Certificate and the CCL By-Laws do not exclude CCL from the restrictions
imposed under Section 203 of the DGCL.
Tax Sharing and Indemnification Agreements
The corporate tax liability which potentially could arise from an
acquisition of shares of CCL capital stock or assets of CCL for a period of
time following the CCL Spin-Off Distribution, together with the related
indemnification arrangements contained in the Tax Sharing and Spin-Off Tax
Indemnification Agreements, could have an antitakeover effect on the
acquisition of control of CCL. See "The Relationship Among Corning, CCL and
Covance After the Distributions--Tax Sharing Agreement" and "The Relationship
Among Corning, CCL and Covance After the Distributions--Spin-Off Tax
Indemnification Agreements."
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DESCRIPTION OF CERTAIN INDEBTEDNESS OF CCL
Description of Notes
Prior to the Distributions, CCL will offer (the "CCL Notes Offering") $150
million aggregate principal amount of senior subordinated notes (the
"Notes"). The following summary of the terms of the Notes and the Indenture
(the "Indenture") under which they are to be issued is qualified in its
entirety by reference to the Indenture which is filed as an exhibit to the
CCL Form 10.
General
The Notes will be senior subordinated obligations of CCL, will be
guaranteed on a senior subordinated basis by CCL's present and future
Restricted Subsidiaries (as defined) on a joint and several basis. The
guarantees will automatically terminate if the related guarantees of the CCL
Credit Facility are terminated.
Stated Maturity and Interest
The Notes will mature on December 15, 2006. Interest on the Notes will be
payable semiannually on June 15 and December 15 of each year, commencing June
15, 1997.
Redemption
The Notes will not be redeemable, at the option of CCL, prior to December
15, 2001. On or after such date, the Notes will be redeemable, in whole or in
part, at specified redemption prices.
CCL will be required to offer to purchase the Notes upon a Change of
Control (as defined) and in the event of certain asset sales.
Certain Covenants
The Indenture will impose certain limitations on the ability of CCL and
its subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur indebtedness
that is subordinate in right of payment to any Senior Debt and senior in
right of payment to the Notes, incur liens, enter into leases and sale and
leaseback transactions, merge or consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of the assets of the Company. In particular, the Indenture will limit
CCL's ability to pay cash dividends on the CCL Common Stock based on 50% of
CCL's net income, plus a credit for issuances of capital stock.
Description of CCL Credit Facility
Prior to the Distributions, CCL expects to enter into a $450 million
credit facility with a syndicate of financial institutions consisting of a
$100 million revolving credit facility and a $350 million term loan facility
(together, the "CCL Credit Facility").
The proceeds from the CCL Credit Facility are expected to be used to
partially finance the repayment of $350 million of intercompany debt owed to
Corning. The revolving credit facility will mature in November 2002 and the
term loan will mature in November 2003. The Distributions are conditioned on
the closing by CCL of the CCL Credit Facility.
Depending on market conditions at the time of the CCL Notes Offering and
the consummation of the CCL Credit Facility, the total combined debt amount,
the interest rates, and the amounts of each of the CCL Credit Facility and
the Notes may vary from that indicated herein.
99
<PAGE>
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS OF CCL
Limitation on Liability of Directors
Pursuant to authority conferred by Section 102 of the DGCL, Paragraph 11
of the CCL Certificate ("Paragraph 11") eliminates the personal liability of
CCL's directors to CCL or its stockholders for monetary damages for breach of
fiduciary duty, including without limitation, directors serving on committees
of the CCL Board. Directors remain liable for (1) any breach of the duty of
loyalty to CCL or its stockholders, (2) any act or omission not in good faith
or which involves intentional misconduct or a knowing violation of law, (3)
any violation of Section 174 of the DGCL, which proscribes the payment of
dividends and stock purchases or redemptions under certain circumstances, and
(4) any transaction from which directors derive an improper personal benefit.
Indemnification and Insurance
In accordance with Section 145 of the DGCL, which provides for the
indemnification of directors, officers and employees under certain
circumstances, Paragraph 11 grants CCL's directors and officers a right to
indemnification for all expenses, liabilities and losses relating to civil,
criminal, administrative or investigative proceedings to which they are a
party (1) by reason of the fact that they are or were directors or officers
of CCL or (2) by reason of the fact that, while they are or were directors or
officers of CCL, they are or were serving at the request of CCL as directors
or officers of another corporation, partnership, joint venture, trust or
enterprise. Paragraph 11 further provides for the mandatory advancement of
expenses incurred by officers and directors in defending such proceedings in
advance of their final disposition upon delivery to CCL by the indemnitee of
an undertaking to repay all amounts so advanced if it is ultimately
determined that such indemnitee is not entitled to be indemnified under
Paragraph 11. CCL may not indemnify or make advance payments to any person in
connection with proceedings initiated against CCL by such person without the
authorization of the CCL Board.
In addition, Paragraph 11 provides that directors and officers therein
described shall be indemnified to the fullest extent permitted by Section 145
of DGCL, or any successor provisions or amendments thereunder. In the event
that any such successor provisions or amendments provide indemnification
rights broader than permitted prior thereto, Paragraph 11 allows such broader
indemnification rights to apply retroactively with respect to any predating
alleged action or inaction and also allows the indemnification to continue
after an indemnitee has ceased to be a director or officer of CCL and to
inure to the benefit of the indemnitee's heirs, executors and administrators.
Paragraph 11 further provides that the right to indemnification is not
exclusive of any other right which any indemnitee may have or thereafter
acquire under any statute, the CCL Certificate, any agreement or vote of
stockholders or disinterested directors or otherwise, and allows CCL to
indemnify and advance expenses to any person whom the corporation has the
power to indemnify under the DGCL or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for directors and officers and controlling persons
pursuant to the foregoing provisions, CCL has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The CCL Certificate authorizes CCL to purchase insurance for directors and
officers of CCL and persons who serve at the request of CCL as directors,
officers, employees or agents of another corporation, partnership, joint
venture, trust or enterprise, against any expense, liability or loss incurred
in such capacity, whether or not CCL would have the power to indemnify such
persons against such expense or liability under the DGCL. CCL intends to
maintain insurance coverage of its officers and directors as well as
insurance coverage to reimburse CCL for potential costs of its corporate
indemnification of directors and officers.
100
<PAGE>
AVAILABLE INFORMATION
CCL and Covance have filed with the Commission the CCL Form 10 and the
Covance Form 10, respectively (together, the "Forms 10") under the Exchange
Act with respect to the CCL Common Stock and Covance Common Stock,
respectively, described herein. This Information Statement does not contain
all of the information set forth in the Forms 10 and the respective exhibits
thereto. For further information, reference is made to the CCL Form 10 and
the Covance Form 10, including the exhibits thereto. When the Forms 10 become
effective, CCL and Covance will be subject to the reporting requirements of
the Exchange Act and, in accordance therewith, will file reports, proxy
statements and other information with the Commission. Copies of the Forms 10,
including the exhibits thereto, and the reports, proxy statements and other
information filed by Corning, CCL and Covance with the Commission can be
inspected and copies made at the public reference facilities of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at
the Commission's Regional Offices: 7 World Trade Center, 13th Floor, New
York, NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60611. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically, such as CCL and Covance. The address of the Commission's Web
site is http://www.sec.gov. Following the listing of the CCL Common Stock and
Covance Common Stock on the NYSE, CCL and Covance will be required to file
with that exchange copies of such reports, proxy statements and other
information which then can be inspected at the offices of such exchange at 20
Broad Street, New York, New York 10005.
162
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
FINANCIAL STATEMENTS OF CORNING CLINICAL LABORATORIES INC.
Report of Price Waterhouse LLP--Independent Accountants F-2
Report of Deloitte and Touch LLP--Independent Auditors F-3
Report of Ernst & Young LLP--Independent Auditors F-4
Report of Leverone and Company--Independent Auditors F-5
Combined Financial Statements:
Combined Balance Sheets--December 31, 1995 and 1994 F-6
Combined Statements of Operations--Years ended December 31, 1995, 1994 and 1993 F-7
Combined Statements of Cash Flows--Years ended December 31, 1995, 1994 and 1993 F-8
Combined Statements of Stockholder's Equity--Years ended December 31, 1995, 1994 and 1993 F-9
Notes to Combined Financial Statements F-10
Financial Statement Schedule II--Valuation Accounts and Reserves F-21
Quarterly Operating Results (unaudited) F-22
Interim Combined Financial Statements (unaudited):
Combined Balance Sheets--September 30, 1996 and December 31, 1995 F-23
Combined Statements of Operations--Three and Nine Months ended September 30, 1996
and 1995 F-24
Combined Statements of Cash Flows--Nine Months ended September 30, 1996 and 1995 F-25
Notes to Interim Combined Financial Statements F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors and Stockholders of
Corning Incorporated and Corning Clinical Laboratories Inc.
In our opinion, based upon our audits and the reports of other auditors,
the accompanying combined balance sheets and the related combined statements
of operations and of cash flows and of stockholder's equity appearing on
pages F-6 through F-21 present fairly, in all material respects, the
financial position of Corning Clinical Laboratories Inc. and the combined
companies as discussed in Note 1 (collectively, the "Company"), a wholly-
owned business of Corning Incorporated, at December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, 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 did not
audit the 1993 financial statements of Maryland Medical Laboratory, Inc.,
Nichols Institute and Bioran Medical Laboratory, which were acquired by the
Company in 1994 in separate transactions accounted for as poolings of
interests and which collectively reflect total revenues of $438 million for
the year ended December 31, 1993. Those statements were audited by other
auditors whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Maryland
Medical Laboratory, Inc., Nichols Institute and Bioran Medical Laboratory, is
based solely on the reports of the other auditors. 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 and the reports of other auditors provide a reasonable basis for
the opinion expressed above.
As discussed in Note 2 to the combined financial statements, in 1993 the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes."
Price Waterhouse LLP
New York, New York
September 20, 1996, except for Note 13
as to which the date is November 4, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Nichols Institute:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 1993 of Nichols
Institute and its subsidiaries (the Company) (not presented separately
herein). These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Nichols
Institute and its subsidiaries for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial statements, the
Company has received a subpoena from the Office of the Inspector General of
the Department of Health and Human Services (OIG) requesting documents in
connection with an investigation and internal review concerning the possible
submission of false or improper claims to the Medicare and Medicaid programs.
No claim or charges have been made against the Company relating to this
investigation. The ultimate outcome of this investigation cannot presently be
determined. Accordingly, no provision for any loss that may result from this
investigation has been made in the accompanying consolidated financial
statements.
As discussed in Notes 1 and 3 to the consolidated financial statements, at
December 31, 1993, the Company was not in compliance with certain covenants
of its senior note agreements and the senior lenders have not waived those
covenants. The senior note agreements provide that, as a result of failure to
comply with the covenants, the note holders have the right to declare the
entire unpaid balance immediately due and payable, and if that were to occur,
the Company would not have the funds required to retire the debt unless
alternative financing is obtained. Management's plans in regard to these
matters are described in Notes 1 and 3. The note holders' right to declare
the entire unpaid balance under the note agreements immediately due and
payable raises substantial doubt about the Company's ability to continue as a
going concern. The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty, except for the classification of amounts due
under the senior note agreements as current.
Deloitte & Touche LLP
Costa Mesa, California
February 28, 1994
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Maryland Medical Laboratory, Inc.
We have audited the combined balance sheet of Maryland Medical Laboratory,
Inc. and affiliates as of March 31, 1994, and the related combined statements
of income, changes in equity and cash flows for the year then ended (not
presented separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Maryland Medical
Laboratory, Inc. and affiliates at March 31, 1994, and the combined results
of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland
May 19, 1994
F-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Moran Research Labs
415 Massachusetts Avenue
Cambridge, MA 02139
We have audited the accompanying balance sheet of Moran Research Labs
(d/b/a Bioran Medical Laboratory, a Massachusetts Business Trust) as of
December 31, 1993, and the related statements of income, retained earnings,
and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Moran Research Labs
(d/b/a Bioran Medical Laboratory, a Massachusetts Business Trust) at December
31, 1993 and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
Leverone & Company
Billerica, Massachusetts
November 10, 1994
F-5
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
- -------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 36,446 $ 38,719
Accounts receivable, net of allowance of $147,947 and
$74,829 for 1995 and 1994, respectively 318,252 360,410
Inventories 26,601 28,248
Deferred taxes on income 98,845 53,696
Prepaid expenses and other assets 22,014 19,241
------------- -------------
Total current assets 502,158 500,314
PROPERTY, PLANT AND EQUIPMENT, NET 296,116 287,562
INTANGIBLE ASSETS, NET 1,030,633 1,053,194
DEFERRED TAXES ON INCOME 6,062 19,593
OTHER ASSETS 18,416 22,000
------------- -------------
TOTAL ASSETS $1,853,385 $1,882,663
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 240,525 $ 236,887
Current portion of long-term debt 12,148 12,572
Income taxes payable 39,766 30,454
Due to Corning Incorporated and affiliates 8,979 6,043
------------- -------------
Total current liabilities 301,418 285,956
Long-term debt (principally due to Corning
Incorporated) 1,195,566 1,153,054
Other liabilities 60,600 56,841
------------- -------------
Total liabilities 1,557,584 1,495,851
------------- -------------
Commitments and Contingencies
Stockholder's Equity:
Contributed capital 297,823 297,823
Retained earnings (accumulated deficit) (3,118) 85,893
Cumulative translation adjustment 2,325 3,096
Market valuation adjustment (1,229) --
------------- -------------
Total stockholder's equity 295,801 386,812
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,853,385 $1,882,663
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $1,629,388 $1,633,699 $1,416,338
Costs and expenses:
Cost of services 980,232 969,844 805,729
Selling, general and administrative 523,271 411,939 363,579
Provision for restructuring and other special charges 50,560 79,814 99,600
Interest expense, net 82,016 63,295 41,898
Amortization of intangible assets 44,656 42,588 28,421
Other, net 6,221 3,464 6,423
------------- ------------- -------------
Total 1,686,956 1,570,944 1,345,650
------------- ------------- -------------
Income (loss) before taxes (57,568) 62,755 70,688
Income tax expense (benefit) (5,516) 34,410 25,929
------------- ------------- -------------
Income (loss) before cumulative effect of change in
accounting principle (52,052) 28,345 44,759
Cumulative effect of change in accounting principle -- -- (10,562)
------------- ------------- -------------
Net income (loss) $ (52,052) $ 28,345 $ 34,197
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (52,052) $ 28,345 $ 34,197
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 101,513 89,517 66,479
Provision for doubtful accounts 152,590 59,480 47,240
Provision for restructuring and other special charges 50,560 79,814 99,600
Deferred income tax provision (32,384) (4,742) (23,841)
Cumulative effect of change in accounting principle -- -- 10,562
Other, net 8,303 14,600 1,765
Changes in operating assets and liabilities:
Accounts receivable (109,500) (103,402) (61,828)
Accounts payable and accrued expenses 14,604 (32,756) (33,903)
Restructuring, integration and other special charges (57,768) (88,093) (46,917)
Due from/to Corning Incorporated and affiliates 2,934 14,783 (2,581)
Other assets and liabilities, net 7,028 (19,583) 8,841
------------- ------------ ------------
Net cash provided by operating activities 85,828 37,963 99,614
------------- ------------ ------------
Cash flows from investing activities:
Capital expenditures (74,045) (93,354) (65,317)
Proceeds from disposition of assets 2,880 55,762 --
Acquisition of businesses, net of cash acquired (22,907) (12,154) (401,428)
Decrease (increase) in investments 985 3,560 (6,942)
------------- ------------ ------------
Net cash used in investing activities (93,087) (46,186) (473,687)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings, primarily with Corning Incorporated 55,729 186,046 709,630
Repayment of long-term debt (13,784) (118,046) (265,196)
Dividends paid (36,959) (60,468) (51,478)
------------- ------------ ------------
Net cash provided by financing activities 4,986 7,532 392,956
------------- ------------ ------------
Net change in cash and cash equivalents (2,273) (691) 18,883
Cash and cash equivalents, beginning of year 38,719 39,410 20,527
------------- ------------ ------------
Cash and cash equivalents, end of year $ 36,446 $ 38,719 $ 39,410
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands)
<TABLE>
<CAPTION>
Cumulative Market Total
Contributed Retained Translation Valuation Stockholder's
Capital Earnings Adjustment Adjustment Equity
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 261,499 $ 146,938 $ (288) $ $ 408,149
Net income 34,197 34,197
Dividends to CLSI (28,088) (28,088)
Dividends to S-Corporation
shareholders (23,390) (23,390)
Equity of pooled entity 4,150 (4,096) 54
Translation adjustment 4,587 4,587
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 1993 265,649 125,561 4,299 395,509
Net income 28,345 28,345
Dividends to CLSI (33,275) (33,275)
Dividends to S-Corporation
shareholders (27,193) (27,193)
Dividends in-kind to S-Corporation
shareholders (7,545) (7,545)
Capital contribution 32,174 32,174
Translation adjustment (1,203) (1,203)
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 1994 297,823 85,893 3,096 386,812
Net loss (52,052) (52,052)
Dividends to CLSI (36,959) (36,959)
Translation adjustment (771) (771)
Market valuation adjustment (1,229) (1,229)
-------------- -------------- -------------- -------------- --------------
Balance, December 31, 1995 $ 297,823 $ (3,118) $ 2,325 $(1,229) $ 295,801
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in thousands, unless otherwise indicated)
1. BASIS OF PRESENTATION
Corning Clinical Laboratories Inc. and Corning Nichols Institute Inc.
(collectively referred to as "CCL" or the "Company") are wholly-owned
subsidiaries of Corning Life Sciences Inc. ("CLSI") which in turn is a
wholly- owned subsidiary of Corning Incorporated ("Corning"). The Company is
one of the largest clinical laboratory testing businesses in the United
States. The accompanying financial statements present the carved-out results
of operations, cash flows and financial position of Corning's clinical
laboratory testing business. Covance Inc. (formerly Corning Pharmaceutical
Services Inc.), a subsidiary of CCL, and its related entities ("Covance") as
well as environmental testing services formerly provided by CCL are excluded.
In 1994, Corning acquired three clinical laboratory testing businesses on the
behalf of CCL in separate transactions accounted for as poolings of interests
(see Note 3). Results presented for 1994 and 1993 include the results of CCL
and the pooled entities on a combined basis.
In May 1996, Corning's Board of Directors approved a plan to distribute to
its shareholders on a pro rata basis all of the shares of CCL and Covance (the
"CCL and Covance Spin-Off Distributions"). The result of the plan will be the
creation of two independent, publicly-owned companies. As a result of the
Spin-Off Distributions, CCL will operate Corning's clinical laboratory testing
business as an independent public company and Covance will own and operate
Corning's contract research business as an independent public company. The
Spin-Off Distributions will be effected by the distribution of a dividend to
holders of Corning Common Stock of all of the outstanding CCL Common Stock,
followed immediately by the distribution of a dividend to the holders of CCL
Common Stock of all of the Covance Common Stock. Corning has submitted to the
Internal Revenue Service a request for a ruling that the Spin-Off Distributions
qualify as tax-free distributions under the Internal Revenue Code of 1986.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The combined financial statements include the accounts of all laboratory
entities controlled by the Company. The equity method of accounting is used
for investments in affiliates which are not Company controlled and in which
the Company's interest is generally between 20 and 50 percent. All
significant intercompany accounts and transactions are eliminated.
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 and
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 those estimates.
Revenue Recognition
The Company generally recognizes revenue as services are rendered upon
completion of the testing process. Billings for services under third-party
payor programs, including Medicare and Medicaid, are recorded as revenues net
of allowances for differences between amounts billed and the estimated
receipts under such programs. Adjustments to the estimated receipts, based on
final settlement with the third-party payors, are recorded upon settlement.
In 1995, 1994 and 1993, approximately 23%, 28% and 25%, respectively, of net
revenues were generated by Medicare and Medicaid programs.
Concentrations of Credit Risk
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's clients as well as their
dispersion across many different geographic regions.
Taxes on Income
The Company uses the asset and liability approach to account 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
F-10
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
the differences are expected to reverse. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period when the change is enacted. In 1993 the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The adoption of SFAS 109 resulted in a charge to net income of $10.6
million, principally representing a reduction in the Company's deferred tax
assets to reflect the then enacted statutory tax rate.
Cash and Cash Equivalents
Cash and cash equivalents include all highly-liquid investments with
original maturities at the time acquired by the Company of three months or
less, and consist principally of amounts temporarily invested in a U.S.
government money market fund.
Inventories
Inventories, which consist principally of supplies, are valued at the
lower of cost (first in, first out method) or market.
Property, Plant and Equipment
Property, plant 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 expected useful lives,
which range from three to forty years.
Intangible Assets
Acquisition costs in excess of the fair value of net tangible assets
acquired are capitalized and amortized over appropriate periods not exceeding
forty years. Other intangible assets are recorded at cost and amortized over
periods not exceeding fifteen years.
Investments
The Company accounts for investments in equity securities, which are
included in other assets, in conformity with Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 requires the use of fair value
accounting for trading or available-for-sale securities. Unrealized losses
for available-for-sale securities are recorded as a separate component within
stockholder's equity.
Impairment Accounting
The Company adopted 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 121) in 1995. The Company reviews the recoverability
of its long-lived assets, including related goodwill and intangible assets,
when events or changes in circumstances occur that indicate that the carrying
value of the asset may not be recoverable. Evaluation of possible impairment
is based on the Company's ability to recover the asset from the expected
future pre-tax cash flows (undiscounted and without interest charges) of the
related operations. If the expected undiscounted pre-tax cash flows are less
than the carrying value of such asset, an impairment loss is recognized for
the difference between estimated fair value and carrying value. This
assessment of impairment requires management to make estimates of expected
future cash flows. It is at least reasonably possible that future events or
circumstances could cause these estimates to change.
In addition, the carrying value of intangible assets has historically been
subject to a separate evaluation based on estimating expected future
undiscounted cash flows from operating activities. If these estimated cash
flows are less than the carrying amount of the intangible assets, the Company
would recognize an impairment loss in an amount necessary to write down the
intangible assets to fair value.
Earnings Per Share
Earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Historical earnings per share
data is not meaningful as the Company's historical capital structure is not
comparable to periods subsequent to the CCL Spin-Off Distribution.
F-11
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
3. BUSINESS COMBINATIONS AND DIVESTITURES
Acquisitions
During 1995, the Company acquired several laboratories in separate
transactions accounted for under the purchase method. The total cost of the
acquired businesses aggregated approximately $23 million and was financed
through borrowings from Corning. Intangible assets of approximately $21.6
million resulted from the transactions and are being amortized over periods
not to exceed forty years.
During 1994, Corning acquired three clinical laboratory testing companies
on behalf of the Company in separate transactions accounted for as poolings
of interests. In June 1994, Corning acquired the stock of Maryland Medical
Laboratory, Inc. ("MML") in exchange for approximately 4.5 million shares of
Corning common stock; in August 1994, Corning acquired the stock of Nichols
Institute ("Nichols") in exchange for approximately 7.5 million shares of
Corning common stock and reserved an additional 1.1 million shares for future
issuance upon the exercise of stock options; and, in October 1994, Corning
acquired the stock of Bioran Medical Laboratory ("Bioran") in exchange for
approximately 6.0 million shares of Corning common stock. Results presented
for 1994 and 1993 include the results of the Company, MML, Nichols and Bioran
on a combined basis.
In 1994, the Company also acquired several other laboratories in separate
transactions accounted for under the purchase method. The total cost of the
acquired businesses aggregated approximately $26 million and was financed
through the issuance of Corning stock and borrowings from Corning. Intangible
assets of approximately $24 million resulted from these transactions and are
being amortized over periods not to exceed forty years.
In the third quarter of 1993, Corning acquired on behalf of the Company
the outstanding shares of common stock of Damon Corporation ("Damon"), a
clinical-testing business, for $405 million, including acquisition costs,
financed through borrowings from Corning. In addition, approximately $167
million of Damon's indebtedness was refinanced. Goodwill of approximately
$600 million resulted from the transaction and is being amortized over forty
years. Reserves aggregating $79 million were established for the costs of
closing Damon facilities as a result of the integration of Damon operations.
In the fourth quarter of 1993, the Company acquired the clinical-testing
laboratories of Unilab Corporation ("Unilab") in Denver, Dallas and Phoenix
in exchange for its ownership interest in Unilab operations, the assumption
of approximately $70 million of Unilab debt, and the Company's investment in
J.S. Pathology PLC. Goodwill of approximately $200 million resulted from this
transaction and is being amortized over forty years. As a result of this
transaction, the Company received a small equity investment in Unilab. The
Company previously owned 43% of Unilab.
The operations of the businesses, subsequent to the dates they were
acquired, are included in the combined financial statements. The pro forma
effect of the 1995 acquisitions on periods prior to the acquisitions is not
material.
In 1993, Corning also acquired and contributed to the Company DeYor
Laboratory, Inc., in a transaction accounted for as a pooling of interests,
by issuing 840,000 shares of Corning common stock. The Company's combined
financial statements for periods prior to this acquisition have not been
restated, since this acquisition was not material to the Company's financial
position or the results of its operations for such periods.
Divestitures
In the second quarter of 1994, the Company sold the California clinical
laboratory testing operations acquired in the Damon transaction to Physicians
Clinical Laboratory, Inc. for cash proceeds of $51 million.
4. TAXES ON INCOME
The Company is included in the consolidated Federal income tax return
filed by Corning. CLSI and its subsidiaries, including the Company, have a
tax sharing agreement with Corning, pursuant to which they are required to
compute their provision for income taxes on a separate return basis and pay
to Corning the separate
F-12
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
Federal income tax return liability so computed.
The components of the provision (benefit) for income taxes for 1995, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------------------
<S> <C> <C> <C>
Current:
Federal $ 22,786 $31,598 $ 46,215
State and local 3,556 7,019 2,815
Foreign 526 535 740
Deferred (benefit):
Federal (28,109) (1,339) (23,818)
State and local (4,275) (3,403) (23)
----------- --------------------
Income tax expense (benefit) $ (5,516) $34,410 $ 25,929
=========== ====================
</TABLE>
Prior to acquisition by Corning, Bioran and certain MML operations were
S-Corporations; accordingly, no federal provision for income taxes has been
reflected relative to these operations.
A reconciliation of the Federal statutory rate to the Company's effective
tax rate for 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Taxes at statutory rate (35.0%) 35.0% 35.0%
State and local income taxes, net of federal tax benefit (0.8%) 3.8% 2.6%
Income from partnership and S-Corporations not subject to
federal and state income tax 1.7% (10.3%) (11.1%)
Goodwill 17.6% 14.3% 4.8%
Non-deductible items 6.0% 8.6% 3.4%
Other, net 0.9% 3.4% 2.0%
--------- --------- ----------
Effective tax rate (9.6%) 54.8% 36.7%
========= ========= ==========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax assets at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- -----------
<S> <C> <C>
Current deferred tax asset:
Accounts receivable reserve $ 48,584 $ 16,692
Liabilities not currently deductible 49,222 34,422
Other 1,039 2,582
---------- -----------
Current deferred tax asset $ 98,845 $ 53,696
========== ===========
Non-current deferred tax asset (liability):
Liabilities not currently deductible $ 21,152 $ 33,572
Depreciation and amortization (15,090) (13,979)
---------- -----------
Non-current deferred tax asset $ 6,062 $ 19,593
========== ===========
</TABLE>
F-13
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
Income taxes payable at December 31, 1995 and 1994 consist of Federal
income taxes payable of $34.2 million and $28.7 million, respectively, state
income taxes payable of $5.0 million and $1.5 million, respectively, and
foreign income taxes payable of $0.6 million and $0.3 million, respectively.
The Company paid income taxes of $21.7 million, $58.5 million and $52.0
million during 1995, 1994 and 1993, respectively.
5. PROVISION FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
In the second quarter of 1995, the Company recorded a provision for
restructuring totaling $33.0 million primarily for workforce reduction
programs and the costs of exiting a number of leased facilities.
Additionally, in the first quarter of 1995, the Company recorded a special
charge of $12.8 million for the settlement of claims related to inadvertent
billing errors of certain laboratory tests that were not completely and/or
successfully performed or reported due to insufficient samples and/or invalid
results. Additionally, in the fourth quarter of 1995, the Company recorded a
charge of $4.8 million related to claims by the Civil Division of the U.S.
Department of Justice ("DOJ") of alleged billing errors related to a
laboratory test performed by Bioran prior to its acquisition by the Company.
In the third quarter of 1994, the Company recorded a provision for
restructuring and other special charges totaling $79.8 million which included
$48.2 million of integration costs, $21.6 million of transaction expenses
related to the Nichols, MML and Bioran acquisitions, and $10 million of
settlement reserves primarily related to Nichols. The integration costs
represent the expected costs for closing clinical laboratories in certain
markets where duplicate Company, Nichols, MML or Bioran facilities existed at
the time of the acquisitions.
In the third quarter of 1993, the Company recorded a provision for
restructuring costs and other special charges totaling $99.6 million. The
restructuring component of this special charge aggregated $56.6 million and
consisted primarily of asset write-offs, facility related costs and costs for
workforce reduction programs related principally to the integration of the
Company's operations with those acquired in the Damon acquisition.
The special charge of $43 million consists of a $36.5 million charge to
reflect the settlement and related legal expenses associated with a
compromise agreement with the DOJ to settle claims brought on behalf of the
Inspector General, U.S. Department of Health and Human Services and a $6.5
million charge for related asserted and unasserted claims. The DOJ claims
related to the marketing, sale, pricing and billing of certain blood-test
series provided to Medicare patients. The DOJ settlement does not constitute
an admission with respect to any issue arising from subsequent civil actions.
The following summarizes the Company's restructuring activity (in
millions):
<TABLE>
<CAPTION>
1993 and
1994 Amounts Balance at 1995 Amounts Balance at
Restructuring Utilized December 31, Restructuring Utilized December 31,
Provisions Through 1994 1994 Provision in 1995 1995
------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Employee termination costs $ 32.5 $14.8 $17.7 $23.4 $27.0 $14.1
Write-off of fixed assets 35.6 19.1 16.5 3.7 9.2 11.0
Costs of exiting leased
facilities 21.7 9.3 12.4 3.1 6.8 8.7
Other 15.0 13.4 1.6 2.8 .5 3.9
------------ ------------ ------------ ------------ ------------ ------------
Total $104.8 $56.6 $48.2 $33.0 $43.5 $37.7
============ ============ ============ ============ ============ ============
</TABLE>
The substantial portion of the balance at December 31, 1995 is expected to
be expended in 1996.
Employee termination costs included severance benefits related to
approximately 3,300 employees (700, 2,000 and 600 in 1995, 1994 and 1993,
respectively). The estimated number of employees to be terminated has been
reduced to 2,355, all of which have been terminated or notified of their
termination at December 31, 1995. Management expects that approximately 300
terminations and the remaining business or facility exits will occur by the
end of 1996. The decrease in the number of actual versus anticipated employee
terminations is primarily attributable to higher than expected attrition. As
a result of higher than expected average termination costs, management's
estimate of total employee termination costs is unchanged. Certain severance
and facility exit costs have payment terms extending beyond 1997.
F-14
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Land $ 18,568 $ 18,969
Buildings and improvements 186,192 173,546
Laboratory equipment, furniture and fixtures 286,326 247,200
Leasehold improvements 39,078 30,050
Construction-in-progress 19,490 33,508
------------ ------------
Property and equipment, at cost 549,654 503,273
Less: accumulated depreciation and amortization (253,538) (215,711)
------------ ------------
Property and equipment, net $ 296,116 $ 287,562
============ ============
</TABLE>
Depreciation and amortization expense aggregated $56.8 million, $46.9 million
and $38.1 million for 1995, 1994 and 1993, respectively.
7. INTANGIBLE ASSETS
Intangible assets at December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Goodwill $1,056,073 $1,043,089
Customer lists 84,558 100,428
Other (principally non-compete covenants) 50,626 61,401
------------- -------------
Intangible assets, at cost 1,191,257 1,204,918
Less: accumulated amortization (160,624) (151,724)
------------- -------------
Intangible assets, net $1,030,633 $1,053,194
============= =============
</TABLE>
Amortization expense aggregated $44.7 million, $42.6 million and $28.4
million for 1995, 1994 and 1993, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 and 1994
consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Accrued wages and benefits $ 81,985 $ 74,519
Restructuring, integration and other special charges 61,878 69,812
Accrued expenses 57,338 34,851
Trade accounts payable 31,129 36,169
Accrued acquisition commitments 8,195 21,536
----------- -----------
Accounts payable and accrued expenses $240,525 $236,887
=========== ===========
</TABLE>
F-15
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
9. LONG-TERM DEBT
Long-term debt, exclusive of current maturities, at December 31, 1995 and
1994, respectively, consists of the following:
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Notes payable to Corning:
Revolving credit notes--interest at the London
Interbank offered rate ("LIBOR") plus 1/8%
to 1/4%, maturing 1997 $ 605,636 $ 551,982
Installment note with interest at 9%, maturing 2001 90,000 100,000
Term note with interest at 6.24%, maturing 2003 100,000 100,000
Term note with interest at 6.93%, maturing 2013 100,000 100,000
Term note with interest at 7.17%, maturing 2004 150,000 150,000
Term note with interest at 7.77%, maturing 2024 100,000 100,000
Note payable denominated in pounds Sterling, interest at the
London Interbank Sterling Rate minus 1%, due 2002 8,049 8,516
Mortgage note payable through 2011, interest at 9.25% 6,138 6,355
Capital lease obligations expiring through 2031 32,518 32,538
Other 3,225 3,663
------------- ------------
Total $1,195,566 $1,153,054
============= ============
</TABLE>
Current maturities on long-term debt totaled $12.1 million and $12.6
million at December 31, 1995 and 1994, respectively.
Long-term debt, including capital leases, maturing in each of the years
subsequent to December 31, 1996 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 261,131
1998 10,493
1999 10,530
2000 10,576
2001 and thereafter 902,836
------------
Total long-term debt $1,195,566
============
</TABLE>
Future minimum payments under capital leases and the present value thereof
are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal year ending December 31,
1997 $ 4,061
1998 3,846
1999 3,840
2000 3,948
2001 and thereafter 116,102
-----------
Total future minimum payments under capital leases 131,797
Less amount representing interest (99,279)
-----------
Present value of minimum payments under capital leases $ 32,518
===========
</TABLE>
F-16
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
The Company paid interest of $74.2 million, $60.2 million and $41.2
million during 1995, 1994 and 1993, respectively.
Based on borrowing rates currently available to the Company for loans with
similar terms and maturities, the fair value of loans payable to third
parties (carrying amount of approximately $50.0 million) was approximately
$62.0 million at December 31, 1995.
10. EMPLOYEE RETIREMENT PLANS
Defined Benefit Plans
An acquired entity had a defined benefit pension plan which in 1990 was
frozen as to the further accrual of benefits. At December 31, 1995 the
present value of the projected benefit obligation using a discount rate of
7.5% was $22.6 million and the fair value of the plan assets (publicly traded
corporate debt and equity securities, government obligations and money market
funds) was $17.4 million. The difference between the projected benefit
obligation and the fair value of plan assets is included in other long-term
liabilities in the accompanying combined balance sheet.
Defined Contribution Plans
The Company has several defined contribution plans covering substantially
all of its full-time employees. Company contributions to these plans
aggregated $18.5 million, $15.9 million and $7.3 million for 1995, 1994 and
1993, respectively.
11. RELATED PARTY TRANSACTIONS
The Company, in the ordinary course of business, conducts a number of
transactions with Corning and its affiliates. The significant transactions
occurring during the years ended December 31, 1995, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------------------
<S> <C> <C> <C>
Interest expense on borrowings $78,930 $55,835 $28,400
Purchase of laboratory supplies 11,261 11,607 7,338
Corporate fees 2,800 2,800 2,450
</TABLE>
Certain executives of the Company are included in various stock
compensation programs of Corning. Expenses related to these programs have
been included in the Company's combined financial statements.
In 1994, Corning contributed capital of $25.2 million through the
reduction of revolving credit notes and former S-Corporation shareholders
contributed capital of a building approximating $4.4 million.
12. COMMITMENTS AND CONTINGENCIES
Minimum rental commitments under noncancellable operating leases,
primarily real estate, in effect at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31,
1996 $ 40,459
1997 30,481
1998 20,527
1999 14,877
2000 12,532
2001 and thereafter 65,920
----------
Net minimum lease payments $184,796
==========
</TABLE>
F-17
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
Operating lease rental expense for 1995, 1994 and 1993 aggregated $46.9
million, $49.4 million and $46.9 million, respectively.
The Company is self-insured for substantially all casualty losses and
maintains supplemental coverage on a claims made basis. The basis for the
insurance reserve at December 31, 1995 and 1994 is the actuarially determined
projected losses for each program (within the self-insured retention) based
upon the Company's loss experience.
The Company has entered into several settlement agreements with various
governmental and private payors during recent years. At present, government
investigations of certain practices by clinical laboratories acquired in
recent years are ongoing. In addition, certain payors are reviewing their
reimbursement practices for laboratory tests. The results of these
investigations and reviews may result in additional settlement payments or
reductions in reimbursements for certain tests. The recorded reserves of
approximately $37.0 million are included in accrued liabilities and represent
management's best estimate at December 31, 1995. Based on information then
available to CCL, management did not believe that the exposure to claims in
excess of recorded reserves would be material (see Note 13).
13. SUBSEQUENT EVENTS
As disclosed in Note 12, federal government investigations of certain
practices by clinical laboratories acquired in recent years are ongoing. In
the second quarter of 1996, the DOJ notified the Company that it has taken
issue with certain payments received by Damon from federally funded
healthcare programs prior to its acquisition by the Company. As a result, in
the second quarter 1996, the Company increased its reserves by $46 million to
equal management's estimate, at that time, of the low end of the range of
potential amounts which could be required to satisfy claims related to the
Damon and other related and similar investigations.
During the third quarter 1996, CCL management met with the government
several times to evaluate the substance of the government's allegations. As a
result of these discussions, in October 1996, CCL management, on behalf of
its Damon subsidiary, reached a settlement agreement with the DOJ which
caused CCL to pay $119 million to the government. This settlement concludes
all federal and Medicaid claims relating to the billing by Damon of certain
blood tests to Medicare and Medicaid patients and other matters relating to
Damon being investigated by the DOJ. Additionally, the Company entered into a
separate settlement agreement with the DOJ totaling $6.9 million related to
billings of hematology indices provided with hematology test results. This
claim will also be paid during the fourth quarter of 1996.
As a result of these settlement agreements, CCL management has reassessed
the level of reserves recorded for other asserted and unasserted claims
related to the Damon and other similar government investigations, including
the investigation of billing practices by Nichols prior to its acquisition by
the Company in 1994. The Company recorded a charge totaling $142 million in
the third quarter 1996 to establish additional reserves to provide for the
above settlement agreements and management's best estimate of potential
amounts which could be required to satisfy the remaining claims. Based on
information currently available to CCL, management does not believe that the
exposure to claims in excess of recorded reserves is material. At September
30, 1996, recorded reserves approximated $215 million.
F-18
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
In October 1996, Corning contributed $119 million to CCL's capital to fund
the Damon settlement. Additionally, Corning has agreed to fund any additional
settlements prior to the CCL Spin-Off Distribution and to indemnify the
Company, on an after-tax basis, for the settlement of the Nichols' and
certain other claims pending at the Distribution Date (see Note 14).
Coincident with the CCL Spin-Off Distribution, the Company will record a
receivable and a contribution of capital from Corning currently estimated at
$25 million which is equal to management's best estimate of potential amounts
which could be required to satisfy the remaining indemnified claims on an
after-tax basis.
Although management believes that established reserves for both
indemnified and non-indemnified claims are sufficient, it is possible that
additional information may become available which may cause the final
resolution of these matters to exceed established reserves by an amount which
could be material to the Company's results of operations and, for
non-indemnified claims, the Company's cash flows in the period in which such
claims are settled. The Company does not believe that these issues will have
a material adverse effect on the Company's overall financial condition.
In addition to the $142 million special charge discussed above, in the
third quarter of 1996, the Company recorded a special charge of $13.7 million
as a result of its decision to abandon the development of a billing system
which had been intended as its standard company-wide billing system.
Management now plans to standardize billing systems using a system already
implemented in seven of its sites.
14. SPIN-OFF DISTRIBUTION (unaudited)
Coincident with the CCL Spin-Off Distribution, the Company plans to record
a non-recurring charge of approximately $20 million ($13 million after tax)
associated with the CCL Spin-Off Distribution. The largest component of the
charge will be the cost of establishing an employee stock ownership plan ($11
million). The remainder of the charge will consist principally of the costs
for advisors and other fees associated with establishing the Company as a
separate publicly-traded entity. The amount of the charge is subject to
change based on the price of the CCL stock on the Distribution Date.
Prior to the CCL Spin-Off Distribution, the Company will borrow
approximately $500 million in long-term debt to repay Corning for certain
intercompany borrowings. The debt is assumed to consist of $350 million of
bank borrowings and $150 million of publicly-traded high-yield notes. Corning
will contribute the remaining debt to the Company's equity prior to the CCL
Spin-Off Distribution. The credit facility governing the bank borrowings and
the indenture governing the notes will contain various customary affirmative
and negative covenants, including the maintenance of certain financial ratios
and tests. The credit facility prohibits the Company from paying cash
dividends on the CCL common stock. Further, the indenture will restrict the
Company's ability to pay cash dividends based on a percentage of the
Company's cash flow.
In conjunction with the CCL Spin-Off Distribution, Corning and the Company
will enter into an indemnification agreement whereby Corning agrees to
indemnify CCL, on an after-tax basis, for any losses arising out of any
federal, criminal, civil or administrative investigations or claims that are
pending as of the Distribution Date to the extent that such investigations or
claims arise out of or are related to alleged violations of federal laws by
reason of CCL, its affiliates, officers or directors billing any federal
program or agency for services rendered to beneficiaries of such program or
agency.
Corning, CCL and Covance will enter into tax indemnification agreements
that will prohibit CCL and Covance for a period of two years after the
Spin-Off Distributions from taking certain actions that might jeopardize the
favorable tax treatment of the Distributions under section 355 of the
Internal Revenue Code of 1986, as amended and will provide Corning and CCL
with certain rights of indemnification against CCL and Covance. The tax
indemnification agreements will also require CCL and Covance to take such
actions as Corning may request to preserve the favorable tax treatment
provided for in any rulings obtained from the Internal Revenue Service in
respect of the Distributions.
Corning, CCL and Covance will also enter into a tax sharing agreement
which will allocate among Corning, CCL and Covance responsibility for
federal, state and local taxes relating to taxable periods before and after
the Spin-Off Distributions and provide for computing and apportioning tax
liabilities and tax benefits for such periods among the parties.
F-19
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(dollars in thousands, unless otherwise indicated)
15. PLANNED CHANGE IN ACCOUNTING POLICY (unaudited)
Coincident with the CCL Spin-Off Distribution, CCL management will adopt a
new accounting policy for evaluating the recoverability of intangible assets
and measuring possible impairment under Statement of the Accounting
Principles Board No. 17. Most of CCL's intangible assets resulted from
purchase business combinations in 1993. Significant changes in the clinical
laboratory and health care industries subsequent to 1993, including increased
government regulation and movement from traditional fee-for-service care to
managed cost health care, have caused the fair value of CCL's intangible
assets to be significantly less than carrying value. CCL management believes
that a valuation of intangible assets based on the amount for which each
regional laboratory could be sold in an arms-length transaction is preferable
to using projected undiscounted pre-tax cash flows. CCL believes fair value
is a better indicator of the extent to which the intangible assets may be
recoverable and therefore, may be impaired. This change in method of
evaluating the recoverability of intangible assets will result in CCL
recording a charge of between $400 million and $450 million coincident with
the CCL Spin-Off Distribution to reflect the other than temporary impairment
of intangible assets. This will result in a reduction of amortization expense
of approximately $10 million to $11.3 million annually and $2.5 million to
$2.8 million quarterly.
The fair value method will be applied to each of CCL's regional
laboratories. In developing management's estimate of fair value, CCL
management will consider, among other things, (i) the financial projections
of each regional laboratory, (ii) the future of each regional laboratory,
including growth opportunities, managed care concentration and planned
actions, (iii) publicly-available information regarding comparable
publicly-traded companies in the industry, (iv) comparable sales prices, if
available, and (v) other information deemed relevant.
F-20
<PAGE>
CORNING CLINICAL LABORATORIES INC.
Schedule II--Valuation Accounts and Reserves
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Net Deductions Balance at
Year ended December 31, 1995 1-1-95 Additions and Other 12-31-95
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances $ 74,829 $152,590 $ 79,472 $147,947
</TABLE>
<TABLE>
<CAPTION>
Balance at Net Deductions Balance at
Year ended December 31, 1994 1-1-94 Additions and Other 12-31-94
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances $71,991 $59,480 $56,642 $74,829
</TABLE>
<TABLE>
<CAPTION>
Balance at Net Deductions Balance at
Year ended December 31, 1993 1-1-93 Additions and Other 12-31-93
------------ ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Doubtful accounts and allowances $ 65,859 $ 47,240 $ 41,108 $ 71,991
</TABLE>
F-21
<PAGE>
QUARTERLY OPERATING RESULTS (unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
1996
- ----
Net revenues $401,395 $ 424,543 $ 405,352
Gross profit 154,277 158,242 149,962
Loss before taxes (1,642) (37,518) (1) (162,989)(1)
Net loss (1,511) (37,922) (119,436)
1995
- ----
Net revenues $417,662 $ 421,853 $ 399,959 $ 389,914 $1,629,388
Gross profit 168,606 175,793 159,091 145,666 649,156
Income (loss) before taxes 19,827(1) (5,088)(1) (56,405)(2) (15,902)(1) (57,568)
Net income (loss) 4,423 (3,852) (38,595) (14,028) (52,052)
1994
- ----
Net revenues $399,063 $ 422,942 $ 408,478 $ 403,216 $1,633,699
Gross profit 159,050 182,050 163,391 159,364 663,855
Income (loss) before taxes 40,624 45,109 (51,250)(1) 28,272 62,755
Net income (loss) 24,152 24,148 (36,535) 16,580 28,345
</TABLE>
(1) Includes impact of restructuring and other special charges of $46.0
million, $155.7 million, $12.8 million, $33.0 million, $4.8 million and
$79.8 million in second quarter 1996, third quarter 1996, first quarter
1995, second quarter 1995, fourth quarter 1995 and third quarter 1994,
respectively, which are discussed in Notes 5 and 13 to the CCL Combined
Financial Statements.
(2) Includes a $62.0 million charge to increase the reserve for doubtful
accounts and allowances resulting from billing systems implementation and
integration problems at certain laboratories and increased regulatory
requirements.
F-22
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
- ----
Current Assets:
Cash and cash equivalents $ 48,319 $ 36,446
Accounts receivable, net of allowance of $116,996 and
$147,947 for September 30, 1996 and December 31, 1995,
respectively 323,171 318,252
Inventories 25,559 26,601
Deferred taxes on income 126,906 98,845
Prepaid expenses and other assets 25,217 22,014
-------------- --------------
Total current assets 549,172 502,158
Property and equipment, net 293,490 296,116
Intangible assets, net 1,001,500 1,030,633
Other assets 42,216 24,478
-------------- --------------
TOTAL ASSETS $1,886,378 $1,853,385
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 374,058 $ 240,525
Current portion of long-term debt 11,885 12,148
Income taxes payable 34,212 39,766
Due to Corning Incorporated and affiliates 14,299 8,979
-------------- --------------
Total current liabilities 434,454 301,418
Long-term debt (principally due to Corning Incorporated) 1,219,900 1,195,566
Other liabilities 99,354 60,600
-------------- --------------
Total liabilities 1,753,708 1,557,584
============== ==============
Stockholder's Equity:
Contributed capital 297,823 297,823
Accumulated deficit (163,158) (3,118)
Cumulative translation adjustment 1,801 2,325
Market valuation adjustment (3,796) (1,229)
-------------- --------------
Total stockholder's equity 132,670 295,801
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,886,378 $1,853,385
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net revenues $ 405,352 $399,959 $1,231,290 $1,239,474
Costs and expenses:
Cost of services 255,390 240,868 768,809 735,984
Selling, general and administrative 125,190 181,346 371,439 399,635
Provision for restructuring and other
special charges 155,730 -- 201,730 45,885
Interest expense, net 19,866 20,927 59,887 61,529
Amortization of intangible assets 10,328 11,293 31,772 33,678
Other, net 1,837 1,930 (198) 4,429
-------------- -------------- -------------- --------------
Total 568,341 456,364 1,433,439 1,281,140
-------------- -------------- -------------- --------------
Loss before taxes (162,989) (56,405) (202,149) (41,666)
Income tax benefit (43,553) (17,810) (43,280) (3,642)
-------------- -------------- -------------- --------------
Net loss $(119,436) $(38,595) $ (158,869) $ (38,024)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(158,869) $ (38,024)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 75,232 76,036
Provision for doubtful accounts 81,891 127,297
Provision for restructuring and other special charges 201,730 45,885
Deferred income tax provision (31,612) (39,403)
Other, net (753) 4,984
Changes in operating assets and liabilities:
Accounts receivable (87,339) (112,110)
Accounts payable and accrued expenses 3,355 18,732
Restructuring, integration and other special charges (19,863) (49,836)
Due from/to Corning Incorporated and affiliates 5,320 4,572
Changes in other assets and liabilities (27,155) 15,656
------------- -------------
Net cash provided by operating activities 41,937 53,789
------------- -------------
Cash flows from investing activities:
Capital expenditures (58,802) (56,062)
Acquisition of businesses, net of cash acquired -- (22,907)
(Increase) decrease in investments (7,580) 1,058
Proceeds from sale of assets 13,285 --
------------- -------------
Net cash used in investing activities (53,097) (77,911)
------------- -------------
Cash flows from financing activities:
Proceeds from borrowings, primarily with Corning
Incorporated 59,090 63,795
Repayment of long-term debt (34,885) (3,766)
Dividends paid (1,172) (27,718)
------------- -------------
Net cash provided by financing activities 23,033 32,311
------------- -------------
Net change in cash and cash equivalents 11,873 8,189
Cash and cash equivalents, beginning of year 36,446 38,719
------------- -------------
Cash and cash equivalents, end of period $ 48,319 $ 46,908
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Corning Clinical Laboratories Inc. and Corning Nichols Institute Inc.
(collectively referred to as "CCL" or the "Company") are wholly-owned
subsidiaries of Corning Life Sciences Inc. ("CLSI") which in turn is a
wholly-owned subsidiary of Corning Incorporated ("Corning"). The Company is
one of the largest clinical laboratory testing businesses in the United
States. These financial statements present the carved-out results of
operations, cash flows and financial position of Corning's clinical
laboratory testing business. Covance Inc. (formerly Corning Pharmaceutical
Services Inc.), a subsidiary of CCL, and its related entities ("Covance") as
well as environmental testing services formerly provided by CCL are excluded.
In May 1996, Corning's Board of Directors approved a plan to distribute to
its shareholders on a pro rata basis all of the shares of CCL and Covance (the
"CCL and Covance Spin-Off Distributions"). The result of the plan will be the
creation of two independent, publicly-owned companies. As a result of the
Spin-Off Distributions, CCL will operate Corning's clinical laboratory testing
business as an independent public company and Covance will own and operate
Corning's contract research business as an independent public company. The
Spin-Off Distributions will be effected by the distribution of a dividend to
holders of Corning Common Stock of all of the outstanding CCL Common Stock,
followed immediately by the distribution of a dividend to the holders of CCL
Common Stock of all of the Covance Common Stock. Corning has submitted to the
Internal Revenue Service a request for a ruling that the Spin-Off Distributions
qualify as tax-free distributions under the Internal Revenue Code of 1986.
The interim combined financial statements reflect all adjustments which,
in the opinion of management, are necessary for a fair statement of the
results of operations for the periods presented. All such adjustments are of
a normal recurring nature. The interim combined financial statements have
been compiled without audit and are subject to year-end adjustments. These
interim combined financial statements should be read in conjunction with the
historical combined financial statements of CCL for the years ended December
31, 1995, 1994 and 1993 included elsewhere herein.
2. COMMITMENTS AND CONTINGENCIES
As disclosed in the Company's 1995 combined financial statements, federal
government investigations of certain practices by clinical laboratories
acquired in recent years are ongoing. In the second quarter of 1996, the U.S.
Department of Justice ("DOJ") notified the Company that it has taken issue
with certain payments received by Damon Corporation ("Damon") from federally
funded healthcare programs prior to its acquisition by the Company. As a
result, in the second quarter 1996, the Company increased its reserves by $46
million to equal management's estimate, at that time, of the low end of the
range of potential amounts which could be required to satisfy claims related
to the Damon and other related and similar investigations.
During the third quarter 1996, CCL management met with the government
several times to evaluate the substance of the government's allegations. As a
result of these discussions, in October 1996 CCL management, on behalf of its
Damon subsidiary, reached a settlement agreement with the DOJ which caused
CCL to pay $119 million to the government. This settlement concludes all
federal and Medicaid claims relating to the billing by Damon of certain blood
tests to Medicare and Medicaid patients and other matters relating to Damon
being investigated by the DOJ. Additionally, the Company entered into a
separate settlement agreement with the DOJ totaling $6.9 million related to
billings of hematology indices provided with hematology test results. This
claim will also be paid during the fourth quarter of 1996. Based on
information currently available to CCL, management does not believe that the
exposure to claims in excess of recorded reserves is material. At September
30, 1996, recorded reserves approximated $215 million.
As a result of these settlement agreements, CCL management has reassessed
the level of reserves recorded for other asserted and unasserted claims
related to the Damon and other similar government investigations, including
the investigation of billing practices by Nichols Institute ("Nichols") prior
to its acquisition by the Company in 1994. The Company recorded a charge
totaling $142 million in the third quarter 1996 to establish additional
reserves to provide for the above settlement agreements and management's best
estimate of potential amounts which could be required to satisfy the
remaining claims.
F-26
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)
In October 1996, Corning contributed $119 million to CCL's capital to fund
the Damon settlement. Additionally, Corning has agreed to fund any additional
settlements prior to the CCL Spin-Off Distribution and to indemnify the
Company, on an after-tax basis, for the settlement of the Nichols' and
certain other claims pending at the Distribution Date (see Note 5).
Coincident with the CCL Spin-Off Distribution, the Company will record a
receivable and a contribution of capital from Corning currently estimated at
$25 million which is equal to management's best estimate of potential amounts
which could be required to satisfy the remaining indemnified claims on an
after-tax basis.
Although management believes that established reserves for both
indemnified and non-indemnified claims should be sufficient, it is possible
that additional information may become available which may cause the final
resolution of these matters to be in excess of established reserves by an
amount which could be material to the Company's results of operations and,
for non-indemnified claims, the Company's cash flow in the period in which
such claims are settled. The Company does not believe that these issues will
have a material adverse impact on the Company's overall financial condition.
3. PROVISION FOR RESTRUCTURING AND OTHER SPECIAL CHARGES
In addition to the $142 million special charge discussed in Note 2, in the
third quarter of 1996, the Company recorded a special charge of $13.7 million
as a result of its decision to abandon the development of a billing system
which had been intended as its standard company-wide billing system.
Management now plans to standardize billing systems using a system already
implemented in seven of its sites.
4. RESTRUCTURING RESERVES
As described in Note 5 to the CCL Combined Financial statements, CCL has
recorded charges for restructuring plans in previous years. Reserves relating
to these programs totaled approximately $37.7 million and $23.5 million at
December 31, 1995 and September 30, 1996, respectively. Management believes
that the costs of the restructuring plans will be financed through cash from
operations and does not anticipate any significant impact on its liquidity as
a result of the restructuring plans.
5. SPIN-OFF DISTRIBUTION
Coincident with the CCL Spin-Off Distribution, the Company plans to record
a non-recurring charge of approximately $20 million ($13 million after tax)
associated with the CCL Spin-Off Distribution. The largest component of the
charge will be the cost of establishing an employee stock ownership plan ($11
million). The remainder of the charge will consist principally of the costs
for advisors and other fees associated with establishing the Company as a
separate publicly-traded entity. The amount of the charge is subject to
change based on the price of the CCL stock on the Distribution Date.
Prior to the CCL Spin-Off Distribution, the Company will borrow
approximately $500 million in long-term debt to repay Corning for certain
intercompany borrowings. The debt is assumed to consist of $350 million of
bank borrowings and $150 million of publicly-traded high-yield notes. Corning
will contribute the remaining debt to the Company's equity prior to the CCL
Spin-Off Distribution. The credit facility governing the bank borrowings and
the indenture governing the notes will contain various customary affirmative
and negative covenants , including the maintenance of certain financial
ratios and tests. The credit facility prohibits the Company from paying cash
dividends on the CCL common stock. Further, the indenture will restrict the
Company's ability to pay cash dividends based on a percentage of the
Company's cash flow.
F-27
<PAGE>
CORNING CLINICAL LABORATORIES INC.
(a wholly-owned business of Corning Incorporated)
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(unaudited)
In conjunction with the CCL Spin-Off Distribution, Corning and the Company
will enter into an indemnification agreement whereby Corning agrees to
indemnify CCL, on an after-tax basis, for any losses arising out of any
federal, criminal, civil or administrative investigations or claims that are
pending as of the Distribution Date to the extent that such investigations or
claims arise out of or are related to alleged violations of federal laws by
reason of CCL, its affiliates, officers or directors billing any federal
program or agency for services rendered to beneficiaries of such program or
agency.
Corning, CCL and Covance will enter into tax indemnification agreements
that will prohibit CCL and Covance for a period of two years after the
Spin-Off Distributions from taking certain actions that might jeopardize the
favorable tax treatment of the Distributions under section 355 of the
Internal Revenue Code of 1986, as amended and will provide Corning and CCL
with certain rights of indemnification against CCL and Covance. The tax
indemnification agreements will also require CCL and Covance to take such
actions as Corning may request to preserve the favorable tax treatment
provided for in any rulings obtained from the Internal Revenue Service in
respect of the Distributions.
Corning, CCL and Covance will also enter into a tax sharing agreement
which will allocate among Corning, CCL and Covance responsibility for
federal, state and local taxes relating to taxable periods before and after
the Spin-Off Distributions and provide for computing and apportioning tax
liabilities and tax benefits for such periods among the parties.
6. PLANNED CHANGE IN ACCOUNTING POLICY
Coincident with the CCL Spin-Off Distribution, CCL management will adopt a
new accounting policy for evaluating the recoverability of intangible assets
and measuring possible impairment under Statement of the Accounting
Principles Board No. 17. Most of CCL's intangible assets resulted from
purchase business combinations in 1993. Significant changes in the clinical
laboratory and health care industries subsequent to 1993, including increased
government regulation and movement from traditional fee-for-service care to
managed cost health care, have caused the fair value of CCL's intangible
assets to be significantly less than carrying value. CCL management believes
that a valuation of intangible assets based on the amount for which each
regional laboratory could be sold in an arms-length transaction is preferable
to using projected undiscounted pre-tax cash flows. CCL believes fair value
is a better indicator of the extent to which the intangible assets may be
recoverable and therefore, may be impaired. This change in method of
evaluating the recoverability of intangible assets will result in CCL
recording a charge of between $400 million and $450 million coincident with
the CCL Spin-Off Distribution to reflect the other than temporary impairment
of intangible assets. This will result in a reduction of amortization expense
of approximately $10 million to $11.3 million annually and $2.5 million to
$2.8 million quarterly.
The fair value method will be applied to each of CCL's regional
laboratories. In developing management's estimate of fair value, CCL
management will consider, among other things, (i) the financial projections
of each regional laboratory, (ii) the future of each regional laboratory,
including growth opportunities, managed care concentration and planned
actions, (iii) publicly-available information regarding comparable
publicly-traded companies in the industry, (iv) comparable sales prices, if
available, and (v) other information deemed relevant.
F-28
